Thoma Bravo launches next small-cap fund with prior pool roughly 50% deployed

The fundraising environment is as strong, or, according to some, as frantic, as many professionals can remember.

In-demand GPs are able to bring funds back on a quick pace, sometimes within a year after raising the last fund. And soft launches – opening data rooms, contacting existing investors about successor funds – are happening more often, sources tell Buyouts.

In this environment, Thoma Bravo, one of the more in-demand GPs these days, launched its second small-cap fund in October with the prior fund only about 50 percent deployed, according to a market document from October seen by Buyouts.

Explore Fund II is targeting $1.5 billion for investments that require equity checks of $200 million or less, the document said.

This deployment threshold caught the eye of some sources as being unusually low for a firm to bring out the successor fund. It points to the busy nature of the fundraising market, but it also shows the diversity of how different firms treat deployment thresholds.

The point of the thresholds is to make sure GPs aren’t out raising money all the time; that they are spending time investing capital before they come back to LPs for more.

Deployment-threshold rules generally restrict either launching the successor fund, or holding a first close on the next fund. More important than abiding by a hard threshold is an understanding between the sponsor and fund investor that the GP won’t start looking for new capital until it is able to actually invest the capital, sources said. As always, it comes down to alignment between GP and LP.

Around 44 percent of North American buyout firms required 75 percent of a current fund to be deployed, or reserved for follow-on investments, management fees and other expenses before successor fund restrictions can be lifted, according to Buyouts’ PE/VC Partnership Agreements Study 2018/2019. Of those respondents, 47 percent said those restrictions involved holding an initial close on the successor fund, while 45 percent said the restrictions involved launching the next fund, according to the survey.

Deployment levels can also be a somewhat squishy number — including not just capital in the ground, but amounts held in reserve for add-on activity, and money tied up in subscription lines of credit. GPs may report 75 percent deployment levels with only 50 percent actually invested.

Thoma chose to launch its three fund platforms around the same time. It brought its 15th flagship fund to market around the end of summer, targeting $22 billion. Shortly after, it launched its fourth mid-market fund, called Discover, targeting $5 billion. Thoma’s third Discover fund was about 79 percent deployed as of October, the marketing document said.

More important than the level of prior fund deployment was launching the three processes around the same time, according to a person with knowledge of the firm. The simultaneous launch “creates a more efficient process for LPs, who will only have to perform due diligence one time, rather than three separate times,” the person said.

Explore II also won’t be activated until the prior fund is fully deployed, the person said. This means while raising capital, the second fund won’t be collecting fees. This is colloquially known as putting a fund on the shelf – another trend among popular GPs who fundraise before the prior fund is out of capital. The firm believes Fund I will be fully deployed by the final close of Fund II, the person said.

This quick fundraising turnaround from popular GPs, along with established groups creating new products, has turned fundraising into a non-stop grind for LPs. “In this market, groups are launching early, or it is a soft launch, as a way to get to the top of the LP queue early,” said a family office LP.