It’s a Saturday afternoon, at the height of vacation season, in one of South Beach’s hottest hotels, and Robert Smith, the founder of Vista Equity Partners, is dressed like exactly no one within a 100-mile radius of Miami: in a three-piece suit. His signature outfit–today, it’s gray plaid, accented by an indigo tie and a pink paisley pocket square–apparently doesn’t take a day off, and Smith isn’t taking one now either.
He’s gathered dozens of, software firms all, for a semiannual weekend off-site to drill them in the ways he expects his companies to operate. It’s not just the suit that’s unusual. Private equity firms almost never treat their portfolio companies, transactional chits by design, like an organic cohort. And until recently, PE, a field built on borrowing against cash-generating assets, wouldn’t touch software firms, which offer little that’s tangible to collateralize. Yet Smith has invested only in software over Vista’s 18-year history, as evidenced by the CEOs, like Andre Durand of the security-software maker Ping Identity and Hardeep Gulati of the education-management software company PowerSchool, who have been summoned to Miami Beach, waiting to swap insights about artificial intelligence and other pressing topics. And Smith deploys more than 100 full-time consultants to improve his companies. “Nobody ever taught these guys the blocking and tackling of running a software company,” says Smith, an engineer by training, as he takes a lunch break at South Beach’s 1 Hotel to nibble on a plant-based burger.
“And we do it better than any other institution on the planet.” Smith includes the likes of Oracle and Microsoft in that boast, and his numbers back up the braggadocio. Since the Austin-based firm’s inception in 2000, Vista’s private equity funds have returned 22% net of fees annually to limited partners, according to PitchBook data. Smith’s annual realized returns, which reflect exits, stand at a staggering 31% net.
His funds have already made distributions of $14 billion, including $4 billion in the last year alone. Not surprisingly given those numbers, Vista has become America’s fastest-growing private equity firm, managing $31 billion across a range of buyout, credit and hedge funds. Smith is putting all that money to work at a breakneck pace, with 204 software acquisitions since 2010, more than any tech company or financial firm in the world.
After finishing an $11 billion fundraising for its latest flagship buyout fund last year, Smith has already deployed more than half of it, focusing as usual on business-to-business software. “They recognize it’s a kind of central nervous system,” says Michael Milken, whose bond-market innovations basically birthed the modern private equity industry and who has been a co-investor in two Vista deals. Taken together, Vista’s portfolio, with 55,000 employees and more than $15 billion in revenue, ranks as the fourth-largest enterprise software company in the world. Smith deploys quickly for a simple reason: While the rest of private equity basically relies on identifying and rectifying inefficient companies, Vista bets that it can improve the operations of even well-run firms–and claims that it’s never lost money on a buyout transaction in its 18-year history. “I am most proud of our system being a loss-prevention mechanism,” Smith says.
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Perpetual wins translate into mammoth personal gains. With an estimated net worth of $4.4 billion, Smith has now eclipsed Oprah Winfrey as the nation’s wealthiest black person. Vista has created another billionaire, Brian Sheth, the firm’s 42-year-old president and dealmaker extraordinaire, who has a fortune estimated at $2 billion. Ever since Forbes outed Smith as a billionaire in 2015, there has been a steady stream of press about him, from the lowest-brow (tabloid interest in his marriage to a former Playboy playmate) to the highest (coverage of his philanthropy, including his Giving Pledge commitment and his stint as the chairman of Carnegie Hall). But neither Smith nor Sheth has ever before delved into Vista’s secret formula, which has as many or more lessons for entrepreneurs and operators as it does for financiers.
“We do something no one else does,” Smith says. On paper, Robert Smith’s journey was a textbook American success story: A fourth-generation Coloradan, he was the son of two Ph.D.’s who became Denver school principals and put education first at home. “Their father and I stressed the need for both of our sons to persevere once they identified and pursued a goal,” say Smith’s mother, Sylvia.
“Robert understood that preparation, hard work and dedication were key to success in his classes.” In 1981 Smith headed to Cornell University to study chemical engineering, spending many nights and weekends in a three-person study group that met in the basement of the engineering school’s Olin Hall. During summers, Smith worked at Bell Labs back home in Denver–a college internship he landed as a high school student after persistent cold-calling. After graduating from Cornell in 1985, Smith took engineering jobs, first at a Goodyear Tire & Rubber chemical plant outside Buffalo, New York, and later at Air Products & Chemicals in Allentown, Pennsylvania. In 1990 Smith moved to Kraft General Foods, where he focused on coffee-machine technology.
His efforts won him two patents: one for a stainless-steel filter and another for a brewing process that makes crema, the layer of foam on top of espresso. In 1992 Smith entered Columbia Business School. He was deftly acquiring the kinds of skills that would prove invaluable as the tech revolution exploded.
But Smith’s rise was also incredibly abnormal. Even today, as the 155th-richest person in America and the 480th in the world, he faces constant, if often unwitting, racism. At a recent dinner in New York City with a group of senior Wall Street types, including a high-level executive of an investment bank, Smith moved to pick up the check for dinner, but the senior banker stopped him. “I can’t have a black guy buy me dinner,” he chortled. The sting of such incidents, whether offhand remarks or doors more overtly shut to him, had an effect on Smith. “It meant we had to work harder,” he says. “And that’s what we did.” From his college days, when he joined the nation’s preeminent black fraternity, Alpha Phi Alpha, known for its bookish but professionally ambitious members like Thurgood Marshall and Martin Luther King Jr., Smith had support.
