Dyal Capital Partners purchased an 18 percent stake in Vista Equity Partners for approximately $875 million in July 2015, valuing Vista at about $4.86 billion, Private Equity International has learned.
As part of the deal, Dyal receives 18 percent of future net management fees and 8 percent of unrealised and future carry from Vista’s portfolio, according to the Vista Equity Partners Fund (VEPF) VI commitment recommendation document obtained by PEI from the Connecticut state treasurer’s office. However, Dyal has no investment approval rights, veto rights, fundraising triggers, or other governance rights, the document notes.
The transaction between Dyal and Vista also resulted in the creation of a long-term incentive plan (LTIP) for Vista’s principals, according to the document, which noted that Vista founder, chairman and chief executive Robert Smith and co-founder and president Brian Sheth diluted their management company stake for the LTIP. Vista has eight principals and four operating principals.
The LTIP owns a 7 percent stake in Vista’s management company and net profits, and has the right to 2.8 percent of VEPF VI’s carried interest, along with 2.8 percent of carry from other Vista funds, the document says.
Dyal is said to have purchased 18 percent of Vista’s existing GP capital account balances and undrawn capital and 18 percent of Vista’s recapitalised management company. A source familiar with the matter said part of Dyal’s investment contributed cash to Vista’s balance sheet for Vista’s future GP commitments.
Dyal is an investment unit of New York-based Neuberger Berman that acquires minority stakes in alternative asset management firms. In August, it also purchased a passive non-voting stake of less than 15 percent in HIG Capital, as reported by PEI.
Austin-based Vista Equity Partners is currently in the midst of fundraising for VEPF VI, which is its sixth flagship fund that launched in February with an $8 billion target and a $10 billion hard cap, according to PEI data.
The fund commitment document indicates Vista held a closing for that fund on $8.9 billion in August and will likely reach its hard cap, according to the document. If so, it will be 67 percent larger bigger than its predecessor, VEPF V, which closed in 2014 on $5.78 billion. VEPF V was generating a 13 percent net internal rate of return, as of 31 March, the document says.
In spite of the jump in size, which will force Vista to conduct more investments as well as larger investments, Vista is “well positioned from a capacity perspective to invest VEPF VI at a normalized investment pace of US$1.5-2.0 billion per year”, the document says.
The fund follows Vista’s strategy of targeting mid- and large-market companies in the enterprise software sector, mainly in North America and Europe. According to the document, which was prepared by investment advisor StepStone Group, this sector offers attractive investment opportunities due to revenue predictability from subscriptions and maintenance fees, high switching costs between providers, business models fostering multiple licensing of a product once developed, a lack of required raw materials besides human labour and a “strong need” for industry-specific software products and services.
The document says VEPF VI will target 12 to 18 companies with valuations of between $400 million and $5 billion. The fund will be investing $200 million to $1 billion in equity per deal. With its predecessor fund, Vista’s strategy was to invest in eight to 10 companies with equity investments of at least $100 million per transaction. This was already an increase in both deal size and number of transactions compared with its fourth fund.
Along with the increase in fund size, Vista has also expanded its investment, operations, and support teams from 68 to 222 professionals. Of those, 11 principals and seven vice presidents are focused on investing the VEPF series, according to StepStone.
Fund VI currently has four investments in the pipeline that would account for around 28 percent of the hard-cap, or $2.8 billion, the document says, adding that all four of them follow Vista’s strategy and do not require an initial investment of over $1 billion.
The document also outlines the structure and terms of VEPF VI, which offers two classes for LPs. Terms for Class A LPs include a 30 percent carried interest, 10 percent hurdle rate, and 1 percent management fee, which falls to zero after the initial 10-year fund life expires, regardless of any fund extensions, according to the file. Terms for Class B LPs include a 20 percent carried interest, 8 percent preferred return, and 1.5 percent management fee that will remain throughout the whole fund lifecycle, including any extensions, it said.
Meanwhile, there was also a change in the key person clause for VEPF VI to include both Smith and Sheth, whereas VEPF V’s clause applied only to Smith.
The commitment recommendation at the Connecticut state treasury proposed a maximum $100 million commitment to VEPF VI by the Connecticut Retirement Plans and Trust Funds (CRPTF) at the 12 October investment advisory council meeting. The CRPTF previously committed $50 million to VEPF III in 2008, and $75 million to VEPF IV in 2012, according to the document. Those funds were generating a net IRR of 29 percent and 24 percent, respectively, as of 31 March.
In outlining perceived risks for the proposed fund, StepStone added that Vista has “aggressively deployed” capital from the fifth fund in less than two years and has used more leverage in its transactions. For example, VEPF V’s net debt to EBITDA multiple was 9.4x, almost double the 5.6x multiple for VEPF IV.
Including co-investment capital, Vista put almost $7 billion to work in the past two years, according to StepStone. The advisor expressed concern that the software sector has high purchase price multiples, and that Vista should slow down its investment pace.