Carl Thoma’s Perspective on Middle Market Valuations in Private Equity International

Graham Winfrey

Thoma Bravo sees mid-market prices rise

Valuations for mid-market companies have risen to levels not seen in years, reducing the number of attractive investment opportunities for private equity firms, according to managing partner of Thoma Bravo Carl Thoma.

“It’s kind of frustrating valuation times,” he said. “Literally in the last six months valuations have gone up about a full multiple or a multiple and a half. They’re getting back to the prices we used to see in 2007.”

Recent data do support the claim that valuations have risen as a multiple of earnings before interest, tax, depreciation and amortisation compared to 2011. The average EBITDA multiple for global buyouts increased from 11.9x during the first six months of 2011 to 12.6x during the first half of 2012, according to Dealogic.

In the mid-market, increased availability of financing for private equity deals has created a more conducive environment for higher valuations, as banks that were “paralysed for a couple years are lending and they’re getting more aggressive”, Gerald Cromack, co-president of investment banking firm Morgan Joseph TriArtisan, told Private Equity International in a recent interview.

Recent deals

“For the companies that we bought that closed in the first quarter, their valuation multiples are probably up a full turn or turn and a half,” Thoma said. “The bad news is the other 75 percent of the fund we’ve got to invest. In that regard, we just wish we would have gotten some more money invested.”

Thoma Bravo has invested 25 percent of its $1.25 billion tenth fund in three investments since the beginning of the year – online security company Blue Coat Systems, information technology business Network Instruments and digital media company Telestream – all of which have benefitted from the recent surge in valuations, Thoma said.

When deploying the remaining capital in Fund X, Thoma Bravo will likely pursue more co-investments alongside its limited partners than the firm has in the past, according to Thoma.

“Since we raised Fund X we’ve picked up some other large pension funds and sovereign wealth funds who will probably do more co-investing with us,” he said. “If a company needs $300 million of equity, we’re only going to put up half that.”

Thoma Bravo’s investment in Blue Coat, a $1.3 billion transaction, marked its second co-investment alongside the Ontario Teachers’ Pension Plan. In July 2010, the two groups teamed up on a $717 million investment in information technology security and data backup company SonicWall.

Tech leads the way

The technology sector – specifically software and technology-enabled services – should continue to “lead deal flow” in the mid-market into 2013, according to Thoma.

“It has come off of 20 years of strong growth [and] there’s quite a bit of fat in these companies, so in that sense there’s a chance to improve margins and get them back focused,” he said.

New technologies including software-as-a-service (SaaS), cloud computing and social media are driving spending in the software sector, according to a recent report from the technology team in Baird’s investment banking department. Global SaaS revenue in 2011 was estimated at $12 billion and projected to reach $22 billion by 2015, according to research from Gartner Group cited in the report. Cloud computing spending is also expected to more than double over the next five years, reaching an estimated $207 billion by 2016, the report said.

Thoma Bravo typically invests in companies with an enterprise value of between $100 million and $500 million, with a focus on software, business and financial services and education.

Founded in 1998, Thoma Bravo formed when Golder Thoma & Company split into two firms, GTCR Golder Rauner and Thoma Cressey Equity Partners – which was eventually renamed Thoma Bravo. The firm is led by Thoma, Bravo, Scott Crabill and Lee Mitchell and manages around $4 billion in private equity commitments.

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