Orlando Bravo was quick to see the disruptive potential of software, making a series of lucrative bets on the sector that turned him into a billionaire and transformed the
buyout shop he leads, Thoma Bravo, into an industry powerhouse. Now, the disruption is coming for his own firm.
The Miami-based financier is confronting it head-on, seeking to ensure his empire is ready for the era of artificial intelligence — and reassure investors that a de
bt-laden bet on online customer surveys, which lost more than $5 billion, is a one-off. The fund that held the investment is lagging behind rivals, and investors are on high alert for other potentially stressed deals.
The challenges illustrate two big questions facing private markets: How can software companies sustain the high margins and stable cash flows that made them inv
estor favorites, if AI models can replace coders? And what happens to the many richly valued takeovers done earlier this decade when borrowing costs were at rock bottom?
Thoma Bravo’s losses on the customer-survey firm, Medallia Inc., stirred up concerns over its c
oncentration in software — a “sector that’s going to go through some very rough times,” said Gustavo Schwed, a professor at NYU Stern School of Business.
Given Thoma Bravo’s strong track record, a single large writeoff “is not dispositive,” said Schwed, a former private equity investor. “The bigger concern is: How many more of
these are there?”investments in the funds may not be worth what the buyout firms paid for them,and are commanding steeper discounts to acquire their holdings.
Then AI took off. Earlier this year, Anthropic PBC rattled investors by releasing new tools to automate tasks in areas such as legal services. Thoma Bravo and other software investors rushed to assure clients that their portfolios were healthy.
For software providers, a big risk is that corporate customers drop specialized products and instead use AI models to sift data, handle workflows and generate reports — or even use tools like Anthropic’s Claude Code to “vibe code” their own bespoke apps.
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Even for software companies that embrace AI, new revenue models are required, since the heft
y computing costs of responding to queries changes the industry’s economics, according to the consultancy firm Bain & Co.
Software heavyweights like Thoma Bravo, Vista Equity Partners and HG Capital are investing heavily in response, said Hugh MacArthur, Bain’s global chairman of p
rivate equity. These investors are running pilots on incorporating AI and creating new products, knowing not all businesses will succeed, he said. He ultimately expects the buyout firms to succeed.
“They’re aware this is an existential issue for them: This is not optional,” said MacArthur.
In Thoma Bravo’s case, its recent funds have acquired nearly 30 AI-focused companies since mid-2023, representing nearly $3.5 billion in enterprise value, according t
o a recent letter to investors. Its portfolio expects to generate about $5.2 billion in AI revenues this year, the letter said.
In addition, portfolio companies have ditched less-certain projects to focus on initiatives with a “j
ustifiable” return on investment, while firm executives are encouraging the businesses to adopt AI faster, Bravo said in the same interview.
Thoma Bravo is deepening links to Alphabet Inc. through the multiyear Google deal, which followed a fact-finding trip by portfolio company bosses to Silicon Valley, Bravo said.
The firm has also tightened its focus by ending a disappointing foray into investing via smaller, “growth equity” stakes. Its sole growth fund, dating from 2021, is a fourth-quartile performer with a negative return, Bloomberg data shows.
