Orlando Bravo, the astute founder and managing partner of private equity titan Thoma Bravo, has robustly countered the intensifying critiques leveled against private markets, asserting that deep, specialized sector knowledge is the critical differentiator between success and failure in an era where artificial intelligence (AI) is rapidly recalibrating the entire software industry landscape. His remarks, delivered during a Tuesday interview with CNBC’s Leslie Picker, underscored a strategic philosophy honed over decades, positioning Thoma Bravo as uniquely equipped to navigate the turbulent currents of a re-evaluating financial ecosystem.
Bravo articulated his firm’s methodology, stating, "We have been living in the details of the space for a very, very long time, not on a high level, not investing in stocks, [but] investing in companies, customer contracts, knowing the details. So, yes, as a sector specialist in private equity, our companies are very, very different." This granular approach, he suggested, is the bedrock of their confidence, even extending to their private credit portfolio. "We are so comfortable with our private credit book, given the choices we’ve made as a specialist," Bravo affirmed, directly addressing concerns about burgeoning risks in the private lending space.
Escalating Scrutiny of Private Markets
Bravo’s defense arrives amidst a period of heightened investor scrutiny regarding private market valuations and overall liquidity. The past year has witnessed a notable wave of markdowns and increasing redemption pressures across both private credit and private equity funds, prompting a re-evaluation of these typically less transparent asset classes. After a decade of unprecedented growth, fueled by low interest rates and a persistent search for yield, private markets have become a significant component of institutional portfolios. However, the pivot to higher interest rates by central banks globally has exposed vulnerabilities, making financing more expensive, slowing M&A activity, and challenging the valuation models that often relied on public market comparables.
The concerns are not merely theoretical. Morgan Stanley recently projected that direct-lending default rates could escalate to approximately 8%, a figure alarmingly close to the peaks observed during the economic dislocations of the Covid-19 pandemic. This forecast sends a stark warning about potential distress in the burgeoning private credit sector, which has grown to an estimated $1.7 trillion market, largely filling the void left by traditional banks in corporate lending. These loans, often to highly leveraged companies, carry floating interest rates, meaning debt service costs have surged alongside benchmark rates, straining borrowers’ cash flows and increasing default probabilities.
Further fanning the flames of skepticism, John Zito, a prominent figure at Apollo Global Management, delivered a pointed message to UBS clients last month. Zito contended that private equity firms were broadly misrepresenting the true value of their software holdings, boldly declaring that "all the marks are wrong." This assertion directly challenged the integrity of valuation practices within the private equity industry, particularly concerning a sector that has been a darling of investors for years, benefiting from secular growth trends.
Thoma Bravo’s Distinct Approach and Investor Confidence
In response to these industry-wide anxieties, Bravo highlighted Thoma Bravo’s enduring track record and commitment to transparency as key factors in maintaining investor confidence. The firm’s investor base, a formidable roster including major U.S. pension funds and global sovereign wealth funds, has remained steadfast, a testament to what Bravo describes as an open dialogue regarding performance. "They’ve seen our marks, they’ve seen our exits, they’ve seen our progression," he stated. "Everybody’s extremely comfortable."
This comfort stems from the firm’s consistent communication and the long-term nature of private equity investments, which often span several years, allowing for market fluctuations to normalize. Unlike public market investors who react to quarterly earnings and daily price movements, private equity limited partners (LPs) typically have longer investment horizons and a more direct line of sight into the underlying assets through regular reporting. Thoma Bravo’s reputation for operational excellence and its focus on driving value through strategic improvements in its portfolio companies, rather than relying solely on financial engineering, also contributes to this investor loyalty. The firm specializes in identifying mission-critical software companies, then applies a proven playbook to optimize their operations, grow their customer base, and ultimately achieve profitable exits, often through strategic sales or initial public offerings.
The Medallia Misstep: Acknowledgment and Transparency
Despite the broader success and investor comfort, Bravo did not shy away from acknowledging a high-profile misstep: the 2021 take-private acquisition of customer experience software company Medallia for $6.4 billion. This deal, notably singled out by Apollo’s John Zito as one that "will be worse than people expect," according to the Wall Street Journal, serves as a poignant example of the inherent risks in private equity.
