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Thoma Bravo built an enviable private equity reputation buying and fixing small to midsized companies. Armed with a new fund, it’s going after bigger prey

Mark Calvey – October 3, 2014
Senior Reporter-San Francisco Business Times

With the world of private equity awash in money, it’s easy for a mere $3.65 billion to get almost overlooked.

That’s how much San Francisco’s Thoma Bravo raised earlier this year for its sixth investment fund, with minimal fanfare. It’s the firm’s largest in its 16-year history, but in a year marked by huge fundraisings, it’s been overshadowed even in its own hometown by firms like Hellman & Friedman, which is closing in on a $10 billion fund and is now turning away money.

But Thoma Bravo’s fund may end up punching well above its weight. The firm’s focus on buyouts of small to midsize tech companies means the fund is likely to be spread across a wide range of bets rather than on just a few big ones. It’s likely to lead to other buyouts as well: Thoma Bravo pursues a so-called “buy and build” strategy, using many of its portfolio companies as a platform for additional acquisitions in a consolidating industry. Thoma Bravo has made 30 acquisitions of companies that served as platforms for additional M&A deals.

Thoma Bravo says that since 2000, the firm’s funds managed by the current partners have outperformed most of their peers. And the modest size of its funds hasn’t obscured its reputation among those who closely follow private equity.

San Francisco Business Times

San Francisco Business Times

“Carl Thoma really is one of the founders of private equity and is quite well-respected. Orlando Bravo, on the other hand, is one of the rising stars of the industry, with a stellar reputation in technology buyouts,” said Kelly Deponte, a managing director at San Francisco-based Probitas Partners, a placement agent that raises money for private equity, real estate and infrastructure fund managers from institutional investors. Probitas Partners doesn’t work with Thoma Bravo.

Like other newly bankrolled private equity firms, Thoma Bravo’s eager to put the money to work, with a $2.5 billion purchase of Compuware pending.

“I love the rush of the deal,” managing partner Orlando Bravo told the San Francisco Business Times. He pointed to the exhilaration he feels in successfully bringing together all parties of a deal – a company’s management and existing shareholders along with his firm’s partners and other – to make a transaction happen.

In addition to Thoma and Bravo, the firm’s leadership included managing partners Seth Boro, Scott Crabill, Lee Mitchell, Holden Spaht and partner Robert Sayle.

Bravo says this year’s larger fund allows his firm to target opportunities involving companies with $1 billion or more in annual revenue as it’s done successfully with small companies. As if to demonstrate its ability to chase larger prey, Thoma Bravo went after Tibco Software, which ended up selling out to Vista Equity Partners in a $4.3 billion deal Sept. 29.

Thoma Bravo brings its M&A expertise to bear as quickly as possible.

“We get heavily involved in sourcing the add-on acquisitions and underlying due diligence, working with management on the right strategy and targets,” Thoma Bravo’s Crabill said. “We also help management with the integration, especially on the first acquisition.”

Making that initial investment in a platform company is key.

“We’re looking for an industry-leading company in a growing industry segment,” Crabill said. “The company may be 10, 15 or 20 years old with thousands of customers and management that has been there a while, with a track record of growing the business profitably.”

San Francisco investment banker Jon Merriman, among others, say the lack of brokerage research on smaller companies left many of these smaller players ignored by the larger investment community.

Thoma Bravo sees Wall Street mispricing the companies it courts.

“The public markets are where we get half of our deal activity,” Bravo said. “The public markets are extremely volatile with respect to technology. When companies are showing great growth they tend to be overvalued, in our view. When they stumble, they tend to be undervalued.

“The public markets really value two things, and rightly so, license growth and subscription revenue,” Bravo said. “But when we find profit opportunities and growth over the long term in those companies that have stumbled on those two grounds, we can make a great return while giving the public shareholders a good premium.”

Bravo said the firm’s shift to buyout opportunities began with one of the software industry’s first take-private deals in 2002, with the acquisition of Prophet 21.

After Completing seven “tuck-in” acquisitions and doubling annual revenue to $80 million, Thoma Bravo sold the company in 2005. Another success was the acquisition of Manatron, a property tax service for state and local governments that was eventually purchased by Thomson Reuters.

The firm plans to remain focused on its buy-and-build strategy even as investor frenzy grows over finding the next hot startup.

“It’s helping us now, because that action is back,” Bravo said. “The commute to Palo Alto is even worse than in 1999. I feel the energy in San Francisco is even bigger than in 1998-99.

“We’re sticking with what we know best: helping established technology and software companies pursue a long-term path of growth,” Bravo said.