Vista Equity Partners VII: fund terms revealed

Vista Equity Partners will offer investors in its latest flagship fund two management fee and carry options, according to investor documents.

‘Class A’ investors will pay a 1 percent management fee, with a 30 percent carry over a 10 percent preferred return hurdle, while ‘Class B’ investors will pay a 1.5 percent fee with a 20 percent carry over an 8 percent preferred return, according to documents prepared by Summit Strategies Group for the Fire & Police Employees’ Retirement System of the City of Baltimore.

The software and tech-focused private equity firm offered the same management fee and carry options on its previous fund, the $11.1 billion Vista Equity Partners VI, which closed last year.

Vista Equity Partners VII, which is targeting $12 billion and is expected to cap the fund at around $15 billion, has already “closed or circled” around $10 billion, according to the documents. The minimum commitment to the fund is $10 million, subject to GP discretion. It is expected to hold the final close early in the first quarter of next year.

The fund will have a five-year investment period from final closing, and a five-year harvesting period, with one optional one-year extension at GP discretion. The GP commitment will be at least 2 percent of total commitments.

The Fire & Police Employees’ Retirement System of the City of Baltimore is considering making a $16 million commitment to the fund.

In its list of considerations for the pension plan to take into account, Summit mentions Vista founder Robert Smith owns all of the firm’s voting rights, and therefore “in effect he has full economic control over decision making”. Smith and co-founder Brian Sheth collectively take around 50 percent of the firm’s total carry, while Dyal Capital Partners – which made a minority investment in the firm in 2015 – takes 11 percent. The remainder is allocated to the senior members of the team.

Summit marked the Vista fund “favourable” on competitive advantage, operations and return profile, and “neutral” on effective alignment,

“Vista manages multiple platforms, which could potentially compete for time and resources,” Summit notes. “However, given the breadth of the team and specialisation by product, this concern is somewhat mitigated.”

Vista has more than 100 investment professionals, of which 25 are dedicated to flagship funds.

On a returns basis, Funds II through V have all been top or second quartile on both an internal rate of return and total-value-to-paid-in basis when compared to PitchBook buyout funds, Summit noted. Fund VI, a 2016 vintage and therefore “too early to evaluate”, has a net IRR of 5.1 percent and a net TVPI of 1x.

Fund VII will target control buyouts of mature software companies, both public and private, with between $500 million and $1.5 billion of revenue at entry. These companies should have roughly 20 percent EBITDA margins, and Vista will look to use its operational expertise to drive margins closer to 40 percent prior to exit, according to the investor documents.

In more than half of cases, Vista expects to replace management with an executive that has previously worked with a Vista portfolio company.

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