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Bravo: Mega-Buyouts Are Getting Harder to Pull Off

Orlando Bravo, the billionaire co-founder of tech-focused private equity firm Thoma Bravo LLC, said that mega-buyouts are becoming more difficult to execute as investors become more cautious.

September 22, 2022
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Orlando Bravo, the billionaire co-founder of tech-focused private equity firm Thoma Bravo LLC, said that mega-buyouts are becoming more difficult to execute as investors become more cautious.

Bravo said in an interview this week that the problem with doing really big deals is getting the equity. He was speaking on the sidelines of the IPEM private capital conference in Cannes, France.

Private equity firms are finding it harder to do deals as the US Federal Reserve and other central banks raise interest rates. This has made it more expensive to borrow money and has caused stock prices to fall, making it harder for buyers and sellers to agree on a price.

Private equity transactions have declined by approximately 30% this year, after reaching a record high in 2021. Even so, the volume of $992 billion remains high relative to historical averages, according to data compiled by Bloomberg.

Scott Kleinman, co-president of Apollo Global Managment Inc., said Wednesday that the slowdown in private equity deal flow looks set to last until late in 2023. Kleinman said that both the US and Europe are poised to tip into a recession, which will likely impact private equity deals for the foreseeable future.

Tightening financial conditions are making it difficult for all types of deals to be completed; however, this is not the case for the transactions that Thoma Bravo specializes in, said Bravo.

Typically, private equity firms target high-growth tech and software firms that tend to pile on less debt than traditional private equity targets.

According to Bravo, there is enough financing for software company takeovers because they only make up 25% of the total deals. In slower-growing sectors, takeovers can require a debt portion of up to 40% or even 50% of the purchase price.

Thoma Bravo has been a frequent borrower from private credit firms, bypassing the Wall Street banks that operate as intermediaries channeling capital from public market investors. Thoma Bravo has instead chosen to work directly with private credit firms in order to obtain the financing it needs. This strategy has allowed the company to avoid paying the fees associated with working with Wall Street banks.

Private lenders are still providing financing for risky high-yield bonds and leveraged loans, even though global banks have all but stopped their underwriting for these types of loans. However, the private lenders are being more cautious and are demanding higher prices for their services.

Tikehau Co-Founder Says Buyout Firms in Denial About ValuationsIn an interview with Bloomberg, Tikehau Co-Founder and CEO Matthieu Pigasse said that many buyout firms are in denial about the current state of valuations."People are still behaving as if nothing had happened," Pigasse said. "It's as if the crisis never happened."Pigasse went on to say that the current situation is "worrying" and that Tikehau is being more cautious with its investments as a result.

Other private equity firms are struggling to obtain debt financing at a reasonable cost, according to market participants. This is especially true for firms looking to do transactions in cyclical sectors.

In June, Thoma Bravo acquired US enterprise software firm Anaplan in a deal valued at $10.4 billion. The purchase price consisted of about 24% loans in the form of a unitranche, which blends senior and subordinated debt into one.

To finance one of the largest buyouts funded by private credit markets, the firm turned to financing from Apollo Global Management Inc., Blackstone Credit, Golub Capital, and Owl Rock Capital.

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