SimCorp sets the technological standard in a growing industry, and by increasing its investments in product development, the company’s management is taking the necessary steps to keep the positive trends on track. We are very familiar with the client group as their core product is portfolio management systems for clients such as asset managers.
However, asset managers are not SimCorp’s only target group. The company is increasingly focusing on capital owners such as pension funds and foundations. Clients in this segment have a higher willingness and capacity to take the decision to invest in a portfolio management system, and naturally, SimCorp should focus on segments that have the highest potential for sales.
Portfolio management systems are the quintessence of a niche market. SimCorp has identified a market of around 1,300 potential clients with more than 20 billion US dollars under management which can be split evenly between capital owners and asset managers.
The majority of the addressable market still rely on their own internally developed solutions. The primary product from SimCorp is called SimCorp Dimension, which has over 200 clients using the product. This translates into a global market share of 16 percent for SimCorp.
With a subscription to SimCorp Dimension, capital owners can monitor all their investments practically in real-time. This information can be used to monitor risk exposures, comply with investment guidelines, make investment decisions or prepare reporting material for board meetings and the like. Dimension is designed to ensure that the data needed by the client is always as up-to-date and as accurate as possible.
The need for good systems has become even more essential as capital owners are increasingly allocating their capital to unlisted assets such as private equity and private debt, which is why SimCorp has made investments in developing modules adapted to such asset classes.
Pursuing and landing new clients is a lengthy endeavour in this niche market, as it is a major and comprehensive investment decision for potential clients to make. This means that market shares move slowly and are gained arduously. In 2020, SimCorp signed 12 new SimCorp Dimension contracts, which is a bit above the average result for the past 5 years, when the company won around 10 contracts a year. Albeit smaller in size, the 12 contracts signed in 2020 matched the number signed in 2019, underscoring the value and potential of SimCorp’s innovative product portfolio.
Massive tech investments
The management has previously estimated a potential of between 40 to 50 contracts to bid on per year, but that has not been the case since the global financial crisis. SimCorp estimates that in recent years, it has won about half of the contracts where the potential client ended up reaching a decision. The most common alternative option a potential client goes with instead of Dimension is, unfortunately, to not make a decision at all. But that’s also a strong indicator of just how strong a position SimCorp has relative to its competitors.
While the sluggishness of the market can appear negative in relation to the company’s pursuit of greater market shares, it does, however, also derive a strong stability in the clients that SimCorp wins.
SimCorp’s integrated system solutions are critically important to their clients, resulting in considerable costs associated with switching to new systems. Such a process is not only costly but also time-consuming and risky, which means that SimCorp’s client relationships are extremely long-term and offer lots of opportunities for additional sales. SimCorp therefore retains nearly all its clients every year. When SimCorp loses a client it is typically because the client’s business has shut down or has been acquired. It is exceedingly rare for a SimCorp client to switch over to a competing solution.
These stable and integrated client relationships helped ensure that SimCorp finished 2020 – which was defined by the Covid-19 pandemic – in fine shape, with flat organic growth in revenue and an unaffected operating margin, despite increased investments into product development. In other words, SimCorp has skillfully adjusted the company’s cost structure to the change in market conditions in 2020.
The quality of SimCorp’s business is also reflected in its 35 percent return on invested capital and growing free cash flow thanks to the lack of working capital, investment needs amounting to less than 1 percent of sales in fixed assets and, finally, stable growth in orders.
The stability of the company’s cash flow generation is explained by the fact that it’s not only the sale of new contracts that creates cash flow. Around 85 percent of the annual revenue stems from clients that were already among the company’s existing clients at the start of the year.
In order to retain its position as technology leader position and attract new clients, SimCorp invests considerable sums into the development of the system; the company operates a software development department of almost 700 developers, corresponding to over a third of its total workforce.
The software development department has been under the skilled management of Georg Hetrodt for many years now. SimCorp invests more than 650 million Danish kroner a year into software development, corresponding to 20 percent of its revenue. These investments help maintain SimCorp’s technological leadership in the industry, and we therefore see it as an attractive use of capital.
