A Blackstone-led consortium, including Apollo and KKR, has taken control of Medallia, a software company previously owned by private equity firm Thoma Bravo. Thoma Bravo acquired Medallia in 2021 for $6.4 billion, but the company's debt burden became unsustainable, leading to Thoma Bravo writing off a $5 billion equity contribution. This marks the second-largest loss in private equity history, surpassed only by the collapse of Texas utility TXU, according to Daniel Rasmussen of Verdad Advisers. Thoma Bravo's co-founder, Orlando Bravo, admitted that the firm overpaid for Medallia, attributing it to fast-paced deal-making in 2021 and growth that didn't materialize.
Medallia's troubles highlight broader concerns within the private credit market, which has ballooned to $2 trillion. Lenders, including Blackstone and Apollo, had provided significant financing to Medallia, and their loans have now been marked down to 60-70 cents on the dollar. This situation forces private lenders, traditionally viewing themselves as "coupon clippers," to become active equity owners. Blackstone, with its experience in buying and improving businesses, is better equipped to handle this than many other private credit firms that lack such turnaround expertise.
Amid mounting fears over software takeovers from the early 2020s, when valuations were high, Medallia's debt increased by over $1 billion post-acquisition due to further borrowing and acquisitions. Interest expenses ballooned after the Federal Reserve's rate hikes in 2022. Thoma Bravo refused requests from lenders to inject an additional $500 million to reduce debt, opting instead for the full writedown. The new deal involves the Blackstone-led group injecting $150 million to stabilize Medallia's balance sheet, and they expressed confidence in the company's business despite its financial challenges.
The Medallia situation serves as a stark example of a private credit problem turning into a private equity one, as lenders are forced to take ownership of distressed companies. While the private credit boom offered quick funding for buyouts, it now presents the challenge of managing defaulting assets. Private credit default rates have reached 6%, the highest ever, suggesting more such cases are likely to emerge. Unlike a costly Chapter 11 bankruptcy, private credit restructurings can be quicker and cheaper, as demonstrated by the Medallia handover.
