In 2007, Vista Equity Partners (No. 1 on the be private equity list with $6.6 billion in capital under management) acquired Tucson, Arizona-based Sunquest Information Systems Inc. for $327 million—$200 million in equity and $127 million in debt. A provider of clinical and financial software for the healthcare industry, Sunquest had generated $147 million in revenues with margins of greater than 30% at $46 million EBITDA (earnings before interest, taxes, depreciation, and amortization).
The problem was that while Sunquest’s technology was used in more than 1,200 U.S. hospitals and commercial laboratories and at more than 60 customers in Canada, the UK, Europe, and the Middle East, the company’s sales and EBITDA had been declining for years. As a result, Vista was able to acquire the company for what Vista CEO Robert F. Smith considered a bargain.
By applying its proprietary operating principles (the details of which were not fully disclosed), Vista turned Sunquest around. In two years, Sunquest’s revenues increased to $185 million with $100 million in EBITDA. Four years later, revenues grew to $200 million with $120 million in EBITDA. Vista ended up selling Sunquest to Roper Industries, a provider of engineered products and solutions, for $1.4 billion, a return of more than 400% on Vista’s initial investment. “We’re not guessing. We’re not stock picking. We’re not placing bets,” says Smith. “We have designed a system that we use to give us a predictable outcome.”
Boosting performance and adding value are two of Vista’s core principles, and its numbers back it up. EBITDA for the firm’s portfolio companies tripled over the last five years. Even during the Great Recession from 2008 to 2009, earnings for Vista’s portfolio companies increased 29% from 1.7 to 2.2 times. Because of its impressive performance and growth, and its portfolio of software and software-enabled companies ranging from $20 million to nearly $1 billion in revenue, Vista has earned recognition as black enterprise’s Financial Services Company of the Year for 2013.
Based in San Francisco; Austin, Texas; and Chicago, Vista has completed more than 80 transactions representing nearly $21 billion, each of which has resulted in a net gain for investors since 2000, the year it opened for business. Through its underlying portfolio companies, Vista has employed more than 18,000 people in more than 65 countries at companies that collectively have more than 50 million users of their software.
The firm’s current funds consist of the following:
- Vista Equity Fund II
- Vista Equity Partners Fund III
- Vista Foundation Fund I
- Vista Equity Partners Fund IV
- Vista Foundation Fund II
Virtually all of Vista’s investments are made in companies that sell essential technology to corporate or institutional customers. “We invest in software companies that help their clients run their businesses day to day,” says Rob Rogers, one of Vista’s principals. “The software provides very strong value to the clients.”
Vista typically acquires a controlling interest (often from 65% to 100%) in an established enterprise software company.
Among other things, investment candidates must meet the following criteria:
- Possess an enterprise valuation from $20 million to $1.5 billion
- Generate at least $15 million in revenues with significant recurring revenue and high customer renewal rates
- Have limited customer concentration
- Be a current or potential market leader
- Possess revenue and margin growth potential
On average, Vista operates these companies for four to six years. “Once we buy a company, we invest significant expertise, time, and resources in it to be a leader in its market for long-term operating success,” says Rogers. “We find that doing so ultimately makes these companies compelling to potential buyers.”
Once Vista has acquired a controlling interest, its team applies what it calls VSOPs, or Vista standard operating procedures. These are hush-hush business-process best practices—Vista has developed more than 50 of them—that are run across the entire acquired company. They include examining the way a business manages its contracts and customers, code development processes and efficacy, services infrastructure, salespeople, sales training, territory management, and pricing grids. “Our VSOPs are designed to manage this process efficiently and effectively, with scale, across our entire platform, across every single software company we look at and buy,” says Smith.
The idea is that by applying these best practices, revenues and earnings will increase along with the value of the company in which Vista has invested. “We are focused on building fundamentally strong, growing businesses which generate additional shareholder value every year,” says Alan Cline, a principal at Vista. “The result is that we can be patient through different business cycles, focusing on the long term to achieve consistently strong financial results for our shareholders. This often results in the eventual sale of the business.”
Cline says that Vista looks to “achieve three times or better returns for our shareholders on each investment we make.”
Smith worked for Goldman Sachs from 1994 to 2000 where he executed and advised in mergers and acquisitions worth more than $50 billion. He says the problem-solving aspect of his business excites him most, and that he is best at creating elegant solutions to complex problems. “That’s really what Vista does in the world of software. It focuses on buyouts of enterprise software and technology-enabled solutions companies. When you create an engineered solution to a problem, you will get a predictable outcome.”
Smith’s analytical strength, determination, and winning attitude are among the reasons for Vista’s success, says John Utendahl, vice chairman of Deutsche Bank Americas Holding Corp. Utendahl was a friend and adviser to Smith during Smith’s early years on Wall Street. “Robert is professionally persistent,” says Utendahl. “He knows how to win. When I first met Robert, he made sure I understood his strengths and areas where he could improve. His balance and self-awareness make Robert tremendously successful. Using a sports analogy, when you’re in a tough game you want Robert on your team.”
Big Deal in the Big Apple
Vista’s consistent returns have helped it get investment capital from pension plans and retirement funds throughout the country. In 2011, New York City Pension Funds was so impressed with the Vista team that it invested $225 million with it, one of its largest single investments with a minority-owned firm. According to the office of John C. Liu, comptroller of the city of New York, funds invested in a previous Vista fund—Vista Equity Partners III—had a rate of return of 29.4%, making it one of the city’s top performers.
Liu says that return is a solid performance considering the then turbulence of the financial markets. “Vista Equity is an emerging manager that has clearly emerged,” he says. “This is part of our ongoing effort to bring along emerging managers and give them a chance to show what they can do.”
“We were the top performing private equity fund in their entire portfolio,” says Smith. “I expect Vista Equity Partners Fund IV is going to be one of the top performing funds in the world.”
While that may seem like braggadocio—and it might be— the numbers don’t lie. Vista returned a little more than $2 billion to its investors in 2012 across its funds. “There are people that by their nature are just born to accomplish things and to focus on being the best,” says Joe Watson, an adviser who has worked with Smith on Smith’s philanthropic endeavors. “There are a lot of people who write books about being the best and talk about being the best, but there are people who are just born that way.”
One of Smith’s goals is to grow the firm’s capital under management to north of $50 billion within the next decade by continuing to deliver superior returns within the enterprise software segment and by establishing new funds every three-and-a-half to four years. “I want people to view Vista as the best technology investors on the planet, period,” states Smith. “My guess is that over the next 20 years, people will come to realize that we’re actually the best technology private equity investors of our generation. The way I look at it, we have 80 wins and no losses.”