Prospectus Summary
PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. It does not contain all of the information that may be important to you and your investment decision. Before investing in our Class A common stock, you should carefully read this entire prospectus, including the matters set forth under the sections of this prospectus captioned “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and our condensed consolidated interim financial statements and related notes included elsewhere in this prospectus.Our Mission
Clearwater aspires to be the world’s most trusted and comprehensive technology platform for investment accounting and analytics. Starting by radically simplifying investment accounting, we intend to use the power of our platform to eventually revolutionize the world of investing.
Overview
Clearwater brings transparency to the opaque world of investment accounting and analytics with what we believe is the industry’s most trusted and innovative single instance, multi-tenant technology platform. Our cloud-native software allows clients to radically simplify their investment accounting operations, enabling them to focus on higher-value business functions such as asset allocation strategy and investment selection. Our platform provides comprehensive accounting, data and advanced analytics as well as highly-configurable reporting for global investment assets daily or on-demand, instead of weekly or monthly. We give our clients confidence that they are making the most informed decisions about investment performance, regulatory compliance and risk.
We provide investment accounting and reporting, performance measurement, compliance monitoring and risk analytics solutions for asset managers, insurance companies and large corporations. Every day, Clearwater’s powerful platform aggregates and normalizes data on over $5.6 trillion of global invested assets for over 1,000 clients. We bring modern software to an industry that has long been dominated by difficult-to-use, high cost legacy technologies and processes, which often lack data integrity and traceability, and often require significant manual intervention. The strength of our platform is demonstrated by our approximately 80% win rate for new clients over the prior four years in deals that reached the proposal stage.
The markets we serve are highly complex and changing rapidly. All asset owners and asset managers need timely, accurate and comprehensive information about their investment portfolios in order to effectively make capital allocation decisions, manage risk, measure performance, comply with regulations and communicate to various stakeholders internally and externally. This requires organizations to have a comprehensive, global view of their investment portfolio. A partial view of one asset class or one reporting regime is ineffective: delivering analysis on 95% of the portfolio is inadequate because, more often than not, the opaque final 5% of the portfolio creates disproportionate risk. A single client can invest in over 60 different asset classes, hold assets in over 40 different currencies, be governed by more than 10 accounting regimes and hold positions representing hundreds of individual tax lots. These clients often have separate accounting, reporting, performance, compliance and risk management products for each asset class and each country. Furthermore, clients frequently require large teams of people to manually review, compare and enter data, correct errors and build custom reports across multiple disparate systems and spreadsheets. Our platform provides our clients with a single consolidated and transparent view of investment data and analytics.
We believe that client demand for Clearwater’s offering continues to grow not only in the United States, but also in financial centers around the world. Prior to 2008, institutions often invested in a narrower range of asset classes for which legacy solutions may have been able to provide adequate accounting, performance
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measurement, compliance monitoring and risk analytics. Over the past decade, however, clients’ needs have grown meaningfully as a result of industry-wide trends such as:
Clients no longer find it sufficient to review investment portfolios on a quarterly, monthly or even weekly basis. Their aged patchworks of on-premises software applications with multiple data warehouses and significant manual intervention exposes them to time delays, a lack of data integrity and traceability, and a significant increase in errors, cost and ultimately risk. For many clients, this has become increasingly untenable.
We allow our clients to replace these legacy systems with modern cloud-native software. Our platform helps clients reduce cost, time, errors and risk and allows them to reallocate resources to other value-creating activities. Our software aggregates, reconciles and validates data from more than 2,500 daily data feeds and more than four million securities that have been modeled across multiple currencies, asset classes and countries. This cleansed and validated data runs through our proprietary accounting, performance, compliance and risk solutions to provide clients with powerful analytics and daily or on-demand configurable reporting. We offer multi-asset class, multi-basis, multi-currency accounting and analytics that provide clients with a comprehensive view of their holdings and related performance. This allows our clients to make better, more timely decisions about their investment portfolios.
