A Running of the Bull

It is a sign of what’s to come…

It is bullish. And I’m not referring to the Encierro in Pamplona, Spain.

Private equity giant Thoma Bravo just raised $34.4 billion, spread across three funds, resulting in its largest haul ever.

The number is so big, it even exceeds Blackstone’s $21 billion fund, and Blackstone is by far a much larger private equity firm.

Source: The Wall Street Journal

The majority of Thoma Bravo’s $34.4 billion is split at $8.1 billion in the Thoma Bravo Discover Fund V and $24.3 billion in the Thoma Bravo XVI Fund, with the remainder in a small fund focused on European companies.

Why is this relevant and interesting to us at Brownstone Research?

It’s simple. Thoma Bravo is one of the most prolific private equity firms in the tech sector, specifically in software.

Fueled Up and On the Hunt

Over the years, Thoma Bravo has acquired several companies that have been in Brownstone Research portfolios – growth companies that I determined were undervalued and could be improved in both revenue growth and gross margins.

These were companies like Qlik, Coupa, Ping Identity, Imprivata, Illumio, and Imperva. I predicted that they would all get acquired, and Thoma Bravo snatched up all of them.

I can never know for sure who an acquirer will be. But I knew for sure that these companies would be attractive to not only Thoma Bravo but also other technology and growth-centric private equity firms and industry-related tech firms looking to grow through acquisition.

This is why I track what Thoma Bravo is up to…

And it now has $32.4 billion in fresh capital targeting the tech sector, primarily software businesses.

Generally speaking, here’s what Thoma Bravo will be looking for:

• Software companies – with a strong product market fit – that demonstrate strong double-digit annual revenue growth
• Healthy gross margins, typically above 70% – or in some cases around 50%, with the potential to grow above 70% through changes in the company’s business model (simple example: changing from a one-time perpetual licensing model to a cloud-based, recurring revenue model)
• Healthy and growing free cash flows, or very near to free-cash-flow breakeven
• A company that may not be perfect regarding its financial metrics, but one that might be merged with an existing Thoma Bravo-owned company (Thoma Bravo has been known to roll up an industry with two or three key acquisitions).

This record stockpile of cash will give Thoma Bravo the ability to not only acquire more software companies but also companies at larger valuations…

The Clock Is Ticking

On average, Thoma Bravo tends to be more conservative with leverage when it makes acquisitions.

Its typical debt-to-equity ratio is in the 1.5 to 2.0 range. For example, if it acquired a company for $4.5 billion, at a debt-to-equity ratio of 2.0, it would invest $1.5 billion of its capital and raise an additional $3.0 billion in debt.

That might sound like a lot of debt, and it is, but that’s what the free cash flow is used for: to pay for the interest on the debt. And the debt allows private equity firms to get more leverage out of their capital. It also increases their returns. More aggressive firms might only put 20% down on a leveraged buyout and try to make it work, but it’s painful and typically only works when interest rates are low and they get lucky with a fast exit, which is rare.

Now, through the Thoma Bravo XVI Fund, Thoma Bravo can go out and target roughly 15 tech companies at valuations ranging from $1.5 billion to roughly $7 billion.

And with the smaller Thoma Bravo Discover Fund V, it can go after as many as 20 tech companies, likely in the $800 million to $1.5 billion valuation range.

These are precisely the kinds of companies that I often recommend in my flagship small-capitalization, high-growth tech investment research product, Exponential Tech Investor.

Not only do I analyze these companies and their potential for independent growth with great investment possibilities, but I also look at them through the lens of an acquisition target.

Use It or Lose It

As with all private equity (PE) and venture capital (VC), the basic rule is “use it or lose it.” Both PE and VC firms are incentivized to allocate the capital quickly, typically within 12-18 months. They hold on to some reserve for additional funding of companies that are showing the most promise. If they aren’t putting the capital to use investing in great companies, investors will start asking for the capital back – so they can put it to better use elsewhere.

That’s why this is so bullish for the software sector…

We now have a cashed-up “predator” looking to make acquisitions as quickly as possible.

Not only that, but acquisitions of high-quality, high-growth tech companies always happen at a premium to the current share price.

But… Why Now?

How did Thoma Bravo break records with its current raise?

That answer is also simple…

Thoma Bravo earned it.

It has an extraordinary track record of managing its funds, not over-leveraging, and delivering great returns to its investors.

Since 2023, Thoma Bravo has returned more than $30 billion to its investors. The Thoma Bravo Fund IX (2008) had an annual internal rate of return (IRR) of 44.10%, and Thoma Bravo Fund X (2012) had an IRR of 37.90%. Numbers like these are as good as some of the very best hedge funds in their very best years.

Money talks. And Thoma Bravo’s investors clearly wanted additional exposure to the new funds.

But there are two more factors at play here:

• Interest rates are going to be dropping materially. Fed Chair Powell can play politics for a while, but the data is clear: Inflation is under control, prices have been falling, and interest rates must be pulled down to reflect reality. When this happens, it’s great for private equity and also for the small-mid capitalization stocks that Thoma Bravo targets. The timing isn’t a coincidence.
• And because interest rates remain high, many small and mid-capitalization technology stocks are undervalued, presenting great investment and acquisition opportunities.

I’m confident that this is precisely what Thoma Bravo pitched to its investors as it was raising its funds, along with a confidential list of targets that it intends to pursue.

If that weren’t bullish enough…

Lying in Wait

We’re at near record levels of “dry powder,” which is the amount of capital private equity funds have… but haven’t yet deployed.

Source: Bain Capital

Dry powder was at record levels in 2023 at $1.3 trillion and only dropped slightly to $1.2 trillion last year.

That’s a tremendous amount of capital just waiting to flood into the markets – both public and private – over the next few years, as interest rates decline and we enter a “risk on” growth market.

While we’re still in a volatile market where interest rates are high – and there is still uncertainty around trade deals and new economic policy – once these things settle down, and they will in the months ahead, the bull market is coming.

It’s going to be a big one.

And I can assure you, my subscribers at Brownstone Research will be very well positioned.

Jeff

P.S. All readers of The Bleeding Edge need to be primed and ready to go when this coming wave of capital begins to disperse. Getting into investments before a growth surge is one of the best ways to build wealth. And as you can tell from what I shared above, this wave is going to be a big one. I want to ensure you don’t get left behind.

So no matter what your current level of membership to Brownstone Research is, Phil Augustine, our customer concierge, and his team are ready to help get you full access to our suite of research services. Please reach out at 888-206-3481 anytime Monday through Thursday, 9 a.m. to 5 p.m. ET. They’ll be waiting and ready to help.