Here is His Formula for Winning in Software Buyouts
Billionaire private equity investor Robert Smith has been on the comeback since going through a dramatic tax evasion scandal. But through it all, Smith hasn’t lost his golden touch. The buyout titan says he never lost money on a buyout.
While Smith holds his formula for success close to the vest, there have been some hints and little insight as to how he grew his company, Vista Equity Partners, into one of the most successful financial firms in the world. The investment firm focused on financing and forwarding software, data, and technology-enabled startup businesses.
Private-equity firms purchase companies using money invested by their founders, institutional investors, and others, increasing their bets with borrowed money. The goal is to sell the companies later at a profit.
“We are very disciplined buyers,” Smith told the Financial Times in 2017. “We manage money for teachers and firemen and municipal workers. We have never lost money on any buyout investment. The last thing they want us to do is be irresponsible with capital and we take our fiduciary responsibilities very seriously.”
While addressing Cornell University’s sixth Entrepreneurship Summit on Nov. 3, 2017, at the Times Center in Manhattan, Smith declared, “We have never lost money in a buyout.”
Just recently, his new buyout fund has raised more than $12 billion, Bloomberg reported. And, now, Smith is seeking a record $20 billion for a new tech-focused fund at his Vista. At the end of 2022, Vista was on track to surpass $12 billion and aims to achieve $20 billion by October of this year. This is just two years after he settled a federal probe into personal tax evasion.
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So what’s Smith’s formula for winning in software buyouts?
According to The Wall Street Journal, Vista “revamps software companies by following detailed protocols.” The process is so detailed–and secret–that The Wall Street Journal describes it as “a factory.”
And the “factory” churned out more than 300 deals, and has $95 billion in assets under management, according to its website.
“Software companies taste like chicken,” Smith once said at a conference in New York. “They’re selling different products, but 80 percent of what they do is pretty much the same.”
Smith keeps the details of his firm’s business model secret.
Before Vista buys a company, it examines whether its software is “mission critical” and whether it has control over its “critical factors for success,” or the key drivers of its performance, The Wall Street Journal reported. If the answers are yes, Vista will buy the company at a high price since it is sure it can increase the company’s profitability.
After the purchase, the company’s Vista Consulting Group (VCG) take over in revamping the company’s contracts and operations. Art Papas, founder of recruiting software maker Bullhorn Inc., which Vista bought in 2012, called the VCG process meticulous.
If a company is operating at a 20 percent profit margin, VCG’s goal is to get it to a 50 percent margin.
In the the “Rubik’s Cube of profitable growth, not only are we increasing the profit margins of those businesses but we actually can accelerate the growth in those businesses at the same time well,” Smith told “The David Rubenstein Show: Peer-to-Peer Conversations,” on March 26.2018
The company has become known big, technology-focused bets and multibillion-dollar deals.
Smith didn’t start off in finance.
Smith was born to two high-school principals and grew up in Denver. He went on to study chemical engineering at Cornell University. He worked as a chemical engineer at several companies, including Kraft General Foods. He then attended Columbia Business School. In 1994, he joined Goldman Sachs Group Inc. as a mergers-and-acquisitions banker. While there, he worked with Houston auto-dealership-software maker Universal Computer Systems Inc. And as the story goes, he persuaded its Universal Computer Systems founder, Robert Brockman, to buy other business-software companies and improve them.
Brockman played a role in helping Smith found Vista by initially providing $300 million to Smith. He later increased his investment to $1 billion, Bloomberg reported. Despite the major investment, Smith retains majority control over Vista.
By 2018, Smith became the richest Black person in the U.S.–but by then, he was already under investigation by the feds. The investigation started in 2016 when prosecutors sent subpoenas to some of Vista’s investors. By 2020, federal investigators claimed Smith had failed to disclose more than $200 million of partnership income connected to Vista funds.
Smith made a deal with the feds.
He agreed that he “engaged in an illegal scheme to conceal income and evade taxes.” The deal also said that Brockman had set the tax scheme in motion with a “take-it-or-leave-it” offer.
But even with the tax evasion scandal, Smith’s Vista has engaged in well over $20 billion in deals. It has returned more than $16 billion to investors, Bloomberg reported.
Billionaire businessman Robert F. Smith speaks after receiving the W.E.B. Dubois Medal for contributions to black history and culture, during ceremonies at Harvard University, Oct. 22, 2019, in Cambridge, Mass. (AP Photo/Elise Amendola)