Thoma Bravo Founder Says Private Equity Has Lost Its Way

Thoma Bravo co-founder Orlando Bravo stated that private equity firms have lost their focus on company fundamentals, becoming overly concerned with macroeconomics in the past three years. This shift has led to firms holding assets longer due to challenging exits and increased reliance on financial engineering tactics like continuation vehicles, effectively selling assets to themselves.

Analysis

Orlando Bravo, co-founder and managing partner of Thoma Bravo, has articulated a critical view of the private equity industry's trajectory over the last three years, suggesting a departure from its core principles. He contends that PE leaders have become excessively preoccupied with macroeconomic factors, diverting attention from the fundamental analysis of individual companies. This shift in focus is reportedly contributing to firms retaining assets for longer durations, a trend exacerbated by challenging exit conditions, including a notably muted initial public offering market. Consequently, private equity firms are increasingly resorting to financial engineering tactics, such as the use of continuation vehicles, which involve selling stakes in portfolio companies to new funds managed by the same firm—effectively, a transaction with oneself. This indicates a potential structural strain within the industry as it navigates a more complex M&A and capital markets landscape.

Key Decisions for Investors

• Investors should scrutinize private equity managers' reliance on financial engineering, such as continuation vehicles, and demand transparency regarding their impact on valuations and liquidity.
• A thorough due diligence process should emphasize managers' focus on genuine operational improvements and company fundamentals, rather than macroeconomic bets or engineered exits.
• Given the challenging exit environment, investors might consider adjusting their expectations for distribution timelines and be cautious about new commitments to funds heavily reliant on favorable market conditions for realizing investments.