David Breach – Software Specialist Enters Private Wealth (Private Wealth 6, EP.450)

David Breach is the President and Chief Operating Officer of Vista Equity Partners, a leading specialist in enterprise software investing with over $100 billion in assets. David joined Vista a decade ago when it managed $13 billion and has been instrumental in helping manage its rapid growth. Robert Smith, Vista's founder, was a past guest on the show, and that conversation is replayed in the feed. Our conversation centers on Vista's strategic expansion into the private wealth channel. David shares the firm's rationale for moving beyond its institutional roots, the lessons learned from other industry leaders, and the operational buildout required to serve private wealth investors. We discuss Vista's approach to product design and the pitch to offer differentiated exposure. David also addresses the challenges of balancing the needs of institutional and private wealth investors and maintaining discipline as more capital flows into alternatives. Learn More Follow Ted on Twitter at @tseides https://twitter.com/tseides?lang=en or LinkedIn https://www.linkedin.com/in/tedseides/ Subscribe to the mailing list https://capitalallocators.com/ Access Transcript with Premium Membership https://capitalallocators.com/signup Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com https://thepodcastconsultant.com/)

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Ted Seides?

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• 0:46Ted Seides?

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• 1:29Ted Seides?

  built for firms who are rethinking how work gets done. You're at your desk looking at a line graph of your firm's growth. The line is moving sideways, linear growth, and you know exactly why. You're constrained by your operational bandwidth that's been the same for so long, it just feels like the cost of doing business. RidgeLine is built to change that line's trajectory, to be the inflection point that takes your growth from incremental to accelerated with the team you already have in place. RidgeLine is the only AI-native investment management platform that brings together the front, middle, and back office with one set of data and powerful AI agents that automate

• 2:12Ted Seides?

  away operational drudgery, so your talent can shift from managing old technology to materializing new ideas. RidgeLine helps asset and wealth managers understand and improve their firm's growth trajectory. To see how your firm compares to 16,000 of your peers, visit ridgeline.ai/trajectory. If you file Form ADV, your firm is already there. Then talk to RidgeLine about how you can do more with the team you already have. Capital Allocators is also brought to you by Juniper Square, the operations partner trusted by the leading private market GPs. One theme that keeps coming up on the show is GPs that build the strongest and most durable

• 2:57Ted Seides?

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• 3:32Ted Seides?

  Hello, I'm Ted Seides, and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can join our mailing list and access premium content at capitalallocators.com.

• 3:59Speaker 01

  All opinions expressed by Ted and podcast guests are solely their own opinions and do not reflect the opinion of Capital Allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Capital Allocators or podcast guests may maintain positions in securities discussed on this podcast.

• 4:19Ted Seides?

  30 years ago, institutional investors held most of their assets in stocks and bonds. David Swensen led a movement to an approach to portfolio management that broadened the asset mix to alternative investments, including hedge funds, private equity, venture capital, and real assets. These days, almost every institutional portfolio incorporates significant allocations to alternatives to produce better outcomes with similar risk or similar outcomes with lower risk. However, capital in the hands of individuals has not yet followed suit. Private wealth portfolios, particularly the so-called mass affluent, typically hold only 2% to 5% of their assets in alternatives,

• 5:01Ted Seides?

  compared to a range of 20% to 50% for institutions. But that's changing quickly. Innovations in structure have allowed individuals to access alternative strategies at lower minimums with liquidity options not previously available. According to Arctos Partners, the six largest private banking and wirehouse platforms committed $110 billion to funds last year, approximately twice the amount invested from the six largest institutional investors in North America. And those flows are just beginning. The potential investment dollars from private wealth to alternatives are staggering. Every 1% asset allocation shift would equate

• 5:44Ted Seides?

  to approximately $500 billion of new investments. The impact of these capital flows will have ramifications for GPs and LPs for decades to come. How will the capital get deployed? What will it do to asset prices? What will it mean for returns and for fees? And who will win and who will lose? This mini-series, Private Wealth, explores the important questions raised by the accelerating convergence of institutional-style investing with private wealth. We'll hear from three of the most influential asset owners, one each from the private banking, wirehouse, and RIA channels, and three of the most significant asset managers

• 6:28Ted Seides?

  playing in the space. Just as this channel is in the early innings of changing the investment landscape, so too will this mini-series be just the beginning of our exploration of what it means for you. My guest on the sixth episode of Private Wealth is David Breach, President and Chief Operating Officer of Vista Equity Partners, a leading specialist in enterprise software investing with over $100 billion in assets. David joined Vista a decade ago when it managed $13 billion and has been instrumental in helping manage its rapid growth. Robert Smith, Vista's founder, was a past guest on the show, and that conversation is replayed in the feed.

