In late March, as the coronavirus pandemic was grinding global travel to a halt, Airbnb chief executive Brian Chesky was forced to shelve preparations for a stock market listing and urgently seek a financial lifeline for the turbulent months ahead.
Rather than call on the venture capital firms that helped the travel lodging business grow into a darling of the digital economy once valued at US$31 billion ($47.9b), Chesky turned to a dealmaker who is becoming the first phone call for Silicon Valley companies in need of cash: Egon Durban.
Durban, co-head of the private equity firm Silver Lake, had previously paid little attention to Airbnb. Yet within days, the 46-year-old investor had committed half of a US$1b distressed loan deal to prop up Chesky's ailing business.
The transaction is just one example of how Durban and Silver Lake, a US$40b firm known for its bold bets on out-of-favour tech companies such as Dell, have become the go-to investor for big name internet companies in need of capital during the pandemic.
In addition to Airbnb, Silver Lake has in recent months injected billions of dollars into the social networking company Twitter, travel booking site Expedia, Alphabet's self-driving auto unit Waymo and Reliance Jio, a fast-growing Indian telecoms group.
Durban has played the lead role in all but one of those investments, earning himself comparisons to Berkshire Hathaway's Warren Buffett, who stepped in during the 2008 financial crisis to backstop companies at the heart of the American economy, ranging from Goldman Sachs to General Electric.
This time, however, Buffett has been sitting on the sidelines while others take the plunge. If Durban's aggressive investments are successful, observers say they will solidify his rise as one of the leading private equity investors of his generation.
"Basically, they're combining tech investing with value investing," says Claudia Zeisberger, a professor at France's Insead business school. In a reference to one of Buffett's famous sayings, she describes Silver Lake's recent approach as: "You wait until the tide goes out, see who's been swimming naked, and then you decide which one you want to rescue."
But the crisis has created huge problems for parts of Silver Lake's existing portfolio. Several of Durban's marquee investments in sports and live events are suffering from reduced activity under lockdown — perhaps none more than Endeavor, the entertainment group led by Hollywood super agent Ari Emanuel, who has been instrumental in opening doors for Durban.
Moreover, some of Silver Lake's new investments, such as Airbnb and Expedia, involve taking stakes in a travel industry whose prospects could be further damaged if there are more waves of the virus without a vaccine to stop its spread.
Durban is effectively betting that the economy will return to normal relatively soon. However if that does not happen, rival investors warn that his high-conviction style may dent the record of the firm he now leads.
"What he's been doing is taking a point of view about how the world might shake out, not in the next year but maybe the next three, four, five years," says George Roberts, the 76-year-old co-founder of private equity firm KKR, who has taken to mentoring Durban.
Durban and Silver Lake, which is in the process of raising a new US$16b fund, declined to comment for this article.
The rise of Egon
Friends and colleagues describe Durban, an American citizen who was born in Germany and grew up in Texas, as an archetypal dealmaker with a ferocious competitive streak. He lives with his wife, daughters and dog in the pricey Silicon Valley suburb of Atherton, whose residents include former Google chief executive Eric Schmidt and Golden State Warriors basketball star Steph Curry.
Outside of work, Durban donates to Tipping Point Community, a poverty alleviation charity favoured by Silicon Valley executives; vacations in Hawaii near his mentor Roberts; and belongs to the exclusive San Francisco Golf Club, holding a single-digit handicap.
Durban was appointed co-chief executive of Silver Lake in December, alongside his longtime colleague Greg Mondre. But his imprint on the firm dates back to its early days.
Founded in 1999 by a group of tech and finance executives nicknamed the "four amigos", Silver Lake aimed to introduce private equity-style buyouts to the tech industry at the height of the dotcom boom. The firm experienced early success with companies such as Seagate, a disc drive business it took private in a US$20b deal before flipping back on to the public market two years later.
Roger McNamee, one of Silver Lake's co-founders, says Durban played an important early role as a junior Morgan Stanley banker who was assigned to advise on the group's formation and later joined as one of its first employees.
"There was an enormous amount of legwork, and he did a fantastic job of it," says McNamee. "The fact that we settled on a private equity model — Egon had an enormous influence on that."
However, one of Durban's first significant deals, the US$9.4b carve-out of NXP from Dutch conglomerate Phillips, quickly ran into trouble, struggling under its debt burden during the 2008 financial crisis. During the company's IPO in 2010, two of its backers, Bain Capital and KKR, wound up selling some shares at a loss.
