The Exchanges

Q So once you've purchased a portfolio company, what's your playbook in this more modern world for software of how you work with the portfolio companies and their management teams?

A We onboard the company into our reporting package. That has our hundreds of metrics by division, functional area, and potentially business unit if the company has multiple business units. That takes about three months of work. Armed with that data, we're then able to separate the businesses so that managers that are reporting to CEO actually kind of get a promotion because they're really running businesses rather than cost areas or cost centers. So the person responsible for customer care, they'll have revenue as well as cost, so they'll have quite a bit of pricing influence, and they start getting a lot more creative about how to do things. To improve their renewal rates. That's a key thing we do. We then go into our playbook. We do monthly operating reviews from eight a.m. to noon every month instead of these strategic board meetings, and in those ops reviews, we have all the direct reports of the CEO present together collaborating, and we go through each of those areas. A lot has been said about playbooks. We could implement Thousands of metrics on these companies, but there's no time. Marcel Bernard used to say, if you try to get to all, you will get to none. So within our framework, we then figure out what are the three big things that will be really material to the company, and that are the easiest to do, and that can actually be executed by the culture that we inherited,…

AI assessment note: “We onboard the company into our reporting package. That has our hundreds of metrics”

Q Why don't we fast forward through your coming out of school? How did you first get interested in what became private equity?

A It's so funny. Tennis gave me the chance to then go to college and to go to Brown and then get into what I call this community. Of people that do investing and are in private equity. But at Brown, I didn't know what investment banking was, and certainly I had no idea what private equity was. And my senior year, actually towards the end of the year, I was going to go to law school. That's what you kind of do, I guess, if you're not sure of a job opportunity. And I had this really worldly friend That told me the investment banks are here. They're recruiting. And I put your name down on the list, right? There's no internet, no phone. So you had to sign up. You remember that Ted from Yale, you literally put it on, uh, on the door and your time slot is two PM. And I go, well, what is this? What do I need to do? He explained what investment banking was. And he told me just buy some wingtip shoes. So he and I went and bought in a second hand store, some wingtip shoes, wore a tie, and I got a job. And I was thinking about it, and it's like, well, I get to work on Wall Street and make money and live in New York City. Let's do it. And then when I was there joining that community, I got to come in close touch with some private equity firms on a deal that I was the junior person on. And I was really early on fascinated by the fact that Two or three people in an office could buy a multinati…

AI assessment note: “I was really early on fascinated by the fact that Two or three people”

Q Charlondo, I want to take a second and talk a bit about some of your philanthropic activities. I know this always comes from a personal place, and at what point in time did you decide that it was important for you to take some of the success you've had and find ways to give it back?

A I started in philanthropy, I like to think relatively early, with causes that were personal to me. That's right, that's how you go about these things. The catalyst for starting the Bravo Family Foundation was Hurricane Maria in Puerto Rico, and I had just come back with Jennifer James, our COO, from a fundraising trip in Asia, and the hurricane hit when I was in Tokyo. The last day I was there. When I got back, I couldn't reach any friends, any family, completely, there's no communication, and the day after, I was able to talk to my dad, and things were not good, and my brother befriended a reporter in the island, and on day two, post-hurricane, she told him that there's a shelter in this town called Lares, Which is close to where I grew up, where the mayor said, I only have two days left of food and water for 35 people. And then I'm looking at CNN, and I'm seeing what's going on, and what's the governor saying. I remember calling my cousin and asking him, can you drive all the way from San Juan to the West Coast, or is it true that everything's blocked and you can't do it? He's an adventure travel person. He runs an adventure travel company in Puerto Rico. He knows, and he did it. He said, yeah, you can do it. So we responded back, and we said, well, if you can get this to the mayor, we will be there in a day and a half with what the mayor needs to hold it together. And when I…

AI assessment note: “The catalyst for starting the Bravo Family Foundation was Hurricane Maria in Puerto Rico”

Q You started doing these tech service deals, and then you worked your way obviously into software. How did that inflection take place?

A With a lot of help and mentorship, I went to do the opposite of what I was doing investing wise. Right. Instead of investing in how many employees can you add and how quickly, because that's where these businesses were valued. Some of them before the bubble burst, I went to do value investing. In established companies, rather than new companies, with existing management, instead of taking new management and putting them in a venture situation. It was literally the opposite investing philosophy from what I just described. Where we were fortunate is I did want to stay in tech. And one of the reasons I wanted to be in tech is not necessarily the passion for technology or the engineering, because I'm not an engineer, is I thought the space was not taken. I thought there was a lot of opportunity in the space and lots of opportunity for young people. Lots of creativity. It just felt good from that standpoint, and it gave me a white space to be able to work in. Where we were lucky was when the dotcom bubble burst Our theory was, well, and we went to the partnership. You can buy recurring revenues in software less expensively than in any other category that Toma Cressy or Toma has looked at. Transaction processing, media, radio in the days, outdoor advertising. And they said, yeah, that seems right. So that part of it, I had a lot of backing for.

