‘Continually evolving tax laws’ drive demand for Avalara, bought by Vista for $8.4bn

Vista Equity Partners, the Austin, Texas-based private equity firm, completed its take-private acquisition of Seattle-based Avalara, an automation tax compliance provider, for $8.4 billion earlier in October.

PE Hub spoke with Monti Saroya, Vista’s senior managing director and co-head of its flagship fund, about the deal. He was upbeat about the opportunities the deal brings and the attractive tailwinds “fueled by the constantly evolving tax and regulatory landscape and the continued explosive growth of e-commerce.”

How does this deal symbolize your investment thesis? Why are you interested in this sector?

We believe the opportunity in enterprise software remains one of the best uses of capital in the world. When we evaluate potential investments, we focus on identifying platforms that are fundamentally primed for “growth at scale” in concert with our Vista best practices. These are rigorous and proven principles that prioritize operational excellence to create additional value and drive profitability.

At a high level, volume and complexity are the nexus where data-driven software solutions are often the most business-critical and resilient – and this is exactly the type of solution Avalara provides. Avalara is a market leader in tax compliance automation that serves customers in a variety of end-markets, including retail, manufacturing, lodging and software.

We also believe Avalara possesses multiple future growth and operational levers capable of driving profitability in an underpenetrated market, and we look forward to working closely with their CEO Scott McFarlane and the entire Avalara team to maximize these opportunities moving forward. Vista has built a reputation as a preferred partner for founder-led, next-generation software companies and embraces the value of founder relationships and their importance throughout the lifecycle of our investments.

How did you identify Avalara? Did you look at any of Avalara’s competitors before settling on Avalara?

Vista has significant experience in the tax compliance and regulatory reporting software space through its investment in Sovos Compliance and subsequent add-on acquisitions. We know the space well, and we’ve been impressed with Avalara’s “cloud-first” platform, which is a clear competitive differentiator. We continue to see compelling value in the space, with attractive tailwinds fueled by the constantly evolving tax and regulatory landscape and the continued explosive growth of e-commerce.

What’s driving deals in cloud-based compliance systems for taxes?

The continued expansion of e-commerce means that providing seamless, cross-jurisdictional transactions are now table stakes for any competitive business. This requires enterprises to be agile and responsive to continually evolving sales and use tax laws that differ, sometimes enormously, across jurisdictions, both domestically and internationally. This creates a complex compliance burden for nearly any company – from earlier stage companies looking for a cloud-enabled solution to help them scale, to larger, more mature enterprises who may still be outsourcing these functions or relying on inefficient or manual internal processes.

What other opportunities do you see in this sector? How are you planning to grow Avalara? 

Vista’s scale, resources and experience will accelerate Avalara’s growth and help execute its strategic vision to automate global compliance. We will help Avalara scale its platform by accelerating its focus on operational excellence, streamlining its systems architecture and continuing to pursue value-accretive M&A opportunities.

How does the current macroeconomic environment affect this deal and the growth strategy?

Enterprise software is still the most productive tool introduced in the business economy in the last 50 years and will likely continue to be for the next 50. So, in an environment with wage inflation, a lack of developer talent, challenges related to cyber-attacks, in many cases companies are increasing their spending in enterprise software. This is especially true for tax compliance as taxes will always be a part of every transaction and businesses will need solutions to address continually evolving tax laws.

Do you have anything in your portfolio that is similar to this deal? If so, what are the similarities and parallels?

Vista has invested in numerous mission-critical, back-office software platforms that help streamline business operations, provide high ROIs and let leadership focus on what they do best: running their business. Some of these investments include governance, risk and compliance (GRC), and enterprise resource platforms (ERP) companies such as AlertMedia, Assent, BetterCloud and ComplySci, among many others.

Have you made any exits in this sector? 

Vista has a strong track record in this sector of recognizing early potential and delivering tremendous growth at scale. In 2012, Vista acquired Sovos Compliance from ADP and partnered with the company to rapidly expand its product suite and international presence through organic growth initiatives and a disciplined and opportunistic M&A strategy that included seven add-on transactions. In 2016, Hg Capital purchased Vista’s majority stake in Sovos Compliance. Today, Sovos Compliance is a global leader in tax compliance and regulatory reporting software that supports over 4,500 customers and integrates with thousands of business applications from ERP to point-of-sale.