Orlando Bravo, Thoma Bravo Founder and Managing Partner joins the Yahoo Finance Live panel to discuss his company, the cloud computing business and SPAC’s.
ZACK GUZMAN: I want to shift our focus over to what we've seen play out on that tech front, though, because growth stocks have continued to perform, as we were just discussing there. And a man who knows that area, specifically software and cybersecurity, quite well joins us now when we look at this.
Fresh off his panel at the Greenwich Economic Forum this morning is Orlando Bravo, founder and managing partner at Thoma Bravo, one of the largest software and tech-focused PE firms. And Orlando, appreciate you taking the time to chat with us today. Talk to me about what we've seen here.
Because it's interesting when you look at some of these names Zscaler included there, it's had a hell of a year, one of those standout cybersecurity companies. It's kind of a strange rotation to see that space be one of the areas investors focus in on when we see risk off days, but it's just what 2020 is, I guess. So talk to me about that rotation you've seen play out.
ORLANDO BRAVO: Well, you know, one of the important things on-- in terms of the rotation that we're seeing lately is, you have to remember, this whole entire $6 trillion market cap software industry is not about a work from home industry. It's an industry about automating entire business processes across entire industries worldwide.
And then you mentioned one of the companies that protects that whole new environment. You also have all the companies that provide the infrastructure to make that environment work. And what we saw coming out and starting through the pandemic was that corporate CEOs said let's spend more and more quickly on going digital and in automating our processes and our functions. And that trend today is the strongest we've ever seen it.
AKIKO FUJITA: Orlando, you know, having said that, when you look at what played out yesterday, it did seem like investors were sort of processing, you know, vaccine open economy, sort of bad tech, bad software. Obviously, you've been doubling down on this space for a while now and seen huge growth. How do you think investors should be [INAUDIBLE]? Is it really about some of these communication tools like a Zoom or a Slack? Or is it really about the cloud space?
ORLANDO BRAVO: It's really about the cloud space. That's number one. Look, our investors have asked us over 20 years, every time we go fundraising, they ask, is this the right time to get into software?
And our answer is, whenever you can buy recurring revenue streams that are growing at double digits, where you're an integral part of the business function, where the value that you're providing your customer so far exceeds your price, and when you can have a chance at really improving the operations of those companies, it's always a good time to be in software.
So when you really take a step back and look at what's going on, is, through the pandemic, the entire sector, almost without exception, proved that customers relied on these products. Subscription retention rates remain just as they were before. And these companies proved that they did not need interaction face-to-face to conduct their business. So salespeople that are stationed all over the world close to their customers and people that need to implement these products, that all happened remotely.
And then third is what you mentioned, is the cloud story. And I'm going to try to break that down. Look, what cloud computing has done is two things. Number one, by being able to rent the product to your customers, you have multiplied your customer size, the customer opportunity by about 10x.
Because now you're in the operating expense of your customers. So if you present them with a product that reduces their cost or improves their revenues, they can buy it. They're not dependent on the capital expenditure budget, which is usually 10% of revenue. That's number one. And that's very basic.
But number two, what you're seeing in a number of these companies is that they're now solving through the cloud operating expense problems of their customers. These are problems that are much larger than cost of goods sold problems. So problems like engineering, problems like making decisions through AI, I mean really complicated, high labor, input cost problems that they're going after.
So in our view, when you see one of those companies that is creating so much value, solving a new, big problem, that has a double digit and/or recurring revenue growth, it's all then about the ability of the management team to execute.
ZACK GUZMAN: Yeah, and you guys also just announced a little bit ago the TPG and TA Associates there are going to be acquiring Planview, one of your portfolio companies here, for $1.6 billion. So what does that maybe say about locking in some of this incredible rally we've seen in the lockdown phase in 2020 about maybe some of taking chips off here in the rally in that space?
ORLANDO BRAVO: You know, it's not a-- for example, that deal is not a market timing move, right? We're long-term investors looking at long-term operating value of these companies. Now the private equity industry that we're in, by definition, we need to be returning capital back, as well as putting capital to work. So if you look at, for us, the last 20 years, we've almost bought and sold the same amount in any given year. And this year should be no exception.
AKIKO FUJITA: Orlando, we're wrapping up what has really been an incredible year for tech IPOs and a huge, huge swing towards SPACs and these blank chip companies. How are you-- being in the PE space, how are you looking at that as a tool to raise funds? And why do you think it's taking off so much this year?
ORLANDO BRAVO: Look, it's another great tool. The financial markets continue to innovate. We believe that SPACs are here to stay and that they actually provide so much value to some companies. If you have a company where you're looking at going public as part of your capital raising goals and it is better for you to be able to project and set your four-year projection up so investors can really understand it, a SPAC can be a wonderful model to do that. Because it enables you to really have in-depth projection conversations with your investors.
If you're also a company that wants to clean up its shareholder base prior to going public, and therefore, you need a significant amount of liquidity, a SPAC is a wonderful choice for that. So it's one of the many tools that allows these companies to achieve their goals.
ZACK GUZMAN: And Orlando, as one of the founders here focused squarely on this space and one of the largest funds, talk to me about which segment of the sector you see is most overlooked. Is it more something like cybersecurity that we were talking about? Is it more something like what JFrog's working on and kind of rolling out seamless app updates or, you know, tech updates for consumers? Or is it more something else that you're looking at right now, heading into 2021?
ORLANDO BRAVO: You know, that-- what a great question. By overlooked sectors, we define those as sectors that are less well understood because either they're moving so quickly or there's some big technology changes that have happened. And overall, right now, there are two of them.
First is all infrastructure services that have to do with operating and connecting and ensuring the uptime of cloud environments. That market is so big. It's so significant. And it's complex enough that we feel the value of that market is being a bit overlooked. Cybersecurity continues to change every year--