CAIS Live Conversations, Building With Alts

Robert F. Smith, founder and CEO of Vista Equity Partners, was first startled by the productivity gains from computer systems as a recent chemical engineer graduate. With more than 600 completed transactions under his belt, Robert now envisions further transformation in enterprise software borne out of GenAI. In this episode, he chats with Brad Walker, Chief Client and Product Development Officer at CAIS, about his early career, Vista’s work to generate value in portfolio companies and his views on achieving product superiority. 

(00:00) Introduction and Host Welcome
(01:32) Robert Smith's Early Career and Industry Beginnings
(03:51) Defining Enterprise Software and Its Value
(05:36) Vista’s Approach to Operational Efficiency
(08:27) The Concept of Product Superiority
(11:46) Vista’s Value Creation Framework
(15:00) Generative AI: The Next Frontier
(19:16) Robert Smith’s Personal Insights and Bucket List
(21:42) Closing Remarks

Creators & Guests

Host
Alex Cavalieri
Head of Marketing, CAIS
Host
Brad Walker
Senior Managing Director | Chief Client & Product Development Officer at CAIS
Guest
Robert Smith
Founder, Chairman and CEO, Vista Equity Partners

What is CAIS Live Conversations, Building With Alts ?

CAIS Live Conversations, Building With Alts, tackles the often untapped potential of alternative investments by sitting down with the various players in the alts ecosystem. Listen in as we dive into alternative investments from the perspective of industry experts, RIA executives, IBD executives, alts manager leaders, and alts experts. Hear what other advisors are doing, learn about new technology, and join us as we turn investment complexities into real-life concepts that could potentially help diversify and drive growth in the independent space.

Welcome to the CAIS Live Conversations podcast. I'm your host, Alex Cavallari, Head of Marketing here at CAIS. We are the leading alternative investment platform for the independent wealth community.

In these conversations, I'll sit down with industry participants from asset management executives to RIA and IBD leaders to uncover their insights and stories that may be driving the growth in the world of alts. Each episode, we take a deep dive into the views of those who are breaking down the barriers and making alternative investments accessible to financial advisors. In this episode, Brad Walker, our Chief Client and Product Development Officer at CAIS, sits down with Robert Smith, founder and CEO of Vista Equity Partners, a pioneer in enterprise software investing.

As the founder of Vista, Robert Smith has spent the past 25 years guiding the firm through more than 600 completed transactions. And in this conversation, we explore his beginnings in finance, Vista's philosophy on value creation, the concept of product superiority and a bucket list goal, a 34-day walking journey that millions have completed. Let's dive in.

The views and opinions expressed by the speakers herein are as of the date recorded, and solely reflect the views and opinions of the speaker, and not necessarily the views of CAIS or the broader financial industry. This podcast does not constitute an offer or solicitation to buy, sell or hold any securities, financial products or services on behalf of CAIS, its affiliates or any third-party investment managers, their affiliates or strategies. This podcast is provided for information purposes only and is intended for an audience of investment professionals.

Welcome everyone. This is CAIS Live Conversations, Building With Alts. This is Brad Walker, Chief Client and Product Development Officer at CAIS.

I am extremely excited to be here speaking with Robert F. Smith, Founder and CEO of Vista Equity Partners. Robert, thank you for being here.

Brad, always a pleasure to see you. This is fun to be here.

Oh, right. Amazing. All right.

Well, let's kick off. For those listening that may not have heard of Vista. Vista, alternative asset manager, $100 billion in assets, huge focus and emphasis on enterprise software, technology.

What was your journey?

Long but fun journey. My career started actually early days, Bell Laboratories, the dawning of the computer age. And then as I finished my undergraduate Cornell in chemical engineering, I basically went into industry and was implementing, think about computer-based control systems into process industries.

Process industries, everything from automotive to food products, to insurance, oil and gas, whatever it might be. And as part of that, I was actually programming, what are called programmable logic controllers to control systems. And what was interesting about that was you saw how when you implement a computer system in a process industry, the massive amount of productivity that comes from it, and one of the plans I implemented, one, it was a 26% increase in production.

