Fantastic. So, Toma Bravo, the private equity firm you run, is probably the largest owner of enterprise software companies in the world right now. It's a bit of a dirty word in the markets with AI threatening to let corporate buyers vibe code their own stuff and stop buying all of your portfolio's companies. Like, is software investable right now?
Oh, big time. This is the time to do it.
Would you rather buy a great software company when they were trading at 15 times revenue or when they're trading at 10 times even EBITDA? I remember back when we started in 2000, there are the most incredible buying opportunities right now in the market. You just need to know what you're looking at and what you're buying. One of the things that one of my partners says, which I think he says it perfectly, this is exactly the wrong time to be buying a mediocre software company at a bargain price.
But if we stick to what we do really, really well, which is: number one, buy the highest quality company in the space, usually the number one leader in a segment of cyber, in a segment of process, in a segment of functions, the number one player; two, that has existing management people that deeply know that domain; and third, companies that are showing big momentum in AI acceleration. Now you can see it because it's been a... If we can get those three at these bargain prices, we are huge, huge buyers of these companies right now.
So, what are you working on?
A lot. A lot. But it's so selective, and we have the benefit of 25 years of history of having our feet on the ground on this stuff. And if I can give you one minute on it, when we started in 2000, nobody wanted to touch software. People were telling us to run away from it as fast as you can, because there were two issues that really sound familiar today. One is there's too much tech risk right now. The tech risk is, of course, AI. Second, Microsoft was going to put all these independent software vendors out of business, right? They were going to consolidate it all. How could you compete with Microsoft? How can we compete with Anthropic and OpenAI right now?
What we did as a group is we listened to that. We were nervous, but we did the detailed work. We would go to every software company, spend nights looking at their files of renewals, go to all their customers, see how they're using their systems. And what we found out, and I think this is really what investors are missing, is what these companies are truly about. In every single area of the economy, of corporations, you have companies that accumulate the entire knowledge of how the right way to do business gets done in that area. What is the best way to source? What is the best way to do payroll? What is the best way to run distribution, manufacturing? And that knowledge of all the players accumulates in just two to three companies per space.
Those two to three companies in every area have this level of domain expertise that cannot be copied, cannot be replicated. And those players today are more valuable than ever. And one last thing is they hold the keys to AI adoption in their customers because they know that domain so well. So we are very, very bullish on that, and we're seeing that in our portfolio.
Why would a CEO of a public software company sell to you at these prices?
Because nobody likes them in the public market. It's got to be super depressing to put up great earnings and have all these same questions from people that sell your stock every day, that criticize you, that make stories about you. Just this is the time to knuckle down, bear down, do the detailed work, build the best products you can. You have to be very open-minded, though, because there's a lot of stuff happening around you. If you don't capture the AI opportunity, you're going to fall behind. Maybe there are new ways to do a process that didn't exist in the last 40 years, and you have to be open-minded to grab that as well versus a new newcomer. That's easier to do as a privately held company than a public one.
1,000%. And you can go long-term on it. You can really make long-term choices of how you're going to be investing to once again capture what it is, the labor reduction that your AI products are going to be providing their customers.
You borrow money to buy the companies that you buy, and the marks, the lenders' marks that they have on these loans suggest that the equity that you own is deeply impaired. So I'm curious how you're thinking about marks on your books when you look at the public competitor set, and also what your creditors are sort of implying about what your business is worth.
Yeah, it's a very good question because if a loan trades at 80 cents, it doesn't mean the equity is zero. It just means, wait a minute, that company is not performing as well right now. The risk has gone up. So instead of me requiring a spread over a SOFR of 350 basis points, which was so low at the peak of the market for private credit, now I may require a spread of 650 basis points. Give me a 10% return to buy into this loan. I think that's very reasonable, while the equity could still have quite a bit of value.
Now, this is a point of debate. Okay, AI will disrupt many, many software companies. Those companies that AI will disrupt were going to be disrupted anyway, but it'll happen a lot faster. There are some, like the domain leaders, the franchise value domain investing that we do, that we feel very good about because they hold a very special place in the enterprise and have a big opportunity with AI. They're the ones that are in the pole position, but they still need to do some work.
The reason why I'm getting to this is, as a lender, those 5% growers in software that are not doing that much, those are a lot riskier today than they were a year ago. Much more risky. You cannot just count on that stable cash flow like before. Both the equity and the debt. Now, the companies that are really well positioned are going like this, and the lenders don't get that benefit because they're stuck with a given interest rate.
I want to talk about AI winners and losers in a second, but just to put a fine point on it, have you marked down your investments as the public peer set has declined?
Of course. We mark to market every quarter. And one of the things that happened in the publics that you got to realize: can you believe that today still the average software as a service company loses money today? There's been no improvement in the last 25 years in the profitability of the software space in the public markets. So one of the big downdrafts really happened to the money-losing companies that went from 15 times revenue to four. Now the profitable comps have gone from about 22 times forward EBITDA down to 16. So it's not like it's this incredibly material change, but you have to bring them down as you see the public comps.
What specifically distinguishes, do you think, a legacy software business that will survive the AI wipeout from one that won't? What are leaders looking for?
Leadership. Look, there are two key areas. One is, what is your company about? If you once again operate in a very, very deep domain where you're running the transactions of your customer and that domain is very difficult to understand.
What's an example of that?
