Thoma Bravo Speaks

The private equity giant opens up about how it does business and why. Plus: a theory about why so many vendors are laying off employees and 1Password courts MSPs.

Editor’s note: Covering the channel is a marathon, not a sprint. Savvy channelholics rest up now and again, so I’ll be snoozing on a beach somewhere next week rather than posting. Back on the job and loving it two weeks from today though.

It’s a tough time to be in venture capital.

“Publicly traded tech multiples have contracted to pre-pandemic levels, investors are more disciplined, and capital availability is poor,” notes Pitchbook in a recent report. “We are projecting commitments will continue to decline into 2024 and will not recover to 2021 and 2022 fundraising levels by 2028, stemming from the lack of distributions.”

Conditions for private equity investors, by contrast, are thoroughly…OK. On the one hand, exits dropped 22% in the first quarter of the year to $81.2 billion, according to S&P Global Market Intelligence, the lowest quarterly total in more than three years.

On the other hand, per the same source, 60% of PE executives foresee more deal activity this year, compared to 34% last year, and Pitchbook expects global assets under management to rise from $5.3 trillion in 2022 (the most recent year for which complete data is available) to anywhere from $8 trillion to $9.7 trillion by 2028.

Pitchbook calls that latter, bigger number a “best case” projection. Do you?

Not if you’re among the people who turned this book into a best seller. Or Warren Buffett. Or the many, many, many people on Reddit who regularly savage private equity generally and Thoma Bravo specifically.

If you read this blog, I’m guessing you have a few thoughts one way or another about Thoma Bravo yourself. It’s a financial giant in the tech sector that owns ConnectWise, Sophos, Proofpoint, and LogRhythm (I think. Hard to tell how this week’s news affects that particular investment). They also hold a substantial share of N-able.

I write about most of those companies fairly regularly. I know what their executives say about Thoma Bravo. I know what their partners say about Thoma Bravo. What I’ve long wondered is what Thoma Bravo says about all the things people say about Thoma Bravo.

I was in San Francisco, where the firm is headquartered, for the RSA Conference last week, so I figured I’d find out. I asked to meet with one of the company’s partners, and Mike Hoffmann (pictured), who sits on ConnectWise’s board of directors and was once on N-able’s board too, agreed to speak. Among the questions I asked: does all the hating on private equity ever bother you?

“Not really,” he says. But he does see it, sometimes on Reddit and more often on X.

“A lot of what you read is just not true,” Hoffmann says. “There’s some people that are really passionate who dig into stuff appropriately and ask good questions and push the management teams. There’s also just tons of FUD, tons of FUD in any market or any media platform that sometimes doesn’t necessarily line up perfectly with how things operate at a more granular level.”

I’m sure to take heat for it, but since we all enjoy plenty of opportunities to talk about private equity, let’s let private equity do some talking for a change. Here are three things Hoffmann wishes people knew about Thoma Bravo:

1. Its companies are not drowning in debt. PE acquisitions are leveraged buyouts, Hoffmann acknowledges, but less leveraged than most people think—on average, he says, under half the money Thoma Bravo uses to buy a software business is borrowed.

“It’s closer to 30%,” Hoffmann notes. “That means for every $1 of debt going in, $2 of equity’s going in.” Unless you made a 70% down payment, he adds, buying your home was a much more leveraged investment than buying a vendor.

2. It cares about growth, not cash. A common complaint about PE firms is that they pull cash from the businesses they buy, strip costs (like support and R&D) to goose profits, make a quick exit, and then move on to the next victim. Not so, Hoffmann insists, at least when it comes to technology businesses.

“This perspective that private equity hives assets off and milk’s cash flows and stuff, that’s just a severe misunderstanding of how private equity firms in the software space make money,” Hoffmann says. “They make money based on compounded earnings over time, and you compound earnings through top line growth.”

More specifically, he continues, the sale price of a PE-owned software company is typically based on a multiple of ARR or ARR combined with EBITDA.

“But everyone looks at the growth rate,” Hoffmann says. “They’re focused on profitable growth, because that’s what’s going to generate the best returns. That’s what everybody wants to see. And so I am probably optimistic that most operators—not all—are making decisions in support of that.”

3. It advises the businesses it owns. It doesn’t run them. I’ll confess, it’s never been crystal clear to me how directly engaged PE firms are in managing the companies they own. Not very, Hoffmann says. Most boards meet weekly, and Hoffmann speaks with members of the management team maybe a couple of times a week. “But a lot of times, it’s kind of like any other relationship,” he says. “I call on my commute home or something like that.”

And not to issue orders. Thoma Bravo provides guidance, according to Hoffmann. It doesn’t make management decisions. In fact, one of the top criteria it uses to evaluate potential acquisitions is the quality of the company’s management.

“We will bring our portfolio [companies] together to talk about trends. We share tons of information. We’ll ask a lot of questions and push so as to help get the best outcomes,” Hoffmann explains. “What we don’t do is drive the strategy of our businesses. We leave that to the businesses themselves.”

That said, Hoffmann notes, he and his peers do go deep with the companies it owns on what he calls “operational topics,” and especially financial ones. Thoma Bravo reviews budgets closely, for example.

“We do that in a very systemized way that allows us to feel like there’s the proper integrity in the way it was built, the proper amount of contingency built in,” Hoffmann explains. The company measures performance rigorously too, and speaks up when it’s slipping.

“We’ve got approaching a hundred portfolio companies and we’ve done a lot of these investments,” Hoffmann says. “We’re able to benchmark everything.”

