When a consortium of investors, which included the Canada Pension Plan Investment Board, bought a majority stake in Skype from eBay in September 2009, it was valued at $2.75 billion. This week Microsoft agreed to buy Skype for $8.7 billion in cash.
CPPIB’s contribution to the $1.9 billion paid for a 65 per cent stake in Skype, investing alongside private equity technology-specialist Silver Lake, Andreessen Horowitz, a venture capital firm launched by the founders of Netscape, and Index Ventures, a global venture capital firm.
The deal demonstrates very clearly the power of liquidity, in droves. When eBay needed a buyer for the 65 per cent portion it wanted, or needed, to sell, these investors had the capital.
This was in an environment where investors were simply not allocating capital to private equity. According to research firm, Preqin, the end of 2009 marked the lowest period of fundraising in private equity for six years.
In 2009, due to liquidity constraints many investors were sellers of private equity, most notably some high-profile endowments, but for the likes of CPPIB which could buy at this time, the benefit is enormous, as this deal demonstrates.
It also reinforces the role and value of relationships. Goldman Sachs knows this only too well, providing financial advice to eBay on the 2009 sale, and now advising Skype (with JP Morgan) on the sale to Microsoft, in the process catapulting it to the top ranking of financial advisers on global technology deals.
For CPPIB, access to the deal was also partly afforded due to an existing relationship it had with Silver Lake, having invested $600 million in the Silver Lake Partners II and Silver Lake Partners III funds since 2004.
CPPIB makes investment decisions based on each decision’s individual merit (particularly their risk merit), and not a desire to fill a certain asset bucket. Any move away from the reference portfolio – which represents the low cost, low complexity investment strategy – to the real portfolio is an active decision away from that reference, with each investment “funded” from the reference portfolio.
At the moment, the total active risk is about 200 basis points – with real estate and public equity about 50 basis points each, and private assets about 100 basis points.
Conceptually the entire equities allocation of CPPIB could be in private equity. With deals like this, that seems compelling.
The other lesson from this turn of events, is the power of foresight. To some extent private equity investing is all about vision. And it’s vision that investors should be prepared to pay large fees for.
Some investors are better at looking into the future than others, or have the structures in place that allow for such investments. But all have in common the belief in the integral role that capital can play in “unlocking growth”. For CPPIB, triple the value in 18 months is some vision.
Maybe that’s why Mark Wiseman, senior vice-president of private investments at the time of the Skype purchase, is now chief investment officer of CPPIB.