Mr. Murphy is clearly not persuaded by the flight of successful people and businesses from his jurisdiction. Perhaps he'll listen to another liberal Goldman Sachs alum who seems to have made an even bigger fortune in finance. This week the Journal ...
Gov. Phil Murphy (D., N.J.) studied macroeconomics at Goldman Sachs , so he’s resisting the conclusion that he needs to stop raising taxes if he wants to revive the Garden State’s economy. Mr. Murphy is clearly not persuaded by the flight of successful people and businesses from his jurisdiction. Perhaps he’ll listen to another liberal Goldman Sachs alum who seems to have made an even bigger fortune in finance.This week the Journal notes that Robert Smith’s Vista Equity Partners has achieved exceptional results by buying software companies and then applying a standard formula for operating them. Miriam Gottfried and Laura Cooper report:
Vista, which has done more than 300 deals, tells investors it has never lost money on a buyout—notable in an industry known for big hits and misses. Its largest fund has consistently been in the top quartile of comparable funds formed the same year, measured by annualized returns after fees, according to data provider Preqin. It now manages more than $31 billion, up from just $7 billion five years ago.
How does Vista generate its fabulous returns? The chairman isn’t telling. According to the Journal, “Mr. Smith has kept the details of his firm’s methods largely secret” and the firm’s best practices are “stored on a company server that makes a record every time anyone downloads or prints them.”
But at least part of the secret recipe has now been revealed. The Journal reports:
Former employees say cost cutting is critical to Vista’s model. Some of the companies Vista takes over are located in markets with a high cost of living, such as Southern California or New York City. To tamp down wages and other costs, Vista will relocate part or all of the company to a less-expensive city such as Dallas. Many employees won’t make the move, allowing Vista to hire cheaper replacements. Vista often keeps a company’s headquarters in place and encourages it to expand in lower-cost markets.
Of course a big reason living costs are so high in blue states like California and New York (and of course New Jersey) is the cost of government, whether directly imposed via taxes or indirectly via regulation.
The alternative approach—call it the red-state model—seems to be working not only for the companies Vista buys but also for Vista itself. While Mr. Smith has made significant political donations to Democrats, his donations have lately been coming more from Texas than from California. Vista has offices in both, and several years ago moved its headquarters from San Francisco to Austin.
Sadly, almost nobody is talking about moving software companies to New Jersey. Instead of boosting production of high-margin goods and services, the Garden State has lately been exporting the people who create them. A recent Journal editorial notes that between 2012 and 2016 “a net $11.9 billion of income left New Jersey, according to the IRS.”
Gov. Murphy has lately responded by enacting tax hikes on businesses and wealthy residents. He and New Jersey legislators also felt the need to impose additional levies on a number of activities including home-sharing and car-sharing. Perhaps these last two will help the governor soak fleeing citizens even after they close on the sales of their New Jersey homes. If they secure temporary housing via Airbnb and then take Uber to Newark airport, Trenton collects twice!
Even Goldman Sachs should have taught Mr. Murphy that a business model premised on customer flight is not built to last. Perhaps he and Mr. Smith could share a drink the next time they’re in Davos and talk about what makes the red states so appealing, even to blue investors.
This column will be on hiatus until July 23.
For promised Moresuch,
Appoint, advise and consent
Till we Havenough.
-- Myles. C. Pollin
Bottom Stories of the Day
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