Private equity firm Thoma Bravo is reportedly poised to take advantage of the recent downturn in software stock valuations, indicating a potential wave of substantial acquisitions. Co-founder Orlando Bravo described the current market as a significant buying opportunity, attributing the sharp decline in software valuations to investor fears surrounding the impact of artificial intelligence on traditional software services.
In a recent interview at the World Economic Forum in Davos, Bravo characterized the ongoing correction in the software sector as an overreaction. The firm, which manages more than $180 billion in assets and recently established a $24.3 billion fund specifically for software investments, is positioned as one of the leading dealmakers in the private equity landscape.
The software sector has struggled in the stock market this year, with indices tracking the industry down approximately 7 percent over the recent three-week period. Major tech companies have also witnessed considerable declines, with Microsoft, Meta, and Oracle experiencing losses of 4.2 percent, 7 percent, and 7.4 percent, respectively. Salesforce and Adobe’s stocks dropped by about 12 percent each.
Thoma Bravo recently made headlines with its $12.3 billion acquisition of HR software company Dayforce, and the firm believes that specialized software companies—particularly those recognized as leaders in niche markets like cybersecurity and payroll technologies—will remain insulated from potential AI disruptions. Bravo emphasized that the essence of software lies not in its code but in the domain expertise that underpins it. He noted that a limited number of firms and individuals possess deep knowledge of specific verticals and processes, which forms a valuable franchise that cannot be easily replicated.
While some companies may attempt to replace traditional software with in-house AI solutions, Bravo warned that they may find it challenging to maintain their IT departments, making such transitions unappealing. He stressed that critical functions, such as payroll, require guaranteed accuracy, which AI may struggle to provide.
Amid Thoma Bravo’s optimism, other private capital firms have adopted a more cautious stance towards software investments due to AI-related concerns. Reports indicate that Apollo Global Management has reduced its software holdings, with some executives emphasizing the priority of assessing AI risks in new deals. Blackstone president Jonathan Gray has similarly highlighted the importance of evaluating AI risks given the firm’s extensive asset base.
Despite acknowledging that some less specialized software companies may be vulnerable to disruption, Bravo pointed out that excessive stock compensation has rendered some public software firms “unbuyable.” Such stock grants would necessitate cash payments, complicating acquisition pursuits.
Thoma Bravo faces challenges, as evidenced by the difficulties encountered with its $6.4 billion acquisition of customer service software provider Medallia, partly attributed to AI-related issues. Nevertheless, Bravo remains optimistic about the software sector’s resilience. In past discussions, he has articulated a belief in the importance of continued investment in the face of market hesitations, urging that waiting for ideal pricing might not be a viable strategy.
As the software landscape evolves amid these dynamics, Thoma Bravo’s strategic approach will likely play a significant role in shaping future private equity transactions and the overall recovery of the software market.
