Shomik Ghosh 的 $CWAN 看多逻辑

I’m excited to have you on for the third time. Shomik, how’s it going?

Good to be here, Andrew. Thanks for having me on. I feel like every single time we talk about very different stuff, right? First it was Shopify, then it was Kelly Partners Group, and now a completely different company. It’s fun to have a wide range here.

I went and re-listened to part of the Kelly Partners Group episode. I hate re-listening to my podcasts. You look the same, while I have dramatically different hairstyles. I had a real homeless beard then, but we’ll get to that.

I’m super excited to have you on because you’re in the VC world, but we’re going to lure you over to the public-markets world eventually because you do such great analysis on this sort of stuff. The company we’re going to talk about today is Clearwater Analytics. The ticker is CWAN. I’ve read your memo and the investor day presentation, and you’ve done great work here. I guess I’ll just pause and toss it over to you: What is Clearwater Analytics, and why are they so interesting?

Yeah. Clearwater Analytics—actually, I guess we should start with what the legacy company is, which was called Clearwater Analytics. Now they’ve rebranded as CWAN. It was started by these actually kind of failed fixed-income managers out in Boise, Idaho, who ran it. As they were doing that, they had a reporting product that they were giving to their clients for maximum transparency. That led to the clients and other people saying, “Well, hey, we actually like that a lot versus your fixed-income investing.”

They went and stood up Clearwater Analytics, which is basically a back-end reporting and compliance-automation platform, essentially built cloud-first. When they started, AWS was around, so they built cloud-first, and it made things super simple when you have complex reporting needs for fixed-income investments in different currencies—loans versus bonds versus CDS, credit default swaps, whatever—to report on where they stand. It can reconcile in different currencies. It can spread that across all the different customers. So, if one customer, like an insurance company, says, “Hey, listen, this CUSIP is actually—something’s wrong with it,” they can go in and reconcile and push that across the whole platform.

Everybody who owns that bond or whatever it is will have that correction permeate throughout the entire platform. That’s really what’s powerful about this kind of single source of truth, cloud-based, cloud-native platform. That was a 98% gross-retention business. It’s very sticky; customers don’t leave, and it’s mission-critical reporting and compliance software.

Now we get to today, which is CWAN. CWAN has Clearwater Analytics, which we just talked about. They then bought Beacon and Bistro, and also bought this other thing called Wilshire Analytics. Basically, that is their alternative-assets accounting suite of things.

When you need to look at complex portfolios, you have Beacon, which helps you model out those things. Then you have the risk analytics and alternative-asset stuff in that suite. Then you have Enfusion, which is the largest acquisition to date. In total, they spent basically a third of their market cap on this: $2 billion on these transformational acquisitions. Enfusion was a public company, primarily serving hedge funds originally, and then moved into asset managers.

That business had traditionally grown quite rapidly, similar to Clearwater Analytics, where it was 20%+ growth. It was sticky software. They then started to move into asset managers, and that actually degraded, so all of a sudden retention started slipping from 97% to 92%, 93%, 94%, and growth meaningfully slowed as well.

Basically, Clearwater saw the ability to take all these assets together, form a single end-to-end front-office-to-back-office platform, and serve their customer base better. There are different segments in their customer base that we can go into, but anyway, that’s what CWAN now is.

No, that’s a great overview. It’s crazy—when you read the investor day materials, you hear them say—or I think it was the merger call—“Wow, congrats on 3 transformative acquisitions at the same time.” You’re like, “1 transformative acquisition at the same time is something. 3 at the same time? That’s pretty crazy.”

I’ve got a lot of questions here, so let me just start high-level. The market’s a competitive place. What are you seeing in the newly transformed, combined CWAN that you think the market is missing, and that makes this a compelling risk-adjusted alpha opportunity?

Yeah. It’s funny because normally I think we all like to start with valuation last, right? But I do think part of what’s interesting right now is that the valuation is, in my opinion, quite compelling where it currently is.

