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Thoma Bravo bucks prevailing trends by raising a big fund

Thoma Bravo is bucking prevailing private-equity industry trends by raising a bigger investment fund this year, but it’s not abandoning its steady strategy of buying middle-market companies in its niche industries.

Led in Chicago by Managing Partners Carl Thoma and Lee Mitchell, the firm in February closed its biggest fund since it was founded in 1980, raising $1.25 billion. The 10th fund outstripped the $822.5 million raised for the ninth fund in 2008.

Messrs. Thoma and Mitchell, who have been in private equity for more than 30 years, are particularly focused on the software industry, which makes up about 70 percent of their investment portfolio, and other businesses also in consolidating industries. They steer the firm along with two San Francisco-based managing partners, Orlando Bravo and Scott Crabill.

Specifically, Thoma Bravo seeks out companies that generate “recurring revenue,” derived from customers who have integrated a product into their businesses. Mr. Thoma says the firm also favors companies with executives eager to improve efficiencies and expand through “tuck-in acquisitions” — industry-speak for acquisitions designed to be merged into the acquirer’s operations, rather than rejiggered and sold off.

Thoma Bravo avoids buying companies from other private-equity firms that likely already have made improvements, preferring subsidiary divestures by big corporations or taking public companies private.

“We’ve been able to really hone in on a strategy and process that works pretty well through even a poor economy,” Mr. Mitchell says. “We had periods in our history where we kind of wandered off of that a little bit and our results generally suffered as a consequence.”

Thoma Bravo this month sold SonicWall Inc., a security and data backup software company, to Dell Inc. While terms weren’t disclosed, analysts estimated Dell bought it for $1 billion to $1.5 billion, potentially twice the $717 million Thoma Bravo paid when it took SonicWall private in 2010.

“The most successful firms are the firms that have focus,” says Maura O’Hara, executive director of the Illinois Venture Capital Association, noting that Thoma Bravo has developed a niche in cyber-security software. “The fact that they’re focused and that everybody understands what they’re looking for makes it easier for deals to find them.” She notes the Dell deal was a “bonanza” because it delivered a big return in a short period.

Thoma Bravo targets annual returns, excluding fees, between 20 percent and 25 percent. Two of its last three funds — VII and IX — have hit that target or exceeded it, and all three ranked in the top quartile of peer funds as of the end of last year, they say.

Fund VIII is still below that because the recession caused it, and other funds of its vintage, to hold investments longer because it was harder to exit, at least at a good valuation, Mr. Mitchell says.

“We haven’t made a lot of bad investments,” says Mr. Thoma. Some of the Chicago firms that aren’t doing well have “very bright capable people but they’ve just had the misfortune of picking some bad industries, and I don’t know whether that’s randomness or just not enough focus on the quality of revenue.”

Despite the perception that private-equity firms always replace management at purchased companies, Thoma Bravo avoids that.

“If you say we’re going to buy this and then we’re going to go out and find a new person to run it, there’s a lot of risk in that and it takes a lot of time,” Mr. Mitchell says.

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