Story Stocks®
Updated: 27-Sep-21 14:49 ET
Allvue Systems has successful debut in its view, but mediocre growth may keep a lid on shares (ALVU)
The IPO market is poised to continue its dizzying pace of new deals following last week's barrage. While this week's set doesn't feature a clear-cut headliner, there are a few among the crowd that stand out. One such IPO is Allvue Systems (ALVU), a SaaS-based company serving the investment management industry. With 15.3 mln shares being offered between $17-$19, this is a medium-sized deal that shouldn't be bogged down with a heavy float once it begins trading on Wednesday. Adding to the positive attributes is the fact that tier one firm Goldman Sachs (GS) is a leading underwriter on the deal, along with Barclays, Deutsche Bank, Credit Suisse, and RBC Capital.
Beyond the IPO specifics, ALVU is likely to garner attention simply because the company is a cloud software developer that's operating in an attractive field with significant room for growth. For some background, ALVU's software is tailored specifically for alternative assets and credit markets, including private equity, venture capital, real estate, private debt, infrastructure and fixed income. In recent years, alternative assets have gained increasing interest from investors as they look to diversify and generate stronger returns. According to Preqin, the alternative investments industry has grown at a CAGR of 10.2% to approximately $11 trillion over the past decade.
Despite this growth, ALVU believes that many investment managers -- such as general partners (GPs), limited partners (LPs), fund administrators, and banks -- are still using outdated legacy systems that create highly inefficient workflows. This collection of platforms is not only costly to operate, but it also hinders performance and growth by consuming time. AVLU's software automates manual processes, which it says improves data accuracy and consistency across workflow.
Some specific functions of the platform include the ability to track potential capital providers and investors, organizing data from those investors, providing investment research and trade order management tools, and the monitoring of investment performance.
With 400 clients and 14,000 individual users under its belt, AVLU is beginning to gain solid adoption among portfolio managers, analysts, and compliance officers. Furthermore, its net dollar retention rate of 115.2%, as of June 30, 2021, demonstrates that its clients are ramping up usage as they identify more use cases.
The company implements a subscription-based revenue model that charges clients a fee based on the number of users and the number of modules purchased from its suite of products. With over 83% of revenue deriving from subscriptions, AVLU benefits from a high level of recurring revenue.
However, where the company comes up short, in our view, is on growth rates. For the six months ended June 30, 2021, annual recurring revenue (ARR) was up 31% yr/yr, which is somewhat underwhelming for a cloud software developer. For this same period, total revenue increased by a mediocre 14% to $71.3 mln. In its IPO prospectus, the company states that it's ramping up its sales force and is working with consultants to help seize its significant market opportunity.
Additionally, AVLU believes that a powerful networking effect exists among its client base and non-client partners. As an example, general partners may ask their fund administrators to use AVLU's software in order to better integrate their accounting programs with the GP's front office software.
Eventually, AVLU's sales and marketing investments should generate stronger growth, but meanwhile, the company's operating loss widened to $(13.5) mln from $(4.8) mln a year earlier. Based on the mid-point of the proposed IPO price range, AVLU's estimated forward P/S would land in the 9-10x area. Some may view that multiple as too rich given the company's widening losses and relatively modest top-line growth.
Overall, we believe that demand will be solid for AVLU's IPO given investors' healthy appetite for new cloud software opportunities. However, we would be hesitant to chase this one due to the higher valuation relative to the sluggish growth.
Beyond the IPO specifics, ALVU is likely to garner attention simply because the company is a cloud software developer that's operating in an attractive field with significant room for growth. For some background, ALVU's software is tailored specifically for alternative assets and credit markets, including private equity, venture capital, real estate, private debt, infrastructure and fixed income. In recent years, alternative assets have gained increasing interest from investors as they look to diversify and generate stronger returns. According to Preqin, the alternative investments industry has grown at a CAGR of 10.2% to approximately $11 trillion over the past decade.
Despite this growth, ALVU believes that many investment managers -- such as general partners (GPs), limited partners (LPs), fund administrators, and banks -- are still using outdated legacy systems that create highly inefficient workflows. This collection of platforms is not only costly to operate, but it also hinders performance and growth by consuming time. AVLU's software automates manual processes, which it says improves data accuracy and consistency across workflow.
Some specific functions of the platform include the ability to track potential capital providers and investors, organizing data from those investors, providing investment research and trade order management tools, and the monitoring of investment performance.
With 400 clients and 14,000 individual users under its belt, AVLU is beginning to gain solid adoption among portfolio managers, analysts, and compliance officers. Furthermore, its net dollar retention rate of 115.2%, as of June 30, 2021, demonstrates that its clients are ramping up usage as they identify more use cases.
The company implements a subscription-based revenue model that charges clients a fee based on the number of users and the number of modules purchased from its suite of products. With over 83% of revenue deriving from subscriptions, AVLU benefits from a high level of recurring revenue.
However, where the company comes up short, in our view, is on growth rates. For the six months ended June 30, 2021, annual recurring revenue (ARR) was up 31% yr/yr, which is somewhat underwhelming for a cloud software developer. For this same period, total revenue increased by a mediocre 14% to $71.3 mln. In its IPO prospectus, the company states that it's ramping up its sales force and is working with consultants to help seize its significant market opportunity.
Additionally, AVLU believes that a powerful networking effect exists among its client base and non-client partners. As an example, general partners may ask their fund administrators to use AVLU's software in order to better integrate their accounting programs with the GP's front office software.
Eventually, AVLU's sales and marketing investments should generate stronger growth, but meanwhile, the company's operating loss widened to $(13.5) mln from $(4.8) mln a year earlier. Based on the mid-point of the proposed IPO price range, AVLU's estimated forward P/S would land in the 9-10x area. Some may view that multiple as too rich given the company's widening losses and relatively modest top-line growth.
Overall, we believe that demand will be solid for AVLU's IPO given investors' healthy appetite for new cloud software opportunities. However, we would be hesitant to chase this one due to the higher valuation relative to the sluggish growth.
