Story of the year: Vista’s Robert Smith and the $139m ‘nothing burger’

The tech-focused investor's chairman and chief executive admitted to tax evasion on almost $200m of assets in October.

A storm in a tea cup. That was the essence of some investors’ reactions to the tax investigation into Vista Equity Partners founder Robert Smith that emerged this year.

In August, reports emerged that Smith was facing a criminal inquiry for failing to pay taxes on hundreds of millions of dollars in assets that moved through offshore entities. The news came as a shock. Smith, the US’s richest Black person with an estimated net worth of nearly $6 billion, is known for his philanthropy, having vowed to pay off the student debts of the entire graduating class of Morehouse College in 2019.

“I expect [Vista LPs] to interpret this as a tax dispute with the IRS,” a family office LP told sister title Buyouts in October. “There was no investor fraud, nothing that touches the SEC. As they said in the old days, ‘This is a complete nothing burger.”’

That “nothing burger” referred to Smith, who is Vista’s chairman and chief executive, admitting to willfully and knowingly participating in an illegal scheme to evade taxes on over $200 million in partnership income. He avoided prosecution by agreeing to pay $139 million in taxes and penalties and cooperating with the authorities on related investigations.

The extent of the misdeeds is laid out in the six-page non-prosecution agreement.

Smith is one of two key investment professionals listed on Vista’s most recent $16 billion flagship fund and is one of five key persons on its latest small-cap vehicle, according to documents from the New Jersey Division of Investment.

LPs in Vista’s funds – which are among the most sought after in the industry due to their performance, as Private Equity International has detailed – appeared initially to be torn to a certain extent. On the one hand, the issue was a personal matter for Smith and had no impact on fund investing or portfolio companies. On the other, the idea of entrusting pension fund capital to the management of someone who has participated in tax evasion on a gargantuan scale is a difficult thing for LPs to stomach.

Most of the investors in Vista’s funds who PEI contacted either declined to comment or simply said they were monitoring the situation. On an anonymous basis, some said they would reserve judgment until they have read the “statement of facts” in the non-prosecution agreement and had calls with the firm.

PEI has so far seen no evidence that any LPs decided to review their relationships with Vista in the form of selling fund stakes on the secondaries market or rethinking re-ups as a direct result of Smith’s tax issues. One investor – New Mexico Educational Retirement Board – decided to not follow through with a planned $100 million commitment in the firm’s third credit fund in November, having said it would make the commitment in April, though its CIO declined to confirm to sister publication Buyouts whether or not the decision was due to Smith’s NPA.

Still, at a time when access to high-quality fund managers is a priority amid the pandemic and economic uncertainty, the likelihood of investors parting ways with Vista is low.

The month following Smith’s settlement, as millions of Americans sat down to carve Thanksgiving turkey, Vista confirmed that co-founder and president Brian Sheth was leaving the firm.

In a statement to Forbes, Sheth said: “My decision to leave Vista was unrelated to Robert’s personal matter, other than wanting to wait to finalize it until after that matter was resolved. Any statement attributable to me that suggests otherwise is inaccurate…I know for Robert and Vista the best is yet to come.”

– Toby Mitchenall and Chris Witkowsky contributed to this report.

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