In a sector where so many investors have wiped out, Vista Equity Partnersâ€™ Robert F. Smith combines a geekâ€™s creativity with a businessmanâ€™s discipline to guide his firmâ€™s high-tech ride to multi-billion-dollar success.
It is unlikely anyone who knew Robert F. Smith 25 years ago could imagine just how far his enthusiasm for technology and proficiency in problem solving would propel him. He got his first big break while still a Denver high school student. Today, the fourth-generation Colorado native is cruising in rarified air as the managing principal and co-founder of San Francisco-based Vista Equity Partners, a leading investor in successful software and technologyenabled businesses.
Since its 2000 inception, Vista has conducted more than $7 billion in transactions, and Smith is one of a few African Americans who have raised a $1 billion private equity fund, an achievement that is especially noteworthy considering that he raised his first fund from a family trust (not his own) in 2000. Current and prior Vista companies have, in aggregate, more than $3.5 billion in revenue and in excess of $1 billion in earnings before interest, taxes, depreciation and amortization (EBITDA). Vistaâ€™s historical returns place it in the top decile of private equity firms, according to the Venture Xpert database, a division of Thompson Financial.
Investment insiders agree that software investment can be difficult for some managers to master. So what accounts for Vistaâ€™s stunning success in a complicated sector where so many other private equity firms have wiped out?
â€œSoftware producers are creative; they are artists,â€ says Joe Watson, chairman of the Marathon Club, a leading national group focused on increasing the flow of investment capital to minority entrepreneurs and private equity firms and sister organization of NAIC. In his experience, investment success in the tech sector requires development of a systemic process to bring the fully realized product to market.
Smithâ€™s firm certainly benefits from his intimate knowledge of the technology business â€” specifically software â€” but it is perhaps the disciplined manner in which he combines that prowess with his personal drive, supreme selfconfidence and tendency to emphasize talent over product that gives his firm its gnarly advantage.
Catching the Wave
Smith began combining his work in technology with his interest in the investment field while still a teenager. Back in the 1980s, when personal computing was still in its nascent stages, then 17-year-old Smith landed a prestigious internship to work on semi-conductors with Bell Laboratories. The internship was intended for college juniors, but Smith secured a spot by sheer doggedness. He recalls calling the program every day for two weeks until they offered him the internship.
Smith says he started every project during the internship with a blank piece of paper and a desire to find the most elegant, innovative solution. He eventually earned a bachelor of science degree in chemical engineering from Cornell University, and an MBA from Columbia University, along with numerous academic achievement awards. Along his career spectrum, he started programming, worked in research and development for a few years and became the principal inventor on two patents for coffee maker extraction and filtration systems in the United States and two more broad patents on the same systems in Europe.
Smith spent the first part of his career working at Bell Laboratories, the Goodyear Tire and Rubber Company and Kraft General Foods, all in technical and operational management positions. Before founding Vista, he focused on technology industry mergers and acquisitions for Goldman Sachs and was its first M&A banker on the ground in San Francisco in 1997.
Smith began his Goldman Sachs tenure executing various buy-side, sell-side, leveraged buyout, raid defense, leveraged re-capitalization and restructuring transactions across multiple industries. His ability to conceptualize, develop, perfect, market, sell and buy software proved exceptional. While at Goldman Sachs, he executed more than $50 billion in transactions across a broad range of technology segments. These included enterprise software, storage software, Internet infrastructure, semiconductors, contract manufacturing, data networking and computer systems for clients such as Microsoft, Sun Microsystems, Apple, Autodesk, Agilent, Texas Instruments, Cadence, Ebay, Yahoo!, Hewlett Packard, Silicon Graphics and Gateway among others.
Listening to Smith talk about his history in the technology field, beginning with that fateful internship, it becomes clear that his philosophy for building value and profits is deceptively simple: it begins and ends with people.
Vista currently manages more than $2.3 billion in equity capital and has completed $1.3 billion worth of transactions in the past two years, including a takeprivate transaction of a publicly traded U.S. company, which Vista then merged with an existing portfolio company. Vista went on to complete three follow-on transactions that led to the formation of Ventyx, the largest independent software company in the utility space.
The firmâ€™s reach extends across the Atlantic ocean as well. In recent years it has completed two leveraged acquisitions â€” one in the U.S. and another in the United Kingdom â€” from largely publicly traded companies. Vista has even closed two privately held companies: one was the largest provider of enterprise software to libraries and the other was the largest software company serving the upstream oil and gas sector.