The reason for that is that they just took on debt to make this acquisition, so now they’re levered. They’re paying down that debt quite quickly, but at one point they were over 4× levered. On top of that, it’s a third of their market cap, so it’s a big swing that they’re taking.

Currently, I haven’t looked today, but let’s see. I think it’s in the $19s—mid-$19s. If you look at that on an ARR basis, they’re trading much less than the median that you would see in vertical SaaS. So that’s interesting because you have to ask, “Why would that be? What’s happening here?”

It’s because people are discounting where CWAN stands now. In terms of my modeling, I have it at roughly a 2.5% free-cash-flow yield on 2026 numbers and a 3.8% free-cash-flow yield going out to 2027. Those are quite compelling for a business that can continue to grow 20%—call it high teens to low- to mid-20s—for a pretty decent amount of time. Given that, it’s quite attractive from a valuation standpoint.

Now why does that happen? The reason it's happening is because the market is just like, “What did you guys do?” You took a 90%–98% gross-retention business that was sticky and were starting to show 115%+ net retention. So it was growing really nicely, and then you just put a shittier business on top that you're now saying you're going to transform.

I think that's actually the opportunity, though. Enfusion, again, started with hedge funds and then moved into asset managers. Where it started with hedge funds was actually with hedge fund launches, or smaller hedge funds. When you launched, you needed order and execution management software. How do you place your trades? How do you make sure that they're compliant when you're placing them? How do you make sure that, if you're buying them in different areas, you have the currency and everything like that in 1 platform? That was Enfusion, and it worked very well for smaller hedge funds.

Then, as they started to branch out into asset management, their actual profitability started to go down because they were investing more in the go-to-market and more in the product to deliver that. But it just wasn't hardened enough. You had this weird thing where growth was slowing, customers were getting unhappy because the product was getting more bloated, and it wasn't moving them fast enough. Their profitability was actually slipping.

Clearwater is saying, “Hey, listen, in our end-to-end vision, if we take this and now layer it onto our platform, we can cross-sell and upsell, but also eventually completely integrate this so that we can have this vision.” That, to me, is a compelling opportunity. Right now, all they have to do is shore up the gross retention. I say, “It's actually a hard thing to do, but they've already taken steps to do that.” They've shown that 94% gross retention is starting to tick up for Enfusion.

That's just shoring up the base. Then it's, “Okay, if you get them to concentrate on hedge funds, can you get them to start to grow from 13% to a little bit higher in a more profitable way?” Then you start to cross-sell into the core insurance base and the asset-manager base that Clearwater already has.

So that was a great overview. I want to get to a bunch of things, but I do just want to ask: earlier, you said, “Hey, these guys are trading at an ARR that's attractive for their vertical.” I've got them in the mid-$19s as we talk—September 18, I believe. I've got them at roughly 7× forward revenue. You can tell me if you disagree or not. What would a normal forward-revenue multiple for a company like this be? I don't think there are perfect pure-play comps here, but what would a forward-revenue multiple for something like this look like?

Yeah. If you look at the comps, I guess the closest you would get is AppFolio or Procore. They're each growing, call it, 15%-ish, so a little bit slower. But they've grown that way for a while. They have scale. If you look at where they're trading, they're basically right around a 9×–10× forward multiple on ARR.

If you look at the broader set, there are also a bunch of others. In general, the average forward ARR multiple right now for the vertical SaaS comps that I look at is, call it, 13×. It's all a question of the quality of it. Clearwater is growing faster than Procore and AppFolio, and actually has higher free cash flow than them as well.

The negative is whether they're going to pull off this integration. That's the key thing. Before, people were very happy owning Clearwater Analytics because they were just like, “We can underwrite it. It's very easy,” and stuff like that. Now you have this situation where people are thinking, “Is Enfusion going to go well or not? What's this Beacon and Bistro thing? How is that going to integrate?” All that sort of stuff is causing the noise and creating this delta between where the rest of the vertical SaaS ecosystem is trading and where Clearwater is.

