Company Overview: Clearwater Analytics, now rebranded as CWAN, began as a reporting and compliance automation platform for fixed income managers, offering cloud-native solutions for complex reporting needs.
Transformative Acquisitions: CWAN has made three significant acquisitions—Beacon, Bistro, and Wilshire Analytics—to expand its capabilities into alternative assets and risk analytics, aiming to provide a comprehensive end-to-end platform.
Market Position and Competitors: CWAN competes with major players like BlackRock's Aladdin, BNY Mellon's Eagle, and SS&C, with a focus on being a cloud-native disruptor in a traditionally on-premise industry.
Valuation and Growth: The company is considered undervalued compared to its vertical SaaS peers, trading at a lower ARR multiple despite its potential for durable growth and high free cash flow yields.
Investment Thesis: The investment opportunity lies in CWAN's ability to integrate its acquisitions, improve retention rates, and leverage its data capabilities to drive growth, particularly in the insurance and asset management sectors.
Private Equity Dynamics: Recent sales by private equity firms have removed an overhang on the stock, though their continued board presence raises questions about governance and strategic direction.
AI and Data Advantage: CWAN's position as a system of record provides a data moat, with AI capabilities enhancing operational efficiency and offering potential for advanced analytics and decision-making tools.
Key Risks: The primary risk involves the successful integration of acquisitions and maintaining growth amidst competitive pressures and market skepticism.
Transcript
You're about to listen to the yet another value podcast with your host me Andrew Walker. Today's podcast we have so show me co on show is a super super thoughtful investor does deep deep research into you know growth of your companies than I normally look like but we have just a fascinating conversation on clear which he has done a ton of work on and I I think it's a really interesting conversation. I when I said I was going to have him on, I had multiple really sharp investors email me say I'm super excited for this one. We've got big positions here. Obviously, nothing's investing advice on this podcast. See the disclaimer at the end, but uh I I think it's just a fascinating idea idea. I think you're really going to enjoy it. And we're going to hop there in one second. But first, a word from our sponsors. This podcast is sponsored by TRA. Look, I've mentioned TRDA a few times. You're going to hear me keep mentioning them. Why? Because one, they're a sponsor, but two, it is a fantastic product. I've heard from so many listeners who have listened to the podcast advertisement, gone and tried it and have really enjoyed it. Some of them have become maybe too freaking contributors because look, Troda is buy interviews that they turn into call transcripts. So you can use it in two ways. A, you can go use it to really quick, my favorite way, really quickly get up to speed on a company you're following that has an interview on there. Look, you're about to listen to a podcast on Sewan. Go to tryda. try r a ta.com/sewan and they've got a sample transcript job. You can see you're going to learn a ton about the company if you read these. So that's one great way to use it. Another great way to use it is looking to get up to speed, looking to talk to another smart investor, you can go be one of the people who does the transcripts, who does the interview and talk to another bysider who they might be bullish, they might be bearish, they might be skeptic, but whatever you do, you're going to learn a lot about the position from swapping thoughts with another smart, sophisticated buyside investor who's following the company. Uh look, I'm on there. You want to go talk some cable stocks? You want to go talk some beaten down biotech stocks? You might find me on the other side of your interview. People always say, "Oh, I recognize you by your voice." But I think it's a fantastic product. I think if you try it, you're really going to enjoy it. So, look, go to try. That's t r y t r a ta.com/cwan and you can see a sample transcript and kind of get to know the product for yourself. But I promise you dozens of listeners have already tried it and really enjoyed it. I think if you enjoy this podcast, I think you're enjoying it, too. So, try.com/cen. And now to the podcast. >> All right. Hello and welcome to the Y another value podcast. I'm your host Andrew Walker with me today. I'm excited to have on for the third time. Show go showm. How's it going? >> Uh good to be here Andrew. Thanks for having me on. And uh I feel like every single time we talk about you know very different stuff, right? First it was Shopify, then it was Kelly Partners Group and and then now you know uh a completely different company. So it's it's fun to have a a wide range here. And >> not only that, I I went and re listened to part of the Kelly Partners Group for a second. I hate relisting to my pods. I always have You look the same. I have dramatically different hairstyles. I had a real homeless beard then, but uh we're going to get there. Look, show, I'm super excited to have you on because you're in that VC world, but we're we're going to lure you over to the public market worlds eventually because you do such great analysis on these sort of stuff. Uh before we get to that, just quick quick disclaimer, remind everyone, nothing on this podcast investing advice, consults, financial advisor. Full disclaimer at the end of this podcast. Uh, show me. The company we're going to talk about today is Clearwater Analytics. The ticker there is CWAN. You've done I read your memo. I read the investigator. You've done great work here. So, I guess I'll just pause and toss it over to you. What is Clearwater Analytics and why are they so interesting? >> Yeah. So, uh, so Clearwater Analytics um, is it's it's actually first I guess we should start off with like what the legacy company is, which was which was called Clearwater Analytics. Now they rebranded as Sewan. Um uh but Clearwater Analytics as it stood was started by these uh actually kind of failed uh fixed income uh uh managers out in Boise, Idaho who uh ran it. And then as they were doing that, they actually had a reporting product that they were uh giving to their clients for for maximal uh transparency. And that led to actually the the clients and other people being like, well, hey, we actually we we like that a lot versus like your fixed income investing. Um and so so they actually went and and and stood up Clearwater Analytics which is basically this backend it started off as a back-end uh reporting and compliance uh automation platform essentially built cloud first right when they started um you know AWS was was out so they built cloud first uh and it just made it super simple to get um you know when you have complex reporting needs of fixed incomes in different currencies uh you know loans versus bonds versus you know like seat credit default swap, whatever, right? Like all sorts of different things. Um, it can it can report on them of uh where where they stand, right? It can reconcile uh in different currencies. It can spread across all the different customers. So, if one customer like an insurance company says, "Hey, listen, you know, this this QIP is actually h it's something's wrong with it, right?" They can go in and reconcile and push that across the whole platform. So everybody who owns that bond or that you know whatever that is um will have that like permeate throughout the whole entire platform and that's really what's powerful about this kind of single source of truth like cloud-based cloudnative uh uh platform. Now, that's where we're talking legacy, right? So, so that was a 98% retention business, gross retention business. Um, you know, very sticky, customers don't leave um mission critical type of uh reporting and compliance uh software. We get to today, which is Sewan. So, now SWAN actually has Clearwater Analytics, right, which we just talked about. They then bought um uh Beacon and Beastro uh and then also they bought uh this other thing called Wilshshire Analytics. Um and basically that is their kind of alternative assets quanting uh suite of things. And so basically when you need to look at complex portfolios you have uh uh beacon which helps you um kind of model out those things. Uh and then you have like kind of the risk analytics and alternative asset stuff uh in that suite. And then you have uh infusion right which is the largest uh u acquisition to date. By the way in total they spent basically a third of their uh of their market cap on this. So 2 billion uh dollars on these transformational acquisitions and this was infusion. It was a public company um primarily serving hedge funds originally. Uh then moved into asset managers. Um that business had traditionally actually grown quite rapidly similar to Clearwater Analytics where it was like 20% plus growth. Uh it was sticky software. They then started to move into asset managers and actually that degraded and so uh all of a sudden the retention started slipping from you know kind of call it you know 97% to 92 93 94% uh and growth meaningfully slowed as well. And so basically, Clearwater saw the ability to take all these assets together, form a single end-to-end front office to back office platform uh and go and serve their their customer base better. And there's there's different segments that we can go into in their customer base. But anyway, that's that's what SWAN now is. >> No, that's a great overview. And it's crazy, you know, reading the investor day and everything when you do it, you hear it and or I I think it's the merger call that come on and somebody says, "Wow, congrats on three transformative acquisitions at the same time." You're like, "Oh, you know, one transformative acquisition at the same time is something. Three at the same time, that's pretty crazy." Uh, I've got a lot of questions here. So, let me just start high level. Look, the market's a competitive place. What are you seeing in the newly transformed combined seaw that you think the market is missing that makes this kind of a compelling riskadjusted alpha opportunity? >> Yeah, so um so I mean you know it's funny because like normally I think we all like to start with valuation last, right? But I I do think like part of what's interesting right now is the fact that the valuation is is in my opinion quite compelling where it currently is. Um and the reason for that is by the way like they they just took on debt um uh to make this acquisition, right? So now they are levered. They're they're paying down that debt quite quickly, but like at one point they were over 4x levered. Um and uh and then on top of that, like you know, it's a third of their of their market cap. So it's it's a big big swing that they're taking. So that being said, currently right now, actually, you know, I haven't looked today, but let's see. I think it's like yeah, looks like it's in the it's in the 19s 19 mid19s. Um so if you look at that like kind of on a uh on an AR basis right they're trading um much less than the median uh that that you would see in um in in vertical SAS right and so that's kind of interesting because like okay well why would that be what's happening here? Well, it's because people are discounting um sort of kind of where where clear stands now in in terms of my modeling, right? I have it out on like 2026 2027 numbers is like 2 and a half% free cash flow yield, 3.8% free cash flow yield going out. Um those are quite compelling for a business that, you know, can continue to grow 20, you know, call it high teens to to, you know, low to mid20s for a pretty decent amount of time, right? And so given that that's where it's like quite attractive from the valuation standpoint. Now why does that happen? The reason it's happening is because the market is just like what did you guys do right? You took a 90 98% gross retention business that was sticky that you were starting to show you know 115% plus net retention. So it was growing really nicely. and then you just put a shitty business you put a shittier business on top um uh that you're now saying you're going to transform right that I think is actually the opportunity though where um so infusion right again we talked about how it started with hedge funds and then it started to move into asset managers where it started with hedge funds was actually hedge fund launches or smaller hedge funds right so when you launched you need an order and execution management software um and so how do you place your trades how do you make sure that they're compliant when you're placing How do you make sure that if you're buying them in different areas, the currency like everything like that you need in in one platform? That was infusion, right? Um and that worked very well for smaller hedge funds. Then as they started to branch out into asset management, their actually profitability started to go down because they were starting to invest more in that go to market and more in the product to deliver that. But you know, it just wasn't hardened enough. And so you had this weird thing where growth was growth was slowing, right? customers are getting unhappy because the product's getting more bloated. It's not, you know, uh, moving us fast enough and then their profitability is actually slipping. So, Clear Water is like, "Hey, listen, in our sort of endto-end vision, if we take this and we we now layer it onto our platform, um, we can now cross-ell and and upsell, but also, you know, eventually completely integrate this, right, so that we can have this this vision." And that to me is a compelling opportunity where right now all they have to do is shore up the gross retention. And I say, "Oh, it's it's that's actually a hard thing to do, but like they've already actually taken steps to do that." And they've shown that um that 94% uh gross retention is starting to tick up for infusion. Um and so that's like that's shoring just the base. And then it's like, okay, if you get them to concentrate on hedge funds, you know, can you get them to start to grow from 13% to a little bit higher in a more profitable uh uh way, right? Um and then you start to cross-ell into the core insurance base and the asset manager base that um that Clearwater already has. >> So that was a great overview. I I want to get a bunch of things, but I do just want to ask so earlier and you said, "Hey, these guys are trading at an ARR that's attractive for their vertical. I mean, I've kind of got them in the mid19s as we talk September 18th, I believe it is. I've kind of got them at like 7xish forward revenue. You can tell me if you disagree or not. What What would a good What would a normal forward revenue company for a a company like this? And I don't think there are perfect uh pure play comps here, but what would a forward revenue for something like this, what do you think it should look like? >> Yeah, I mean like you know, so uh so like if you look at sort of the comps that I would say I mean I guess the probably the closest you would get is like an app folio or like a procore, right? Where it's like they're each growing call it you know 15ish% so actually a little bit slower, right? But they're they're kind of growing around there. But like, you know, they've they've they've grown that for a while. They have they have scale, right? Um and uh and so if you look at where they're at, right? Um they're basically right around that sort of uh call it, you know, 9x 10x uh uh forward sort of uh uh multiple on AR, right? Um but then if you look at like the broader set like also there's a bunch of others like in general the average forward