Monday, May 5, 2014

Vista's Smith Found a Way

Smith started Vista after leaving Goldman

Much has been said or written about how difficult it is to crack barriers at venture capital and private-equity firms. Quite a lot--enough to discourage some MBA graduates in finance with genuine interests in long-term investing from even bothering. Similarly much has been said and written about the scarcity of women and under-represented minorities in important roles in private equity--as investors, fund managers or principals and founders.

Most in finance, however, know the impressive rewards that are reaped in private-equity investing, conducted at such big names as Blackstone, KKR, Silver Lake, and Carlyle. Many gasp at the cascade of wealth generated by venture funds scattered about the Bay Area on the West Coast.

However, the story of Vista Equity Partners is hardly known, and perhaps it should be. The private-equity industry is aware of Vista, because the big firms and their leaders and the big investors keep an eye out on each other. Major banks know Vista and all the other firms, because banks sit side by side with them in the big deals they all seek to do.  The principals of Vista aren't likely those who rejoice in telling their stories broadly, unless they do so in front of prospective investors when they organize a new fund.

Maybe it's time its story is told more prominently and thoroughly. The firm seemed comfortable allowing the New York Times  in April to report its unique business to a wide business audience.

Vista is one of the few large private-equity firms founded and led by an African-American, Robert F. Smith. Smith was a banker in mergers and acquisitions at Goldman Sachs, when he decided to move on from a blazing career in technology investment banking to help found a new private-equity firm in 2000, a daring move for someone who had reached a comfortable perch at Goldman.

Smith had taken challenging, but conventional steps before he had the idea of starting a new firm. They were tough, methodical steps in a process that helped him understand the mechanics of private investing, understand at expert levels a sector of the technology industry, and meet certain movers and shakers among investors.

He went to Cornell to become a chemical engineer and got work experience at Kraft General Foods before he pursued finance and the MBA at Columbia. Attracted to his credentials and the academic milestones he racked up at Columbia, Goldman Sachs brought him on board and inserted him on a career trek that could have eventually thrust him into the most inner management circles at the top of the firm.

But right near the peak, he slipped away from Goldman's privileged banking club and decided to do what might have been the impossible in 1999-2000, when the dot-com bubble burst and the technology industry was running in circles trying to determine what would happen in the second chapter of the Internet: He started a private-equity company focusing on business software.

Fourteen year later, Vista is a player, managing $10 billion-plus across several funds, regularly attracting large institutional investors and proving that it can generate sound, consistent returns. Smith, in fact, told the Times that investor returns have exceeded those at Warren Buffett's Berkshire Hathaway.

(The Times tried to get more specific details about those investment returns, but verified that Vista's returns rank among the best in the industry. Buffett might rebut that achieving higher returns are harder when you manage a capital base 30-times higher and must respond to a more fickle group of investors, who happen to be public shareholders.)

Vista ought to be better known beyond private-equity circles, a little bit to broadcast the successes of a black CEO of a large private-equity organization, a lot to show how Vista has proceeded on a different course.

Those not familiar with private-equity investing might reason that success comes from accumulating massive amounts of investor funds and spraying them across industries, wherever growth opportunities peek out and wherever strokes of luck and fortune might rain down.

With offices in Austin, San Francisco and Chicago, Vista has a more disciplined, defined approach. Like most private-equity firms, Vista has a management company that oversees investments across several funds.  Vista is currently organizing its fifth fund. Investors are typical large institutional investors:  pension funds, school endowments, other asset managers, etc.  The Vista funds invest only in technology companies involved with "enterprise software," basically companies that create, develop, sell and/or license software to other client corporations to use to run their businesses. Each fund has slightly different investment approaches and timetables that match investors' objectives.

Vista's investment portfolio hardly strays from "enterprise software." It invests in few companies, not an army of software firms. It prefers to have a majority stake in a company and to be the only outside investor to avoid clashing with other big-stake investors and to have greater impact on operations and strategy. It uses ownership leverage to have a seemingly intrusive, but strategic role in operations. Companies, with sales in a range from $100 million-$1 billion, are typically still growing, looking for new markets, and might be encountering operations hurdles.

Vista just doesn't invest, appear at board meetings and provide occasional advice or guidance. It immerses itself in a company's operations, implementing detailed financial requirements and goals, coaching and training management, expediting "follow-on" acquisitions that enhance the business, and even inserting itself into recruiting new employees.  While it has consistent success, some detractors have, of course, complained that Vista, in its role, has dismissed unproductive managers and reorganized businesses without purpose--common responses to actions taken by private-equity investors with large stakes.

Because of its greater operations immersion, Vista will likely maintain ownership and control of a company over a longer term than other private-equity firms that aim for a swiftly arranged IPO or sale.  Some examples of Vista investments follow:   Mysys provides software for financial institutions for banking functions, trading, risk management, and portfolio management. Accruent offers software solutions in the real-estate industry for building construction, development and facilities management.

MicroEdge has a client base of foundations and non-profit organizations to which it sells software for grant-making, management and monitoring. Newscycle Solutions peddles software for news media to manage circulation, content, and customer relationships.

How did Smith do it? How did he find a way? A combination of factors might explain it.

He amassed expertise in finance--from tools he learned in business school and from the experience of hundreds of deals, transactions and difficult client negotiations while at Goldman. At Goldman, he participated in some of the largest, most complex deals of that period.

He gained expertise in the technology industry--with experiences in engineering, physics, computers and quantitative analysis from his engineering degree and business-school training, as well as Goldman banking experiences.

Confidence with clients, in business negotiations and in business challenges grew from responsibilities and experiences at Goldman. Such confidence and a reputation for accomplishment likely helped him assemble a talented team when Vista launched. At Vista, Smith is the lead principal, as CEO, but he doesn't do it alone. He manages a team with relevant expertise and backgrounds. A handful came from Goldman.

At Vista, Smith and team have shown discipline by sticking steadfastly to a tried-and-true investment regiment. They have not been teased by industry sectors not familiar to them, nor to they tread on territory beyond their comfort zones.

Just as important as any other factor, it helped that investors were willing to take a chance with Smith and his firm, willing to take risks and buy into the firm's parochial philosophy.

And then all these factors had to fall neatly in place in timely fashion.

If Vista is like most private-equity firms, it seeks not to attract too much media attention, if only to discourage others from copying its philosophy or chasing after the same investment gold-mine findings (which bids up acquisition prices). But Smith doesn't mind broadcasting one off-shoot he and Vista sponsor, a special venture called Project Realize.

The project is intended to help managers and owners in small companies in big cities. Smith, with Vista support, selects a small business, typically with less than $25 million in revenues and engaged in a processing business. Project Realize coaches its managers as part of a formal growth program. Participants are shepherded through all facets of finance, marketing and operations. Vista helps them achieve targets in revenue growth, operations efficiency and funding.

Some might see this is as an "incubator" for established small companies operating in various industries.  Smith sees this as an "adoption" of a company for which Smith and his Vista network provides priceless consulting services in management, strategy, operations and finance. In some ways, the services they provide are far more invaluable than if they had provided investment funds and captured board seats.

It's probably not an accident that Smith, the one-time chemical-engineering major, selected Cedar Concepts Corp., a chemical-manufacturing company, as its Project Realize's current project.

Tracy Williams

See also:

CFN:  Horowitz and his "Latest Venture," 2014
CFN:  Knocking Down Doors in Venture Capital, 2012
CFN:  Venture Capital Diversity Update, 2011

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