Comps-wise, I put them in the bucket with Samsara and Veeva, which would be best-in-class and trading way higher. Then you have AppFolio, Procore, Guidewire, and ServiceTitan. Those are the names that would be in that list.

And look, I guess the company probably agrees with your valuation math, too, because I hear 2.5% forward free-cash-flow yield, and I think, “Oh, that's more expensive than most of the stuff I look at.” As I was prepping for this podcast versus the last podcast, I kept having to remind myself that the last company I did was trading at 2.5× EBITDA.

So the answer to “Hey, you don't like this asset?” can be, “Yeah, but it trades at 2.5× EBITDA,” whereas this trades for 7× revenue. It's good; it's just a question of how good. I was going to say, I think the company probably agrees with you because, at the start of this month, they announced a $100 million share buyback. You generally don't see levered, acquisitive, quick-growing companies announce big buybacks like that, I would say.

Yeah. I think growth durability is something we would talk about, too. You look at waste-management companies. I don't think any of us would say they're trading at cheap valuations, but for their durability, they are.

Well, growth durability, actually, that's where I wanted to go next. There are 2 things I want to talk about. I think the simplest one to talk about—we can start with—is how sticky the product is. I think there was a call on Tegus, the sponsor of this podcast, where there was a bull and a skeptic. The one thing—I think it was the skeptic—said was, “Hey, I was at a company that tried to rip out a competitor's product, and it was hell, if I remember correctly.”

This is a very sticky product. Once these systems get integrated into the back end, I'd love you to quantify how sticky you think it is. You can throw in an anecdote, whatever, but let's talk about the stickiness of this product to start.

Yeah. First off, I think we should say that, in general, everybody in this space is sticky. Who are their competitors? Well, the biggest is BlackRock's Aladdin. They built this for BlackRock internally. When you were mentioning that this was started internally as a fixed-income product, my first thought was that BlackRock's Aladdin started internally. This is really where people dogfooded their own product. It's really funny how this whole industry grew up that way.

Exactly. Yeah, it's crazy. BlackRock's Aladdin is, I would say, best-of-breed, and they work with the largest asset managers, sovereign funds, and all that sort of stuff. Then you have BNY Mellon, which has Eagle.

You have State Street. Yeah, you have State Street, which is Alpha. Then there's Deutsche Börse, which is a European exchange that owns SimCorp. Then there's SS&C. SS&C is probably the most direct competitor right now to Clearwater, and they're just a complete product.

They're a share bleeder, right? Like you mentioned, they said on their call that SS&C is a legacy product. They update it once a year, once every 6 months. This is cloud, right? These guys are cloud, so it's updating every day. But please continue. I'm sorry to cut.

Well, what's funny about SS&C, though, is that it's a share bleeder, but not actually when you look at the gross-retention numbers of SS&C. They still have fairly good retention because, once again, it just takes a lot to change these systems, which is the pro and the con. It takes longer sales cycles to make that change. But then the question is, what's the impetus to change? We can get into that.

Right now, the reason why they're a share bleeder is just because they're retaining their current customers, but they're not able to win the next customers. Everything is changing with alternative assets, the transparency that you need, risk modeling, and all these sorts of things. That's the dynamic: everyone has really good retention.

The other dynamic, which is kind of crazy, is Aviva, which is a large conglomerate of businesses but has an insurance arm. I believe it is one of the largest customers of Clearwater Analytics. Funnily enough, Aviva Wealth Management is one of the larger customers of BNY Mellon Eagle.

That's kind of weird. Within this, you have them buying 2 separate things. But with BNY Mellon, they can package in custody, deposit solutions, and all that sort of stuff for the wealth-management side of the equation. Meanwhile, the insurers—what are they doing? They're buying fixed income. They want to make sure that they're compliant and reporting on time, things like that.

The best solution they can get is, in this case, Clearwater Analytics. That's where everyone is going to retain really well.