AR right now I think for for uh for like kind of the vertical SAS comps that I look at is like you know call it 13x right um and so it's all a question of the the the uh the quality of it. Now like I said clear water is growing faster than Procore and Appfolio actually has higher free cash flow than them as well. Um and so really the negative is is like are they going to pull off this integration or not? So that that's the key thing right is like before people were very happy owning clear water right analytics because they were just like oh we can under we can underwrite it it's very easy stuff like that now you have this like man like okay is infusion going to go well or not like what's this beacon and bro thing how is that going to integrate right like all that sort of stuff that's causing the noise that's creating this delta between um you know where the rest of you you know the the the vertical SAS ecosystem is trading and then where clear water is and by the But comps-wise, like you know, I put them in this bucket of like like Samsara, Viva, which would be like, you know, best of class, right? Trading trading way higher. And then you have like Appfolio, Procore, you know, Guidewire, uh, Service Titan. Those are sort of the names that that would be in that list. >> And look, I guess the company probably agrees with your valuation math, too, because I hear two and a half% forward free cash flow, and I think, oh, that's more expensive than most of the stuff I look at. you know, the the last podcast I do, like as I was prepping for this podcast versus the last podcast, I kept having to remind myself, well, the last company I did was uh you know, trading at two and a half times IBIDA. So, the answer to, hey, you don't like this asset, it can be, yeah, but it trades at two and a half times Ebida, whereas this trades for seven times revenue. So, it's like it's good. It's just a question of how good. I I was going to say I think the company probably agrees with you because at the start of this month they announced $und00 million share buyback and you generally don't see kind of levered integration quick growing companies announce big buybacks like that I would say. >> Yeah. And I think also like the growth durability is something we would talk about right like I mean you know you look at waste management companies it's it's like I don't think any of us would say they're trading at at at cheap valuations but for their durability they are. >> Well the growth durability actually that's where I wanted to go next. So there there's two uh things I want to talk about. I think the simplest one to talk about we we can start with and that's how sticky is the product right and I think there was a call on TRDA the sponsor of this podcast where it was a bull and a skeptic and the one thing I think it was the skeptic who said hey I was at a company that tried to rip out a competitor product and it was hell if I remember the correctly. This is a very sticky product like once these get integrated into the back end but I'd love you to just quantify how sticky you can throw in antidote whatever but let's talk about the stickiness of this product to start. >> Yeah. So um so first off I think we should kind of say that in general everybody in this space is sticky. So who are their competitors right their competitors are uh well the biggest is is Black Rockck Aladdin. Um they you know built this for Black Rockck internally. Yeah, when you were mentioning that this was started internally at a fixed income product, my first thought was Black Rocks Aladdin started internally. So this is really where people like dog fooded their own product. It's really funny how this whole industry grew up that way. >> Exactly. Yeah. It's crazy. And so like Black Rock, you know, Black Rocks Aladdin is like, you know, I would say best of breed, right? Um and they work with the largest largest, you know, asset managers, sovereign funds, all that sort of stuff. Um then you have like BNY which has Eagle. Um >> you have State Street. Yeah. You have State Street which is Alpha. Um, and then there's a Deutsche Borch, which is a European uh exchange that owns uh um SIM Corp. Um, and then there's SSNC. Right now, SSNC is actually kind of probably the most direct competitor right now to Clearwater. Um, and they're just a complete product, right? Uh, >> they're a share bleeder, right? Like you mentioned, this is they mentioned on their call like SNC, it's a legacy product. They update it once a once a year, once every six months. This is cloud, right? Like these guys are cloud. So, it's updating every day. But please continue. I'm sorry to cut. >> Well, what's what's funny about SSNC though is it's a shared bleeder, but not actually when you look at the gross retention numbers of SSNC. So, they actually have like still fairly good uh uh retention, right? Because like once again, like it's just it takes a lot to change these systems, right? Which is the pro and the con, right? Because it does take longer sales cycles to make that change. But then the question is like well, what's the impetus to change? Which we can get into. But like um right now the reason why they're a share leader is actually just because like they they're retaining their current customers but they're not able to win the next customers right because of the fact that everything's changing with alternative assets uh transparency that you need risk modeling all these sort of things right um so so that's kind of the dynamic one everybody has really good retention right um the other dynamic which is kind of crazy is like so Aviva which um is an insurance uh or what's large conglomerate of of stuff, right? But but they have an insurance arm. They are, I think, I believe, one of the largest customers of Clearwater Analytics. Funnily enough, Aviva Wealth Management is one of the larger customers of BNY Melon Eagle. So that's kind of weird that like within this thing you have you know they're they're they're uh they're buying two separate things but that becomes like you know with BNY they can package in custody uh deposit solutions you know all that sort of stuff to uh to the wealth management side right of the ETF we meanwhile the insurers right like what are they doing they're they're buying fixed income they want to make sure that they're compliant that they're reporting on time things like that and so that's like the best solution that they can get is is is in this case clear water analytics and so that's where everyone is going to retain really well. But now the question is who is going to take share in that world given that retention is high right across the whole base and that's where actually Clearwater's vision is is kind of compelling which is the sense of they are saying hey listen we are truly the disruptor cloudnative uh first you know kind of uh person that's taking on the incumbent by the way Eagle uh Sim Corp says they have a cloud product uh state alpha they're mostly on prem and then they jerryrig some like cloud product on top of that, right? So, it just doesn't work the same that a Clear Water Analytics works or a Black Rock Aladdin. Those are the best of breed in terms of um uh in terms of like where they play, right? Um and so now the question is, well, what's the trend? Okay, there's a couple trends and one there's some that are short-term and some that are long-term. So, short-term um specifically for Clearwater, uh like probably 50% of their base is actually insurers, right? Yes, they serve asset managers. they have like Apple and you know intuitive surgical and whatever on the treasury side but like really most of their money comes from um uh you know the insurers and when you think about that the insurers um you know they're mostly investing in fixed income and so the national it's the NIC I don't even know what they're called but national something association of insurers or whatever they set this policy that's the first time in 30 years that made this change to the classification of fixed income you can no longer just use like Moody's and S&P ratings to say Hey, this is like in this bucket. You have to kind of take into other factors and they have a whole series of things that you can read through, but you have to take into these other factors of how you classify it. Now, guess how how to actually classify it. That's freaking hard, right? You either need to have a team of you need to hire more in the back office to go and do that reclassification or you use a Clearwater or some sort of system or an SSNC with their services arm, right, to go and get you up to speed. And so, that right now is professional services work for Clearwater like this year. um because it was implemented in January of 2025. Um but that's also a tailwind for people who are realizing like holy our on-prem legacy system does not enable us to do this in a in a in an easy manner, right? And so that's where Clearwater can now start to take more share because of this trend, right? Um the other trend is alternative assets, right? Private credit growing like crazy. Whether it's sustainable or not, who knows? But like it's growing like crazy, right? And then on top of that PE, uh, VC, you know, all those sort of investments. And so once again, like those insurance companies or asset managers who are doing it, it is very hard like I on the venture side, right? Like we used SSNC at a previous fund and we it took a long time for us to, you know, actually reconcile the books and get the the uh get the quarterly reports out, let alone the investment team trying to ask the back office for specific data cuts, right? And so that's what we were asking for for like hey what's our risk or or what's our exposure in in infrastructure software yeah or or Jeremy whatever right and to get that the back office team would be like well but like we're trying to do the accounting we're trying to do this and trying to do that and like we're just like guys but this is how we make an investment right like you know and there's this there's this this infighting right and so we actually stood up Adapar which is is a a private uh uh competitor specifically for focus on alternative assets but um but we stood that up And what's really interesting is going through that, I can tell you I'm I'm just never going to rip out Adapar, right? It would just it took so much time to get it right, but once we got it right, oh my god, the investment team could go in for the first time and just have all these different data cuts and slices and things like that. And meanwhile, the back office team was like, "Oh, this is amazing. I don't you're not bothering me. I can just focus on my job." Right? So that's the efficiency that you're getting out of these platforms. It's one of the things they talked about, hey the hedge funds, like I I think said, hey, all you hedge funders, you guys think you have better risk models than our off-the-shelf stuff, better all these type of models. That's great, but like the under our underlying data is going to be better than yours. So all these guys build their models on top of their underlying data. And then you know if you've ever built all my Excel models are built on Bloomberg. Guess what? It would be really effing hard for me to switch Bloomberg. Like that's the main use of Bloomberg for me these days. It'd be really effing hard for me to switch out because all my models are built off Bloomberg. like if all the hedge fund models are built off the data coming from them and I love they had that uh you can talk about it if you want but they talks about their data mode. I absolutely love that. We can go to back to that in a second. I do want to ask one uh one quick question. Okay. You mentioned Aladdin is the best of breed product for generally the largest of the large firms. You and I tomorrow we launch Showmick and Andrew's you know fund of funds or whatever it's going to be and we take a huge position in Clearwater which is obviously a great success and we use it to go from we launch with a hundred and we use it to go to you know a trillion dollars in asset under management right are we going to switch over to Aladdin at some point because now we're just this massive person or is it so sticky that you know uh Clearwater yes we started at 100 million but we're going to keep with them so they're just going to as their customers customers kind of grow, they're going to just grow with them even though Aladdin is kind of the best of breed super large product. Does that make sense? >> Yeah, it makes sense. So, uh, so it it depends on if we're talking about Clear Water or Sewan, right? With Clearwater, you would have kept Clear Water in that instance because you would you would still be using their back office because it it it still can scale, right? And so, uh, so you would still be using it because it it it works. It just, you know, the team's used to it, they're trained on it, stuff like that. And then you would look at whether it's Aladdin or whether it's Bloomberg for the order order and execution management side or or you know other there's other solutions out there but like at that scale it's basically like a Bloomberg or or Aladdin. Um and so uh so you look at other solutions in that in that area. Um what's interesting though is with CWAN right now um that this is the endto-end vision right which is like well hey as you are scaling and you're starting to now invest in more complex products right like let's say you start to invest in a bunch of derivatives you need an order and execution management uh system for that because it's not as easy as just placing like an equity trade or like a bid on a you know Coca-Cola's bonds right like it's just you it's more complex and so you need a system right that that on front office side. Then on top of that with the derivatives, you need to understand your risk, right? What's the delta, gamma, beta, whatever all these sort of factors of that risk. So that's where beacon and bis bistro come in. And then that's where uh you know legacy clear water, right? I hate to use the word like but like you know the former clear water like analytics that's when that comes in onto the back office and middle office side of like the investment accounting. So they're they're actually that is why they made this move is because they're just like when those clients start getting bigger, especially as they move more into asset managers, right? That is something that they want to not give up that share to somebody else because they're just like we've already earned the trust of the customer. We, you know, we're embedded in them. We've shown them we can scale and so now we can we can truly deliver this end to end vision, right? That that helps them. But as of stands today, you are correct that at some point as they got to scale, they would look for a different OEMs, which is the front office. And then on the middle office, you know, kind of uh risk modeling side, they'd look for a different solution as well. >> Let me So this is company has historically been a 20% grower. You know, they buy infusion and they I think they say in the say, hey, they historically grew faster and then their growth they took their afterbar and their growth dip to 12%. You know, heaven forbid, but let's just use the 20% number. It's not maybe I'm too public markets focused, equity focused, but you know, it's it's not obvious to me why this is a business that is growing 20% long-term because underlying like the world has already been very financialized, right? Active public investing is shrinking, not growing. Now, there's plenty of growth spaces, but you know, it's not clear to me why they can grow at 20% because, you know, it seems like everybody's already got some of this. uh as you said the