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 The agreement allows Vista to temporarily finance large corporate
buyouts just with the cash from its $5.8 billion fund, as against
using both debt and equity to buy companies. Under the right
circumstances, this flexibility allows Vista to be nimble in
auctions and secure the best possible debt financing after it has
clinched a deal.
Two months ago, Vista used the clause in one of the largest private
equity deals of the year, committing to fund the $4.2 billion
takeover of TIBCO Software Inc with equity. One day later, it
secured debt commitments from JPMorgan Chase & Co and Jefferies LLC
for the deal, reducing its equity exposure to $1.6 billion.
The maneuver helped it not only outbid rival Thoma Bravo LLC in the
TIBCO auction, but also use JPMorgan and Jefferies, which where were
originally backing Thoma Bravo during the auction and were offering
better financing terms, the sources said.
Investors in the Vista fund, known as limited partners, include some
of the largest U.S. public pension funds, including the New Jersey
State Investment Council and the Oregon Public Employees Retirement
Fund. These funds do not disclose to their members and retirees all
the risks they undertake, because the agreements with Vista and
other private equity firms are confidential. The revelations
highlight how important aspects of the investment of public money in
private equity are shrouded in secrecy.
Representatives for these pension funds declined to comment.
Public pension funds have invested more money in buyout funds in
recent years in a search for yield amid persistently low interest
rates. Private equity accounts for 9.4 percent of total public
pension fund investments and has delivered a 12.3 percent annualized
return to the median public pension over the last 10 years, more
than any other asset class, according to the Private Equity Growth
Capital Council, the industry's lobby group.
Several pension fund investors, private equity placement agents and
lawyers interviewed by Reuters said Vista’s terms are highly
atypical and not widely known even within the private equity
industry. Most firms have caps - usually around 15 to 20 percent of
the fund - on how much equity they can commit to a particular deal.
Private equity funds also rarely make all-equity commitments for
such deals, preferring to tie up debt financing ahead of time. When
they do make such all-equity commitments, the equity checks tend to
be much smaller.
The reason is that doing so poses the risk that investors see their
entire capital tied up in one investment, potentially hurting
returns and denying them the benefits of diversification, these
industry sources said.
Such a situation can arise, for example, if the debt market
conditions were to suddenly sour, as it happened in the summer of
2007 before the financial crisis. In the TIBCO deal, Vista's
financial liabilities are capped at $275.8 million. But if the banks
walk away before the deal closes, TIBCO can try to force Vista to
close on the deal with its fund.
"It's a bit like walking on a wire without a net," said Alan Klein,
a partner at law firm Simpson Thacher & Bartlett LLP.
Vista declined to comment.
The sources said that Vista believed it wasn't taking any risk
because it already had more than $2.4 billion in debt offers from
banks when it made its equity commitment for TIBCO. Vista is also
extremely confident in its track record, the sources said.
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The firm is ranked ninth among the most consistently performing
private equity fund managers by market research firm Preqin.
FULL DISCLOSURE
Vista discloses the special equity arrangement to its limited
partners in its fund agreements, according to an excerpt of a
limited partner agreement seen by Reuters.
But two pension fund investors who spoke on the condition of
anonymity were surprised when they were told that Vista had
temporarily committed most of the fund’s equity in the TIBCO deal.
These investors and other industry sources said some Vista investors
may not have paid attention to either the arrangement or its
implications in what is typically a very lengthy and complex
contract.
"To me, that is taking an awful lot of risk," said Kelly DePonte,
managing director at advisory firm Probitas Partners LP. "This would
be an area of concern that I would raise for the limited partner to
look at."
EQUITY BRIDGE
Most private equity funds have a so-called "bridging" provision in
their agreements with investors that allows the managers to spend an
additional 5 percent to 10 percent of the fund on the basis they can
syndicate that commitment in 12 to 18 months.
Vista's latest fund, Vista Equity Partners Fund V, has an uncapped
bridging provision, according to a limited partner agreement excerpt
seen by Reuters and the sources.
That provision allows Vista to commit as much of its $5.8 billion
fund into one deal as it wants. It then has 18 months to reduce the
fund's exposure to a 20 percent threshold. Capital that is above
that threshold at the end of the 18 months becomes permanent capital
of the fund, according to the limited partner agreement.
Vista was initially working with Bank of America Merrill Lynch and
Deutsche Bank AG, but it held out signing up those banks because it
was looking for more aggressive financing terms, the sources said.
JPMorgan and Jefferies have offered Vista debt equivalent to about
11 times TIBCO's 12-month earnings before interest, tax,
depreciation and amortization to the end of September, which Moody's
Investors Service Inc called "very high."
(Reporting by Greg Roumeliotis in New York; Additional reporting by
Liana B. Baker in New York; Editing by Paritosh Bansal and John
Pickering)
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