In This Issue

• Exclusive: Tech private equity investor Orlando Bravo on the recent software sell-off
• Warren Buffett is having a Coca-Cola moment with Apple
• Date set for CNBC's Delivering Alpha conference: Sept. 28 in New York City
• Bill Gross says stagflation might be on the horizon

The Sharpe Angle Interview: Orlando Bravo

Head of tech-focused PE firm says recent software sell-off was "a long time coming" 

Forget “growth at all costs.” You know, that mindset historically associated with Silicon Valley to ruthlessly chase world domination regardless of what it means for financials. 

 

Well, in a rising interest rate environment, that’s all over, according to Orlando Bravo, a founder and managing partner of Thoma Bravo. 

 

“How could you create a company – and a large company – over time, where the societal resources that you use for production way exceed the output?” he said in an exclusive interview for CNBC’s Delivering Alpha Newsletter. “It just cannot last and that’s a bit of a structural problem the software industry has now, and groups like us look to fix that.” 

 

Bravo said the recent correction in growth stems from investors “finally digging into the business models – looking at when profitability is going to come and discounting assets that have high growth, but no near-term prospects for profitability.” 

 

Bravo, credited with growing his tech-focused buyout firm to manage more than $100 billion in assets, said the recent downturn has been “phenomenal on the buy side” for Thoma Bravo because it allows them to buy “high-growth, innovative companies and put together an operating framework that allows them to be profitable as well and create profitable growth engines.” 

 

The firm has been a prolific dealmaker. According to PitchBook, Thoma Bravo landed five of the top 10 largest global buyouts in the software sector in 2021, worth a combined $31 billion. 

 

The selling or exiting of businesses for PE is a bit more challenging in the current environment. Particularly through IPOs, which Bravo notes is “certainly a problem.” 

 

He said, private equity has to buy businesses at, say, a 30 percent premium and then when it comes time to exit, sell into the public markets at a 20 percent discount to publicly traded comparables. 

 

“So the value that you have to create in between has to be so large for you to make your investment case work if you’re planning on taking it public later,” he said. 

 

The firm’s focus is profitability: “we buy multiples of revenue, but we sell them on multiples of Ebitda.”

 

One of the key sub-sectors for the firm has been cybersecurity. Thoma Bravo’s cybersecurity investments carry a $20 billion equity value, the firm said.

 

Three months before Russia’s invasion of Ukraine, Thoma Bravo’s cyber companies saw a huge spike in “denial of service” attacks emanating from Russia. Now, there’s been a 10x surge in these kinds of attacks, Bravo said. 

 

“These attacks are at scale, they’re complicated, and even the best cybersecurity technology experts in the U.S. don’t quite know how they pull them off at this scale,” he said. 

 

As tensions accelerate overseas, he said corporations need to shore up their “cybersecurity posture” now. 

For Warren Buffett, Apple is his new Cola-Cola as the investing icon reaps $100 billion in six years

Warren Buffett's recent success from his massive Apple bet is spurring comparisons with the legend's greatest investment of all time — Coca-Cola.

 

Berkshire Hathaway began buying Apple's stock in 2016 and amassed a 5% ownership of the iPhone maker by mid-2018 with a cost $36 billion. As the tech giant's share price skyrocketed, the value of Buffett's bet has ballooned to more than $160 billion, bringing his return well over $100 billion on paper in just six years.

 

The highly lucrative investment reminded some Buffett watchers of Coca-Cola, the Oracle of Omaha's oldest and longest stock position. The consumer juggernaut's stock has soared over 2,000% since Buffett started buying in 1988, and it's still Berkshire's fourth largest equity position with 400 million shares.

 

"Buffett is having his Coca Cola moment on Apple," said Bill Smead, chief investment officer at Smead Capital Management and a Berkshire shareholder. "They both went way up the first five to seven years he's owned them."

Investing in high-flyers like Apple seemingly defies Buffett's well-known value investing principles, but the out-of-character move turned out to be his best investment over the last decade. Apple's stake also played a crucial role in helping Berkshire weather the coronavirus pandemic as other pillars of its business, including insurance and energy, took a huge hit.

 

The 91-year-old investor has become such a big fan of Apple that he now considers the tech giant as one of the "four giants" driving his conglomerate of mostly old-economy businesses he's assembled over the last five decades.

 

Apple "has been a homerun for Berkshire, no doubt," said James Shanahan, Berkshire analyst at Edward Jones. "Buffett acquired most of the position at an average cost of about one fourth of the current market price."

 

Apple's stock repurchase strategy also allows the conglomerate's ownership to increase with each dollar of the iPhone maker's earnings. Berkshire has trimmed the position, but its ownership still crept up from 5.27% at the end of 2020 to 5.43% at the end of last year.

 

The conglomerate has also enjoyed regular dividends from the tech giant over the years, averaging about $775 million annually.

 

If one were to take cues from what Buffett said when he first purchased Coca-Cola shares, it wouldn't be a far-off guess that the investor is in Apple for the long haul.

 

"In 1988 we made major purchases of Federal Home Loan Mortgage and Coca Cola. We expect to hold these securities for a long time," Buffett wrote in his 1988 annual letter. "In fact, when we own portions of outstanding businesses with outstanding managements, out favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well..."

Delivering Alpha Headlines

Big thoughts from the big money

Bill Gross sees possibility of stagflation

Bill Gross, the one-time so-called bond king who co-founded fixed income giant Pimco, said he sees the possibility of stagflation in the economy and he wouldn’t buy stocks aggressively now. "Inflation now is so high on a historical basis that it’s going to be difficult raising interest rates too much,” Gross told CNBC. If global central banks are stuck in a low interest rate world, that could result in persistent inflation combined with a global economic slowdown, an environment dubbed stagflation, Gross said. “I wouldn’t be a buyer of stocks here. I’d simply be a cautious investor,” Gross added.