Vista wants generalists to ‘feel pain’ of high multiples: Smith

Vista Equity Partners is sick of “tourist” generalist funds crowding into the enterprise software sector, and the firm is not afraid to price them out of the market.

In a December 2 keynote talk at PartnerConnect Southwest 2015, Vista founder Robert Smith said his firm routinely bids up deals pursued by generalist mega-funds to discourage them from pursuing businesses in the sector. Vista, which manages approximately $14 billion in committed capital, invests exclusively in software and technology businesses.

“We’ll push them over the edge and make them overpay,” he said. “And they’ll feel pain five years from now, which will hopefully push them back and keep them from doing deals in this space for another 10 years. That’s part of the dynamic we employ in our space.”

Vista is notorious for driving up prices on software and technology deals, said one LP who watched Smith’s keynote. The firm agreed to take risk-and-asset management specialist Solera Holdings private in September for $6.5 billion, or roughly 14 times the company’s reported adjusted EBITDA for the 2015 fiscal year, according to Solera’s public filings. Last year, Vista acquired Tibco Software at a 17x EBITDA multiple before cost savings.

Many LPs, including speakers at the conference, expressed discomfort with rising deal prices. Private equity firms’ large stores of dry powder, along with corporations’ cash-flush balance sheets, helped boost entry multiples on new deals well into double digits.

While Vista tends to offer big bids for new portfolio companies, Smith cautioned LPs in the audience to not judge the firm solely for its headline deal multiples. A high entry multiple may reflect a lean business, and Vista’s post-deal strategy often includes deep investments in product development and human resources.

“We actually spend more money on product development than Lockheed Martin across our portfolio,” he said, later adding: “We know exactly what we want to pay for a company and what it’s worth [to] us because this is all that we do.”

Vista’s returns bear that out. The firm’s 2007 fund netted 2.66x multiple and a 31.7 percent internal rate of return through June 30, according to the Oregon Public Employees Retirement Fund. Fund IV, vintage 2011, netted a 20.5 percent IRR and 1.59x multiple as of the same date. Both vehicles are firmly upper quartile, according to Cambridge Associates’ benchmark for buyout and growth equity funds.

“[LPs] should be comfortable because of our returns. It’s what we do, and we’re specialists. It’s as simple as that,” Smith said. “There are those [GPs] who call themselves technology investors and some of their worst investments are in software. Like all things, if you invest on multiples only, you’ll disappoint.”

Action Item: Visit Vista Equity’s website here: www.vistaequitypartners.com.

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