By Will Louch and Dawn Lim
Buyout titan Robert Smith is trying to stage one of the most epic comebacks in US money management: seeking a record $20 billion for a new tech-focused fund at his Vista Equity Partners two years after settling a federal probe into personal tax evasion.
It isn’t proving easy.
The fundraising that began more than a year ago with a flurry of commitments from clients including the New York State Common Retirement Fund slowed by the end of 2022. Amid a tough climate for the whole industry, some of Vista’s past backers are concerned about its leader’s admission of tax evasion and $139 million deal to avoid prosecution in 2020, according to people close to several institutions as well as consultants who are gatekeepers to such investors.
In recent months, as Smith and lieutenants fanned out to Asia and the Mideast to drum up more clients, Vista’s challenges became more apparent as one of its biggest rivals sped past. Thoma Bravo, another technology-focused firm that started raising its fund at the end of 2021, announced in December it had finished gathering $24.3 billion for its flagship fund in 10 months. Vista was on track to surpass $12 billion in the final weeks of 2022 and aims to reach $20 billion by October.
So goes the dealmaker-turned-philanthropist’s effort to move beyond the legal episode that prompted him to apologize to clients and colleagues. On stage at Manhattan’s Hudson Yards last year, Smith showcased Vista and its slate of dealmakers to hundreds of investors, and signaled that the scandal was behind him.
“I’d also like to take a moment to express my gratitude for many of you who provided great support to me and the firm as I navigated the resolution of my tax matter,” he told the audience, according to a person with knowledge of the comment.
His pioneering investment firm is known for big, technology-focused bets and its playbook for helping software companies in particular generate more revenue from their products. It’s been involved in a spree of multibillion-dollar deals, such as the headline-grabbing buyout of Citrix Systems Inc. announced last January and more recent acquisitions of KnowBe4 Inc. and Duck Creek Technologies.
The verdict on whether Smith can fully realize Vista’s fundraising ambitions is still out. As every buyout fund manager faces more strapped investors and turbulent markets, it’s a tough time to have other questions.
Organizations that aren’t interested in investing more money include the New Mexico State Investment Council, people with knowledge of their thinking said, asking not to be named discussing private talks. Others, such as the Canada Pension Plan Investment Board, remain on the fence, the people said. Representatives for both institutions declined to comment.
Another has pulled back because of the tax issue. UK foundation Wellcome Trust offloaded hundreds of millions of dollars of exposure after investing with Vista previously, according to people with knowledge of the matter. “We expect our investment partners to demonstrate high standards of corporate responsibility, and we are prepared to take action if these expectations are not met,” the trust said broadly in an emailed statement. A spokesperson declined to comment specifically on its relationship with Vista.
People close to other institutions reluctant to work with Vista because of Smith’s tax case spoke on the condition their organizations not be named. The holdouts include pensions for public servants whose paychecks are funded by taxpayers. Most noted they have avoided telling Vista outright that they won’t invest, avoiding confrontation and keeping the relationship open in case their views change in the future.
This look at how Vista is seeking to move on from Smith’s tax case is based on interviews with more than 20 people with knowledge of the firm, including current and former employees and investors. They agreed to speak on the condition they not be named.
“Vista has assembled and continues to attract an incredible, diverse and growing roster of investors, founders, operators and investment professionals who share our conviction in the sector and our team,” the company said in a statement.
“Our success is underpinned by our disciplined approach and deep operating expertise in enterprise software, one of the most attractive and resilient assets even during times of economic volatility,” it said.
Choosy Clients
It is a competitive moment for buyout firms that bet on tech ventures.
Many US pension funds are already over-allocated to private equity. And acquirers are no longer able to lean on rock-bottom interest rates for financing. Yet, funds are eager to raise money. A drop in publicly traded tech stocks last year — with the Nasdaq down 33% — also lowered valuations for private ventures, potentially creating opportunities for investors willing to take a risk.
That’s allowing institutional investors to be choosier about which buyout shops they pick. The performance of Vista’s once-market-leading buyout funds has been mixed in more recent years, compared with competitors.
Inside Vista, Smith has been awarding equity stakes to key executives, easing his longtime grip on the firm and spreading responsibility for its stewardship to an array of lieutenants. The changes — essentially steps toward a partnership model — give rainmakers more financial incentive to stay, helping to institutionalize a business long synonymous with Smith.
The personal-tax issue recently wrapped up. Smith was supposed to testify as a witness in the government’s prosecution of his former lawyer, Carlos Kepke, at a trial starting in November. But Kepke, who maintained his innocence on charges that he helped Smith evade taxes, died by suicide on the eve of the proceeding.
The Rise
Smith’s ascent was meteoric. He was an investment banker at Goldman Sachs Group Inc. in the late 1990s when he met his firm’s first major backer, the billionaire Robert Brockman, a pioneer in selling software to manage car dealerships. Smith advised the entrepreneur on a potential sale of his company.
The pair realized there were huge returns to be made using borrowed funds to acquire software ventures and honing their profitability. It was a novel concept then.
Brockman had industry expertise and a lot of cash, initially providing $300 million to Smith, who was in his late 30s and had limited experience atop tech firms. The elder businessman, who later increased his investment to $1 billion, played a role guiding Vista in its early years, offering advice on targets and improvements.
Vista took off, with Smith in the limelight. He owned the biggest piece of the firm, was an influential member of its investment committee and instituted what was practically a uniform of three-piece suits at Vista business events.
One of Smith’s former Goldman colleagues, Brian Sheth, joined Vista and rose through the ranks as a prolific investor. In 2010, Sheth was given the title of co-founder and, over time, earned a bigger share of the firm’s profits than the rank and file. He zipped around in fast cars, and was spotted in one with a vanity license plate commemorating a Vista fund.