So this is a facility that was built in the 40s. And think about 26% increase in production, which is a whole shift. Right.

So then, one thing that occurred was Moore's Law made computing power more efficient, lower cost. And so it went from the large-scale Fortune 500 type companies to smaller companies. And we started implementing these computing systems in offices.

That same sort of productivity dynamic occurred. You know, way back in the day, you would actually go and do everything from word processing to spreadsheets to efficiencies in managing supply chains, to even things like, you know, managing the way that people were getting paid in their time sheets, right, which were all manual. They became automated, etc.,

which now today, you know, you think about it, it's no-brainer. But then it was a massive productivity dynamic that occurred. Well, what was interesting in my journey, I then worked for a place called Goldman Sachs, worked in M&A, went out and was asked to help start our tech group.

I was the first M&A banker on the ground in San Francisco, focused on tech in 1997.

1997, good.

Yeah, and I had a great group of clients. You may have heard of one called Apple Computer, probably heard of them, one called Hula Packers, there's one called Texas Instruments, a little company called Yahoo, a little company called eBay. Those are all my clients way back in the day in Silicon Valley.

And it was interesting to me, I saw people who were, you know, investing, but they were venture capitalists in software and no one was doing buyouts in software. And when you think about the model of enterprise software, enterprise software is business to business software. For some of your clients, you may not know that there's, you know, call it consumer software that you and I use every day when we're going from place to place and wanting to get in a car that we don't own and all that sort of stuff.

That's consumer software. That there's business software. Business software is a thing that actually ensures there is consistency, reliability in the way that business transactions occur.

Everything from how you now buy an airline ticket and how it's delivered to you digitally to the way that an insurance claim might be processed to ensuring that when you get paid from work, that wire transfer actually goes into your account. That's business software in essence. And you want it 100% reliable.

Well, the interesting about business software is it is still, for the most part, I call it a 95% gross margin business. You build it once, you sell it many times. There's no working, there's negative working capital.

It is something that has no cap back. So it has a really interesting business model associated with it. That if you operate these businesses efficiently, they can liberate massive amounts of free cash flow.

And if you actually create product superiority in the delivery of these products, you actually have the ability to hold customers, not for quarters or for years, but for decades. And no one was doing buyouts in enterprise software. So, of course, I thought, man, that's pretty good idea, right?

Let's build a place where we can actually find these enterprise software companies that are mission critical, business critical, and enable those, either, in that case, owners of those businesses at the time, the founders of those businesses or ultimately the stewards of those businesses, to operate their businesses more efficiently. And that's what this is all about. We are bringing what I call operational efficiency to these enterprise software businesses so they can grow faster, be more profitable and create a more reliable system of how they're delivering the products to their customers and then ultimately deliver that back to their investor base.

Excellent. Let me bring you back two steps.

Sure.

So Goldman Sachs, you're the banker leading enterprise software technology. Was there a distinct moment when you thought you were on to something with enterprise software that got you to found and run Vista to where it is today over $100 billion in assets?

Yeah. The distinct moment, like all things, is a thousand cuts of moments. One is, when you go in as a banker, you'll see hundreds of companies in a year, evaluating them.

People will, at the time, they bring to Goldman Sachs, hey, I want you to sell my software company, my business. We do some due diligence and figure out if this is the kind of business we want to represent, if it's big enough, if it's worth, call it the time of what was a fledgling technology business. And when you see that, what you saw was a wide variability of how people operated their businesses.

You saw some that the way they go to market in infrastructure, where they'd have all their salespeople sitting in one place, the headquarters location, as opposed to having a distributed sales force. Or there was no administration for consistency in the way they drove contracts, or consistency in the way that products were built, or consistency in the way they hired people to develop their products. And so when you see a few hundred companies like that, you say, you know what, if you operate them more efficiently, okay, according to certain standards, we now call them best practices, of which we have now over a hundred or so that we drop into our portfolio companies as required, that you can actually have a pretty consistent outcome in the way that these businesses will perform.