products are completely sticky. I just don't understand why they're growing. So like where is this huge growth come especially they were smaller historically especially going forward where are they this huge growth for continuing to grow at 20% going to come from? >> Yeah. So so uh couple things one first of all in the end market of hedge funds right um I think you and I both agree that like that's probably not sustainable 20% growth over over a long period of time. I I it especially if you were originally focused on these smaller hedge funds that were launching, right? I think there's, you know, I don't know the numbers today, but like I imagine it's it's significantly down from, you know, 10 years ago. >> Look, no, I I mean, again, maybe I'm too public market poses, but everybody knows small hedge funds are a dead and dying breed because for a lot of them are just going to the big pod shops right now, right? So if they're going to the big pod shops, that's some growth for whoever the big pod shops manager is, whether it's Sewan or someone else, but it's not 20% plus growth and you know, it's just incremental growth and it's hard for me to see how that can sustains. >> Yeah. So, so that's really where it comes to this um you know, you almost have to bet that the PE mindset, right, goes into optimization mode, which is like, hey, infusion we're going to optimize uh the hedge fund component to be profitable. You know, it'll be a call it a maybe maybe low teens grower sort of type of thing, but we're just going to make sure that that's like short up and could be profitable and cash flow. Well, maybe we can also cross-ell some of our solutions into that, right? But it's not necessarily going to be a massive thing, right? Uh in my opinion, that's not how I view it. Um on the insurance side, I think that is still a large market. Now, they you know, I don't have exact numbers, but again, 50% of their base is is um is uh you know, insurers and um and you know, like within the US, I would say they they're like pretty well penetrated. They're not saturated yet, but they're they're they have a good name. They have a good brand. They're out there. Now, internationally, it's completely different, right? In Europe, APAC is a complete wild west. No one's even like that's that's wide open, right? Um and Europe is still pretty uh pretty open as well. Um and so that's where, you know, uh actually infusion had a lot of European presence. Uh um they bought this jump technology in France which had a a French presence, right? they're really been focused on how do we get more of this presence in Europe to build this out because then uh those insurers by the way are actually longer running than the US insurers because like Europe just has uh unique aspects around insurance and so um so that's where they're going to get growth from one expanding internationally into those insurers with this whole vision right they just announced a German uh insurer that they they sold all the components to the full CW platform um but also alternative assets for for those insurers, right? Because they need to understand the risk. They need to understand the reporting, stuff like that. That's how you upsell Beacon and Bistro and and the the the risk analytics modules onto that. And then you have the asset management business. And so that's really where like the growth engine will be is like can you with this endto-end platform start to penetrate more of the asset managers and asset managers are still growing globally, right? As we talked about because it's becoming more money is becoming a bit more centralized in that way. And so you have these more of like you know call them enterprise to you know small enterprise to mid enterprise to large enterprise. Now those large enterprise and mega enterprises that's when you're going up against Aladdin you still got to do a lot of backend integration work before you can enter those conversations. But for those small to mids that's where you can play in and your your pricing is more attractive than a black rockck. >> The the insurance sector I mean the size of the insurance sector literally boggles the mind when you start thinking about it. But there has been a big trend and again insurance is so big it's hard to call it but there's been a big trend you know every private equity firm wants their insurance their captive insurer to invest in private credit off of basically to mine their balance sheet right to pull the Birkshire Hathaway uh you know Apollo bought Athen is the model everybody's going after how does that play into clear water because I could imagine two two things right it lots of room for expansion your insurance company gets bought by a private equity firm and you just go and say Hey, why don't you just start rolling this out and we'll we'll use our solution. And I still wanted to give the data fly we'll share in a second. But I could also imagine the other where the private equity firm says, hey, we're the largest biggest of breed as we buy these insurance companies. Yeah, it's a multi-year ramp, but we're going to start putting them all onto Aladdin or heaven forbid our own internal product. Like how does that kind of play with that? And you can say, look, it insurance is so big it's it actually doesn't really budge the needle either way. >> Yeah, I mean I guess I would say like there's so many people have tried that. uh uh very few have succeeded. So that that's one thing just in general like I think Apollo is certainly uh a standout with what they did with Athen. But also like you know I they it wasn't easy for them either. Like I've listened to a bunch of podcasts with them explaining like how it went through and like it was just really challenging for them to get that business turned around because it also wasn't like the best run business when they bought it either. So um so I think like a lot of other people are trying to do it. I don't know if how successful they'll be just because of how hard that that that is and a different mindset. Um you know when we look across like who has done it well like I mean you basically have I mean Markel is not even doing that great with it to be honest like in terms of uh um in terms of their specialty insurance arm like you have Bergkshire and you have Fairfax, right? And then you've got a couple others that are trying to do this mini thing but like I I just haven't really seen it be besides a trend that people are all talking about as permanent capital. I just haven't really seen it take off in a way that would affect my underwriting of Clear Water is is my >> Let me switch to a different a different question. So, when I said I was going to have you on the podcast, I had two really sharp uh software investors who I know both have good track records, long short, like to email me and say, "Hey, I'm really excited for this podcast. This is a big position for me." Right? Two guys who when they say they've got a big position software, I generally like drop something, especially because whenever I've run something by them and been like, "Uh, I don't know." Like they they've caught red flags I've missed. So, uh, but so I've got them two plus you, right? I've got the the three musketeers telling me this is an interesting long. I read this, I'm like, "Yeah, I get it. >> Great growth runway, buying back shares, integration." >> But then I look and I see June 16th, 2025, uh, WCAS, one of the private equity firms here, selling out basically their whole stake, right? And that yesterday that they recently had, they say, "Hey, a couple years ago, the knock on our stock was it's too illquid. There's super voting shares. the private equity firms control too much. That's been solved. All the private equity firms are gone. And I'm kind of looking around saying, "Oh, well, it's nice that the shares are more liquid, but why is private equity running for the door?" So, I'd love to just ask you, why is private equity running from the door here? >> Yeah. Yeah. So, so, uh, a couple things. One, that was definitely actually an overhang, right, that they were trying to get rid of. Uh, that was an active thing that they've been talking about for a while. The other thing is actually ironic. Well, this is this is actually a pro and a con. Uh the pro is like yes, they've sold their shares. Uh and so you could say they're running out the door. The the the con is actually they're not running out the door because they're all still board members. Um the the the the part that sucks about that is like, you know, so so uh the way they're comped, right, in their proxy statement is wild. Like I still don't think that this is the best way, but they're literally comped on like 18% growth, you get X, 20% growth, you get um >> you're not the only one you're not the only one who's pointed this out to me. Yeah. >> Yeah. And then 20% plus growth, you get, you know, you get some kicker on top of that, right? And so that's why you you can see them, they're very focused on this 20% number. No Because like that's how they get comped, right? Um and that's I wish that wasn't the case, right? Um the whole comp committee, by the way, is all PE guys. So So the CEO was was former at WCAS. He was an operator there for a number of years. So he joins um there's there's I think uh two or three members of the board from WCAS that are on the audit committee as well. Uh the other people are Premier uh Warberg I'm forgetting the other P but there's four private equity funds and like all of them are board members and all of them are also on the comp committee which is just like what the heck you know like >> well look private equity if you if you follow them the one thing you will see is when they are on a on a board they try to cons control the compensation committee like invariably I I think I've heard from some more like corporate governance people hey the chairman's got a lot of power but it's really whoever chairs the compensation committee that drives the most influence. So it's not loss of me that they're on that, but please continue. >> Yeah. Well, but but I think that's like so on the one hand like yes, they're very thoughtful in terms of incentives, in terms of what drives like shareholder return, right? Because that's like what they're uh going through, but I I mean at the same time that just kind of the fact that there's still so many PE board members is is kind of rubs me the wrong way. They are trying to diversify that, right? They they added um a former um uh insurance leader actually from from Apac onto the board and they uh they also uh added someone else I'm forgetting. Um but uh uh but so they're trying to they're trying to focus on on on building that. But like again if we go back to okay so they're incentivized to grow 20%. So so one like by hook or by crook right they're going to grow 20%. you know, not the cook part obviously, but I'm just saying like you can also get a sense for why like acquisitions might make sense as well, right? Which might be the bare case is like well then why are you doing this, right? That being said like um I think given what we talked about of like hey as your as your uh uh customers start to scale like will they stick with you? Well yes they'll stick with us on our core module but like you know then we're we're fighting for the share against others like how much pricing do we have all that sort of stuff. you can see why the vision makes sense for them to make these acquisitions to go after this endto-end platform. I think a big thing by the way that we didn't talk about is like a a significant portion again insurance companies mostly uh uh mostly are going to be um fixed income, right? Asset managers are still also going to have a decent amount of fixed income and then corporate treasuries are also going to have a decent amount of fixed income. And so when you look at if we actually get three rate cuts this year or and some next year to get to some more normalized thing, what happens when you know rates go down assuming that inflation you know is kind of steady uh you you have the long end uh a fall as well and prices go up right and because they have an AUM pricing model they take um basically it's half of a bip on on on AUM you actually get this component where rate cutting cycles help in multiple ways. one you know software longer term cash flow durability all that sort of stuff. So you know the software multiple will go up but also literally their revenue will their net retention will go up. In the in the uh investor they have a slide where they kind of break down uh uh how how it's made up of and they say like you know call it 2 to 3% is this aum pricing. I think actually that that is um I think that will be higher um in a in a you know in a rate cutting cycle um especially depending on like how quickly those rates get cut uh and um and just sort of how how bonds react. And so that to me is where like you can you can look at this 20% grower in the near term, right? And say like, hey, you know what? I think Core Clear Water's actually got some upside to what they put out in their numbers. And then the question is, well, now like what does infusion do? Well, again, infusion they've said, hey, it's going to grow 13%. You know, kind of we're going to keep it steady. But if they can fix the leaky bucket, then all of a sudden that 13%, right? Because if they're just adding the same net new AR, they're not, you know, they're not increasing or anything. If you change if you stem the leaky bucket, then actually that leads to growth, right? So you can all of a sudden start to look like a 15% grower than a 13% grower by stemming that. >> It I I think the AUM point's really interesting because as you said, this is super sticky business. You're probably only getting ripped out when every handful of times when a client grows so large that they want to risk the switch to a better product or you know, unfortunately small hedge funds go bust and you know, a company goes bust. Aside from that, churn has historically been about 2% I think they've got. And then as you said, if AUM and ignoring the near-term boost of the rate cuts that you're suggesting, AUM at asset managers just tends to go up because it's a nice thing. You know, people say you go to the casino, you pay the vig to the casino, you invest in the stock market, the stock market pays the vig to you. AUM goes up. So you almost have a naturally, you know, NRR should naturally be over a hundred as long as you're not just like bleeding share is really interesting. But let me come back to the private equity firm. >> Yeah, I just want to hit hit on that point one more time. I mean, again, I've got smart friends who are looking at this. They they do these deals. I'm surprising when I look and I see I mean, there were class C shares and all this sort of stuff. So, I don't know if the insider sales are stuff, but at least 500 million, probably well over a billion dollars of sales. I mean, this is 20% of the company getting blown out by these private equity firms over the past 12 months. I I'm a little surprised by that. Now, the story has changed. As we said, three transform transformative deals, but I'm just surprised that private equities, you know, we can talk about sticking the board members on here neither here, but I'm just surprised that they're letting go when like I I'm seeing this attractive future here. Like why aren't they stuffing it into a continuation fund or why are they trying to retake this thing private? You know, why why would you sell when it seems like you've got this long runway here? >> Yeah. I mean, I think I you know, this this is where it's like unless unless in contact with the private equity guys, it's hard to know how they're thinking about, but I I do think this is where I take some deep at at his word, the CEO. um because he was a former private equity guy and and he was just he has basically stated that like you know the p the biggest push back was like well when are they going to you know so-called get off lockup right always and you know we we we deal with that in venture a lot right it's like when's the lockup going to end who's going to sell what what's the selling schedule things like that these guys actually held the stock for quite a long time right considering that it was public and and they continue to hold it um it wasn't just like a hey lockup came and they sold right continue to hold it. So, I do think like this was an orchestrated thing um from management saying like, "Okay, hey, let's like let's start to sell this down." Um, you know, there's different components to it like WCIS owned it for the longest. You know, they've reduced their position sizably. Again, Sundep came from there. So, I that's where I think like it makes sense to me that he would be like, "Hey guys, I need you to like start to clear this out so I get rid of this overhang." Um, Per Permira though, right, still owns actually uh they're they're still the largest private equity owner um in the public markets. I think that was actually because they were one of the later investors as well. And so there you do have this dynamic where like sure everyone's selling down, but they're not selling down equal amounts of their stakes. Like the people who've been in there from the earliest and who the CEO came from, they're like, you know, for whatever reason they sold. I seem to think that that's because management told them to, right? And then Premier is still like, "Well, yeah, we're going to sell, but we're still going to own I think they still own like uh 3% or something um uh of the shares um uh of the company. I mean um because they want they still believe in the upside, right? So I I think that's where puts and takes of that. I don't know if we'll ever know an answer besides if you if you know the private equity folks directly, but >> No, I I mean I would guess because I I think this IPOed in 2000 did they IPO in 2021 or is that when WCS made their investment? 