By 2018, Smith’s wealth surpassed Oprah Winfrey’s to make him the richest Black person in the US. When he told Morehouse College’s graduates in 2019 that he would pay off their student loans, Smith became a household name.
As his star was rising, a long-running tax scheme was unraveling.
Offshore Accounts
In 2016, prosecutors commenced a grand jury investigation in San Francisco. They sent subpoenas to some of Vista’s investors. By 2020, federal investigators concluded Smith had failed to disclose more than $200 million of partnership income tied to Vista funds.
In a deal with prosecutors, Smith signed a seven-page statement of facts, agreeing that he “engaged in an illegal scheme to conceal income and evade taxes.” The document describes his years-long use of offshore money flows, third parties and bank accounts in Switzerland and the British Virgin Islands. It said Brockman, who provided key initial financial backing, had set the tax scheme in motion with a “take-it-or-leave-it” offer.
Smith poured some of his untaxed wealth into buying and renovating a vacation home in Sonoma, California, and ski properties in France, his statement shows.
When Smith’s deal with prosecutors was announced in October 2020, Sheth, who was never accused of wrongdoing, argued he should be in charge, telling Smith that having a person associated with tax crimes at the helm would damage the firm, according to people with knowledge of the situation. But Smith held on and Sheth left.
“Brian greatly appreciates his time at Vista, collaborating with the talented people there and all that they achieved together for their investors,” a spokesperson for Sheth said in an emailed statement.
Other departures followed. Kristin Nimsger Weston, who had been CEO of two Vista portfolio companies, started working with Vista’s competitor Thoma Bravo. She had questions about how Vista’s fundraising and business would be affected in the short term after Smith’s tax case, and she pivoted away from working with the firm, according to people with knowledge of the decision. Nimsger Weston declined to comment through a spokesperson.
In 2021, top dealmakers Alan Cline and Rob Rogers also left, though it’s not clear why. They didn’t respond to messages seeking comment.
Some investors have said Smith’s tax troubles and leadership changes at the top of the firm have been cause for worry.
“Such organizational changes and distractions raise concerns about leadership succession and the potential impacts on the organization and performance,” Connecticut’s pension fund staff wrote in a due diligence report in November.
Still, they credited Vista for taking steps to reduce reliance on its founders, pointed out its low loss ratio on deals and lauded the diversity of its workforce. Connecticut later made a $200 million commitment to Vista’s latest buyout fund, according to the state.
Growing Up
Even before the probe, the firm was transforming itself from its roots as a small buyout shop into a more traditional institution.
It started winding down some of its more exuberant practices, such as rewarding dealmakers and executives with gifts including expensive watches. It made senior hires from other big shops.
In 2015, Smith struck a deal to sell a stake in his private equity firm to Dyal Capital Partners. And as Vista grew, Dyal raised its holding to roughly 30%. That ended up paving the way for another step after the probe concluded: sharing a larger portion of profits and power with other senior executives.
The opportunity arose when Dyal merged with Owl Rock in 2021, triggering an option for Vista to buy back some of Dyal’s shares. Vista took it, reaching a deal with Dyal that allowed it to parcel out a minority stake in the firm to a group of executives.
The arrangement called for a bigger share of profits to go to David Breach, an attorney and former Kirkland & Ellis partner who joined Vista about eight years ago. Breach is now the firm’s president and oversees day-to-day operations.
The deal had an added benefit: It more than doubled Vista’s valuation from a level set in 2015 to between $10 billion and $15 billion, according to a person close to the firm, multiplying Smith’s wealth on paper.
Even if Dyal missed out on selling that chunk of shares to a higher bidder, its executives saw a potential advantage, people with knowledge of their thinking said. Vista, they figured, may perform better with a broader group of managers owning more of their firm.
Brockman, Vista’s first big investor, died in August while awaiting his own trial for tax evasion. He had pleaded not guilty to those charges.
Investors’ Verdict
Smith is everywhere over the past year — meeting clients, speaking at conferences and on podcasts, and cultivating his image on social media, where he champions philanthropy and education. His social calendar also included celebrating his 60th birthday with a James Bond-themed party last month.
His firm is moving frenetically too.
Since his tax evasion came to light in 2020, Vista has engaged in well over $20 billion in deals. It has returned more than $16 billion to investors, selling companies including Ping Identity.
And it has sought to tap wealthy individuals, placing funds through Goldman’s and JPMorgan Chase & Co.’s private wealth platforms.
“Vista’s last two years have been our most productive and prolific in terms of capital deployed and returned, and we believe we have tremendous momentum,” the company said in its statement.
The firm aims to close fundraising for its new buyout fund by October. Senior executives have been traveling the globe, touting Vista’s past performance as they hunt new clients in the Middle East and Asia, according to people with knowledge of the manager.
Connecticut’s data tracking Vista’s last five flagship funds show the oldest of them ranked in the top quartile of its peers as mid-2022. Vista’s next three funds also ranked better than the median by a key measure of performance. But the latest, from 2019, ranked in the third quartile. Returns in that case could still improve if Vista is successful in redeploying — or “recycling” — capital from early bets into new ones, the analysis notes.
The outcome won’t be known until Vista winds down its bets.
Employees, investors and friends who have spoken to Smith said he’s confident the firm will move on from his tax case, which he considers a distraction.
He and other executives at Vista believe the firm’s equity is already worth more than what its shares fetched in 2021, some of them said.
–With assistance from Gillian Tan, David Voreacos, Neil Weinberg, Preeti Singh and Sonali Basak.
(Updates with Connecticut’s commitment in 36th paragraph.)
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