• 7:12Ted Seides?

  Our conversation centers on Vista's strategic expansion into the private wealth channel. David shares the firm's rationale for moving beyond its institutional roots, the lessons learned from other industry leaders, and the operational buildout required to serve private wealth investors. We discuss Vista's approach to product design and the pitch to offer differentiated exposure. David also addresses the challenges of balancing the needs of institutional and private wealth investors and maintaining discipline as more capital flows into alternatives.

• 7:47Speaker 02

  Before we get to the interview, a quick announcement. We've set new dates for our Capital Allocators University for investor relations and business development professionals. Those dates are December 3rd and 4th in New York City. Later in the year is just a better time of year for this gathering. It's post AGM season, travel starts to wind down, it's right before the holiday crunch time, and it's a great time for capital raisers to reflect on their previous year and plan for the year ahead. December 3rd and 4th in New York City. CAU for IRBD is a closed-door gathering for capital raisers to connect with peers, learn from allocators and other experts, and really share invest practices with each other. You can learn more at capitalallocators.com/university. Thanks so much for spreading the word about Capital Allocators University

• 8:32Speaker 02

  for investor relations and business development professionals.

• 8:36Ted Seides?

  Please enjoy my conversation with David Preach. David, great to see you.

• 8:43Speaker 03

  Great to see you, Ted. Thanks for having me.

• 8:45Ted Seides?

  Why don't you take me all the way back to your upbringing?

• 8:49Speaker 03

  Well, I was actually born in a suburb of Toronto, Canada. My parents actually were not high school graduates. I'm one of three boys. And my father started life as a butcher and worked his way up and became a regional vice president for AMP supermarkets, which no longer exists, but was a big supermarket chain back in the day. Then in 1980, he was asked to take a job transfer and we ultimately ended up moving to Detroit. So that's how I ended up in the United States. I went to high school in Detroit. Graduated high school young. I was 16 when I went away to college, which was a little unusual. But I started pursuing a business degree and my father got me my first job,

• 9:31Speaker 03

  which was in food sales over the course of the summer. And then at the end of my third year, the company that I was working for offered me a full-time job. So I started to work full-time in food sales, pursued my degree at night at Eastern Michigan while I was becoming a food salesperson. That went on for about five years. And then I had this idea of going to law school. I really didn't know any lawyers, but I thought being a lawyer is a better job than being a juice salesman. So I went to law school and really just completely fell in love with studying law. Started practicing law in Detroit at a firm named Honigman Miller as a corporate lawyer.

• 10:11Speaker 03

  And just felt like this is what I'm supposed to do. I had some aptitude for it and I had a lot of passion for it. And then as it pertains to the world of alts, in I guess it was 1999, I was recruited by Kirkland and Ellis to move to Chicago and join their private equity practice. Back then, private equity wasn't what it is today. For corporate lawyers, it was actually not considered the premier place to practice law. People were doing the AOL Time Warner merger. That was the big part of law and representing private equity firms wasn't quite as prestigious, unlike it is nowadays. I started focused on private equity. I ended up being asked to move out to San Francisco to start a new office for Kirkland

• 10:55Speaker 03

  and build out a West Coast private equity practice. So I ended up making that move and ultimately built out a fairly large office. At the time, it was the fastest growing office that Kirkland had ever opened. And one of the important things about that move is I met Robert Smith. Robert had formed Vista in 2000. I had moved out in 2003 and I met Robert and started working with Vista, which was this new young firm that was only doing enterprise software, which was really the only firm back then that was that focused on software. Over the course of the next 10 years, I ended up building quite a large legal practice. I was on Kirkland's Global Executive Committee and was loving my life

• 11:38Speaker 03

  and enjoying what I was doing. And then I got a fateful call from Robert in the summer of 2014. And at that time Vista was about 13 billion of assets under management. I think we probably had about 100 total employees back then. And he asked me to come see him in Austin and he talked to me about his vision for Vista. He talked to me about where he thought enterprise software was heading. I could see how the alts industry was continuing to expand and grow. And I got the proverbial offer I couldn't refuse. So I ended up making a fairly major career pivot. Initially joined Vista as the Chief Operating Officer. A few years later was named President of the firm as well. And so I've been at Vista a little

• 12:21Speaker 03

  over 10 years now and we've had a really terrific run. We're a little over 100 billion of assets under management. We're one of the largest and most active investors in enterprise software globally and with about maybe 750 employees currently. It's been fun to be part of all that and I still have a tremendous amount of passion for it. I wake up every day just really excited. I get to do what I do.

