The Big Bet

Episode 302

10/25/2022

Episode 302

The Big Bet

In this month’s Investing in Identity series, we discuss Thoma Bravo’s incredible sequence of recent deals, including their third identity and access management (IAM) company this year:
  • Sailpoint for $6.9B
  • PingIdentity for $2.8B
  • ForgeRock for $2.3B
Hear from our experts as they dissect Thoma Bravo’s strategy for the identity market, its potential next move as it takes these companies private, and how to find product-market fit in a private equity investment playbook. 

Host:

Travis Jarae, CEO at Liminal

Guest:

David Field, Partner at PTB Ventures

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Travis Jarae [00:00:10] Welcome to Investing in Identity. It is October 2022. And I’m Travis Jarae, the founder and CEO of Lemon, all joined by Dave Fields, Partner from PTB Ventures. Welcome, Dave.

 

David Fields [00:00:21] Thank you for having me back. I know we got we got a little little deal to discuss in a minute here. So let’s let’s go to the board, right?

 

Travis Jarae [00:00:30] Yeah, exactly. We’re going to try to keep this as brief as possible. But, you know, Thoma Bravo. Big one, everyone’s talking about it. So we’re going to spend the next 10 minutes or so talking about it. So Dave, obviously everyone’s talking about Obama right now picking up for rock. This is after the ping identity deal after the sale point deal. We covered sell point back in April and then of course ping an for Ad-Rock since then. What’s going on here?

 

David Fields [00:01:02] Yeah. So this is really an incredible sequence of deals that I’m going to try to get into and be brief about it. But like it, it’s really breaking new ground or, you know, kind of forging a new path as far as like the private equity investing playbook. So like, let’s talk about this. So these are three companies which were all publicly traded, as of, you know, barely six months ago. Right. You know, so we’ve got three take private transactions now. So they’re going public, two to private. Typically, these would be LBO or leveraged buyouts. The first thing I want to highlight is that these are not LBO, these are just buyouts. There is no leverage or credit involved in these acquisitions. Right. So that 12 billion number, that’s 12 billion of equity checks out of their funds that Thoma Bravo has written. So that is a their funds, I believe their most recent funds are more like the $30 Billion range is what they tend to raise as far as vehicles. So they’re putting as far as for a single fund, they’re putting 30 or 40% into just into digital identity, which is really pretty incredible. Right. So that’s a big check, a major commitment. Now, why? So the question I try to beg the question of like, okay, why? Why are they using credit to finance these deals? Right. Typically, you know, a good LBO candidate is a company that is probably more mature, has a relatively stable. But but, you know, not it still has some growth, but is a modest grower but has very stable sort of profitability metrics and strong free cash flow generation, which allows you to then apply some financial engineering, largely leveraging credit to enhance equity returns. Now, that’s not possible here. Right. So all three of these companies well, sell point is, is somewhat of a free cash flow generator, but still pretty marginal in its free cash flow generation. Whereas Fords rock and ping identity are both cash burners. They are both. They they right now, they’re still in that growth phase where they are investing a lot in sales, marketing and product in order to pursue revenue growth and profitability, something that’s really probably five, maybe even ten years down the road. Right. So the profile of these assets is very different from what you typically see in private equity. Take privates. And so I think that’s pretty interesting. $12 billion as far as an equity check, I’m still trying to do some of the analysis on it. Maybe I’ll have this for next month, but I believe this is now up there on a consolidated basis. It’s probably one of the biggest private equity checks of all time. Right. So like financially deal structure, they’re really treading some new ground now. So the big question for me is, is why are they doing this right? And you have three companies which are not I don’t think are the biggest or dominant player in any of the segments in which they participate. So if this is sort of like the buy and build or the private equity roll up, one of the very interesting things here is can you take sort of the second player or the second leader in sort of a market segment? And can you combine three assets where the whole is then greater than than the sum of its parts? Right. That’s why an M&A makes sense. You’ve got both revenue and cost synergies, right. And so they’re doing this because they believe that does make sense. And so that kind of for me brings it to kind of the core thesis behind these three investments, which is like, do you believe that both a diversified and integrated offering will actually outperform the individual, the individual assets themselves? Right. And so clearly, Thoma Bravo believes they can looking at it just as an outsider, I think it’s a huge lift, right. Because you have three companies obviously sell points, the biggest of the three, but they’re all pretty big and mature in their own right. And now you’ve got to figure out how to invest in both sales and marketing and product while also getting to getting to profitability over some 3 to 5 year span. So to me, that’s that’s a big lift. And so this is kind of where I as the financial guy, turn this back to you, Travis, and say, you know, on the product side, on the business side, how would somebody go about doing this? And is this well, before you get into the execution question, is it actually something that even makes sense? Theoretically.