2021. It was >> Yeah, I I would guess I mean we're four years on I I would guess WCS was kind of coming up on end of life, but it's still >> it's still strange to me. I I hear you all on all of that, but yeah, it just seems like you've got a company this great run rate, but you know, they're a private equity firm. They they could have been coming up and like I'd love to quickly return. I I' we've mentioned it a few times, but I love I hadn't even thought about this till I read your stuff and I started reading the investor day transcript, but you know, they talk about how their data is going to be superior to their clients data. Do you remember the story? I'm happy to to lead you into it if you want, but yeah. Do you want to tell that because I think it's such an interesting piece. >> Yeah. So, I mean, um, so I think like in general like what we what we like in in software, right, as software investors, we want to bet on system records, right? Um, and this is why like Salesforce CRM is is still such a big component of their business because like when you become the system of record, you just get this data mode, right? There's it's not just even the data that's getting logged from like, you know, you logging like Andrew logging, hey, I you know, I'm going to talk with Showmake on this date and so on so forth in the system and some notes behind that, but it's also all the other systems that are going to integrate into that, right? And transfer data in because it's because you become the system of record and so things need to connect to it, right? And so um so in general this is what we constantly look like when when you find these system of records you're like oh my god yes you know this can compound for so much longer than anybody thinks right that that is 100% the case in all of software whenever you get this um and that's what clear water uh kind of at least middle and back office solution is right it is a core system of record where you get this um data data reconciliation uh you get um all this fixed income alternative assets That's everything all in one place. And then again, you have this use case of okay, well, you know, someone has an error. Well, that permeates through everybody, right? That's really big because like SSNC does not have that because Advent and whatever their um you know, alternative asset solution is and stuff. They actually don't talk and I've dealt with this, right? SSNC has a pays you pay them a shitload in services because they actually go through and they're doing the reconciliation each time between their disperate back office systems, right? Um and so that's really key to the story. Um and and what happens is now if you can get this where from trade execution right to risk analytics modeling to now uh backend reporting you can get one QIP to flow through all of that. >> Yes, >> that is a really really rich concept right because you can you know end to end what's happened with that security in your whole life cycle. That is very powerful >> and I it's powerful in so many ways. I'm just like a your audit costs go down, right? Because nothing on this podcast is investing advice or tax advice, but you know your audit cost if you're doing it the old way, your auditors need to go and pull individually each cus and look at some but with this like they're basically already handling it. So they're just getting an Excel spreadsheet and doing it. And I know I'm simplifying a little bit there, but you can just imagine all sorts of ways or you know for your risk as you said if you're looking and you're managing a heck of a lot more, you know, your show McAnnandrews fully realized trillion dollar asset manager. Uh it's very possible that one provider reports the German currency position wrong and you think you have 5% exposure to Germany when you actually have 10%. And that's a disaster when you're running a trillion. If these guys are fixing it, they're fixing it across systems. Like your systems are always just a little bit better, a little more integrated. Like you can just imagine so many ways that it's an improvement. It's a cost reduction across multiple angles. It's just And I understand this isn't unique to them, but you can see how that's flywheelish and how that's encouraging people don't do this internally, push this externally, how it makes this much stickier and how they can kind of say, hey, switch to us. It's one basis point, but it's going to actually save you quite a bit of money whether it's external compliance costs or internal headcount. >> Yeah. And by the way, you know, one thing we haven't talked about with with all this data, right, is like naturally what feeds well off of data? Well, modern AI. Um, >> oh, I actually, it's funny you said that. I had minimized my questions on my left side of screen, which I had minimized my AI thing, but they they are pitching that they're a huge AI and a beneficiary. So, please >> Okay. So, so a couple different ways. One, first of all, how is AI currently affecting? It's, by the way, kind of similar to how AI is affecting kind of everybody in the market currently right now, which is like mainly customer support, R&D, um, uh, and and just servicing your your customers, right? And so that's what we're seeing right now where, um, they are, you know, they they've said and and they've been able to do this with like they've been leveraging GNA. Now, obviously with the infusion acquisition that that's different, but they're going to get some leverage on it pretty quickly because of stuff that they're doing on the AI side with call transcripts with with with uh when to route certain reconciliations to the India team or not, right? Things like that. Um, and so that's kind of the that's kind of where currently it would stand, right? And that's going to be like that plays really well into the P margin efficiency sort of story. Um but like where I get excited right is not necessarily that like I I I care much more about the growth the side of the the equation and for me the growth side is is where I get interested because um what AI is actually quite good at doing is um is taking documents like like OCRing documents right so you like you said you get a PDF from an investment manager and it's got like a bunch of line items and it's got like you know German currency and this and that and blah blah blah and taking that and inputting it into a system is really hard to do right it just it's manual work it's nobody likes doing it stuff like that and so right now it's like okay you have your team in India that goes and uploads in and make sure it's doing that but like if you're able to leverage AI one you get efficiency on on that side um but then two also now the AI has context of those documents right where they're stored where where it's you know uh what database it's in things like that and you can start to now run agents on top of that to do different uh do different things so for example let's just say you're like, hey, you know, imagine a query, a prompt that was just like, I want to understand all of my exposure to to Germany, right, or to the German currency across my entire um asset base. And all of a sudden now that can look at German equities, that can look at German derivatives, that can look at fixed income, that can look at real whatever, right? Everything across everything and start to give you a report and say, "Hey, here's where it breaks down, things like that." That is so freaking hard to do because right now if you were to do that there's there's only two ways. Either one you pay professional services to Clearwater to have their team spin it up for you and and do that or you have you hire an in-house team or SSNC or consultants um to go and and build that out so that you can get that view. This goes to where I think like you know we talk a lot about like back office and margin efficiency and stuff like that but like as me and you know like a lot of times we're just trying to understand like the portfolio analytics so we can manage our risk so we can make decisions off of that right and especially if you have this massive book >> across these different assets it's really hard to do that and so now all of a sudden the investment team can make better decisions and I'm telling you when you can sell to the investment teams like to the CIO right instead of the the CTO you can unlock actually more dollars and more ACV off of that because all of a sudden it's like, hey, I'm actually helping you make better investment decisions. It's like the equivalent of like I'm being a revenue driver for you versus a cost center. >> Yes. Yes. No, it's a great point. And let me let me ask you one last question. And we have talked this podcast about, hey, uh these guys trade cheap on an ARR versus some of the peers. I think you think they're probably better than a lot of the peers that they trade cheaper than right now, right? uh what would a fear valuation here look like? Because here's the crazy thing. Everybody knows Excel. If you plug in 20% revenue growth forever and these guys say, "Hey, our long-term growth algorithm is 20%." Well, guess what? They should be valued more than the entire US economy, the entire world economy. Obviously, that ends at some point, but how do you think about like a fair valuation? Where would you have said if I had emailed you this morning been like, "Show me, I'm so excited for the podcast and you said, "Actually, Andrew, when you asked me if the riskadjusted out for opportunity, I'd say it's fairly balanced." How would you think about a fair value here? >> Yeah, I mean, you know, I I kind of look at like again, I I look at more of like, okay, well, based on the comps, I actually wouldn't look at AR in this case. Like AR, yes, like it's great, but AR is also hard because um toast, for example, has payments in their ARR, right? So, like gross profit's actually a much easier kind of multiple to go off of just because it's more normalized for everybody. And so if you look at gross gross profit multiples, you can kind of get to like, hey, this is where I think even if you cut out like the Samars and the Vivas of the world, like cut those out because they're so good, right? Like here's here's where uh where it it should trade at. But the other thing I think is by the way, like we don't get this often in in in in software, so it's kind of funny that but like they actually do have free cash flow, right? So So um so I think like this is actually one you can run a DCS DCF on. it is sensitive then to your you know the the the durability of like that growth but I think like for me as I look at it I'm like hey two years out I would pay like 30x free cash flow for this right um which you know uh what is it 1 divide by 30 uh is >> 3.3 >> yeah 3 yeah exactly so like 3.3% free cash flow yield right um uh which I think equates to like something in the it's like the you know mid20s share price or something like that right um uh and so like not not like crazy in terms of um like I think that's actually still a very reasonable price to pay. That that's hence why I'm like excited about today because like I'm like that's a reasonable price to pay for something I think has longer durability than the market's currently factoring in. And so like even at that price, right, I'll make a really good return IRR wise because like it's starting to compound this way. And like I've thought about, you know, you can put in all your assumptions and things like that, but like I've penciled out like in the middle of my range that like, you know, I think you look at like 25% plus IRS from like this current um uh from this current price at like 19.2 or whatever it's at right now. >> Which is probably why those smart friends and you those smart friends were emailing me saying, "Hey, I've got big position clear water." Look, uh should this has been great. I have a hard stop at 3:00 though, so we're going to have that end here. I I've enjoyed having you on for the third time. Uh, you know, we're going to lure you over to the public markets one day and then you and I will just be doing a podcast once a month on the the best undervalued growth uh growth stocks. It's going to be awesome. Third time, fifth podcast, get the YAP shirt. So, you got that to look forward to. But, Kush, uh, this has been awesome. Looking forward to chatting again in the near future. >> I'm liking it, too. And, and by the way, I know I know TRA is a sponsor of this, but like, you know, love the work that they're doing. The bull bear uh, sort of debates that they have is really cool. There's Clear Water Call on there, but there's also uh a bunch of others I've enjoyed uh looking at and so like definitely check it out. >> Well, well, my checks in the mail. I'm sure your check will be in the mail soon. >> Well, I just, you know, I know I know there are sponsors, so I got got to help help you plug them. But uh but no, it's it's actually a pretty cool take on on uh on on kind of expert calls, so I I I appreciate. But dude, it's so awesome to do this with you. Um and thanks for just, you know, doing all this. like uh I will say I got from from uh from Chris Waller I got uh Terravest right when he came on uh and you know that ended up being a quite nice return for me over the past few years and so um so you know I I I love >> Have you reached out to Chris? I'm going to put you in touch with Chris. >> I haven't I haven't reached out to Chris now. Chris is awesome. >> Cool. All right, man. We'll talk soon. >> All right, >> a quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial adviser. Thanks.