So it was a whole series of moments that led to that, aha, this is actually something that can actually work in the marketplace. And today, it is, okay, how do you now GenAI enable these companies? These companies often have unique data sets, unique workflows that they sell into their industries.

And so how do we now ensure that we can bring this new technology, this new kid on the block, GenOchive AI, to enable those businesses to be more effective in their go-to-market motion, in the products that they're building, or actually expanding the TAM, the total addressable market, the products that they can actually sell into their customer base?

We're going to come back to AI here in a second.

I hope so.

I want to hit... You mentioned something called product superiority.

Yeah.

It's a new phrase. First time I'm hearing it. So I think our listeners are going to say, Hey, Robert, let's dig into that for a second.

But talk about it. What is the concept? And if we can bring it back into wealth, how could financial advisors use product superiority?

Right. So the way to really think about the markets that we live in generally, and I'm going to say this generally, they are determined typically by either some price advantage or some product superiority. In enterprise software, business software, there is usually a, I'll call it a consolidation on one or two platforms and those one or two platforms provide superior products to that industry based on whatever criteria that industry is desirous of at that time that ultimately leads to long term economic advantage in that marketplace.

Here's a case in point. 30 years ago, there were five or six, depending on how you want to count them, different spreadsheet products in the marketplace. Now this is going to be, I think we're talking to registered investment advisors.

Those over the age of probably 28, 100% all use Excel. Okay, under the age of 28, you're now seeing some using Google Sheets, right? Okay, or some Smart Sheets or something like that.

So what has actually occurred over time was in the early days, there's a thing called Multiplan and Asterix and VisiCalc. And all of these were spreadsheet programs, Lotus 1, 2, 3. But what occurred was this little group called Microsoft figured out that if they had product superiority, i.e.

invest a lot of money in Excel, and then the second piece of this is what we call Execution Excellence, the ability to drive that superior product onto a platform, in that case it was this office product, they ended up capturing all of the market share for the spreadsheet business, which became a global business once we distributed computing power. And all of a sudden, they are the only ones providing a solution set into a marketplace, not for quarters, not for years, but for decades. And in their case, it was actually generations using that product.

And in spite of the amount of money that was put in different markets for additional products, it is only recently that you see an emergence of a new platform or sets of platforms that is actually creating a challenge to that market. And that challenge still is less than a 5% market penetration by those who are providing those sorts of solution sets into that marketplace. So it's quite of an interesting dynamic.

So I like to say enterprise software still is a winner-take-all, winner-take-most type market. And product superiority is one of the critical factors for success in that marketplace.

Fascinating. Love that. Because we see financial advisors every single day asking us for the same exact thing.

I think we all ask ourselves for the same thing. Our most precious resource is time. Right.

And so how do you become more efficient in your practice? Give yourself more time, more time to spend with clients, et cetera.

Right. I think to that point, Brad, just to pick up on the last part of your question, it will become essential for CAIS and others to deliver superior products. I'm talking about the ability to enable, to enable the registered investment advisor to deliver a superior experience to their customers.

Some of that's going to be, okay, the selection of assets, the selection of alternative assets. Some of it's going to be the way that they actually engage with their advisor. Okay.

What is it that they're looking for? When are they looking for it? Some of it will be, I just need to answer a question.

I need to understand what this alternative assets might, what it is. Okay. Some of it might be, I need to understand why am I getting this particular selection?

Why does it make sense to invest in enterprise software as opposed to invest more in real estate as an alternative, right? Given what the market is. And delivering a platform set of tools and set of experiences is really what the opportunity set is for CAIS, which is one of the reasons why we're here and we're partnering with you.

Yeah, we appreciate it.

It's our pleasure.

Look, you're spot on. Let's pull that thread for a second. So, you make an investment in a company, an enterprise software company.

