Advent Software Buying Upstart Rival Black Diamond For $73 Million; Vows It’s Not Buying A Competitor To Kill It, Like It Did With TechFi
Created: Friday, 13 May 2011 01:35
Hess, along with Black Diamond’s founder Reed Colley and David Welling, its chief solutions officer, were understandably excited and upbeat when I interviewed them last night in a 9 p.m. conference call.
But I felt compelled to be a complete killjoy, beginning the call by asking Hess if the purchase of Black Diamond would be a repeat performance of June 2002, when Advent bought TechFi only to kill its portfolio management software solutions within a few years.
Hess was ready. “I can understand why people would be worried about that,” he said.
The most infamous acquisition in the annals of advisor technology, the 2002 episode further fueled Advent’s reputation for corporate ruthlessness in an independent advisor industry dominated by entrepreneurial professionals. And the similarities between Advent’s purchase of Techfi back then and the Black Diamond acquisition now are remarkable.
In June 2002, Advent bought Techfi for $23 million in cash, which put $12 million in the pocket of its young founder, Matt Abar, then 31. Yesterday’s transaction will make 34-year-old Colley extremely wealthy. While refusing to say exactly how much stock he owns in Black Diamond, Colley did say that, in addition to stock compensation to employees, the only other shareholders in Black Diamond are its original angel investors. Black Diamond has no strategic investors or venture capital investors.
In another similarity, Advent, as I reported back then
(in a magazine that has removed my byline from articles I wrote), said it planned to “keep alive TechFi's product line targeted at independent advisors, and to nourish it.” Hess made the same kind of pronouncements yesterday about the Black Diamond deal.
“Were completely committed to seeing Black Diamond be successful and Advent is 100% committed to the advisory space,” Hess said.
Should you believe Advent this time? If you were unfortunate enough to be among the hundreds of advisory firms burned by Advent’s killing of Techfi’s Portfolio 2000 application and its online app, AdvisorMart, or just a bystander who witnessed other advisors being burned, should you trust Advent now?
I may live to regret it, but I have to say I think you can trust Advent now. Hess is right and things are different this time.
When Advent bought Techfi in 2002, revolution in software development was just getting under way. Tools developers could use to make writing software much easier were just beginning to have an effect on the advisor app market. Nearly a decade later, the software revolution that began back then is now flourishing.
While there were only a few viable portfolio accounting and performance reporting apps available to advisors back then, now there are many. The A4A Review section
lists more than a dozen PMS apps and a bunch of smaller players could be added.
Software development so much easier than it was a decade ago. (That’s why app stores for phones have thousands of apps written by programmers from all over the world.) Advent can’t buy every upstart competitor that comes along.
Though Black Diamond is being acquired, another startup software company will take its place in no time. A brilliant, energetic and entrepreneurial young engineer, perhaps one who worked at Black Diamond, will go out on his own and try to start the next Black Diamond.
In addition, portfolio management software (PMS) applications used to be like roach motels: Advisors could get in one but could not get out. Converting from one program to another was a massive headache and expensive. That's no longer true. Black Diamond runs on a Microsoft SQL database, as do many PMS apps. You can export that data and it is a lot more rational and standardized than the databases used by PMS apps a decade ago. If Advent jacks up prices on its Black Diamond clients, they'll leave.
So I believe Advent will empower Black Diamond and Colley.
“After the transaction is complete,” says Advent’s press release, “which is expected to occur in the next several weeks, Black Diamond and its existing management team will lead the advisory strategy for Advent, operating as an independent business group within the Company.”
Hess says Advent’s business is now divided into three discrete segments: hedge funds that use of Advent’s Geneva solution for accounting; money managers that use Advent Portfolio Exchange or Axys; and wealth managers that will use Black Diamond. Colley will become General Manager of the Black Diamond group, reporting to Hess.
The strategy sounds pretty good, but the Black Diamond acquisition could be most consequential to the 3,000 firms using Advent’s flagship product, Axys. Axys is written in an ancient proprietary computer language from the 1980s, but Advent has been having a terrible time trying to replace Axys.
Hess says Advent has “no plans to sunset Axys,” meaning it will not force Axys users to pay more money and jump to Black Diamond. But maintaining two systems targeted to advisors makes little sense and cannot last.
Hess explains the evolution of Advent’s strategy by saying that Advent has transformed itself in the past decade. In the 1980s and 1990s, Advent only offered Axys. He says it attracted a mix of different types of clients. “Whether you were a hedge fund manager, advisor or institutional money manager, we put all comers on Axys,” says Hess.
In 2003, after five years away from daily management, Advent’s founder Stephanie DiMarco, returned to the company after its stock had plunged and its business was reeling. Hess says DiMarco’s focus on creating separate a product for hedge fund managers was a breakthrough.
“That strategy proved successful and that now accounts for a third of our business, and clients are thrilled that we are focus on their vertical,” says Hess. “Over time, we’ve gained an appreciation that the advisory business is a distinctively different business than asset management and hedge funds, and that’s what ultimately made us pick up the phone to call Reed.”
About five years ago, Advent launched Advent Portfolio Exchange (APX) but that is too costly and complex for most Axys users. A web-based version of APX has been offered by Fidelity but I don’t know any advisory firms using it. Another version of APX, OnDemand (formerly Advent Back Office Solution), has 500 firms using it, Hess says. But APX has not provided a popular migration path from Axys
and Advent commitment to the advisory firm segment has been questionable as it has become more vulnerable to the slew of new startups.
Among the smaller PMS companies challenging Advent in the advisor business are AssetBook (started by a co-founder of Techfi), FinFolio (started by Abar), Oron Advisor Services, IAS, Morningstar Office and InData. All of these PMS companies have made inroads and, as a group, they pose a threat to Advent’s ability to hang onto its Axys clients.
With the acquisition of Black Diamond, which is highly regarded, Advent now has a migration path to offer Axys users. Black Diamond’s reports are said to be slick, and the app is priced below APX. Black Diamond, Colley says, has 280 clients managing $75 billion on its platform.
A web-based app, Black Diamond could allow Advent to provide advisors a solution more affordable than APX. And Advent does not risk hurting its APX business with institutional money managers by creating a no-frills version of APX.
Does Advent’s strategy of making Black Diamond make sense to you?
Hess says Advent bought Black Diamond “because we recognize an opportunity to grow in this space and also we feel obliged to our clients to help them grow their business and give them the right tool to grow their practice,” says Hess.
I press Hess: Can advisors who got burned and saw Advent shut down Techfi believe you this time?
“The best thing I can do is prove it,” he says. “We will prove it.”
Do you believe him?
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