The $1.3 billion, vintage 2012 Thoma Bravo Fund X from Thoma Bravo had a net internal rate of return of 34.2 percent as of September 30, according to an investor who asked not to be named. That IRR well above the 14.8 percent top-quartile threshold for U.S. private equity funds of the same vintage, and the median return of 8.18 percent, as of June 30, according to estimates from Cambridge Associates.
Orlando Bravo, managing partner of Thoma Bravo, spoke with Buyouts by phone from his office in San Francisco.
Thoma Bravo Fund X raised $1.275 billion in five months in 2012. Can you tell us about the fundraising?
The 2011 fundraising environment had gotten better coming out of the financial crisis. But the most important thing that helped us was our prior fund performance. We raised Fund X on a Fund IX return of 3.2x and a 43.5 percent net IRR [at the time]. Earlier funds also had strong numbers. The performance had been very good and very consistent. When we went to market, I did not do a single trip outside of San Francisco to raise the fund. It was mostly existing LPs and it got done really quickly. It was surprising how quickly it was done, from my perspective.
Why did Fund X get more interest from sovereign wealth funds?
One is, they had tracked us for a while so it’s not like they just showed up that day. They had seen the performance of Fund VIII and Fund IX. Fundraising relationships get built over time. If you keep doing well, they finally make it in. They had been watching us, and Fund X could accommodate them. We usually add three or four significant investors in a fund. The size of this fund was large enough so someone could write us a $100 million check and get in. Before that, the funds were smaller so it was harder for a bigger LP to get in.
Did Thoma Bravo build up its fundraising infrastructure prior to Fund X to raise the fund without a placement agent?
We did not use a placement agent. And we did not have, at that time, an investor relations group. We just sent out materials to our prospects and it got done very quickly. We didn’t even go on the road for that fund. We ended up making it bigger, because we saw opportunities that were huge, so we added $400 million to the fund, after closing, to form the Thoma Bravo Special Opportunities Fund I, which invested with Fund X. So the combined pool was $1.7 billion.
Shortly after raising Fund X, Thoma Bravo bought Deltek for a purchase multiple of 14.6x EBITDA. Did it seem pricey at the time? (Prevous Deltek owner New Mountain Capital won a Buyouts Deal of the Year award for its ownership of Deltek.)
We should win the deal of the century for Deltek. We realigned the resources of the company so EBITDA going forward was $125 million. That brought the purchase price multiple down to below 10x EBITDA for us. Then we on-boarded the company into the Thoma Bravo process of improvement. Through that process, we’ve gone to a 37 percent EBITDA margin at Deltek from a 23 percent EBITDA margin. We’ve also increased revenue to roughly 10 percent growth per year — faster than it was growing prior to our ownership. And we’ve done five add-on deals.
Fast forward to 2015 and EBITDA has gone to $175 million from $85 million and we’ve taken out all of our invested capital through dividends — all of our money. We still own the company and EBITDA has more than doubled in three years. This is going to be one of the best deals we’ve ever done. The company had a lot of room to improve. We did it through the Thoma Bravo process. We promoted the CFO of Deltek to CEO, and away we went.
Could you talk about a couple of deals in Fund X that drove performance? Has the fund exited any deals yet?
The fund has exited many deals. One of the marquee deals, very similar to Deltek, was Blue Coat. It’s a company we took private in February 2012, the same year we bought Deltek. We paid $1.1 billion for it, which was the same price as Deltek. When we bought it, they had $95 million in EBITDA and revenue was declining. We turned it around to EBITDA of $204 million and sold it in May 2014 to Bain Capital. We made 3.5x our invested capital in 3.3 years. That was a big deal. It represented a significant portion of Fund X. We also bought Digital Insight for around $1 billion in 2013. We took EBITDA to $111 million from $75 million, and in 2014 we sold it to NCR. We doubled our money in the sale. It was a 2x gain for us in about five months.
Any other exits or dividend recaps from the fund?
We also sold other companies in the fund. We sold Telestream Inc after making a 4.4x and a 65 percent IRR. The other Fund X deal we sold was Network Instruments to JDS Uniphase Corp for $200 million in cash. We earned a 3x multiple on invested capital and an 85 percent IRR on that one.
What’s left from Fund X and are you selling any of those companies soon?
There’s nothing imminent in that fund for 2016 [in terms of portfolio company sales]. We still have some incredible assets. Deltek is still in the fund. We have GHX in the fund, with a very significant gain on paper, and Mediware, also with a significant gain on paper.
Did Fund X contribute to the evolution of Thoma Bravo?
It really did. The trend that we’d been following for a long time is buyout deals in software getting bigger. They’re getting bigger because the industry is consolidating and larger companies are available for sale. Fund X marked the beginning of our doing larger transactions and proving those would work. If you look at the deals there — Deltek, Blue Coat and Digital Insight — they were all billion dollar-plus deals and they’ve all been great. Fund X proved you could do larger deals with the same performance as smaller deals in software. That was key. That’s what Fund X meant.
Carl Thoma told Buyouts in 2012: “Somewhere along the way, the PE industry lost its way. Our industry is about moving capital and supporting companies so they can grow and create jobs. Nothing more, nothing less … Somewhere along the way it got to be about ‘private equity is about people getting rich.’” How did Fund X buck this trend?
Carl Thoma is my partner, so of course he’s right! We’ve produced great returns for the pension fund investors that we serve — most of our investors are public pension funds. In terms of supporting our portfolio companies, in every single one of our deals we backed existing management teams. We didn’t rip them out and replace them with high-paid mercenaries who stay for two or three years and then they leave.
A company’s longevity comes by having the same people in it, and working with them with metrics, processes and by investing in innovation, and really helping them. These are companies that were very good, but they had stumbled for different reasons. And everyone makes mistakes. That’s why Fund X was important for our evolution.
If you look at the entire portfolio of Fund X, we have, per company, a significantly larger number of employees than we had when we made our investments. Deltek has made five acquisitions, has more people, and is investing in innovation. We’re proud of that and how it can work. You can make a great return, help management and build company resources over time and employ more people. It should all go together. That’s an integral part of our culture and something that makes us unique.
Action Item: See Portfolio Advisors’ memo recommending the Los Angeles City Employees’ Retirement System commit up to $15 million to Thoma Bravo Fund XI: http://bit.ly/1YwMLSR
Photo of Orlando Bravo courtesy of Thoma Bravo