You're doing more than just looking at financial metrics. You're digging into the company before you make your investment. You make the investment.

What role is Vista playing to create efficiencies or bring enhancements? What infrastructure have you built at the organization to really find these companies where you can 10x them, right? If they are kind of adopting some of your ideas.

Yeah. So that's a great question. Thanks for asking it.

I think this is what I call our most differentiated advantage in our marketplace. You know, we have a group called Value Creation Group. And what we look to do is first and most importantly, underwrite to what we call critical factors for success being under our control.

Things that we know how to do. You know, when we go and meet an entrepreneur who owns an enterprise software business and they're, you know, at that point where they're doing, you know, 70 million in ARR, you know, or they're doing 100 million ARR and they want to go to 200 million. But they haven't quite figured out a few things like territory management or they haven't figured out, you know, what's the right pricing structure or what the right contracting agreement should be in place.

And or, you know, what sort of platform they should be delivering their next generation of product or software on or how to utilize GenAI in enabling their product to be more efficient for their customers going forward. What we do is bring a whole group. We have over 100 plus subject matter experts, as well as our investment team, to when we do the underwriting, saying here are the five things we're going to change.

Here are the eight things we're going to change. Here's we're going to work with your management team to install, I use that word, to install these best practices, to be a part of your culture, to be a part of your way of you do business. Why do I say the word install?

Because it creates a sustainable business outcome. What we want to do is accelerate the corporate maturity of the businesses that we invest in and when we buy. Because now that positions them to be faster growing, more profitable and the ability to sell them to the next buyer who can now leverage that benefit to capture more economic rent for them, which gives us a better price where we can sell the business.

That's what we're focused on doing. And we think that gives us the ability to scale across our small or medium and our large businesses as well as our credit platform.

Yeah. And 25 years doing it, I mean, you're on top.

Well, so far, like all things, you've got to knock wood and keep working every day. And GenAI, I think, is going to be the next enabler of that, you know, we are full. Go ahead.

Yeah, if you don't mind, let's touch on GenAI for a second. It is, everyone's talking about it. I think it hits everything you're touching on now.

How is Vista leveraging GenAI, number one? Number two, if you can help our listeners understand how when you are building your portfolio of different companies, GenAI is one thing. And then, are you able to spread that across other portfolio companies?

Yeah, great question. The way to think about this, GenAI is an enablement tool for enterprise software. There are various investment cycles that will manifest as GenAI becomes a mature and utilized tool and capability.

The first wave in all of these things, typically, I call it the economic benefit goes to the hardware. So, the silicon providers, the hardware providers, they're going to be the ones who capture this first wave, which you're seeing play out in the market today. Okay, at some point, they become commodity-like at the end of the day, because there's going to be certain geographies where they may not get there, but there's going to be other companies in current geographies that will get there, and it's just a function, and it then becomes a function of price.

Moore's Law will ultimately kick in in that dynamic. And you take advantage of it in the early part as an investor, but at some point in time, you're looking at what I call commodity-like returns for a commodity-like product, commodity being defined by, in that case, silicon at some price. And then there's another wave that occurs about the same time, a little bit later in the lag, which is the infrastructure providers, which you're going to see.

The hyperscalers are going to build large data sets or data centers that, frankly, or least large data centers that are going to erect, and you'll be high-teens type returns in those businesses early on, and then it's going to drop down to an 8% or 9% bond-like business, like all of those kind of infrastructure-prior business. But the vast majority economic rent will ultimately inure to the benefits of what I call the software providers, those who actually have something they can apply GenAI to. Why do I say that?

Because if you have, I'll use the word sovereignty and dominion over data and workflows for your industry, and you are a trusted provider of data and information, and in that case, workflows, i.e. software, to that industry, most of those industry participants won't go out there and try to build their own GenAI applications using inference data. They're going to go to their software provider and say, okay, you're in property and casualty insurance.

How do I utilize your solution in my property and casualty business and utilize the GenAI solution for go to market or for more efficiency? Those are the businesses that will deliver the economic rent to their customers and actually capture that economic rent over not quarters, not years, but decades. You got it.