A lot of you, I’m guessing, have a different take on PE than Hoffmann, based perhaps on direct experience with vendors you liked more before an acquisition than after. You know where to reach me. I’ll explore the most thoughtful dissents in a future post.

A theory about why so many vendors are laying people off these days

As long as I had him, I took advantage of my time with Hoffmann to get a PE investor’s take on a question that’s been on my mind lately: why, at a time when 64% of MSPs surveyed by N-able earlier this year project double-digit growth in 2024, Gartner expects global security and risk management spending to climb 14% this year, and global IT services outlays are rocketing toward $2 trillion by 2028 are so many technology companies laying people off?

And I’m not just talking about big technology companies like Cisco, Salesforce, and Dell. Trend Micro let 2% of its workforce go earlier this year, Proofpoint parted with 6%, and high-flyer Pax8 (number 1,038 on the latest Inc. 5000 list, with 571% three-year revenue growth) more recently laid off something approaching 5%. What’s the story?

“It’s a good question,” Hoffmann muses. He does have a theory though.

“If you think about the post-ZIRP [era], when the markets traded off a bit and interest rates went up, not all companies took the medicine,” he says. “They had staffed for growth plans and expectations or other sorts of things that with the benefit of hindsight, they wish they probably had maybe done a little bit less.”

As for Thoma Bravo, he continues, interest rates, recession jitters, and other economic anxieties influence investment decisions, but they don’t drive them. They certainly didn’t stop it from spending some $5.3 billion on Darktrace a few weeks ago.

“You look at the overall market as a whole, of course, and the trends going on, but you analyze the merits of that investment and the partnership you have with the management team, the valuation you’re buying the company [at], the financial characteristics of the business, and the opportunity in front of the business. Everything’s very specific,” Hoffmann says. “It’s a long way of me saying that even in really challenging markets and dynamics, sometimes you find the gem who is the disruptor.”

1Password courts a completely different channel

Is it really possible after last Friday’s post and this Wednesday’s monster follow-up, that I still have reporting to share from this year’s RSA Conference?

It is, and for better or worse it’s another story with a PE angle as well. This one concerns 1Password, an identity management vendor founded in 2005 that courtesy of three funding rounds led by Accel and worth a collective $920 million has amassed millions of users and nearly 150,000 business customers.

Now it wants more, especially among SMBs, which is why the company introduced a partner program for resellers, system integrators, cloud service providers, and others (led by Head of Global GTM Partnerships Monica Jain) in February, and hired Jason Eberhardt (pictured) last month. His job, as 1Password’s first-ever global vice president of MSP channel, is to do what so many other security vendors are doing these days: supplement conventional partners with MSP partners as well.

“You and I know that’s a completely different channel,” says Eberhardt.

A veteran of similar roles at Symantec, Bitdefender, and Proofpoint, Eberhardt is familiar with those differences. MSPs want multi-tenant solutions and consumption-based pricing, for example. The partner edition of 1Password’s Enterprise Password Manager solution, which officially entered beta testing during RSAC last week, features both.

In time, it will also offer integrations with popular RMM and PSA solutions and be available through leading distributors. Eberhardt plans to form a partner advisory council, offer weekly office hours, and provide live access to 1Pasasword’s channel team via Slack too.

“We’re going to be so available that it’s going to be ridiculous,” he says.

Arming partners to make money is part of his plan as well. According to Eberhardt, most MSPs use password managers but few sell them, largely because they don’t regard identity management as the essential security function it is at a time when users and their identities are so squarely in threat actor crosshairs. Businesses spend big money on EDR, XDR, and MDR solutions, he notes, but it’s wasted money if attackers stroll through company’s digital front door with stolen credentials.

“We’re going to give them the sales tools, the battle cards, to have that conversation,” Eberhardt says.

For the moment, only a handful of MSPs are enrolled in the program Eberhardt is actively constructing. That’s in keeping with his plan to flight test the new offering with an invite-only list of beta partners before opening everything up more broadly, probably toward the end of this year.

“We’re going to build this the right way,” Eberhardt says.

My co-host and I are building the MSP Chat podcast right way too

Latest evidence: The new episode features an interview with Rob Scott of Monjur about the dangerous AI-related holes most MSPs have in their MSA. Miss it at your own risk!

Also worth noting

• Let the tea leaf reading begin. ConnectWise has a new CFO.

• Speaking of ConnectWise, it’s named the 26 finalists for this year’s PitchIT contest for startup providers of software and services. Three finalists will fight it out for the $70,000 first prize and $30,000 second prize this November at ConnectWise’s IT Nation Connect event.

• TD SYNNEX’s new high-growth tech center of excellence is designed to help partners fuel growth in AI, security, hybrid cloud, modern infrastructure, and data analytics.

• Research from Barracuda Networks suggests that users of its Email Protection platform block 70% more business email compromise attacks than users of built-in M365 security alone.

• NetApp’s new all-flash AFF A-Series storage devices are designed for use with AI workloads.

• HPEs pay-as-you-go GreenLake platform has new hybrid and private cloud options .

• Responding to requests from SMB partners and end users, Veeam has added support for the Proxmox VE virtualization platform to its data protection suite.

• ManageEngine is the latest addition to the growing list of SaaS management vendors.

• Lookout now offers its mobile endpoint security solution through Pax8.

• Do we need to observe that this is a bad idea? 40% of cyber teams have opted not to report an incident to avoid losing their jobs, according to security vendor VikingCloud.