B (2:48)

The community there big time. I'm actually going to Puerto Rico next week for a foundation event. My experience thus far has been one of opportunity. I'm very self aware of that even when I look at our organization today. Thoma Bravo. We were one of the first to do a software buyout deal during the dotcom bubble collapse. Even though we were one of the first to do tech buyouts and we were one of the people or one of the groups that created this category that has been very profitable for LPs and it's the biggest category in buyouts and we'll continue to grow and continue to take share. I've never created anything new. I got the opportunity to learn from one of the best investors in the world, Carl Thoma. I got the opportunity to learn from the best operator I'll ever meet. Marcel Bernard, the most important person that has ever worked at our company. During the 70s he ran different divisions of Motorola. We grabbed both concepts and just applied them to an industry that we really, really liked.

A (3:55)

What a time to be doing that though. Helping found thoma Bravo in 2008 really is the tech bubble the remnants of it, the financial crisis. It's such a moment in time. How does that, how did that help guide you? How you grew? Thoma Bravo. And how you think about this market today, especially when so many parallels are being drawn between what's happening in AI at the moment and the tech bubble of the 2000s.

B (4:17)

Yeah. And by the way, to end with Puerto Rico. Therefore, since I was given so many opportunities, our whole business is based on giving opportunities to existing management, to our people. Promoting from within and in Puerto Rico to try to change the opportunity set so the more people participate and have an equal chance. That's kind of what, what I try to do there. In terms of what what happened during, during the bubble. One important lesson is to focus on the business and the numbers that are right in front of you instead of being too affected by the noise. These are general things that are going on right now. AI is going to be transformative. It's going to be so powerful, it's going to be so exciting and it's very, very new. And very early. So many people will be are paralyzed now, including LPs to say do I touch this area a services company, do I touch a software company? Is this going to be disrupted? I just get these inputs all the time of how everything is going to change overnight. It will change significantly, but it will be an evolution in right after the dot com bubble burst. I don't know who remembers and who was there around that time people thought that enterprise software was dead. One article after the other. These stocks traded at $1 and $2 a share. Can you believe that? It's one of the greatest industries, $1.5 trillion economy today. We made a lot of mistakes before that, but we would go to these companies and they would let us look at all their files. We'd say no, this is a good business. All the customers are renewing, they're buying more. They really need to use these products. So just focusing on the details in the business really helps you do something a little bit different than everybody else.

A (6:12)

Well, it's interesting because it's a two track and I want to get into software more, but it feels like a two track. You're describing LPs being frozen on legacy tech or evolving tech let's call it. And then on the other side, a frenzy around AI. And here huge valuations that a lot of these private capital or public market companies are getting around. I do look at that and say we've gone too far.

B (6:34)

Look, AI and software go together. That is becoming clearer and clearer. Look at the $250 billion market cap software companies, they have absorbed AI. Now they're selling huge agentic solutions to their customers. We have a portfolio of about $30 billion in revenue. Now we're private equity so we can react faster than other forms of governance. All of our companies now have big AI solutions embedded in their products or agentic solutions to close the loop. Another available markets or tam, total available market has doubled, tripled. It really, really goes together. It's not like this new thing where the corporate enterprise would completely change all of their processes, all of their technology, all of their interdependencies. AI will create new solutions and new use cases, many of which will allow people to use technology more than they were doing before. Look, there's so many solutions today that exist that allow customers to save half of the cost in many items in supply chain in many, many, many categories. And right now society or Companies use them 5%, 10%. So it all, it all takes time. But once again it goes together.

A (7:58)

There is at least you can See in public market, those nerves, Salesforce, Adobe, some of the worst performing stocks underperforming the S and P down think about 22% year to date because of that. And maybe that's a correct way to look at those specific companies, maybe not. Has there been a valuation reset in private capital as well? And to what degree does that hurt you or does it present opportunities?