But now the question is: Who is going to take share in that world, given that retention is high right across the whole base? That is where Clearwater’s vision is compelling. They are saying, “Listen, we are truly the disruptor—a cloud-native-first company taking on the incumbent.”

By the way, Eagle and SimCorp say they have a cloud product. State Street Alpha is mostly on-premises, and then they jerry-rig some cloud product on top of that. It just does not work the same way that Clearwater Analytics or BlackRock Aladdin does. Those are the best-of-breed products in terms of where they play.

Now the question is: What is the trend? There are a couple of trends, and some are short-term while others are long-term. In the short term, specifically for Clearwater, probably 50% of its base is insurers. Yes, they serve asset managers—they have companies like Apple and Intuitive Surgical on the treasury side—but most of their money really comes from insurers.

When you think about insurers, they are mostly investing in fixed income. The NAIC—the National Association of Insurance Commissioners—sets this policy, and this is the first time in 30 years that it has changed the classification of fixed income. You can no longer just use Moody’s and S&P ratings to say, “Hey, this is in this bucket.” You have to take other factors into account, and they have a whole series of things that you can read through to determine how to classify it.

Guess how hard it is to actually classify it. That is freaking hard. You either need to hire more people in the back office to do that reclassification, or you use Clearwater or some other system, or SS&C with its services arm, to get you up to speed. Right now, that is professional-services work for Clearwater because the change was implemented in January 2025.

That is also a tailwind for people realizing, “Our on-premises legacy system does not enable us to do this easily.” That is where Clearwater can start to take more share because of this trend. The other trend is alternative assets: private credit is growing like crazy. Whether that is sustainable or not, who knows, but it is growing like crazy.

On top of that, there is private equity, venture capital, and all those sorts of investments. Once again, for insurance companies or asset managers doing that, it is very hard. On the venture side, we used SS&C at a previous fund, and it took a long time to reconcile the books and get the quarterly reports out, let alone having the investment team ask the back office for specific data cuts.

We would ask, “What is our risk or exposure in infrastructure software, or whatever?” The back-office team would say, “We are trying to do the accounting. We are trying to do this and that.” We would respond, “But this is how we make an investment.” There was this infighting.

We actually implemented Addepar, which is a private competitor specifically focused on alternative assets. Going through that, I can tell you that I am never going to rip out Addepar. It took so much time to get it right, but once we did, the investment team could go in for the first time and have all these different data cuts and slices.

Meanwhile, the back-office team was saying, “This is amazing. You are not bothering me. I can just focus on my job.” That is the efficiency you get out of these platforms.

It is one of the things they talked about with hedge funds: “All you hedge funders think you have better risk models than our off-the-shelf stuff, and better models for all these different things. That is great, but our underlying data is going to be better than yours.” All these people build their models on top of that underlying data.

If you have ever built models, all my Excel models are built on Bloomberg. It would be really difficult for me to switch away from Bloomberg because all my models are built off Bloomberg. If all the hedge-fund models are built off the data coming from these platforms, that creates a lot of stickiness. I love that they talk about their data moat. We can go back to that in a second.

You mentioned that Aladdin is the best-of-breed product for generally the largest of the large firms. You and I launch Shomik and Andrew’s fund of funds tomorrow, or whatever it is going to be, and we take a huge position in Clearwater, which is obviously a great success. We use it to go from launching with $100 million to reaching $1 trillion in assets under management. Are we going to switch over to Aladdin at some point because we are now this massive firm, or is it so sticky that, even though we started at $100 million, we are going to stay with Clearwater and they are just going to grow with us, even though Aladdin is the best-of-breed product for a very large firm? Does that make sense?

Yes, it makes sense. It depends on whether we are talking about Clearwater or CWAN. With Clearwater, you would have kept Clearwater in that instance because you would still be using its back office. It can still scale, so you would continue using it because the team is used to it, trained on it, and so on.

You would then look at whether it is Aladdin or Bloomberg for the order and execution management side. There are other solutions out there, but at that scale, it is basically Bloomberg or Aladdin. You would look at other solutions in that area.

