A post-pandemic boom in technology dealmaking is taking shape, with last year’s top private equity fundraiser – Thoma Bravo – ready to lead the charge.

Thoma Bravo was firing on all cylinders in 2020. In a challenging year for fundraising, the software-focused PE firm grabbed headlines with a massive $22.8 billion haul, including $17.8 billion for a 14th flagship buyout offering. Fund XIV’s close made it the biggest tech PE pool on record, Buyouts data show, edging out Vista Equity Partners’ 2018-vintage Fund VII.

Thoma Bravo Fund XIV was also last year’s largest PE fund closing, irrespective of strategy, and among North America’s 10 largest of all time.

For Orlando Bravo, Thoma Bravo’s co-founder and managing partner, 2020 was “absolutely our best year ever.”

“Enterprise software has shown its resilience time and time again,” he says. “We feel last year represents a major milestone that validates our strategy for investing in the sector and sets us up for the years ahead.”

Ironically, Thoma Bravo “almost didn’t raise Fund XIV” because of covid-19. “When the lockdown happened in March, we didn’t know if investors would accept it,” says Bravo.

Limited partners, it turned out, flocked to the offering. The virus and remote marketing notwithstanding, they helped Thoma Bravo wrap up fundraising inside of seven months. Bravo attributes the rapid pace in the midst of a health crisis to “our deep relationships with LPs.”

Another factor is track record. In a PE category that has seen outsized returns, Thoma Bravo has ranked at or near the summit. Making more than 270 software acquisitions over almost two decades, it has fully realized 60 investments. This contributed to an aggregate 3.7x gross multiple and 49.6 percent gross IRR, according to a report by the Pennsylvania State Employees’ Retirement System.

Several lucrative exits last year added to this performance history. They include the sale of mortgage tech provider Ellie Mae to Intercontinental Exchange for $11 billion. Thoma Bravo earned a 4.1x gross multiple and 217 percent gross IRR, two people with knowledge of the matter tell Buyouts.

Ellie Mae’s sale gave a significant boost to Fund XIII, Thoma Bravo’s vehicle for buying the company in 2019 for $3.7 billion. The fund was generating an 83 percent net IRR as of June 2020, the PA SERS report said.

Thoma Bravo also sold mainframe software-maker Compuware to BMC for $1.5 billion, sources say. In addition, it realized billions in secondary proceeds from the listed Dynatrace, an application performance monitoring platform spun out of Compuware after its 2014 acquisition.

These and other exits made 2020 a record year for liquidity, the sources say, amounting to $12 billion in gross proceeds. Thoma Bravo declined to comment.

Betting on software

Thoma Bravo was among the first private equity firms to specialize exclusively in software buyouts.

It began around the time of Bravo’s 1998 hire by the firm’s forerunner, Thoma Cressey Equity Partners. Thoma Cressey co-founder and managing partner Carl Thoma had at this point noticed software’s unique fit with the buy-and-build strategy he pioneered many years before. He asked the young Bravo to go to dotcom-era Silicon Valley and hunt for dealflow.

Thoma Cressey’s debut software investment, and one of the earliest by a buyout shop, was Prophet21. Bravo led the take-private acquisition in 2002 and oversaw the product distribution software provider’s three-fold growth. Prophet21 was sold in 2005 for $215 million, generating a strong multiple.

Prophet21 set the tone for subsequent tech investing, Bravo explains. It suggested a repeatable game plan that combined the buy-and-build formula with an emphasis on enterprise software businesses with recurring revenue in fragmented verticals. “We decided, let’s do it again.”

Carl Thoma, co-founder of Thoma Bravo

As Thoma Cressey invested more in software, the still-nascent sector became a core competency and driver of overall performance. In 2008, the firm decided to rebrand as Thoma Bravo and switch from a generalist strategy to the full-time pursuit of software buyouts.

The bet was initially validated by the strategy’s inaugural vehicle. Thoma Bravo’s 2008-vintage Fund IX earned a 44.7 percent net IRR, thanks in part to the financial crisis. It went on to secure a top ranking in the HEC Private Equity Value Creation Hall of Fame.

The thesis suggested by Prophet21 continued to pay off, managing partner Scott Crabill says, “especially as software became a very robust market.” Thoma Bravo, which targets control opportunities in application, infrastructure and security software, has since 2008 seen its addressable market in North America swell by 5x to today’s $500 billion in revenue.

Orlando Bravo with managing partners Seth Boro, Holden Spaht and Scott Crabill

Thoma Bravo itself has “evolved with the software space,” Crabill says. Bravo agrees: “The most important thing to producing long-term value is being prepared to adapt. The big aspirations we had 12 years ago have since been dwarfed by ground-breaking innovations, such as migration to the cloud.”

