By Cha Junho, Park Jongkwan
Global private equity (PEF) manager Thoma Bravo is one of the fastest-growing "star managers" in the world. While it may not be as well known as some of the larger PE firms like Carlyle, KKR, and Blackstone, it is unique in that it has amassed $131 billion in assets under management from limited partners (LPs) around the world, thanks to its strategy of investing exclusively in technology companies.
It is one of the most favored PEFs among LPs. In 2019, the fund exited Ellie Mae, a mortgage finance technology company it acquired for $3.7 billion, for $11 billion in less than 18 months. Domestic investors such as the National Pension Service and the Teachers' Mutual Aid Association have also emerged as favorite managers, participating in follow-on funds. In June of this year, the company completed a mega-deal to sell Adenza to Nasdaq for $10.5 billion amid the stock market downturn. The firm has more than doubled its profits in just over two years since the acquisition.
Orlando Bravo, 53, founder of Thoma Bravo, explained the investment strategy in an exclusive interview with The Korea Economic Daily on Tuesday in Gwanghwamun, Seoul. "We are currently focusing on investing in North American tech," he added. Thoma Bravo's investment strategy and decision-making is led by a man who has been called "the best dealmaker on Wall Street" (Forbes) and "the king of SaaS" (Financial Times).
PEF is known to favor industries that generate stable cash flows. Why does Thoma Bravo only invest in software companies that are somewhat volatile?
We only invest in three areas of B2B software: applications, infrastructure, and cybersecurity. When we started, many software companies had potential but weren't making money. Venture capitalists (VCs) were investing, but there were no private equity firms willing to commit large amounts of money. We actively sought out opportunities to invest in companies that had innovative ideas but weren't yet profitable.
Tech disruptors are companies that can generate significant cash flow with a little help from the operational side. What we've been doing for 23 years is taking companies that have innovation and turning them into profitable companies, and then partnering with them to help them take those profits and reinvest them back into faster growth, or into R&D, or into engineering research. So that's the simple formula that we've been applying over and over again.
I'm curious about some of your major investments and valuation stories.
One example is Compuware, which we acquired in 2014 for $2.2 billion. Within Compuware, there were several divisions, and after the acquisition, we looked at a division called Dynatrace, which was primarily about managing cloud computing environments, managing uptime and automation in the cloud.
Compuware's main business was mainframe management, and the growth rate of that business was relatively low. We worked with the management team to turn that around, and as a first step, we sold the main business. At the same time, we spun off the Dynatrace division separately, reinvested heavily in it, and focused our resources on developing the next generation of products. We also brought the founder of Dynatrace into the core management team. Dynatrace went public separately and is now valued at $14.2 billion.
We prefer to set a single agenda and work with the existing founders, management team, and employees. We like to work with experienced partners because they can analyze the elements of the business and we can make the right investments in each element.
Another example I'll give you is Epicor, a software company. It was our first acquisition 22 years ago, and it was a company that was selling software to distributors. It was a 15-year-old company, and it was unprofitable and ungrowthy. Our partners were able to work with the existing management team and turn it into a high-margin company in three years.
Why do you focus your investments on B2B over B2C in software?
With B2B software, customers have a real-time financial incentive to use the product. They can use the software to reduce costs, increase productivity, protect their infrastructure with cybersecurity software, and so on, and generate greater revenue. The B2C market, on the other hand, is more complex, despite its simplicity. Consumers are unpredictable, and there is a high risk of losing brand power at any time.
What do you think about the prospect of a second IT bubble as interest rates rise?
The majority of the companies we invest in have potential but are not making money, so they may struggle in the stock market. As capital becomes more expensive to raise and growth slows given a number of macro factors, investors will sell and stock prices will fall. It happened during the financial crisis, it happened during the coronavirus in Q1 and Q2 of 2020, and it could happen again.
As market participants ourselves, we actually like it better when markets are stable. But more importantly, it's impossible to time the market, especially since we're not investing in an index, we're buying and selling companies. Each of our funds acquires, on average, three to four companies a year, so I think the important thing is more about judging whether the company is growing, how it's growing its cash flow, and ultimately what its value is, rather than what the overall market is doing.
