Baltimore’s Fire & Police pension backs Vista Equity, reviews its fee structure

  • Assets under management: $2.8 bln
  • PE portfolio: $186 mln
  • PE allocation vs target: 6.5 pct against 10 pct
  • Why this is important: GPs develop performance-based fee structures for LPs to choose from

Fire & Police Employees’ Retirement System of Baltimore committed $16 million to Vista Equity Partners’s seventh fund targeting $12 billion at its Sept. 18 meeting.

Software-focused Vista Equity already closed on around $10 billion, according to a presentation by Summit Strategies Group that advises the Baltimore pension system. Summit estimated Fund VII’s hard cap at around $15 billion.

Vista Equity expects the final close for Fund VII in first quarter.

Vista structured Fund VII to provide two fee-and-carried interest options for limited partners. For Class A, annual management fees are 1 percent, carried interest is 30 percent and the preferred return is 10 percent. For Class B, annual management fees are 1.5 percent, carried interest is 20 percent and the preferred return is 8 percent. GP commitment is 2 percent, documents said.

The minimum LP commitment is $10 million, documents said.

A spokesperson for Vista Equity said the fee terms were the same as Fund VI, but declined to elaborate.

Going beyond traditional PE fees

Different fee-and-carried interest structures have been around for some years now.

For instance, Audax Group offered a 2 percent management fee and 20 percent carried interest, or a 1 percent management fee and 30 percent carry for its fifth fund that closed on $2.25 billion in 2015, Buyouts reported.

Bain Capital also explored fee options for past funds.

More innovative fee structures have popped up in recent fund-raises.

Some of those structures included ratchet-based carry, where the percentage of carry increases as the fund achieves certain benchmarks; deal-by-deal carry enhancements that include interim clawbacks with placing in escrow a percentage of carry or profits distributed subject to minimum returns, Buyouts reported.

Fund details

Vista Equity will target buyouts of mature software companies with between $500 million and $1.5 billion in revenues, the documents said. The fund will buy companies with around 20 percent of Ebitda margins and work to drive margins to 40 percent upon exit, pension documents said.

Fund VII will invest in 10 and 14 companies. The key personnel for Vista’s latest fund are founders Robert Smith and Brian Sheth, and David Breach, chief operating officer, according to pension documents. Breach joined the private equity fund in 2015 and previously worked at Kirkland & Ellis LLP.

Vista’s fund sizes have almost doubled since 2007. Its funds IV, V and VI raised $3.5 billion, $6 billion and $11.1 billion respectively. It is early days yet for Fund VI that closed in 2016, but Vista’s funds III, IV and V produced an internal rate of return of 27.9 percent, 19.2 percent, and 14.6 percent respectively, documents said.

Vista’s funds II and III are fully realized and funds IV and V are in harvest mode, pension documents said. Fund VI had invested 70 percent of its capital as of Dec. 31, 2017, documents said.

The larger size of Vista’s seventh fund has raised concerns among LPs including Oregon Investment Council that committed $500 million to it.

Baltimore Fire and Police Pension system also noted the same concern but decided to commit to this Vista fund because of its track record.

“Excluding two non-control venture capital deals that were completed in Fund II, Vista has not lost money on a realized deal across its flagship funds, Further, only two unrealized control deals have been marked down, with the worst impairment being 0.75x cost,” documents said.

Smith controls all the voting rights, and 50 percent of Vista’s total carry is taken collectively by its two founders, pension documents said.

Action Item: Read Summit Strategies presentation here