Not surprisingly given those numbers, Vista has become America's fastest-growing private equity firm, managing $31 billion across a range of buyout, credit and hedge funds. Smith is putting all that money to work at a breakneck pace, with 204 software acquisitions since 2010, more than any tech company or financial firm in the world. After finishing an $11 billion fundraising for its latest flagship buyout fund last year, Smith has already deployed more than half of it, focusing as usual on business-to-business software. 'They recognize it's a kind of central nervous system,' says Michael Milken, whose bond-market innovations basically birthed the modern private equity industry and who has been a co-investor in two Vista deals. Taken together, Vista's portfolio, with 55,000 employees and more than $15 billion in revenue, ranks as the fourth-largest enterprise software company in the world.

Smith deploys quickly for a simple reason: While the rest of private equity basically relies on identifying and rectifying inefficient companies, Vista bets that it can improve the operations of even well-run firms--and claims that it's never lost money on a buyout transaction in its 18-year history. 'I am most proud of our system being a loss-prevention mechanism,' Smith says.

Perpetual wins translate into mammoth personal gains. With an estimated net worth of $4.4 billion, Smith has now eclipsed Oprah Winfrey as the nation's wealthiest black person. Vista has created another billionaire, Brian Sheth, the firm's 42-year-old president and dealmaker extraordinaire, who has a fortune estimated at $2 billion.

Ever since Forbes outed Smith as a billionaire in 2015, there has been a steady stream of press about him, from the lowest-brow (tabloid interest in his marriage to a former Playboy playmate) to the highest (coverage of his philanthropy, including his Giving Pledge commitment and his stint as the chairman of Carnegie Hall).

But neither Smith nor Sheth has ever before delved into Vista's secret formula, which has as many or more lessons for entrepreneurs and operators as it does for financiers. 'We do something no one else does,' Smith says.

On paper, Robert Smith's journey was a textbook American success story: A fourth-generation Coloradan, he was the son of two Ph.D.'s who became Denver school principals and put education first at home. 'Their father and I stressed the need for both of our sons to persevere once they identified and pursued a goal,' say Smith's mother, Sylvia. 'Robert understood that preparation, hard work and dedication were key to success in his classes.' In 1981 Smith headed to Cornell University to study chemical engineering, spending many nights and weekends in a three-person study group that met in the basement of the engineering school's Olin Hall. During summers, Smith worked at Bell Labs back home in Denver--a college internship he landed as a high school student after persistent cold-calling.

After graduating from Cornell in 1985, Smith took engineering jobs, first at a Goodyear Tire & Rubber chemical plant outside Buffalo, New York, and later at Air Products & Chemicals in Allentown, Pennsylvania. In 1990 Smith moved to Kraft General Foods, where he focused on coffee-machine technology. His efforts won him two patents: one for a stainless-steel filter and another for a brewing process that makes crema, the layer of foam on top of espresso. In 1992 Smith entered Columbia Business School. He was deftly acquiring the kinds of skills that would prove invaluable as the tech revolution exploded.

But Smith's rise was also incredibly abnormal. Even today, as the 155th-richest person in America and the 480th in the world, he faces constant, if often unwitting, racism. At a recent dinner in New York City with a group of senior Wall Street types, including a high-level executive of an investment bank, Smith moved to pick up the check for dinner, but the senior banker stopped him. 'I can't have a black guy buy me dinner,' he chortled.

The sting of such incidents, whether offhand remarks or doors more overtly shut to him, had an effect on Smith. 'It meant we had to work harder,' he says. 'And that's what we did.'

From his college days, when he joined the nation's preeminent black fraternity, Alpha Phi Alpha, known for its bookish but professionally ambitious members like Thurgood Marshall and Martin Luther King Jr., Smith had support. A crucial mentor: John Utendahl, who founded a pioneering black-run investment bank and happened to speak at Smith's Columbia graduation. Soon after, Utendahl, currently a vice chairman at Bank of America, took Smith to lunch and over tuna sandwiches persuaded him to ditch his M.B.A. focus of marketing to work on Wall Street. 'There is a spark, a poise, even a wisdom that you can't teach or learn. Some people are just blessed to have it,' Utendahl says. 'That's how I felt when I met Robert as a young man.'

