Vista founder: now is ‘one of the best times’ for software investment

Robert F. Smith discusses the disruption AI will create, how the public market has a limited view in what's actually happening in software and the shakeout he expects in PE.

Robert F. Smith, founder and CEO of Vista Equity Partners, says despite the headlines around software's demise, this is one of the best time's to invest - 'for some'.

Speaking at Citywire's inaugural Private Assets in Wealth event in Lucerne, Smith discussed the evolution of enterprise software and the impact of AI, touching on his experience investing in the space for more than 25 years.

'As you all probably know, 96% of software companies are private. So, the public market even today only has a fraction and limited view as to what is actually occuring in the value creation activities in software companies,' he said.

Smith launched Vista in 2000, as the dot-com bubble burst and public markets turned on tech. But he decided to set up a fund that invested in enterprise software. Asked why he pressed ahead, he went back to his engineering background, recalling his work at Bell Labs and Goodyear Tire, which showed him how software can reshape productivity.

'When you install a computer system, you're now able to observe at a higher frequency… everything under the curve is waste that you now have the ability to eliminate. So that first experience, I eliminated basically 26% of the waste of that plant in that production line,' he said.

Back in 2013, many investors feared that cloud computing would also destroy software. But Smith recalled meeting Andy Jassy, who was then building out Amazon's compute infrastructure.

'We said if you do that well, you can actually decrease the cost of how you service and operate your businesses… And so I went to this guy who I met by name of Andy Jassy… I said: "Hey, we want to move our companies into this hosted environment." … And so we cut a deal in 2014 to do just that.'

But in his view, the cloud providers did not have the context or the workflows that the application providers defined and the intellectual property would still sit with the enterprise software companies.

Challenges for PE managers

It is no question that private equity is going through a tough time with dealmaking slower than before and companies on portfolios getting older.

The era of generating returns simply by riding low interest rates is clearly over, and Smith expects a shakeout. To survive, PE firms need to build internal structures to harness AI directly within their portfolio companies.

'Our private equity world got very comfortable in buying assets, having low interest rate environments, and doing modest amounts of work in capturing a rising tide,' he said.

'That was great...but before we get back to that, this new technology will infuse every single industry. It will change the shape of those industries. It will change the nature of who can benefit from the productivity that this technology brings and it will be those who are most adept at understanding and building institutions and structures that not only can create that value, but hold that value in those portfolio companies that will survive.'