Shomik Ghosh's $CWAN bull thesis
Summary
Transcript
You're about to listen to the yet another value podcast with your host me Andrew Walker. Today's podcast we have so show me co on show is a super super thoughtful investor does deep deep research into you know growth of your companies than I normally look like but we have just a fascinating conversation on clear which he has done a ton of work on and I I think it's a really interesting conversation. I when I said I was going to have him on, I had multiple really sharp investors email me say I'm super excited for this one. We've got big positions here. Obviously, nothing's investing advice on this podcast. See the disclaimer at the end, but uh I I think it's just a fascinating idea idea. I think you're really going to enjoy it. And we're going to hop there in one second. But first, a word from our sponsors. This podcast is sponsored by TRA. Look, I've mentioned TRDA a few times. You're going to hear me keep mentioning them. Why? Because one, they're a sponsor, but two, it is a fantastic product. I've heard from so many listeners who have listened to the podcast advertisement, gone and tried it and have really enjoyed it. Some of them have become maybe too freaking contributors because look, Troda is buy interviews that they turn into call transcripts. So you can use it in two ways. A, you can go use it to really quick, my favorite way, really quickly get up to speed on a company you're following that has an interview on there. Look, you're about to listen to a podcast on Sewan. Go to tryda. try r a ta.com/sewan and they've got a sample transcript job. You can see you're going to learn a ton about the company if you read these. So that's one great way to use it. Another great way to use it is looking to get up to speed, looking to talk to another smart investor, you can go be one of the people who does the transcripts, who does the interview and talk to another bysider who they might be bullish, they might be bearish, they might be skeptic, but whatever you do, you're going to learn a lot about the position from swapping thoughts with another smart, sophisticated buyside investor who's following the company. Uh look, I'm on there. You want to go talk some cable stocks? You want to go talk some beaten down biotech stocks? You might find me on the other side of your interview. People always say, "Oh, I recognize you by your voice." But I think it's a fantastic product. I think if you try it, you're really going to enjoy it. So, look, go to try. That's t r y t r a ta.com/cwan and you can see a sample transcript and kind of get to know the product for yourself. But I promise you dozens of listeners have already tried it and really enjoyed it. I think if you enjoy this podcast, I think you're enjoying it, too. So, try.com/cen. And now to the podcast. >> All right. Hello and welcome to the Y another value podcast. I'm your host Andrew Walker with me today. I'm excited to have on for the third time. Show go showm. How's it going? >> Uh good to be here Andrew. Thanks for having me on. And uh I feel like every single time we talk about you know very different stuff, right? First it was Shopify, then it was Kelly Partners Group and and then now you know uh a completely different company. So it's it's fun to have a a wide range here. And >> not only that, I I went and re listened to part of the Kelly Partners Group for a second. I hate relisting to my pods. I always have You look the same. I have dramatically different hairstyles. I had a real homeless beard then, but uh we're going to get there. Look, show, I'm super excited to have you on because you're in that VC world, but we're we're going to lure you over to the public market worlds eventually because you do such great analysis on these sort of stuff. Uh before we get to that, just quick quick disclaimer, remind everyone, nothing on this podcast investing advice, consults, financial advisor. Full disclaimer at the end of this podcast. Uh, show me. The company we're going to talk about today is Clearwater Analytics. The ticker there is CWAN. You've done I read your memo. I read the investigator. You've done great work here. So, I guess I'll just pause and toss it over to you. What is Clearwater Analytics and why are they so interesting? >> Yeah. So, uh, so Clearwater Analytics um, is it's it's actually first I guess we should start off with like what the legacy company is, which was which was called Clearwater Analytics. Now they rebranded as Sewan. Um uh but Clearwater Analytics as it stood was started by these uh actually kind of failed uh fixed income uh uh managers out in Boise, Idaho who uh ran it. And then as they were doing that, they actually had a reporting product that they were uh giving to their clients for for maximal uh transparency. And that led to actually the the clients and other people being like, well, hey, we actually we we like that a lot versus like your fixed income investing. Um and so so they actually went and and and stood up Clearwater Analytics which is basically this backend it started off as a back-end uh reporting and compliance uh automation platform essentially built cloud first right when they started um you know AWS was was out so they built cloud first uh and it just made it super simple to get um you know when you have complex reporting needs of fixed incomes in different currencies uh you know loans versus bonds versus you know like seat credit default swap, whatever, right? Like all sorts of different things. Um, it can it can report on them of uh where where they stand, right? It can reconcile uh in different currencies. It can spread across all the different customers. So, if one customer like an insurance company says, "Hey, listen, you know, this this QIP is actually h it's something's wrong with it, right?" They can go in and reconcile and push that across the whole platform. So everybody who owns that bond or that you know whatever that is um will have that like permeate throughout the whole entire platform and that's really what's powerful about this kind of single source of truth like cloud-based cloudnative uh uh platform. Now, that's where we're talking legacy, right? So, so that was a 98% retention business, gross retention business. Um, you know, very sticky, customers don't leave um mission critical type of uh reporting and compliance uh software. We get to today, which is Sewan. So, now SWAN actually has Clearwater Analytics, right, which we just talked about. They then bought um uh Beacon and Beastro uh and then also they bought uh this other thing called Wilshshire Analytics. Um and basically that is their kind of alternative assets quanting uh suite of things. And so basically when you need to look at complex portfolios you have uh uh beacon which helps you um kind of model out those things. Uh and then you have like kind of the risk analytics and alternative asset stuff uh in that suite. And then you have uh infusion right which is the largest uh u acquisition to date. By the way in total they spent basically a third of their uh of their market cap on this. So 2 billion uh dollars on these transformational acquisitions and this was infusion. It was a public company um primarily serving hedge funds originally. Uh then moved into asset managers. Um that business had traditionally actually grown quite rapidly similar to Clearwater Analytics where it was like 20% plus growth. Uh it was sticky software. They then started to move into asset managers and actually that degraded and so uh all of a sudden the retention started slipping from you know kind of call it you know 97% to 92 93 94% uh and growth meaningfully slowed as well. And so basically, Clearwater saw the ability to take all these assets together, form a single end-to-end front office to back office platform uh and go and serve their their customer base better. And there's there's different segments that we can go into in their customer base. But anyway, that's that's what SWAN now is. >> No, that's a great overview. And it's crazy, you know, reading the investor day and everything when you do it, you hear it and or I I think it's the merger call that come on and somebody says, "Wow, congrats on three transformative acquisitions at the same time." You're like, "Oh, you know, one transformative acquisition at the same time is something. Three at the same time, that's pretty crazy." Uh, I've got a lot of questions here. So, let me just start high level. Look, the market's a competitive place. What are you seeing in the newly transformed combined seaw that you think the market is missing that makes this kind of a compelling riskadjusted alpha opportunity? >> Yeah, so um so I mean you know it's funny because like normally I think we all like to start with valuation last, right? But I I do think like part of what's interesting right now is the fact that the valuation is is in my opinion quite compelling where it currently is. Um and the reason for that is by the way like they they just took on debt um uh to make this acquisition, right? So now they are levered. They're they're paying down that debt quite quickly, but like at one point they were over 4x levered. Um and uh and then on top of that, like you know, it's a third of their of their market cap. So it's it's a big big swing that they're taking. So that being said, currently right now, actually, you know, I haven't looked today, but let's see. I think it's like yeah, looks like it's in the it's in the 19s 19 mid19s. Um so if you look at that like kind of on a uh on an AR basis right they're trading um much less than the median uh that that you would see in um in in vertical SAS right and so that's kind of interesting because like okay well why would that be what's happening here? Well, it's because people are discounting um sort of kind of where where clear stands now in in terms of my modeling, right? I have it out on like 2026 2027 numbers is like 2 and a half% free cash flow yield, 3.8% free cash flow yield going out. Um those are quite compelling for a business that, you know, can continue to grow 20, you know, call it high teens to to, you know, low to mid20s for a pretty decent amount of time, right? And so given that that's where it's like quite attractive from the valuation standpoint. Now why does that happen? The reason it's happening is because the market is just like what did you guys do right? You took a 90 98% gross retention business that was sticky that you were starting to show you know 115% plus net retention. So it was growing really nicely. and then you just put a shitty business you put a shittier business on top um uh that you're now saying you're going to transform right that I think is actually the opportunity though where um so infusion right again we talked about how it started with hedge funds and then it started to move into asset managers where it started with hedge funds was actually hedge fund launches or smaller hedge funds right so when you launched you need an order and execution management software um and so how do you place your trades how do you make sure that they're compliant when you're placing How do you make sure that if you're buying them in different areas, the currency like everything like that you need in in one platform? That was infusion, right? Um and that worked very well for smaller hedge funds. Then as they started to branch out into asset management, their actually profitability started to go down because they were starting to invest more in that go to market and more in the product to deliver that. But you know, it just wasn't hardened enough. And so you had this weird thing where growth was growth was slowing, right? customers are getting unhappy because the product's getting more bloated. It's not, you know, uh, moving us fast enough and then their profitability is actually slipping. So, Clear Water is like, "Hey, listen, in our sort of endto-end vision, if we take this and we we now layer it onto our platform, um, we can now cross-ell and and upsell, but also, you know, eventually completely integrate this, right, so that we can have this this vision." And that to me is a compelling opportunity where right now all they have to do is shore up the gross retention. And I say, "Oh, it's it's that's actually a hard thing to do, but like they've already actually taken steps to do that." And they've shown that um that 94% uh gross retention is starting to tick up for infusion. Um and so that's like that's shoring just the base. And then it's like, okay, if you get them to concentrate on hedge funds, you know, can you get them to start to grow from 13% to a little bit higher in a more profitable uh uh way, right? Um and then you start to cross-ell into the core insurance base and the asset manager base that um that Clearwater already has. >> So that was a great overview. I I want to get a bunch of things, but I do just want to ask so earlier and you said, "Hey, these guys are trading at an ARR that's attractive for their vertical. I mean, I've kind of got them in the mid19s as we talk September 18th, I believe it is. I've kind of got them at like 7xish forward revenue. You can tell me if you disagree or not. What What would a good What would a normal forward revenue company for a a company like this? And I don't think there are perfect uh pure play comps here, but what would a forward revenue for something like this, what do you think it should look like? >> Yeah, I mean like you know, so uh so like if you look at sort of the comps that I would say I mean I guess the probably the closest you would get is like an app folio or like a procore, right? Where it's like they're each growing call it you know 15ish% so actually a little bit slower, right? But they're they're kind of growing around there. But like, you know, they've they've they've grown that for a while. They have they have scale, right? Um and uh and so if you look at where they're at, right? Um they're basically right around that sort of uh call it, you know, 9x 10x uh uh forward sort of uh uh multiple on AR, right? Um but then if you look at like the broader set like also there's a bunch of others like in general the average forward AR right now I think for for uh for like kind of the vertical SAS comps that I look at is like you know call it 13x right um and so it's all a question of the the the uh the quality of it. Now like I said clear water is growing faster than Procore and Appfolio actually has higher free cash flow than them as well. Um and so really the negative is is like are they going to pull off this integration or not? So that that's the key thing right is like before people were very happy owning clear water right analytics because they were just like oh we can under we can underwrite it it's very easy stuff like that now you have this like man like okay is infusion going to go well or not like what's this beacon and bro thing how is that going to integrate right like all that sort of stuff that's causing the noise that's creating this delta between um you know where the rest of you you know the the the vertical SAS ecosystem is trading and then where clear water is and by the But comps-wise, like you know, I put them in this bucket of like like Samsara, Viva, which would be like, you know, best of class, right? Trading trading way higher. And then you have like Appfolio, Procore, you know, Guidewire, uh, Service