Will Thoma Bravo's US$10b bet on RealPage pay off?

New York

Thoma Bravo is aiming to end 2020 on a high. The private equity firm is buying online rent collector RealPage for more than US$10 billion, including debt, a large sum for a leveraged buyout even in normal times.

But the buyer will need to move mountains to make a good return. The San Francisco-based private equity firm founded by Orlando Bravo recently raised US$23 billion - the most in its history - and RealPage is a logical target. Thoma Bravo had stakes in cybersecurity firm McAfee and cloud-based mortgage processor Ellie Mae. RealPage provides software to real estate firms to help with marketing and billing, and it also provides data it aggregates from its various clients that help them understand how, say, to price leases. That is somewhat recession proof, and crucially, it is growing fast enough to sustain a healthy dollop of debt.

Revenue has grown 13 per cent to US$1.1 billion in the year through September compared to 2019, and the company has a strong 30 per cent Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin. The trouble is the price. Thoma Bravo is paying more than 30 times this year's forecast Ebitda, according to Refinitiv estimates - where, on average, RealPage has traded closer to 18 times.

Say the buyer funds half of the roughly-US$10 billion price in debt, already way more than the seven times Ebitda that has become the norm this year. That would leave Thoma Bravo and any partners responsible for a hefty US$5 billion equity investment.

To double their money, they would either have to increase the value of the company by 50 per cent, despite its already-high valuation, or pay down debt - ideally some mixture of the two. That's a stretch, as the company is only making US$300 million of cash flow from operations a year.

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Hearty growth is therefore needed. A voracious appetite for acquisitions is one way to get there. Already, the company has done 25 deals since 2010, and 40 since it was founded, according to analysts at D.A. Davidson. And as real estate markets firm up, RealPage should benefit as a provider of metaphorical picks and shovels. Even then, Thoma Bravo is taking the growing optimism that 2021 will be better than the year just gone and running with it. REUTERS