Skype's owners, led by private equity firm Silver Lake, are set to earn more than three times their investment, for a total capital gain of more than $5 billion, on the sale of Skype to Microsoft Corp, a source familiar with the situation said.

The gain is particularly large considering the short amount of time the investors have owned internet phone service Skype -- around 18 months -- since buying a majority stake from eBay. That is a short turnaround for private equity which typically invests with a time horizon of three to five years.

The $8.5 billion price Skype is commanding from Microsoft reflects the premium being put on hot social media properties and the number of potential buyers.

Microsoft's deal to acquire Skype was announced on Monday.

Skype, which was considering an IPO, sparked interest from parties including Facebook and Google according to sources.

Cisco also was interested, a source said. Cisco was not immediately available for comment.

One concern Skype and its owners may have had was whether they were missing out on getting substantially more, giving escalating valuations put on companies such as Facebook and Groupon.

That could explain the six weeks it took for Microsoft and Skype to reach a deal. Microsoft decided to make an unsolicited offer with the final price by April 18, it said.

It's not like the deal came together in five days, it came together over the course of the last few weeks, said one source familiar with the deal. They had time to digest the price, they had time to understand the parameters of the contract and then ultimately figure out the final pieces.

For Microsoft, the stakes were high. The world's largest software maker has been beset by a string of setbacks including the failed acquisition of Yahoo Inc and a halting start in the mobile phone arena now dominated by Google Inc and Apple Inc.

It decided against hiring investment bankers to help them with the deal. Microsoft said it decided to appeal directly to Skype's ownership base with Silver Lake taking the lead.

BUMPER RETURN

The Silver Lake-led investor group bought a majority stake in Skype from eBay in 2009 -- during the credit crisis -- for $1.9 billion in cash and a $125 million note. EBay retained about a third of the company.

It took a lot of conviction to invest in the summer of 2009, said Egon Durban, managing director of Silver Lake. We made the biggest investment in our firm's history and had the courage to invest. But I also believe Microsoft has a real shot at making this business worth three to four times more than even they've paid for it.

Private equity firms can make high returns on investments if timed and executed right. Such returns can reap substantial rewards for private equity executives running the funds -- which typically take 20 percent of the profit.

The internal rate of return for the Skype deal -- a key measure for private equity investors -- was 70 percent to 80 percent, the first source who spoke to Reuters said. That is far higher than a typical private equity return.

EBay, which owns a minority stake in Skype, said that it made a total return of $1.4 billion on its original investment.

Durban said that Skype fit at the intersection of three very powerful macro trends -- social, video and mobile communications.

He said that over the past 18 months, Silver Lake and the other investors had made achievements such as acquiring the Skype intellectual property, resolving litigation with the company's founders, recruiting a new management team, and signing up strategic partnerships with companies such as Verizon, Citrix, Samsung, Panasonic, Sony and LG.

We always felt that Skype ... was misunderstood and underestimated by people through its whole life span, said Marc Andreessen, who heads venture capital firm Andreessen Horowitz which is an investor in Skype.

I think it's great to see Microsoft taking it this seriously and really valuing it for what it is.

The Skype investment is one of the largest capital gains made on a private equity investment, the first source said.

(Additional reporting by Nadia Damouni and Phil Wahba; Editing by Derek Caney and Tim Dobbyn)

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