B (8:21)

The chairman said that he's an optimist and I'm always an optimist. When you own a company, you always have opportunities. Now you mentioned a couple of stocks. Great, great companies. Now, is their valuations and multiples down because there's so many threat, or are there multiples down because their growth rate has gone down? We really think it's the latter. Investors buy numbers, they put money out and they buy numbers. That's what the greatest investors do. The rest is, is noise. And the market is highly, highly, highly efficient. So I don't think that there's been this rerating of the sector because of AI, because really smart investors agree that this over time will help these companies that are trusted by the customers, that have proprietary data that are embedded in their systems. It's helpful. I cannot even begin to describe how helpful it is.

A (9:24)

Does it at all though put pressure on margins? For example, if you have someone that says, all right, I can find a cheaper solution that's AI driven, it doesn't take as much, it doesn't cost as much. Does the whole industry pricing need to change because of the AI offering?

B (9:39)

There's always the question whether software is Econ101 where price equals marginal cost. You built all these products, but the marginal cost of delivering one is extremely low. So you kind of race to the bottom and you have to control discounting. The key and what we try to do is have the lowest cost of production, have the most efficient company there is. So when we do buy these billion dollar companies, we are very upfront that the first course of action is we're going to reduce the cost of the business, try to get it to a 40% margin, usually from zero. And if you have the best run company making the right investment decisions, you can invest plenty in AI because you're not wasting a lot of money in other activities or trying activities that the company doesn't even have a core competency in doing.

A (10:32)

Well, considering you've done that to so many companies, I'd love to know how you're using AI internally. What about Thomas Bravo's own processes? How are you utilizing AI to grab information?

B (10:42)

It's really? And I think most companies are using it that way. Right. We all as consumers use it to ask questions, get quick data. Search companies as well are using it in that way. We're using it to get information a lot quicker. For example, at the end of the quarter, we love those quarter ends. Now it's October because companies have a January fiscal year end. That's something that SAS companies did a while ago. But as we come to the end of October, instead of me having to call every single partner across our portfolio of 60 companies, I just know the bookings results and you kind of can consume that pretty quickly and say, oh, is this, are we in good trends? And that really informs how you invest in companies as well. All your pipeline of deals is the industry slowing down? Are customers buying more? But the ability to consume information very quickly and data is how we use it.

A (11:29)

I talked to one of your competitors who maybe will remain nameless. That's a, that they were experimenting with an AI IC member that they would feed it all of its information and all the decisions they made. And you'd almost get kind of a vote or she. I don't think we can gender these things on the ic. Would you ever do something like that? Would you use it for actual decision making?

B (11:48)

That would be pretty cool. I mean we would. And I've heard some VC firms have done that as well. And this IC member shows up and then has the most power and how could they possibly be wrong? They have all the data, the super brain, that would be fun to do at some point.

A (12:03)

Okay, well, you have to let me know.

B (12:04)

The thing is, see Danny, the thing is all these things are very helpful right now. But you try to think of your time during the day. I always tell our team, private equity, you have three things to do. Get the money, get the deal and improve the deal. If in your 18 hour day, if you really want to stretch it that way, seven days a week, trying to crush it and make money for LPs in an ultra competitive market, you're not spending time on those three. Maybe a competitor is going to do better. So you have to be careful how much you're levitating and investing in projects that are intellectually interesting versus actually getting that deal, which, which as you know many practitioners here, it's very hard to convince a company that's worth $10 billion to sell it to you, no matter how poorly they're doing. And it's a day to day. We do control deals only. It's a day to day effort to improve the Company, the head of sales quits. Now you got a problem. The pipeline is low. You have a problem with a competitor, you have to take out the cost. You have to track that company on a monthly basis. For example, we do, instead of quarterly board meetings, given the intensity of our operations, we do monthly operating reviews, 8am to noon with every single company, all the direct reports in the room. And these processes are, that is the alpha that our industry looks, looks for. In software, it is incredibly huge. When we started in software, the average software company lost money. Today, after the industry became this money, 1.5 trillion, the average publicly traded software company loses money. There has been no operational improvement in the public markets in almost 30 years in the way software companies run. Now, groups like us, we started small, we started producing 25% margin, now 35, now 40 to 45, because we're also buying better businesses. And we've learned. But that is so intense that it gives you very little time to pursue internal projects. Hmm.

