Market Data 
By Milana Vinn
(Reuters) – Private equity firm Vista Equity is in talks to cede control of its company Pluralsight (NASDAQ:) to lenders, according to three people familiar with the matter and fund documents reviewed by Reuters.
The financial information in the documents sheds light on how Pluralsight is set to become the first major debt restructuring of a company that borrowed from “shadow banks”.
The term is used on Wall Street to describe lenders that are investment firms and do not face the regulatory restrictions of traditional banks.
The three sources, who have direct knowledge of the debt negotiations, said that no agreement is certain. They asked not to be identified because the matter is confidential. Spokespeople for Vista and Pluralsight declined to comment.
Vista, which has more than $100 billion in assets under management, acquired Pluralsight, an educational software platform for information technology workers, for $3.9 billion in 2021. It then merged it with cloud computing learning company Cloud Guru, which it acquired for $1.6 billion.
Vista turned to investment firms, rather than banks, to place more than $1.5 billion in debt on Pluralsight three years ago, the documents show. Pluralsight carried debt net of cash of about $500 million prior to the acquisition, according to a filing with the U.S. Securities and Exchange Commission.
Traditional banks face restrictions from their regulators in providing the loan Vista wanted, viewing it as risky because it does not require a company to post as much cash flow, the sources said.
This was a “recurring revenue term loan” that relied on future sales that Pluralsight generated, the sources added.
With this debt, Vista could generate strong returns if Pluralsight’s business performed well, according to the sources. But it stood to lose Pluralsight more easily to creditors if its bet on the company soured, the sources added.
The lenders are negotiating the conversion of the debt into equity that they would hold in Pluralsight, the sources said. The creditors include Blue Owl Capital, Ares Management (NYSE:), Goldman Sachs’ asset management unit, Benefit Street Partners, BlackRock (NYSE:), Oaktree and Golub Capital, the sources added.
Blue Owl and Ares declined to comment, while Goldman Sachs, Benefit Street, BlackRock, Oaktree and Golub did not respond to requests for comment.
MARKDOWN
The documents, which Vista shared with its private equity fund investors over the last two years, show how most of Vista’s $1.6 billion equity investment in Pluralsight was marked down to zero in May, over just one quarter, after taking smaller valuation hits in the previous eight quarters. They also show that Vista propped up Pluralsight by allowing it to borrow $162.5 million from its private equity fund.
The rapid decline in Pluralsight’s value is a cautionary tale for buyout firms tapping the $1.7 trillion private credit market to saddle companies with too much debt, said Gustavo Schwed, an NYU Stern management professor.
“I do think that it’s a wake-up call. It’s probably going to get people to reevaluate these credit agreements and make sure they are tighter,” said Schwed.
Steven Kaplan, a Chicago Booth School of Business professor, said the jury was still out on how many cases like Pluralsight will emerge.
“It’s too early to tell, but I think the bigger picture is that some buyout firms went very aggressive in 2020 and 2021, and in retrospect shouldn’t have,” Kaplan said.
The Pluralsight deal was a bet by Vista that the corporate world’s IT spending, that had been super-charged by the COVID-19 pandemic driving remote working, would continue to buoy its business, the fund documents show.
But an economic slowdown that pushed Pluralsight’s customers to lay off IT staff and a rise in interest rates that made its debt more expensive squeezed the company’s finances. Some of Pluralsight’s competitors made learning products freely available in the first quarter of 2024, exacerbating its woes, according to the fund documents.
“The company experienced rapid deterioration of its business in the first quarter,” Vista wrote in a fund document dated May 28.
WARNING SIGNS
Pluralsight’s creditors got a warning in the first quarter of 2023, when Vista asked them to loosen covenants on Pluralsight’s debt so the company could continue to meet its obligations including its interest payments, the sources said. Vista made a $75 million equity injection in Pluralsight in the first quarter of 2023 to ease the lenders’ concerns about its cash position, one of the documents shows.
Vista started to report a decline in Pluralsight’s revenue to fund investors in the third quarter of 2023, the documents show.
In its 2023 fourth-quarter fund update on April 15, Vista said Pluralsight “had shifted from unprofitable to a sustainably profitable business”, pointing to a 28.5% profitability margin as of the end of November.
But Vista also warned that Pluralsight would face “liquidity challenges” in the early second quarter of 2024 because of “capital structure constraints”, according to one of the documents.
By that time, Pluralsight had borrowed $162.5 million from Vista’s private equity fund through a “subscription line facility,” a loan typically used as a bridge until money from fund investors for new investments comes in, the document shows.
Vista had already marked down the equity value of Pluralsight from $2.3 billion in the first quarter of 2023 to $1.5 billion in the fourth quarter of 2023, according to the documents.
In a May 28 update to fund investors, Vista said Pluralsight’s equity value went from $1.5 billion to zero in the first quarter of 2024. Chris Walters, who took over in April as Pluralsight chief executive from the company’s co-founder Aaron Skonnard, reassessed its business plan and came up with a new forecast, the update states.
Walters projected that Pluralsight’s customer renewal rate as a percentage would be in the low 70s in 2024, as it grappled with market pressure, according to the document.
“The forecast, combined with liquidity constraints due to the debt structure, resulted in the equity value being marked to zero,” Vista wrote in the update. Walters and Skonnard, who did not give a reason for stepping down as CEO, did not respond to requests for comment.
Vista told fund investors the company could not service its debt and had engaged advisers for “critical” negotiations with its lenders.
In May, Vista moved some of Pluralsight’s intellectual property to a new subsidiary and then borrowed against it to meet Pluralsight’s interest payment obligations, according to credit ratings agency KBRA.
“This situation may serve as an important bellwether for the industry,” KBRA said in a note last month.
