A Private Equity Titan With a Narrow Focus and Broad Aims
(New York Times) -- April 10, 2014 One of the best-performing private equity firms of the last 15 years doesn’t have a big name like K.K.R., Blackstone or TPG.
But Vista Equity Partners, a firm with $8 billion under management that deals exclusively in the unglamorous business of enterprise software, has managed to beat the titans of private equity at their own game.
Much of Vista’s success can be traced to the unconventional tactics of its hands-on chief executive, Robert F. Smith, who has delivered investors a staggering 31 percent average annual rate of return since co-founding Vista in 2000.
Preqin, a consulting firm that tracks the industry, reports that Vista’s third fund returned $2.46 for every dollar invested, better than every other big fund raised between 2006 and 2010, the boom years for private equity.
The firm has acquired more than 110 companies and never lost money on an investment, according to people familiar with its performance.
Demand to invest in Vista’s newest fund is so strong that Mr. Smith may raise $5 billion instead of the intended $3.5 billion. Yet despite Vista’s impeccable track record, Mr. Smith, one of the few black private equity titans, says he has faced an uphill battle to get some investors on board. At times, he has felt the unspoken pressure to work twice as hard to get half the respect of his peers, especially in the clubby world of private equity. The issue, he believes after decades in finance, is his race.
“I still see it when I raise funds,” he said in his first extended interview since Vista was launched. “I know that’s the reason certain limited partners don’t back us.”
Mr. Smith’s rise — from newly desegregated Colorado classrooms to the top of private equity rankings — is a little-known Wall Street success story, shaped by epochal changes in civil rights, technology and finance. And his success, in spite of long odds, has inspired him to take a counterintuitive approach to managing investments and hiring.
Instead of stripping out costs from the companies it acquires, Vista usually adds sales and engineering talent. And instead of searching for candidates with Ivy League degrees and prestigious internships, Vista looks for workers who have leadership potential and innate analytical abilities.
Using a personality test first developed by IBM that gauges technical and social skills, as well as a candidate’s interest in the arts and humanities, Vista assembles a decidedly unusual work force. Last year, the firm used the test to pare down more than 125,000 job applicants and offered just 6,000 jobs, often to unlikely candidates.
One of Vista’s best software salesmen used to be a roofer. Another previously worked at a Verizon store, and went to making $240,000 a year, from $22,000. In Iowa, a pizza deliveryman took the Vista aptitude test, got an A, and was offered a job paying $43,000 annually.
Not only are many of these workers less expensive than their better-credentialed peers, but to Mr. Smith, they are often more driven to succeed. And employing them, he believes, provides a social good.
“We find those kind of people and put them to highly productive use for decades,” Mr. Smith said.
Vista says turnover at its companies is the lowest in the software business. After Vista acquires companies, Mr. Smith says, they release more reliable software more frequently, customer satisfaction rises and profitability improves. And most Vista companies have 25 percent to 60 percent margins, he adds.
And while many buyout shops strive for diverse portfolios, owning everything from energy companies to theme parks, Vista is content to specialize in software, and focus on a diverse work force. Black, Hispanic and Asian men and women occupy leadership roles across the firm and its portfolio companies.
It is all part of Mr. Smith’s push to repair the damaged reputation of his industry.
“Everyone thinks that private equity is very transactional: Buy a company, do some financial engineering, and sell it,” he said. “We’re looking to transform the culture of that company, transform the way they think about themselves and the industry they serve.”
What Vista is doing is also very profitable.
“Right now our returns are better than Warren Buffett’s,” said Mr. Smith, 51, without going into specifics because Vista was in the process of raising money for its next fund.
But when many people meet Mr. Smith for the first time, they find not a brash money manager, but an effusive intellectual with a passion for engineering.
Bill Haack, founder of Zywave, first encountered Mr. Smith in 2008. Vista wanted to buy his firm, which provided insurance software. They met over dinner in San Francisco. Instead of discussing revenue projections, however, Mr. Smith wanted to talk science.
“He started talking about quantum mechanics,” Mr. Haack remembered. “And everything he said made sense.”
Mr. Smith, who favors three-piece suits and exudes a Clintonian charm, quickly won over Mr. Haack, who agreed to sell his company the next day.
Mr. Smith discovered his passion for enterprise software when he joined Goldman Sachs’s technology team in San Francisco in 1996. He advised Apple on its decision to bring back its co-founder, Steven P. Jobs, as chief executive; helped orchestrate Hewlett-Packard’s spinoff of Agilent; and worked with clients including Microsoft, Yahoo and eBay.
But instead of being seduced by hardware makers and consumer Internet companies, Mr. Smith grew intrigued with enterprise software companies like Oracle. And after years of counseling executives, Mr. Smith longed to strike out on his own.
“Robert wanted to be making those decisions, not advising people,” said Gene Sykes, Goldman’s co-head of global mergers and acquisitions, and an early mentor. In 1999, Mr. Smith left Goldman to help found Vista.
It was not his first leap of faith. Growing up in a mostly black, middle-class neighborhood in Denver, he was ambitious from an early age. Some of his pluck came from his parents, both of whom had Ph.D.s in education; some came from being one of two African-Americans in his recently integrated school.
When he was an infant, his mother carried him at the March on Washington, where the Rev. Dr. Martin Luther King Jr. delivered his “I Have a Dream” speech. Seven years later, his uncle was slain in a racially motivated killing.
In high school, he applied for an internship at Bell Labs but was told the program was intended for college students. Mr. Smith persisted, calling every day. When a student from M.I.T. did not show up, he got the position, and that summer he developed a reliability test for semiconductors.
Mr. Smith studied chemical engineering at Cornell, then took a job at Kraft General Foods, where he earned two patents. Not satisfied with climbing the corporate ladder, he went to Columbia for a business degree.
Despite an initial distaste for investment bankers, he was persuaded to join Goldman Sachs, drawn to high-stakes mergers and acquisitions. Before long, he was in Silicon Valley, discovering enterprise software. Today, Vista companies sell software that makes oil wells more efficient, nuclear power plants more reliable and blood tests more accurate.
Wealth allows Mr. Smith to support an unusual cross section of philanthropic causes.
During his youth his family vacationed at Lincoln Hills, a 300-acre retreat outside Denver frequented by black jazz musicians like Duke Ellington. Decades later Mr. Smith returned on a fly-fishing trip and found it in disrepair.
He bought the property, restored it and now uses it to host both underprivileged schoolchildren, and entertainers like Maceo Parker, Angie Stone and Jamie Foxx. Mr. Smith and Mr. Foxx are friends and spend vacations together riding horses, skeet shooting and fly-fishing.
In Austin, Tex., where he lives, and Chicago, where Vista has an office, he has founded programs to support music education and minority entrepreneurship. One such initiative is sponsorship of competitions to discover talented young violinists.
Despite his egalitarian streak, Mr. Smith is also every bit a private equity chieftain. He opposes increasing taxes on carried interest — the profits from private equity investments — and he believes the best way to lift up the poor is to create jobs.
Yet, despite being in the company of some of Wall Street’s most successful entrepreneurs, Mr. Smith feels he has few obvious peers.
“The biggest challenge I’ve faced is a degree of loneliness,” he said. “Who is out there like me that I know?”
Press release: http://nyti.ms/1ef62qF
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Robert F. Smith, Founder and CEO of Vista Equity Partners, one of the world's leading private equity firms, founded Project Realize in the Fall of 2010. Vista Equity Partners has delivered outstanding investment results to its investors for over ten years.Continue Reading