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Q&A – Wall Street Journal Money Beat

Vista Equity Partners is on a tear. In the past month, the technology-focused private-equity firm finalized a $5.8 billion investment fund and agreed to buy three companies: business-software maker Tibco Software Inc.TIBX +0.59%, payment-processing firm TransFirst Holdings Inc. and ethics-and-compliance software maker Navex Global.

The firm says 80% of the Fortune 500 are clients of its companies, which make software for a host of professions including healthcare, recruitment and automotive retailing.

The firm’s founders Robert F. Smith, 51, and Brian Sheth, 38, recently spoke to MoneyBeat about Vista, and how it differs from its peers. Here’s an edited summary of that conversation.

How do you differentiate yourself from other private-equity firms?

Mr. Sheth: We bring the management of our portfolio companies together twice a year so they can establish peer-to-peer relationships and interdependence. Our CEOs interact weekly if not monthly, and other leaders like Chief Marketing Officers or Heads of Development interact daily if not weekly. That allows them to share knowledge that can help them transform their businesses.

Mr. Smith: For us, that means ‘time-to-value’ is shortened, and also results in extremely capable, competitive management teams who rightly think they’re great at what they do. It also means we can move executives to other company within our portfolio.

Can you elaborate on why you place such a focus on executive networking?

 

Mr. Smith: Being a CEO is a super lonely job, there’s the adage that ‘It’s lonely at the top,’ but the reality is that if you’re the CEO of a public or private company, you’re not normally going to go to your board for advice or mentor-ship because in today’s environment, people view that as weakness. No CEO is going to complain down to their staff, even the best and strongest are able to use their Vista network to give them a penalty-free environment in which they can discuss these topics with a level of thoughtfulness. You want your best folks asking questions everyday.

Mr. Sheth: We sometimes bring some of our other CEOs to pitch companies we’d be interested in buying because they can tell our story better than I do, they live it. Some of them are on their second or third turn with us, and there’s a reason why they come back for more.

Vista looks at thousands of potential companies to invest in. How do you find them?

Mr. Smith: Around 2,000 deals in the past two years have involved an investment bank or advisor and we actively “cover” these guys because we recognize the value they bring, whether it’s insights or relationships. That’s how we get the first, last, or sometimes only look.

You’ve got a debt fund, Vista Credit Opportunities. Does it invest alongside your equity fund?

Mr. Sheth: We’ve made 35 investments across 21 companies. Of those [investments], only six are not affiliated with Vista and three are Vista minority investments.  We’ve got unique insights on how these companies are managed and how credit should be priced. Most of the investors in our debt fund are also invested in our equity fund and they understand the risk profile of our deals. Software debt is a growing opportunity because revenue is highly predictable thanks to long-term contracts, and strong cash flows allow us to quickly repay debt.  For context, we’ve raised $17.7 billion of debt across our portfolio and repaid $7 billion. The performance of our companies is somewhat uncorrelated with economic cycles or end markets because the software  itself is embedded in our customers’ businesses. If they stop making payments, they can’t run their business.

How did you come up with the name Vista?

Mr. Smith: Our first investor is a charitable trust that suggested a name like the Emerging Technologies Investment Fund. That didn’t roll off the tongue so I was driving across the Golden Gate Bridge and saw an exit for Vista Point, then arrived home to my street, Vista del Sol; then I called Brian and said, “What about Vista?”

Your internal turnover is less than 5% since you founded the firm in 2000. Why do you think that is?

Mr: Smith: Some of our associates get into great business schools but choose to stay, so we’ll find them different avenues of training, be it at a Vista portfolio company or our consulting practice, Vista Consulting Group. We consciously force some of our team to do certain tasks knowing their weaknesses, like if someone is having a tough time engaging with senior people, their next assignment will be to work with someone the age of their parent. We do this because when they emerge, they have the courage to take on other tasks they’ve never done before. That leads to retention, because people want to be challenged. When we see one of our team, who may not have known how to even hire a car straight out of college, successfully lead a deal through transformation and an exit, we sit back and think “We did it right”. We’re not just a firm of two guys doing deals, we’re about creating a business and culture where we train people with the hunger, ambition and desire to learn to be their best selves.

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