• 12:45Ted Seides?

  You have to tell me, how does what you learned in food sales apply to what you've done since?

• 12:52Speaker 03

  Two interesting things. I think anyone getting some time in sales is going to benefit you throughout your career. In any job that anyone's going to have, you're selling in some form or fashion. Learning how to listen and ask questions and understand the needs of your customer and then thinking about what product you have or what solution you have that can fill that need. A lot of people just don't know how to listen. They don't know how to ask questions. They don't know how to understand the other person's perspective. So that's probably one of the biggest things that I took out of my sales career. The other thing is in sales, you get told no a lot. And learning how to be told no and get up the next day and go do it again and accept that you're going to get rejected nine times

• 13:37Speaker 03

  to get the 10th yes is something that a lot of people don't learn that in life. When you've been in sales, you learn how to handle rejection. That's a valuable lesson.

• 13:47Ted Seides?

  You don't often think of sales and then going to law. Also love to ask you a similar question. Of the various things you learned over your career in the law, what have been the most impactful on what you're doing now?

• 13:59Speaker 03

  Two big components of it. In private equity, you fundamentally are buying, operating and selling companies. So having a very deep background in transactions and how transactions happen, how parties act, how you run processes, those are all very valuable lessons. And when I joined Kirkland, I did literally hundreds and hundreds of transactions. I would do 60, 70 transactions a year in one form or fashion. So when I joined Vista, I had a deep transactional background that was very helpful. While I thought I was more of a business lawyer than the typical lawyer, I was certainly not an investor. So as I joined Vista, that was an area that I knew I needed to develop my knowledge base and

• 14:43Speaker 03

  really understand how we think about investing in software and why we like certain companies more than others, where we see opportunities to create value. The second part of it is A law firm is a professional services firm. An alternatives firm is a professional services firm where you are working with very high aptitude, highly motivated, ambitious people. And learning how to build teams, learning how to drive culture, learning how to spot talent and cultivate talent and opportunity. Some of my building out a fairly large legal practice, there were lessons I learned in that that certainly applied as we were trying to grow Vista.

• 15:23Speaker 03

  Some management lessons were transferable and certainly just being a very active practitioner of M and A was helpful.

• 15:32Ted Seides?

  You bring those two things together. I'd love to ask you about the people aspect of getting deals done. What are the most important things, just as it relates to the people on the two sides of a transaction that you saw where things worked and where things derailed?

• 15:47Speaker 03

  One of the most important things, the people that I've dealt with over my career that I thought were the most effective and that I tried to emulate as I was learning my craft is you need to have different approaches for the people you're dealing with. The best practitioners, they just have different speeds, different gears, different styles. And part of what you have to do is really understand and assess the person that you're dealing with. What are their needs? What are their goals? What are their issues that they might have internally or they might have with your transaction? And it goes back to that sales thing, listening and understanding what's their motivations and how do you persuade them? Because you really have to be able to persuade people.

• 16:32Speaker 03

  In most transactions, you're in fairly level playing fields. You want to buy, they want to sell, but no one has to do a deal. So being able to figure out where's the common ground that works for both of you? And how do you get there? Being able to understand people is a very important element. The best transactional folks, whether business or lawyers that I've ever worked with or across from were people that really sought to understand what your needs were, what your motivations were, and then how can we package something? It's a cliche about a win-win, but you ultimately do have to find a solution that is going to work for you and is going to work for them.

• 17:13Speaker 03

  Less good deal people don't listen, don't try and understand the other side. They come in with what their goals are without really understanding the other side's goals.

• 17:23Ted Seides?

  Let's turn to Vista. That's a tremendous amount of growth from 13 billion to 100 in the 10 years since you've been around. What's changed in the business to allow that growth to happen?