AI assessment note: “when the dotcom bubble burst Our theory was... You can buy recurring revenues in software”

Q So as you go through the evolution of ownership of one of these businesses, you implement these three things, hopefully good things happen. There's probably three more then and three more after that. How do you go about distilling and sharing all of the lessons that you've learned on the operations of these somewhat comparable businesses across each other in your portfolio over time?

A Like a pack of wolves, it happens every Monday in this great collaborative sharing environment. We get together every Monday, both as an investment team and with our operating partner group. And you see every couple of years, you see a big theme that gets rolled out through all the portfolio companies. At one point, it was how do we work with the channel? What are the best channel partner incentive programs? And how can those be modified? To fit the needs of us, the manufacturer of product, and as well as the distributor. But those themes kind of roll from one year to the next. Now, we do have 25 operating partners that work across all of these companies, so a lot of the sharing happens. I feel, and our culture and our philosophy is, have it happen at the project level. The more centralized you become, the You're putting the monkey on your back, and you don't want that. You want to delegate it all down.

AI assessment note: “We get together every Monday, both as an investment team and with our operating partner group.”

Q How do you stay in touch with the businesses, the management teams of portfolio companies that you then exit afterwards, given that you're really still in the same ecosystem?

A It's such another great insightful question, because what we have noticed is when we sell these businesses, if they're sold to private equity, we can track them. Whatever we did together, they continue to do for a very long period of time. So all that initial work that went into it, we have almost set these companies up to become private equity assets for long periods of time. We see them trading from one private equity firm to another, and everybody does well in it with the same team. We keep in touch with them as friends. We may buy a competitor. We may buy a company that partners with them most likely. And at some point in their career, we actually get many of them to be operating partners at Tomo Bravo. And that's the best candidate because they've implemented our plan. We've made money together. They know us and we're not taking risk with anybody new.

AI assessment note: “We keep in touch with them as friends... get many of them to be operating partners”

Q And how do you think about this question of keeping a management that may be underperforming and delivering them these types of tools compared to deciding that the management team might not be the right one to take the business where you want it to go?

A Our philosophy is to really stay with the existing management. Because we highly value the knowledge of the business that they have that we don't have. Even if we do great diligence, we will never come up to speed fully on where they're at. Secondly, they do have the following of their employees. So whatever leadership actions they take, they have that trust. And third, they have the history and knowledge of their customers. If we can marry that with our analytical approach to decision making and our cultural approach to Of inspiring them to do some things differently. That's the best. Now we say, and you asked me about the art of the business here, we say that as long as people are making positive progress, you stay the course. Even if that progress may not be fast enough for your investment case, because people move at different speeds. There are some management teams that struggle for six months to join in the partnership. And then you get a step function in terms of how they're doing things. Others slowly ramp up over two years, and then they do it. Sometimes you need an event that's a catalyst. For example, sometimes you need an add-on acquisition that really worked, where it was integrated properly, and where they appreciated what we brought to the table as well, because we need their buying also. Sometimes it takes them To miss numbers. To realign their business with rea…

AI assessment note: “Our philosophy is to really stay with the existing management.”

Q How have you thought about any pushback you may have had from investors in your funds about doing a deal that has effectively a different type of capital base behind it?

A Investors are right in pointing out that they want the GP focused on the business that they're paying the money to do, and there's a lot of money they're paying. What we have explained to our partners is this is the business that we do. Our mission is to help these innovative software companies Let's achieve close to their full potential and do it again and again. By being in this market, we're not adding any work because we're already in these verticals. We're already talking to these companies. We're already interfacing with them. This is what we do. This adds value to our core business, and it makes us more informed and better at public markets, and we have so many candidates that will be public companies. That's going to be a way for us In the future of exits. So it adds to what we do. It puts us more in that community. It gives us a better brand. It allows us to talk to more people, which improves our private equity business.

AI assessment note: “What we have explained to our partners is this is the business that we do.”

Q Why don't you go ahead and dive into what quality revenues mean?

A Give us good gross retention rates, and the industry is pretty familiar with that. Give us very high net retention rates, and there's so much analytical work that goes into this because these companies have many products, legacy and new, many regions, many go-to-market strategies, channel, direct, many types of customers, enterprise, mid-market, small and medium-sized business, many verticals potentially. So doing that Work is really, uh, it's really scientific, and some people do a great job at it, some people do a poor job at it, and you can make big mistakes. It's not as easy. These headline numbers that public investors talk about could be a bit murky, because they also don't have the information, the raw data, uh, week by week or month by month. You also look at duration of bookings. These are total contract value, annual contract value, and how that distorts the net retention rates of companies.

AI assessment note: “Give us good gross retention rates... Give us very high net retention rates”

Q Then with the management team, I'm drawing a lot of parallels how people might think about you and your management team at Toma Bravo when they're thinking of investing. You mentioned they want to win. How do you test that degree to which someone wants to win?