Clearwater benefits from powerful network effects. With our single instance, multi-tenant architecture, every client, whether new or existing, enriches our global data set by making it more complete and accurate. Our software continually sources, ingests, models, reconciles and validates the terms, conditions and features of every investment security held by all of our clients. This continuous process helps to create a single repository of comprehensive, accurate investment data (often referred to within the industry as a “Golden Copy” of data) that benefits all our clients to the extent they otherwise have rights to the data. Through this continuous process, we are able to identify and adjudicate data discrepancies that otherwise could introduce error and risk into our clients’ investment portfolios. We believe that a meaningful competitive advantage of this network effect is that we are increasingly seen as the best and most accurate source of investment accounting data and analytics in the industry.
Our team members are passionate about client success. Our clients have direct access to a dedicated client service team, a specialized group of experts devoted to ensuring data is as accurate and current as possible and resolving any challenges our clients may encounter utilizing our platform. We take pride in our extremely high client satisfaction rating with a NPS of 60+, in contrast with competitors who typically score much lower. Our gross revenue retention rate has remained approximately 98% over the past ten quarters, which we believe is a testament to the strength of our offering, our ability to deliver operational efficiency for our clients and our focus on providing exceptional client service. We are able to deliver this service to our clients by attracting, retaining and engaging an outstanding team.
We have a 100% recurring revenue model. We charge our clients a fee that is primarily based on the amount of assets they manage on our platform, subject to contracted minimums. A majority of the assets on our platform are high-grade fixed income assets, leading to very low levels of volatility and highly predictable revenue streams. When applicable, we charge additional transaction fees for certain complex asset classes (e.g., derivatives and other financial instruments).
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We have achieved significant organic growth in recent periods. Our revenues increased from $168 million in the year ended December 31, 2019 to $203 million in the year ended December 31, 2020, representing an increase of 21%. For the six months ended June 30, 2020 and 2021, our revenues were $95 million and $118 million, respectively, representing year-over-year growth of 24%. We had net income of $8 million and a net loss of $44 million in the years ended December 31, 2019 and 2020, respectively, representing net income margin of 5% and net loss margin of (22%), respectively. For the six months ended June 30, 2020 and 2021, we had net income of $14 million and $3 million, representing net income margin of 14% and 3%, respectively. Our adjusted EBITDA was $51 million and $57 million in the years ended December 31, 2019 and 2020, representing adjusted EBITDA margins of 30% and 28%, respectively. For the six months ended June 30, 2020 and 2021, we had adjusted EBITDA of $31 million and $36 million, representing adjusted EBITDA margins of 33% and 30%, respectively. For additional information on adjusted EBITDA, including a reconciliation of adjusted EBITDA to net income, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”
Our Industry
We operate in the investment accounting and analytics market, serving a range of clients that own or manage investment assets. Before the global financial crisis in 2008, the investment community generally invested in a relatively small number of asset classes that could be tracked with legacy software tools and processes. Over the ensuing years, the industry has faced several challenges that have strained and broken this fragmented and often manual approach to investment accounting operations. These new developments have included increasingly globalized holdings, growing regulatory complexities, the increasing prominence of complex alternative assets, and pressure to increase speed and accuracy while reducing cost. In light of these developments, asset owners and asset managers began to require a comprehensive, global view of their investment portfolios. These organizations initially reacted by buying dedicated products for each asset class, country and reporting regime, building proprietary data warehouses for different use cases, and increasing employee headcount in accounting and compliance functions. These practices resulted in investment accounting operations that were slow, expensive, inflexible and inconsistent, very often resulting in inaccurate data and reporting. We believe that our purpose-built single instance, multi-tenant technology platform provides clients with a vastly superior solution to their growing needs.
Increasingly Global Investment Portfolios
Investors today increasingly hold positions in globally diversified assets as they search for yield and diversification. As a result, they require a global platform that delivers a multi-asset class, multi-basis, multi-currency solution across different accounting, reporting and regulatory regimes.