What is interesting about CWAN right now is that this is the end-to-end vision. As you scale and start investing in more complex products, such as derivatives, you need an order and execution management system for that. It is not as easy as placing an equity trade or bidding on Coca-Cola’s bonds. It is more complex, so you need a system on the front-office side.

On top of that, with derivatives, you need to understand your risk: the delta, gamma, beta, and all these other risk factors. That is where Beacon and BISTRO come in. Then the legacy Clearwater Analytics comes in on the back-office and middle-office side for investment accounting.

That is why they made this move. When those clients start getting bigger, especially as they move more into asset management, they do not want to give up that share to somebody else. They have already earned the customer’s trust, they are embedded in the customer, and they have shown that they can scale. Now they can truly deliver this end-to-end vision.

As things stand today, you are correct: Once they reached a certain scale, they would look for a different OEM for the front office. On the middle-office risk-modeling side, they would look for a different solution as well.

This company has historically been a 20% grower. They acquired Enfusion, and I think they say in the S-1 that they historically grew faster, but then their growth dipped to 12%. Heaven forbid, but let us use the 20% number. Maybe I am too public-markets-focused and equity-focused, but it is not obvious to me why this is a business that can grow 20% over the long term.

The world has already been very financialized. Active public investing is shrinking, not growing. There are plenty of growth spaces, but it is not clear to me why they can grow at 20%. Everybody already has some version of this, and, as you said, the products are completely sticky. I just do not understand why they are growing. Where does this huge growth come from, especially going forward, to support continuing to grow at 20%?

A couple of things. First of all, in the hedge-fund end market, I think we both agree that 20% growth is probably not sustainable over a long period of time. Especially if they were originally focused on smaller hedge funds that were launching, I imagine the number of new launches is significantly down from 10 years ago.

Look, I mean, maybe I am too public-markets-focused, but everybody knows that small hedge funds are a dead and dying breed. A lot of them are just going to the big pod shops now. If they are going to the big pod shops, that is some growth for whoever manages the big pod shops, whether it is CWAN or someone else, but it is not 20%-plus growth. It is incremental growth, and it is hard for me to see how that can be sustained.

Yeah. That’s really where it comes to this: you almost have to bet that the private equity mindset goes into optimization mode. It’s, “Hey, Enfusion, we’re going to optimize the hedge fund component to be profitable. It’ll be, call it, maybe a low-teens grower, but we’re just going to make sure that it’s shored up and profitable and generates cash flow. Maybe we can also cross-sell some of our solutions into that.” But it’s not necessarily going to be a massive thing.

In my opinion, that’s not how I view it. On the insurance side, I think that is still a large market. I don’t have exact numbers, but again, 50% of their base is insurers. Within the U.S., I would say they’re pretty well penetrated. They’re not saturated yet, but they have a good name and a good brand; they’re out there.

Internationally, it’s completely different. In Europe and APAC, it’s a complete Wild West. No one’s even— that’s wide open. Europe is still pretty open as well. Enfusion had a lot of European presence; they bought JUMP Technology in France, which had a French presence. They’ve really been focused on how to get more presence in Europe and build this out, because those insurers are actually longer-running than the U.S. insurers. Europe has unique aspects around insurance.

That’s where they’re going to get growth: expanding internationally into those insurers with this whole vision. They just announced a German insurer to which they sold all the components of the full Clearwater platform. But there are also alternative assets for those insurers, because they need to understand the risk and the reporting. That’s how you upsell Beacon, BISTRO, and the risk analytics modules onto that.

Then you have the asset management business. That’s really where the growth engine will be: can you, with this end-to-end platform, start to penetrate more asset managers? Asset managers are still growing globally, as we talked about, because more money is becoming a bit more centralized in that way. You have these different segments, from small enterprise to mid-enterprise to large enterprise.