Among other things, the company has set the industry standard for a so-called investment book of record (IBOR). The purpose of an IBOR is for a securities transaction to be registered immediately throughout the system, be it in the portfolio manager’s overview of the portfolio or the accounting department’s systems, where the purchase or sale is registered so that all statements can be correctly updated.
SimCorp Dimension can solve practically all the system-related tasks that the clients may need to perform. However, that does not mean that all of SimCorp’s clients purchase access to all the modules. In 2019, SimCorp’s management made a strategic adjustment that allowed a greater share of the company’s sales department to focus on optimising how the clients use the system. The goal is to ensure the client get as much out of their modules as possible, but of course also for SimCorp to try to identify cases where the client could potentially require additional modules or user licences. SimCorp’s new COO, Christian Kromann, has played a central role in enhancing SimCorp’s focus on additional sales.
The greater the share of the client’s processes that run on SimCorp’s systems, the less difficult it becomes to integrate additional modules. In risk monitoring and portfolio management systems, the client must always be able to feel confident about the accuracy of data produced from those systems. Over the years, SimCorp Dimension has been developed for and in collaboration with the clients to ensure that as a bare minimum, the system offers all the necessary functionality.
The number of portfolio management system providers has been declining due to consolidation among several of SimCorp’s competitors, and in our view, a smaller number of players sharing the profit pool is a positive development in relation to the market dynamic and discipline.
Improvement in US sales
As mentioned earlier, the sales processes in this market can be lengthy, and there has even been a tendency of increasingly longer sales processes in recent years. The procurement of a portfolio management system is not only a major financial investment of typically one million US dollars a year but also a major organizational decision. Implementing a new system often takes a large number of working hours spent organizing historical data, while also entailing adjustments and adaptations in daily work processes.
SimCorp’s global market share is 16 percent, and while the company holds about a third of the market share in central and northern Europe, it only holds a modest 7 percent of the North American market. North America makes up more than 40 percent of SimCorp’s potential market, and the management is accordingly highly focused on growing the company’s market share in that region.
The order intake in the North American market experienced some tailwind in 2020 with 4 new clients, which was a much-needed boost following 2019, where the company only won 2 new clients. Around half of all newly acquired clients in SimCorp’s industry are based in the US which is why SimCorp needs to gain ground in the large American market.
SimCorp’s technological lead ought to result in a growing market share, even though they have not had the client intake in recent years that we had expected. All else being equal, we see no indications that SimCorp’s long-term competitive position has become weaker.
James Corrigan has been in charge of the US division of SimCorp since 2014. Even though the company’s growth in the past few years have been somewhat sluggish, half of SimCorp’s current American clients have been won under Corrigan’s management, which has also seen a significant strengthening of the organization, competencies, and success rates in the US. Moreover, the annual 20 percent growth of US sales since 2014 has been twice that of the rest of SimCorp.
The combination of SimCorp’s robust product catalogue and an increased understanding of the market ought to lead to better growth rates in the coming years. In order to deliver on this potential, SimCorp has made significant investments in improving its so-called front-office solution, which is currently not as competitive as the rest of SimCorp Dimension.
In recent years, the British market has been marked by a low client intake, and 2020 was no exception. The breakout of the Covid-19 pandemic has likely also put a damper on some decision processes among potential clients. SimCorp did not win any new British clients in 2020, whereas the company gained 2 in 2019. Unfortunately, SimCorp did not gain any new clients in the French market either in 2020, which has otherwise been overseen by Emmanuel Colson with considerable success since 2013.
The order intake of 115 million euros in 2020 bodes well for the company’s future growth, and the management’s long-term goal is double-digit annual growth in revenues. Despite a rather ‘flat’ 2020 in terms of revenue, SimCorp has achieved an annual sales growth of around 10 percent since 2015.
