Orlando Bravo - The Art of Software Buyouts - [Invest Like the Best, EP. 257]

Episode Summary

Executive Summary: Patrick O’Shaughnessy interviews Orlando Bravo about Toma Bravo’s software-private-equity model, arguing that the biggest opportunity in tech investing is not capital scarcity but disciplined operating execution. Bravo explains why market leaders, profitable growth, and fast decision-making beat the common SaaS “grow first, profits later” mindset.

Main Topics: Capital vs. opportunity mismatch (Priority: 5/5): Software opportunities are growing faster than traditional PE can deploy capital. Control investing through operations (Priority: 5/5): Toma Bravo drives returns by improving P&Ls with management, not replacing them. Profitability and growth are compatible (Priority: 5/5): Bravo argues high margins fund better growth decisions, not slower growth. Market leadership as the core screen (Priority: 4/5): They target the best product in a category, especially in fragmented enterprise software. Why cyber and enterprise SaaS are overlooked (Priority: 4/5): Complex B2B software lacks consumer familiarity, creating inefficiency and opportunity. Selling early and selling strategically (Priority: 4/5): Bravo prefers exiting when strategics approach, since their interest may fade quickly. Leadership, service, and talent development (Priority: 3/5): He emphasizes decentralized leadership, culture add, and building opportunity for young talent.

Key Arguments: Growth funds deploy in 9-12 months; control funds now invest in 12-24 months, not 4-5 years. High growth and high margin are not mutually exclusive; one can drive the other. Public markets wrongly equate growth with losses, even though SaaS marginal cost is near zero. The best returns come from operating discipline plus correct growth decisions, not just multiple expansion. Market leaders matter because buyers converge on top 2-3 products over time, especially in cyber. Working with existing management speeds change and preserves deep product/customer knowledge. Strategic buyers approaching can signal it is time to sell because their priorities can shift quickly. Enterprise software is attractive because recurring revenue and better cash flow support strong outcomes.

Data Points: Toma Bravo assets under management: over $90 billion - Orlando Bravo describes the scale of the firm. Software acquisitions overseen: more than 350 - Bravo discusses his track record in software buyouts. First software deal valuation: around two times maintenance revenue - Profit21 was bought at a very low early-software multiple. Gross margins in software: 90% gross margins - Used to explain why maintenance streams and software can be highly cash generative. Growth equity fund deployment pace: 9 to 12 months - Bravo says growth funds are being invested much faster today. Traditional private equity fund deployment pace: 4 to 5 years - Contrast with historical control-fund pacing. Traditional private equity deployment pace today: 12 months, 24 months - He says control investors are also deploying much faster than before. SaaS compounding rate: 20% - Bravo cites billion-dollar-plus SaaS assets compounding at this rate. SaaS doubling period: every four years - Derived from 20% compounding in his discussion. Average SaaS portfolio EBITDA margin: 35% or 40% EBITDA margin - He says Toma Bravo’s portfolio is far more profitable than average SaaS. S&P 500 PE: around 23, 24 PE - Used in a valuation comparison with profitable software. S&P earnings growth: 7% a year - Used in the comparison of index returns over four years. Profitable software index earnings growth: 20% - Bravo compares software’s growth to the S&P. Profitable software index PE: 32, 35 PE - Used to show attractive software valuations relative to growth. Public software market cap: $2.7 trillion - He notes the large scale of the public SaaS market. First-year customer call price: $300 per call - Tegas ad copy highlighted cheaper expert calls. Alternative expert call price: $1,000 or more - Tegas ad copy contrasted its pricing with competitors. Expert call library size: more than 10,000 calls - Tegas ad copy described the size of its call repository.

Pivotal Quotes: "There are many, many reasons for that, but now you see the whole community doing that." — Orlando Bravo: On why PE and growth investors are investing much faster now. "We believe in both high growth and high margin and they're not mutually exclusive." — Orlando Bravo: On the core philosophy behind Toma Bravo's software strategy. "If your job title has a C in it, you're not allowed to complain." — Orlando Bravo: On leadership, responsibility, and the tone executives should set.

Implications: Software investors will need to underwrite operations, talent, and category leadership more than ever, while capital allocators rethink rigid asset-class silos.