Those large enterprises and mega-enterprises are when you’re going up against Aladdin. You still have to do a lot of backend integration work before you can enter those conversations. But for the small to midsize companies, that’s where you can play, and your pricing is more attractive than BlackRock’s.

The insurance sector—I mean, the size of the insurance sector literally boggles the mind when you start thinking about it. But there has been a big trend, and again, insurance is so big it’s hard to call it, where every private equity firm wants its insurance company, its captive insurer, to invest in private credit, basically to mine its balance sheet—to pull the Berkshire Hathaway. Apollo bought Athene. That’s the model everybody’s going after.

How does that play into Clearwater? I could imagine 2 things. There’s lots of room for expansion: your insurance company gets bought by a private equity firm, and you say, “Hey, why don’t you just start rolling this out and we’ll use our solution?” I still wanted to give the data point we’ll share in a second.

But I could also imagine the other scenario, where the private equity firm says, “We’re the best of breed. As we buy these insurance companies, it’s a multiyear ramp, but we’re going to start putting them all onto Aladdin or, heaven forbid, our own internal product.” How does that play with Clearwater? You can say, look, insurance is so big that it actually doesn’t really move the needle either way.

I guess I would say that so many people have tried that, and very few have succeeded. That’s one thing in general. I think Apollo is certainly a standout with what they did with Athene, but it wasn’t easy for them either. I’ve listened to a bunch of podcasts with them explaining how it went, and it was just really challenging for them to get that business turned around because it also wasn’t the best-run business when they bought it.

A lot of other people are trying to do it. I don’t know how successful they’ll be, just because of how hard that is and because it requires a different mindset. When we look across who has done it well, Markel isn’t even doing that great with it, to be honest, in terms of its specialty insurance arm. You basically have Berkshire and Fairfax, and then you’ve got a couple of others that are trying to do this smaller version.

I just haven’t really seen it be more than a trend that people are all talking about as permanent capital. I just haven’t really seen it take off in a way that would affect my underwriting of Clearwater.

Let me switch to a different question. When I said I was going to have you on the podcast, I had 2 really sharp software investors, both of whom I know have good long-short track records, email me and say, “Hey, I’m really excited for this podcast. This is a big position for me.” When they say they’ve got a big position in software, I generally pay attention, especially because whenever I’ve run something by them and been like, “I don’t know,” they’ve caught red flags I missed.

So I’ve got them plus you. I’ve got the 3 Musketeers telling me this is an interesting long. I read this, and I’m like, “Yeah, I get it: great growth runway, buying back shares, integration.”

But then I look and I see June 16, 2025: WCAS, one of the private equity firms, selling basically its whole stake. Recently, they said, “Hey, a couple of years ago, the knock on our stock was that it was too illiquid, there were super-voting shares, and the private equity firms controlled too much. That’s been solved. All the private equity firms are gone.”

I’m looking around and saying, “It’s nice that the shares are more liquid, but why is private equity running for the door?” I’d love to just ask you: why is private equity running from the door here?

Yeah. A couple of things. One, that was definitely an overhang they were trying to get rid of. That was an active thing they’d been talking about for a while.

The other thing is actually ironic. This is both a pro and a con. The pro is that, yes, they’ve sold their shares, so you could say they’re running out the door. The con is that they’re not running out the door because they’re all still board members.

The part that’s frustrating is the way they’re compensated. Their proxy statement is wild. I still don’t think this is the best way to do it, but they’re literally compensated based on growth: at 18% growth, you get X; at 20% growth, you get—

You’re not the only one who’s pointed this out to me.

Yeah. And at 20% or more growth, you get some kicker on top of that. That’s why you can see they’re very focused on this 20% number, because that’s how they get compensated. I wish that wasn’t the case.

The entire compensation committee, by the way, is made up of private equity people. The CEO was formerly at WCAS; he was an operator there for a number of years before joining. There are 2 or 3 members of the board from WCAS who are also on the audit committee. The other ones are Permira and Warburg Pincus—I’m forgetting the other P—but there are 4 private equity funds, and all of them are board members. All of them are also on the compensation committee, which is just like, “What the heck?”