Johannes Huth, head of KKR in Europe, says his firm wound up making a "decent return" on its investment after the business was worth little in the winter of 2008.
The deal that put Durban on Wall Street's radar came one year later, with the takeover of online telephone company Skype. Silver Lake led an investor group that purchased a majority stake in the business from eBay for US$1.9b, unwinding a tangle of lawsuits in the process.
After resolving the suits and overhauling nearly the entire management team, Durban engineered a sale to Microsoft less than two years later, resulting in an estimated US$5b windfall for investors including the venture capital firms Andreessen Horowitz and Index Ventures.
"Egon is incredibly good at looking at different industries and deciding whether to bet on the incumbent or the disrupter," says Greg Brown, chief executive of Motorola Solutions, a communications equipment company backed by Silver Lake.
A decade of expansion
The Skype deal accelerated Durban's rise at Silver Lake, where he has become the firm's top dealmaker overseeing its largest portfolio of investments.
In 2011, Durban and a group of close colleagues grew frustrated with Silver Lake co-founder Glenn Hutchins, who they felt was not contributing enough to the firm while reaping outsized rewards. The group, which included Mondre, Mike Bingle and Kenneth Hao, threatened to quit if they were not promoted to managing partners, according to people with knowledge of the matter. Eventually, Hutchins and another co-founder David Roux stepped back from management duties to make way for the younger group.
As his profile grew within Silver Lake, Durban cultivated a wide-ranging network of contacts from Hollywood to the Middle East who would serve as a source of deals outside of the firm's traditional comfort zone.
None has been more influential than Endeavor's Emanuel and his vast Rolodex in the sports and entertainment world.
Following an initial US$200 million investment in 2012, Silver Lake built a majority stake in Endeavor one year later by helping to finance its US$2.3b purchase of sports marketing group IMG, going on to steer the company through a series of acquisitions including Donald Trump's Miss Universe pageant series and the Ultimate Fighting Championship mixed martial arts events group.
Durban has been a public cheerleader for Endeavor, telling the FT in 2014 it would be one of the best performing investments Silver Lake had ever made.
So far, though, Durban's quest to turn Endeavor into a dominant entertainment conglomerate has run into trouble. Last year, the company pulled an IPO it initially hoped would raise more than US$700m and provide Silver Lake a route to exiting its stake.
But the Endeavor investment has been crucial for Durban in other ways. After Silver Lake bought a 10 per cent stake in the Madison Square Garden Company last year, the owner of the New York Knicks and New York Rangers basketball and ice hockey teams, Emanuel helped introduce Durban to James Dolan, the company's executive chairman. Durban subsequently made an offer to buy the teams but was rebuffed, says a person with direct knowledge of the matter.
Soon after that, Emanuel was involved in brokering a deal for Durban's firm to take a 10 per cent stake in the parent company of English Premier League champions Manchester City, valuing the holding company at US$4.8b — a record price paid for a football group.
Durban's investment in Manchester City, in turn, deepened ties with Sheikh Mansour bin Zayed al-Nahyan, the Abu Dhabi royal who acquired the club in 2008, and Khaldoon al-Mubarak, the head of Abu Dhabi's Mubadala sovereign wealth fund.
Those connections proved useful in May as Silver Lake became the first of four US private equity firms to invest in Jio, the mobile telecoms business of Mukesh Ambani's Reliance Industries. Durban strengthened his ties to Ambani after CFG acquired Indian football club Mumbai City from the family of India's richest man, say people briefed on the matter.
Like Endeavor, Silver Lake's US$24.9b takeover of Dell alongside its founder Michael Dell was meant to be a transformational investment in the company. Durban's supporters say the leveraged buyout and subsequent public listing have generated enormous value for Silver Lake, which initially invested about US$1.8b in the company in 2013.
But the acquisition also faced bitter legal opposition from shareholders, who claimed the deal undervalued Dell's shares. "What they did was a heist on the public markets with the help of the board," says Marshall Sonenshine, an investment banker and professor who has taught the Dell buyout as a case study to his students at Columbia University and Harvard University.
Dell's shares have underperformed the S&P 500 since returning to public markets through a merger with publicly traded VMware in December 2018. After beginning to trade at US$46, Dell is now hovering at just below US$50.
