Hidden Giant: The Secret Success of Vista Equity Partners

By Jeremie Mutolo

The performance and success of a private equity firm is difficult to evaluate. Does a firm that effectively raises large funds from numerous wealthy investors fare better than a firm that can double or triple their investors’ money? If asked what the industry performers were over the past several years, the names of more notorious asset management and PE shops come to mind, with the likes of Blackstone, KKR, and The Carlyle Group presumably landing on the list. Even less prominent or sector-specific private equity firms such as Berkshire Partners and Silver Lake Management would gain honorable mention. Very few, however, recognize the middle-market firm based in San Francisco, which at the end of 2014 was crowned the top-performing private equity firm in the world.

Founded and headed by Robert Smith ‘85, a Cornell College of Engineering alumni, Vista Equity Partners has quietly outperformed its competitors over the past several years, yet fails to fully capture the respect of the finance industry. The private equity firm mainly focuses its investments on software, data, and technology companies valued between $25 million and $3 billion, investing a modest $20 to $700 million per transaction. A quick glance at their news section will show that in just the second half of this year alone, Vista Equity has taken part in several acquisitions, totaling roughly $2.15 billion. What’s even more impressive is the performance of their recently closed 2007 buyout fund, Fund III, which, according to Pitchbook.com, has an internal rate of return of 28.24 percent, with Buyouts Magazine reports an even higher IRR.

The success of Vista Equity Partners speaks to the idea of specialization, something that has become a lost art among financial firms. Vista Equity’s focus on software, data and technology-based companies allows them to develop a niche and garner industry experience handling such companies, providing them with the knowledge necessary to ensure maximum returns for their investors. Investors realize the importance of such “niche” investing, so much so that according to the Wall Street Journal, Vista Equity Partners was able to handily surpass its $8 billion dollar goal for its newest tech buyout fund, Fund VI. If the fund is able to close above $10 billion, it will make it one of the largest tech-focused PE funds in recent memory, a record currently held by Silver Lake. This is not the first time that VEP has seen this level of excess investment; their previous two funds, Fund IV and Fund V both exceeded their respective asking amounts. Despite this, Smith remains confident that an abundance in capital should prove to “have no effect on the firm’s performance or strategy”, according to PEHub.

    Mr. Smith’s business acumen is also another facet of VEP’s success, with Smith spending six years at Goldman Sachs focused solely on technology M&A. He handled deals with tech giants such as Apple, Yahoo!, and eBay before forming Vista Equity Partners in 2001. The fundamental reason behind the success of VEP, however, lies in their disciplined investment philosophy. VEP’s ability to strategically identify, acquire, and merge companies through a series of “small” deals is what allows the firm to consistently draw wealthy investors. The recent merger of Fiverun, Marketlive and Shopatron to form the cloud-based retail platform Kibo speaks to the innovative vision of Smith and the firm.

Vista Equity Partners’ success comes at a time when a great number of tech companies are choosing to take their companies private, or remain private entirely. The past few years have been notoriously brutal to technology IPOs, with roughly 50 percent of the tech companies that have become publicly available trading below their IPO price. The decision to go private will vary from company to company, but many enjoy the freedom to focus on remodeling from the inside without fretting over meeting shareholder expectations or maintaining regulation requirements. Toronto-based financial service firm Canaccord Genuity began tracking 95 business software companies that had an IPO and found that 78 percent of them had been acquired, showing just how uncompromising the public market have been. Additionally, tech companies have accounted for 46 percent of buyouts this year, with the private equity industry spending more than $15 billion targeting these types of companies and somewhere of $300 to $400 billion in excess cash reserves readily available to be used, with some firms suggesting an even larger amount of “dry powder”. The poor market environment for tech IPOs presents an opportunity for VPE to feast on companies seeking to make an exit, especially with their proven track record and ease of raising funds. Combined with venture capital funds experiencing “the highest investment rate in 15 years”, according to the Wall Street Journal, the environment is ripe for firms like Vista Equity Partners to be successful in acquiring and renovating these companies.

Source: Allison Griswold, Atlas; Dealogic

But the tech IPO drought that heavily marked the first half of the year is beginning to reverse, as several tech companies have recently gone public, including Twilio and Nuantix. Investors are slowly clamoring for more “unicorns” to become publicly traded, suggesting a broader trend of tech IPOs starting to emerge once again. This bodes badly for a company that makes its money by taking companies private.

Or does it? Widely popular tech companies such as Dropbox and Snapchat are speculated to be going public in the next few years, while Spotify and Uber are mulling over the decision with financial advisors. Demand for these companies to go public is immense, and a favorable market reaction to these highly valued companies will provide a lucrative exit strategy for companies in VEP’s portfolio. If investor fervor is as advertised, Vista Equity Partners finds itself in a great position to reap the rewards.

As companies and the overall economy becomes more reliant on software, private equity firms will begin to aim their sights on the same tech companies Vista Equity Partners has spent years investing in. The bidding war VEP had earlier this year while trying to acquire the event-management software company Cvent speaks to the greater competition the firm will face moving forward. But the discipline and enterprise, traits commonly found in Cornell graduates, of Robert F. Smith will keep Vista Equity Partners performing at the top for years to come.