Well, look, private equity—if you follow them, the one thing you will see is that when they’re on a board, they try to control the compensation committee. Invariably, I think I’ve heard from some corporate governance people, “The chairman has a lot of power, but it’s really whoever chairs the compensation committee who drives the most influence.” So it’s not lost on me that they’re on that, but please continue.

On the one hand, yes, they’re very thoughtful in terms of incentives and what drives shareholder returns, because that’s what they’re focused on. At the same time, the fact that there are still so many private equity board members kind of rubs me the wrong way.

They are trying to diversify that. They added a former insurance leader from Aflac onto the board, and they also added someone else whose name I’m forgetting. They’re trying to focus on building that out.

But if we go back to the fact that they’re incentivized to grow 20%, then, by hook or by crook—they’re going to grow 20%. Not the “crook” part, obviously, but I’m just saying you can also understand why acquisitions might make sense, which might be the bear case: “Well, then why are you doing this?”

That being said, given what we talked about—if your customers start to scale, will they stick with you?—yes, they’ll stick with us on our core module. But then we’re fighting for share against others. How much pricing power do we have? All that sort of stuff.

You can see why the vision makes sense for them to make these acquisitions to go after this end-to-end platform. I think a big thing we didn't talk about is that a significant portion—again, insurance companies mostly are going to be fixed income, asset managers are still also going to have a decent amount of fixed income, and corporate treasuries are also going to have a decent amount of fixed income.

When you look at what happens if we actually get 3 rate cuts this year and some next year to get to something more normalized, what happens when rates go down, assuming that inflation is kind of steady? You have the long end fall as well, and prices go up, right? Because they have an AUM pricing model—they take basically half of a basis point on AUM—you actually get this component where rate-cutting cycles help in multiple ways. One, there's the software's longer-term cash-flow durability and all that sort of stuff, so the software multiple will go up, but also, literally, their revenue will go up; their net retention will go up.

In the investor day presentation, they have a slide where they break down how it's made up, and they say, call it 2% to 3% is this AUM pricing. I think that will actually be higher in a rate-cutting cycle, especially depending on how quickly those rates get cut and just sort of how bonds react. And so that, to me, is where you can look at this 20% grower in the near term and say, “Hey, you know what? Clearwater's actually got some upside to what they put out in their numbers.”

Then the question is, well, now what does Enfusion do? Again, Enfusion has said, “Hey, it's going to grow 13%. We're going to keep it steady.” But if they can fix the leaky bucket, then all of a sudden that 13%—because if they're just adding the same net-new ARR, they're not increasing or anything—if you stem the leaky bucket, then that actually leads to growth, right? So you can all of a sudden start to look like a 15% grower rather than a 13% grower by stemming that.

I think the AUM point's really interesting because, as you said, this is super-sticky business. You're probably only getting ripped out when a client grows so large that they want to risk the switch to a better product or, unfortunately, small hedge funds go bust and a company goes bust. Aside from that, churn has historically been about 2%, I think.

And then, as you said, ignoring the near-term boost of the rate cuts that you're suggesting, AUM at asset managers just tends to go up because it's a nice thing. People say you go to the casino, you pay the vig to the casino; you invest in the stock market, the stock market pays the vig to you. AUM goes up. So you almost have a natural—NRR should naturally be over 100% as long as you're not just bleeding share. It's really interesting. But let me come back to the private equity firm.

I just want to hit that point one more time. I've got smart friends who are looking at this; they do these deals. I'm surprised when I look and see that there were Class C shares and all this sort of stuff—at least $500 million, probably well over $1 billion, of sales. This is 20% of the company getting blown out by these private equity firms over the past 12 months. I'm a little surprised by that.

Now, the story has changed, as we said: 3 transformative deals. But I'm just surprised that private equity firms are letting go when I'm seeing this attractive future here. Why aren't they stuffing it into a continuation fund, or why are they trying to take this thing private? Why would you sell when it seems like you've got this long runway here?

