Big question: will LPs be there for Vista’s next flagship fund?

Vista Equity told limited partners to “make room” for the firm’s next flagship fund later this year, several LPs told Buyouts, setting the stage for what will be a big test in the wake of CEO Robert Smith’s tax evasion settlement last year.

The general consensus is that Vista will not have too much trouble raising the flagship fund based on its strong past performance. Some LPs, like those at public pensions or other institutions who will have to explain the tax situation to politicized boards, could choose to avoid the situation altogether.

But Vista LPs who skip the next fund because of reputational concerns would likely be replaced by others, including big sovereign funds from overseas, looking to build exposure to the firm, sources said.

“It feels like the people that are staying with Vista have made their bet on Robert and this isn’t going to sway them,” said an LP consultant about fundraising and Smith’s tax situation.

The LPs told Buyouts they expected Vista to launch its next flagship vehicle, Fund VIII, in the second half of the year, or possibly even early next year. The fund launch will depend on the firm’s ability to deploy its current flagship fund, which closed on $17 billion in 2019. Bloomberg also reported on the fundraising plans this week.

No target has been indicated on the coming fund, the LPs said, though the expectation is the firm will target at least as much as the prior fund.

Smith last year admitted he should have paid taxes on a portion of carried interest from Vista’s first fund that he directed into an offshore structure. He agreed to pay $139 million in back taxes, interest and fines and cooperate in the tax evasion case against his friend and partner, Houston software tycoon Bob Brockman.

LPs who have spoken with Buyouts have generally given Smith a pass on the tax evasion situation, characterizing it as a personal matter and not something that involved Vista’s subsequent funds.

Challenges could arise with public institutions like public teachers, police and fire pensions, where investment staff answers to politically appointed CIOs and elected boards, and ultimately, the state Treasurer. These types of institutions are much more focused on the reputational perception of backing managers with past bad behavior.

“For us … the CIO would question your sanity if you came in and recommended any investment with [a firm after a tax fraud situation],” said an LP with a large public pension plan who has not committed capital to Vista.

Since Smith’s settlement with the government, a few other senior executives have left or stepped out of leadership. Brian Sheth, Vista’s No. 2, resigned late last year in what he has described as a long-term transition out.

And, two co-heads of Vista’s mid-market funds, Rob Rogers and Alan Cline, stepped out of leadership roles ahead of their transition out of Vista. Vista named two other executives inside the firm to assume the co-lead roles on the fund families, Foundation and Endeavor.

Vista has long been an aggressive and prolific fundraiser, spurred by its performance, which is widely considered one of the strongest in the industry, although performance on the firm’s more recent flagship funds doesn’t appear as strong as its earlier pools, at least for now.

Vista’s sixth flagship fund, which closed on $11 billion in 2017, was generating a 1.3x total value to paid-in multiple and a 13.1 percent IRR as of Sept. 30, 2020, according to performance information from StepStone Group, prepared for the Connecticut Treasurer’s office. Fund VII is still too early in its fund life for meaningful performance.

The fifth fund, which closed on $5.8 billion in 2014, was producing a 1.8x multiple and a 20.3 percent IRR as of March 31, 2020, according to information from the New York City Police Pension Fund.

Fund IV, which closed on $3.5 billion in 2012, was generating a 1.8x TVPI multiple and a 15.8 percent IRR as of the same date, according to Connecticut’s information. Fund III, which raised $1.3 billion in 2008, was producing a 2.4x TVPI and a 27.9 percent IRR, Connecticut reported.