- The cloud has become a key piece of private-equity firm THL’s investment playbook.
- THL pitches acquisition targets on reduced costs via a move to the cloud.
- The top exec behind the strategy walks us through how the PE firm is using the cloud.
For many on Wall Street, the public cloud has been about internal transformation. But at private-equity firm Thomas H. Lee Partners (THL), the focus is quite the opposite.
Shifting to the public cloud enables firms to modernize decades-old technology, save costs by offloading IT maintenance, and accelerate their data analytics.
But for THL, the cloud has become an important part of the investing giant’s playbook for winning over acquisition targets.
The Boston-based firm’s sweet spot is investing in mid-market companies in the tech and healthcare industries — some of which haven’t experienced the business boost that the cloud can offer. Mapping out potential operational savings via the cloud has become a key part of the firm’s pitch to companies it wants to acquire, Mark Benaquista, a managing director at THL, told Insider.
The cloud lets THL be more aggressive in the bidding process
THL, which has invested in and acquired hundreds of companies, leans on the Strategic Resources Group (SRG) for its externally facing cloud work. SRG partners closely with THL’s deal teams to identify growth opportunities for portcos with technology. Much of the strategic and operational work is overseen by Benaquista and Hitesh Anand, in addition to leaning on third-party partners, like Amazon and Microsoft, to assist in the actual execution of the plan.
THL has seen mounting competition in the investment space, Benaquista said. He likened the due diligence and courtship process for founders and CEOs to speed dating with a bunch of investment firms.
But the cloud, with its promise of cost savings and easy innovation, is helping THL stand out in the bidding process, Benaquista said.
“We see some nuance that allows us to be more competitive, drive efficiencies, or reduce operational cost,” which gives the investment team more flexibility in the competitive deal process, Benaquista added. “Otherwise, if you’re just looking at the EBITDA of a company, you may miss the finer points of how the tech stack plays into the optimization opportunity,” he said.
The cloud allows THL to be more competitive in bidding wars
In one case around 2017, THL was competing with other investment firms to acquire Ten-X, an online real-estate marketplace that offered both residential and commercial properties that had previously been foreclosed.
During the courtship process, THL had done some forecasting around cost savings that could come with migrating the company to the cloud and shuttering its data centers. The annual cost to maintain those data centers was roughly $60 million. What was more, the data centers were in need of replacement and would have cost more than $10 million to refresh, Benaquista said.
THL pitched Ten-X on a wholesale move to the cloud, and offered to help the company with the migration. THL won the deal, and ended up cutting that $60 million-per-year IT infrastructure cost to $30 million, Benaquista said.
Shifting to the cloud would prove to be beneficial beyond just the initial cost savings.
Eventually, as part of the move to the cloud, THL was able to split up Ten-X’s commercial and residential businesses with the aim of selling the former.
When the pandemic hit and the government issued eviction moratoriums, Ten-X’s residential real-estate business, fueled by foreclosed properties, had come to a standstill, Benaquista said.
Instead of bleeding capital, Ten-X was able to dial down its operations in the cloud, something it couldn’t have done with on-premise data centers, and stem the business from hemorrhaging cash, he said. In mid-2020, THL sold the commercial real-estate business for $190 million.
The cloud helps portcos grow revenue while keeping back-office costs flat
In another case, THL used the cloud to modernize back-office operations for a portco that was involved in recruiting and placing traveling nurses (the portco was eventually folded into healthcare-staffing firm, Ingenovus).
Prior to THL’s involvement, the company would recruit and ramp up nurses based on clients’ current open positions and needs. THL implemented a cloud-based solution that involved self-service registration and credentialing.
“Think Uber for nursing,” Benaquista said.
The new operation allowed the portco to deploy nurses within 24 hours. During Hurricane Harvey in 2017, nurses were able to arrive via helicopter to avoid flood waters.
“Had we not had that solution in place, it would have taken a week or more to find verified nurses,” Benaquista said, adding that back-office operations stayed “materially flat” while nurses on site grew by six times.