SMITH LANDED IN GOLDMAN SACHS' mergers-and-acquisitions department, eventually moving to San Francisco to advise companies like Microsoft and eBay and becoming cohead of enterprise systems and storage. He was part of the team that helped Apple recruit Steve Jobs back.

For all his prominent clients, it was a little-known Houston company specializing in software for auto dealerships, Universal Computer Systems, that caught Smith's eye. Its margins were higher than any business Smith had advised, and he was stunned to learn the company's owners were plowing its cash into certificates of deposits. Why not acquire other mature software companies, Smith asked, and apply their best business practices there too? Great advice, but the owners insisted that Smith roll up his sleeves and execute the plan for them. They backed up their offer with a commitment of $1 billion of the company's cash, as the sole investor, if he started a private equity fund. 'I had one of those in-the-mirror moments,' Smith says. 'I looked at myself and asked, 'If I don't do this, how will I feel about it ten years from now?' '

The short answer: regretful. And so in 1999 Smith left Goldman and soon began recruiting cofounders, notably a business-school classmate, Stephen Davis, and a young analyst who worked under him at Goldman, Brian Sheth. The son of an Indian-immigrant father with experience in tech marketing and an Irish-Catholic mother who worked as a reinsurance analyst, Sheth would provide the yang to Smith's yin, focusing on acquisitions and divestitures, so that his boss could concentrate on investors and the companies themselves. Their relationship would become ironclad: 'When something is happening with our families we are each other's first call,' says Sheth, who vacations with Smith and served as best man at his wedding.

When Smith quit, most of his colleagues thought he'd lost his mind. He was on a partnership track at Goldman, which meant he was set to receive a multimillion-dollar windfall given the firm's impending initial public offering. What's more, banks didn't lend against software companies because they didn't have hard assets. How could Smith run a leveraged-buyout business in software without leverage? The concentration risk also seemed huge--investing in a single industry where a few innovative lines of code from a competitor could make a business obsolete overnight.

Brian N. Sheth, the co-founder and President of Vista Equity Partners.

But Smith saw things differently. Software was eating the world. Soon every company would become a software company, its business digitized. A portfolio of software companies serving 50 industries would be diversified with a stream of recurring revenue, given the shift to 'software as a service.' Smith's bet: Wall Street would soon realize that software companies not only gushed cash but actually had terrific assets to lend against--those ironclad maintenance contracts.

'Software contracts are better than first-lien debt,' Smith says. 'You realize a company will not pay the interest payment on their first lien until after they pay their software maintenance or subscription fee. We get paid our money first. Who has the better credit? He can't run his business without our software.'

In 2000 Smith opened Vista's doors in San Francisco. His first acquisitions were all equity. As the firm went from one profitable deal to another, Smith eventually got lenders to finance Vista's purchase of Applied Systems, an insurance software maker, in 2004, Vista's first leveraged buyout. In 2007 Vista merged software companies serving utilities and created Ventyx, increasing the number of products it sold to existing customers substantially--a subsequent sale to ABB resulted in a profit of nearly $1 billion.

When the dust settled, Smith's first buyout fund returned 29.2% annually net of fees. Smith raised money for a second fund from institutional investors, returning a net 27.7% annually. In 2011, seeking to escape the Silicon Valley bubble, Smith moved Vista's headquarters to Austin, Texas. He could, by this point in his career, do pretty much anything he pleased.

'I still experience racism in my professional life,' Smith says. But by being smarter and working harder, Smith proved the American Dream extended to the finance industry, where he became the first self-made Wall Street billionaire who wasn't a white male.

WHEN VISTA SELLS a company, Smith reverts to engineer mode, often giving its CEO an expensive Swiss or German watch. 'It is not about being generous,' Smith says. 'It is a function of the process and focusing on the detail of finding the person who is going to be the best at making that one gear.'

