Executive Summary
Thoma Bravo's reported handover of Medallia to its lenders represents a $6.4 billion equity write-down on a 2021 take-private. The transaction matters not because of the size, though the size is meaningful, but because of what it signals about a broader class of PE-backed software deals from the 2020-21 vintage. Medallia was a recognized enterprise software platform with real customers, real revenue, and real brand presence in the customer experience category. Thoma Bravo is arguably the most respected software-focused PE firm globally, with a track record spanning multiple cycles. If the Medallia thesis could not survive the 2022-2026 environment, the math on dozens of comparable deals from the same vintage across the industry deserves scrutiny. LPs holding exposure to growth-oriented software funds raised in 2020 or 2021 are increasingly modeling markdowns rather than assuming carry-value realizations.
What Actually Happened With Medallia
Thoma Bravo announced the take-private of Medallia in July 2021 at $34 per share, valuing the company at approximately $6.4 billion. The transaction closed in October 2021. The thesis was straightforward and consistent with successful software PE deals of the era. Medallia held a strong position in customer experience management software. Operating improvements under a sponsor known for software value creation would expand margins. Revenue growth in the customer experience category, accelerating with broader digital transformation spending, would compound through the hold period. Within five to seven years, a strategic sale or IPO at expanded multiples would produce strong returns to fund investors.
The execution against this thesis ran into specific structural problems.
Revenue growth normalized. Medallia's revenue growth rate in the years preceding the take-private had benefited from accelerated digital transformation spending during 2020 and 2021. That tailwind faded in 2022 and 2023 as enterprise software demand normalized. The company continued growing, but at rates well below the underwriting assumptions.
Debt service became expensive. The take-private was financed with substantial debt, common for software PE deals of the era. Base rates moved from near-zero at acquisition to 5%+ in 18 months. Spreads on PE software acquisition debt widened on top of the base rate move. Refinancing windows that should have allowed Thoma Bravo to roll the capital structure into more favorable terms remained mostly closed through 2022 and 2023.
Exit markets contracted. The strategic and IPO exit channels that the thesis depended on did not materialize at the multiples required. Customer experience software comparables in public markets compressed substantially. Strategic buyers became more disciplined on premium pricing. A 2024 or 2025 exit at multiples that would have cleared the underwriting math was not available.
The combination produced a capital structure that could not be serviced through operational cash flow at the available scale. The equity got wiped. The lenders take ownership of the company. The fund vintage takes a substantial markdown. LPs that committed to that vintage absorb the loss across their broader allocation.
Why This Specific Case Matters
Credit handovers of PE portfolio companies are not new. The reason this one specifically deserves attention has to do with the seller, the asset, and the scale.
Thoma Bravo is among the most institutionally credible software-focused PE firms. The firm's track record spans multiple cycles, with consistent demonstration of value creation in software portfolio companies and strong DPI delivery to LPs across many funds. When a firm with that level of operational credibility and underwriting discipline cannot make a deal work, the question is whether the deal was uniquely flawed or whether the structural environment that produced the deal also produced others with similar characteristics.
Medallia is a recognized enterprise asset, not a niche or speculative platform. The company has substantial revenue, an established customer base, and a real position in its category. The thesis was not exotic. Operational improvement plus organic growth plus eventual exit at expanded multiples. This is the standard PE-backed software thesis applied to a quality asset. When this thesis breaks on a quality asset, the implications for similar theses applied to less-quality assets are more severe.
The scale is large enough to register as a measurable event in LP portfolios. A $6.4 billion equity stake represents a meaningful position in any fund that participated. The accumulated markdown across LPs is significant on its own and contributes to the broader DPI drought across the asset class.
The combined characteristics produce a signaling event that smaller credit handovers do not. LPs and other GPs are reading Medallia as evidence that the structural problem extends beyond marginal cases.
The Broader 2020-21 Software Cohort
The aggregate exposure across the broader 2020-21 software PE cohort is substantial. Industry estimates suggest that PE deployed roughly $200 to $250 billion into software take-privates and growth equity investments in 2020 and 2021. Most of these transactions were structured with significant leverage and underwriting assumptions reflecting the rate and growth environment of the time.
The structural patterns that produced the Medallia outcome are common across this cohort. Entry multiples were at or near peak levels in 2020-21 software, with many deals closing at 15 to 20x ARR multiples that public market comparables have since compressed to 5 to 8x. Debt structures were sized to the rate environment of 2020-21, with refinancing windows that have remained mostly closed for three years. Revenue growth has normalized to rates well below the underwriting assumptions. Exit markets have contracted, with both IPO and strategic acquisition activity for PE-backed software at multi-year lows.
Not every deal in this cohort is in distress. Many companies have continued to perform well operationally, even if at growth rates below the underwriting assumption. Companies with strong unit economics, low customer acquisition costs, and resilient demand have weathered the period reasonably. Companies in sectors where consolidation has continued to make sense at adjusted multiples have found exits.
The deals in distress are typically characterized by some combination of three factors. The first is entry multiples that priced in growth assumptions that have not materialized. The second is leverage structures that cannot be refinanced affordably and cannot be serviced from operational cash flow. The third is competitive positioning that has deteriorated faster than the underwriting assumed.
Industry-wide estimates suggest that 15 to 25% of 2020-21 software take-privates are in some form of distress that will require either creditor restructuring, sponsor capital infusion, or operational adjustments that materially change the exit math. The visible cases like Medallia are the tip of a larger structural issue.
For more on the structural inversion in PE return composition that produced these distresses, see multiple expansion is dead: how PE returns inverted.