We want to be the GenAI enablement platform. So when you have an enterprise software company and you likely do not have access to the same tools, resources and relationships that we have. Give you an example.

We have a whole series of these things called hackathons. They are our own companies. We've had over, I think, a hundred of our teams have now participated in these.

Our companies show up. They bring one, two teams. We bring Anthropic, OpenAI, Stripe.

We bring all of these providers into AWS, Google, all the providers into this environment to teach, train, develop and work with our people to develop applications, not just say, oh, how to use it. Remember, this is my top developer is build an application. Then we grade these applications.

We have prizes and all that fun stuff. And then what we're able to do is say, okay, here's an application that sits on a particular platform. Does that application lend itself to five, eight, ten, twelve other portfolio companies?

It might be on different platforms. And so we make it platform agnostic, take the application, put it on whatever platform, and then replicate it across the infrastructure. That's the value of scale.

If you have an individual software company, you're relying on the individual instance of capability in that software company, where if you sit in our ecosystem, and we've got 86 companies a day, we've got four more we're going to consolidate or finish the closing on the next few months, over 90 enterprise software companies that we can GenAI enable and leverage the capabilities. We don't care if it's a 30 million dollar software company or a 10 billion dollar revenue software company. We have that capability to run it across our platform because the way we're organized and the way that we've designed our infrastructure to utilize that size and scale and capacity for the shared benefit and added benefit for all of the port coast.

Robert, I'll tell you, this 15 minutes, you're a fascinating individual.

Oh, that's kind of you to say.

You've built an incredible organization around Vista. The culture we've gotten to know is off the charts. What haven't you done yet?

It could be financial or just pleasure. What's on your bucket list?

That's a good question. So I'll tell you one thing I did. Actually, it's this time last year, which is why it's on my mind.

There's a walk. It's called the Camino de Santiago de Capistano. And it's a walk.

Millions of people have done it. And my cousin asked me to go last year.

And where is it?

In Spain. Now, they're everywhere, but that's kind of the main one. And we did six days.

And the full one is about 34 days or 40 days, depending on how fast or slow you are. I'd actually like to complete that whole thing. We did six days, and my cousin calls me like a year in advance.

I want you to walk with me for a bunch of personal reasons. And we grew up together. I said, sure, I'll go with you.

And like I say, if you call me this year for something to do next year, I'll probably have time to go do it. And then all of a sudden, it creeps up on me. And you do it.

But I will tell you what was most fascinating about it for me. One, I like to say, I came up with two things. One was a revelation.

The revelation was, I'm exactly where I'm supposed to be, doing exactly what I'm supposed to be doing. Which is a wonderful thing, as you play the tape of your life, decisions you have made, things that you've done, things you didn't do. Maybe I should have done this versus this.

It's a wonderful place to be, because it actually solidifies your place in your own mind about who you are, which was wonderful to come out with. And the second piece was to make sure that I am always speaking my truth with love. And so those are the two things that came out of that.

And again, that was six days. I'm like, man, I'm wondering what's going to happen if I do the full 34 days outside of sore legs and lose a few more toenails. But it's a marvelous experience.

And you know, it is one that you do. And again, I've met a lot of people who have now done it. You know, if you take that time and really, you know, do the solo part of the walk, I mean, you're walking with people, but you know, you're thinking yourself and you're going through that.

It's a marvelous experience. So that's what's on my bucket list. I want to complete that 34 days.

I like it. I like it. It's fascinating.

Like I said, this was this was excellent. I truly appreciate you being on our podcast here. And I appreciate everything you're doing at Vista.

And I can't wait to see what you do with GenAI.

Well, it's our pleasure. And we're happy to be partners with you and excited to move forward and enable your customers now to participate more broadly in this GenAI revolution, which is going to change everything. So it's an exciting time to be here.

Excellent. Thank you, Robert. Appreciate it.

Thanks, Brad.

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