News broke this morning that Vista Equity Partners, a famous private equity shop, has closed an $850 million fund to continue its purchasing of smaller technology companies.
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Vista is best known for its multi-billion dollar funds and deals, but this smaller fund is a double-down on a different model. The new fund, dubbed Vista Equity Endeavor Fund II, is the successor to the aptly named Vista Equity Endeavor Fund I, a smaller (around $500 million) vehicle that was described at the time of its debut as focusing on “companies too small to fit into [Vista’s] flagship funds.”
Returning to the newly-built Endeavor Fund II, Forbes reports that the capital pool will target firms with between $10 and $30 million in ARR (annual recurring revenue), at a price range of “$30 million and $100 million.” Recall that private equity shops do not usually invest in companies the way that venture capitalists do; Vista wants to buy whole firms, strip them of costs, change their growth curve, and then sell them, spin them out, or take them public.
It’s a model that Vista is good at; the firm’s leader Robert Smith has even come up with an analogy for how he views the market for software companies: “Software companies taste like chicken […] They’re selling different products, but 80% of what they do is pretty much the same.”
Don’t tell your favorite startup that, but for the Austin-based Vista Equity Partners, selling software and building SaaS companies is something that can be beaten into a formula.
Vista’s current real fundraising effort is a $16 billion vehicle that it has already raised $14 billion for, sums of money that tower above its new, smaller fund. But small deals can make for good returns, and given the sheer amount of capital that private equity investors are sitting on, it’s perhaps not surprising that Vista wants to take on all stages of the tech buyout market.
Private equity, as an investing class, has taken a greater shine to growth-oriented tech companies in recent years. Traditionally focused on EBITDA (profit) multiples, software companies tend to trade for less-certain revenue multiples. Notably, despite that valuation deviation, prices that PE groups are paying for unprofitable tech companies are rising.
How long the love-affair can last is probably predicated on the stock market staying near record highs; change the pricing of comps, and the market value of some PE holdings will dip.
For now, however, Vista is sitting pretty with a new, larger focused fund aimed at smaller companies, and a larger fund incoming with enough weight to derive its own gravity. Keep in mind that in markets, it’s always brightest right before night comes.