- Smith: “Make them overpay”
- Vista invests more in product development than Lockheed, Smith says
- Software specialist nets top-quartile returns
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 known for driving up prices on software and technology deals, said one LP who watched Smith’s keynote. For examples, Vista 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,” Smith 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 a 2.66x multiple and a 31.7 percent internal rate of return through June 30, according to the Oregon Public Employees Retirement Fund (OPERF). 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.
Those returns will likely play an important role as the firm determines LP demand for its next flagship fund, which Smith previously hinted could be as large as $10 billion in size. The firm has been fast to deploy Fund V. As of June 30, Vista had called a little less than half of the $200 million Oregon Public Employees Retirement Fund committed to Fund V, according to the pension.
“It’s got a lot of buzz. They’re back in market. I have no idea kind of where the fund size ends up,” said one LP. “The growth and profile around their founder is really amazing.”
Vista is already marketing its second credit opportunities fund, targeting between $750 million and $1 billion, and is expected to begin raising its next small-cap software vehicle, Foundation Fund III, at some point in the coming months.
“[LPs] should be comfortable because of our returns,” Smith said. “It’s what we do, and we’re specialists. It’s as simple as that. 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: Vista founder and CEO Robert Smith can be reached through his assistant Maria Nicolas at 512-730-2480.
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