Founded in 1971 in Copenhagen and listed since April 2000 on what today is Nasdaq Nordic, SimCorp (SIM DC) offers integrated software solutions to the world’s leading asset managers to help them improve performance, handle regulatory compliance, enhance efficiency, and save costs. SimCorp also provides services such as business consulting, implementation, and maintenance of their software solutions.
The company’s suite of products includes not only both front- and back-office solutions, but also middle-office software for strategy, risk analysis, performance management and reporting.
Its key product is SimCorp Dimension, a customisable, modular software which supports all elements of the investment process: Asset Manager, Client Manager, Data Warehouse Manager, Order Manager and Settlement Manager, among others.
SimCorp Gain: an enterprise data management solution for reference and market data management
SimCorp Coric: a solution for client communications and reporting automation
SimCorp Sofia: operated as a separate and independent business unit, it provides a front-to-back investment management solution specific for the Italian insurance market
Business model
Lower fees, higher compliance burden, increased risk of cyberattacks and globalisation of products encourage large asset managers to consolidate to get the benefits of scale. In addition, leading investment managers are sharpening their focus on directly alpha-generating activities through increasing digitalisation and cloud-transformation as well as outsourcing of operational responsibilities. This focus on simplicity is expected to lead buy-side companies to significantly increase IT software spend to optimise their business models.
The IT landscape, however, mostly offers fragmented systems, leading to an inflexible structure that lacks the ability to respond to changes, carries considerable costs and inhibits cross-system data handling. One of SimCorp's strengths, on the contrary, is its integrated front-to-end solution, where software modules can handle virtually any task relevant to an investment manager, from portfolio management and research (front office) to risk and reporting (middle office) and accounting and clearing (back office).
SimCorp builds its economic moat mainly through the high switching cost and mission-critical nature of its products: once implemented, they are incredibly sticky. Global investment managers increasingly prefer comprehensive solutions: they are easy to get now, but very difficult to get rid of as day-to-day operations and decision-making become heavily dependent on the installed software. Plus, asset managers would not bother spending much time on system integration and staff training or risking any business interruption even if a slightly better and cheaper solution emerges.
But given that operations are complex and constantly evolving, clients require a software partner with deep expertise and high reinvestment rates. SimCorp ticks both of these boxes, having been a vendor to the industry for many decades: to ensure that product offerings are always up-to-date and at the forefront of the industry’s needs, the management regularly re-invest around 20% of annual revenue back into R&D. SimCorp has ~2.000 employees, with a third of them in R&D, which emphasises the high priority of constant improvement of their software and services; 42% of employees are professional services (i.e. customer backup and support), 8% is in sales and the rest is admin and headquarter functions.
Another selling point is the breadth of partnerships: for example, the integration of the MSCI RiskMetrics results and messages enables clients to use SimCorp Dimension as a consolidated data warehouse and reporting platform, again reducing both operational costs and risks. Or the agreement with Tradeweb, a pioneer in the development of electronic trading and trade processing: Tradeweb’s Client Integration supports both pre-and post-trade messages through SimCorp Dimension's Order Management module.
The result is an incredibly low client churn and above 100% net revenue retention: according to the company the average client relationship lasts at least 7 years.
While the initial sale (i.e., new licenses) generally only includes a few modules, SimCorp's clients frequently opt to add on more modules (i.e., add-on licenses) throughout the partnership. Currently, more than three-quarters of revenue comes from aftermarket maintenance and services: with this level of recurring sales, the business is less exposed to cyclical risk than the overall asset management or technology industries.
Reference market and competitors
The global asset management industry is huge and with thousands of players. But SimCorp’s solutions cost the average customer around €2.3 million per year, with an entry level fee estimated at €1 million (plus data cleaning and transfer costs): it is obviously not for everyone.
SimCorp has thus defined their TAM as the top 1.300 global asset managers, of which they already service 209 (16% market share in terms of number of clients, not total spend). From a geographic perspective, Europe has the highest penetration rate and North America the lowest, representing an important growth opportunity as acknowledged by the management. Plus, APAC, whose asset management industry is expected to increase the fastest over the next few years, could be another long-term driver, leaving significant room for future expansion.
Competitors include a variety of companies: from old school tech powerhouses (IBM, Oracle, SAP), to bank specialised software vendors (Temenos, Clearwater Analytics, Sungard – now part of Fidelity National Information Services -, Charles River – acquired by State Street -, Murex), to process and infrastructure consultants (Deloitte, BCG, McKinsey), and in some cases, hardware hosts. Within front office/portfolio management, the biggest competitors are BlackRock Aladdin and Bloomberg. But overall, the closest company for completeness of services and products (but much bigger in terms of revenues and market cap) is SS&C Technologies, which operates technology stack across securities accounting, front-office functions, middle-office reporting and back-office.
Some financial numbers
Over the last few years, SimCorp has struggled to sign many new clients, with a net addition of just 19 since 2018. Recent operating trends have been below average for two key reasons: COVID disruptions and higher than usual product investment as the SaaS offering is rolled out and scaled up.