Bravo candidly explained the firm’s error in judgment: "When we bought it, we way overestimated or extrapolated the very high rate of growth of that company into the future. We made a mistake. And that cost us to pay too much." He further elaborated on the consequences, acknowledging, "Now, the equity from our standpoint has been impaired for a long time." Crucially, Bravo emphasized the firm’s transparency regarding this particular investment. "Our investors, this group that holds the capital in the world, has known that for years. So there is no new news." This frank admission and prior communication with investors underscore Thoma Bravo’s approach to managing expectations and maintaining trust, even when faced with underperforming assets. The Medallia case illustrates that even the most specialized firms are not immune to valuation challenges, particularly during periods of market exuberance, like the tech boom seen in 2021, when growth metrics were often projected aggressively into the future. The subsequent market correction and economic headwinds revealed these aggressive assumptions to be unsustainable, leading to the impairment of equity.
AI as a Disruptor and Differentiator
Looking beyond individual investments, Bravo painted a vivid picture of the profound impact of artificial intelligence on the software industry. He drew a sharp distinction between the resilience of Thoma Bravo’s privately held software companies and the accelerating disruption faced by many publicly traded software firms. While acknowledging the Medallia challenge, Bravo stressed the robust performance of the broader portfolio. "The other 77 companies that we have, for the most part — and it’s so relevant for AI — they’re absolutely crushing it," he asserted, suggesting that these companies are either leveraging AI effectively or are positioned to withstand its disruptive force.
Bravo’s analysis suggests that the current valuation declines in some public software names are "very warranted." He posited that many public market software companies were already on a trajectory toward disruption, and AI is simply accelerating this process. "In the public markets, if you look at it, there are many, many software companies in the public markets that will be disrupted from AI. Those companies were going to be disrupted anyway. AI will create a disruption a lot faster," Bravo explained. This perspective highlights the brutal efficiency of AI in rendering legacy software solutions obsolete or significantly less competitive. Companies that fail to integrate AI, automate processes, or evolve their product offerings risk losing market share rapidly.
Private equity firms, particularly specialists like Thoma Bravo, argue they are better positioned to help portfolio companies navigate this seismic shift. Without the constant pressure of quarterly earnings reports and public market scrutiny, privately held companies can make longer-term strategic investments in AI research and development, retool their product lines, and even pivot their business models more effectively. This agility, coupled with the operational expertise often brought by private equity sponsors, allows for a more focused and rapid adaptation to emerging technological paradigms. For Thoma Bravo’s portfolio, this means actively working with management teams to identify AI opportunities, integrate AI capabilities into their products, and enhance their competitive moats against emerging threats. The "77 companies crushing it" likely represent businesses that are either inherently resilient to AI disruption, are early adopters of AI technologies, or have successfully leveraged their private ownership to make necessary, albeit sometimes costly, transformations.
Broader Implications and the Future Landscape
The ongoing debate over private market valuations, liquidity, and the transformative power of AI points to a significant inflection point for the financial industry and the technology sector. The era of cheap money that fueled the rapid expansion of private markets is over, replaced by a more disciplined environment where capital is more expensive and growth harder to achieve. This shift demands greater transparency, more rigorous valuation methodologies, and a clearer articulation of value creation strategies from private market participants.
For institutional investors, the increased scrutiny necessitates a careful re-evaluation of their private market allocations. While these asset classes continue to offer diversification and potentially higher returns, the risks associated with illiquidity and opaque valuations are now more pronounced. Fund managers will increasingly be judged not just on their headline returns, but also on their ability to deliver consistent performance, manage risk, and provide clear reporting, especially on their most challenged investments.
The software industry, already dynamic, is now undergoing an even more profound transformation driven by AI. Companies that thrive will be those that can rapidly innovate, integrate AI effectively into their core offerings, and adapt their business models. This creates both immense opportunities for growth and significant risks of obsolescence. Private equity firms specializing in software, like Thoma Bravo, stand at the nexus of this change. Their ability to identify promising companies, instill operational discipline, and guide them through AI integration will be crucial for their continued success and for the broader health of the private markets. The challenge for these firms will be to consistently demonstrate the value they add beyond financial leverage, proving that their deep sector expertise is indeed the ultimate differentiator in an increasingly complex and competitive landscape. The market will continue to demand proof of concept, not just promises, as the full implications of AI unfold and the private market ecosystem matures under the weight of heightened expectations and scrutiny.
