Carl Thoma has been in the private equity industry for 27 years, weathering the Drexel Burnham blow-up of the late 1980s and the tech and telecom meltdown of the early 2000s. As reported last week, Thoma Bravo’s new fund is nearing its final close after lowering its initial target by nearly half. The $800 million pool of capital will be Carl Thoma’s ninth buyout vehicle since getting his start under the name Golder Thoma in 1980.
After the jump, a Q&A with him on everything from lending terms to Lent, and from evaluations to “ego and greed.”
With Bryan Cressey gone, that leaves you and Orlando Bravo at the top of the firm. How did that change the fundraising process?
The fundraising process wasn’t very different. It was led by Scott Crabill, Orlando and I. Scott and Orlando are the future leaders of the firm.
Things have changed in some ways in the last 15 years, in the way that the industry has become more institutionalized. Most institutional investors want to invest money for a long time. They want continuity.
It sounds like you’re grooming Scott and Orlando to take the firm forward-are you planning to retire?
I won’t think about retiring for another 10 years or so.
Although it’s been widely reported, I know you can’t talk about specifics on your fundraising since it has yet to close. But, I have to ask, why did you want double your fund size this time around?
It was just ego and greed (laughter). But really, that was put in check right away. Without lowering the fund, we could have gotten away with it, but we have smart LPs, and from day one they said, “There’s no need to raise a fund that big.” Looking back, we’re glad we listened to them, because the size and scale of our current fund is perfect for our buy and build strategy.
How has that worked out so far? How are your other, similarly sized funds performing?
Fund six, seven and eight are all managed by Thoma Bravo and Cressey & Co. together. We even share the same office space, so the way those are managed hasn’t changed at all. Fund six got beat up badly because it had exposure to companies serving the telecom space. We thought we were smart by not investing directly in telecom but as those companies blew up, we lost business.
So, fund six is about a break even fund. Some days it’s 5% or 6%, some days its 2% or 3%. There are still three companies left in fund six. We would have liked to have sold them by the end of the first quarter next year, but given the exit environment that’s not going to happen.
Fund seven is top quartile, in the high 30% range. Fund 8 is too early to tell.
What did you learn from the tech and telecom bubble days?
After that drastic meltdown, we revamped our strategy and we’re ready. What happened in 2001 was brutal, so we’ve conditioned our portfolio on a few principles. One is “quality revenue,” meaning recurring revenue. We want 65% to 70% of it to come in even if we do nothing. That stability is what lenders are looking for.
What precautions are you taking on your existing portfolio to whether the downturn?
We’re anticipating lower revenues next year, so we’re buying less inventory. We’re trying to maximize margins next year. We’re looking at net spending and discretionary spending. Cap-ex will be less than it was 12 months ago. The truth is that no one really knows right now. People are looking like deer in headlights. This is not like going through Lent; you can’t do it for a set period of time and know when it’s going to end.
How much debt is available on deals today?
I’ve heard people saying the most debt you can get is $450 million. The most we can do is $150 million because that’s all the lenders we know who are actually lending! People all say they’re “in the market” but the terms they’re offering are imprudent to doing business.
Yet you’ve done two deals from your new fund, one that was announced last week. What kinds of lending terms were in the market?
I’d say LIBOR plus 800 or 1200 for senior. We’re seeing around 650 or 900 over for second lien, which we’re calling reasonable. We’re trying to use as little mezzanine as possible because it’s so expensive. Around April it was 14% or so, now it’s usually 15% or 16%, and the quality of deals a mezz lender will commit to has tightened, too.
Can we expect any more deal announcements by the end of the year?
We’re working on six deals, but who knows if any of them will come through. Before, you’d get maybe two or three of the six deals you work on done. Now, that’s closer more likely to be one.
Why is that?
People are still fearful of a slowdown and that it will last longer. I say it’ll be 2010 before things pick back up. There is a lot of healing and confidence that needs to return.
Is that worrisome? What is your investment period?
We have a six year investment period. It’s not a problem. We’ve been through down periods before. After the Drexel Burnham Lambert blow-up, we went 18 months without making an investment.
Sitting on all that dry powder, I’m sure you’re interested in investing in at least some areas of the market.
We’re looking at a lot of tuck-ins right now because we’re seeing some of the lowest valuations in decades. We’re buying some with 100% equity, and its ok because we can buy them at such attractive prices. Also, most of the platform companies have acquisition liens set up in advance so we can use those. We’ve definitely seen people asking to renegotiate an entire loan before agreeing to an add-on, but we do not need to do that.
What sectors are attractive to you right now?
We’re interested in financial services. We haven’t seen deal values like this in 20 to 30 years. The mid-market money managers and regional banks, with valuations between $100 million and $200 million, are attractive, and some of the insurance companies haven’t been hit yet and are in good shape. In the rest of the financial services world we’re seeing companies that might be out of intensive care but aren’t running a marathon yet. There are good parts of consumer products, if valuations can come down. They’ve stayed high there because someone like P&G can pay 10, 12 or 14x for a company.
What are you staying away from?
We’re laying off of education for the time. We want to proceed carefully because of Sallie Mae. (The student loan provider recently put a freeze on new loans.) Sallie Mae could have an impact, although for now schools will just keep the loans on their balance sheets. As a general rule, schools will be up because there is a correlation between not having a job and going to school, but we’re going slow down in that area in the near term.