Thoma Bravo adjusted not by changing its core strategy, Bravo says, but by “evolving its tactics, including adopting new operational capabilities, metrics and processes.”

The Chicago and San Francisco firm also added to its available capital. Thoma Bravo’s flagship funds were increased incrementally to track rising valuations of software’s market leaders, Crabill says. Fund XIV will acquire majority stakes in businesses sized $600 million to $2 billion.

In addition, to tap into a universe of some 75,000 companies, Thoma Bravo expanded its family of funds. Last year’s fundraising featured a third Discover Fund, which deploys the same strategy to mid-market opportunities as well as the first entry of a lower mid-market Explore Fund.

Also in 2019, the firm launched a second private debt offering with a $1 billion target. In October, the firm signaled the importance it attaches to “investing across the entire capital stack,” Crabill says, by hiring Oliver Thym, formerly a credit head in Goldman Sachs’ merchant banking group. Thym, he says, is charged with growing the platform “exponentially.”

Digital boom

Technology valuations climbed in the years prior to 2020, contributing to above-average returns for PE firms active in the sector.

Spiking values also created anxieties about a bubble that might eventually burst. Fears were redirected early last year with the fallout of the pandemic, causing software investors – including Thoma Bravo – to move quickly to safeguard portfolios against a big economic hit.

“In the end, none of this really happened,” Crabill says. “In fact, the opposite happened. Software thrived with more growth opportunities, and values, instead of dropping, went up.”

“Enterprise software proved itself during covid-19, just as it did in the financial crisis,” managing partner Holden Spaht says. “It proved very resilient.” Thoma Bravo’s portfolio was in especially solid shape, he adds, with the average company having more than 80 percent of its revenue contractually recurring with high retention rates.

Along with resiliency, the surprising good fortune of software last year owes to covid-19’s widely-touted digital acceleration.

A 2020 survey of C-level executives and senior managers by McKinsey and Company attests to the trend. It found the health crisis to be “a tipping point of historic proportions” in tech adoption, speeding up by several years the digitalization that companies across industries and regions are bringing to customer and supply-chain interactions, internal operations and product portfolios.

McKinsey said the survey results point to “a sea change” in mindsets about the strategic role of innovation in business, with CEOs recognizing tech as a critical component in their organizations and “not just a source of cost efficiencies.”

It is an observation Bravo strongly endorses: “Software is the backbone of doing business in every way.”

“Business leaders are today asking themselves questions about how to stay competitive in a new digital era. How do we work in a non-face-to-face environment? How do we re-engineer? How do we remove servers and IT from in-house and put it all in the cloud? And once we’ve automated, once everything is done, how do we secure it?”

The answers, Bravo says, lie in mission-critical software, demand for which is steadily increasing the market’s size. He expects to see continued upside, with tech dealmaking ramping up in a post-pandemic recovery and beyond. “These trends are in their infancy. We’re only getting started.”

Too many tech funds?

The appeal of software, and its seemingly open-ended prospects, have drawn more investors and capital into the sector. This is certainly apparent in the case of private equity.

Tech-focused fundraising has risen sharply in the past decade, Buyouts data show. In the North American market, committed capital has been especially substantial since 2016, averaging $100 billion or greater per year, for a total of almost $612 billion. About 45 percent of the five-year amount was collected by PE funds in 2019 and last year’s first nine months.

A key driver of capital flows is the ever-expanding size of pools. Thoma Bravo Fund XIV finished 41 percent larger than Fund XIII, while the $16 billion Vista Equity Partners VII was 51 percent larger than Fund VI. The same holds true for Insight Partners, which closed an 11th software offering in 2020 on $9.5 billion, and Francisco Partners, which closed a sixth tech offering at $7.5 billion.

Even bigger streams of capital are anticipated at the hands of new and existing players. Silver Lake is poised to complete a sixth flagship tech vehicle above an $18 billion target, surpassing even Thoma Bravo’s latest flagship. Among the other investors in marketing mode with fresh offerings are Bain Capital and Technology Crossover Ventures.

A crowded field of tech PE firms will intensify competition for the best deals. This, plus the huge pots of money commanded by specialist funds, could also put further pressure on already high valuations.

None of this fazes Bravo, who says the fast-growing sector “can absorb it.” For this reason, he is not expecting to run into any challenges deploying Thoma Bravo’s $22.8 billion in dry powder.

Managing partner Seth Boro agrees, noting that there is presently “less competition at the high end of the market.” Moreover, an influx of investors into the software space, he says, has resulted in “more buyers” of PE-backed companies.

