Page 114 - Forbes - USA (November 2019)

institutions and its funds use structures known as “corpo- Silver Lake now manages $43 billion, and Forbes estimates
rate blockers,” which protect investments from taxation. that Durban, Hao, Bingle and Mondre, all under 52, are
It’s a pretty slick tax-avoidance trick, and there’s noth- billionaires.
ing illegal about this or about corporate blockers. A decade A few months after the Silver Lake stake deal, Dyal’s Rees
ago, tax lawyers called “management fee waivers”—in which bought a stake in Starwood Capital, a real-estate-oriented
buyout managers gave up management fees in exchange for firm owned by Barry Sternlicht, which now manages $60
more carried interest—the “holy grail” because the waivers billion. Another Dyal deal from 2016 was a near 15% stake
converted top-bracket taxable income to capital-gains-rate in H.I.G. Capital, a private equity firm run by Sami Mnaym-
110 income and deferred taxation for years. neh and Tony Tamer. The stake deal gave Sternlicht an esti-
But in 2015 the Internal Revenue Service indicated that it mated net worth of $3.1 billion. Mnaymneh and Tamer are
would begin auditing these fee waivers. Thoma Bravo, the now worth $4 billion each.
N
O private equity firm run by billionaire Orlando Bravo, for ex- Credit-oriented PE firms—which have been thriving as
I ample, told its investors that the IRS was auditing its man- heavily regulated bank lenders have retreated from riskier
A T
G agement fee offsets in its 2012 fund. loans—are also getting in on the game.
I With fee waivers out, these stake deals allow Wall Street’s Take the case of Scott Kapnick. A former co-head of in-
T
S
E billionaires club to continue to admit new members. Some vestment banking at Goldman Sachs, Kapnick founded HPS
V have even coined a name for them: “Synthetic fee waivers.” Investment Partners in 2007 while working for JPMorgan
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I Chase’s Highbridge Capital hedge fund unit. HPS’ private

T ality: Firms are selling off pieces of them- zanine lending, was so successful that Kapnick became CEO
E
H he current deal bonanza reflects another re- credit platform, which specialized in senior debt and mez-
T
selves to build staying power. What fol-
of all of Highbridge when its cofounder billionaire Glenn
lowed Blackstone’s initial public offering in Dubin left the bank in 2013. But in 2016, JPMorgan decided
2007 was a sixfold increase in assets in the to spin out most of HPS with Kapnick as its CEO.
ensuing decade, from $88 billion to $545 billion currently. Fast-forward two years to July 2018 and HPS is managing
Today’s private stake deals offer a glimpse into the up-and- $45 billion. Dyal’s tax-advantaged bite of HPS has turned
coming firms that will dominate tomorrow’s Wall Street. former career banker Kapnick, 60, into a billionaire.
In July 2016, Silver Lake, a private equity firm known for Don’t expect populist cries about income inequality to
tech deals like Skype and Alibaba, tapped Dyal to raise $400 slow down the blizzard of private equity stake deals coming
million. At the time, the Silicon Valley-based firm managed to market.
$24 billion and the deal valued the operation at about $4 In December 2018, Blackstone, which is ramping up its
billion. Silver Lake was founded in 1999 by tech investing GP-stake business, bought just under a 10% stake in a little-
pioneers Jim Davidson, Glenn Hutchins, Dave Roux and known New York City firm called New Mountain Capital
Roger McNamee. McNamee left early on in 2004, and by run by a Forstmann Little refugee named Steven B. Klinsky.
2013 Davidson, Hutchins and Roux had also moved on. The Blackstone’s cash injection helped put Klinsky’s net worth
firm’s younger partners, led by Egon Durban, Kenneth Hao, at an estimated $3 billion. (New Mountain vehemently
Mike Bingle and Greg Mondre, wanted more cash to contin- denies Forbes’ valuation, arguing the net present value as-
ue investing in the firm’s enormous new funds. They were sumes success for many years.)
asset-rich but in need of liquidity. Vista’s Smith has gone as far as to tap the well for a sec-
The new managing partners used part of the $400 mil- ond helping. In 2017 Dyal bought another sliver of Smith’s
lion raised by Dyal to increase their own commitments in firm, valuing it at $7 billion. Mnaymneh and Tamer of H.I.G.
their funds. Some of the proceeds went to the founders, have also sold a second stake. Kuwait’s sovereign wealth
part of an agreed-on sum related to the transfer of the firm, fund is now making investments in general partnerships, as
by investing on their behalf in Silver Lake’s funds. After is a firm run by Jeb Bush and another created by the family
the Dyal deal, Durban and the other remaining Silver Lake office of Richard and Betsy DeVos.
partners wound up with 90% of the firm’s future net free in- “There is a need for capital. These businesses can con-
come. Davidson retained a slice of future performance fees sume a lot of capital, so the capital is important,” says Dyal
in Silver Lake Fund V. Capital’s Rees. “The vast majority of our invested capital
Meanwhile, Durban, 46, masterminded an incredible stays in the business to fund GP commitments and product
deal for Dell that has so far returned $4.4 billion in profit. extensions.” F

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