News reports about Vista Equity over the last few months have taken many investors by surprise. It is not often that such an apparent pillar of the investment community falls from grace — think Madoff, for those of you who were wondering.
When a founder, chairman and CEO of a firm admits to being part of the biggest tax evasion scheme in the U.S. history — not only does it say something about the leadership of the firm but also its culture. Fish, as they say, rot from the head and surely this is the case at Vista. While the jury is still out on who knew what and when, it is clear that one man could not do this alone. There are more chips to fall at Vista, in my humble opinion.
What does this mean for investors? It is clear that most, if not all investors, do not have the resources of the federal government to uncover a scheme as wide and broad as the one perpetrated by Robert F. Smith and Robert Brockman. However, that does not mean that they shouldn’t do a deep dive into this or any organization to get a true picture of firm culture.
Due diligence is more than just asking about and verifying operations and confirming that the proper checks and balances are in place. It also must be about learning about the people who are pulling triggers and making asset allocations. It is about understanding how decisions are made and by whom. And, most importantly, it is about how a firm is run and who is running it.
Over the last five years the IMDDA has grown from a fledging organization of a dozen or so members to one of more than 450. Our membership includes some of the most well-known institutional investors, from public and corporate pensions to endowments and foundations. We work with them to teach due diligence best practices and engage directly with them to provide the tools to make better investment decisions.
Best practices include leaving/redeeming from a manager that has anyone indicted for or admitting to being guilty of tax fraud – let alone the Founder, CEO and Chairman. With apologies to people at Vista who may be put out of work because of Mr. Smith’s actions over 20 years, I don’t see how any investor, regardless of the size and shape of their portfolio, can be still be invested in Vista. Nor does it make sense that the firm still be able to operate — think Arthur Andersen.
The recent news that Vista President Brian Sheth has left the firm also is unsettling. The fact that the company dropped the news of his departure on Thanksgiving Day, well, I think that says it all — there is something wrong here.
It is time for Vista investors to head for the exits. Due diligence does not end when an investment is made — it is an ongoing process. The lesson learned from the Smith fraud is that things are often not what they seem, and constant and ongoing due diligence is the key to good investment decisions.
It has never been more important for investors to perform accurate, complete, and ongoing due diligence. Investors need to take the time to execute deep dives into their existing and prospective managers to truly understand the what, where, why, and how their money is being managed.
As one famed investor said, when the tide rolls out, we see who is swimming naked. COVID is the tide and while the markets are rallying, and performance is up, rest assured there are a lot of folks swimming naked and not before long they will begin to show themselves.