• 17:36Speaker 03

  If you think about the different components, one element is what market have we been in? And enterprise software has become the largest part of the global economy. Even though it's so large, it's continuing to grow in mid to upper teens compounded annual growth rates as far as you can accurately predict things. So one element of the growth is that we've been in a segment of the world that has grown quite rapidly and that has allowed us to raise larger pools of capital because we have a larger opportunity to pursue without having to compromise our underwriting and our investment approach. The second element of it is because

• 18:18Speaker 03

  we are sector focused, if you want to view software as a sector, we own today 90 companies with a little over 30 billion of revenue. They all have a lot of the same attributes, a lot of the same challenges, a lot of the same organizational structures. So things that we learn from one company are oftentimes transferable to 89 other companies. One of the things that I think we have done very well as the business has grown is we've really thought about how does the scale of what we do, how do we harness it for every one of our companies? As an example, we do a bunch of best practice sharing summits and CXO

• 19:01Speaker 03

  summits where we bring together all of the product heads in every one of our companies, all of the sales leaders of every one of our companies, all of the CFOs of every one of our companies, all of the CEOs. And we will have a whole bunch of content that we think that we want to deliver to that group of people. And then we're oftentimes having them deliver content to each other where they're talking about their value creation journey and what they've learned and how it's transferable to others. So harnessing the scale Of what we do within a defined set of businesses being enterprise software. I think we've gotten very good at as we've gotten bigger. We've also built a very large value creation team or apparatus.

• 19:46Speaker 03

  So we have over 130 professionals, some of whom are generalist operating partners, and many of whom are subject matter experts within each of the different operational areas of a software firm that work with our companies to help them optimize whatever they're trying to accomplish. So whether it's how do I incorporate code assist into my code writing? How do I think about my go to market strategies? How am I managing my product roadmap? How am I thinking about customer contracts and incentivizing my customers to sign the longer term contracts and whatnot? These are all things that we bring a set of resources to our companies to help them on that journey and to really train them.

• 20:29Speaker 03

  A lot of our companies, especially in our mid-market, they've never set up a development or a customer support center outside of the United States. We call that our center of excellence strategy. One of the things that we can do is help them. Okay, if you want to start a development center in Guadalajara, Mexico, or in India, or Eastern Europe, we've done it. We can help you do it and have you avoid the pitfalls that someone doing it for the first time are likely going to do. As importantly, we've stayed true to what we think we're pretty good at. We have not really had strategy creep in what we do. When Robert started the firm 25 years ago, his two fundamental thesis points were enterprise

• 21:11Speaker 03

  software is a really interesting type of business to invest in. And if we bring operational value creation excellence to these companies and we bring them resources to help them do that, that we can create value on a more predictable, repeatable and consistent basis. That's exactly what Vista does today. We just do it at 100 billion scale. So software's been this great place to be. Why does it continue to be? It continues to be the most productive tool that a company can implement. Our average company has about a 625% ROI to its customer.

• 21:52Speaker 03

  So if you're going to spend money in your company, there's almost no more effective way to spend money than to consume software that enhances the productivity of your firm. Today's market is a super interesting market, Ted. If you look at what's gone on over the last few years, we had a really interesting moment in software. So as we went into the pandemic and the COVID shutdown, very quickly after you saw a real acceleration of the consumption of software and technology, people had to digitize their supply chains, their customer relationships, their employee relationships. And you saw in the public markets, a major spike in valuations.

• 22:36Speaker 03

  Historically, software was trading six to eight, nine times forward revenue multiples. At the height of 2021, you saw it peak at a little over 17 times forward revenue multiple. So just dramatic valuations. And during that time period, we really avoided doing anything in the public markets because we just don't know how to buy companies at 17 times and have it be a good outcome because we did not believe that that was sustainable. Then in 22, you saw the tech wreck. You saw a pullback in spending, in particular in the technology space. And then you saw multiples crash. That created a really interesting opportunity to buy public companies, take them private

• 23:21Speaker 03

  at extremely attractive valuations. We engaged in a number of transactions in 22 and 23 along those lines.

