The Exchanges

Q What was that entrepreneurial moment for you? So you're at Goldman Sachs, you're looking at all these different businesses in this area, you know, what was the trigger to say, you know what? I think I need to do this on my own.

A So I started to understand what investors, private equity investors were doing out in the marketplace because I was actually pitching companies and selling companies to them. And I realized that none of them, like any in that period of time, none of them are really thinking about software as an area of investment. Some may have had one or two software investments, but they were thinking about technology broadly, and at that time, there's a lot of focus on semiconductors and services business and those sorts of things, and I realized that there was just, frankly, a lack of awareness of the impact of software, because when you, as an engineer, having gone through that experience, I could actually see the actual ROI of the products that software companies sold. When you actually, for instance, implemented a payroll system in a large company, You eliminate massive numbers of waste in the system or inefficiencies in the system that actually can then be repurposed in other parts of the organization to help the company grow or become more profitable. So when you start to realize that not very many folks at that time in the private equity industry were actually focused on that space, I said, this is one that you could actually create a sustainable competitive advantage, something we all learn in business school, by approaching one market, becoming an expert in that market, and actually…

AI assessment note: “that's really what gave me the spark of inspiration.”

Q At what point in time over that trajectory of the last two decades, did you go from having a series of individual companies to having this centralized VCG and the ability to institutionally share this across your portfolio companies?

A It has been that way from the beginning, from the first three, four, five portfolio companies that we invested in, we would bring those CEOs together and we'd have shared experiences around, okay, well, how did you actually manage Your product development or your services, and you've got 10,000 customers. This is a time when everything was on premise and you've got 10,000 customers. You need to send updates. How did you do that effectively? And how did you, when you send those updates out, not get deluged on Monday with thousands of calls because it wasn't installed properly. And those are some of the problems of the past that we've solved, uh, the way we do things today and going forward to the time in which we actually started to really migrate businesses from on prem to the cloud. And so I think we've done more of those migrations than probably any institution on the planet today. And those are the sort of shared best practices. When you do it once, we take it back and we find, okay, what went well? How should we refine this? What are the methodologies that we should do a little more work on? And then the next time we do it, we do it a little differently or a little better, a little faster. And or implementing, you know, our quote to cash systems. In some cases, the early days, it would take six to nine months to get those implemented. And today, in some cases, we're able to…

AI assessment note: “It has been that way from the beginning, from the first three, four, five”

Q How do you internally organize the delivery of that sources of information?

A The way to think about it, we've got, this is the unique piece, you know, investment team, and then our value creation team. Our value creation team has operating MDs and Vista Consulting Group working in concert. And every portfolio company has some operating MD assigned to it, and some set or collection of VCG Vista Consulting Group resources that are assigned to whatever value creation dynamic that we've agreed upon with the management is going to be accomplished over some period of time. And so then there's an engagement plan, an engagement model. And again, we're not there to do it for the management team. We're there to educate, inform, and bring forward what I call the resources to enhance Their ability to accomplish the goals that we've underwritten to. And it's literally, in some cases, our value creation team is talking to senior management team people every day for periods of time until we've kind of broken the back of whatever challenge it is that we might have. And then the frequency goes down, and it'll go to once a week, once a month, once a quarter, whatever it might be, depending upon where they are in implementing some of these best practices. So, and depending upon how heavy the lift is. So every engagement model is different. It's bespoke based on not only what we're underwriting to and agreed to with management, what are we going to do, how are we going to …

AI assessment note: “Our value creation team has operating MDs and Vista Consulting Group working in concert.”

Q What have you seen in the external marketplace, or selling businesses in particular, about the potential signaling effect of your own actions as it relates to the underlying business that you might be bringing to market?

A We will see that from time to time, and it's interesting, you know, it's, well, if Vista's selling it, is there no more economic rent that can be taken out of that market, you know, because people think we do a really good job of managing the businesses with our management teams, and in some cases, it's just because it's where it lives in its fund life. We have these funds with certain durations, and at some point in time, investors do want their capital back. Now, the good news is, and with a number of our large investors now, they're saying, hey, Let's think about ways to recycle capital more efficiently, and so we've had some very innovative agreements on that side, which I'm very excited about, because people are starting to really understand the durability, the resiliency, the long-term nature of enterprise software, and saying, yeah, this ten-year construct doesn't really fit certain parts of our market. Early and years ago, when we do recapitalizations with other general partners, they were wondering, oh, gee, are you guys really committed to this, because you're making money on this trade here, and Do you care about the company going forward? But I think we've done enough of these partnerships with some very large GPs that they realize that in many cases we're making more money on the recapitalization after we've sold them half of it than we made on the first part. So t…

AI assessment note: “if Vista's selling it, is there no more economic rent that can be taken”

Q You mentioned re-rating in the pricing environment a couple different times. How do you think about the marketplace understanding now, far more than they did certainly 20 years ago, that these are great businesses and therefore they have to pay higher prices going in?

