Orlando Bravo: ‘Time is ticking, pressure is mounting to both buy and sell’

PE Hub editor-in-chief Mary Kathleen (MK) Flynn interviewed Orlando Bravo, the co-founder and managing partner of tech-focused private equity firm Thoma Bravo, on stage at PEI Group’s NEXUS 2024 summit back in March, and she’ll interview him again at NEXUS 2025 next March. In the meantime, they touched base recently about the evolving landscape for PE tech deals this Autumn.

Their conversation covered everything from falling interest rates to rising cybersecurity threats, and they took a look back at one of the best deals Thoma Bravo ever did. Here’s an edited version of their conversation. Click on the audio player above to listen to the full discussion.

What’s changed since we spoke in March? For one thing, interest rates are starting to come down.

What has changed is that the pressure is mounting on private equity to both buy and sell. I mentioned during that interview that the deal environment was very slow. And it’s slow because growth rates have come down. When growth rates come down, people start seeing problems in their portfolios, because you have to adjust your cost basis. Leadership problems emerge. You actually really have to go back to operating companies in more difficult times when your customers are not full of budget and flush with investments in your products. So what ends up happening is these owners of businesses – as private equity is – they start focusing on their portfolios, and they become overall more negative.

Now interest rates are coming down. That’s very clear. There was just a 50 bps rate cut. That really hasn’t had – and in my opinion, won’t have – a big impact on just all of a sudden, speeding up the deal environment. What will have an impact is that the cash that is sitting in private equity will have to be put to work, and time is ticking. And that cash is not there indefinitely. Capital needs to be returned to LPs, and that also needs to move, and needs to happen. So that pressure continues to mount. And I think we’re getting towards the end of it.

One last thing I want to mention is that’s when you can really distinguish managers. In our opinion, and the way we work at Thoma Bravo, we’re always buying and we’re always selling, regardless of the market conditions. You really have to have that discipline, because we don’t know what the market is going to do and where valuations are going to be six months from now, and nobody really knows that.

Let’s talk about the selling piece of it and the exit environment. Is the IPO market finally going to open back up?

In the selling environment, we have been in an environment which is now normal.

What happened in 2020-2021 was a blip. That was one time. What I mean by normal is, if you want to sell companies, you just can’t sit there and wait for the phone to ring for buyers full of liquidity to want your business.

Now, if you own the highest quality companies, there are always – in any market – good buyers for that. You just have to work on it. Think about any asset whatsoever. If you own the house that people want that is a really high value in the perfect location, if you own the building that is iconic, people that are smart will be interested in that property. It’s the same thing for the companies that private equity owns.

That’s why our strategy has been to buy the number one player in different business-to-business software segments, and try to operate those companies the best so that we can always find buyers. Now, of course, it takes longer. Buyers are more cautious. They do more work, but that’s healthy. You just have to be patient and continue to work with them, instead of trying to create arbitrary deadlines of when they need to transact. Remember, strategic buyers are full of cash, and they do need to reinvent their businesses, to go digital, to become more competitive versus their peers.

In our view, the IPO market is open. There are good buyers of public stocks out there every day. The issue is valuations. If you have an unprofitable software company, you’re just not going to like the multiple, because the public comps for unprofitable software companies in this $10 trillion ecosystem in the public markets today, they trade at five times revenue. And if you want to go public, you have to take a discount to your comparable so you can give people an incentive to buy your stock.

People are just not going to like the price. So the problem is valuation, and the reality of that now. If you’re a profitable, growing software company, valuation is normal. It’s just not heroic. So people just have to get used to it, because you still need to take about a 20 percent discount to a 25 PE multiple, or 30 PE multiple, which puts reality back into people’s minds in terms of what these assets are worth.

Do you have any prediction about the IPO market? Will it be more robust toward the end of the year or beginning of 2025?

It almost has to be. That’s an easy prediction, because it’s been so bad that it almost cannot get any worse. We’re in a cycle now that really reminds me – although it is different, and every cycle is different, and what happens afterwards, from an economy standpoint, is always unpredictable – but it reminds me of the environment we were in when the internet bubble burst in 2000.

What happened was, there was a last generation of companies that were really built the wrong way, and when their growth slowed, they couldn’t make it back up. But then a new generation – Internet 2.0 – came in and we know what happened. Google was one of the first IPOs after the dot-com bubble burst. It reminds me of that time. I feel there’s a big lost generation of VC investments, but there are new [start-ups] now that are going to be the next wave of IPOs.

Thoma Bravo has invested a lot in cybersecurity. The Darktrace acquisition just closed. Tell us about what you see as the growth opportunities for cybersecurity moving ahead, and the role AI might play both in increasing the risks and hopefully solving the problems?