Recurring revenue from stable, long-term contracts with its clients is one of the main factors behind SimCorp’s 2020 results. Despite the absence of revenue growth in 2020, we remain impressed that SimCorp has maintained a solid profit level of 29 percent of revenue. SimCorp achieved this under challenging conditions and during a period where the company increased its development investments from 18 percent to 20 percent of revenue in order to build an even stronger foundation for growth in the future.
The management wants to increase profit margins over time, and we expect that the company’s profit margins can climb past 30 percent as with market-leading software suppliers in other markets.
Unfortunate financial reporting rules
Since 2016, SimCorp has been selling the right to use its software as a subscription that typically runs for periods of 6 to 7 years. Whereas in the past they sold the system with significant payments on acquisition, the payments today are split into annual instalments. This transition from the previous major up-front payments to now solely running subscription payments has unfortunately resulted in a lower degree of transparency in SimCorp’s quarterly financial statements.
However, there is a greater long-term value in the subscription solution. As the length of the client relationship does not change, it is positive for long-term cash flows that the clients now have to renew their contracts at regular intervals, and this translates into greater financial value throughout the client relationship. That said, it is regrettable that financial reporting rules have to make financial reports so difficult to read, given that the business model is relatively simple.
The size of the instalments paid by clients is determined by the number of users, modules and financial instruments used in SimCorp Dimension. If SimCorp manages to sell more users or modules to the clients, it can result in extremely profitable growth. SimCorp also sells consulting services, both in connection with the implementation of the system as well as clients’ ongoing needs for extra support.
SimCorp has seen a rise in demand for the company’s consultants to operate larger portions of the clients’ systems. The consultants do not have the same attractive margins as newly sold licenses, where a simple commission payment to the salesperson means that the additional earnings are not equivalent to the sales price. The sale of consulting hours is, however, a good source of income, and the organic growth in revenue from consulting hours was just under 1 percent in 2020 following strong growth in 2018 and 2019 based on a robust order intake.
The implementation of the strategic decisions in SimCorp is driven by CEO Klaus Holse and CFO Michael Rosenvold. In 2019, Christian Kromann was also brought in as COO and has since been focused on the commercial aspects of the company. Kromann joined SimCorp with commercial experience from Tia Technology and SunGard where he gained extensive experience with IT solutions for financial companies.
During his time at SimCorp, Holse has contributed with his strong commercial and technical knowledge gained from senior positions at Oracle and Microsoft. We believe that Holse has contributed to a strong performance-oriented and long-term approach. Ss CEO, Holse has helped shift SimCorp’s focus away from northern Europe, Germany, the UK and France and instead towards growth in promising new international markets.
Peter Schütze became chair of the board in 2019 and has many years of experience with financial companies gained through his time at Unibank and Nordea Danmark. We are convinced that he will continue in the same strategic direction in SimCorp that he also helped establish during his six-year tenure as vice-chairman. The vice-chairman of the board is Morten Hübbe, CEO of the insurance company Tryg, which is also one of our companies.
SimCorp does not hold any debt and has a cash reserve of more than 50 million euros. The free cash flow is regularly distributed to the company’s shareholders through an annual dividend as well as recurring share repurchases. The dividend for 2020 was 7.50 Danish kroner, corresponding to just over 1 percent of the market value of a SimCorp share. SimCorp has increased its dividend by nearly 10 percent a year over the past 5 years.
In addition, SimCorp repurchased shares for the sum of roughly 75 million Danish kroner in 2020, resulting in nearly 2 percent of the market value being distributed to its shareholders. The year 2020 was a year with limited dividends, and the management is therefore planning to repurchase shares for the sum of 300 million Danish kroner in 2021, corresponding to nearly 1 percent of SimCorp’s market value.
SimCorp’s growth is supported by its clients’ demand for a more comprehensive, more rapidly updating overview of risk exposures, portfolio compositions and increased complexity in investment choices. On top of that comes regulatory requirements on documentation and regulation.
While this is an obstacle to some players, it is an opportunity for SimCorp who can provide the best solutions in the industry for that exact area. With even more funds invested into development of already industry-leading solutions, we have a positive view of SimCorp’s opportunities to generate significant growth in orders, earnings and free cash flow.