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