Avaloq’s private equity owner is looking for an exit three years after its initial investment. The banking software firm hasn’t delivered on its initial promise.

In March 2017, Francisco Fernandez was ebullient: private equity powerhouse Warburg Pincus has just valued Avaloq, which he co-founded, at more than 1 billion Swiss francs ($1.05 billion). The three- to five-year path towards a public listing included hitting $1 billion in sales.

Three years after Warburg Pincus snapped up 45 percent of Avaloq, the private equity firm is disenchanted with its plans for the Swiss banking software company. A $54 billion powerhouse, Warburg Pincus has abandoned plans to list Avaloq’s stock publicly. A spokeswoman for the investor said it had «never prepared the company for a public listing.»

Rocky Efforts

What happened? The answer is a mix of organizational and technological shortcomings as well as overblown promises. Avaloq, founded in 1985, commands nearly half of the Swiss market for core banking systems for lenders with more than 500 employees, according to data from Active Sourcing.

But its efforts to grow up – streamline and professionalize its structure, bolster profitability, lessen reliance on software license deals in favor of a more piecemeal, «software as a service» approach – have been rocky at best.

Ditching IPO Plans

Warburg Pincus’ long-term plan was for a stock-listing as soon as this year, its then-head of Europe told finews.com in 2017. It had already ditched that plan last year when it instead quietly began peddling its stake, which now stands at 45 percent.

The coronavirus outbreak put the kibosh on these talks, two sources told finews.com. A spokeswoman for Warburg Pincus said, «a sale process has never been formally launched and we are not in any rush to sell our stake.»

Stagnating Margin

Now led by CEO Juerg Hunziker, who spent much of his first year at the helm wresting founder Francisco Fernandez’s hands from the steering wheel, Avaloq has struggled with the shift from selling big-ticket one-time software licenses into the more modular, pick-and-choose product model.

The company lifted revenue by just six percent last year to 609 million Swiss francs ($640.8 million) last year. Avaloq doesn’t split out its revenue mix, but its profit margin is still less than 16 percent, compared to 15.4 the year before Warburg Pincus came aboard.

Unflattering Peer Comparison

The investor bet on fattening Avaloq’s margins – except Avaloq is likely still coping with the drop-off of license business without enough SaaS income kicking in yet. Warburg Pincus said that Avaloq has met the investment plan set out in 2017. 

The fundamental case is solid: banks and wealth managers will be too stretched to build their proprietary technology, so they will increasingly draw on standardized solutions.

A glance at Temenos bears this out: the Genevan rival to Avaloq is within striking distance of the $1 billion revenue mark – and widened its profit margin to nearly 38 percent last year. At current stock prices, it is valued at 10.8 billion francs. Temenos also snapped up a major deal with Kony last year, in its own SaaS bid.

Overblown Avaloq Promises

By contrast, Avaloq has become known more for making promises – dealmaking, internationalizing its software business, SaaS expansion – than delivering on them. In 2016, Fernandez predicted Avaloq would hit the 1 billion franc revenue market in 2019 (it came up 391 million francs short).

The coronavirus pandemic has added to the 35-year-old company’s worries: Hunziker has told staff this year he is cautious about this year, but Avaloq’s mid-term outlook is intact, according to a person familiar with the matter. Notwithstanding his optimism, S&P Global Ratings cut the firm's outlook to negative, from stable, three weeks ago.

Project Delays, U-Turns

The rating agency predicts a corona-induced drop in revenue of as much as four percent this year, as well as 30 million francs in exceptional costs. It noted that under Hunziker, who took over from Fernandez as CEO two and a half years ago, Avaloq is now sitting on a considerable cash pile to weather the crisis.

Avaloq also muddled through two gigantic projects replete with delays and confusion: Raiffeisen and Duesseldorf-based Apobank. It u-turned on taking over a common technology team with the Swiss lender, only to do so with the German bank. The arrival in 2018 of former Credit Suisse heavyweight Michael Pahlke to smooth its delivery service doesn't appear to have had the desired effect.

Squad of Heavyweights

The fizzled plan begs the question of what the next corporate step is for Avaloq. One of the top-five private equity houses in the world, Warburg Pincus had wooed the Swiss firms for years before Fernandez finally acquiesced in 2017.

The U.S. firm was also aided by a who’s who of European finance heavyweights: ex-Swiss Re CEO Jacques Aigrain, former Deutsche Bank finance chief Stefan Krause; Javier Marin, former CEO of Banco Santander, and Stefano Boccadoro, an Italian former Santander top executive. If Warburg Pincus can’t make a go of Avaloq, who can?

Peter Hody contributed reporting