Thoma Bravo's Carl Thoma.
Raised on a ranch in the Oklahoma panhandle, Carl Thoma is unflappable in tough times, cautious in good. As a managing partner with Thoma Bravo LLC, he has helped navigate the Chicago buyout firm through the credit crisis, closing deals in the consumer and software sectors.
Now Thoma Bravo is surveying financial services for opportunities, including potential tuck-ins for the Texas life insurance company it owns. "I've been doing this for 35 years," the 60-year-old Thoma says with a steady voice. "I've lived through several of these meltdowns."
Private equity firms will have to adjust by being patient, he says. Not least among their challenges is waiting for valuations to come down, as sellers are slow to recognize their companies are worth less now than a year ago. But for the down-to-earth Thoma, who similarly held back in the financial crises of the '80s, "that's not the end of the world."
Assuming earnings go up, there is still room for returns from PE-backed companies. Sponsors may simply have to settle for 2 or 3 times their money instead of 4 or 5 times, he says. With the rest of the financial world suffering so badly, Thoma predicts that the buyout industry is going to come out of the crisis "incredibly tall."
He notes that "we don't have to do much to outperform the stock market." Hedge funds are blowing up, while Treasuries are yielding a slim 3% or 4%, "so there's not much competition."
Like many others, the firm is cautiously scanning the distressed financial services sector. "We're all trying to figure where the opportunities are," he says.
For the big insurance companies swept up in Wall Street's downward spiral, notably American International Group Inc., the worst may be over, Thoma comments. But some of the smaller insurers that invested in risky securities -- including property/casualty companies -- might still take a hit, he says.
Or, he adds, annuity firms that guaranteed strong rates of returns, and bought aggressive securities to achieve them, could also run into trouble.
The old, traditional life insurance companies, such as Northwestern Mutual Life Insurance Co., should do "just fine," he says. "There's really no way you can have a run on a life insurance company." The only danger would be if they had bought a lot of risky securities, Thoma adds, such as subprime mortgages or credit default swaps.
Thoma Bravo is no stranger to the space. The firm has owned American-Amicable Life Insurance Co. of Texas for more than eight years. In early 2000, the sponsor, then known as Thoma Cressey Equity Partners, bought the Waco insurer for $104.6 million.
"We never believed in credit enhancements, because we knew that was 'hokey pokey,' " Thoma says. Right now, about 95% of the insurer's money is in government instruments, he notes, and the company's debt has been paid off in full. Its main concern is deciding how to be judicious with excess capital to continue growing the business.
Thoma Bravo is close to wrapping up an $800 million fund that it began raising last fall, according to a source. The new pool was pretty much completed in late spring, but a few contributions are still rolling in.
Lehman Brothers Private Equity Fund Advisers, among the firm's existing limited partners, is contributing $35 million to the new vehicle, says John Massey, chairman of Lehman's private equity fund investment committee. "The thing that attracted me to [Thoma] was his common sense," says Massey, who has known him since the early 1990s and is a director of American-Amicable. "He doesn't do fads."
Thoma Bravo targets businesses generating $5 million to $50 million of Ebit, a segment that has been affected by the financial crisis but is not frozen by it, Thoma says. Indeed, as recently as Oct. 20, one portfolio company, Acresso Software Inc., said it was buying Intraware Inc. for undisclosed terms.
So far this year, Thoma Bravo has also made three platform investments, including Luxe Beauty Holdings Inc., which it formed to buy hair care products provider Sexy Hair Concepts LLC. Luxe Beauty will eventually look to buy other personal care businesses.
Thoma's firm also bought Manatron Inc., which makes software used by local governments for property tax assessments, for $66 million, as well as Macrovision Solutions Corp.'s software unit for $200 million.
Even as the credit markets were tightening, the firm never turned to hedge funds as alternative sources of financing. In fact, it avoided them. "When you're as old as I am, you knew that was hot money," Thoma says. Instead, the firm prefers its relationship banks, such as Bank of Montreal, Bank of America Corp. and CIT Group Inc., which are still selectively lending, he adds.
If anything, Massey points out, "Carl is almost too conservative."
As an investor in what might be considered the lower end of the middle market, his firm has financed its acquisitions with 50% equity and 50% debt over the past six or seven years, though a sponsor might today be pushed toward 60% equity. The larger funds may have known the market was overheating, but they were just hoping to get in and out of their deals before the party ended. "I think sometimes greed sets in," Thoma says.
Thoma majored in accounting and agriculture economics at Oklahoma State University and in 1973 earned an M.B.A. from Stanford Graduate School of Business. He made his foray into private equity the following year at First Chicago Investment Corp. In 1980, he co-founded Golder, Thoma, Cressey, Rauner Inc., which in 1998 split into GTCR Golder Rauner LLC and Thoma Cressey Bravo, which then became Thoma Bravo last year. Since inception, Thoma Bravo and its predecessor firms lay claim to a net annual internal rate of return of about 28% to investors.
What worries Thoma is how the next 12 to 18 months will play out among consumers and small businesses: "The challenge we face in America is not to let the excesses of hedge funds and Wall Street spill over too much into Main Street, because that's where most of private equity's future lies."
That's where Thoma hopes his instincts prove him right.
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