Last year close advisers to Durban suggested he take greater control of the firm and consolidate the top ranks. Days after the Manchester City deal, he was named co-CEO, taking greater day-to-day management responsibilities, while Hao was appointed chairman, retaining his investment mandate. Meanwhile, Bingle took on a smaller role, investing on a case-by-case basis as he plans to manage his own family office.
The succession set the stage for the recent deal spree. In February, Durban sprung into action as activist hedge fund investor Elliott Management was trying to oust Twitter founder Jack Dorsey as chief executive.
Dorsey had been struggling to fend off Elliott's Jesse Cohn before Durban brokered a compromise that saw Silver Lake invest US$1b in the company. Cohn backed off in exchange for board seats and regular performance reviews of Dorsey, say people involved in the deal.
Similar to Buffett's approach, Durban and Silver Lake have structured their investments in Twitter, Airbnb and Expedia with additional protections in case the companies underperform.
Airbnb committed to paying interest rates in excess of 10 per cent on the debt extended by Silver Lake, which also received equity warrants implying an US$18b valuation — a significant discount to the company's prior US$31b valuation.
Several rival firms still passed on backing Airbnb in the latest funding round, thinking the terms did not sufficiently compensate investors for the risks, according to people involved in the discussions. The company has said it expects 2020 revenues to be cut in half from US$4.8b last year.
With more than 140 countries adopting some form of quarantine measures to limit the spread of the virus, international travel has been brought to a standstill. The medium-term outlook for the industry will start to look extremely bleak if customers do not begin to feel confident about the idea of getting on a plane.
"Egon and his team intuitively and immediately understood that our global community put us in a strong position to succeed when people are travelling again," says Chesky, the Airbnb chief executive.
Coronavirus has also brought new challenges for Endeavor and Silver Lake's other entertainment holdings, which include the AMC movie chain and venue manager Oak View Group. Credit rating agencies Moody's and S&P have downgraded bonds issued by AMC and Endeavor, plunging both deeper into the junk-rated debt category. Endeavor added to its debt pile in May with US$260m in loans carrying near 11 per cent interest rates.
In May, another of Durban's landmark investments, the satellite company Intelsat, filed for bankruptcy after years of being weighed down by an almost US$15b debt load. Silver Lake's planned US$2.6b sale of Global Blue, the shopping refund business, is in doubt as its buyer is attempting to back out of the deal citing the impact of the pandemic on travel.
People close to Durban and Silver Lake point to the firm's record as evidence they can navigate a path through the crisis. Silver Lake's fourth flagship fund returned 25.9 per cent annually between 2013 and the third quarter of 2019, according to public pension data, placing it within the top quartile of similar funds.
Privately, Durban has said that he thinks other investors are discounting the promise that pharmaceutical companies can successfully develop and distribute a vaccine for Covid-19, boosting the prospects of Silver Lake's portfolio of leisure and travel companies.
Still, others are eager to cast doubt on his recent run of investments.
"It's either going to end wonderfully and look like he is Warren Buffett or he's going to be the guy who basically splashed billions of dollars into hotel companies and advertising companies in the middle of a crisis," says one person who has worked closely with Durban. "A lot of smart people haven't been willing to make those bets."
TWO BETS ON FUTURE GROWTH
Airbnb: Alongside credit investor Sixth Street Partners, Silver Lake propped up the ailing travel lodging start-up with a US$1b distressed debt deal, which also granted equity warrants valuing the company at a discount. Silver Lake went on to purchase a chunk of a separate US$1b five-year loan issued by Airbnb.
Manchester City: Silver Lake's US$500m investment represented a more than 10 per cent stake in the City owner. The firm had been attracted by rich demand for football media rights, valuing the company at a record US$4.8b. On Monday, Manchester City begins its appeal of a two-year ban from the Champions League, seeking to overturn a ban for "serious breaches" of financial fair play rules that could cost the club £100m ($194.8m) a season in revenues.
TWO DEALS THAT HAVE FACED PROBLEMS
Endeavor: Durban teamed up with Hollywood networker Ari Emanuel to build his talent agency into an entertainment conglomerate through acquisitions. But Endeavor has run into trouble following a pulled IPO last year, and its debt has been downgraded further into junk during the pandemic.
Intelsat: The satellite company, which was bought out by Silver Lake and BC Partners in 2008, filed for bankruptcy in May after being weighed down by US$15b in debt. Silver Lake has largely sold out of its stake but still held more than US$10m of shares at the end of the first quarter.
Written by: Miles Kruppa, James Fontanella-Khan and Arash Massoudi
© Financial Times