To Smith the watch represents that 'we created a system.' And it's that system that has allowed Vista to gobble up enterprise software companies, confident that it can almost always make them better. When Smith started shopping for software companies, he found that many were run by former programmers and other technologists who were not formally trained in business and grew rapidly by sheer strength of product launches, with little analysis of whether they made sense.

Drawing on his background as an engineer and a Goldman vet, Smith began writing what amounted to user manuals for running enterprise software companies. The manuals weren't just about efficiency but also incorporated cost-cutting measures and fee-generating ideas. Eventually, Smith's playbook became the Vista Standard Operating Procedures--VSOPs. These were later renamed a more generic and user-friendly Vista Best Practices.

'If you are a software executive, how do you build your commission structures or run your go-to-market strategy? How do you find and train talent? Who teaches you those things?' Smith asks.

To implement his playbook, Smith created an in-house McKinsey: Vista Consulting Group. These employees, now 100 strong, help portfolio companies implement the best practices, also 100 strong, most of which run three to ten pages, with reams of attachments and examples. Printed out, they fill binders. They are stored in a password-protected online library, available only to authorized portfolio company managers.

'I just had an employee get a promotion,' says Kristin Nimsger, CEO of Social Solutions, a cloud company providing

The playbook includes exhaustive details on things like contract administration and steps needed to ensure a company is being paid for all the code or services its customers use. In one case, a company Vista bought charged customers only for inbound support calls, neglecting to charge a minimum amount for ongoing support. Vista canceled all the contracts and got 100% of the customers to enter into new deals with higher minimum support payments.

Another set of playbook commandments revolve around sales, including incentives for salespeople cross-selling and upselling additional products. In one case, a portfolio company was rewarding salespeople the same way whether they brought in one-year contracts or longer-term ones.

In isolation, many of the playbook's best practices seem mundane. But software companies are often rife with eccentricities and legacy processes endemic to startup culture. Things like weekly deal-pipeline meetings, commonplace at B-school-driven corporations like IBM and Procter & Gamble, are often absent. By sticking to the rules in Smith's playbook, his software companies are transformed. Add some modest leverage, and, voilà, Vista got amazing returns.

Smith's playbook is ever evolving, and Vista partners and portfolio companies are welcome to make suggestions. 'One of the things I am most proud of is that we are going to add ten new best practices to the group,' says Reggie Aggarwal, the CEO of Cvent, a company that makes software for managing events and meetings.

Of course, critics argue that companies swallowed up by Vista are in no way immune to the traditional private equity slash and burn. Lawrence Coburn, CEO of Cvent competitor DoubleDutch, blasted Vista after the purchase, saying, 'They eliminate duplication, slash R&D, optimize for financial performance and raise debt.'

Smith's playbook goes well beyond corporate to-do lists. When Vista buys a company, all employees and recruits are required to take a personality-and-aptitude test, like one first developed by IBM. The hour-long test assesses technical and social skills, and attempts to gauge analytical and leadership potential. For Smith the test is particularly important because it attempts to bypass inherent biases, such as where people grew up or went to school, not to mention race or gender. Vista says 35% of the employees at its portfolio companies are women. Last year Vista companies administered 850,000 tests to hire 6,000.

'The meritocratic system creates loyalty,' Smith says. 'People from all over the country from different places all take the test. We all know something about each other, that we came through this meritocratic system.'

The Vista test also identifies roles that fit personality profiles. A woman who ran a Domino's Pizza franchise in North Carolina was deemed to be a good sales trainer and was promoted to do so for a Vista company. Another from the mailroom, for example, scored high on Vista's test and became a programmer. 'To write code you need to be creative,' Sheth says. 'How much of that is going to happen if you all have the same background?'

After Vista has people where it wants them, there are boot camps that train employees, not just for two weeks but for six to nine months. In the past three years, Vista has put 12,000 new hires through these boot camps. They start by giving employees the big picture: how the Vista company makes money and the way customers use its products. The focus later shifts to specific corporate roles. Vista University provides 'nanodegrees,' like one now being offered in artificial intelligence. Monthly meetings designed to cross-pollinate best practices among Vista employees from different companies in similar roles--from cybersecurity to HR and product development--are held.

