Vista Equity Partners CEO talks the state of private equity spending, tech stocks, and company hiring

Vista Equity Partners CEO and Founder Robert Smith discusses private equity, investing in tech, the IPO landscape, Fed rate hikes, and more at the Yahoo Finance All Markets Summit.

Video Transcript

JULIE HYMAN: It is one of the biggest enterprise software conglomerates in the world. And it's in private hands. Vista Equity Partners has more than $94 billion in assets under management with a current portfolio of 85 companies and is still growing, recently striking a deal to buy cybersecurity firm KnowBe4 for $4.6 billion. Joining us now is the founder, chairman, and CEO of Vista Equity Partners Robert Smith. Thank you so much for being here.

ROBERT SMITH: Thank you, Julie. Thank you for having me.

JULIE HYMAN: It's great to have you here.

ROBERT SMITH: Good to see you.

JULIE HYMAN: Yeah. You too. In person. So, obviously, you have a big reach of your portfolio companies, all of those companies that I mentioned. So you have a lot of insight into corporate spending on technology right now because they are business-to-business largely. What are you seeing right now? What are you hearing from your companies, from your clients? And does it feel like from where you sit that we are on the cusp of a recession?

ROBERT SMITH: Yeah. Great set of questions. I think, importantly, enterprise software still is viewed as the most productive tool introduced in the business economy the last 50 years like it will be for the next 50. So in an environment where there's wage inflation, a lack of developer talent, challenges related to cyber attacks, companies are actually increasing in many cases their spending in enterprise software.

Now, overall, again, we're about $24 billion in revenues across our entire platform, which think of us maybe fourth or fifth largest enterprise software company in the world, and we have over I think 350 million users of our software. When we're looking at what the spending dynamics have been over the last year, over 25% kind of bookings growth, we're seeing kind of 20 to 25 now. So we're seeing some slowdown in certain sectors and, frankly, acceleration in others, things like low-code, no-code environments, things for productivity, anything around cybersecurity to protect the enterprise. Those are the sorts of dynamics that we're seeing.

So am I seeing a broad slowdown across our platform? No. Are we seeing some pockets where we actually see it? Yes. Typically, those will be in any of the B to B to C. Any of those consumer-oriented businesses, you'll see a little more slowdown. You're not seeing people buying as much in the future as they used to, which you saw in some of the Apple and some of their numbers, et cetera, where some of the companies that we focus on, really, this mission critical business, critical enterprise software continues to be in demand, and robust demand for the most part.

JULIE HYMAN: Is there a point you see in the future, is there a point typically in these kinds of cycles, where you do start to see that pullback? I mean, to be fair, when we were in the financial crisis in that recession, the enterprise software industry was not as developed as it is now. So I'm not sure we have a perfect analog. But what are you expecting to see?

ROBERT SMITH: Great analysis. So if you look at 2014-2018, coming out of that great financial crisis, there was about 10%, 12% of the companies were in what we call a native cloud environment. Today, it's closer to 35%. As a result of that, these companies grow faster. The productivity tools that they are delivering can be delivered more effectively, more efficiently. And so the utilization rates of them has actually been enhanced.

The other thing that's actually quite interesting is the productivity dynamic. As you know, in the US today, we've actually decided to effectively close our borders. And I like to say the most scarce commodity on the planet isn't oil or lithium or cobalt, it's actually software programmers. There's 7 and 1/2 billion people on the planet. It's only 29 million of us who write code for a living. And these are the people who are actually providing and building these productivity tools that have to continue to enable and digitize not only companies, but entire economies in countries, in education, in cybersecurity. Those are the areas that we're actually seeing that increased demand.

Now, all that said, I still think that you're going to see the downturn and some of the consumer interest rates go up. People are buying fewer and fewer phones and cars and those sort of consumable devices, probably making decisions between, do I fill my gas tank with fuel or do I buy another consumable device? But in the business segment, businesses have to continue to think about how I can do more with less. And software is one of the ways-- enterprise software is one of the ways that they're going to continue to embrace it.

So is there going to be slow down? In certain segments. I will argue in Europe in particular I think we're going to see a more advanced slowdown than many other economies. We're not seeing as much in the US as we sit here today.

