Medallia on June 17 announced the transfer of its ownership from specialist software private equity investor Thoma Bravo LLC to an investor group led by Blackstone, Apollo and FS KKR Capital Corp. The investor consortium comprises private credit lenders to Medallia, a software firm described as “global leader in customer and employee experience”.
The deal will reduce Medallia’s outstanding debt and furnish US$150 million of new capital. Far more significant, though, is the money lost. Thoma Bravo took Medallia private in a $6.4 billion deal in 2021. Five years later, $5.1 billion of that value has been destroyed in the second largest private equity loss on record.
Medallia was originally invested by Thoma Bravo Fund XIV, the firm’s 2021 vintage $17.8 billion buyout vehicle. According to PitchBook, this has 98 institutional investors, including many pension funds, such as the Alaska Retirement Management Board, California Public Employees’ Retirement System, the UK’s Border to Coast Pensions Partnership.
Factors behind the collapse include rising cost of debt over the past five years, the retreat of private equity buyers that had previously been ready to make follow-on investments, and the slowdown in the software industry’s growth.
According to Amit Shah, chief marketing officer and global growth leader at Zycus, the debacle demonstrates the distinction between “software built to be flipped and software built to last”.
The deal also shows the convergence of private equity and private credit in a variant on the so-called loan-to-own strategy, where an investor picks up a company’s debt with plans to eventually transform this to equity ownership. Whether the lender consortium intended this originally, it’s certainly the outcome.
Orlando Bravo, the founder of Thoma Bravo, has admitted publicly that his company had overpaid for Medallia. According to the Financial Times, the firm wrote down its investment in Medallia to practically zero a year ago.
Medallia is described as being artificial intelligence-enabled. But AI propositions have recently been implicated in value destruction at software companies. It’s worth considering whether similar or greater value destruction is awaiting a fresh generation of overvalued AI companies and their backers and investors.
Less than two weeks before news of the deal broke, Bravo was speaking to CNBC about the transformative potential of AI for junior workers. One wonders now what Thoma Bravo’s institutional investors must think of such rhetoric.
Perhaps private equity firms and their limited partners can be forgiven for riding to their present positions on the back of the cheap money era and easy credit. No one should be surprised if the whole industry needs a big reset now that that era is over.
