Sandeep Sahai, CEO of Clearwater Analytics, at the New York Stock Exchange on Sept. 24, 2021.
Source: NYSE
Company: Clearwater Analytics Holdings (CWAN)
Business: Clearwater Analytics Holdings is a provider of comprehensive cloud-native platforms for institutional investors across global public and private markets. The company’s single-instance, multi-tenant architecture delivers real-time data and artificial intelligence-driven insights throughout the investment lifecycle. The platform eliminates information silos by integrating portfolio management, trading, investment accounting, reconciliation, regulatory reporting, performance, compliance, and risk analytics in one unified system. The company serves insurers, asset managers, hedge funds, banks, corporations and governments. The company is also a provider of enterprise risk analytics and developer infrastructure. Its capabilities in complex portfolio management across both public and private markets include structured products, private credit, and derivatives.
Stock Market Value: $6.37 billion ($21.76 per share)
Clearwater Analytics Holdings shares year to date.
Activist: Starboard Value
Ownership: ~4.9%
Average Cost: n/a
Activist Commentary: Starboard is a very successful activist investor and has extensive experience helping companies focus on operational efficiency and margin improvement. They are known for their excellent diligence and for running many of the most successful campaigns. Starboard has initiated activist campaigns at 59 prior information technology companies and their average return on these situations is 36.92% versus an average of 20.01% for the Russell 2000 during the same time periods. Additionally, Starboard has taken a total of 163 prior activist campaigns in their history and has an average return of 21.26% versus 14.34% for the Russell 2000 over the same period.
What’s happening
On Dec. 9, Starboard announced a nearly 5% position in Clearwater Analytics and is urging the company to run a robust sales process if it has received in-bound interest from potential buyers.
Behind the scenes
Clearwater Analytics is a provider of front-to-back, cloud-based investment accounting solutions. The company has steadily taken share from legacy solutions, such as BlackRock, State Street and SS&C, as they are widely viewed as the premium modern platform. In 2016, private equity firm Welsh, Carson, Anderson & Stowe became the majority investor in the company. In 2020, Warburg Pincus and Permira made minority investments, and, about a year later, these three firms took the company public at $18 per share.
Clearwater performed fairly well from its IPO through 2024, supported by consistent growth and historically strong margins that drove a premium valuation relative to peers, and these sponsors were rewarded accordingly. Warburg and Permira, which owned 22%, each sold their positions entirely and WCAS, which owned 56%, reduced its stake to roughly 1% by November 2024, at prices as high as $29.11 per share.
Shortly thereafter, the company started making a string of acquisitions — a public company, Enfusion, and two private businesses, Beacon and Bistro. All of these transactions were announced between January and March of this year and closed within the following few months. The consequence of this is that Clearwater shifted from being a clean high-growth vertical software story with strong margins, a premium valuation, and a net cash balance, to a riskier, less certain integration story with leverage around 3x EBITDA.
Unsurprisingly, the market questioned the company’s decision to change course so sharply as well as its ability to integrate these three acquisitions while continuing to maintain its core organic growth story, and the stock sold off sharply, ultimately reaching a low of $15.73 per share after its third-quarter earnings report last month.
Shortly thereafter, it was reported that Clearwater had engaged advisers to evaluate strategic options after receiving a bevy of unsolicited offers from firms like Thoma Bravo and even Warburg Pincus and Permira, both of whom still had representatives on the board.
These announcements prompted Starboard to disclose its nearly 5% position in Clearwater and urge the company to run a robust sales process if it has received in-bound interest from potential buyers. But don’t misunderstand Starboard’s motive or thesis. They are not short-term strategic investors jumping on an opportunity for a quick return. They have likely been looking at Clearwater for many months and had owned it because they like the standalone story and see an opportunity to create long term value. But, to paraphrase the overused quote attributed to Mike Tyson (but really said by Cus D’Amato), everyone has a plan until they get hit. And Starboard is as good as anyone with rolling with the punches. So, when news surfaces that the company is considering a sale and that two of its board members may be bidders, Starboard is doing what any good activist would do and making sure there is a fair process to maximize value for shareholders. Starboard will then decide whether that price is better than the risk adjusted value shareholders could receive from a standalone plan of integrating the acquisitions and growing the core business. Moreover, a credible and fair process could likely attract additional bidders, including strategics such as BlackRock and Nasdaq. While the leveraged buyout math works in the high $20s per share, strategics could push it to a 3 handle.
There could be a quick resolution here if the board decides to sell to the company and receives a bid that is good for everyone. But that is a risky activist thesis on its own. What makes this a good activist campaign for Starboard is that they are a believer in the company as a standalone entity and see a path to create shareholder value.
If the standalone path is ultimately pursued, it would make a lot of sense for the private equity investors who no longer own any material position to resign from the board and be replaced with industry experts and a shareholder representative who can guide management through a standalone plan.
Essentially, there are three potential outcomes to Clearwater’s current inflection point: (i) a standalone plan where the company integrates its acquisitions and grows its core; (ii) a sale of the company for a satisfactory premium following a real and competitive review process; or (iii) an abbreviated sale process orchestrated in part by Warburg and Permira resulting in a sale to Warburg and Permira. Starboard would likely be happy with (i) or (ii) and we expect them to do everything within their power to prevent (iii).
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist investments.