Despite a brief lull early on due to the virus, Thoma Bravo sustained its usual deal pacing in 2020. Fund XIV has yet to do its inaugural deal; however, its predecessor accounted for five pending and completed platform investments. The firm’s Discover and Explore funds also made five investments.

Fund XIII’s transactions include AxiomSL, a risk management and regulatory solutions provider to financial institutions. Thoma Bravo acquired a majority interest from TCV for close to $2 billion, sister title PE Hub reported.

Fund XIII was also the vehicle for Thoma Bravo’s agreement to rebuy Flexera, an IT infrastructure software provider, from TA Associates and Ontario Teachers’ Pension Plan. PE Hub said the company’s sale would likely fetch up to $2.9 billion. Thoma Bravo previously owned Flexera from 2008-11.

Secret sauce

In a more competitive deal environment, Thoma Bravo’s “most important differentiator is our operational strategy,” Crabill says. The firm’s techniques for improving a software business have matured over time, he says, supported by a growing team of operating partners and advisors.

Senior operating partner Marcel Bernard, an executive of 40-plus years, was the team’s original member. He assumed a pivotal role in the Prophet21 deal and has since been a director of multiple portfolio companies, sometimes sitting as board chairman.

Thoma Bravo today has 20 operating partners, some former CEOs and senior managers of successful portfolio companies. Among them is David Murphy, the ex-president and COO of network security provider Blue Coat, acquired in 2011 and sold in 2015, generating a 60 percent gross IRR.

While most buyout shops claim to have an operational focus, many give priority only to “product and market strategy,” Crabill says. Along with this, Thoma Bravo concerns itself with the “nuts and bolts” of a business “at a point in its lifecycle when it can benefit most from an emphasis on operational best practices.”

Spaht, who led the Ellie Mae deal, agrees, saying the firm mostly targets “high-quality software franchises” with a record of expansion but which do not yet have the organizational structures and processes required “to double or triple their businesses again.”

Thoma Bravo works with executives to “quickly identify three to four operational levers that will move the needle on our investment horizon,” Spaht says. This includes everything from flattening the organizational structure to investing in systems that give management the tools to make data-driven decisions.

In keeping with its buy-and-build approach, Thoma Bravo and managers also scope out consolidation options in a company’s vertical. Bolt-on candidates are often selected according to their ability to add customers and market share or complement and strengthen existing product offerings.

In the case of Ellie Mae, Spaht says, Thoma Bravo found a “high-flyer,” accounting for about half of all US mortgages processed and with a 98 percent customer retention rate for its core product. Prior to the 2019 acquisition, however, the listed business saw its stock plunge as investors reacted to declining revenue growth brought on by headwinds in the mortgage market.

“Public shareholders over-reacted,” Spaht says. “They didn’t understand the nuances of the company’s pricing model.”

Thoma Bravo, alongside managers, took steps to put Ellie Mae back on course, Spaht says.

These included reductions in operating costs; investing more heavily in lower-cost geographies; refocusing sales and product resources on the core business; and increasing pricing consistency across the customer base.

These initiatives, Spaht says, restored profitability, facilitating acquisitions. Ellie Mae did this in late 2019, buying mortgage automation software provider Capsilon for $350 million.

Taken together, operational improvements raised Ellie Mae’s EBITDA margins to 60 percent, from 17 percent to 18 percent, and accelerated growth, Thoma Bravo reports. This took place over an ownership period of only 16 months, concluded with last year’s sale to ICE.

Thoma Bravo also had success with Planview, a portfolio and work management solutions provider bought in 2017. A strategy of redirecting Planview’s focus to enterprise customers and doing bolt-ons grew EBITDA margins to 40 percent, from 17 percent, Spaht says.

Thoma Bravo in 2020 agreed to sell Planview to TPG and TA Associates for $1.6 billion. It will retain a minority stake to participate in “future value,” Spaht says, including further industry consolidation and opportunities linked to the shift to remote working.

Talent culture

Bravo joined Thoma Cressey in 1998 after graduating from Stanford University. His meteoric rise in the following decade owed much to Thoma – one of private equity’s founding fathers – who began his career in the 1970s at First Chicago Equity Group. Thoma took Bravo under his wing, teaching him the mechanics of PE investing.

“Carl gave me a lot of responsibility and authority early on, as well as a lot of second chances,” Bravo says. “He also taught me that private equity was all about the numbers and that it’s okay to make a mistake as long as you don’t make the same one again.”

In addition, Thoma imparted “the kind of values you should look for in building a team,” Bravo says. A key takeaway was his dictum: “Hire right and never lose good people.”