JULIE HYMAN: Are your portfolio companies doing any kind of preemptive battening down the hatches, so to speak? Any kind of cutting in spending or hiring freezes, et cetera?

ROBERT SMITH: Yeah. Not at this point. I mean, there's a few that, actually, who have a little more consumer-- what I call a little more consumer-facing orientation who have to think about, OK, are we overbuilding in our sales capacity or development capacity? But for the most part, the companies we buy typically have a massive ROI. Think I told you. We talked about this before.

Our average company, the products they sell to their customers is a 640% return on investment. So if you think about that, almost anything else a corporation can do doesn't come anywhere near that kind of ROI. If you're doing any sort of Six Sigma or Kaizen or energy efficiency dynamics in your company, they're orders of magnitude below or multiples below that 640%. So corporations are continuing to advance.

And they're spending. Now, in our companies in cases where we're thinking, you know what, they may not expand as much, sure, you've got to think about do you hire fewer people. But for the most part, the vast majority of our companies are still meeting their annual operating plan, which includes hiring. Our average company increases its organic employee growth by about 20% from time which we buy it to the time in which we go to a monetization. So that really hasn't changed at this point.

JULIE HYMAN: I want to turn to sort of your acquisition strategy. I mentioned KnowBe4. That's a leveraged buyout. So is the Citrix deal, which was earlier this year, for 16 and 1/2 billion dollars. A big deal that you did with Elliott. The lenders behind the Citrix deal reportedly then when they turned around and sold the debt, they had to do so at a discount because we've seen some big changes in the funding environment. So how has the funding environment changed? And was it tough to get the KnowBe4 deal financed as a result of those changes?

ROBERT SMITH: Sure. I mean, you've got two markets, in essence, that we think about there. It's the syndicated debt market and what we call the private debt market. And the syndicated debt market that Citrix was part of, I think there were 30 banks involved. So the exposure of any one of them was actually modest relatively speaking. But it was a fully underwritten deal, fully priced from our perspective. And they go through distribution. Most of them ended up keeping it on their balance sheets because they know the work that we do and the value creation dynamics that will actually bring those bonds back to par. And, in essence, they'll be tidied up at the end of the day.

If you think about the private market, that private market has emerged over the last six, seven years as being quite robust. But it went from 10 or so lenders to now about 30 or 40 in that space. And so you may have to go to a few more. But we still see the ability to get deals like KnowBe4 done, Avalara done in these private markets as opposed to relying on syndicated debt markets. So that's a dynamic that we're seeing in the marketplace.

JULIE HYMAN: And what about on the other side? You mentioned exits. Are any of your investors getting a little antsy here? Because it's tough to have exits right now. We were talking before we came here on set about the so-called class of 2021, the companies that came public last year by and large have not done so well. It's a tough environment.

ROBERT SMITH: Right. It is. And part of what we do is we focus on a couple of things. We do them really well. A, valuation going in. So we maintain a very strict price discipline in the way we invest. And just to give you some round numbers, we focus on what we call a growth-adjusted revenue multiple. 2014-2018, growth-adjusted revenue multiple in the marketplace was about 0.43.

When we went through this massive capital expansion in 2020 where I call it every central government on the planet decided to really flood the market with liquidity to make sure that their economies didn't go into recession during the beginning of the pandemic, call it created a lot of capital and a lot of ambition, and a lot of funds, but a lot of capital to work above what I call that normalized level.

We were very disciplined and actually didn't have any that we did above that level. And we're still able to deploy massive amounts of capital, over $18 billion, invested in that period of time. Now, all that said, we were still in a down economy that we're seeing today. We've just now completed-- we announced yesterday a company called Aptean that we sold.

In that sort of environment, if you build high-quality companies, we have the ability in that point at that point to actually sell these companies in these down markets. So seen in the last 12 months, everything from Mediaocean to Dato to iCIMS. I mean, these are businesses I think we've done a great job in building the capacity of those companies to do really well. And of course, Aptean is one we just recently announced. And of course, the sale of Ping, which we completed, which I think closes the next week and a half or so.

JULIE HYMAN: So you guys have still been busy. I'm curious what's your advice to retail investors would be when it comes to tech stocks. You obviously see some good valuations still out there. Do you think that retail investors should be looking at tech stocks right now?

