New Vista megafund carves out consulting fees from offset

  • Firm caps consulting fees at $5 mln per portfolio company
  • Those fees will not offset LP management fees
  • Fund VI hard capped at $10 bln

Vista Equity Partners’ vaunted consulting group stands to make as much as $5 million per investment from the firm’s new flagship fund, none of which will find its way back to limited partners.

Like many large buyout funds, Vista Equity Partners VI will offset management fees its fund investors pay for 100 percent of the fees and expenses charged to the fund’s underlying portfolio companies.

That total excludes, however, amounts that Vista Consulting Group, the in-house consulting group, received for any services amounting to less than $5 million for each separate investment in a portfolio company, according to a StepStone Group due-diligence report obtained by Buyouts.

Should the firm hit its $10 billion hard cap — which several sources expect it to —Vista VI’s portfolio would likely include 12 to 18 company investments. At that size, Vista’s consulting team stands to collect as much as $90 million that would not be subject to offset.

Buyouts obtained the StepStone report through an open-records request with the office of Connecticut State Treasurer Denise Nappier. Nappier greenlit a $100 million commitment to the fund in November.

Vista’s consulting affiliate is responsible for implementing a playbook of best practices known as Vista Standard Operating Procedures at each of the firm’s portfolio companies.

“The VSOPs developed, refined and implemented within VCG have generated large efficiency gains, incentivized sales teams and greatly expanded median EBITDA margins” across the firm’s portfolio companies, the report says. The team also conducts due diligence on new deals alongside the firm’s investment team.

“The Vista guys really swear by that playbook approach,” a public pension consultant told Buyouts. “They throw a ton of people at deals.”

Vista’s consulting group has roughly doubled in size to 84 professionals over the past two years. That mirrors similar growth in Vista’s flagship fund sizes and further expansion into other product offerings, like credit. The firm closed its previous flagship fund on $5.8 billion in 2014.

According to the firm’s SEC filings, Vista Consulting Group operates at or near break-even, and it benchmarks its fees against “comparable services.” Vista declined to provide any information about how it benchmarks those services, or how it arrived at the $5 million per investment cap for internal consulting fees.

“Who are the alternatives? E&Y? McKinsey? Those guys don’t get out of bed for $500,000 a year,” said one LP. “That’s how all of this got started. They brought these guys so they could leverage them across a few different platforms.”

In any case, the consulting team’s input likely contributed to the firm’s track record, which Buyouts sources consider stellar. Since inception, Vista’s flagship and foundation funds have netted a combined 1.6x multiple and 27 percent internal rate of return, according to StepStone.

Only three of the firm’s investments produced losses, StepStone wrote. All three were minority investments, and two were decade-old, early-stage investments that no longer reflect Vista’s strategy, the report says. In that decade, the consulting group grew from just two professionals to its current size, which significantly curtailed the firm’s hiring of outside consultants for its portfolio companies.

Vista’s track record likely contributed to its ability to keep consulting fees, or at least a significant share of its consulting fees, from being subject to any form of management-fee offset, sources said. Similar leverage enabled the firm to change its key-man clause on its most recent fund, Buyouts has reported.

Nonetheless, it’s unclear whether Vista set up a similar cap on consulting fees not subject to offset with its previous funds. One source with knowledge of the firm said Vista set similar caps on previous funds. An LP said it’s something the firm’s done historically, but “I don’t know if they’ve ever put a number on it.”

Either way, Vista’s fee arrangement with its consulting team is unlikely “to move the needle too much” for most investors, one Fund VI LP told Buyouts. Other sources said they’re more concerned with the firm’s ballooning fund sizes, though not enough to skip out on the fund.

“I don’t want them to have to charge anything,” said one consultant. “We do everything we can to push them down, but there’s too much demand.”

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Robert Smith, founder, chairman and CEO of Vista Equity Partners, speaks at the Milken Institute Global Conference in Beverly Hills, California, on May 2, 2016. REUTERS/Lucy Nicholson