Copenhagen headquartered SimCorp is the global leader in integrated software solutions for large asset managers, insurance companies and sovereign wealth funds. Its main product, SimCorp Dimension, builds on the company’s state of the art investment book of records (IBOR) technology to provide front-to-back office multi-asset class functionality to its clients. More than half of the top 50 global investment managers are Dimension users and US$20 trillion was managed through the system in 2018.

Unusually for a company that is a supplier to the finance industry, SimCorp isn’t a particularly cyclical business as revenue is earnt from license fees which are independent to the amount of funds clients have under management. SimCorp’s products are embedded within their client’s daily operations, including compliance with government regulation, and as a result are not considered a discretionary expense. It also helps that customers are large institutions such as the Abu Dhabi Investment Authority, the Healthcare of Ontario Pension Plan and UBS Asset Management, that can easily withstand periods of market volatility. In addition to high revenue visibility, SimCorp displays many of the traits we like to see in a business.

Early mover

SimCorp’s 50-year long presence in the industry and early focus on integrated solutions lie at the core of the company’s competitive advantage.

SimCorp software allows clients to run incredibly complex operations smoothly and accurately, and once adopted it is risky and disruptive for them to migrate to an alternative provider. Over the years, the recurring revenues from this sticky client base has enabled SimCorp to fund the development of one the best solutions available in the market today. It is now extremely difficult for smaller peers to keep up with, let alone to challenge, SimCorp’s leadership.

Figure 1: Global Market Shares

Sources: FactSet, Company Filings, Fairlight Estimates

Whilst Dimension can be purchased as one solution, clients tend to purchase its individual modules over time in order to minimise implementation risk. SimCorp has developed its modules organically rather than through M&A, which allows for seamless integration, placing SimCorp at an advantage when clients seek to adopt additional software solutions when compared to standalone solutions. Aggregating independently-developed pieces of software is not a straightforward process and carries multiple risks. So, trying to replicate SimCorp’s level of integration through M&A is problematic, even for well capitalised new entrants.

Great prospects for growth

SimCorp currently has a leading 15% global market share. But, importantly, to grow it doesn’t need to displace BlackRock and State Street, the other two leading industry players, which would not be easy given the above-mentioned high switching costs that users experience. Rather, SimCorp’s main growth opportunity is to win over financial institutions that are currently using outdated software and are looking to upgrade. Such institutions form the majority of the addressable market (Figure 1). In addition, another 10% of the addressable market is comprised of inhouse systems which are quickly becoming obsolete due to the increasing demand from clients for accurate performance reporting and regulatory compliance. Error prone excel spreadsheets and clunky products that have been coded internally are likely to be replaced over time by the third party software designed by Simcorp, BlackRock and State Street. SimCorp should be able to expand its business for many years to come.

Attractive and well managed business

Given the nature of software businesses where development expenses are mostly incurred upfront, SimCorp doesn’t require much capital to grow. Since 2006, the company has grown sales by almost four times while achieving an average free cash flow conversion of 99% (Figure 2). SimCorp has a long serving management team and an engaged workforce which collectively own about 5% of the company’s shares. Management is quite conservative – research and development are fully expensed every year and the company has a negligible amount of debt. Management has been paying most of the annual free cashflows to shareholders in the form of dividends and buybacks and we expect this to continue, even during this difficult year.

Figure 2: Sales (LHS) and Cash Conversion (RHS)

Sources: FactSet, Company Filings, Fairlight Estimates

The Fairlight View

Due to the COVID-19 induced sharp and indiscriminate sell off across global stock markets, the Fairlight Global Small & Mid Cap Fund was recently able to establish a position in SimCorp at an attractive multiple of free cash flow.