ROBERT SMITH: Well, the way I like to say, not all tech stocks, of course, are created equal. Enterprise software. If you look at the earnings of a lot of the enterprise software companies, they actually are holding up pretty well. Now, their stocks continue to get hammered for a couple of I'll call it technical reasons, part of which is they get pulled down by the consumer and the internet stocks.

And you have people who are institutional investors, crossover investors who are creating public books. And in those public books, they had consumer, internet, and enterprise. And if their consumer and internet books are down 50%, 60% and they levered that book up, they've got to meet those margin calls. Well, how do you do that? You sell into strength. So you're selling it into the enterprise businesses that have the float, have the capacity, et cetera.

Our market is really interesting because we're still 70%-- or sorry, 97% private companies. But in these markets, for us, as you've seen us, anytime we see downturns in the market, that's when we look at companies we I really would like to buy and now have become what I'll call more affordable for the type of underwriting that we do where we can bring our value creation metrics to it.

JULIE HYMAN: Let's switch gears a little bit. I want to talk about Morehouse. We're talking about 2019 when you paid off the student debt of the graduating class from Morehouse.

ROBERT SMITH: Yeah. Sure.

JULIE HYMAN: And then you ended up starting the Student Freedom Initiative, which helps to continue those sorts of efforts. But I'm curious to take a step back. Obviously, the Biden administration has done some student debt relief. Do you think we need a bigger overhaul of the student debt system in the US?

ROBERT SMITH: I do. I think we need to rethink what it is that we want in our economy. We want productive students. We want them to be able to increase their quality and standard of life, again, relative to their parents. Everyone wants to see that level of improvement. And look, not all kids need to go to college in order to create a very productive standard of living. So I think we have to be thoughtful about that. I think the universities have to think about being responsible deliverers of high-value education that can be used in work environments or entrepreneurial settings as part of what their relationship is with the customer, there being the student.

The Student Freedom Initiative which we set up is basically a fund that, in essence, these students they borrow money from so they can hopefully offset what I call the acute pain of parent PLUS loans, which I saw was pretty acute to the students at Morehouse. But when they pay it back, they actually pay it back into the fund that gets relent to the next generation of students.

We focus on STEM students, STEM students at HBCUs and MSIs or minority serving institutions, because we have to activate more of our citizenry here in America to be part of this digital revolution. STEM students have probably the highest possibility of participating in this digital revolution. So we want to ensure that we educate as many as we can and provide them with the opportunities to-- and on other side of that, of course, is internships and full-time jobs-- to participate in our economy.

Again, that scarcity of developers, that scarcity of technical talent. We need to address that since we pretty much closed our borders at this point in time to immigration, which was one of the fueling dynamics in America to fuel our productivity. So we've got to turn to our internal resources, being our citizenry, to get them to enable them to participate in the economy much more effectively.

JULIE HYMAN: We're unfortunately running short on time. So I have one more question I want to ask you. And it sort of speaks to the last thing initially we were talking about. You're frequently referred to as the richest Black man in America. Does that feel like a heavy mantle to wear? And what do you want your legacy to be with that sort of big moniker?

ROBERT SMITH: Yeah. That's a really interesting question. I think about it in the context of how I grew up. I grew up in a family where my mother and my father were very responsible citizens in the community. And that meant providing fabric of opportunity. They were both schoolteachers. But they also were civically enabled. My father started a north city park civic association, was the chairman of the local YMCA. And my mother and he worked on developing head start programs.

And so they were very invested in the education in a segregated neighborhood of the kids and giving them opportunities to improve their quality of education, quality of nutrition, quality of care that I think really made a big difference and for me and my family. So I think about it through that lens. And they had certain limited resources, very limited resources. I have a few more resources. So I'm delighted to bring organizational capacity, capital, and wherewithal to initiatives that I think are going to improve the standards of people on this planet and people in the communities that I come from.

JULIE HYMAN: Robert Smith, thank you so much for being here.

ROBERT SMITH: Thank you.

JULIE HYMAN: We really appreciate it.

ROBERT SMITH: Yeah. Good to see you. Yeah. Thank you so much.