A Yeah, it's interesting. Institutional investors, our investors, for instance, are understanding that more and more. I have, I don't know, X number of investor calls a day or week, whatever it might be, and there's still a percentage who are saying, wow, this seems like an overinflated market, and the prices are high, and if they haven't been in it like we have for 20 years, I mean, three years ago people said that, five years ago people said it, but as more and more investors become educated as to the value of Recurring revenue, high retention rates, mission critical, business critical enterprise software. You're going to see more and more capital coming into the area because they'll see the returns and the loss ratios and say, wow, on a risk adjusted basis, this is a good place to be. Now, how do I get in it? Well, if you go into public markets, there's very few expressions, right, of how to actually participate in certain parts of enterprise software. If you're in the private market, We've got a very wide landscape of opportunity, and so there's an education process that has to take place, and we do a lot of that primary education with our investor base, but then as they start to realize it, then they move in that direction. It's been interesting to see some of the public market investors really start to come to more of the realization of it, and I think a lot of that is comi…

AI assessment note: “as more and more investors become educated as to the value of Recurring revenue”

Q So along those 500 transactions over the years, what do you look for in your due diligence that leads you to think this is one of those enterprise software companies that you want to own for your portfolios?

A Again, the most important thing is really, does this provide a real sustainable value to the customers that they're serving? You got to look at the must have versus nice to have kind of rubric of decision to making from the customer's perspective. So that's kind of .1. .2, does the management team really understand not only the value that they are creating for their customers, but how their customers are actually using that product, and how in using that product, it actually enhances their relationship with their customers. So that's kind of point number two. Then we look at some of the other elements. Is it a recurring revenue business? Does it have high retention rates with its customers? Why does it have high retention rates with its customers? Is there An opportunity to upsell existing products to that customer base. And then you have to look at the management team. Does this management team have the capacity to scale and grow, or do they need a different set of training or tools or experiences or relationships to enable them to grow those businesses? And probably 70, 80% of the companies that we buy Is led by someone that this is the largest company either they've been in or the largest company they've ever led that day. And so often they're moving off into a sphere that they have no experience and they're looking for some construct for some help. And I think that's one of…

AI assessment note: “does this provide a real sustainable value to the customers that they're serving?”

Q So the other side of that, you talked about the structure of called the private equity industry, and I know you've had a couple of different products, including the most recent, a long duration fund. How do you think about going in what the appropriate, let's call it sleeve or product is for a company that you're buying when ultimately they're all enterprise software businesses?

A First, there's this kind of size criteria. For the most part, there's a size differentiation as to where they belong. We are constantly evaluating, is this a good platform company? Is this an add-on to another company? Is this the sort of company we want to own forever? And we've got our rules of engagement as to which fund it belongs to, and the good news is the way we work, we have our private equity management committee and executive committee, et cetera. We get in and talk about those sort of Potential conflicts and all this belongs in this fund versus that one. And in some cases, we'll bring our limited partner advisory committee into that sort of engagement. But yeah, it's all software at the end of the day, but at what stages? It's a company that we look at and say, this is what we do want to own for the next 10, 12, 15 years, or it's just a company that we think that the taxonomy of the industry will lead to this being a consolidator. It should be public, right? Or the taxonomy of the industry says that this is a company that likely needs to be an add-on investment or be consolidated over time. And the good news is The men and women at Vista have been doing this, many of them for 15 plus years, and have a good sense for how we should evaluate it, and then we make some decisions on that basis.

AI assessment note: “First, there's this kind of size criteria. For the most part, there's a size differentiation”

Q Why don't we start with, I'd love to just have you go back into your background and what got you from wherever you were to forming Vista, what, 20 years ago now?

