Vista Equity launches debut debt fund

The Robert Smith-led firm will target $600m for its first debt fund and likely $500m for its second small-cap vehicle as it comes off a year in which it returned $2bn to LPs.

Vista Equity Partners, which closed its fourth fund last year well oversubscribed and over its cap, is working on two new funds to invest in debt and small-cap technology companies.

Vista has launched its debut debt fund that is targeting $600 million and will target mainly the firm’s own software deals, according to an investor letter seen by Private Equity International.

“Fundamentally, software debt to equity ratios remain relatively low, with high level of recurring revenues, positive cash flow characteristics and favourable yields, creating a substantial risk-adjusted return opportunity to invest in software debt,” the firm said in the letter. The fund is called Vista Debt Partners Fund I, according to the letter.

Robert Smith

The firm, led by former Goldman Sachs executive Robert Smith, also is launching its second Foundation Fund that may target $500 million for investments in small-cap software companies, the letter said. Vista’s first Foundation Fund closed on $400 million in 2010, is about 75 percent drawn and was generating an 1.30x multiple and a 17.4 percent internal rate of return as of 30 June, 2012, according to performance information from the California Public Employees’ Retirement System.

Vista declined to comment.

Vista closed its fourth flagship fund last year on $3.5 billion, well above its target and even slightly above its hard-cap of $3.3 billion due to a $200 million GP commitment. Fund IV, which was about 33 percent drawn around year end, received strong support from LPs impressed with Vista’s performance in its $1.3 billion Fund III, which was generating a 2.2x multiple and a 29.3 percent IRR as of 30 June, according to CalPERS’ numbers.

Fund III has one full realisation, that of Sunquest Information Systems, and partially realised or recapitalised three other companies returning about $1.9 billion to LPs, according to the investor letter.

Last year was busy for Vista – the firm invested in seven platform companies and made eight follow-on acquisitions for about $1.6 billion. Also, the firm raised about $2.2 billion of debt to support the deals, the letter said. The firm returned just over $2 billion to investors across all its funds. Also, Vista’s portfolio companies expanded earnings before interest, taxation, depreciation and amortisation by 47.2 percent, with overall revenue growing by 19.9 percent, according to the investor letter.

In terms of personnel, the firm made Michael Fosnaugh a partner and promoted Betty Hung and Monti Saroya to senior vice presidents. Vista also expanded its operational improvements group by 11 people last year for a total of 19 people, the letter said.