Thoma Bravo’s Holden Spaht sees ‘fundamental’ revaluation for Nasdaq

Nasdaq is buying Thoma Bravo portfolio company Adenza in a cash and shares deal that sources say gave the private equity firm a return of more than 2x.

Holden Spaht, Thoma Bravo
Holden Spaht, Thoma Bravo

Thoma Bravo expects its new investment in Nasdaq to reap dividends as the market buys into the multinational financial services company’s focus on technology, managing partner Holden Spaht told PE Hub Europe.

The private equity firm is taking a roughly 14.9 percent stake as part of a deal in which Nasdaq acquires Thoma Bravo portfolio company Adenza for $10.5 billion – comprising $5.75 billion in cash and the rest in shares.

That means a return on investment of more than double for San Francisco- and Chicago-headquartered Thoma Bravo, according to sources familiar with the situation. The private equity firm declined to comment on the return.

Thoma Bravo had only held Adenza for a few years before Nasdaq came calling. That meant the process was exclusive – but bilateral.

“We always feel like if the right strategic buyer is interested in one of our portfolio companies – regardless of where we are in our investment horizon – we need to listen,” said Spaht, who is expected to join Nasdaq’s board in New York City once the deal closes.

“As Nasdaq was doing its due diligence on Adenza, we were doing our due diligence on Nasdaq. The more we saw, the more we liked. We see a lot of upside as the cost and revenue synergies are realised and the deal becomes accretive in the coming years.”

Nasdaq’s share price took a hit after the deal became public on 12 June, falling from about $58 to $51, where it has hovered around since. But Spaht is confident that investors will buy into the story.

“We also believe there is a fundamental revaluation opportunity for Nasdaq’s earnings as the market and shareholders begin to appreciate how software- and technology-centric the business has become,” he said.

That is in keeping with noises over the last few years from Nasdaq chief executive officer Adena Friedman, who has made tech a priority.

The acquisition of Adenza, a fintech firm with dual headquarters in London and New York City, fits that strategy. Adenza has more than 60,000 users at banks, broker dealers, insurers, asset managers and other companies. The company’s estimated revenue for 2023 is $590 million, while organic revenue growth is around 15 percent, annual recurring revenue growth is 18 percent and adjusted EBITDA margin is 58 percent.

It has a “unique financial profile – a combination of growth, profitability and revenue quality that is rare among software companies”, said Spaht.

The valuation represented 31x 2023E EBITDA and 26x 2023E EBITDA, including fully phased net expense synergies.

The acquisition is projected to add around $300 million to Nasdaq’s annual unlevered pre-tax cashflow, according to a release.

Rules, rules, rules

Thoma Bravo is bullish on Adenza’s future, in which it has a stake via its Nasdaq shareholding.

“Banks across the globe are facing increasing levels of regulation and we don’t expect the pace of regulation or complexity of compliance to slow down,” said Spaht. “Banks are also going through a multi-decade digital transformation journey with a focus on outsourcing technology to best-in-class providers and moving to the cloud.

“These trends are highly favourable for Adenza as they have the best technology in the market and they have been cloud ready for a number of years.”

Thoma Bravo announced plans to form Adenza in July 2021 via a merger of Calypso, whose acquisition it had just completed, with AxiomSL, whose acquisition it had announced less than three years ago in October 2020.

Sources familiar with the AxiomSL deal told PE Hub at the time that the company was valued at close to $2 billion. That was a platform acquisition, which Spaht said had high quality of revenue, a chance to improve operations and potential bolt-ons. The company’s gross revenue retention was almost 100 percent, he added.

Winning out

Calypso then signed with Thoma Bravo in March 2021, with sources having earlier suggested to PE Hub that the price tag for the highly sought-after business was likely around $2.5 billion.

“It was a competitive process, but we knew we had a great angle with our plan to merge the businesses,” said Spaht. “The businesses are both market leading platforms helping banks solve risk and regulatory requirements and have complementary strengths. Financially, the combined company has the most unique financial profile we have seen in vertical market software – a rare combination of scale, profit margin, revenue quality and organic growth.”

The merger, completed in December 2021, allowed for $30 million in cost reductions, with streamlining and implementation of best practices, said Spaht. Investments in cloud, customer success and improved gross and net retention followed.

“We spent a lot of time on pricing and packaging, and those improvements are directly reflected in the improved EBITDA margin and strong growth,” he said.