A I started my career as an engineer, chemical engineer, and it was neat in that time being a chemical engineer because we were actually now moving beyond what I'll call trying to invent new unit operations, but actually putting in control systems of these unit operations. So, What that really meant was implementing computing power into the environment of process engineering. And one of the greatest call it discoveries that you find when you do that is how much waste is eliminated when you actually put computing power against those sort of things. So as I started to realize that while inventing things was a great way of life, I learned that capital and utilization of capital can actually be much more effective. And I went off to business school, went and joined Goldman Sachs and then mergers and acquisitions department, then was asked to move out to San Francisco to help start our tech group. So it was our First M&A Bank, Round to Ground, focused on technology back in. 1997 or so. Well, in that process, really started to evaluate, see how software companies were run, and in that dynamic, started to see that same sort of inefficiency, shall we say, in how software companies were run. Well, it was a new industry, and because it was a new industry, there were very few, call it, operating procedures that were, how do you run a software company? So I had the good fortune in that regar…

AI assessment note: “I started my career as an engineer, chemical engineer... went and joined Goldman Sachs”

Q And so what were the things back then that you knew or felt you knew about these software companies that would allow them to fit into this sort of box of private equity or leveraged buyouts?

A Yeah, so there's a couple inherent advantages of enterprise software that are now just being realized, and I think that's why you see the re-rating of these software companies and the valuations at the levels that they are, and they continue to expand. One of which is, if you really think about it, it's a business, it's a 95% gross margin business at the end of the day. Okay, how many industries are 95% gross margin? You build it once, you can sell it as many times as you can, There's no inventory, so as a result, you never use it up. There is negative working capital associated with the business, and when you think about how the mature industries at the time were consolidating, it still is a winner-take-most type of a market. I chuckle, Ted, every now and then I have the opportunity to work with people and investors and companies all around the world, and sometimes I'll walk into an environment and haven't met these people, and I'll say, okay, how many people here And I'll use a certain spreadsheet software, and everybody raises their hand, and I said, why is it I can walk in anywhere in the world and say the name of that spreadsheet, and everybody uses the same thing? Well, that's a consolidating dynamic that occurs. Now, when I started, there were five or six different spreadsheet companies, but ultimately, there was one winner, and that one winner, on the one hand, perhaps …

AI assessment note: “it's a 95% gross margin business... There is negative working capital”

Q So as you look out for the next 20 years, how do you evolve the next generation of leaders at Vista?

A I look at, there's kind of pyramids of opportunity. Our AXOs, I'll talk to the investment team, and I'll talk to BCG. Really, they've got to be fundamentally and technically sound and underwriting, period, in the story. The good news is we work on a lot of companies, probably do 50 deals, 50, 60 deals a year, so they have a lot of, like, completed, which means we're doing multiples of that in evaluation, and so our people have an opportunity to really become expert at underwriting. I was actually just encouraged yesterday. I got an email from one of our largest investors who has completed a deal with us, a co-invest deal, and this is a global investor, billions of dollars that they invest, and they said, you all do the best diligence of Anyone we've ever engaged with by heads and shoulders. And knowing that team, and it is a MD, senior vice president, associate, and I know the quality of the work that we do, and it's just great to see that expression coming unprompted from a very large, very sophisticated investor. That tells me we're continuing to do the right things in the development. When you start to get into the vice president level, we have to teach a different set of skills, which we commit ourselves to. Teaching them how to source, how to engage, how to engage with management teams, and you remember the ages of these folks. I mean, they're engaging with senior executiv…

AI assessment note: “When you start to get into the vice president level, we have to teach”

Q When you've extended, as you have through private equity to credit and public equity, what was the thought process in introducing that with a model that's already working so well?

A I mean, our industry has evolved over the last 20 years, Ted. You remember 1518 years ago, there were only a few institutions that would offer any form of credit to software companies, and they did very well because they had very little competition. Most of the big lenders were out there saying, well, gee, Your assets leave every night out of the elevator. And then they started to understand over time, and I think we had a role in this, that the recurring revenue nature of the relationship with customers is something that actually, frankly, is more resilient than some other tangible kinds of engagements with those customers. Then you look at, in the age of the pandemic, people paid their software bills before they paid their rent. And so that realization of, wow, I look at my portfolio today, 71 companies, I think we're 92% recurring revenue, over ninety-plus percent in retention rates with our customer base, and the average customer you have for a decade or more, well, it creates a massive amount of certainty, especially if it's very little capex on those businesses around free cash flows, and so what that leads to is, wow, this seems like an industry That should have a bigger and broader credit, call it expression in the capital markets. And so I think it was nine years ago or so, almost 10 years ago, we said we need to form a credit business to not just support Vista, but th…

AI assessment note: “we said we need to form a credit business to not just support Vista”

Q I'm curious what the dynamic is between your investment team and the operating executives at companies you buy, right? They're coming into an ecosystem where you've done this over and over and over again, and whether it's software implementation, hiring practices, all these things you're talking about, what does that dynamic look like between you and them?