A (14:08)

Well, you mentioned the things that you should be doing if you are in this industry and delivering share, delivering value to your LPs. One of them of course, is exiting. And this is an industry that has struggled with that as a whole. After maybe over investing in 2021 and 2022, you've seen the rise of continuation vehicles, for example, liquidity solutions. And many people would say it's just a way to provide liquidity. It's the creativity of this industry and it's an natural progression. Other people would say it's a failure that you didn't get the exits and that you're continuing things on. Where do you stand on it?

B (14:42)

Both. It's pretty controversial. LPs have gotten used to it. They've accepted this. I think you should do that as the exception rather than the rule. You can also do so many in your fund. You mentioned valuations in our world world. Say you are looking at a 15% growth company that has high quality of revenue, that is a market leader in its space, that is now highly profitable because it's been owned by private equity. Those companies used to trade in the private markets for 20 to 25 times EBITDA, something in that range from one firm to another. Now the valuations of Those companies are 15 times EBITDA. So as a owner, the opportunity is that you can buy other companies, add on acquisitions much cheaper than you had in your model. So you always try to use these things as an owner to your advantage. You then have to create more value so that at 15 to 17 times exit you can produce the returns that your investors expect. And that's where comes in. And it's that optimism of there's always something you can do about it. When there was inflation, you have this huge labor inflation in your employee base. But that means you can raise prices to your customers even more because these are productivity tools. Same thing if prices go down. So what happened in private equity and the reason why I say the industry for a while there lost its way is one of the reasons is people forgot to sell our industry is you get the money, you try to transform a company as best you can, and then you sell that company. There is no permanent hold in our industry. If you want to do that, go to the public markets, form a holding company, tell your investors, I'm going to hold these things forever. Back me and we'll figure out a way to make money that way way buy my stock. Private equity is not that the industry levitated too much. And we always say it's much harder. Remember when I said how hard it is to buy a company? It's much harder to sell it. So our team has to spend more time selling a company than buying a company. And that's something that we do rigorously and it's something that really helped us. You and I were talking about in super return. In the last 18 months, we delivered back to our investors 20 billion in cash. That really helped our firm firm. Now it didn't happen overnight. We were working on those deals and on those sales for a while.

A (17:13)

So all these evergreen funds that, that are popping up, sounds like they're a.

B (17:16)

Problem then it's, it's. If you hold the company too long in private equity and in this transformation world that we live in that is not linear, you will ultimately face a big project, especially in software. Because it's not just the technology change or AI or how you have to have invest. It's that these companies are exhausting to run you live quarter over quarter. That's why it's tough for family businesses to hold software companies. Right. It's not a, it's not a thing. You go from one entrepreneur to the other. And it's also a culture of employee ownership where employees, especially in Silicon Valley, need to have that return and that pop in their options on that restricted stock. So if you hold these things for 20, 30 years, I mean, we would love to, it'll be better for our business, we'll make more money, but it's not the, the way to really serve your customers as LPs.

A (18:05)

Well, as you mentioned, when we had spoken earlier this summer, you were really out front with saying private equity has lost its way. Where do we stand in that cycle now? Every now and then you hear news report of a company or a fund that tried to fundraise. It doesn't do so successfully as it has in the past. Where are we out on the. In the shakeout? Are we about to see some real visible pain between the haves and have nots?

B (18:26)

We are in the middle of the shakeout. It's when you see the few funds that raise all this great amount of money. They have two things. They have great performance and they have liquidity to their LPs. They have high DPI's. The, the investors in private equity states, sovereign wealth funds. That's where most of the capital comes from. The big money, 80% of the money. Their boards still believe in private equity. The 10 year performance beats everything. The 15 year performance, the 20 year performance. The challenge is they have an allocation usually to private equity of 15%. Some are growing a little bit from 13. Others may be decreasing depending on their portfolios. That investor base or that allocation is very stable, which is really nice for us and for the industry. But that allocation is stable because people get money back and they redeploy the money. If not, that allocation would grow on indefinitely. So when we meet with our own investors, we have a sheet for every one of them and that's the one piece of paper we have is how much money they've given us, how much money we've given back and therefore how much money maybe they have left to redeploy. Because also as a manager they cannot be. We would love to 100% concentrated in Thoma Bravo. By continuing to give us capital, they can, they need manager diversification. So the people that have, don't have liquidity and are having problems, they're just going to go away. And I've never seen that in the industry in 30 years. The best managers are going to get a lot more money. And we're seeing that also in the, in the business.

