When MarketWatch started reporting on markets and investing, there was a general consensus among the biggest firms on Wall Street that private equity and software didn’t mix. The billionaire buyout barons didn’t think lenders would ever give them credit on assets that amounted to lines of code. Even if they could find funding, the risk of investing in something that could be rendered obsolete by a programmer working in a garage seemed too great.
But a young and ambitious former teenage tennis prodigy from Puerto Rico saw things differently. Orlando Bravo realized that software maintenance agreements could become a goldmine of investment capital. He created a new private equity firm, Thoma Bravo, to invest exclusively in enterprise software companies. Today, Thoma Bravo has $122 billion in assets under management and some of the best returns in the buyout industry. On Tuesday, the company signed an agreement to buy the management company of the name ForeRock FORG,
in a $2.3 billion deal.
As MarketWatch turns 25, we wanted to ask Bravo what’s next for software and private equity. Here are his slightly edited comments:
What do you expect to read in MarketWatch about software and private equity five years from now?
You will read about how private equity is reshaping the software industry. Our industry is running software the way it’s meant to be and doing a phenomenal job of turning these companies – into great innovators – [into also producing] for their shareholders – compared to the big innovators who lose money for their shareholders every day in the public markets. This is a long term trend. It got higher and higher. But now there is going to be a big moment in the next five years in private equity and software. All investors finally want profitability. They don’t want to indefinitely fund companies that are losing money just because they’re growing fast, or because they’re delivering value to their customers or solving their problems. And the public market has no answer to that.
What is the response from private equity?
First, the alignment. Absolute alignment between company management and end shareholders. In public companies, restricted stock practices are out of control. You see that when the stock goes down they dilute you even more because they need more and more stock. You are constantly dealing with this enormous dilution. It’s really a big lack of alignment. Two is the value of the fundamentals. Many of these companies need the help of very experienced owners and very experienced executives because they are younger companies and many of them want to learn. Many of them are run by founders, who are doing it for the first time and who are great. But they need to have a structure and an ownership structure that allows them to be successful. Not a structure with 10,000 owners changing their minds and stock trading no matter where the real business economy is.
Why can’t Oracle do this? Why should private equity do this?
Oracle definitely does. OracleORCL,
is one of the best to do so for sure. It’s actually one of the patterns we learned 22 years ago from talking to other executives and managers about how you actually run a software business. It’s 1000% true. But now, remember, there’s a $5 trillion market cap in software. One company can’t do everything and it’s a very fragmented industry. Extremely fragmented.
Is it really a novelty? Has your company been in business for over two decades?
Private equity, on the whole, has been a very small factor and has played mostly on the fringes – significant fringes – of technology. Opportunity now presents itself at these much lower valuations, especially for people who have the ability to absorb these assets and turn them into highly profitable engines of growth. Now, this is the first time that there is the possibility of buying the absolute market leaders, the best companies, to be at the cutting edge of technology. This was never available before. Because the private equity was too small to buy the leader, buy the best innovator, buy the best player. This is no longer the case. And second, the valuations of these top innovators, despite their loss-making structures, were unaffordable for a fundamental investor and now they are affordable. Third, these companies are looking for a way to consolidate…as a recession comes, growth slows, and their stock prices suffer. This is the first time we’ve seen this opportunity and it’s so clear.
What are you worried about reading in MarketWatch five years from now?
Why am I going to have to invent something? I would make something up about the fear of stagflation. Here’s my answer: I don’t spend my time worrying about things I can’t control. I have no fear because I would make it up because I think things are going to be good for private equity and software. It’s just better.
Can we try to scare you? To what extent is the rise of Thoma Bravo linked to ultra-low interest rates and quantitative easing? How does this model work if you have higher interest rates and less access to cheap debt?
We are doing much better in a bear market. If you look at our history, our best times go way back to 2000 and 2008. It’s not even close. Let me put it this way: venture capital and some growth equity is all about momentum. You buy high and sell high. In a forgiving environment that continues. We don’t do that. We take a company, we try to buy it at a fundamental price, and we create profits that weren’t there before. In an environment of high interest rates, low valuations and low growth, high interest rates and low growth lead to lower valuations. It allows us to have a really attractive entry point so that when we produce those profits, we own them at a very high yield of those profits. On top of that, we then focus on the best run company against public competitors so that we can then consolidate the industry against them. I would like the environment to enter a low valuation, low growth environment, I love that. And private equity, at least in software and technology, has nothing to do with debt. Look at our transactions over the past five years, the debt is about 25% of the purchase price. Look at public documents. You can see that everything is very tight.
Even 10 years ago, when your company was relatively small, the world’s largest private equity firms missed the opportunity to conduct software buyouts. Now you’re raising software buyout funds that are as big as their biggest private equity funds. What opportunities exist today that people miss?
In 1997, I once had a meeting with the head of a large private equity firm. I was trying to find a job. And in 1997, this person said that the private equity had been taken. It was a job interview and now we are much bigger than this company. In fact, it’s a fear I have. That we miss something like this because we don’t stay on our toes and aren’t impatient. We must continue to look to the future as we have grown and have more people. So notice how deep into crypto I am, trying to understand this environment. Although the industry is in a crypto winter, despite some issues the industry is facing from an ethical standpoint and a transparency standpoint. Another example: will social media be like enterprise software? Is there something ? We watch it. We don’t see it yet because it’s not as stable. But can someone find elements of great stability in it, underwrite it thinking differently and create a better business model? That’s what private equity incentivizes people to do. How can I take an asset and make a lot more money?