High Regulatory Complexity
Increased regulatory requirements within the financial services and investment industries continue to proliferate in jurisdictions around the world. The spread of these new regulations has been accompanied by a nearly six-fold increase in global yearly regulatory alerts and SEC enforcement actions, from approximately 10,000 alerts and enforcement actions in 2008 to nearly 60,000 in 2018, according to SEC press releases and annual reports. Asset owners and asset managers need a robust and dynamic solution to help them achieve and maintain compliance in this complex and ever-evolving environment.
Growing Importance of Alternative Assets
Investors are increasingly allocating capital to alternative assets and complex financial instruments as part of a search for higher investment returns in the low interest rate environment that has persisted over the past decade.
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Alternative assets are typically traded less broadly and frequently than traditional investment assets and often have less data readily available about them. This complicates reporting and risk management. Asset owners and asset managers need comprehensive, accurate and timely data regardless of the complexity of their investment holdings.
Rising Demand for Risk Management and Transparency
Investors are seeking the highest quality investment data and portfolio visibility in order to effectively make capital allocation decisions, manage risk and measure performance. Additionally, the rise of environmental, social and governance (ESG) initiatives in investing has increased the need for transparency in portfolio holdings as investors seek to measure compliance with ESG objectives. Asset owners and asset managers need a solution that provides on-demand transparency in order to optimize risk management and provide their stakeholders with the holdings-based visibility that they require.
Pressure to Increase Efficiency
The asset management industry is highly competitive and asset management firms must constantly improve operating efficiency to maintain profitability. Additionally, the growing prominence of passive investment strategies has compressed fees for active asset managers and led to a greater focus on managing overall organizational costs to maintain profitability and operational efficiency. In order to effectively compete, asset owners and asset managers need modern automated solutions that reduce the need for greater headcount, and ultimately lower costs.
Digital Transformation from Legacy Technologies
Many of the challenges that plague asset owners and asset managers result from their reliance upon legacy software products and outdated manual processes. Asset owners and asset managers are seeking cloud-based solutions that address the costly, manual and error-prone deficiencies of these legacy technologies.
Our Market Opportunity
We believe that Clearwater has a significant opportunity to disrupt the global investment accounting and analytics market. Our research suggests that this addressable market is an approximately $10 billion global revenue opportunity when combining Clearwater’s current solutions and client end-markets with new end-markets, geographies and products. From 2015 to 2020, the market growth rates within our current client end-markets were between 5-7% for asset management, 3-7% for insurance and 2-4% for corporations. Our clients tend to be larger entities in these end-markets and generally grow at the higher end of these ranges.
Our Value Proposition
Clearwater’s purpose-built single instance, multi-tenant technology platform helps clients around the world radically simplify their investment accounting and reporting, performance measurement, compliance monitoring and risk analytics. Our solutions provide our clients with a comprehensive view and single source of truth for their investment portfolios and we believe our solutions deliver unmatched levels of speed, flexibility, traceability, repeatability and auditability, all with no manual labor required of our clients. Some key aspects of our value proposition include:
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Our Platform
Our purpose-built single instance, multi-tenant technology platform radically simplifies our clients’ investment accounting and reporting, performance measurement, compliance monitoring and risk analytics infrastructure and workflow. Our software automates data aggregation, data reconciliation and data validation of each security in our clients’ investment portfolios. This creates a fully reconciled “Golden Copy” of investment portfolio data, which can be trusted for accurate reporting and analytics. Our clients benefit from having a comprehensive “single pane of glass” view for daily visibility into all investment data and analytics.
Purpose-Built Technology Stack
In order to deliver these powerful solutions and benefits, we purpose-built our technology stack to efficiently process millions of daily transactions in a highly scalable and efficient manner. Our platform is built on a single code base and eliminates the need for costly and time-consuming patches and upgrades across multiple, disparate software instances. As new features are developed and deployed, they are made available to all clients. Our system leverages the latest machine learning and artificial intelligence tools to ingest both structured and unstructured data that is transformed into a universal security model that enables network benefits for our clients.
