Private equity investors in SolarWinds sold a $315m stake in the software group to one of their own longstanding financial backers, shortly before the US warned that “nation-state” hackers had hijacked one of the company’s products.
The transaction reduced the exposure of Silver Lake and Thoma Bravo to the stricken software company days before its share price fell as vulnerabilities were discovered in a product that is used by multiple federal agencies and almost all Fortune 500 companies.
But the trade could prove embarrassing for Menlo Park-based Silver Lake and its rival Thoma Bravo, which rank among the biggest technology-focused private equity firms in the world.
The firms together held roughly 75 per cent of SolarWinds at the end of September, securities filings show, and three executives from each of the private equity firms sit on SolarWind’s board.
The two firms sold a portion of that stake to Canada Public Pension Plan Investment Board at a price of $21.97 a share in a private placement transaction that closed on December 7, representing a 5 per cent stake in the IT company, securities filings show.
SolarWind shares changed hands at $18.52 on Wednesday, leaving the Canadian pension fund nursing a paper loss of about 15 per cent after less than 10 days.
Institutional investors often cultivate long-term relationships with private equity sponsors in the hope of receiving side-benefits such as early access to new funds and the ability to co-invest in deals. CPPIB has committed $1.7bn to four Silver Lake funds since 2004 and $1.1bn to five Thoma Bravo funds since 2014, according to data from PitchBook.
In a joint statement, the firms said they “were not aware of this potential cyber attack at SolarWinds prior to entering into a private placement to a single institutional investor on December 7”. CPPIB declined to comment on the transaction.
Unlike buy or sell orders that are executed by a stockbroker, secondary private placements are typically heavily negotiated over a period of days or weeks, analysts say.
Such “private placements” can provide large investors with an opportunity to purchase stock at a discount, while allowing the seller to liquidate a large holding at an agreed price.
The Washington Post earlier reported on the stake sale by Silver Lake and Thoma Bravo, without identifying the buyer.
The US government issued an emergency warning on Sunday about what appeared to be a sophisticated cyber espionage campaign that centred on Orion, a piece of its software used by hundreds of thousands of organisations around the world.
The Pentagon, the US state department, all five branches of the US military, the NSA, the Department of Justice and the Office of the President of the United States are among SolarWinds’ clients, according to its website.
Additional reporting by Hannah Murphy