A (20:06)

What does it look like for funds to just go away? Is it they kind of quietly wind down? Does more consolidation happen? Do you have some really high profile shakeouts? What exactly does that even look like?

B (20:19)

We're seeing a lot of funds wind down and close. We meet with, you know, we have most of, most of our, our partners are most of the states and most of the sovereign wealth funds. And I spend about 25 to 30% of my time with them to see how our Performance matches up to our competitors to see how they're doing. How else could we help them? Are we doing enough co invest? We are so close to our partners and they are very open and they tell us we're really worried about these dormant or zombie funds because they've lost half their team, they've gone to do something else and their senior people know that they'll wind down the portfolio and there's no future future fundraiser. It is still. Private equity is still a bit of a momentum business. When you're returning a lot of money, your people have confidence to put money out, investors have confidence to give you money. People are happier. Everybody that carries worth something to the team, people are getting promoted from within. The older Generation didn't lose 10 years of opportunity. It's great. So you see that now and now that's accelerating because the added pressure is the S and P. P, with a magnificent seven in the last five years has done great. It's hard to compete with those stocks and yeah, that's where we are.

A (21:31)

So to be clear, the issue isn't just that exits aren't happening. It's that just straight up, managers are underperforming. Underperforming public markets 100%.

B (21:39)

Over the last five years, the average private equity firm and venture capital firm has underperformed the s and P500. Now, the best of the best always crush it. They find a way. And we're talking about losing its way. And for, I mean, there's a lot of experience in this room. But for those of you that are younger in starting a firm or building a firm, private equity should be agnostic as to what the environment is. You're not buying a stock, you're buying a company. It's not what's happening to you. Well, you buy a stock and the stock price goes down and inflation goes up, or this happens, or there's a tariff war or trade, you can only sell the stock or keep it. But things are happening to you when you own a company. There is so much you can do about it. You just have to adapt to the times.

A (22:33)

What do you then make as the shakeout is happening that there's a serious and big push into wealth and retail? Some, some would criticize that and say it's because fundraising has been challenged that people are looking into other avenues. Is there a bit of that happening in this industry?

B (22:50)

Look, it's new, just like I. Or the power of these predictive models is new. How will it evolve? Would it be a good thing for the industry and Institutional investors or not, once again on those things, since they haven't happened, we don't know. Now look at what I just said about institutions. That 15%, one of the reasons it's going to grow so much is because allocation by retail and private wealth is close to zero percent. So it's going to go up. I mean that's the huge market that is completely untapped that will be tapped into this alternative asset class for us. The way we see it is we are going to look at it, but very carefully and very strategically. And the reason we're going to go slowly and strategically into it is that investors, retail investors and high net worth investors really need to understand what the manager does, how the manager invests. I go back to the point of our business is not linear. We buy a billion dollar revenue company that has no earnings, we cut 20% of the cost. We do this with those projects. Even when we get the best outcomes at the end, they weren't a straight line. So with these investors that have liquidity, if they don't understand really well what you're doing, they may make bad choices with their investment over time. Just like we go, I mentioned 30% of my time is with institutions. I really need our partners to know exactly what we're doing, why we're doing, doing it. When we make a mistake, they understand. When we do well, there's a reason why we got lucky or did well. Explaining that to the retail channel is going to be absolutely critical. Think about it, right? We're investing the capital. You want to know who you're dealing with for sure.

A (24:39)

I mean, but there are other firms, you can make the argument they're going full speed ahead and maybe there's something of a first mover advantage. Do you look at some of the things happening, Apollo having an easy ETF, others discussing trying to get into 401ks and worry that maybe you need to get in first.

B (24:57)

There's that FOMO and you have to, you have to resist it, especially since there's so much demand for it. I mean if you open the floodgates, there is just incredible demand because it's zero going to 15. And people want actually, and rightly so, individuals to be part of the economy and North American economy, especially in tech and software, where you're targeting smaller companies with owners that can really add value to these companies as an, as an alternative, right, to just buying the magnificent seven forever, which we forever won't do. As great as they've done over the last five years.

