Vista Equity Partners execs' ties to Austin real-estate investor Nate Paul - Business Insider

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11/28/2020 3:04:00 PM

Once friends, now estranged: Inside the ill-fated relationship between Vista CEO Robert Smith and Nate Paul, the Austin investor embroiled in a political scandal

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on allegations of bribery and abuse of office in connection with an Austin real-estate developer who was a political donor.It marked a dramatic, high-profile escalation of the controversy surrounding Paxton and Nate Paul, the real-estate investor whom

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the FBI raided last yearfor still undisclosed reasons.What isn't as well known is that Paul, who is now 33, counted Vista Equity Partners' Robert Smith and longtime Vista executive Brian Sheth among his early supporters.Smith, who is 57, is the chief executive of Vista, a $58 billion software-focused private-equity firm. In October he admitted taking part in a tax-evasion scheme and using millions in unreported income to buy and renovate a vacation home in Sonoma, California; buy two ski properties and a piece of commercial property in France; and build and improve a residence in Colorado, where he funded charitable activities.

Smith settled with the US government for $140 million.Sheth, who is 44, was Vista's No. 2 executive, before a Nov. 26marked his immediate exit. Read more:Inside Vista Equity Partners, where a top exec is negotiating a messy exit and questions about its future loom large

The Vista executives, who are both billionaires, invested with Paul as he was building his real-estate investment firm, World Class Capital Group, dating back to at least the early 2010s, people who have worked with Paul said. Paul founded his firm in 2007.

Business Insider spoke with 15 people to learn more about the relationship between the three men, and the connections between Vista and World Class Capital.The relationship between Smith, Sheth, and Paul was marked by millions of dollars in support from the Vista executives, Sheth's attendance at Paul's nightclubs, and Smith's appearance at one of his club's openings.

But their bond turned sour after Paul found himself in financial trouble, and Sheth — who was first to form the relationship — stopped talking to him other than through his lawyer.Spokespeople for Smith, Sheth and Vista declined to comment on the record for this story.

Paul did not respond to multiple requests for comment about the contents of this article. Business Insider tried to reach Paul through Tom Watkins, a Husch Blackwell attorney who has represented Paul in litigation, as well as Michael Wynne, a lawyer who currently represents Paul. Neither provided a comment.

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Paxton's office didn't immediately respond to a request for comment.A young investor with big ambitionsSheth met Paul through Austin's Indian American community shortly after Sheth moved to Texas in 2010, according to one person familiar with their relationship. Sheth introduced Paul to Smith when Smith moved to Austin from Switzerland in 2012, a second person said.

Initially, Sheth and Smith saw in Paul a promising young investor who reminded Sheth of himself at an earlier age, a person familiar with their relationship said. Both shared an Indian heritage, and Paul had serious ambitions to rise to prominence in the world of finance.

His firm, World Class, focused on real-estate purchases, and its assets expanded as he snapped up shopping centers, bars and restaurants, and a live-music venue.Two people who worked at World Class in the early 2010s said Smith was considered to be a mentor for Paul. In a Forbes

profilein 2017, Smith used his influence to tout Paul's investing acumen. (The headline read, "The 30-Year-Old Texas Tycoon Who Is Building A Real Estate Empire.")The article — which said Smith had invested "tens of millions" with Paul across five deals — quoted him as saying that Paul's "returns have been spectacular" and "he does a good job returning capital early."

"I look at what Nate has accomplished; he has thought very strategically about areas like storage and the Austin marketplace," Smith told Forbes.Most of Smith's investments were in debt instruments, some of which converted into equity investments, a person familiar with Smith's investments said. Today, Smith has less than $5 million in equity across three deals, the person said.

Paul has also been close to Sheth since the two men met a decade ago. Sheth helped Paul change his business focus from distressed investing to purchasing attractive and performing Austin properties, a person familiar with their relationship said. Over the years, Sheth invested $12 million in deals with Paul and sometimes Smith, the person added.

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In 2012 a lawyer for World Class signed documents to create a company called RA Finance Partners LLC. It listed Paul, Smith, and Sheth as managing members, records kept by the Texas Secretary of State showed.Later that year, according to a document that Paul signed, World Class Real Estate LLC became RA Finance's registered agent. The entity was set up for the purpose of making a joint investment, one that never panned out, the person familiar with Smith's investments said.

In 2016 the Austin American-StatesmanPaul as an up-and-coming businessman, and it ran a lengthy Q&A. One part shed light on his relationship to Sheth.Asked who had influenced him the most outside his family, Paul said:"Brian Sheth, the president of Vista Equity Partners. He's been a mentor, a role model and is like a big brother to me. He's helped provide tremendous insight and guidance to me building my organization and developing as a business leader."

According to people who know all three men, they were joined not just by an interest in real-estate investments but also by their fondness for nightlife. Smith and Sheth both liked to socialize, and Paul delivered an Austin nightlife experience for them, one person said.

It wasn't uncommon in the early 2010s for Paul to be seen inside Vista's offices and attending offsite events, another person said.As part of his real-estate investing, Paul had acquired restaurants, bars, and nightclubs in downtown Austin, including Rio, a club with a rooftop pool. Both Paul and Sheth would bring friends to Rio and close sections of the club down, according to a person familiar with the events, who said it was known that they held an investment in the building that housed the club.

Vista houses portfolio companies in World Class propertiesA skyscraper owned by World Class in Dallas, called 717 Harwood, houses some of Vista's portfolio companies, including Active Networks, Lanyon, and Omnitracs.That Vista portfolio companies were paying rent to a landlord that may have been backed by Vista's principals struck Daniel Strachman, a founder of the Investment Management Due Diligence Association, as a move that could be frowned on by limited partners.

Strachman, who helps LPs conduct due diligence on investments, said that Vista should disclose such an arrangement with investors as an industry best practice, in part to maintain good relationships with clients.  "I would think that disclosure is not just a sentence. It's a signed document saying we have entered into this transaction," Strachman, who has not conducted due diligence on Vista funds, said. 

Vista's ADV disclosure form,filedwith the SEC in late October, showed that Vista employees and executives may invest in funds or investment vehicles that do business with other funds and portfolio companies. The ADV said these kinds of setups could pose conflicts of interest.

Business Insider could not immediately determine whether the disclosure existed at the time the portfolio companies signed the leases or whether the 717 Harwood situation had been specifically disclosed.Smith originally invested in some of the building's debt, before a conversion from debt to equity gave him a stake of less than 4%, the person familiar with his investments said.

That person said that each of the company's chief executives signed off on location and lease terms, after conferring with a third-party real-estate consultant and before Smith owned his stake. Business Insider couldn't immediately determine whether Smith was a lender to the building at the time the companies signed their leases.

Inside World Class, an unusually secretive culture with red flagsAs the three men projected an air of business success and even friendship, World Class' practices raised suspicions among employees, investors, and, ultimately, law enforcement, according to interviews with people who worked at the company in the 2010s.

Three sources said Paul was unusually secretive about his work, telling staff members he didn't want them interacting with investors directly — a message that raised red flags to at least one employee who left the company after being directed not to communicate with investors by email.

The unusual work environment led to high turnover, people who worked there said.Later, Paul faced lawsuits in Austin accusing him and World Class of fraud and misrepresentation. Read more: Business Insider »

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