• 23:31Speaker 03

  It's typically the case that private markets take longer to reset because people want to remember the multiple from 21 in 23. In the public markets, you're effectively for sale every day. The private markets, you can choose when you want to sell. So in 22 and 23, you saw reluctance by private sellers to reset prices. So more difficulty trying to find transactions in the private markets that would make sense. You also had this dynamic in 21, a lot of growth equity flowed into software. You saw a lot of enterprise software businesses get big growth equity investments that really gave them a bunch of runway. Well, most of those companies can't raise growth equity anymore because

• 24:12Speaker 03

  growth equity is running more towards AI than software. So you've seen private valuations revert to a more normal level. We think this is just a great vintage to be deploying capital, given this major reset in valuation. So I'd say that's the other reason why we think we're in a very attractive market right now.

• 24:34Ted Seides?

  We're going to take a quick break in the action to tell you about Brookfield. Brookfield invests in the thing behind the thing behind the next big thing. Their focus across infrastructure, energy, real estate, private equity, and credit is helping to build the backbone of the global economy. Brookfield combines deep operational expertise with disciplined, long-term investing, uncovering value, and partnering alongside clients to shape tomorrow's economy today. Invest in the businesses that shape tomorrow. Learn how you can own what's next at Brookfield.com/own.

• 25:12Speaker 02

  This is not an offer to sell or investment advice. Investing involves risk, including the loss of capital.

• 25:17Ted Seides?

  And now, back to the show.

• 25:21Ted Seides?

  How do you think about the risk alongside the opportunity of AI and Gen AI in a software-dominated investment thesis?

• 25:31Speaker 03

  We're looking at AI through three major lenses that I think some are more opportunity. And then there's elements where there's risk. Most of our companies have sovereignty and control over important and unique data sets and workflows. So that, if done correctly, should be your moat to both allow you to take advantage of the gen AI opportunity, but to also defend yourself against the risk of gen AI. There are some companies out there that do not have proprietary data. They don't have rights to the data. They don't have dominion over the workflows. There are going to be companies that you'd say five years from now, do they have a right

• 26:16Speaker 03

  to exist? And they might very well not have a right to exist. So as we look at new investments, we're really looking at it through that lens of what are their data moats? What are their workflow moats that we think as we enable them with gen AI, they should be the winner? So then you say, what's the opportunity? Operational efficiency. If you look at the different components of a software company, every one of those functions has an opportunity to be much, much more efficient with the use of generative AI. We're seeing productivity gains of 10 to 30% on code writing. That's going to grow. We talk about a company in the rule of 40.

• 26:57Speaker 03

  When we look at a software business and say, is it being run effectively? We look at the EBITDA margin and then the top line revenue growth rate, and we say those two should add up to 40. As we think about incorporating generative AI into the actual operations of the software business, we can see companies getting to rule of 50, rule of 60, rule of 70, and being significantly more profitable over the next few years as these solutions get better. Then you think about what are the revenue opportunities? Every one of our companies has some generative AI enhancement to their core solution. So they're incorporating it into the product itself, making it more valuable, giving additional

• 27:42Speaker 03

  insights, enhancing the user interface. The next version of that that you're hearing about is a gentifying software. We can create agents that will take affirmative action that would ordinarily be done by a human. A simple example would be you're using sales enablement software and the software tells you, hey, it's time to send an email to Ted to check in. The AI enhancement of that might be as you're writing your email, use Gen AI to help you write your email to Ted. The agentic version of that is the agent knows it's time to write an email to Ted, writes the email to Ted. It's highly personalized and hits send on the button. And the human doesn't do anything.

• 28:27Speaker 03

  And then if you hit a reply, there might be a different agent that actually reads the reply and then decides based on all of the training that it's done across thousands of customer emails, how to respond your email before the human being needs to read the email and write the response back. So that agent opens up a whole new window of value creation.

• 28:50Ted Seides?

  As you look at continuing to capture the growth in this space, I'd love to turn to the other side of the business, which is funding all of this. You've made a big decision to move into the wealth space and would love you to walk me through how you thought about that as a specialist.