I remember like it was yesterday. It was 2010, and our funds were investing so heavily in cybersecurity. And I went over to [Thoma Bravo co-founder] Carl Thoma, who has been in the industry since the 1970s, and I asked him, “How do you think about portfolio diversification? Do you think we’re investing too much in cyber?” And he said, “You can never have too much cyber.” So I said, “Great. Okay, so we’re good.” And we kept going.

Today if you put together all the portfolio companies that are owned by our funds, we are the largest cybersecurity company in the world, and within that, we have the number one player in various areas and threat vectors in cyber – like Proofpoint is the number one player in e-mail cybersecurity; Ping Identity, in workforce and customer; SailPoint in governance, and many, many, many others.

Every company is becoming a software company; that is still alive and true. And as that happens, you need to protect your infrastructure and your applications. And as companies go digital, you need more. You have more cybersecurity threats and cybersecurity needs. That’s first and foremost.

Now AI is just fueling that incredible trend. And to give you a couple of examples, now you have all these AI bots. So you have to secure the identity of those bots, just like you do the identities of your employees and of your customers, and what access to what data should those bots have, and how should they use that data. All of that is a new big cybersecurity problem – and a new market for cybersecurity companies.

Another example: I mentioned e-mail cybersecurity, and we own Proofpoint there, the number one player. E-mail is your number one threat vector. Your number one threat of being breached comes from an e-mail… Proofpoint receives trillions and trillions of e-mails that it checks for its customers, but now with AI and generative AI, somebody can pretend to be the biggest bank in the US, and it can just look so perfect… It just opens up a whole complicated set of issues that need to be invested in and protected.

So you think there’s plenty of growth ahead for cybersecurity?

Incredible. We meet many of our company’s customers, both as supporting our companies in sales processes, in renewals and customer satisfaction, but also for all of us to continue to stay ahead of these trends. And it was really interesting, one of my colleagues was doing a lot of those meetings with financial institutions in New York, and basically all the chief security officers told them, “We have all budget that we need for cyber solutions. We will never underinvest in cyber, because if our bank or financial institution were to go down, these are the implications of that.”

The threats are real, and I don’t mean to make light of them, but obviously, for somebody investing in all this, it’s a good trend for you as an investor.

It’s a phenomenal trend as an investor. Now, at the same time you have a broad portfolio of large market-leading companies, then you have to protect them against being breached, which may have an implication not only in your company, but in your customers’, and that right now cannot be totally prevented. Companies are more focused on how to contain those situations and how to communicate them throughout their constituencies to stop the spread of a potential issue.

We’ve been talking about moving forward. But I would like to also ask you to look back a little bit to your Dynatrace deal. Thoma Bravo invested in Dynatrace 10 years ago as part of a Compuware carve-out, and earlier in 2024 you fully exited. Tell us a little bit about that deal, and where does it rank in the long track record of Thoma Bravo investments?

Thank you for asking us about one very good deal, because we also make plenty of mistakes. Every investment management partnership has such a an amazing story, and Compuware and Dynatrace summarizes many of them.

It first started with the take-private of Compuware for [$2.4 billion]. Compuware was mainly known as a mainframe company. Our team – Seth Boro and Chip Virnig – very astutely, saw the Dynatrace asset as a market-leading asset in basically protecting cloud infrastructure, in being able to keep its uptime as the world was going digital and as a potential number one player in that space, because there were other companies that had distributed products along with mainframe. In this one, our team saw the potential of a big market leader here.

We took the company private, and we divided it into the mainframe business, Compuware, and into Dynatrace. What was interesting about this is that in both divisions, which became independent companies, we backed the existing leaders of those businesses, and that is something that is very near and dear to our hearts – working with existing management to turn management teams into even better leaders, or turn great innovators into great operators as well.

In the case of Compuware, that itself was a very successful company that we exited to a great private equity firm, to KKR, and then we kept Dynatrace.

And not only did we back existing management, but the founder of Dynatrace [Bernd Greifeneder] was heavily involved in investing and building that business. And some people think that private equity is about just earnings and EBITDA, cutting costs and maximizing things. It really isn’t, especially in software. We invested so much money behind the founder’s vision of the next-generation product – to keep the uptime of interconnected cloud environments. It worked. And those investments paid off. And he and the management team were right.

That became a company that we held over a long period of time. It went public, and it was really successful.

Investments in private equity are not linear – because people are not linear. We went through some really tough times when many, many things were not working at the investment, but our team was able to solve business problems and stay with the people and stay the course, and it was one of our lucky deals.

How does Dynatrace stack up in the long track record that Thoma Bravo’s had?

We’ve had many lucky ones, and we have so many good leaders at Thoma Bravo that I don’t want to say it’s number one, because then I’ll get a call from my other partners mentioning other deals right after this. It’s one of the best.

For more on Thoma Bravo’s 10-year investment in Dynatrace, see our recent interview with Thoma Bravo partner Chip Virnig.

And to watch Orlando Bravo and MK Flynn talk live in March 2025, register for NEXUS 2025 here.