A crucial mentor: John Utendahl, who founded a pioneering black-run investment bank and happened to speak at Smith’s Columbia graduation. Soon after, Utendahl, currently a vice chairman at Bank of America, took Smith to lunch and over tuna sandwiches persuaded him to ditch his M.B.A. Focus of marketing to work on Wall Street.
“There is a spark, a poise, even a wisdom that you can’t teach or learn. Some people are just blessed to have it,” Utendahl says. “That’s how I felt when I met Robert as a young man.” SMITH LANDED IN GOLDMAN SACHS’ mergers-and-acquisitions department, eventually moving to San Francisco to advise companies like Microsoft and eBay and becoming cohead of enterprise systems and storage. He was part of the team that helped Apple recruit Steve Jobs back. For all his prominent clients, it was a little-known Houston company specializing in software for auto dealerships, Universal Computer Systems, that caught Smith’s eye. Its margins were higher than any business Smith had advised, and he was stunned to learn the company’s owners were plowing its cash into certificates of deposits. Why not acquire other mature software companies, Smith asked, and apply their best business practices there too?
Great advice, but the owners insisted that Smith roll up his sleeves and execute the plan for them. They backed up their offer with a commitment of $1 billion of the company’s cash, as the sole investor, if he started a private equity fund. “I had one of those in-the-mirror moments,” Smith says. “I looked at myself and asked, ‘If I don’t do this, how will I feel about it ten years from now?’ ” The short answer: regretful. And so in 1999 Smith left Goldman and soon began recruiting cofounders, notably a business-school classmate, Stephen Davis, and a young analyst who worked under him at Goldman, Brian Sheth.
The son of an Indian-immigrant father with experience in tech marketing and an Irish-Catholic mother who worked as a reinsurance analyst, Sheth would provide the yang to Smith’s yin, focusing on acquisitions and divestitures, so that his boss could concentrate on investors and the companies themselves. Their relationship would become ironclad: “ When something is happening with our families we are each other’s first call,” says Sheth, who vacations with Smith and served as best man at his wedding. When Smith quit, most of his colleagues thought he’d lost his mind. He was on a partnership track at Goldman, which meant he was set to receive a multimillion-dollar windfall given the firm’s impending initial public offering.
What’s more, banks didn’t lend against software companies because they didn’t have hard assets. How could Smith run a leveraged-buyout business in software without leverage? The concentration risk also seemed huge–investing in a single industry where a few innovative lines of code from a competitor could make a business obsolete overnight. Sheth, the co-founder and President of Vista Equity Partners.
But Smith saw things differently. Software was eating the world. Soon every company would become a software company, its business digitized. A portfolio of software companies serving 50 industries would be diversified with a stream of recurring revenue, given the shift to “software as a service.” Smith’s bet: Wall Street would soon realize that software companies not only gushed cash but actually had terrific assets to lend against–those ironclad maintenance contracts. “Software contracts are better than first-lien debt,” Smith says. “You realize a company will not pay the interest payment on their first lien until after they pay their software maintenance or subscription fee.
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He can’t run his business without our software.” In 2000 Smith opened Vista’s doors in San Francisco. His first acquisitions were all equity. As the firm went from one profitable deal to another, Smith eventually got lenders to finance Vista’s purchase of Applied Systems, an insurance software maker, in 2004, Vista’s first leveraged buyout. In 2007 Vista merged software companies serving utilities and created Ventyx, increasing the number of products it sold to existing customers substantially–a subsequent sale to ABB resulted in a profit of nearly $1 billion. When the dust settled, Smith’s first buyout fund returned 29.2% annually net of fees. Smith raised money for a second fund from institutional investors, returning a net 27.7% annually.
In 2011, seeking to escape the Silicon Valley bubble, Smith moved Vista’s headquarters to Austin, Texas. He could, by this point in his career, do pretty much anything he pleased. “I still experience racism in my professional life,” Smith says. But by being smarter and working harder, Smith proved the American Dream extended to the finance industry, where he became the first self-made Wall Street billionaire who wasn’t a white male.
Want to work for one of our companies? Are you confident, energetic, and passionate about business and technology?
Vista Equity Partners employs a network of skilled and dedicated investment professionals, consultants, and business leaders. We are committed to long-term value creation, and we help software and technology companies to reach their full potential by combining investment with operation improvements, best practices, and long-term strategy. Send us a resume if you think you’re a good match for our team and our portfolio of companies. If there is a match found between your employment background and our current needs, we will contact you to schedule an interview. Otherwise, we will keep your resume and profile in our database for future opportunities. About Vista Consulting Group: Vista Consulting Group (“VCG”) is the operating and consulting arm of Vista Equity Partners. VCG drives value creation through operational excellence, which is a key differentiator in Vista’s success and ability to generate unparalleled returns.
The VCG team works in conjunction with the Vista investment professionals and key portfolio company employees to help our current and newly acquired businesses strengthen their operations through the implementation of standardized, repeatable and proven processes and methodologies. These best practices are known as the Vista Standard Operating Procedures (“VSOPs”), and have been developed and refined over the last decade. Job Purpose: This role primarily focuses on the identification and implementation of the library of Vista Standard Operating Procedures (VSOPs), which are designed to empower and improve a professional services organization’s performance. Working with portfolio leadership, the Program Manager, Professional Services will oversee creation or enhancements of programs designed to quickly and predictably implement software solutions, drive software adoption, increase services margin, and improve customer satisfaction. The Program Manager, Professional Services also directly interacts with VCG leaders in other departments (Development, Support, Finance and Sales) as a key voice in VCG’s cross-functional structure.