All of this is run by Smith's consulting group, which operates like a seasoned special-forces unit. 'Financial performance of a company is just a trail in the sand of the operational performance,' Smith says. 'The more standardized the input, the more standardized the output. You have to design your system, and you have to believe in it.'

WITH THE REST OF PRIVATE equity getting turned on to enterprise software deals, Vista's system is about to get a major test. While bargains are much harder to come by, Vista's goals for each buyout will remain the same: three times its money. Smith expects to hold on to his portfolio companies longer, identifying each acquisition target based on how much the Vista playbook can juice results.

'We don't underwrite to hope. We underwrite based on critical factors for success under our control,' Smith says. 'What we need to change, we have changed before, so we know how to do it.' On average, Vista doubles the Ebitda of its companies within five years. Term plus 3.0 free download.

A lot of the responsibility will fall to Sheth, who has previously made a practice of racing to the exit door. For example, Vista bought Transfirst, a payments-processing software maker, for $1.5 billion in 2014, then sold it for $2.35 billion in just over a year, tripling Vista's money once leverage was factored in. In January, Vista sold its majority stake in Trintech, which makes software for financial professionals, after it doubled revenues in two years. On average Vista's exits tend to occur 4.7 years after purchase, compared with 5.7 for Blackstone.

While it would be easy enough for Smith to fall back on his philanthropy--recent pledges include $20 million to the new National Museum of African American History & Culture and $50 million from a foundation linked to Vista's first fund to help Cornell boost the representation of women and minorities in scientific research--numbers like that keep Smith feeling upbeat, even cocky, regarding Vista. Nearly two years ago, at the Milken Institute's annual Global Conference, Smith found himself shoulder-to-shoulder onstage with the old-guard billionaires of the buyout business, including David Rubenstein, Leon Black and Jonathan Nelson. Titans he no doubt read about in B-school and who probably wouldn't have given him a second glance a decade ago.

When Carlyle's Rubenstein said his investors had been conditioned to accept lower returns given the high price of assets, Smith shifted in his chair and parried, 'I got to go get some of his [investors].' He then turned to Rubenstein and, with the brio of someone who knows he's arrived, quipped: 'Let me know where you are flying next. I will go with you.'

Move over Larry Ellison. Vista owns 48 enterprise software companies servicing 20 industries ranging from energy to law to higher education and live events.

• Tibco Software, which makes business-intelligence software, was purchased by Vista in 2014 for $4.3 billion.
• Solera Holdings makes software for auto and home insurers and was purchased by Vista in 2015 in a $6.5 billion deal.
• Cvent, which makes software for managing and planning corporate events, was purchased by Vista in 2016 in a $1.7 billion deal.
• Finastra makes risk management software for banks and financial firms. It was created by Vista in 2017 through the merger of D+H and Misys.
• PowerSchool makes education-management software. It was purchased in 2015 for $350 million. It's spent another $1 billion on add-on acquisitions.
• Marketo is a giant in cloud-based marketing automation software. It was purchased by Vista in 2016 for $1.8 billion.
• Ping Identity makes identity-security software and was purchased by Vista for $600 million in 2016.

There was a time when buyout firms like KKR and Apollo could be successful simply by piling debt on a company, cutting costs and then letting the magic of leverage and compounding do its work. But what worked in the past may no longer be viable. There is now more than $1 trillion of private equity cash chasing deals and bidding up prices. According to DealLogic, private equity firms did $58 billion of tech transactions in 2016, a third of all U.S. deals.

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Even Vista has had to pivot from buying legacy software companies to acquiring higher-growth operations, often at big prices and valuations.