Titan. Those are sort of the names that that would be in that list. >> And look, I guess the company probably agrees with your valuation math, too, because I hear two and a half% forward free cash flow, and I think, oh, that's more expensive than most of the stuff I look at. you know, the the last podcast I do, like as I was prepping for this podcast versus the last podcast, I kept having to remind myself, well, the last company I did was uh you know, trading at two and a half times IBIDA. So, the answer to, hey, you don't like this asset, it can be, yeah, but it trades at two and a half times Ebida, whereas this trades for seven times revenue. So, it's like it's good. It's just a question of how good. I I was going to say I think the company probably agrees with you because at the start of this month they announced $und00 million share buyback and you generally don't see kind of levered integration quick growing companies announce big buybacks like that I would say. >> Yeah. And I think also like the growth durability is something we would talk about right like I mean you know you look at waste management companies it's it's like I don't think any of us would say they're trading at at at cheap valuations but for their durability they are. >> Well the growth durability actually that's where I wanted to go next. So there there's two uh things I want to talk about. I think the simplest one to talk about we we can start with and that's how sticky is the product right and I think there was a call on TRDA the sponsor of this podcast where it was a bull and a skeptic and the one thing I think it was the skeptic who said hey I was at a company that tried to rip out a competitor product and it was hell if I remember the correctly. This is a very sticky product like once these get integrated into the back end but I'd love you to just quantify how sticky you can throw in antidote whatever but let's talk about the stickiness of this product to start. >> Yeah. So um so first off I think we should kind of say that in general everybody in this space is sticky. So who are their competitors right their competitors are uh well the biggest is is Black Rockck Aladdin. Um they you know built this for Black Rockck internally. Yeah, when you were mentioning that this was started internally at a fixed income product, my first thought was Black Rocks Aladdin started internally. So this is really where people like dog fooded their own product. It's really funny how this whole industry grew up that way. >> Exactly. Yeah. It's crazy. And so like Black Rock, you know, Black Rocks Aladdin is like, you know, I would say best of breed, right? Um and they work with the largest largest, you know, asset managers, sovereign funds, all that sort of stuff. Um then you have like BNY which has Eagle. Um >> you have State Street. Yeah. You have State Street which is Alpha. Um, and then there's a Deutsche Borch, which is a European uh exchange that owns uh um SIM Corp. Um, and then there's SSNC. Right now, SSNC is actually kind of probably the most direct competitor right now to Clearwater. Um, and they're just a complete product, right? Uh, >> they're a share bleeder, right? Like you mentioned, this is they mentioned on their call like SNC, it's a legacy product. They update it once a once a year, once every six months. This is cloud, right? Like these guys are cloud. So, it's updating every day. But please continue. I'm sorry to cut. >> Well, what's what's funny about SSNC though is it's a shared bleeder, but not actually when you look at the gross retention numbers of SSNC. So, they actually have like still fairly good uh uh retention, right? Because like once again, like it's just it takes a lot to change these systems, right? Which is the pro and the con, right? Because it does take longer sales cycles to make that change. But then the question is like well, what's the impetus to change? Which we can get into. But like um right now the reason why they're a share leader is actually just because like they they're retaining their current customers but they're not able to win the next customers right because of the fact that everything's changing with alternative assets uh transparency that you need risk modeling all these sort of things right um so so that's kind of the dynamic one everybody has really good retention right um the other dynamic which is kind of crazy is like so Aviva which um is an insurance uh or what's large conglomerate of of stuff, right? But but they have an insurance arm. They are, I think, I believe, one of the largest customers of Clearwater Analytics. Funnily enough, Aviva Wealth Management is one of the larger customers of BNY Melon Eagle. So that's kind of weird that like within this thing you have you know they're they're they're uh they're buying two separate things but that becomes like you know with BNY they can package in custody uh deposit solutions you know all that sort of stuff to uh to the wealth management side right of the ETF we meanwhile the insurers right like what are they doing they're they're buying fixed income they want to make sure that they're compliant that they're reporting on time things like that and so that's like the best solution that they can get is is is in this case clear water analytics and so that's where everyone is going to retain really well. But now the question is who is going to take share in that world given that retention is high right across the whole base and that's where actually Clearwater's vision is is kind of compelling which is the sense of they are saying hey listen we are truly the disruptor cloudnative uh first you know kind of uh person that's taking on the incumbent by the way Eagle uh Sim Corp says they have a cloud product uh state alpha they're mostly on prem and then they jerryrig some like cloud product on top of that, right? So, it just doesn't work the same that a Clear Water Analytics works or a Black Rock Aladdin. Those are the best of breed in terms of um uh in terms of like where they play, right? Um and so now the question is, well, what's the trend? Okay, there's a couple trends and one there's some that are short-term and some that are long-term. So, short-term um specifically for Clearwater, uh like probably 50% of their base is actually insurers, right? Yes, they serve asset managers. they have like Apple and you know intuitive surgical and whatever on the treasury side but like really most of their money comes from um uh you know the insurers and when you think about that the insurers um you know they're mostly investing in fixed income and so the national it's the NIC I don't even know what they're called but national something association of insurers or whatever they set this policy that's the first time in 30 years that made this change to the classification of fixed income you can no longer just use like Moody's and S&P ratings to say Hey, this is like in this bucket. You have to kind of take into other factors and they have a whole series of things that you can read through, but you have to take into these other factors of how you classify it. Now, guess how how to actually classify it. That's freaking hard, right? You either need to have a team of you need to hire more in the back office to go and do that reclassification or you use a Clearwater or some sort of system or an SSNC with their services arm, right, to go and get you up to speed. And so, that right now is professional services work for Clearwater like this year. um because it was implemented in January of 2025. Um but that's also a tailwind for people who are realizing like holy our on-prem legacy system does not enable us to do this in a in a in an easy manner, right? And so that's where Clearwater can now start to take more share because of this trend, right? Um the other trend is alternative assets, right? Private credit growing like crazy. Whether it's sustainable or not, who knows? But like it's growing like crazy, right? And then on top of that PE, uh, VC, you know, all those sort of investments. And so once again, like those insurance companies or asset managers who are doing it, it is very hard like I on the venture side, right? Like we used SSNC at a previous fund and we it took a long time for us to, you know, actually reconcile the books and get the the uh get the quarterly reports out, let alone the investment team trying to ask the back office for specific data cuts, right? And so that's what we were asking for for like hey what's our risk or or what's our exposure in in infrastructure software yeah or or Jeremy whatever right and to get that the back office team would be like well but like we're trying to do the accounting we're trying to do this and trying to do that and like we're just like guys but this is how we make an investment right like you know and there's this there's this this infighting right and so we actually stood up Adapar which is is a a private uh uh competitor specifically for focus on alternative assets but um but we stood that up And what's really interesting is going through that, I can tell you I'm I'm just never going to rip out Adapar, right? It would just it took so much time to get it right, but once we got it right, oh my god, the investment team could go in for the first time and just have all these different data cuts and slices and things like that. And meanwhile, the back office team was like, "Oh, this is amazing. I don't you're not bothering me. I can just focus on my job." Right? So that's the efficiency that you're getting out of these platforms. It's one of the things they talked about, hey the hedge funds, like I I think said, hey, all you hedge funders, you guys think you have better risk models than our off-the-shelf stuff, better all these type of models. That's great, but like the under our underlying data is going to be better than yours. So all these guys build their models on top of their underlying data. And then you know if you've ever built all my Excel models are built on Bloomberg. Guess what? It would be really effing hard for me to switch Bloomberg. Like that's the main use of Bloomberg for me these days. It'd be really effing hard for me to switch out because all my models are built off Bloomberg. like if all the hedge fund models are built off the data coming from them and I love they had that uh you can talk about it if you want but they talks about their data mode. I absolutely love that. We can go to back to that in a second. I do want to ask one uh one quick question. Okay. You mentioned Aladdin is the best of breed product for generally the largest of the large firms. You and I tomorrow we launch Showmick and Andrew's you know fund of funds or whatever it's going to be and we take a huge position in Clearwater which is obviously a great success and we use it to go from we launch with a hundred and we use it to go to you know a trillion dollars in asset under management right are we going to switch over to Aladdin at some point because now we're just this massive person or is it so sticky that you know uh Clearwater yes we started at 100 million but we're going to keep with them so they're just going to as their customers customers kind of grow, they're going to just grow with them even though Aladdin is kind of the best of breed super large product. Does that make sense? >> Yeah, it makes sense. So, uh, so it it depends on if we're talking about Clear Water or Sewan, right? With Clearwater, you would have kept Clear Water in that instance because you would you would still be using their back office because it it it still can scale, right? And so, uh, so you would still be using it because it it it works. It just, you know, the team's used to it, they're trained on it, stuff like that. And then you would look at whether it's Aladdin or whether it's Bloomberg for the order order and execution management side or or you know other there's other solutions out there but like at that scale it's basically like a Bloomberg or or Aladdin. Um and so uh so you look at other solutions in that in that area. Um what's interesting though is with CWAN right now um that this is the endto-end vision right which is like well hey as you are scaling and you're starting to now invest in more complex products right like let's say you start to invest in a bunch of derivatives you need an order and execution management uh system for that because it's not as easy as just placing like an equity trade or like a bid on a you know Coca-Cola's bonds right like it's just you it's more complex and so you need a system right that that on front office side. Then on top of that with the derivatives, you need to understand your risk, right? What's the delta, gamma, beta, whatever all these sort of factors of that risk. So that's where beacon and bis bistro come in. And then that's where uh you know legacy clear water, right? I hate to use the word like but like you know the former clear water like analytics that's when that comes in onto the back office and middle office side of like the investment accounting. So they're they're actually that is why they made this move is because they're just like when those clients start getting bigger, especially as they move more into asset managers, right? That is something that they want to not give up that share to somebody else because they're just like we've already earned the trust of the customer. We, you know, we're embedded in them. We've shown them we can scale and so now we can we can truly deliver this end to end vision, right? That that helps them. But as of stands today, you are correct that at some point as they got to scale, they would look for a different OEMs, which is the front office. And then on the middle office, you know, kind of uh risk modeling side, they'd look for a different solution as well. >> Let me So this is company has historically been a 20% grower. You know, they buy infusion and they I think they say in the say, hey, they historically grew faster and then their growth they took their afterbar and their growth dip to 12%. You know, heaven forbid, but let's just use the 20% number. It's not maybe I'm too public markets focused, equity focused, but you know, it's it's not obvious to me why this is a business that is growing 20% long-term because underlying like the world has already been very financialized, right? Active public investing is shrinking, not growing. Now, there's plenty of growth spaces, but you know, it's not clear to me why they can grow at 20% because, you know, it seems like everybody's already got some of this. uh as you said the products are completely sticky. I just don't understand why they're growing. So like where is this huge growth come especially they were smaller historically especially going forward where are they this huge growth for continuing to grow at 20% going to come from? >> Yeah. So so uh couple things one first of all in the end market of hedge funds right um I think you and I both agree that like that's probably not sustainable 20% growth over over a long period of time. I I it especially if you were originally focused on these smaller hedge funds that were launching, right? I think there's, you know, I don't know the numbers today, but like I imagine it's it's significantly down from, you know, 10 years ago. >> Look, no, I I mean, again, maybe I'm too public market poses, but everybody knows small