Kind of A Big Deal: Thoma Bravo Earns 4x On Datatel Sale

Thoma Bravo this week infused the stale exit market with fresh air, earning a 4x return on its investment in Datatel, a higher education software service provider.

After a four-year ownership, the buyout shop sold Datatel to Hellman & Friedman and JMI Equity. Terms weren’t disclosed, but a source familiar with the situation said the deal was valued at $570 million, earning Thoma Bravo a 4x return on one of the largest investments from the firm’s seventh fund. Under Thoma Bravo’s ownership, Datatel doubled its earnings and used its cash flow to pay down debt organically. Meanwhile, Thoma Bravo took a $124 million dividend recap in 2006.

In addition to plumping up Thoma Bravo’s returns, the sale represented a win for co-investors Trident Capital, HarbourVest Partners and JP Morgan Asset Management.

I spoke with Orlando Bravo, managing partner of Thoma Bravo, about selling in an exit draught, criticism of sponsor-to-sponsor deals and the importance of “high quality revenue.”

peHUB: How were you able to exit now, when so many firms want liquidity but aren’t able to find willing buyers?

Bravo: You can always hold a company longer. We believed, given the consistency and predictability of the company’s revenue, that it will continue to grow. Hellman & Friedman approached us and offered us a fair price for the company. We did not do an auction; we knew what the business was worth. We’ve done 40 of these deals over the past ten years, so we knew what it was worth.

peHUB: What makes Datatel such an attractive company?

The products that Datatel provides to colleges and universities are mission critical. So they have the education vertical-colleges aren’t going out of business even if they are under budgetary pressure. Further, the business model has high quality revenue, it is very predictable. The company has loyalty as the independent market leader after being around for 30 years or so.

peHUB: What operational improvements did Thoma Bravo apply to the company that contributed to its success?

Bravo: In the software sector, we have a complete program to continuously improve both revenue growth and margins of software companies. There’s no single silver bullet, but we worked on improvement of professional services support, and margins, and productivity gains. We married the right management team with our main operating partners.

peHUB: There’s been a lot of criticism of sponsor-to-sponsor deals lately. What levers are left for Hellman & Friedman to pull to get an equally as impressive return on the company?

Bravo: Well, I can’t comment on H&F’s plans for the company but I have an issue with (sponsor-to-sponsor deals) being seen as such a negative, because the buyout community is no longer a tiny niche industry. Private equity is still a growth business and small percentage of overall allocations, but I liken it more to asset managers buying and selling securities to each other. There are some businesses out there that are great for this type of trade and Datatel is one of them. Datatel is the kind of property that we’d like to hold forever. I think earnings and growth will continue for a very long time with the company. But we’re in the business of providing liquidity to LPs, so that’s not something we can do. There are some businesses that don’t have the growth and quality revenue of Datatel that wouldn’t be as good of candidates for this type of thing.

Why did you bring in co-investors on this deal?

We brought in JPM and HarbourVest, which we have a very close relationship with. We have a very active co-invest program with LPs. The equity check came from Thoma Cressey Bravo VII, which was a much smaller fund, and underwriting it all would have been too big of an exposure. Trident capital also joined and they were with us from the beginning to end.

Do you still do co-invest deals?

Yes, we recently bought Flexera Software from Macrovision. The co-investors that joined us were JP Morgan and HarbourVest.

That deal was from your newest fund (Fund IX,), right?

Yes, we feel we’re a big outlier, as we have done three meaningful deals at a very good time in the cycle. One was Flexera, the second was Manatron, the largest property tax software provider. That is a buy and build program. The third was a take-private of Entrust.

With $822.5 million in the bank (from Fund IX), do you expect to continue the same deal pace?

I would say yes, we’ll continue to be very active.