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FORBES.COM NOVEMBER 30, 20 19THEINVESTIGATIONinstitutions and its funds use structures known as “corpo-
rate blockers,” which protect investments from taxation.
It’s a pretty slick tax-avoidance trick, and there’s noth-
ing illegal about this or about corporate blockers. A decade
ago, tax lawyers called “management fee waivers”—in which
buyout managers gave up management fees in exchange for
more carried interest—the “holy grail” because the waivers
converted top-bracket taxable income to capital-gains-rate
income and deferred taxation for years.
But in 2015 the Internal Revenue Service indicated that it
would begin auditing these fee waivers. Thoma Bravo, the
private equity firm run by billionaire Orlando Bravo, for ex-
ample, told its investors that the IRS was auditing its man-
agement fee offsets in its 2012 fund.
With fee waivers out, these stake deals allow Wall Street’s
billionaires club to continue to admit new members. Some
have even coined a name for them: “Synthetic fee waivers.”T
he current deal bonanza reflects another re-
ality: Firms are selling off pieces of them-
selves to build staying power. What fol-
lowed Blackstone’s initial public offering in
2007 was a sixfold increase in assets in the
ensuing decade, from $88 billion to $545 billion currently.
Today’s private stake deals offer a glimpse into the up-and-
coming firms that will dominate tomorrow’s Wall Street.
In July 2016, Silver Lake, a private equity firm known for
tech deals like Skype and Alibaba, tapped Dyal to raise $400
million. At the time, the Silicon Valley-based firm managed
$24 billion and the deal valued the operation at about $4
billion. Silver Lake was founded in 1999 by tech investing
pioneers Jim Davidson, Glenn Hutchins, Dave Roux and
Roger McNamee. McNamee left early on in 2004, and by
2013 Davidson, Hutchins and Roux had also moved on. The
firm’s younger partners, led by Egon Durban, Kenneth Hao,
Mike Bingle and Greg Mondre, wanted more cash to contin-
ue investing in the firm’s enormous new funds. They were
asset-rich but in need of liquidity.
The new managing partners used part of the $400 mil-
lion raised by Dyal to increase their own commitments in
their funds. Some of the proceeds went to the founders,
part of an agreed-on sum related to the transfer of the firm,
by investing on their behalf in Silver Lake’s funds. After
the Dyal deal, Durban and the other remaining Silver Lake
partners wound up with 90% of the firm’s future net free in-
come. Davidson retained a slice of future performance fees
in Silver Lake Fund V.
Meanwhile, Durban, 46, masterminded an incredible
deal for Dell that has so far returned $4.4 billion in profit.Silver Lake now manages $43 billion, and Forbes estimates
that Durban, Hao, Bingle and Mondre, all under 52, are
billionaires.
A few months after the Silver Lake stake deal, Dyal’s Rees
bought a stake in Starwood Capital, a real-estate-oriented
firm owned by Barry Sternlicht, which now manages $60
billion. Another Dyal deal from 2016 was a near 15% stake
in H.I.G. Capital, a private equity firm run by Sami Mnaym-
neh and Tony Tamer. The stake deal gave Sternlicht an esti-
mated net worth of $3.1 billion. Mnaymneh and Tamer are
now worth $4 billion each.
Credit-oriented PE firms—which have been thriving as
heavily regulated bank lenders have retreated from riskier
loans—are also getting in on the game.
Take the case of Scott Kapnick. A former co-head of in-
vestment banking at Goldman Sachs, Kapnick founded HPS
Investment Partners in 2007 while working for JPMorgan
Chase’s Highbridge Capital hedge fund unit. HPS’ private
credit platform, which specialized in senior debt and mez-
zanine lending, was so successful that Kapnick became CEO
of all of Highbridge when its cofounder billionaire Glenn
Dubin left the bank in 2013. But in 2016, JPMorgan decided
to spin out most of HPS with Kapnick as its CEO.
Fast-forward two years to July 2018 and HPS is managing
$45 billion. Dyal’s tax-advantaged bite of HPS has turned
former career banker Kapnick, 60, into a billionaire.
Don’t expect populist cries about income inequality to
slow down the blizzard of private equity stake deals coming
to market.
In December 2018, Blackstone, which is ramping up its
GP-stake business, bought just under a 10% stake in a little-
known New York City firm called New Mountain Capital
run by a Forstmann Little refugee named Steven B. Klinsky.
Blackstone’s cash injection helped put Klinsky’s net worth
at an estimated $3 billion. (New Mountain vehemently
denies Forbes’ valuation, arguing the net present value as-
sumes success for many years.)
Vista’s Smith has gone as far as to tap the well for a sec-
ond helping. In 2017 Dyal bought another sliver of Smith’s
firm, valuing it at $7 billion. Mnaymneh and Tamer of H.I.G.
have also sold a second stake. Kuwait’s sovereign wealth
fund is now making investments in general partnerships, as
is a firm run by Jeb Bush and another created by the family
office of Richard and Betsy DeVos.
“There is a need for capital. These businesses can con-
sume a lot of capital, so the capital is important,” says Dyal
Capital’s Rees. “The vast majority of our invested capital
stays in the business to fund GP commitments and product
extensions.”FORBES (ISSN 0015 6914) is published monthly, except January and July, by Forbes Media LLC, 499 Washington Blvd, Jersey City, NJ 07310, Periodicals postage paid at Newark, NJ
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