Some LPs give Vista’s Smith a pass for tax evasion, one calls it ‘nothing burger’

Smith will pay his penalty and back taxes, and then should get on with the business of running and growing Vista, several LPs told Buyouts.

Several LPs believe Robert Smith should stay as leader of Vista Equity Partners because the tax evasion scheme he copped to did not involve misuse of LP capital.

That was the general sentiment among investors contacted by Buyouts this week, both those who back Vista funds and those not involved in the firm’s business. Smith will pay his penalty and back taxes, and then should get on with the business of running and growing Vista, they told Buyouts.

“People will say this was an odd, possibly aggressive thing you did to move this out of your taxable income and into a charity … but it never touched the firm; this was all his personal money,” said a family office LP who has backed Vista funds. “I expect [Vista LPs] to interpret this as a tax dispute with the IRS. There was no investor fraud, nothing that touches the SEC. As they said in the old days, ‘This is a complete nothing burger.”’

Smith agreed with federal authorities on Thursday that he should have paid taxes on a portion of carried interest from Vista’s first fund that he directed into an offshore structure. Smith had paid taxes on the portion of Fund I carry that flowed directly to him, federal authorities said this week.

Smith will pay $139 million in back taxes, interest and fines and co-operate in the tax evasion case against his friend and partner, Houston software tycoon Bob Brockman. Brockman provided Smith with $1 billion as Vista’s first and only LP in the debut fund.

Federal authorities are investigating Brockman for allegedly hiding some $2 billion in taxes, the largest single evasion case in US history.

Smith said in a letter to LPs this week that he set up the offshore structure at the insistence of his only investor in his first fund. (Buyouts obtained a copy of the letter.)

Smith told LPs that he looks forward to moving past the tax investigation, which has run for more than four years. He said he is “as committed as ever to moving forward as a CEO, an investor, a community leader, and a philanthropist,” according to the letter.

“I am strengthened by great passion and purpose for the work I get to do and for the firm I get to lead,” Smith said in the letter.

“The decision made 20 years ago has regrettably led to this turmoil, which has put undue stress and burden on too many. I should never have put myself in this situation, and more importantly, I apologise for any issues or concerns that this may have caused for you.”

Strong returns

Vista LPs, who have benefited from the firm’s strong performance over the past years, are likely not too concerned with the case, said a GP at a separate firm. “For people he’s made a lot of money for, he has settled a tax issue, and it doesn’t impact the firm at all,” the GP said. “If you think it’s an issue, that’s probably because you didn’t get access to the Vista fund you want.”

Vista’s performance has been among the strongest in the industry, and the firm has grown several adjacent strategies like a mid-market, small-market and credit focus, as well as a perpetual-capital pool.

At least one Vista LP expressed concern about Smith’s actions, which the Department of Justice described as an “international tax fraud scheme”. Said the LP: “The scale, size and purposeful way he went about [this] is pretty amazing. I just think LPs are more interested in returns. Sad but true.”

An LP who is not a backer of Vista funds said the scope and scale of Smith’s tax avoidance should cause LPs to question Smith’s leadership: “They’re giving him a pass on cheating the federal government out of hundreds of millions of dollars in revenue? That takes my breath away.”

Vista would likely continue to be a draw for LPs even if Smith were to step down, according to another family office LP who has backed Vista funds. Smith has set up leadership structures around the various funds, though many view Smith as the heart of the firm.

“They’re a well-oiled machine. If he stepped down, I’d probably view that as a negative if he’s either forced out or decides to step back,” the LP said. “He’s been the architect of that firm, but at the same time, he’s made it institutional.”

Vista’s other senior leader, Brian Sheth, is considering leaving the firm, a decision he started to communicate in December, a source familiar with Vista said. There is no timetable for his departure, the source said.