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He Might Be Tech’s Last Bull. Here’s Why the Founder of Thoma Bravo Is Still Buying.

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Imagine everything you aspire to buy was suddenly available at 30% off. You could have an epic shopping spree. You might max out your credit cards. Because, some bargains are once in a lifetime.

That’s the situation facing Thoma Bravo, a private-equity firm with more than $120 billion in assets that invests primarily in enterprise software companies. Over two decades, Thoma Bravo has invested in more than 420 technology businesses—they currently have stakes in more than 70 companies—and they are stepping on the accelerator.

In 2022, the tech-rich Nasdaq Composite index fell more than 30%, with many cloud-based software companies suffering steeper declines. For a firm in the business of buying, fixing, and selling tech companies, the opportunity came loudly knocking.

In December, Thoma Bravo raised $32.4 billion in fresh capital, including $24.3 billion for its Thomas Bravo Fund XV, the single-largest tech buyout fund ever assembled. It has stockpiled cash.

In 2022, tech deals ground to a halt: The initial public offering market shut down; strategic buyers turned cautious, amid economic worries and greater regulatory scrutiny; and spiking interest rates slowed the buyout market.

The exception was Thoma Bravo. Since the start of 2022, either alone or in combination with other investors, the firm has bought or announced plans to acquire UserTesting, Nearmap, Coupa Software
(ticker: COUP), Ping Identity, ForgeRock (FORG), SailPoint, Mercell, Anaplan, and Bottomline Technologies, to name a few. And there will be many more to follow.

This past week, I spoke with Thoma Bravo co-founder Orlando Bravo about private equity, software, Twitter, FTX, and several other things. Here are highlights from the conversation.

No one does more tech buyouts than you. What’s your edge?

We have the ability to turn creative innovators into great cash flow companies. Most companies we take private are great, but they’re usually not profitable. We have to generate 40%-plus Ebitda margins [earnings before interest, taxes, depreciation, and amortization] to make money at the prices we pay.

To drive up margins, you are slashing costs.

Yes, we take out costs, absolutely. There are times when a company is growing so fast that you can hold head count and grow into the margins. But in an environment like today—where we’re almost certainly facing a recession, and no one knows how deep—you are well served by decreasing costs.

With the selloff, has your approach changed?

There’s a lot more to buy. We just did this large fund raise, and the opportunity is many, many, many, many, many multiples of that.

Your model is to buy companies—and later sell them. How long do you own them?

We use four or five years as a guide. Our average holding period has been shorter—3.3 years. People ask how we can turn a company from zero margin to 40% with the existing management—that’s our secret sauce. You can make changes very quickly.

What are you hearing from portfolio companies about the outlook?

It’s not that bad. In the June quarter, purchasing managers were really pulling back. The September quarter was soft. But the December quarter was pretty decent. I feared the fourth quarter was going to be surprisingly bad, and it was not. I didn’t see anything nearly as bad as what we saw in the financial crisis, or what we saw in the first two quarters of Covid in Q1 and Q2 of 2020.

What’s happening on the exit side?

Not much. As an organization, we’ve never been afraid to sell. But right now there’s just not much going on. This past year we sold most of Veracode, to TA Associates. We sold Frontline, an education software company, to Roper Technologies (ROP). And we sold Kofax to Clearlake Capital and TA. But nothing in the last six months.

Do you see the software IPO market reopening soon?

Software companies that are 20% growers are trading at five times ARR [annual recurring revenue]. I’m not sure venture-backed companies want to go public at that level which might be a markdown from the last two to three rounds. The other question is whether investors want the same kind of companies where they just lost 80%. Investors are going to want high margins, reasonable prices, and good growth.

Did you bid for Twitter?

We looked at it seriously. If you just looked at the metrics, it looked like a Thoma Bravo deal, at around seven times forward revenue, growing around 15%. It had Ebitda, and a huge operating opportunity. But when we buy an enterprise software company, we have an exact plan on how we can create value. Here, we didn’t know how. Is it an extremely valuable company for society? It sounds like it. But that doesn’t necessarily translate into being an extremely valuable company as an investment. We didn’t make a formal offer.

Finally, I have to ask about your investment in FTX.

It was obviously a mistake. And we have personally apologized to investors in our growth fund. It wasn’t a large investment—$100 million—but it was a big mistake and an embarrassing one. It wasn’t a diligence mistake. Diligence mistakes are when you miss a lawsuit, or you miss a trendline. This was a judgment mistake. I said even before the issues at FTX that we’re not going to make any more crypto investments, because I was not loving the business practices we’re seeing in crypto.

Write to Eric J. Savitz at eric.savitz@barrons.com

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