Buyout firm Thoma Bravo builds war chest for software companies

The mood was buoyant when private equity executives congregated at the SuperReturn conference in Berlin last month. But billionaire Orlando Bravo, the co-founder of software buyout firm Thoma Bravo, stood out for his exuberance.

“One of the questions that we always get asked is, when’s the party going to end?,” Bravo said. But the analogy was wrong, he said, because a party has “a finite end”.

The private equity industry is rolling on with record buyouts worth more than $1tn this year, according to Refinitiv, and Thoma Bravo has helped set the pace. The US-based firm has taken six multi-billion-dollar public companies private in the past year — the most of any buyout firm worldwide, PitchBook data show.

Its biggest deals, the $10.2bn buyout of real estate software company RealPage in April and the $12.3bn buyout of cyber security firm Proofpoint in August were part of an acquisition binge where the firm invested virtually all of $22.8bn in cash it had raised from investors less than 14 months ago.

At private meetings in Berlin, Thoma Bravo representatives outlined a fundraising effort that would bring in $35bn, according to people with direct knowledge of the matter. The fastest-growing of all the major buyout firms, its $91bn in assets are greater than the private equity giant Blackstone’s $88bn when it went public in 2007. Thoma Bravo declined to comment on its fundraising plans.

“We’re doing nothing different now than we used to. It’s just add another zero, and then another zero,” Orlando Bravo told the Financial Times, referring to the expanding opportunity to invest in software.

Thoma Bravo’s rise from a niche investor with barely a few billion dollars in assets a decade ago has bucked most industry conventions.

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Led by Bravo and a tight-knit group of managing partners, the firm has done nothing but buy software companies for nearly 20 years. The focus contrasts with listed rivals such as Blackstone and KKR which have built sprawling businesses that make them look more like asset managers than a private equity firm.

Software valuations have been soaring, but Bravo said he was unfazed. Since the beginning of 2020, his firm has exited over 20 software investments through sales or initial public offerings, generating $29bn in gains on $7bn of invested capital, according to people informed on the matter.

A $2.2bn equity investment in mortgage software company Ellie Mae in 2019 yielded an $11bn windfall when the business was sold to Intercontinental Exchange a year later, which pushed the internal rate of return on its 2018 fund up to more than 50 per cent, according to disclosures from multiple state pension funds.

These returns colour Bravo’s optimism. “It’s amazing to me that people get out there and say the market is overvalued. It is irresponsible, almost,” he said. “Good luck in sitting on cash and waiting for the market to get cheap.”

A native of Mayagüez, Puerto Rico, Bravo, aged 51, moved to Rhode Island in the late 1980s to study and play on the tennis team at Brown University. He then worked at Morgan Stanley and earned business and law degrees from Stanford University.

In 1998, he was hired by dealmaker Carl Thoma and sent to San Francisco to invest in technology as the dotcom bubble peaked. His first two investments were losers, but Bravo forged ahead, focusing on specialist software companies he believed were undervalued. In 2008, the firm was renamed Thoma Bravo as it focused exclusively on software.

Thoma Bravo aims to buy software businesses with loyal customers but where the strategy may have drifted or sales growth slowed. The firm seeks to hold on to management and advise on pulling levers such as raising subscription prices, reshaping sales incentives and dumping money-losing businesses.

“Typically, they have real buy in from management because they’ve been doing things their own way and it hasn’t worked to unlock the full potential of the company,” said David Scudellari, head of private equity and credit at PSP Investments, a Canadian pension fund with over $200bn in assets.

The approach contrasts with competitor Vista Equity Partners, headed by billionaire Robert Smith, which for years sought to replace management and impose rigid change. Thoma Bravo’s assets have catapulted above Vista’s.

Thoma Bravo’s deals still involve lay-offs — often more than 10 per cent of staff — and outsourcing, shifting operations to countries with low labour costs.

In the case of Instructure, an education tech company, the strategy eliminated jobs and curtailed sales incentives. As it cut more expensive workers, Instructure hired hundreds of IT employees in Budapest.

Morale suffered. “I would be lying if I said it wasn’t traumatic,” said Steve Daly, Instructure chief executive. However, the company, which was taken private in 2020 and relisted in July, reported that gross profits increased 62 per cent year on year in its most recent quarter.

“We’ve had investors say, ‘This was the Instructure we always thought it could be,’” Daly said. Thoma Bravo’s $1bn equity investment is now worth $2.6bn.

Some Instructure shareholders complained that its board sold the company to Thoma Bravo on the cheap. Praesidium Investment Management, a top shareholder, called the sale process “rushed” and “riddled with conflicts of interest”.

As valuations skyrocket, Thoma Bravo’s model involves increasing leverage, with investment banks and private credit funds willingly lending at once-unheard of debt ratios.

“Purchase price multiples over a decade ago were so much lower, as were the leverage multiples,” said Kipp deVeer, head of Ares Credit, one of the firm’s lenders. “[You’re] seeing huge purchase prices because these businesses have proven to be growers and non-cyclical.”

A banker involved in recent Thoma Bravo deals said they are being underwritten at ratios of 15 times debt to adjusted earnings before interest, tax, depreciation and amortisation because lenders capitalise companies’ future subscription revenues, lowering reported leverage to about seven-times.

Thoma Bravo also faces new risks. The buyouts of RealPage and Proofpoint needed more than $15bn in equity to get done, or roughly 70 per cent of the overall value. “The bigger equity cheque is somewhat by necessity,” says the banker. “There’s only so much the debt market can provide.”

Orlando Bravo said pieces of deals are syndicated to existing investors like pensions and sovereign wealth funds. The move lowers the concentration of a single investment in any fund.

Some investments fail. When network infrastructure giant Riverbed Technology filed for bankruptcy last month, it wiped out most of the $1.4bn Thoma Bravo and investors including an Ontario teachers pension fund had invested. “We underestimated the rate of technological change in the networking side of the business,” Bravo said of the deal. “Sometimes we make mistakes.”

Texas-based cyber security company SolarWinds was hacked last year and its software was used to spy on governments and businesses. Thoma Bravo had taken the company private with Silver Lake for $4.5bn in 2016 and relisted it in 2018.

Among subsequent shareholder lawsuits against SolarWinds, one suit draws attention to offshoring and cost cuts implemented by its private equity backers but does not name them as defendants. A Thoma Bravo partner on SolarWinds’ board declined to comment on the situation.

The experiences have not caused Bravo to become defensive.

“There has been a negative connotation on optimism, equating it with being naive or unstudious,” he says. “I have lived through 25 years of extremely smart people calling me with a wonderful explanation of why they didn’t do a particular deal. Many multiples later, they have nothing to show for it,” he adds.

Bravo’s bullishness extends to his own firm, which has no outside investors even as other private equity firms go public or sell minority stakes.

“We are very careful not to do things just because other people are doing it,” said Bravo. “All of these deals undervalue these firms massively.”

Additional reporting by Kaye Wiggins in Berlin