In the tech-stock doldrums of 2003, a boutique private-equity firm now called Najafi Cos. quietly paid $20 million of its own cash and assumed $80 million of debt to take VeriSign Inc.'s (Nasdaq: VRSN) Network Solutions unit private. For the next few years, Network Solutions LLC -- a provider of Web address registrations -- stayed under the radar.
This year, Najafi sold Network Solutions to another private-equity firm, General Atlantic LLC. The price tag: around $800 million. Minus debt-servicing fees and other costs, Najafi says it pocketed a profit of around $700 million -- a return of 35 times its invested capital after a little more than three years.
How Najafi, run by 44-year-old Iranian-American Jahm Najafi in Phoenix, pulled off such a return underscores the golden age of today's private-equity market. It also demonstrates the outsize profit potential both of companies scooped up from the corporate dustbin and of smaller transactions that have largely been out of the headlines, as multibillion-dollar deals by the likes of Cerberus Capital Management LP and Kohlberg Kravis Roberts & Co. grab the spotlight.
Still, such private-equity returns are likely to become rare amid the continuing flood of cash into private equity that has pushed up deal prices and premiums, and the surging stock market that has heated up company valuations. Moreover, the steady economy has helped to reduce the number of turnaround plays.
"To buy companies cheap now is now harder, and there are more deals being done at much higher multiples," said Mario Giannini, chief executive of Hamilton Lane, an institutional money manager in Bala Cynwyd, Pa., with $10 billion under management. "A lot of things have to go right (with smaller private-equity deals now) to make a strong return."
For Najafi, good timing certainly helped. Najafi waded into the technology realm at a time when many investors were leery of the sector. It paid in 2003 only about $20 million, plus the debt, for most of Network Solutions, whose purchase by VeriSign amid the dot-com peak was done for stock valued at $21 billion.
Along the way, Network Solutions worked hard to remake itself into a broader provider of Internet services for small and midsize businesses. The Herndon, Va., company also spent roughly $50 million to buy two small technology companies to widen its product portfolio; it now offers more than 119 products and services. By the end of 2006, its revenue was $286 million, up from $180 million in 2004, and sales are rising more than 50 percent a year.
This year, Najafi took advantage of today's wave of deal making, with the availability of cheap debt financing and an appetite for growing companies, and sold.
"There's a lot of potential upside in smaller companies because there are multiple ways to grow these businesses," said Ted Virtue, chief executive of private-equity firm MidOcean Partners LLP in New York. "The bread and butter of buyouts are these midmarket deals."
The midmarket buyout ranging from $100 million to $500 million is one of the most active slices of private equity, with 134 such transactions in the United States last year, compared with the 50 deals done in the $1 billion to $10 billion range in the same period, according to Dealogic.
Still, Najafi's return of around 35 times is unusual; other private-equity investors said they typically aim to generate a return of as much as triple their original cash investment on any particular deal. "There's no other deal we've done that's returned 35 times our capital," said Najafi, chief executive of his namesake firm.
Najafi's firm started in 2003 as a subsidiary of Phoenix real-estate company Pivotal Group Inc., which is run by Najafi's older brother, Francis, who is part owner of the Phoenix Suns National Basketball Association team. At the time, the younger Najafi largely invested capital that he and his family reaped from real estate in the 1980s and 1990s; he spun out the private-investment arm into its own entity two years ago. Today, unlike with other private-equity firms that raise funds from institutional investors, Najafi said he invests only his own capital and that of his firm's three partners.
Najafi began looking into buying Network Solutions from VeriSign in early 2003. At the time, Network Solutions had several strengths: a well-known brand name from its dot-com days and a large customer base, numbering several million customers.
The onetime Internet star, however, was suffering from declining revenue as it faced new competitors in the market. Nearly 90 percent of the company's revenue at the time was from domain-name registrations, said Network Solutions Chief Executive Champ Mitchell, who began overseeing the unit in 2001. Mitchell said the division was "poorly structured ... and had terrible customer service; I was brought in to catch a falling knife."
Bob Korzeniewski, a VeriSign executive vice president, acknowledged that Mitchell was brought in to stabilize Network Solutions. He said the Mountain View, Calif., company decided to sell Network Solutions in 2003 because providing domain names didn't fit with VeriSign's underlying Internet-infrastructure business.
VeriSign sold 85 percent of the company to Najafi and his firm, keeping the remaining stake. Network Solutions eventually bought back that slice in early 2006 for more than $20 million, plus an additional amount to repay some debt.
Meanwhile, Network Solutions began widening its product offerings. Since January 2005, Network Solutions has added 69 services and products.
The new offerings are fueling Network Solutions' growth. Today, 45 percent of its revenue comes from domain-name registrations, down from the nearly 90 percent of 2003.
Last year, Najafi and Mitchell considered taking Network Solutions public. At the same time, the company started getting attention from bigger private-equity firms. "People realized we were doing well, and we received an unsolicited offer" from a private-equity buyer, Najafi said. After holding an auction conducted by Morgan Stanley, General Atlantic, a buyout firm in Greenwich, Conn., with $14 billion under management, walked away as the winning buyer in February.
"Network Solutions is a fantastic business, and we're thrilled to be the owner," said Anton Levy, a managing director at General Atlantic.
Dennis K. Berman contributed to this article.