Vista and its founder face an uncertain future

The non-prosecution agreement signed by Robert Smith keeps him out of court, but the next test will be investors’ tolerance of tax evasion.

“I can’t think of anything remotely of this magnitude in private markets.”

That is how one veteran West Coast investment consultant described the revelations about Vista Equity Partners’ Robert Smith.

Smith, founder, chairman and CEO of one of the most successful firms in the business, last week admitted wilfully 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 co-operating with the authorities on related investigations. The extent of the misdeeds is laid out in the six-page non-prosecution agreement.

The revelations are truly sad. Smith is looked up to as a philanthropist, a wildly successful private equity investor and an African American leading in a white-dominated industry. In 2017 we named him our Game Changer of the Year in recognition of his position at the forefront of tech investing and influence on the industry.

The question now is: can he remain at the helm of Vista? It is a question complicated by reports that Brian Sheth, who co-founded the business with Smith, has recently expressed a desire to leave the firm.

A source close to the firm paints a resoundingly positive picture: “Robert fully intends to continue leading Vista and there are no issues that would prevent him from doing so,” says the person who asks not to be identified. Vista has over 700 LPs and “an overwhelming number … have come forward in support of Robert’s leadership and what he is building, and will remain invested with Vista”, says the source.

Vista itself declined to comment.

Investors we have approached have been less forthcoming. Of the more than 50 limited partners in Vista’s latest flagship funds we contacted, few were willing to respond. Ohio Police & Fire Pension Fund is “monitoring the situation”, as is the Virginia Retirement System. Most simply declined to comment.

On an anonymous basis, investors are happy to share a bit more. The head of alts at one US public institution says they will reserve judgment until they have read the “statement of facts” in the NPA and had calls with Vista. “We are always reviewing our investments and relationships. This one now requires a little more attention,” they note.

There may be no regulatory reason why Smith should not lead Vista. And as the CIO of Los Angeles City Employees’ Retirement System, Rod June, wrote to us, his pension has “no existing policy that prohibits a future commitment to a GP member who is alleged to have engaged in the kinds of misdeeds that you outline in your email”.

But to many people, the idea of entrusting pension fund capital to the management of someone who has participated in tax evasion on a gargantuan scale is incredible.

It is difficult for an investor to disentangle themselves from an existing manager relationship. If that manager happens to be a top performer, then it comes with additional opportunity cost. Nevertheless, many of Vista’s 700 LPs must currently be considering this option. They will naturally take their time to gather facts and reach a position.

As the West Coast consultant neatly put it: “Investors will say, ‘It will be nice if we can ignore this.’ But they can’t.”