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In our Sunday piece today, we’ll be discussing the pioneering investor who flipped the private equity world upside down, and more, in just 4 minutes to read

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QUOTE OF THE DAY

“Dreaming big to me meant knowing my history, but not being bound by it. It meant harnessing the past to drive me into the future. It meant grounding myself in who I was and where I came from so I could soar into who I wanted to become. ”

—

Robert F. Smith

FlIPPING PRIVATE EQUITY UPSIDE DOWN

A fresh start

For the nearly 400 students graduating in Morehouse College’s 2019 class, a historically black men’s liberal arts school in Atlanta, student loan debt was no issue.

But not for the reasons you might think.

See, these graduates received what the school’s president called a “liberation gift” from a billionaire investor hoping to ensure they could begin their careers with a clean financial slate.

That generous billionaire is Robert F. Smith, the founder and CEO of Vista Equity Partners. \

Incredible Wealth

At the end of 2021, he oversaw $86 billion in assets under management and permanent capital, touching around 70 enterprise software companies that employ over 75,000 workers. With a net worth of almost $7 billion, Smith is the third-richest Black person in the world, behind only Aliko Dangote and Mike Adenuga from Nigeria.

Further down that list is Oprah at $2.7 billion, Michael Jordan at $1.6 billion, Jay-Z at $1.4 billion, and Tyler Perry and Lebron James with $1 billion net worths.

His backstory

Smith grew up in a primarily Black, middle-class neighborhood in Denver, born to parents who were both school principals with doctoral degrees. From a young age, Smith was raised with a deep respect for education and philanthropy.

He’s since recalled watching his parents write monthly checks to the United Negro College Fund, always contributing some amount no matter how tight their budget was.

Smith went on to study Chemical Engineering as an undergrad at Cornell before becoming a product engineer at Goodyear and Kraft Foods. He later completed an MBA in finance at Columbia.

A titan of finance

From there, he became the Co-Head of Enterprise Systems and Storage at Goldman Sachs, spending six years there overseeing $50 billion worth of M&A transactions, including deals by Apple, Microsoft, Texas Instrument, eBay, and Yahoo.

Smith then set out in 2000 to blaze his own trail. He co-founded Vista Equity Partners, a private equity firm that would leverage his technical know-how to invest in enterprise software across several industries, from serving healthcare to oil & gas.

Vista would soon become one of the largest and most successful investment firms in the tech sector, with an impressive track record of savvy buyouts.

Proving the skeptics wrong

His decision to focus solely on enterprise software raised eyebrows initially, though. Many prospective investors were hesitant about debt financing for software businesses with few tangible assets to claim in bankruptcy courts.

Weary from the euphoria of the Dot Com Bubble at the time, investors also worried about something known as “technical debt.”

The term references the reality that, especially at that time, many software companies would prioritize speed over quality to meet ambitious growth deadlines, meaning they might have to spend considerable time later fixing flawed computer code — not the sort of sustainable business models that creditors like to see.

Yet, Smith knew that many of these businesses could tap into future revenue streams from subscriptions, known today as software as a service (SaaS). This was an insight few understood, and it positioned Vista perfectly to sink its teeth into a new market.

A former investment banking colleague later remarked, “Robert, over time, convinced an entire industry to see this cash flow stream of software revenue as a reliable annuity that could be financed with debt.”

The secret sauce

True to his engineering background, Smith says that Vista’s secret sauce derives from a “very simple methodology” that implements over 100 operating procedures known as Vista Best Practices.

Beyond identifying companies that offer software necessary to their client’s operations, Vista looks for companies that demonstrate success in, and control over, various key performance drivers.

One former Vista Managing Director described the investment process as a factory: “A deal comes in, and it gets compartmentalized, and they apply experts on each compartment. After it goes off the assembly line, the margins are higher.”

Giving it all away

With his wealth, Smith ranks as one of America’s most active philanthropists. He’s also signed Warren Buffett’s famous Giving Pledge, which obliges him to donate the bulk of his wealth to charitable causes after death.

After paying off the Morehouse students’ debts, he pledged to help other historically Black colleges and universities, setting up a nonprofit to provide financial and career support with a $50 million donation. Another notable donation was his $20 million commitment to the National Museum of African American History in 2016.

Takeaways

To what does Smith credit his success? Well, surely many factors, to say nothing of his grit, intelligence, and self-confidence. But a chance internship at Bell Labs changed his life, and the mentorship he received from a senior engineer ingrained in him “the joy of figuring things out.”

Smith is an inspiration not only for his contributions to the world of finance but also for his commitment to education and giving back.

And with that, we wrap up our Black History Month series covering a few remarkable African-American business magnates.

Check out our past pieces this month on Michael Jordan, Jay-Z, and Oprah. Or read more about Robert F. Smith here.