A federal lawsuit filed last week in the Central District of California against Vista Equity Partners, a private equity firm with more than $50 billion of assets under management, alleged that Omnitracs, a leading telematics provider for the transportation and logistics industry, is in dire financial straits.
Dr. Kurt Lauk, a former board member of Solera, which is owned by Vista, characterized Omnitracs as “failing,” writing that Vista “overpaid” for Omnitracs and was “unable to successfully and/or profitably run the company.”
Omnitracs’ chief executive officer, Ray Greer, disputed Lauk’s characterization of Omnitracs, calling him uninformed and said that his comments are not reflective of the company’s financial performance. Greer said that Omnitracs was growing faster than the industry and taking market share, enjoyed EBITDA margins “north of 30%,” and was continuing to invest in new cloud-based software products.
Greer did not provide numbers on net income or organic revenue growth and said that he could not comment on any pending transaction, whether an acquisition or potential sale.
As of publication time, Vista Equity Partners executives have not responded to a request for comment.
Lauk alleged in his lawsuit that Vista interfered in Solera’s corporate governance and steered Solera away from profitable acquisitions and toward bad deals that would benefit Vista to the detriment of Solera’s shareholders.
Specifically, Lauk said that Vista blocked Solera’s acquisition of Lytx, a video telematics company, and tried to force Solera to instead buy Omnitracs, which Vista had acquired in 2013. According to Pitchbook, in 2015 and 2017 Vista tried to sell Omnitracs, but the deals were cancelled. Lauk’s lawsuit concerns the 2017 deal.
In June, we reported that Omnitracs was again taking bids for a sale.
“Vista and [Vista chief executive officer Robert Smith] were hoping to pawn off Omnitracs on Solera by using Solera’s money to bail them out of an unsuccessful and poorly run acquisition, and bury it inside Solera’s portfolio where Vista could hide its Omnitracs-investment-mistake from its own investors,” the suit alleges.
After blocking the deal, Lauk said he was fired from Solera’s board and stripped of his stock options. Tony Aquila, Solera’s founder and former CEO, is also suing Vista for interfering in the governance of the company and withholding his stock options.
Robert Smith, the founder and CEO of Vista Equity Partners, is known to tell investors that he has never lost money on a deal. Vista, which specializes in software companies, has closed more than 300 transactions.
If what Lauk alleges is true — that Vista makes a practice of steering its operating companies to purchase other Vista operating companies — it would help explain how Vista has avoided realizing losses on any of its buyouts. Though the mechanism is complicated, Vista’s new investors are paying Vista’s old investors. On Sept. 16, the Wall Street Journal reported that private equity companies selling their portfolio companies from earlier vintage funds to new funds is part of an industry-wide trend that is on the rise.
Last month, Barron’s ranked Vista as the most aggressive private equity user of debt, as measured by the deteriorating quality of its covenants. Covenants are the strings attached to leveraged buyouts, the obligations that borrowers have to lenders. A lender to a company being acquired in an LBO might require the company to maintain a certain amount of cash reserves or stay above a certain level of EBITDA.
By using so-called ‘covenant-lite’ debt to finance its deals, Vista is able to operate its portfolio companies with less accountability to lenders and does not have to provide lenders with as much information about the performance of its companies.
Covenant-lite debt gives Vista more flexibility in how it runs the companies it purchases, but from the lenders’ perspective, it also makes the loans riskier. To compensate for the additional risk, banks charge a higher interest rate, making the debt more expensive to service. Private equity firms typically slash costs to widen margins and use the extra cash to pay off the debt, ideally resulting in a leaner, more efficient company that can then be sold for a profit.
Notably, the EBITDA (earnings before interest, taxes, depreciation, and amortization) margin Greer quoted for Omnitracs is before interest and does not take into account the cost of Omnitracs’ debt.
Dr. Lauk’s attorneys were not impressed with Vista’s strategy.
“Artificially increased margins from cost-cutting do not equate to a viable, long-term business,” said Sanford Michelman, law partner at Michelman & Robinson, which represents Lauk.