Bravo says these principles were “instrumental in shaping Thoma Bravo and its strategy.” They continue to guide its mentoring culture, he says, enabling talent acquisition and retention, capabilities that are essential to delivering long-term performance.

Boro, who joined in 2005 from Summit Partners, agrees, saying Thoma Bravo’s creation of “avenues for young people to accelerate their careers” encouraged “high tenure and low turnover.” Spaht, who also came onboard in 2005 from Morgan Stanley Capital Partners, says the culture has endured despite significant increases in assets and headcount.

Thoma Bravo extends its philosophy to the portfolio. Unlike many PE firms, it does not as a rule replace management teams when acquiring software companies but instead looks to work with the owner-operators who were responsible for years of prior growth.

Bravo also sees this practice in performance terms. “Whether it is our investment team or the software executives we partner with,” he says, “we view talent coupled with a shared mission as a key determinant of success.”

The making of Orlando Bravo

The life lessons that made Orlando Bravo a leading private equity investor began in an old Spanish colonial town on Puerto Rico’s west coast.

Bravo, 50, was born in Mayagüez, which over its 260-year history has survived earthquakes, hurricanes and tidal waves. His family ran a successful tuna-fishing ship agency, founded in 1945 by his grandfather and later taken over by his father, both named Orlando.

Bravo credits his father and paternal grandfather with teaching him “how to be an entrepreneur.”

“They both worked hard growing Bravo Shipping and loved doing it,” Bravo tells Buyouts.

“They also had a strong sense of business ethics – about doing the right thing and not cutting corners. They were my role models.”

Bravo was also influenced by his maternal grandfather, Rafael Ayala, a physician who left Castro’s Cuba for Puerto Rico. “He was an intellectual, a writer, a poet,” he says. “He was also a philanthropist through his work, setting up healthcare communities across the island.”

In addition to acquiring entrepreneurial and philanthropic instincts, Bravo early on learned to compete.

One of Bravo’s first passions was tennis, which he started playing at the age of nine. He quickly gained proficiency under the watchful eye of coach Antonio Ortiz, who Bravo says not only reinforced his work ethic but taught him “to take myself lightly.”

At age 15, Bravo traveled to Florida to join the academy of Nick Bollettieri, an International Tennis Hall of Fame inductee. He engaged in an intensely competitive training regime, playing against the likes of Andre Agassi and Jim Courier.

The training paid off, as Bravo went on to achieve a top-40 ranking as a US junior tennis player. This, and his continued pursuit of academics, paved the way to Brown University, which he entered to study economics and political science. He graduated Phi Beta Kappa in 1992.

Bravo next began his first full-time job with Morgan Stanley. He worked as an analyst in the mergers and acquisitions group under Joseph Perella, co-founder of Perella Weinberg Partners, giving him his first taste of private equity.

Bravo, however, decided to continue his education, going west to Stanford University. He studied both business and law, graduating in 1998 with a joint degree from Stanford Law School and an MBA from Stanford Graduate School of Business.

After graduating, Bravo met PE legend Carl Thoma, then a managing partner of Thoma Cressey Equity Partners, the successor to GTCR. Thoma hired and mentored him, teaching Bravo the mechanics of dealmaking. Another key mentor was business executive Marcel Bernard, the firm’s first operating partner.

Working from Silicon Valley, Bravo immersed himself in software investing. “He proved himself immediately and has been a leading force behind the firm’s dominance as a software and tech specialist ever since,” Bernard told Buyouts sister title Private Equity International in 2016.

Bravo rose through Thoma Cressey’s ranks and a decade after joining the firm co-founded Thoma Bravo, one of the first PE shops to specialize exclusively in software buyouts. He has since overseen more than 270 software acquisitions with an enterprise value of over $79 billion.

Bravo was in 2019 named “Wall Street’s best dealmaker” by Forbes. Last year, he placed 213th on Forbes’ ranking of the 400 richest Americans, with an estimated net worth of $3.7 billion.

Perhaps channeling his grandfather, Bravo has devoted time and resources to philanthropy, much of it focused on Puerto Rico.

After Hurricane Maria devastated the island in 2017, Bravo and his wife Katy launched Bravo Family Foundation and personally helped deliver critical aid to isolated communities. In 2019, he donated $100 million to promote Puerto Rican entrepreneurship and economic development.

Bravo also gave back to his alma maters, establishing the Orlando Bravo Center for Economics Research at Brown, and the Bravo Family Public Interest Post-Graduate Fellowship Fund at Stanford.

Today, in his few leisure hours, Bravo says he still plays tennis, “reliving the rhythms of my youth.” He also has a vineyard at his Napa Valley home, where he and his family make wine “for our friends.”