• 29:07Speaker 03

  We're participating in the largest part of the global economy and it's continuing to grow at a very, very healthy pace. And we think we're very well positioned to capture the opportunity, given our specialization and given our focus for 25 years on this. So we really think about wanting to ensure that we have the right amount of capital to pursue the opportunity. I've been around the alt world for almost 30 years. You've been around it forever as well. Was an institutional play for a very long time, but I don't think that the institutions alone can provide the capital that we need to capture our opportunity. So as we thought about wealth, our first question was, we don't want to cannibalize any opportunity for our institutional

• 29:50Speaker 03

  investors because they are the backbone of our firm and our most critical relationships and partners. But if we could add some capital on top of that, will that enable us to do more, do the transactions where we've had to partner up with other GPs in order to? Have the capital necessary to pursue the opportunity. I'd rather not partner up with other GPs and have my own capital. So we really looked at it as could we enhance our strategy with having some additional capital from the wealth space and our conclusion was yes. And then we really thought about, okay, well, how do we do it the right way? What do folks that are really good at this, how have they done it?

• 30:33Speaker 03

  There have been some multi-sector firms that started skiing the snow before us. We spent a bunch of time looking at how they've approached it. What kind of products do you need? What sort of personnel do you need? We hired Dan Perron. We really wanted to approach it in the right way. But we also want to be thoughtful about it. We're not a public entity. We're really focused on what is the capital we need to enable our strategy? Not what is the capital we need to make our shareholders happy? So we're trying to be really thoughtful about here's the amount of capital that we want to raise in this channel to augment our institutional capital to make sure we've got the right level of capital for what we think our opportunity is and our capability to deploy it. So that was the decision we made.

• 31:16Speaker 03

  It's probably been about two and a half, three years ago now on this journey to think about product and to think about strategy. And I think one of the interesting things as a quote sector firm is we're not trying to say, invest with us instead of the others that have been in wealth first. We're saying, okay, you've got some very good managers who have got broad exposure and they're investing across a lot of different sectors. But if you believe in the power of generative AI, we think investing with Vista through the enterprise software space is a great way to capture the promise and opportunity of Gen AI. So we view ours as a complementary to one of the generalist managers as opposed to we think we're going to replace them.

• 31:59Ted Seides?

  As you did your research, what did you find you were going to need internally to pursue the opportunity in wealth?

• 32:08Speaker 03

  You definitely need to bolster your operations. There's just more operational lift to the wealth market versus the institutional market. So we brought in folks that are focused on that. How you approach the market is different. So we brought in some marketing people that understand the wealth channel. And then Dan has built out a coverage team to really cover the different sectors of the wealth market, whether it's the private banks, whether it's the wirehouses, whether it's the RIA channel. We've added, I think, 22, 23 folks in the go to market side of the wealth space. Do I think we need some really good people to manage the most critical relationships and to provide the support

• 32:53Speaker 03

  that this channel needs? For sure, we want to be thought leaders with the channel on why we think you should be investing in software and why we think, you should think about the different ways to play the generative AI opportunity, whether it's chips and hardware, whether it's infrastructure, whether it's energy. We think the long tail of opportunity is going to be in the application side, which is what it's historically been as you look at the evolution of technology. Then we want to be the preferred partner.

• 33:22Ted Seides?

  As you started bringing on the team and thinking about the channel, what were some of the key decisions that you had to make about where you wanted to pursue capital and where you wanted to leave for others?

• 33:36Speaker 03

  When you think about the wealth space, the easy play is I'm going to take my drawdown funds to the private bank channel and I'm going to put my drawdown fund on a bank channel and go raise some money. That's where a lot of us start. That's where we started. But then, as you say, okay, long term, what does the wealth market really want? Sure, they want drawdown products, but they also want evergreen products. We had to think through what would our evergreen product look like? And how would it invest relative to our core investing? So our approach to this is to have our products invest alongside each other, pari passu, as opposed to we don't want to. Be in a situation where we've got products competing for deals.

• 34:21Speaker 03

  We've been very disciplined as Vista has grown and as the software industry has grown. We've always wanted to participate up and down the market. What's interesting about software, Ted, is about 96, 97% of all software companies are private. So if you believe in software, if you like the business model, if you can see the power of the ROI that software brings to companies, it's really hard to do just as a public investor. And certainly in the middle and lower middle market, it's almost entirely private. We've always wanted to have products where we can give our investors exposure to the small cap, mid cap and large cap parts of the market. And as we were thinking about an evergreen product, we want to be able to give them exposure

• 35:06Speaker 03

  across the entire software market. So we thought about the product design. We thought about what are they looking for versus what we need. The other thing that I think has been interesting about as we've moved into wealth is that in addition to having a large private equity business, we've got a very strong credit business that is focused on software and we've got a combination of traditional drawdown funds as well as a private BDC product, which is well suited for the wealth space. So we're excited to bring what we do in credit to the wealth space as well. We always start with, can we bring something that isn't already there? That's a little bit differentiated, that is offering something unique and different.