A Yeah, I'll tell you what works well for us is now that we've been doing this for what, 21 years or so, we've got Literally hundreds. I think it's 400, over 400 executives who've been on their second, third, fourth, fifth, sixth tour of duty at a Vista company. One of the best things we do is now bring those new executives in contact with existing executives and say, okay, let's talk about how we're going to implement whatever the best practice might be. And here, 15 people who've done that Over the last two and a half years. Why don't you spend some time with them and talk about what worked well, what didn't? What did they wish they knew going into it that they can tell you now? And when you have that socialization experience from software executives, and it's kind of interesting, like all things, if you're in a software company, how often do you talk to another software company about their challenges? You're kind of focused on your own world, your own challenges, and you're trying to glean whatever insights you Come to your podcast to hear words of wisdom. You take those nuggets and you say, okay, how do I take that nugget and actually create something? Well, we have the unique advantage of having, in many cases, like today, 71 ecosystems. 71 separate software companies, but we bring the C-suites together. We bring the middle managers together in certain best practice solution…

AI assessment note: “that is probably the greatest tool that we have that decreases any resistance to change”

Q How do you think about exit strategy on businesses, particularly in light of how much you're trying to do to improve them up front?

A I always tell our senior executives and our teams at Vista, we have to think about the absolute best that that company can be. And look, you may not ever get it right. If you hold them long enough, you'll probably get more right over time. That's really what the plan and the point is. But in some cases, things change in an industry. You might have a new competitive entrance. You might have a dislocation of Some technology or industry construct that says, ah, you know what, the original investment thesis of this has changed, or the environment has changed, so we have to change investment thesis, and so we're not going to be able to hold it as long and do as much work, and in some cases you get inbound interest, which we get quite often of our companies and people kind of making you offers on the businesses, and we'll run a process in most cases that we think kind of pulls forward what we could realize in two or three or four years to today. Look, investors, one of the things they want is they want their capital back, right? And I think we do a good job of ensuring that we deliver those returns to our investors. All that said, certain businesses, I would have loved to have held a little bit longer, but because of the time in which we hold them, the construct of our industry is one of invest over five years, return over that next five, and so that's kind of, it was built 30 years …

AI assessment note: “construct of our industry is one of invest over five years, return over that next five”

Q to turn to a couple of closing questions. Before I do, I have two questions I want to ask you. One, not so positive. The other one's super positive. So let's start with the first one, which is obviously in the public, you've had this tech situation, and I'm curious, what did you learn from that experience? And then maybe what surprised you most in other people's reaction to it?

A Yeah, that's a good question. And I've addressed this many times, but the short answer is, you know, I followed some really bad advice some I've made amends regarding that advice and mistakes I've made, and been very fortunate to have the embrace of my community of support of stakeholders to move forward and get beyond that. The thing's surprising. Like all things, you see the emergence of, I'll call it a Machiavellian nature in some people. It was a bit surprising. I've also seen, quite frankly, the complete embrace, and I call it of the beloved community of stakeholders, and that's the thing that keeps me going and propels me in that regard. So look, like all things, we all make mistakes in life. I'm just fortunate that I've had a community of people who said, let's move forward, and we know who you are, and let's get on down the road.

AI assessment note: “you see the emergence of, I'll call it a Machiavellian nature in some people.”

Q You mentioned assessment tools that you're known for. What are some of those tools?

A Sure, we have some which are aptitude, personality, profile, and those elements give us a sense as to is that individual in the right seat for the task that's ahead of them. And so you can have somebody who is a brilliant person but actually working in the wrong role for that organization or has the wrong sort of touch. To be in customer service, the wrong sort of touch to be in sales, and so the way I like to think about it's more lock and key approach, so it isn't just that, oh yeah, it's smart people do certain things certain ways. It's really certain people are very effective in certain types of jobs, and so you really want to try to find the right sort of people to fit in the right jobs, and sometimes you have to move them around, and sometimes you have to augment and support, and sometimes they're just because of where they are in their life or something, they're not a good fit for the job that they're in. And often we'll go in and partner with the company. Sometimes they do an exceptional job of their talent management. And sometimes they're hiring based on who's available at the time, who knows whom, et cetera, versus actually knowing what's the right sort of characteristics that you need for a person in that job. So I think we've become very effective at that and kind of finding the right characteristics for the right role in that company at that period of time. And so…

AI assessment note: “we have some which are aptitude, personality, profile”