Vista's acquisition of Marketo, a marketing automation software leader based in San Mateo, California, is a good example. After investors became disenchanted with its less than stellar 30% to 40% revenue growth rate, Marketo's share price plummeted by some 50% in early 2016. Then in May 2016, Vista swooped in to buy the company, putting up $1.3 billion in cash in a $1.8 billion deal. It was a generous 64% premium, but Vista knew that before long an operational overhaul, coupled with the small amount of debt it added to its balance sheet, would turn the cloud-based marketing software company into a winner. Recently, Marketo's cash flow (Ebitda) has turned positive. -- N.V.

Must Read: Little Black Book Of Billionaire Secrets

High asset prices and less confidence in market beta to lift returns in recent years have greatly narrowed the margin of error for private equity firms to deliver acceptable returns. Some general partners have looked back at the past decade of trials and errors to identify lessons and patterns that will shape their next approach to value creation. They have drawn up playbooks consisting of detailed, sequenced actions taken over time to maximize value from each investment.

The application of a playbook to a target company will depend on three factors. The first is the industry, as specific cost bases and capabilities have more or less relevance to individual industries. Manufacturing optimization clearly looms large in the chemical industry, and marketing and branding figure prominently in consumer products.

The second factor is the investment thesis: A playbook suited to a target company that has solid operations and is poised for growth may not work with a bloated company in distress. Third, the playbook should accommodate the target’s strategy to move the business forward. Companies competing in the same market can have very different strategies, and strategy determines where a PE firm can cut costs and where it should double down on investment.

Given these factors, PE firms with the most highly developed playbooks today tend to define their deal sweet spots narrowly. They may focus on investments in a single industry or on businesses across industries but with similar investment theses and opportunities for creating value.

Vista Equity Partners, which invests primarily in software and technology-enabled companies, applies a set of more than 50 proprietary standard operating procedures in areas such as product development, sales and marketing, customer support, professional services and general administration. Vista’s in-house consulting group works with investment professionals and portfolio company executives to apply those best practices. In a recent case, Vista sold TransFirst, a payment processor that Vista had acquired for $1.5 billion a little more than a year earlier, for $2.35 billion. PE Hub reported that Vista focused on building out TransFirst’s back-end settlement capability while enhancing its sales channels.

3G Capital has a well-defined playbook that applies zero-based budgeting to consumer products or retail companies. This differs from traditional budgeting processes by examining all expenses for each new period, not just incremental expenditures in obvious areas. A zero-based approach puts the onus on managers to justify the costs that need to be kept—a subtle but powerful shift in perspective from what should be removed. Teaming with Berkshire Hathaway to acquire Heinz, 3G eliminated roughly 7,000 lower-value positions and rationalized corporate and manufacturing footprints. 3G’s plays raised EBITDA margins from 18% to 26%. After aggressively expanding margins, 3G ran another play from its book, successfully merging Heinz with Kraft.

While many playbooks started with a focus on cost reduction, the most successful ones today contain a strategic blend of cost and growth moves. Cost cutting is no longer sufficient on its own to generate strong returns. To reliably create value and obtain the desired multiple upon exit, a portfolio company must be set up to achieve profitable growth over the long term.

Audax, for example, focuses exclusively on finding solid middle-market companies that it can transform, through add-on acquisitions, into market leaders. Since its inception, Audax has invested $4 billion in 101 platform investments and 534 add-on acquisitions, often in fragmented markets. In one example of its buy-and-build playbook, Audax bought Advanced Dermatology & Cosmetic Surgery, a US physician practice with a strong presence in Florida and Ohio. Some 40 add-ons and five de novo clinics later, Audax had built the business into a national platform and invested in centralized support services, resulting in expanded relationships with payers and higher clinic utilization rates. Since its initial investment in 2011, revenue quadrupled to more than $200 million, and Audax sold the asset to PE firm Harvest Partners in 2016, retaining a minority stake.

All PE firms want to create value as quickly as possible—to grow revenue and take out cost—and a strong playbook helps to accomplish that.

Read more: Global Private Equity Report 2017

Hugh MacArthur, Graham Elton, Daniel Haas and Suvir Varma are leaders of Bain & Company’s Private Equity practice.