In late 2018, mortgage finance tech provider Ellie Mae met with a dramatic reversal of fortune. The listed company, long a blue-chip darling of shareholders, fell out of favor when rising interest rates began to cut into its revenue.
Between August and November, Ellie Mae’s shares plunged by nearly 50 percent, signaling the apparent end of a lofty run on the New York Stock Exchange.
Yet although rate hikes by the Federal Reserve created headwinds in the US mortgage market, they did not impact Ellie Mae quite as harshly as its stock dive suggested.
The software company, which helps lenders originate more loans cost-effectively and at a faster pace, accounted for about half of all US mortgages processed and had a 98 percent customer retention rate on its core product, Encompass.
This meant Ellie Mae could “sustain volumes” despite market bumps, Holden Spaht, managing partner of Thoma Bravo, tells Buyouts. “Growth decelerated and the deceleration was temporary,” Spaht says. Even as Ellie Mae’s shares dropped, “it was still gaining customers.”
Thoma Bravo, a veteran in software buyouts, spotted an opportunity. It recognized that public investors had overreacted, that they had failed, in Spaht’s words, to “understand the nuances of the company’s pricing model.”
When Thoma Bravo viewed Ellie Mae, it saw a continuing high-flyer, a cloud-based platform positioned to lead digital transformation in the residential mortgage industry.
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Deciding Ellie Mae had a better shot at achieving its potential in private ownership with a value-adding control partner, Thoma Bravo reached out.
Other investors, including a few private equity firms, also had their eyes on Ellie Mae. Thoma Bravo, however, prevailed in the competitive bidding process, agreeing in early 2019 to a purchase price of just over $3.7 billion. It put up about $2.2 billion of equity, with the rest financed with debt through an initial commitment from Jefferies Finance. By April, Ellie Mae’s shares had ceased trading.
Ellie Mae’s headline price struck many observers as high. “The price the market saw,” Spaht says, “was not the price that we saw.”
He adds that Thoma Bravo “had a lot of conviction around the price paid” because of an operating plan designed to build on Ellie Mae’s “good fundamentals.” The plan drew on the “nuts-and-bolts” strategy developed and deployed by Thoma Bravo over two decades of investing in application, infrastructure and security software.
The firm targets software franchises with a record of growth, but which do not have the organizational processes and structures to go to the next level. When doing a deal, it looks to identify “three to four operational levers that will move the needle during our investment horizon,” Spaht says.
Implementing the operating plan
Unlike many PE firms, Thoma Bravo does not as a rule replace top management after acquiring software companies. Instead, it prefers to partner with the owner-operators that were responsible for years of prior expansion. This was a crucial starting point with Ellie Mae, Spaht says, with the investor quickly aligning itself with president and CEO Jonathan Corr and his team.
Alongside executives, Thoma Brazo zeroed-in on key areas that could benefit from an emphasis on operational best practices.
They included a pricing model that “underpriced Ellie Mae’s software relative to the value it was delivering,” Spaht says. Another area was cost structure, which needed streamlining after major spending on platform updates to satisfy regulatory compliance demands.
Thoma Bravo and management also looked closely at product management – “at what sells and what doesn’t,” Spaht says. This resulted in a decision to “redirect sales and product resources to the core business,” thus highlighting Ellie Mae’s primary strengths.
In addition, attention was paid to Ellie Mae’s go-to-market organization, which was restructured around key lender segments. The company’s sales and products activities were also enhanced through greater team access to data, which was facilitated by “a big systems investment,” Spaht says.
Another important focus was market share. Thoma Bravo and the executives aimed to expand Ellie Mae’s customer base in a large US population of mid-market originators, in part by tapping into the firm’s long experience with buy-and-build deals.
“There was a great consolidation opportunity in a hugely fragmented space,” Spaht says.
Thoma Bravo makes the “majority of our operational progress” in the first 12 months of ownership, he adds. The gains accrued from initiatives on Ellie Mae’s cost and pricing sides “happened much faster than expected,” restoring profitability.
The business was “firing on all cylinders,” Spaht says, “giving us the cashflow to buy something that was on our roadmap.”
Within six months of the acquisition, Ellie Mae took this step by purchasing mortgage automation software provider Capsilon from Francisco Partners for $350 million.
The deal was “very strategic,” Spaht says. Capsilon brought about $45 million of revenue and more than $20 million of pro-forma EBITDA to Ellie Mae and increased its total addressable market by roughly $4 billion.
As a market leader in machine learning and natural-language processing tech, Capsilon also introduced fresh capabilities to Ellie Mae’s platform. These allowed customers to more accurately recognize and extract data from mortgage applications, Spaht says.
Taken together, operational improvements launched in early 2019 succeeded in accelerating Ellie Mae’s organic growth to 50 percent, from 6 percent, Spaht says. EBITDA margins jumped to 60 percent, from a previous 17-18 percent.
Revenue for the trailing 12 months moved up from $481 million at entry to $744 million at exit.
Sale to Intercontinental
Ellie Mae entered 2020 in a far stronger competitive position than at any point in its history. Ironically, this position was bolstered by tailwinds created by the health crisis, including a digital boom that fueled software values.
In addition, the Federal Reserve “flooded the economy with money” and was maintaining a “benign interest-rate environment,” Spaht says.
In September – only 18 months after the 2019 acquisition – Thoma Bravo sold Ellie Mae to Intercontinental Exchange, parent organization to the NYSE. Intercontinental had recently developed more exposure to the mortgage industry and was preparing to play a bigger role in its digitization. To do this, Spaht says, “you had to own Ellie Mae.”
Intercontinental paid $11 billion, including debt. Thoma Bravo earned a gross multiple on invested capital of 4.1x and a gross internal rate of return of 217 percent, Spaht says.
For a PE firm with a history of lucrative exits, Ellie Mae was one of Thoma Bravo’s best. It gave a significant boost to the investor’s $12.6 billion flagship Fund XIII, which was generating an 83 percent net IRR as of June 2020, according to a report by the Pennsylvania State Employees’ Retirement System.
The exit contributed to a record year of liquidity for Thoma Bravo, which realized total gross proceeds of $12 billion, Buyouts has reported.
Thoma Bravo’s ownership of Ellie Mae also produced employment benefits. The company’s workforce grew to 1,759 employees, from 1,505, Spaht says. Prior to the sale, he notes, last year’s goal had been to “get to 2,300” employees.
Thoma Bravo holds portfolio assets for four to five years, on average. “It was not an easy decision to sell Ellie Mae after an 18-month hold,” Spaht says, “as it is just one of those great companies you want to own for a long time.” In the end, however, “it was the right deal for us.”
Thoma Bravo in 2020 secured a combined $22.8 billion for a 14th flagship offering and two mid-market vehicles. Fund XIV, which raised $17.8 billion, was the year’s largest PE fund closing, irrespective of strategy, and among the North American market’s largest of all time.
In January, founder and managing partner Orlando Bravo told Buyouts in a cover story that 2020 was “absolutely our best year ever.”
With numbers like this, how could it have been anything else?
Ellie Mae
The winning numbers
50%
Ellie Mae’s organic growth, up from 6%, over 2019-2060%
What Ellie Mae’s EBITDA margins increased to, compared with
17%-18% previously$11bn
Price paid by Intercontinental Exchange for Ellie Mae last year4.1x
Gross investment multiple earned by Thoma Bravo217%
Thoma Bravo’s gross IRR
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