hedge funds are a dead and dying breed because for a lot of them are just going to the big pod shops right now, right? So if they're going to the big pod shops, that's some growth for whoever the big pod shops manager is, whether it's Sewan or someone else, but it's not 20% plus growth and you know, it's just incremental growth and it's hard for me to see how that can sustains. >> Yeah. So, so that's really where it comes to this um you know, you almost have to bet that the PE mindset, right, goes into optimization mode, which is like, hey, infusion we're going to optimize uh the hedge fund component to be profitable. You know, it'll be a call it a maybe maybe low teens grower sort of type of thing, but we're just going to make sure that that's like short up and could be profitable and cash flow. Well, maybe we can also cross-ell some of our solutions into that, right? But it's not necessarily going to be a massive thing, right? Uh in my opinion, that's not how I view it. Um on the insurance side, I think that is still a large market. Now, they you know, I don't have exact numbers, but again, 50% of their base is is um is uh you know, insurers and um and you know, like within the US, I would say they they're like pretty well penetrated. They're not saturated yet, but they're they're they have a good name. They have a good brand. They're out there. Now, internationally, it's completely different, right? In Europe, APAC is a complete wild west. No one's even like that's that's wide open, right? Um and Europe is still pretty uh pretty open as well. Um and so that's where, you know, uh actually infusion had a lot of European presence. Uh um they bought this jump technology in France which had a a French presence, right? they're really been focused on how do we get more of this presence in Europe to build this out because then uh those insurers by the way are actually longer running than the US insurers because like Europe just has uh unique aspects around insurance and so um so that's where they're going to get growth from one expanding internationally into those insurers with this whole vision right they just announced a German uh insurer that they they sold all the components to the full CW platform um but also alternative assets for for those insurers, right? Because they need to understand the risk. They need to understand the reporting, stuff like that. That's how you upsell Beacon and Bistro and and the the the risk analytics modules onto that. And then you have the asset management business. And so that's really where like the growth engine will be is like can you with this endto-end platform start to penetrate more of the asset managers and asset managers are still growing globally, right? As we talked about because it's becoming more money is becoming a bit more centralized in that way. And so you have these more of like you know call them enterprise to you know small enterprise to mid enterprise to large enterprise. Now those large enterprise and mega enterprises that's when you're going up against Aladdin you still got to do a lot of backend integration work before you can enter those conversations. But for those small to mids that's where you can play in and your your pricing is more attractive than a black rockck. >> The the insurance sector I mean the size of the insurance sector literally boggles the mind when you start thinking about it. But there has been a big trend and again insurance is so big it's hard to call it but there's been a big trend you know every private equity firm wants their insurance their captive insurer to invest in private credit off of basically to mine their balance sheet right to pull the Birkshire Hathaway uh you know Apollo bought Athen is the model everybody's going after how does that play into clear water because I could imagine two two things right it lots of room for expansion your insurance company gets bought by a private equity firm and you just go and say Hey, why don't you just start rolling this out and we'll we'll use our solution. And I still wanted to give the data fly we'll share in a second. But I could also imagine the other where the private equity firm says, hey, we're the largest biggest of breed as we buy these insurance companies. Yeah, it's a multi-year ramp, but we're going to start putting them all onto Aladdin or heaven forbid our own internal product. Like how does that kind of play with that? And you can say, look, it insurance is so big it's it actually doesn't really budge the needle either way. >> Yeah, I mean I guess I would say like there's so many people have tried that. uh uh very few have succeeded. So that that's one thing just in general like I think Apollo is certainly uh a standout with what they did with Athen. But also like you know I they it wasn't easy for them either. Like I've listened to a bunch of podcasts with them explaining like how it went through and like it was just really challenging for them to get that business turned around because it also wasn't like the best run business when they bought it either. So um so I think like a lot of other people are trying to do it. I don't know if how successful they'll be just because of how hard that that that is and a different mindset. Um you know when we look across like who has done it well like I mean you basically have I mean Markel is not even doing that great with it to be honest like in terms of uh um in terms of their specialty insurance arm like you have Bergkshire and you have Fairfax, right? And then you've got a couple others that are trying to do this mini thing but like I I just haven't really seen it be besides a trend that people are all talking about as permanent capital. I just haven't really seen it take off in a way that would affect my underwriting of Clear Water is is my >> Let me switch to a different a different question. So, when I said I was going to have you on the podcast, I had two really sharp uh software investors who I know both have good track records, long short, like to email me and say, "Hey, I'm really excited for this podcast. This is a big position for me." Right? Two guys who when they say they've got a big position software, I generally like drop something, especially because whenever I've run something by them and been like, "Uh, I don't know." Like they they've caught red flags I've missed. So, uh, but so I've got them two plus you, right? I've got the the three musketeers telling me this is an interesting long. I read this, I'm like, "Yeah, I get it. >> Great growth runway, buying back shares, integration." >> But then I look and I see June 16th, 2025, uh, WCAS, one of the private equity firms here, selling out basically their whole stake, right? And that yesterday that they recently had, they say, "Hey, a couple years ago, the knock on our stock was it's too illquid. There's super voting shares. the private equity firms control too much. That's been solved. All the private equity firms are gone. And I'm kind of looking around saying, "Oh, well, it's nice that the shares are more liquid, but why is private equity running for the door?" So, I'd love to just ask you, why is private equity running from the door here? >> Yeah. Yeah. So, so, uh, a couple things. One, that was definitely actually an overhang, right, that they were trying to get rid of. Uh, that was an active thing that they've been talking about for a while. The other thing is actually ironic. Well, this is this is actually a pro and a con. Uh the pro is like yes, they've sold their shares. Uh and so you could say they're running out the door. The the the con is actually they're not running out the door because they're all still board members. Um the the the the part that sucks about that is like, you know, so so uh the way they're comped, right, in their proxy statement is wild. Like I still don't think that this is the best way, but they're literally comped on like 18% growth, you get X, 20% growth, you get um >> you're not the only one you're not the only one who's pointed this out to me. Yeah. >> Yeah. And then 20% plus growth, you get, you know, you get some kicker on top of that, right? And so that's why you you can see them, they're very focused on this 20% number. No Because like that's how they get comped, right? Um and that's I wish that wasn't the case, right? Um the whole comp committee, by the way, is all PE guys. So So the CEO was was former at WCAS. He was an operator there for a number of years. So he joins um there's there's I think uh two or three members of the board from WCAS that are on the audit committee as well. Uh the other people are Premier uh Warberg I'm forgetting the other P but there's four private equity funds and like all of them are board members and all of them are also on the comp committee which is just like what the heck you know like >> well look private equity if you if you follow them the one thing you will see is when they are on a on a board they try to cons control the compensation committee like invariably I I think I've heard from some more like corporate governance people hey the chairman's got a lot of power but it's really whoever chairs the compensation committee that drives the most influence. So it's not loss of me that they're on that, but please continue. >> Yeah. Well, but but I think that's like so on the one hand like yes, they're very thoughtful in terms of incentives, in terms of what drives like shareholder return, right? Because that's like what they're uh going through, but I I mean at the same time that just kind of the fact that there's still so many PE board members is is kind of rubs me the wrong way. They are trying to diversify that, right? They they added um a former um uh insurance leader actually from from Apac onto the board and they uh they also uh added someone else I'm forgetting. Um but uh uh but so they're trying to they're trying to focus on on on building that. But like again if we go back to okay so they're incentivized to grow 20%. So so one like by hook or by crook right they're going to grow 20%. you know, not the cook part obviously, but I'm just saying like you can also get a sense for why like acquisitions might make sense as well, right? Which might be the bare case is like well then why are you doing this, right? That being said like um I think given what we talked about of like hey as your as your uh uh customers start to scale like will they stick with you? Well yes they'll stick with us on our core module but like you know then we're we're fighting for the share against others like how much pricing do we have all that sort of stuff. you can see why the vision makes sense for them to make these acquisitions to go after this endto-end platform. I think a big thing by the way that we didn't talk about is like a a significant portion again insurance companies mostly uh uh mostly are going to be um fixed income, right? Asset managers are still also going to have a decent amount of fixed income and then corporate treasuries are also going to have a decent amount of fixed income. And so when you look at if we actually get three rate cuts this year or and some next year to get to some more normalized thing, what happens when you know rates go down assuming that inflation you know is kind of steady uh you you have the long end uh a fall as well and prices go up right and because they have an AUM pricing model they take um basically it's half of a bip on on on AUM you actually get this component where rate cutting cycles help in multiple ways. one you know software longer term cash flow durability all that sort of stuff. So you know the software multiple will go up but also literally their revenue will their net retention will go up. In the in the uh investor they have a slide where they kind of break down uh uh how how it's made up of and they say like you know call it 2 to 3% is this aum pricing. I think actually that that is um I think that will be higher um in a in a you know in a rate cutting cycle um especially depending on like how quickly those rates get cut uh and um and just sort of how how bonds react. And so that to me is where like you can you can look at this 20% grower in the near term, right? And say like, hey, you know what? I think Core Clear Water's actually got some upside to what they put out in their numbers. And then the question is, well, now like what does infusion do? Well, again, infusion they've said, hey, it's going to grow 13%. You know, kind of we're going to keep it steady. But if they can fix the leaky bucket, then all of a sudden that 13%, right? Because if they're just adding the same net new AR, they're not, you know, they're not increasing or anything. If you change if you stem the leaky bucket, then actually that leads to growth, right? So you can all of a sudden start to look like a 15% grower than a 13% grower by stemming that. >> It I I think the AUM point's really interesting because as you said, this is super sticky business. You're probably only getting ripped out when every handful of times when a client grows so large that they want to risk the switch to a better product or you know, unfortunately small hedge funds go bust and you know, a company goes bust. Aside from that, churn has historically been about 2% I think they've got. And then as you said, if AUM and ignoring the near-term boost of the rate cuts that you're suggesting, AUM at asset managers just tends to go up because it's a nice thing. You know, people say you go to the casino, you pay the vig to the casino, you invest in the stock market, the stock market pays the vig to you. AUM goes up. So you almost have a naturally, you know, NRR should naturally be over a hundred as long as you're not just like bleeding share is really interesting. But let me come back to the private equity firm. >> Yeah, I just want to hit hit on that point one more time. I mean, again, I've got smart friends who are looking at this. They they do these deals. I'm surprising when I look and I see I mean, there were class C shares and all this sort of stuff. So, I don't know if the insider sales are stuff, but at least 500 million, probably well over a billion dollars of sales. I mean, this is 20% of the company getting blown out by these private equity firms over the past 12 months. I I'm a little surprised by that. Now, the story has changed. As we said, three transform transformative deals, but I'm just surprised that private equities, you know, we can talk about sticking the board members on here neither here, but I'm just surprised that they're letting go when like I I'm seeing this attractive future here. Like why aren't they stuffing it into a continuation fund or why are they trying to retake this thing private? You know, why why would you sell when it seems like you've got this long runway here? >> Yeah. I mean, I think I you know, this this is where it's like unless unless in contact with the private equity guys, it's hard to know how they're thinking about, but I I do think this is where I take some deep at at his word, the CEO. um because he was a former private equity guy and and he was just he has basically stated that like you know the p the biggest push back was like well when are they going to you know so-called get off lockup right always and you know we we we deal with that in venture a lot right it's like when's the lockup going to end who's going to sell what what's the selling schedule things like that these guys actually held the stock for quite a long time right considering that it was public and and they continue to hold it um it wasn't just like a hey lockup came and they sold right continue to hold it. So, I do think like this was an orchestrated thing um from management saying like, "Okay, hey, let's like let's start to sell this down." Um, you know, there's different components to it like WCIS owned it for the longest. You know, they've reduced their position sizably. Again, Sundep came from there. So, I that's where I think like it makes sense to me that he would be like, "Hey guys, I need you to like start to clear this out so I get rid of this overhang." Um, Per Permira though, right, still owns actually uh they're they're still the largest private equity owner um in the public markets. I think that was actually because they were one of the later investors as well. And so there you do have this dynamic where like sure everyone's selling down, but they're not selling down equal amounts of their stakes. Like the people who've been in there from the earliest and who the CEO came from, they're like, you know, for whatever reason they sold. I seem to think that that's because management told them to, right? And then Premier is still like, "Well, yeah, we're going to sell, but we're still going to own I think they still own like uh 3% or something um uh of the shares um uh of the company. I mean um because they want they still believe in the upside, right? So I I think that's where puts and takes of that. I don't know if we'll ever know an answer besides if you if you know the private equity folks directly, but >> No, I I mean I would guess because I I think this IPOed in 2000 did they IPO in 2021 or is that when WCS made their investment? 