Memorandum to: State Investment Council
From: Christopher McDonough, Acting Director
Subject: Proposed Investment in Vista Equity Partners Fund V, L.P.
The New Jersey Division of Investment (“Division”) is proposing an investment of up to $200 million in Vista Equity Partners Fund V, L.P. The Division has commitments to three of Vista’s previous funds; $100 million to Vista Equity Partners III, L.P., $200 million to Vista Equity Partners IV, L.P. and $75 million to Vista Foundation Fund II, L.P. This memorandum is presented to the State Investment Council (the “Council”) pursuant to N.J.A.C. 17:16-69.9.
The Division is recommending this investment based on the following factors:
- Stellar Track Record: Vista has returned a gross multiple of invested capital of 3.8x with a 50% Internal Rate of Return (“IRR”) on all realized investments since inception, as well as generating a net 1.8x Multiple of Invested Capital (“MOIC”) and a 29% IRR on all investments, realized and unrealized, since 2000. In addition, the second and third series of the Flagship fund are top quartile with respect to net IRR and net MOIC, and the third series was named the top performing domestic buyout fund in its vintage (2007) by Thomson Reuters.
- Operational Value-Add: The Vista Consulting Group, with over 30 team members, is focused on strengthening the operations of portfolio companies through the implementation of standardized, repeatable and proven processes. These operating procedures have materially improved sales prospects, customer satisfaction, R&D throughput and price increases at its companies. On average, the team has increased recurring revenues across its portfolio companies by 1.5x and expanded Earnings Before Interest, Taxes and Depreciation (“EBITDA”) by 2.8x across its portfolio.
- Attractive Industry: Vista is solely focused on the enterprise software industry, whose technology spans across many major industries from healthcare to real estate to financial services. The firm’s target company is typically a market leader with products that are mission critical to its users, have recurring revenue streams from long-term contracts and high customer retention rates. The highly predictable and strong cash flows characteristics of its companies’ provide insulation from economic cycles and end markets as evidenced by consistent portfolio EBITDA growth through the recent recession. Furthermore, software companies generate high EBITDA margins since products are created once and sold many times and their minimal capital expenditures result in high free cash flow conversion rates.
- Experienced Team: The senior management team has worked together for close to two decades, and over the past 14 years has completed over 110 transactions representing over $26.4 billion in transaction value.
A report of the Investment Policy Committee (“IPC”) summarizing the details of the proposed investment is attached.
Division Staff and its private equity consultant, Strategic Investment Solutions, undertook extensive due diligence on the proposed investment in accordance with the Division’s Alternative Investment Due Diligence Procedures.
As part of its due diligence process, staff determined that the fund has not engaged a third-party solicitor (a “placement agent”) in connection with New Jersey’s potential investment.
We will work with representatives of the Division of Law and outside counsel to review and negotiate specific terms of the legal documents to govern the investment. In addition, the proposed investment must comply with the Council’s regulation governing political contributions (N.J.A.C. 17:16-4).
Please note that the investment is authorized pursuant to Articles 69 and 90 of the Council’s regulations. The Vista Equity Partners Fund V, L.P. will be considered a private equity buy-out investment fund, as defined under N.J.A.C. 17:16-90.1.
A formal written due diligence report for the proposed investment, was sent to each member of the IPC and a meeting of the Committee was held on March 11, 2014. In addition to the formal written due diligence report, all other information obtained by the Division on the investment was made available to the IPC.
We look forward to discussing the proposed investment at the Council’s March 19, 2014 meeting.
Source: State of New Jersey State Investment Council