Thoma Bravo’s acquisition of RealPage is a big deal (no pun intended!). It’s not only one of the largest PropTech acquisitions ever completed but also a watershed moment for the entire PropTech industry representing the dawn of a new age and throwing the spotlight on a market that has traditionally lagged behind other areas of the economy in software development and adoption.
This deal might come as a surprise for some, but for those in the PropTech industry day-in and day-out, it doesn’t. It’s timing actually couldn’t be more fitting. The real estate industry is the largest asset class in the world and the industries that interact with it are massive trillion-dollar markets. These industries are complex, involve myriad stakeholders, and have traditionally operated offline in paper, pen and spreadsheet environments, resulting in higher costs and lower productivity. Although the built world was already experiencing a transformational shift from offline to online over the previous decades, COVID-19 accelerated that rate of change.
COVID-19 finally shifted the mindset of real estate owners to realize that technology is no longer an option, it’s a requirement, and condensed adoption into months what otherwise might have taken decades. In the past, as most real estate operations teams operated from a single “central command” post, technology was often seen as a nice to have, not a need to have, and the initial capital requirements to implement and train were often too high. However, now that employees are operating remotely in distributed teams, costs are dropping, and operational needs have changed, they require new, cloud-native, integrated software solutions. Users are changing too! Baby Boomers who have dominated key decision-making positions and the broader real estate workforce are nearing retirement age. A “changing of the guard” so to speak is underway and the Millennials, who are more comfortable interacting with online interfaces and taking over for their Baby Boomer counterparts, will further contribute to the market’s adoption of software. As a result, owners have no choice but to adapt or seriously risk being left behind (or worse!). Although COVID-19 has upended the world, including many areas of the built world, technology has the opportunity to be the real estate industry’s antidote. We expect Thoma Bravo realized this, and so it’s refreshing to see the trends that Nine Four has been witnessing and acting on be legitimized by a great, well-respected player making a big bet in the space.
It’s also fitting that the deal involved arguably the biggest names on each side of the transaction. Thoma Bravo is one of, if not, the largest and most active private equity firm in the world and RealPage is one of, if not, the preeminent real estate asset management software platform in the world. From an outsiders perspective the combination of the two is a match made in heaven.
The private equity industry, including Thoma Bravo, is known for using “roll up” strategies to expedite growth through inorganic M&A. Typically private equity firms will acquire a core asset and complete smaller “bolt on” acquisitions to help grow a customer base, expand a complementary product suite and/or enter a new geography, among other strategic reasons. These smaller acquisitions integrate with the core asset and create “synergies” by cross-selling products across customer bases resulting in value creation in the form of improved customer experience (ie more products to choose from and lower prices!) and increased shareholder value. Looking forward, I wouldn’t expect anything less from Thoma Bravo’s strategic growth plan for RealPage. Scott Crabill, Managing Partner at Thoma Bravo, corroborates this when he says, “we look forward to applying Thoma Bravo’s… investment expertise… to help drive RealPage’s continued growth and identify attractive M&A opportunities”.
Since its founding in 1998, RealPage has acquired ~40 companies and 20 of those have closed in the past five years. Saying they’ve been busy would be an understatement! Some have been larger than others (hundreds of millions vs single digit millions) and have involved lots of different categories including everything from core asset management to energy & utility management, marketing management, payment management and so on. This is important because it shows RealPage has developed a “muscle” for and core skillset around executing M&A. As a result, RealPage’s M&A DNA combined with its well-respected market leading position makes it a perfect core asset for Thoma Bravo to successfully execute a potential roll up strategy with.
This is where it gets exciting for the rest of us founders and investors. The combination of Thoma Bravo and RealPage creates a serious, active acquirer in the space for earlier stage startup technology. RealPage already was formidable but it leveled up with Thoma Bravo’s experience and check book behind them. In addition, this combination creates a forcing function for and puts pressure on other asset management software incumbents, such as AppFolio and Yardi to start making strategic moves too. If RealPage starts executing a roll up strategy, I expect it will increase additional M&A activity and prices for the best assets in the space.
Some relevant PropTech areas that these incumbents will be watching closely include access (SmartRent), energy & utilities (SmartRent), investor relations (Juniper Square), leasing (Funnel) and maintenance (Sightplan) among others. RealPage already offers modules in most, if not all of those areas but current offerings tend to be more on-prem and closed ended and may no longer solve the new needs of today’s businesses. This is why the mobile-first, cloud-native and interoperable technologies offered by more nascent-stage startups will be strategically important to RealPage and others’ future growth and competitive advantage. Incumbent solutions helped improve end user productivity, but up-start solutions improve productivity and move the needle even further. As real estate owners continue to prioritize optimization, technology will remain absolutely critical for a very long time.
The consolidation that could happen in asset management can certainly happen in other areas across the PropTech landscape too! Lending (nCino), construction (Procore), maintenance (ServiceTitan) and insurance (Vertafore) represent other large industries with critical technologies that could serve as core assets to pursue roll up strategies across budding startup ecosystems. Although we know the end game for many of the earlier stage startups isn’t necessarily to be acquired as part of a roll up strategy, for some, and under the right circumstances, it might make sense.
One thing is for sure. We’re in for an exciting 2021! It will be fun to watch how this new dynamic plays out and is refreshing to see new energy and more attention entering the space. And this serves as another example of how PropTech is only in its infancy and has a lot of room for growth. If you’re a founder, investor or user and would like to discuss, please reach out! We look forward to co-stewarding this exciting potential together with you.