 

Travis Jarae [00:05:36] Yeah. No, it’s it’s a really great question. And, you know, when they acquired Sale Point, we all we all kind of took a step back and said, what other assets does Thoma Bravo have? And we kind of walked through how, you know, kind of an example was access management company kind of fits into their existing portfolio. But then they acquired Ping and then they acquired Forge Roc. There’s, you know, these are all very good companies to your point. But they’re. Very different actually in terms of how they approach different things. Like I am an Iam. But what you starting to see is and if we go ahead and look at the the, the landscape, you know for dropping and sell point is represented here in blue. So if you’re following along on video you can see that. But if not, that’s privileged access management IGA workforce IAM cusThoma IAM. So authentication and consent management, right. It’s a nice grouping and other companies kind of in that range are companies like Okta, right, with, you know, a very decent public market profile but clearly the the leader in the space. So what you’ve seen here is if these companies are all merging together, right? If Timo Bravo’s going to create a bigger platform together with these three assets, you have a real contender against the market leader, which is currently Okta. If they keep them separate. Well, you know, I would be looking at some of the other assets Thoma Bravo has like imperva, sophos, xos, star, logarithm and proofpoint kind of represented here in the orange really on the other side of the landscape with network security, endpoint security and Uber. Right? More of that fraud risk cybersecurity angle. You know, how would these companies really work together is what I would be thinking about. You know, the fact that Tony Bravo was looking at taking Darktrace off the public markets as well and that deal fell through, tells me that there’s still some work between the AI and that identity security side and the actual true cybersecurity, the more kind of fundamental cybersecurity side. Now, what makes me very excited about a potential role up between for dropping and sale point is I can see these guys really moving down in the landscape when this is represented by the green on the landscape. This is the identity proofing, the fraud detection and prevention and maybe even the biometrics segment. Right. You can see where you start to capture more of the the consumer lifecycle and integrate that into the cusThoma journey and then provide them with better experiences through your traditional your same type of workflow management. So if I’m looking at this and I am any company and any of these solutions segments, I’m thinking Telmo Bravo has a plan here. And either I want to go talk to Thoma Bravo about becoming part of that plan, or I need to go figure out what is to Bravo’s strategy and how should I actually defend against it. You know, that’s really where most companies need to be thinking here. I’ve heard whisperings about other companies doing Bravo are talking to and you know, chances are they’re going to continue to migrate south in the landscape. And therefore, everybody that’s building their product, their strategy needs to have a defense or think about how to get in touch with them on Bravo, like I mentioned.

 

David Fields [00:09:11] Yeah. I mean, I think it’s from my perspective. Look, this is incredibly exciting. The way I think about the deal now is I wanted to come up with a prediction for this and and rather than the prediction it made. So my prediction now is that this deal is going to be a Harvard Business School case study one day.

 

Travis Jarae [00:09:33] Right. Like it.

 

David Fields [00:09:34] And I say that because at first, what I was what I was thinking about in prepping for this, I was thinking, you know, this deal is either going to make a ton of money and it’s going to work really well, because it turns out that software does enable roll ups like this in a way that you couldn’t do it in the more in like the legacy sort of like brick and mortar or manufacturing world or industrial world. And this sort of like you can do a roll up like this where you are putting together parts of relatively equal or relatively equal size, certainly compared to other role of strategies where typically the base acquisition is 20 times or greater than kind of what you’re bolting on. Right. And you can’t really consider paying and for drop or not really both times to sale point. Right. Right I look at this you’re going to take these companies, you’re to combine them. They’re going to emerge much stronger, much more dominant than like the doctors of the world are kind of. And this is going to be something that could potentially go from being a $12 billion market cap company to something that’s like 50 billion, maybe even bigger, or it’s going to be a debacle. It’s found. So it’s not that intelligent to say this thing is either going to work out or it’s going to fail. Right. Like that’s that’s how how things work.

 

Travis Jarae [00:10:42] It’s not where you land.

 

David Fields [00:10:43] But I bet I will say is that this is a very unique you have to go back to what I said before is like you have this very you we’ve been calling out for roll ups in identity seems very fragmented for a while and who’s going to come along and consolidated? Somebody is now trying to do that, but it’s really borrows from several different sort of, you know, business school style playbooks. Right. And so it’s exciting to see them integrated into one and it’s going to be interesting to look back in five years. I think this is going to be really one of those deals that defines the way the industry is shaped and and the way actors behave for for the next decade.

 

Travis Jarae [00:11:19] Yeah. I mean, it’s it’s a pretty good prediction and I guess, you know, kind of in that vein, my prediction will be that these guys integrate with a, you know, they buy up or create some form of integration with identity proofing vendors, a large identity proofing vendor that can do KYC, doc fee and other regulatory, you know, compliance kind of KYC related services. So that’s going to be my prediction. So maybe we’ll kind of check back in on this when they make their next acquisition in the next few months here, I’m assuming.

 

David Fields [00:11:53] Yeah, I was going to say my my prediction has, you know, kind of this 3 to 5 year outlook. Outlook, I think yours is more like 3 to 5 months. Just, you know, look at the deal page so far this year. So. That’s right. I got to imagine that, you know, I wouldn’t be surprised if January or February were discussed in the next deal.

 

Travis Jarae [00:12:09] Yeah. And with that, you know, you know, like I mentioned kind of at the beginning of today’s session, we’re going to be a little bit quicker, a little bit more pithy. This will be a deal that we’re going to continue to follow, continue to track. And, you know, and our next investing and identity form, hopefully we have something else to add on to this conversation. But until then, you know, we want to kind of highlight a few things to look forward to here at Liminal. The first is we have our our New York City networking events at the Classic Cars Club in November. So you guys can reach out about that one. We are publishing our outside in report on identity and travel. And then later this year, we’ll have a sneak peek for our members on our new liminal digital identity landscape. So very much looking forward to kind of going through all of those things and just a, I guess a teaser for the digital identity landscape, verifiable credential management making a strong push. So, you know, lots of good debate internally here. So with that, Dave, always a pleasure. Thanks. Thank you for your insight here and thank you all for tuning in.

 

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