Sandeep Sahai, CEO of Clearwater Analytics, on the New York Inventory Change on Sept. 24, 2021.
Supply: NYSE
Firm: Clearwater Analytics Holdings (CWAN)
Enterprise: Clearwater Analytics Holdings is a supplier of complete cloud-native platforms for institutional traders throughout world private and non-private markets. The corporate’s single-instance, multi-tenant structure delivers real-time knowledge and synthetic intelligence-driven insights all through the funding lifecycle. The platform eliminates info silos by integrating portfolio administration, buying and selling, funding accounting, reconciliation, regulatory reporting, efficiency, compliance, and threat analytics in a single unified system. The corporate serves insurers, asset managers, hedge funds, banks, firms and governments. The corporate can also be a supplier of enterprise threat analytics and developer infrastructure. Its capabilities in complicated portfolio administration throughout each private and non-private markets embrace structured merchandise, personal credit score, and derivatives.
Inventory Market Worth: $6.37 billion ($21.76 per share)
Clearwater Analytics Holdings shares yr so far.
Activist: Starboard Worth
Possession: ~4.9%
Common Price: n/a
Activist Commentary: Starboard is a really profitable activist investor and has intensive expertise serving to corporations concentrate on operational effectivity and margin enchancment. They’re identified for his or her glorious diligence and for working lots of the most profitable campaigns. Starboard has initiated activist campaigns at 59 prior info know-how corporations and their common return on these conditions is 36.92% versus a median of 20.01% for the Russell 2000 throughout the identical time intervals. Moreover, Starboard has taken a complete of 163 prior activist campaigns of their historical past and has a median return of 21.26% versus 14.34% for the Russell 2000 over the identical interval.
What’s taking place
On Dec. 9, Starboard introduced an almost 5% place in Clearwater Analytics and is urging the corporate to run a sturdy gross sales course of if it has obtained in-bound curiosity from potential consumers.
Behind the scenes
Clearwater Analytics is a supplier of front-to-back, cloud-based funding accounting options. The corporate has steadily taken share from legacy options, similar to BlackRock, State Avenue and SS&C, as they’re extensively considered because the premium trendy platform. In 2016, personal fairness agency Welsh, Carson, Anderson & Stowe turned the bulk investor within the firm. In 2020, Warburg Pincus and Permira made minority investments, and, a couple of yr later, these three companies took the corporate public at $18 per share.
Clearwater carried out pretty effectively from its IPO by way of 2024, supported by constant progress and traditionally sturdy margins that drove a premium valuation relative to friends, and these sponsors have been rewarded accordingly. Warburg and Permira, which owned 22%, every offered their positions completely and WCAS, which owned 56%, lowered its stake to roughly 1% by November 2024, at costs as excessive as $29.11 per share.
Shortly thereafter, the corporate began making a string of acquisitions — a public firm, Enfusion, and two personal companies, Beacon and Bistro. All of those transactions have been introduced between January and March of this yr and closed inside the following couple of months. The consequence of that is that Clearwater shifted from being a clear high-growth vertical software program story with sturdy margins, a premium valuation, and a web money stability, to a riskier, much less sure integration story with leverage round 3x EBITDA.
Unsurprisingly, the market questioned the corporate’s determination to alter course so sharply in addition to its skill to combine these three acquisitions whereas persevering with to take care of its core natural progress story, and the inventory offered off sharply, in the end reaching a low of $15.73 per share after its third-quarter earnings report final month.
Shortly thereafter, it was reported that Clearwater had engaged advisers to guage strategic choices after receiving a bevy of unsolicited affords from companies like Thoma Bravo and even Warburg Pincus and Permira, each of whom nonetheless had representatives on the board.
These bulletins prompted Starboard to reveal its practically 5% place in Clearwater and urge the corporate to run a sturdy gross sales course of if it has obtained in-bound curiosity from potential consumers. However do not misunderstand Starboard’s motive or thesis. They aren’t short-term strategic traders leaping on a possibility for a fast return. They’ve doubtless been Clearwater for a lot of months and had owned it as a result of they just like the standalone story and see a possibility to create long run worth. However, to paraphrase the overused quote attributed to Mike Tyson (however actually stated by Cus D’Amato), everybody has a plan till they get hit. And Starboard is nearly as good as anybody with rolling with the punches. So, when information surfaces that the corporate is contemplating a sale and that two of its board members could also be bidders, Starboard is doing what any good activist would do and ensuring there’s a honest course of to maximise worth for shareholders. Starboard will then resolve whether or not that value is healthier than the chance adjusted worth shareholders might obtain from a standalone plan of integrating the acquisitions and rising the core enterprise. Furthermore, a reputable and honest course of might doubtless appeal to extra bidders, together with strategics similar to BlackRock and Nasdaq. Whereas the leveraged buyout math works within the excessive $20s per share, strategics might push it to a 3 deal with.
There could possibly be a fast decision right here if the board decides to promote to the corporate and receives a bid that’s good for everybody. However that may be a dangerous activist thesis by itself. What makes this a very good activist marketing campaign for Starboard is that they’re a believer within the firm as a standalone entity and see a path to create shareholder worth.
If the standalone path is in the end pursued, it could make plenty of sense for the personal fairness traders who not personal any materials place to resign from the board and get replaced with business specialists and a shareholder consultant who can information administration by way of a standalone plan.
Primarily, there are three potential outcomes to Clearwater’s present inflection level: (i) a standalone plan the place the corporate integrates its acquisitions and grows its core; (ii) a sale of the corporate for a passable premium following an actual and aggressive evaluate course of; or (iii) an abbreviated sale course of orchestrated partially by Warburg and Permira leading to a sale to Warburg and Permira. Starboard would doubtless be proud of (i) or (ii) and we count on them to do the whole lot inside their energy to forestall (iii).
Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist investments.