Advent Software Inc. (ADVS) provides software solutions which are used primarily by the asset management and investment community. Advent enables the automation and integration of data across money management enterprises as well as with external parties. Solutions are designed to improve informational accuracy resulting in improved decision-making.
- ADVS will be challenged to maintain its recent growth given the substantial shrinkage in its target market.
- ADVS has benefitted from the increased investment in complex financial instruments. With the current trend moving away from such vehicles, marginal demand for related analytics may suffer.
- Coming increases in regulation may result in attrition in the asset management space, which would be a negative for ADVS. If substantial industry shrinkage occurs, ADVS' deferred revenue trend may turn negative as well.
- Although it is a relatively small portion of ADVS's overall business, the MicroEdge platform is also likely to suffer due to pressures being felt by the grant-making/philanthropic community.
- We are initiating coverage with a SELL rating.
- Changes in the asset management community at large result in growth of traditional asset managers at the expense of managers such as hedge funds. The net result is little or no shrinkage in ADVS' overall target market.
- Increased risk management/reporting needs drive increased adoption for analytical platforms such as that offered by ADVS.
Pension funds and wealthy individuals alike are leaving hedge funds faster than ever before, lawyers and managers said. Between July and September, investors pulled out a record $31 billion, which helped shrink the industry 11 percent to $1.7 trillion.
The root causes of the financial meltdown are numerous and inter-related. One of the "pillars" of the bubble we saw was the explosion in complex securities such as CDOs and other structured finance vehicles. Investment in these instruments begat the need for sophisticated analytics for buyers and sellers to track these products. Hindsight shows that this was done poorly, if at all. Newfound risk aversion has resulted in a sharp reduction in the creation of structured finance vehicles and thus results in reduced marginal demand for advanced analytics as investors migrate to plain vanilla products. This represents an additional negative for ADVS.
Lastly, ADVS also sells solutions to the grant-making/philanthropic community through its MicroEdge segment. This represented 11% of overall revenues in 2007. Additional fallout from the market turmoil and the Madoff scandal in particular has been the negative impact on the philanthropic community. Many charities were heavily invested with Madoff and have either shuttered or severely curtailed their operations. Before that, the immense wealth destruction we have seen had already negatively impacted charitable giving. As these organizations are hurt, their desire and/or ability to afford outsourced software platforms such as MicroEdge is hurt.
Disclosure: Author does not currently hold a position in ADVS