As a producer of asset management software, each deal it signs tends to be large, so it often requires a series of face-to‐face meetings for clients to feel comfortable taking on a new licence. This has proven to be difficult to arrange given the restrictions in most countries in 2020 and 2021, and so sales have slowed. 2022 seems to be more promising, though: 3 new signings in Q1 and already 4 in Q2, with annual recurring revenues up +10% yoy in Q1 and a new order intake of €26 million.
The sustainable competitive edges, along with the recurring revenue model, allowed SimCorp to generate consistent growth with decent margins and superior returns on invested capital.
Revenues have grown at 9% p.a. since 2007 (and 11% p.a. since 2016): as a matter of fact, annual revenues never decreased yoy for the last 15 years, including during the global financial crisis (2020 was the worst year with just 0.3% growth).
The key drivers for the historical revenue growth have been the number of clients and average revenue stream per client: the modularised approach gradually increases the revenue per customer from the entry level. The company does not disclose how much it gets from an “all-in customer”, but it can be estimated in the €4 to €5 million range per year.
In addition, SimCorp is moving the business into the cloud and the revenue stream will gradually migrate from “on-premise” software and support to SaaS subscription per user: the cloud version has higher agility for upgrades, implementation of new features, regulatory changes, etc… While most clients still have the software solution on-premises, during 2021 eight of them moved to the cloud and now 34 clients (16% of total) are cloud-hosted: a few clients use AWS, however most prefer private solutions from Microsoft Azure or IBM Private Cloud. The cloud revenue stream per customer to SimCorp can be 2-3x higher than on-premises: continued transition to SaaS will therefore have a positive impact on gross margin and overall profitability in the outer years 2025-2030.
SimCorp has always been run very conservatively: as at 31 March 2022 it had less than €2 million in net debt, with plenty of cash available. As indicated below, over the past 15 years FCF closely followed earnings upward, implying a decent quality of the business growth.
The business does not require much in terms of investments (except for R&D, which is typically expensed in the P&L and capitalised only in limited and clearly defined circumstances), and SimCorp has historically had a very safe and solid use of cash: over the last 10 years, ~30% of cash from operations (pre-working capital) has been deployed in total capex (including WC), ~11% has been spent on acquisitions and 70% has been returned to shareholders.
Occasionally, and when required to complement the suite of products, SimCorp acquire external assets. In 2017 it spent €38 million for APL Italiana (what today is SimCorp Sofia), while in 2019 it acquired AIM Holding (now rebranded SimCorp Gain) for €60 million.
SimCorp is largely owned by institutional investors (>80%), with employees and management owning around 5%: the largest holders are Mawer Investment Management, Columbia Threadneedle and BLS Capital Fondsmæglerselskab (all above 5% each), followed by Comgest, Handelsbanken AM and Vanguard with ~3% each. Both Mawer and Comgest recently joined the company’s client list.
Current valuation
While the stock has significantly de-rated since the peak in early 2021 (price has fallen more than 40%), it is still not in what you would call value territory.
It is currently trading at a P/E of 26x, P/sales of 6x and FCF yield of just 2%: not terribly expensive (there are “worse” multiples for much inferior Saas companies…), but also not cheap despite the positive unit economics.
In the last few months there were rumours that Temenos, the Swiss financial software company with a market cap double that of SimCorp, could be a target for a LBO, first by EQT and then by tech specialist Thoma Bravo (no valuations or multiples have been reported): given the shareholder structure and no voting restrictions, SimCorp itself could also become a potential target (although PE markets have cooled a lot recently).
Risks to keep in mind
The risk map for SimCorp has been unchanged for years, with competition and consolidation in the asset management industry at #1 and #2.
Further consolidation among the large asset managers could reduce the 1.300 potential pool. While this could mean larger single accounts and higher revenues (especially in a subscription-per-user model), it is also a double-edged sword: should one of SimCorp’s current clients become a target, the acquirer could decide to replace SimCorp with its own software vendor.
Summary
Asset management itself may not be an attractive industry: in aggregate, it does not generate value to its customers and many of these businesses are a pure marketing- and sales-driven play. In addition, regulatory pressure, rising costs and the “race to zero fees” are among the other secular risks. And so far there are yet no signs of an “active management resurgence”.
But investors can look to suppliers to find value, and SimCorp is a good candidate for those interested in the space: an excellent non-cyclical business with a recurring sales model, durable competitive advantages and decent long-term growth opportunities.
Valuation does not look extremely compelling (and could also fall further), but with annual growth in the 9%-10% range and incremental ROIC of 25%-30%, a P/sales of 6x and EV/NOPAT of 30x are justified. Returns will likely come from three key sources: 1) low risk and high quality cashflows from existing customers (with significant upside via selling additional products); 2) new customer acquisition, and 3) margin expansion over the medium term as the business passes through current elevated investment in cloud capabilities.