Will Investors Find Envestnet IPO Compelling?

| About: Envestnet, Inc. (ENV)
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Envestnet (NYSE:ENV) provides technology-enabled investment solutions and services to 19,376 US financial advisors representing $107 billion in assets. Its offerings run the gamut from back-office and reporting services to financial planning tools and account management. Envestnet is benefiting from the shift toward independent advisors, who lack the scale to perform these functions in-house and use Envestnet as a cost-effective alternative. The company, which was founded by executives from Nuveen Investments and is backed by venture firms GRP Partners and Foundation Capital, is looking to go public in a $100 million IPO; Morgan Stanley (NYSE:MS), UBS (NYSE:UBS) and Barclays (NYSE:BCS) are the bookrunners on the deal, which is on this week's IPO calendar.

Business model

Envestnet offers its clients the flexibility to pick from a range of front-, middle- and back-office services, including portfolio diagnostics, proposal generation, investment model management, rebalancing and trading, performance reporting and monitoring, and billing, as well as fiduciary oversight. It also offers consulting services. The 19,376 advisors using its platform consist of both independent advisors and those accessing its services through enterprises such as custodian banks or broker/dealers. Most of its revenue is generated on a percent-of-assets basis (the average fee is about 0.17% of assets).

Market traction

Envestnet has grown the number of accounts it services at a 39% CAGR since 2005, and assets have grown at a 29% CAGR despite the financial crisis. The company has a customer base that consists of some well-known names (Ameriprise, Pershing, Charles Schwab, TIAA-CREF and Fidelity) as well as a large number of independent advisors. The company generated $78 million in revenue in 2009 and it believes it can grow sales at a 20% CAGR; near-term sales growth should be strong thanks to a large contract signed with a BNP Paribas subsidiary in May. EBITDA margins have been held in the low teens by large marketing and administration expenses, but the company believes it can eventually scale EBITDA margin to the upper twenties, representing long-term EBITDA growth of 25%.

Key risks

While Envestnet has gained traction in the marketplace and should continue to benefit from secular trends, there are numerous risks to this story. The company has yet to shown that it can scale expenses and it may never be able to reach its margin targets. Revenue is linked to assets and thus susceptible to market fluctuations. Fees have come down since 2007, which caused revenue to fall 15% in 2009. Finally, the business is competitive and some of its large customers also offer their own competing services.

IPO Outlook

Envestnet addresses an important area of the financial industry and is growing in recognition (the company was recently highlighted in a cover story in Financial Planning magazine), which should boost interest in its IPO. Additionally, recent financial services/technology IPOs like SS&C (NASDAQ:SSNC), Financial Engines (NASDAQ:FNGN) and Green Dot (NYSE:GDOT) have all traded up more than 10% since their IPOs. That said, Envestnet still has a lot to prove, and insider selling coupled with a valuation that bakes in its expected margin expansion may lead some investors to remain on the sidelines.