Our clients access the platform through a web-based interface that is highly configurable and provides a set of tools that enable our clients to derive actionable insights on a daily basis. This allows our clients to view their portfolio data from anywhere with an internet connection. Our intuitive, easy-to-use website allows users to view high-level portfolio information and quickly drill into portfolio specifics down to the most granular security level. Our platform also creates automated feeds to other client systems—such as trade order management systems, data warehouses, enterprise resource planning (ERP) systems and others—eliminating the need for clients to manually enter data from Clearwater’s solution into other client systems.
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Our Solutions
Our solutions are offered through one unified Clearwater platform and are detailed below:
Our platform offers flexible configurations and outputs, customized general ledger entries for multiple accounting bases, and regulatory completeness. A suite of standardized reports automates relevant investment-related disclosures such as Fair Value Hierarchy and Level 3 Roll-forward and can be easily configured to provide the detailed accounting information investment accountants and internal stakeholders need. Our daily reconciliation, flexible reporting and general ledger capabilities ensure that period-end close processes are efficient and accurate.
Clearwater Prism
Large asset managers and insurance companies often have a constellation of point solutions and proprietary systems that are typically stitched together in a highly manual and inflexible fashion. Despite causing numerous friction points, our clients find that this legacy infrastructure is very difficult to replace at once. Our Clearwater Prism solution solves one of the most acute needs created by this heterogeneous infrastructure: the need for a single comprehensive view across systems with internally consistent data.
Our Clearwater Prism solution offers our clients a single security master and comprehensive reporting portal for all of their investment data. The Clearwater Prism solution feeds this data into our clients’ existing
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accounting, compliance, performance and risk systems, including those offered by both Clearwater and other third party software vendors. The outputs from each system are consolidated into one data store and reporting is provided through a single integrated portal with the same level of configurability as with Clearwater’s other solutions.
Our Clearwater Prism solution eliminates manual reconciliation of security data without the need to replace existing systems that are core to our clients’ operations and allows our clients to replace their disparate data warehouses with a single Golden Copy of all investment data and associated reports.
Our Clients
Clearwater serves a broad universe of institutional clients across multiple end-markets. Today, our largest client end-markets are asset management, insurance, and corporate treasury. We are also growing our client base in the public sector with numerous state and local governments. While these end-markets and their clients can be quite different from each other, ultimately all of our clients need timely, accurate and comprehensive information on their investments in order to effectively make capital allocation and portfolio decisions, manage risk, measure performance, comply with regulations, and communicate to various stakeholders both internally and externally. Chief Financial Officers, treasurers, controllers and Chief Operating Officers select our platform to deliver a holistic solution consisting of data aggregation, accounting book of record (ABOR), multi-basis reporting, powerful analytical tools and other key features.
As of June 30, 2021, we had over 1,000 clients across 29 countries. In addition, as of June 30, 2021, we had 50 clients that contributed at least $1,000,000 in annualized recurring revenue.
Our Growth Strategy
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system performance. Historically, we have sold our solutions as one unified offering. As clients have continued to find innovative uses for our platform in other business functions, we expect to sell and price those newer modules separately.
Recent Developments
As of June 30, 2021, we had $432.7 million outstanding under our existing credit agreement (as amended from time to time, the “Existing Credit Agreement”). We have entered into negotiations to enter into a new credit agreement arranged by JPMorgan Chase Bank, N.A. (the “New Credit Agreement”). It is anticipated that the New Credit Agreement will provide for a $ term loan facility (the “New Term Loan”) and a $ revolving credit facility (the “New Revolving Facility”). We expect to use the proceeds of the new term loan facility to repay a portion of the indebtedness outstanding under our Existing Credit Agreement and to pay certain transaction expenses. The proceeds of the new revolving credit facility are expected to be used for working capital and other general corporate purposes. For a description of the New Credit Agreement, see “Description of Certain Indebtedness.”
Summary Risk Factors
Our business and our ability to execute our strategy are subject to many risks. Before making a decision to invest in our Class A common stock, you should carefully consider all of the risks and uncertainties described in the section of this prospectus captioned “Risk Factors” immediately following this Prospectus Summary and all of the other information in this prospectus. These risks include, but are not limited to, the following: