These days, the buy side has no shortage of obstacles. Margins are tightening, costs are rising, regulations are hitting, and investor preferences are changing. Simply put, it’s a rapidly changing world for asset management. Then there are the vendors—and maybe there’s too many of them.

Rumors had been swirling for the last four-or-so months that StatPro, the cloud-based UK firm that offers portfolio analytics through its SaaS-delivered tools, was up for sale. On Oct. 29, those rumors became reality: Confluence Technologies, a US-based provider of automation software for investment managers, announced its acquisition of StatPro for £161.1 million (more than $207 million) in cash. Backed by private equity firm TA Associates, Confluence will take the London Stock Exchange-listed StatPro private.

According to some sources, this deal came as a bit of a surprise. While StatPro was known to be on the auction block, the speculation was that it would be a State Street, JP Morgan, Northern Trust or one of the other larger banks that have alternative investment services to add the performance analytics specialist to their portfolio. Confluence, though, made for a natural fit thanks to their US-focused risk and regulatory suite of solutions, and their desire to expand into Europe.

Being completely honest, we have a lot of work ahead of us in terms of understanding how to best integrate all of these contributing units into something that ultimately needs to benefit the client.

Mark Evans, Confluence

Alleviating some of the buy side’s pain points, and allowing their now-combined client base to focus on innovation, are the rationales for the deal, Mark Evans, CEO of Confluence, tells WatersTechnology.

“We approached each other, more or less. We’ve been talking forever,” Evans says of the two companies. “It just became absolutely, glaringly obvious that we should be joined. It’s all about data at the end of the day; that’s our view. They have a great creation and curation in the front and middle office, and we have great curation and delivery in the back office. It was just one of those the-time-is-right things.”

StatPro, led by founder and CEO Justin Wheatley, had been busy itself in the acquisition arena. In July, the company bought Milan-based ECPI, an ESG research and index business. In 2016, the company bought InfoVest, a South African software provider specializing in data warehouse, ETL and reporting software, as well as advanced-risk-metrics specialist Investor Analytics. Perhaps their biggest deal, though, was their 2017 acquisition of fixed-income-analytics service provider UBS Delta, which is still being phased into StatPro’s flagship software, Revolution.

“It’s a mosaic,” Evans says. “I could look at Revolution alone and make an argument it’s an incredibly powerful part of what we view the evolving ecosystem to be. … I think UBS Delta is a spectacular product that needs to get more oxygen, and we are there to provide it both through partnerships and investment. I think the ESG company in Milan is really cool and was an interesting response to our clients’ desire to get more clarity around those challenges. Everything going on down at InfoVest [is] powerful, interesting [and] transformative.

“The fact of the matter is, we have a lot of work ahead of us. Being completely honest, we have a lot of work ahead of us in terms of understanding how to best integrate all of these contributing units into something that ultimately needs to benefit the client.”

Another key point for both companies was geographic location. With each firm’s respective presence and brand confidence, Confluence, which is headquartered in Pittsburgh, hopes to capture a larger European base, while returning the favor for London’s StatPro in the US.

While the companies break ground on the work that lies ahead, the rest of the industry is tuning in to watch.

One industry observer commented that they think the performance measurement market is overdue for some consolidation, adding that investment managers want, more and more, to standardize around one system, and choose from a smaller pool of vendors. Confluence’s keenness on StatPro, they note, may stem from their boldness.

“StatPro were very gutsy when they built Revolution from the ground up as a pure SaaS solution. They effectively end-of-life’d [sic] their existing legacy-deployed solution [StatPro 7] and went all-in by investing in a next-generation, cloud-based system, betting that they would end up with increased revenue to offset the loss of revenue from their legacy product line. No other firm in the asset management software business has been so daring,” they say. “Competitors have implemented ‘faux’ SaaS offerings by putting boxes in data centers and letting firms remote access them. So I think the sale is cashing in on this initiative. Going private will make it easier for StatPro to continue with this strategy without having to answer to the markets.”