• 35:47Speaker 03

  In the case of our credit business, we've got over 200 investment professionals that spend all day running around, meeting with software companies. And many, many, if not most of these companies, especially in the middle and lower middle market, are founder run businesses. In our private equity business, we generally want to buy control. Lots of companies don't want to sell control. They've got a capital need, but they're not ready to do that control transaction. So our credit business can come in with oftentimes a first lien credit solution with a very attractive loan to value, typically sub 20% with actual financial covenants, which don't really exist in the sponsor financing market. And oftentimes, we can get a little bit extra yield because it's a less competitive

• 36:32Speaker 03

  market and we're bringing something value added by being part of this VistA ecosystem. So oftentimes, we can get some warrants, which again, in the sponsor credit world, you don't. So when you look at our BDC or our drawdown funds, broadly speaking, a lot of the private BDCs, they correlate to each other 50, 60%. They're all going into the same deals. When we do a big buyout, typically, most of the major private credit firms are all participants in the credit. So we buy a company like Smartsheets, which is a publicly known deal. If you're in seven different credit managers, you're probably in Smartsheets seven times. So we're bringing something that's not as correlated because typically, we're going

• 37:15Speaker 03

  to deploy about 75% of our credit capital in these, what we call founder direct deals, rather than just doing sponsor LBOs. We think it's different. We've got to do a good job of communicating that to the market so that they understand, why do I need to add a Vista product?

• 37:31Ted Seides?

  When you put your evergreen strategy together, what's inside the box?

• 37:37Speaker 03

  We've got three main private equity fund products that are the typical drawdown structures. Any transaction that they do, this evergreen product is going to participate. So what's in the box is you're going to get enterprise software exposure across the full spectrum of large cap, mid cap, small cap. The transactions are all underwritten to the same standard. They're all going to go in at the same time, go out at the same time. So there's a very clear alignment of interest and not conflicting with any part of our strategy.

• 38:09Ted Seides?

  How do you balance capital that can come in, say, on a monthly basis with uncertain deal volume on the other side of what the assets will be in the fund?

• 38:20Speaker 03

  That's a little bit of the trick to the wealth space is deployment. We have a balance sheet. We'll be putting other facilities in place so that we can engage in, in some respects, warehouse pieces of transactions, waiting for the inflows to come in. On the one hand, because we're such a big investor in software, we do in a typical year, at least 15 to 20 platform investments across our portfolio. So the scale at which we operate, I think, is going to address a lot of that issue. And then there's just some things using the firm's balance sheet to help smooth it a little bit.

• 38:54Ted Seides?

  You mentioned that you want to be in the space to be part of your growth in the future. How do you moderate what could happen?

• 39:02Speaker 03

  There's two approaches to this market. I want to get every dollar people will give me, or I want to get the dollars that I think enable my strategy. We are in the second group. How we think about it is what's the right amount of capital to raise that's going to augment what we're doing institutionally? And that's what we're going to raise, assuming that we have more interest than what our target is, we're going to meter what we take on because it's really important to give a good experience to the investors that you do take on. It's critically important that we honor our obligations to our institutional investors as well. So you just have to balance it. And again, we're not trying to grab every dollar that we can grab. We want to enable our strategy.

• 39:45Ted Seides?

  As well known as the Vista brand is in the institutional space, it's probably equally not known in the wealth space. I'd love to hear how you've thought about building your brand in a new channel.

• 39:56Speaker 03

  What's interesting is in my capacity, I meet with a lot of RIAs. And I would say among that cohort of folks, we're actually very well known. Most of them are very familiar with Vista and our reputation in the enterprise software space. At like the actual consumer client level, Vista would not be a household brand. Robert, our founder, he's a fairly well-known guy because of some of the philanthropy he's done. But I think within the RA space, I seldom have to meet with a firm and explain what we do. I have to add another layer of detail to it. But I think as we continue to build out in the space and resource it, we want to be

• 40:37Speaker 03

  known as folks that are delivering in a differentiated way and financial advisors that want to augment what they're otherwise doing. We hope we'll get that message through to folks.

