The perils of the public market: Investor reflects on why vendors are going private
A managing partner at Thoma Bravo, which has amassed a large portfolio of software companies, shares his views, and we also talk to a supplier that made the journey
Dell may be the largest tech company to ever go private, but it is by no means the only vendor that has decided it would be better off to pursue strategic options without the constant second guessing of public investors. To learn more about the trend, Network World Editor in Chief John Dix talked with Seth Boro, a Managing Partner at private equity firm Thoma Bravo, which has taken Riverbed, Dynatrace and many other network companies private, and with Kevin Thompson, CEO of SolarWinds, a supplier of IT management tools that Thoma Bravo helped take private in a $4.5 billion deal last February. Below is the interview with Boro. Click here for the interview with Thompson from SolarWinds.
We’ve seen a number of companies going private, some of which you’ve helped, but give us the big picture view of what’s driving the shift?We’ve been taking software companies private for the better part of 10 years, with some larger companies in our portfolio, like SolarWinds, Riverbed and Compuware, having gone through the process in the last 18 months or so.
A big part of the appeal is gaining more flexibility to operate your business, and that can be related to things like transitioning from a perpetual license model to one that’s recurring revenue, which is a theme in software companies and is hard to do in the public markets because your growth can slow and your profitability can get checked in the short term.
But going private can also help companies navigate acquisitions and consolidations and do it in a very aggressive way, and that’s something that’s hard to do when you’re public. Third, I think a lot of management teams are incredibly frustrated with the very short-term nature of public markets, and that has become more acute over time.
I think the going private trend has been in the press more because the companies making the transition have been bigger, but it has been a big part of our business for as long as we’ve been investing in the software area.
Are all your investments in software companies?
We’re 100% focused on software. It’s a great industry that has growth that is outsize relative to other sectors. And since we’ve been doing it for so long we have a lot of proprietary ideas about how to create value for investors. But really underpinning that is it’s a huge market with all sorts of different subsectors, with growth rates that are higher than GDP. Software in general is a highly fragmented market, so we find lots of opportunities to make either product or customer acquisitions to build businesses over time. That consolidation investing strategy is part of our heritage.
Given your investments in network companies, do certain industry segments appeal to you more than others?
At Thoma Bravo we’re exposed to all sectors of the software economy.
Does the cloud complicate your strategic vision, or has it just become a new delivery option?
We see it creating opportunity across the portfolio. A lot of what we have been doing is working with our companies to help them manage the fact that private and public cloud infrastructure is a meaningful change and helping to make sure we’re positioned to deliver product to this new infrastructure.
So you’re not so much worried about a company you invest in getting disrupted by a new cloud entrant?
In technology there’s always someone trying to disrupt something. We’re more focused on making sure the companies we’re buying — which are generally very longstanding companies that have long histories, big customer bases, very mature products – are developing for whatever that next-generation technology might be.
Is there a sweet spot in terms of the size of a company you would take private?
No. At Thoma Bravo we have funds that can pursue companies of virtually all sizes. We don’t make venture investments, so the companies we’re investing in are typically buy-and-control, but we have the flexibility to play up and down the size range.
Do you typically go after them or do they come to you?
It’s a mix. If we see an opportunity we find exciting and we have a good strategy, we can be very proactive. In other cases we have companies approach us.
Do you look for synergies between the companies you invest in, as kind of a multiplier?
We never force anything, but obviously if there’s opportunity to collaborate we encourage that. But given that each of our portfolio companies is run separately with a separate board and separate management team, we don’t force partnerships that may be unnatural. That being said, one of the benefits of having a big portfolio is we get educated across the sectors so we have strong views on where opportunities might be which really helps us make new investments.
Have you ever rolled companies together into a larger concern?
It will happen very rarely, but more often than not we’ll use our companies, which we call platform companies, to make acquisitions in their industry after we buy them.
What is the end game? Is there a common exit strategy?
Every situation is different. Most of our companies have been bought by strategic buyers, but we never contemplate what the exit is going to be while we’re making the investment. Our objective is to work with management and employees to build the best possible company that we can, and our philosophy is the outcome will take care of itself regardless of timeframe.
We have owned companies for less than a year or two, and we have one company that’s coming up on ten years.
In terms of the bigger picture, Dell is an example of a huge company going private, do you expect to see other technology companies going private as well?
I would think so. I think there is appetite for it. I think it’s a general theme in tech. If you talk to the executives in our portfolio, they would tell you that as private companies they have a lot more operating flexibility, that there are things they can do they couldn’t do when they were public, that having a single partner that has complete alignment with them on what they’re trying to achieve is a lot of fun and very straightforward versus having to navigate some of the perils of the public markets.
It goes back to the first question you asked, which is why is this shift taking place? I think it allows companies to operate a lot more flexibly and make strategic decisions that would be hard if you’re focusing on quarterly results at all times.