Sources differ on what the price of the transaction means. Stocks sold at 230 pounds per share, a 55% premium on top of its Thursday closing price, reported Proactive Investors in September. That’s a huge premium, which means Confluence sees huge value in StatPro, some say, while others are scratching their heads.

“I think the valuation that was put on StatPro, £160 million, also looked kind of thin compared to what the brand value and perception was,” says an executive at a European exchange. “Given that it has recently acquired the entire stake in UBS Delta with all their technology, I would have valued it at much more.” The source compares StatPro’s Delta buy for £13 million ($14.5 million) to LSEG’s purchase of Citi’s Yield Book and fixed-income indices for £525 million ($685 million). “UBS Delta was a direct rival to Yield Book—I don’t know how they did that.”

Paul Sinthunont, an analyst at consultancy Aite Group who specializes in buy-side research, also thought the price was a bit low.

“It seems to be potentially low for the firm, considering businesses like Axioma fetched $850 million with the acquisition by Deutsche Boerse,” he says.

Sinthunont also echoes other sources in noting that the UBS Delta piece and the fact that StatPro had made the painful transition to the cloud years ago as being prime examples of StatPro’s value.

“In terms of vendor strength, Statpro does have a large client base, ranging from smaller to larger buy-side institutions, and it has a strong functional breadth of capabilities across performance and risk,” he says. “StatPro’s own acquisition of UBS Delta improved its fixed income capabilities back in 2017, and so Confluence also acquired that component as well. StatPro also invested a lot in cloud architecture that should support the future-proofing of the business.”

Moving Forward

Evans says the combined workforce, including senior management, is poised to stay in place, and emphasis on human capital and intellectual prowess is at the forefront of the firms’ integration plan.

“When you look at our regulatory platform, and you look at StatPro’s ability to measure and present risk, those two things are meat and potatoes. …The closer your systems are tied together—such that the risk numbers that live in a regulatory presentation are provably correct and provably tied together—is really exciting to us,” he says. ”But I think it’s much larger than that. …I look at [StatPro] more as an intellectual asset than specifically a product asset. I think that as an intellectual asset, they have taken a view that is absolutely consistent with our view that decisions are made and data is consumed, it’s churned into some decision-making processes, things come out of that, and then instead of it disappearing, it should continue to move down the line.”

StatPro has found a niche in the regulatory risk space, but multiple sources note that StatPro is still working on integrating the various tools that it had previously acquired. So going forward, the key for Confluence will be to continue on that integration path—which only now become more complicated—or figure out if it will be best to sell off or shutter other pieces, they say.

Over the last 12 months, StatPro has worked to build out it capabilities around processing large volumes of data/results to prepare daily extract/distribution of performance information to various internal and external stakeholders; improve processing times and automation, while reducing any manual intervention to a minimum; and address data quality by introducing impact date management. “Only the historical dataset affected by the backdating or any other data corrections is recalculated and results are re-generated, thus reducing the extra processing time required to deliver the final results,” according to a spokesperson at StatPro, who spoke with WatersTechnology before the acquisition was announced.

On the fixed-income attribution side, the vendor has worked to build out its offering for the usage of multiple data sources for risk analytics and yield curve data, and to allow clients to “use their own analytics as the priority source and then fall back on the system source,” says the spokesperson. They are also addressing the challenge around transparency on calculated results by providing better troubleshooting tools, “such as the granular prove-out of fixed income return/contribution decomposition, flexible management of model residual assignment, or maintaining the track record of system setting overrides performed by the user.”

Finally, it has added a brand new fixed-income attribution model that allows interest-rate bets to be split from the spread allocation bets, while also providing the user with the choice of two new spread allocation methods for the decomposition of spread effects, “i.e. spread duration allocation method or the Duration Times Spread (DTS) approach.”

At the time of the acquisition, StatPro’s IT roadmap included the expansion of its attribution capabilities to cover “the different flavors of decision-based attribution,” which the vendor had planned to rollout in 2020. It is also investing in modeling fundamental equity factor models, with the planned release of “several regional models in 2020. At the same time, we are developing the infrastructure to cover factor-based performance attribution, which we expect to deliver in late 2020 or early 2021.”