A It goes back to a sense of purpose and a mission. Why do they care And why do they care so much? Is it something that they owe their organization and the people that have helped them and the next generation leadership? Is that it? That's a big one. That's a big one for me personally. Is it something in their background that they have something to prove all the time to themselves? Is it that they need external reaffirmation from their community of competitors and peers? What is it about it that really drives them? And if you can get to the bottom of that and people are doing something for a deeper reason, wow, you're in a great place.

AI assessment note: “if you can get to the bottom of that and people are doing something”

Q Within the firm, how do you structure that pack of wolves on each deal?

A It's so great. We are Lucky to be structured by many verticals, so we work, our philosophy is to work in very small project teams, because when you do that, you give the associate on the deal, the VP on the deal, all the participants a very broad job, and when you have broader jobs, you become a lot more creative. We believe that the individuals should see Everything on the investment. The financing, because the financing is coming out a certain way, the price may not be working, or if the price is not working, you may need to reduce the cost more, or you're taking more operating risk, or there's, there's creative solutions that you need to be figuring out all the time. Maybe can you model in and add an acquisition? Can you sign that before the deal's happening? So you kind of are trying to solve this problem of how do you price or win this deal by looking at everything around it. And We structure ourselves to get to the point by these small project teams are structured by software subsector. So we have managing partners that run the big verticals, applications, infrastructure, cybersecurity. But within those, we have teams that run healthcare software, financial technology software, individual identity in cyber. Those teams are responsible from Originating the deal, knowing their community, knowing everybody in the space, as well as executing on the deal and serving on the boa…

AI assessment note: “these small project teams are structured by software subsector”

Q So when you get into the granularity of that data, I can imagine situations where it's not crystal clear, right? There might be certain products, certain regions that are doing better than others. How do you think about both the strength of the business you're going to buy and then how you'll fine tune that once you own it?

A Well, on that top line, you have to be able to explain why things are staying the same or why things are changing. And then you take that quantitative analysis And make sure that the qualitative is giving you the same answer. So, for example, if the customer references Align well for why there's a net expansion in the customer base. Is it because they're buying more seats? Is it because the cross sell with other products are working? Is it because they're growing through other operations that the company has? It has to fit what the numbers are telling you. The same thing is in customer support. If you have very high gross renewal rates, And then you also are able to see in the operational data that most calls, the first call resolution time has remained really good and stable. It comes together. It also comes together with the quality of a product. If our engineering team is telling us, no, this product is really good because it's architected in a certain way. It runs very efficiently. There's very low downtime. There's very little bugs. Most of the customers are in the latest release or in the case of SAS, they're on their latest release. Okay, great. Is that resulting in really high gross retention rates? It has to fit together.

AI assessment note: “you take that quantitative analysis And make sure that the qualitative is giving you the same answer”

Q When you think about innovation, you started by saying you like these recurring revenue software businesses, embedded customers. It's, I don't want to say the antithesis of innovation, but it is a nice cashflow stream that you're figuring out how to improve. Where does innovation come in in these businesses?

A What a great question. Because software is, Has changed dramatically since the first example I gave you and why we got into the space in the first place. And our tactics for software have changed dramatically as well with that change. Our culture has evolved from a tactical standpoint, but our philosophy is the same. Let me explain that. So yeah, we started because it was good value. You could buy these recurring existing customer bases where you're giving them good service, You're integral to their operations, and you could buy that for two times revenue. And you could make money by increasing pricing along with inflation, not shocking your customer, and running a more efficient operation. And if you did add-on acquisitions and became the number one in the space, that was even better. That's over. That has been over since. 2005. And then you had the financial crisis, so maybe you could sneak in and do a couple of deals like that, but that's been over for 15 years. What happened was instead of complaining about that being over and saying valuations are too high, we're gonna exit the space. See, that's where you can evolve if you have an open-minded culture and a risk-taking culture. Well, we said, well, look at this. The good news now Is you have SAS software. So therefore, since you can rent the product and deliver it through the cloud, and everybody can be on the latest relea…

AI assessment note: “The good news now Is you have SAS software. So therefore, since you can rent the product”

Q across the competitive landscape in the industry, there are a fair number of the original founders that are, let's just say, a little more like Carl's vintage than yours. And I'm curious, as you think about the next five or 10 years for Toma Bravo, how do you position yourselves when you see the potential for some of the other private equity firms to have to have significant succession transitions?

A First, I really like the, if you can call it a prior or earlier generation, many of them are my mentors, just out of the goodness of their hearts, really. I have an incredible appreciation for what they meant at the time. They invented the private equity industry. Sometimes I see them and I go, bye, thank you for inventing the private equity industry. I really appreciate it. And it's true. And our role is, I see it as, what kind of next generation private equity firm are we, and how we adapt to society that way. It's more with the times. So we have a lot of young people. We run a much flatter organization. We don't have an org chart, because everybody knows what their job is. We look to transfer ownership Over time. I think that's consistent with how the world is working now and how people want it to work as well, which is a totally different world than in the eighties when you had to break up these huge corporations that were potentially abusing their power over their shareholders, and you had to break up these divisions and, and run it differently.

AI assessment note: “our role is, I see it as, what kind of next generation private equity firm”