Coming from a background working at financial institutions both large and small, there isn’t anything more important to day-to-day functionality than the software. The flow of information and data that must be properly funneled to all stakeholders across financials is massive and complex and is an area of the market I believe is ripe for innovation. In many ways, companies providing this software make for much better investments than the banks themselves.
SS&C Technologies (NASDAQ:SSNC) is a prime example of this dynamic. While large bulge bracket investment banks and consumer-oriented firms largely house their information technology (“IT”) development in-house, smaller players in the financial services industry – registered investment advisors (“RIAs”), community banks, hedge funds, endowments – just do not have the capital to build this infrastructure out themselves. Even in some cases, larger entities (Morgan Stanley (MS), JPMorgan (JPM), Ares Management (ARES)) find reason to use SS&C Technologies products. Heightened regulatory requirements and a tough banking and trading environment have only deepened this need, and many are looking for independent vendors that can provide full service solutions.
It’s a great business model. Once a customer is locked into the new ecosystem, they are locked in; retention rates at SS&C Technologies have long been above 95% on an annual basis (97% retention rate currently). Switching costs are enormous, and it isn’t unusual for many financial firms to still be using software product (with some updates) put into service way back in the 1990s. Heavy customer retention alongside the recurring revenue model (subscription/license fees) and low capital expenditures make cash flows easy to predict and stable. These are the types of businesses I love, and while there are concerns on the sustainability of the high EBITDA margins found here, I don’t believe investors will see much risk there. The major catalyst present – to either the upside or downside – over the next several years is the closure and integration of the
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