For example, when we sold Eli Lilly to ICE for $11 billion, the market was good, and then four months ago we sold Adensa to Nasdaq for $11.7 billion, and the market was a little bit different, and at the time we acquired those companies, the tech index was high, not low. I think the fact that we've created more value since those acquisitions and made strategic acquisitions has been a key factor.
Ironically, it was during the 2008 financial crisis that we made the decision as a company that we were going to focus solely on software going forward. It was a big change for investors, and it was obviously difficult to raise money, but because we focused on the essence of the investment during a difficult time, we developed a very strong bond with the LPs we partnered with at the time.
Korea has world-class tech companies in B2C sectors such as games and mobile apps, but it's hard to find global companies in B2B. Do you have any advice for fostering the industry?
I think the interesting thing about the software industry is that it is fundamentally a global business, so if you have a product that can create a lot of value for your customers, for example, you can immediately distribute it globally and you don't need a physical supply chain, you don't need to subcontract for transportation, you can do it globally, whether it's a development team, R&D team, or sales, you can do it globally, and because of the nature of software, you can reach out to customers who are also global.
So the more open a company is, the more they can use that technology to try different strategies. If Korean companies focus more on connectivity, I think the B2B segment will be even better.
My advice as an investor is that companies need to take some risks. As a business owner, that's why I can disrupt the existing business system that I have and introduce technology into it and increase productivity significantly, so I can increase market share, so I would say that risk-taking is also important.
What do you think are the keys to a competitive PEF?
I think it's very important to understand the industry and how it operates, and the private equity industry has changed a lot over time. When I started in 1997, it was more about getting deals done, especially financial structuring and so on.
But as competition in the marketplace has increased, things like technical investment strategy techniques have become so commonplace that they're not really special skills, they're just tactics that everybody knows, and that in and of itself doesn't create a competitive advantage.
So I think good private equity is about improving and strengthening a company to make it a better company when you acquire it, and so I think the ownership model that we have can be a stronger growth model because it allows us to align the synchronization between the shareholders as well as the company.
Can you explain a little bit more about the alignment of interests between shareholders and the company?
Publicly traded companies have shareholders, and shareholders naturally care about performance, but they have very limited information about how the company is being run at an operational level. The board of directors has to look out for the shareholders, and that applies to the performance of the management team as well, so I would say that there are multiple layers of oversight in corporate management, and in private equity, you have one owner with one agenda, and that agenda is shared by the management team.
And there's a lot of power in that because when you have that alignment, you're able to work together more consistently to make decisions, not just investment decisions, but decisions about how to run the company, how to make decisions about the culture fit of the company, how to make decisions about human resources.
If you're a publicly traded software company, you have to look out for your shareholders, so there's a lot of different opinions and approaches to managing the share price, whether it's share buybacks, whether it's additional M&A, whether it's reinvestment in the core product, and I think in this private equity environment where you have one owner, it's easier to have a specific, concrete goal, a common goal, and to agree with management on that goal and move together on that timeline.
Rather than having a vague, indefinite timeline, I think it's a more powerful way to do it because it gives you a lot more clarity, and clarity is always a good thing, but it also increases the timeliness and the urgency for management to act on it.
What's the one sector that you've been focusing on the most lately and seeing as promising?
Cybersecurity. I'm convinced that as digital transformation accelerates, cyber threats will increase exponentially and on a global scale.
We've been focused on cybersecurity since 2009, and last year we spent KRW 25 trillion on acquisitions, including Anaplan (KRW 13 trillion), Salepoint (KRW 8 trillion), and Ping Identity (KRW 3.5 trillion), most of which are security-specific. Ping Identity is a dominant player in customer information security. SailPoint is a dominant player in enterprise personalization security, and Proofpoint is a leader in email cybersecurity, among others.
I'm curious about your deal-sourcing know-how.
The number of software companies we're invested in right now is about 450, total value is about $250 billion, and it's growing rapidly. I think one of our strengths is that we know a lot of the key players in the industry and we have close relationships and follow-ups with them, including the board of directors.
Especially the leadership team, including myself, and our managing partners, we've been together for at least 16 years, and there's very little turnover, so we're able to run and maintain the team collectively, so it's very easy for us to work very closely with the business owners and the board and the management side, but it's also easy for us to follow up and for our team members to follow up over the long term.
Do you plan to invest in Korean software companies?
I think Korea can become a market leader in B2B software in the future and we would like to be the first to come and invest.
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