A (25:32)

It's really interesting because there's pressure and other people are thriving. And amid all of that you had one of the biggest take privates of the year until EA came along with a 55.

B (25:43)

I know, we thought we were.

A (25:45)

They knocked you off the throne.

B (25:46)

Well, I don't know. I don't know. My partners were like one of them is ripping his eyebrows out. He didn't understand. I thought it was a good thing because at some point we can't be the only crazy ones doing all these $10 billion deals. I mean literally we were.

A (26:00)

But they upped you by 55 billion. The biggest LBO in history. Just given some of the stresses we were talking about. Is that a one off, an aberration? Is Thoma Bravo doing a huge deal with Dayforce and Jepsen? Is that a one off or have the mega LBO is returned?

B (26:15)

It's look, this is not new for us, right? You mentioned the CR Jefferson and Dayforce that were both around 10 billion announced deals but we did proof point at 11 billion. RealPage at 10 billion. SailPoint at 8 billion. Ping and Forge Rock at 8 billion. I mean we were just going there because our strategy is to focus on our two core competencies. One is our team really knows how to buy the best. The market leader in these categories of apps, infrastructure and cyber, the number one player. And it's so important in cyber to buy the number one player. You cannot go in and buy the number 3, 4, 5. I can talk about that all day. Why that's the case. And our second team's core competency is. Is turning a great innovator which those companies are into actually a great business. Taking that 20% growth of the company and innovation and market leadership and making it work for the shareholder. When those companies were delivering zero cash, have them deliver 40% cash. That way our investors become fundamental investors in software. Instead of depending on a revenue multiple exit which is completely arbitrary, arbitrary and completely volatile, they depend on selling the company or they're selling the company at a 25pe highly justifiable as a small premium to the S&P 500 for four times the growth and a much, much better business, all recurring. Where cash flow is greater than P E, we turn a revenue multiple to an EBITDA multiple. What happened is as the SaaS industry has really taken off and it's still at its infancy, 50% of the systems are still on premise. We have this enormous opportunity to take these beautiful companies and transform in that way. Now we need to keep proving that we can generate the performance at the scale that we're doing. And we've had some, some wonderful exits in the past at a big scale. So it's nice to see somebody do a $55 billion deal because now we can tell our investors were middle market. We do middle market only and we're really targeted. And these things are really small. We're like, you see, we told you these, these companies are.

A (28:23)

Yeah, only about a minute left, Orlando. And I know you've touched on this in different places, but it might be nice to just put it together for, for everyone watching and for trying to navigate a particularly difficult time in private equity and private capital investing. What are just the most important principles to be concentrating on at this time?

B (28:42)

Focus on the business. You know, focus on your investors, but really spend most of your time cold calling all the companies. Really focus on the business. Get away from what's the firm going to be in 10 years or 20 years. What's the strategy? What's my org structure? Mentor your people to get the deal and then figure out a way, a repeatable process that you can continuously improve the company. Have your feet on the ground and focus on the business that's right in front of you. Do the work, do the diligence. It is so important. And don't be as affected by what everybody thinks. The answers are sometimes so obvious, investing wise and operating, that you just need to go to the source and focus on it. Our group has become much larger now. We have $180 billion under management. We work as hard as possible to run it, just like when we did when we did our first deal at 50 million. And frankly, the problems that our companies have and the opportunities that our companies have and how we generate a deal and convince a founder or a big company to work with us is the same as it was before. So remaining true to that is very, very important.

A (29:52)

That's the perfect note to end it on. Orlando, thank you so much for joining this morning and thank you all for watching. Please join me in thanking all. Orlando. Bravo.

B (29:59)

Bravo. Thank you. There are two kinds of people in the world. People who think about climate change and people who are doing something about it. On the Zero podcast, we talk to both kinds of people, people you've heard of, like Bill Gates. I'm looking at what the world has to do to get to zero. Not using climate as a moral crusade. And the creative minds you haven't heard of yet. It is serious stuff, but never doom and gloom. I am Akshat Rati. Listen to Zero every Thursday from Bloomberg podcasts on Apple, Spotify or anywhere else you get your podcast.