2021. It was >> Yeah, I I would guess I mean we're four years on I I would guess WCS was kind of coming up on end of life, but it's still >> it's still strange to me. I I hear you all on all of that, but yeah, it just seems like you've got a company this great run rate, but you know, they're a private equity firm. They they could have been coming up and like I'd love to quickly return. I I' we've mentioned it a few times, but I love I hadn't even thought about this till I read your stuff and I started reading the investor day transcript, but you know, they talk about how their data is going to be superior to their clients data. Do you remember the story? I'm happy to to lead you into it if you want, but yeah. Do you want to tell that because I think it's such an interesting piece. >> Yeah. So, I mean, um, so I think like in general like what we what we like in in software, right, as software investors, we want to bet on system records, right? Um, and this is why like Salesforce CRM is is still such a big component of their business because like when you become the system of record, you just get this data mode, right? There's it's not just even the data that's getting logged from like, you know, you logging like Andrew logging, hey, I you know, I'm going to talk with Showmake on this date and so on so forth in the system and some notes behind that, but it's also all the other systems that are going to integrate into that, right? And transfer data in because it's because you become the system of record and so things need to connect to it, right? And so um so in general this is what we constantly look like when when you find these system of records you're like oh my god yes you know this can compound for so much longer than anybody thinks right that that is 100% the case in all of software whenever you get this um and that's what clear water uh kind of at least middle and back office solution is right it is a core system of record where you get this um data data reconciliation uh you get um all this fixed income alternative assets That's everything all in one place. And then again, you have this use case of okay, well, you know, someone has an error. Well, that permeates through everybody, right? That's really big because like SSNC does not have that because Advent and whatever their um you know, alternative asset solution is and stuff. They actually don't talk and I've dealt with this, right? SSNC has a pays you pay them a shitload in services because they actually go through and they're doing the reconciliation each time between their disperate back office systems, right? Um and so that's really key to the story. Um and and what happens is now if you can get this where from trade execution right to risk analytics modeling to now uh backend reporting you can get one QIP to flow through all of that. >> Yes, >> that is a really really rich concept right because you can you know end to end what's happened with that security in your whole life cycle. That is very powerful >> and I it's powerful in so many ways. I'm just like a your audit costs go down, right? Because nothing on this podcast is investing advice or tax advice, but you know your audit cost if you're doing it the old way, your auditors need to go and pull individually each cus and look at some but with this like they're basically already handling it. So they're just getting an Excel spreadsheet and doing it. And I know I'm simplifying a little bit there, but you can just imagine all sorts of ways or you know for your risk as you said if you're looking and you're managing a heck of a lot more, you know, your show McAnnandrews fully realized trillion dollar asset manager. Uh it's very possible that one provider reports the German currency position wrong and you think you have 5% exposure to Germany when you actually have 10%. And that's a disaster when you're running a trillion. If these guys are fixing it, they're fixing it across systems. Like your systems are always just a little bit better, a little more integrated. Like you can just imagine so many ways that it's an improvement. It's a cost reduction across multiple angles. It's just And I understand this isn't unique to them, but you can see how that's flywheelish and how that's encouraging people don't do this internally, push this externally, how it makes this much stickier and how they can kind of say, hey, switch to us. It's one basis point, but it's going to actually save you quite a bit of money whether it's external compliance costs or internal headcount. >> Yeah. And by the way, you know, one thing we haven't talked about with with all this data, right, is like naturally what feeds well off of data? Well, modern AI. Um, >> oh, I actually, it's funny you said that. I had minimized my questions on my left side of screen, which I had minimized my AI thing, but they they are pitching that they're a huge AI and a beneficiary. So, please >> Okay. So, so a couple different ways. One, first of all, how is AI currently affecting? It's, by the way, kind of similar to how AI is affecting kind of everybody in the market currently right now, which is like mainly customer support, R&D, um, uh, and and just servicing your your customers, right? And so that's what we're seeing right now where, um, they are, you know, they they've said and and they've been able to do this with like they've been leveraging GNA. Now, obviously with the infusion acquisition that that's different, but they're going to get some leverage on it pretty quickly because of stuff that they're doing on the AI side with call transcripts with with with uh when to route certain reconciliations to the India team or not, right? Things like that. Um, and so that's kind of the that's kind of where currently it would stand, right? And that's going to be like that plays really well into the P margin efficiency sort of story. Um but like where I get excited right is not necessarily that like I I I care much more about the growth the side of the the equation and for me the growth side is is where I get interested because um what AI is actually quite good at doing is um is taking documents like like OCRing documents right so you like you said you get a PDF from an investment manager and it's got like a bunch of line items and it's got like you know German currency and this and that and blah blah blah and taking that and inputting it into a system is really hard to do right it just it's manual work it's nobody likes doing it stuff like that and so right now it's like okay you have your team in India that goes and uploads in and make sure it's doing that but like if you're able to leverage AI one you get efficiency on on that side um but then two also now the AI has context of those documents right where they're stored where where it's you know uh what database it's in things like that and you can start to now run agents on top of that to do different uh do different things so for example let's just say you're like, hey, you know, imagine a query, a prompt that was just like, I want to understand all of my exposure to to Germany, right, or to the German currency across my entire um asset base. And all of a sudden now that can look at German equities, that can look at German derivatives, that can look at fixed income, that can look at real whatever, right? Everything across everything and start to give you a report and say, "Hey, here's where it breaks down, things like that." That is so freaking hard to do because right now if you were to do that there's there's only two ways. Either one you pay professional services to Clearwater to have their team spin it up for you and and do that or you have you hire an in-house team or SSNC or consultants um to go and and build that out so that you can get that view. This goes to where I think like you know we talk a lot about like back office and margin efficiency and stuff like that but like as me and you know like a lot of times we're just trying to understand like the portfolio analytics so we can manage our risk so we can make decisions off of that right and especially if you have this massive book >> across these different assets it's really hard to do that and so now all of a sudden the investment team can make better decisions and I'm telling you when you can sell to the investment teams like to the CIO right instead of the the CTO you can unlock actually more dollars and more ACV off of that because all of a sudden it's like, hey, I'm actually helping you make better investment decisions. It's like the equivalent of like I'm being a revenue driver for you versus a cost center. >> Yes. Yes. No, it's a great point. And let me let me ask you one last question. And we have talked this podcast about, hey, uh these guys trade cheap on an ARR versus some of the peers. I think you think they're probably better than a lot of the peers that they trade cheaper than right now, right? uh what would a fear valuation here look like? Because here's the crazy thing. Everybody knows Excel. If you plug in 20% revenue growth forever and these guys say, "Hey, our long-term growth algorithm is 20%." Well, guess what? They should be valued more than the entire US economy, the entire world economy. Obviously, that ends at some point, but how do you think about like a fair valuation? Where would you have said if I had emailed you this morning been like, "Show me, I'm so excited for the podcast and you said, "Actually, Andrew, when you asked me if the riskadjusted out for opportunity, I'd say it's fairly balanced." How would you think about a fair value here? >> Yeah, I mean, you know, I I kind of look at like again, I I look at more of like, okay, well, based on the comps, I actually wouldn't look at AR in this case. Like AR, yes, like it's great, but AR is also hard because um toast, for example, has payments in their ARR, right? So, like gross profit's actually a much easier kind of multiple to go off of just because it's more normalized for everybody. And so if you look at gross gross profit multiples, you can kind of get to like, hey, this is where I think even if you cut out like the Samars and the Vivas of the world, like cut those out because they're so good, right? Like here's here's where uh where it it should trade at. But the other thing I think is by the way, like we don't get this often in in in in software, so it's kind of funny that but like they actually do have free cash flow, right? So So um so I think like this is actually one you can run a DCS DCF on. it is sensitive then to your you know the the the durability of like that growth but I think like for me as I look at it I'm like hey two years out I would pay like 30x free cash flow for this right um which you know uh what is it 1 divide by 30 uh is >> 3.3 >> yeah 3 yeah exactly so like 3.3% free cash flow yield right um uh which I think equates to like something in the it's like the you know mid20s share price or something like that right um uh and so like not not like crazy in terms of um like I think that's actually still a very reasonable price to pay. That that's hence why I'm like excited about today because like I'm like that's a reasonable price to pay for something I think has longer durability than the market's currently factoring in. And so like even at that price, right, I'll make a really good return IRR wise because like it's starting to compound this way. And like I've thought about, you know, you can put in all your assumptions and things like that, but like I've penciled out like in the middle of my range that like, you know, I think you look at like 25% plus IRS from like this current um uh from this current price at like 19.2 or whatever it's at right now. >> Which is probably why those smart friends and you those smart friends were emailing me saying, "Hey, I've got big position clear water." Look, uh should this has been great. I have a hard stop at 3:00 though, so we're going to have that end here. I I've enjoyed having you on for the third time. Uh, you know, we're going to lure you over to the public markets one day and then you and I will just be doing a podcast once a month on the the best undervalued growth uh growth stocks. It's going to be awesome. Third time, fifth podcast, get the YAP shirt. So, you got that to look forward to. But, Kush, uh, this has been awesome. Looking forward to chatting again in the near future. >> I'm liking it, too. And, and by the way, I know I know TRA is a sponsor of this, but like, you know, love the work that they're doing. The bull bear uh, sort of debates that they have is really cool. There's Clear Water Call on there, but there's also uh a bunch of others I've enjoyed uh looking at and so like definitely check it out. >> Well, well, my checks in the mail. I'm sure your check will be in the mail soon. >> Well, I just, you know, I know I know there are sponsors, so I got got to help help you plug them. But uh but no, it's it's actually a pretty cool take on on uh on on kind of expert calls, so I I I appreciate. But dude, it's so awesome to do this with you. Um and thanks for just, you know, doing all this. like uh I will say I got from from uh from Chris Waller I got uh Terravest right when he came on uh and you know that ended up being a quite nice return for me over the past few years and so um so you know I I I love >> Have you reached out to Chris? I'm going to put you in touch with Chris. >> I haven't I haven't reached out to Chris now. Chris is awesome. >> Cool. All right, man. We'll talk soon. >> All right, >> a quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial adviser. Thanks.