What This Means for LPs
LPs with exposure to growth-oriented software PE funds from 2020 or 2021 face a specific allocation question. The portfolio markdowns from the affected vintages will continue to surface over the next two to four years as additional deals work through their capital structures. Some will be public credit handovers like Medallia. Many will be quieter restructurings, sponsor capital infusions, or marked-down continuation vehicle transactions.
The aggregate effect on vintage DPI will be meaningful. Funds with heavy 2020-21 software exposure will likely deliver realized returns substantially below the underwriting assumptions for those deals. Whether the fund-level returns are above or below historical norms depends on the diversification of the portfolio and the performance of non-2020-21-software components.
LPs that have already absorbed markdowns on prior 2020-21 deals are typically applying caution on new commitments to the same managers. The pattern is most visible in re-up decisions. Managers with disproportionate 2020-21 vintage exposure that has not yet been resolved face more skeptical re-up conversations. Managers with cleaner recent vintages or with explicit acknowledgment of the underwriting lessons learned from the cohort fare better in those conversations.
The signal that LPs are increasingly looking for is honesty about the cohort performance. Managers that have written down 2020-21 deals to realistic carry values, communicated transparently with LPs about the issues, and articulated specific underwriting changes for new deals are differentiating positively. Managers that continue to hold 2020-21 deals at marks that imply eventual exit values the market is unlikely to confirm face more friction in fundraising and re-up.
For broader LP allocation context, see what LPs actually want in 2026.
The Lender Perspective
A consequence of credit handovers that does not get discussed in the equity-focused press is what happens on the lender side. The credit funds, BDCs, and direct lenders that financed 2020-21 software take-privates are increasingly finding themselves becoming reluctant software company owners.
The economics for the lenders are not straightforward. Lenders are not typically equipped to operate software companies. Holding a company that needs operational improvement requires either bringing in a new operator, hiring an operating team, or attempting to dispose of the asset quickly. None of these are core competencies for credit funds.
The disposition path most lenders are pursuing involves a combination of refinancing the equity position, bringing in a new operating sponsor, or selling the asset at a significant discount to the prior PE owner's basis. The clearing prices at which these dispositions occur reset the comparable transaction data that affects subsequent deal valuations across the broader market.
For credit funds with concentrated 2020-21 software exposure, the cumulative impact on returns is meaningful. The portfolio companies that perform well will return capital, but the portfolio companies that perform poorly will require active management that compresses the credit fund's effective return below the contractual coupon. The aggregate vintage returns for credit funds with this exposure will reflect the underlying portfolio company performance more than the credit terms.
The implication for LP allocation to credit strategies is that vintage selection matters as much as it does for equity strategies. Credit funds raised to deploy into 2020-21 software companies face structurally weaker return profiles than credit funds with broader vintage diversification.
What Has To Change in Underwriting
The lessons from the Medallia cohort are propagating through underwriting practices across software PE. The changes are visible in three specific areas.
Entry multiple discipline has tightened substantially. Software acquisition multiples have compressed from the 2020-21 peak across most sub-sectors, both because public comparables have come down and because PE firms have become more conservative about underwriting growth assumptions that proved unreliable in retrospect. Current software deals are typically pricing at 8 to 12x ARR for mature platforms, down from 15 to 20x at the prior peak.
Debt structures have moderated. Leverage levels on new software take-privates are typically 30 to 40% below the levels common in 2020-21. Interest coverage requirements at acquisition have tightened. Refinancing optionality is being structured into debt agreements more carefully. The capital structures being put in place now are designed to be serviceable across a range of rate scenarios rather than optimized for the rate environment at acquisition.
Underwriting growth assumptions have come down. The 25 to 35% annual revenue growth assumptions common in 2020-21 software underwriting have been replaced with assumptions in the 10 to 18% range for most platforms. The lower growth assumptions reduce the modeled returns at exit, which has put pressure on entry multiples to compensate. The math has rebalanced, but at lower deal volumes because seller expectations have not fully reset to the new underwriting reality.
These changes will produce a 2026-27 vintage of software PE deals that look quite different from the 2020-21 vintage. Lower entry multiples, more conservative leverage, lower growth assumptions, and longer expected hold periods. Whether this vintage produces strong realized returns depends on what the exit environment looks like in 2030 or 2031, but the underwriting is at least more aligned with realistic market conditions than the 2020-21 vintage was.
What LPs Should Be Asking About Existing Exposure
For LPs reading this with existing 2020-21 software fund exposure, the practical questions are not about new commitments. The practical questions are about what to do with the existing positions.
The first question is what the actual unrealized portfolio looks like at honest marks. Many GPs are still carrying 2020-21 software deals at marks that imply substantial recoveries. LPs should be asking for specific portfolio company detail: revenue, growth rate, EBITDA, capital structure, debt service coverage, refinancing maturities, and exit pipeline. The detail will reveal which positions are on a realistic exit path and which are not.
The second question is how the GP is communicating about the cohort. Direct, honest communication that acknowledges the structural issues and articulates the response is meaningful. Vague optimism about eventual recoveries that the market data does not support is a warning sign.
The third question is what the GP is doing about the positions. Active operational engagement, capital infusion where the underlying company has a viable path, and active disposition where the company does not are all legitimate responses. Holding without active engagement, waiting for the exit market to recover, is increasingly being read by LPs as deferral rather than strategy.
The fourth question is what the GP's underwriting looks like for new deals. The lessons learned from the 2020-21 vintage should be visible in current underwriting practices. Specific changes in entry multiples, leverage structures, and growth assumptions, with concrete examples, demonstrate that the GP has absorbed the lessons. Generic acknowledgment that the environment has changed without specific underwriting changes is less convincing.
GPs that handle these conversations well preserve LP relationships even through challenging vintage performance. GPs that handle them poorly find re-up conversations becoming difficult regardless of historical performance.