• 40:47Ted Seides?

  What have been some of the biggest unexpected challenges on this journey the last three years in moving into the space?

• 40:52Speaker 03

  I'd say structuring the product and thinking about what do you want your product to be and what do you think the right amount of capital is? We spent a lot of time focused on that. There are a lot of fantastic firms in the RIA community and really making sure that you're resourced to meet with them, explain what you're doing. I'm on the road an awful lot, meeting with folks and I was warned upfront that I travel quite a bit for my day job to begin with and Robert and some of their partners do and that's going up. I love the meetings and it's a lot of fun. I love talking about Vista and I love meeting with smart folks that are interested in hearing about us. It's not quite a hand-to-hand combat game, but you really do have to make yourself available

• 41:37Speaker 03

  and really spread out and get your message out.

• 41:40Ted Seides?

  What does success look like for you in the wealth channel over the next few years?

• 41:45Speaker 03

  Raising the capital that we think we need to raise with partners that view us as partners and with our institutional investors. We really want to be viewed as a partner. We've got to really listen to the voice of our investors and deliver what solutions they need. I think success for us is that we have deep partnerships in the wealth space where people know what we're trying to do for them. We actually deliver on what we say. We stick to the strategy as we've articulated it and they view us as a reliable and consistent partner. We believe that we're one of the premier investors in our space. And if three or four years from now, if I've got clients that I want them to have exposure

• 42:30Speaker 03

  in this part of the economy, these are the guys and gals to do it with, then I'd say we've been successful. And I think it's important to be disciplined and to be consistent to who you are.

• 42:40Ted Seides?

  How do you address some common concerns in the institutional community that there's the potential for so much money that can come from wealth? That that'll have an impact on purchase prices, returns going forward?

• 42:51Speaker 03

  It boils down to what are you trying to accomplish? I can look any of our institutional investors in the eyes and say, we are not trying to raise every dollar we can get. We understand very clearly our obligations and our commitments to each of you, and we're going to fulfill those commitments. And we believe that getting some additional capital in the wealth space is going to enhance our ability to do what we want to do for you. That's how we're approaching it. And like all things in life, the proof is in the execution of it. As I'm out talking to our institutional investors, there are concerns broadly about this trend in the industry. I would just encourage each institutional investor, you have to evaluate each of your partners on what their strategy is and how they're approaching it.

• 43:36Speaker 03

  And hopefully folks see what we're doing and understand the value of it to them.

• 43:42Ted Seides?

  All right, David, I want to make sure I get a chance to ask you a couple of closing questions. What was your first paid job and what'd you learn from it?

• 43:49Speaker 03

  So my first paid job was being a newspaper boy. And that probably taught me the discipline of being on time. Because if you're delivering that Saturday or Sunday morning paper late, your customers get really unhappy.

• 44:03Ted Seides?

  What's your favorite hobby or activity outside of work and family?

• 44:06Speaker 03

  Having moved to Austin about five years ago, I absolutely love boating. And I love to get out on Lake Austin. I've got a little wake surfing boat. And my wife loves to go out. When my kids are in town, they come out. And I would say spending time on the water is my favorite hobby when I'm not working.

• 44:25Ted Seides?

  What's your biggest pet peeve?

• 44:27Speaker 03

  Throughout my career, I frankly can't stand people that manage up well and manage down poorly. I honestly have always wanted to live life the other way, that folks that are organizationally at a different level below you, you should be nicer to those folks and more respectful than the folks above you. I've encountered a number of those folks in my career, and I really don't like it.

• 44:53Ted Seides?

  All right, David, last one. How's your life turned out differently from how you expected it to?

• 44:58Speaker 03

  Well, as a person who started as a juice salesman going to Eastern Michigan, I never would have expected that I would end up as the president of one of the largest private equity firms in the United States. So needless to say, I don't think you can have a more unusual outcome than that.

• 45:15Ted Seides?

  David, thanks so much for taking the time and sharing your experience on the Wealth Channel.

• 45:19Speaker 03

  Thank you. It's great to see you again, Ted, and appreciate being here.

• 45:24Ted Seides?

  Thanks for listening to the show. To learn more, hop on our website at capitalallocators.com where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more. Have a good one and see you next time.