Smith says Vista has never lost money on a deal. It has, however, doubled, tripled and even quintupled cash flow at some of its companies, including Applied Systems (an insurance agency management software concern), SER Systems (a call management software firm) and SRC Software (a financialPlanning and performance management software company).
â€œRobert is one of the most focused managers I have ever seen,â€ says Derek Jones, a director with Credit Suisseâ€™s Customized Fund Investment Group (CFIG). CFIG is a fund of funds group that invests in hundreds of private equity firms, of which Vista is one. CFIGâ€™s platform allows Jones and his colleagues to observe many fund managers around the country. They have invested in 350 managers and are invested in 800 funds. Measured against CFIGâ€™s vast database and industry benchmarks, Jones says Smith is a top performer.
â€œHe has set up a culture with very talented people and set a very high bar for them to be the best,â€ Jones says. â€œIf one of his companies has a 75 percent share, he wants 100 percent. Heâ€™s on a mission to create enormous wealth for his investors and his team.â€
The Vista team is made up of people who have backgrounds similar to Smithâ€™s. However, it is a credit to Smithâ€™s diligence and patience that they are at Vista.
â€œItâ€™s the selectivity he has in picking the team,â€ Watson, says â€œVista hires only the very best. Regardless of [Robert], Vista could not succeed without the people who surround him.â€
Nurturing the Leaders
Vistaâ€™s investment returns, according to Smith, are not reliant on financial leverage, but rather â€œsustainable operating leverage.â€ In other words, Vista invests in companies with excellent management teams that have a long-term perspective and are committed to maintaining leadership in their markets.
Defined as a â€œvalue-added investor,â€ Vista contributes more than just money. It also provides strategic, multi-level support and professional expertise â€” with Smithâ€™s background playing heavily â€” to spur portfolio companies to optimal performance. By focusing on making the companies, employees, processes and products the most efficient and best they can be, Vista better positions them to maintain a leading position in the market.
â€œRobert Smith can blend both sides of his brain,â€ Watson says. â€œHe can appreciate the artistry and operationalize [sic] it, a tremendous skill set that few people have,â€ which is what makes Vista unique. According to Watson, â€œoperationalizationâ€ is not just about selling, it includes all aspects of managing and running a software business, which might include anything from crystallizing the focus of developers to developing training or ensuring that the product really delivers on the solutions it promises.
Vista is people, process and outcome oriented. Perhaps the most important aspect of this strategy is investment in people, a seemingly by-gone notion for many companies.
â€œWe get back to basics,â€ Smith says. â€œWe hire smart people, train them, and they are very productive for us.â€
And companies that prove productive for Vista may also prove good for the U.S. econOmy. Smith has brought a number of jobs back from overseas to cities like Chicago, Portland, Ore.; Columbia, S.C.; Provo, Utah; and Huntsville, Ala. Moving well-paying jobs back into U.S. cities that have experienced a virtual hemorrhaging of living-wage jobs in recent decades may sound surreal, but those who know Smith and the Vista team are not at all surprised.
â€œVista has developed a systemic model for business management that allows it to sustain and replicate successful performance,â€ Watson says.
Smith elaborates: â€œOur focus on driving recurring revenue and operational excellence are transformational elements. [What we do] requires deep domain experience along a variety of functional skills … and of course a deep understanding of software and its productive potential to our customers.â€œ He concurs that his focus on one sector is what makes Vista a standout performer, but he also knows how good the competition is, so he never ceases to stay on top of his game.
In the last five years, Smith says private equity managers have raised more than $1.4 trillion dollars, $400 billion of which was raised in 2007 alone. To him, the most interesting of these facts is that only a few firms raised the majority of this money. Many of the firms now have individual funds of over $15 billion and some in excess of $20 billion.
A number of these firms are back in the market or expected to be back in the market within the next 18 months.
â€œThe biggest firms continue to capture the lionâ€™s share of investment capital, and they do this through everincreasing core funds with widening scope and then augmenting the core funds with geographic funds, additional asset class funds and finally the emergence of sector specific funds. Effectively, these firms have now figured out how to add new product areas to sop up any additional capital. Theyâ€™ve gotten â€œbigâ€ and â€œnicheâ€ at the same time.â€
Vista differentiates itself by being the best in its narrower, more specific field. Given that the todayâ€™s world relies inextricably on software to function, itâ€™s not a bad strategy.
â€œOur investments require very little additional capital to capture ever increasing cash flow streams,â€ he says. â€œThe Vista model leads to those outcomes.â€