Yeah. I mean, I think this is where, unless you're in contact with the private equity guys, it's hard to know how they're thinking about it. But I do think this is where I take Sandeep, the CEO, at his word, because he was a former private equity guy. He has basically stated that the biggest pushback was, “When are they going to, so-called, get off lockup?”

We deal with that in venture a lot, right? When is the lockup going to end? Who's going to sell what? What's the selling schedule? These guys actually held the stock for quite a long time, considering that it was public, and they continued to hold it. It wasn't just, “Hey, the lockup came and they sold.” They continued to hold it.

I do think this was orchestrated by management, saying, “Okay, let's start to sell this down.” There are different components to it. WCAS owned it for the longest, and they've reduced their position sizably. Again, Sandeep came from there. That's where I think it makes sense to me that he would say, “Hey, guys, I need you to start to clear this out so I can get rid of this overhang.”

Permira, though, still owns—actually, they're still the largest private equity owner in the public markets. I think that was because they were one of the later investors as well. So you do have this dynamic where, sure, everyone's selling down, but they're not selling down equal amounts of their stakes. The people who've been in there from the earliest, and who the CEO came from, for whatever reason, they sold. I tend to think that's because management told them to, right?

Permira is still like, “Well, yeah, we're going to sell, but we're still going to own, I think, 3% or something of the shares of the company,” because they still believe in the upside. So I think that's the puts and takes of it. I don't know if we'll ever know the answer, unless you know the private equity folks directly.

No, I mean, I would guess—I think this IPOed in 2021. Did they IPO in 2021, or is that when WCAS made their investment?

Yeah, I would guess we're 4 years on. I would guess WCAS was coming up on the end of its life.

It's still strange to me. I hear you on all of that, but it just seems like you've got a company with this great a run rate. They're a private equity firm. I'd love to quickly return to this.

We've mentioned it a few times, but I hadn't even thought about this until I read your stuff and started reading the investor day transcript. They talk about how their data is going to be superior to their clients' data. Do you remember the story? I'm happy to lead you into it if you want, but do you want to tell that? I think it's such an interesting piece.

Yeah. In general, what we like in software, as software investors, is to bet on systems of record. This is why Salesforce CRM is still such a big component of their business, because when you become the system of record, you get this data moat. It's not just the data that's getting logged from you logging—Andrew logging, “Hey, I'm going to talk with Shomik on this date,” and so on—in the system, with some notes behind that; it's also all the other systems that are going to integrate into that and transfer data in, because you've become the system of record and things need to connect to it.

In general, this is what we constantly look for: when you find these systems of record, you're like, “Oh my God, yes, this can compound for so much longer than anybody thinks.” That is 100% the case in all of software whenever you get this.

That's what Clearwater's middle- and back-office solution is. It is a core system of record where you get this data reconciliation, all this fixed income, alternative assets—everything all in 1 place. And then you have this use case of, okay, well, someone has an error. That permeates through everybody, right? That's really big because SS&C does not have that: Advent and whatever their alternative-asset solution is actually don't talk to each other. I've dealt with this.

With SS&C, you pay them a shitload in services because they actually go through and do the reconciliation each time between their disparate back-office systems. So that's really key to the story. And what happens is, now, if you can get this from trade execution right through risk analytics and modeling to back-end reporting, you can get 1 CUSIP to flow through all of that.

Yes.

That is a really, really rich concept, because you can know, end to end, what's happened with that security in its whole life cycle. That is very powerful.

I think it's powerful in so many ways. Your audit costs go down, right? Nothing on this podcast is investing advice or tax advice, but your audit cost, if you're doing it the old way, means your auditors need to go and pull each individual CUSIP and look at some of them. With this, they're basically already handling it.

So they’re just getting an Excel spreadsheet and doing it. I know I’m simplifying a little bit there, but you can just imagine all sorts of ways. For your risk, as you said, if you’re looking and managing a heck of a lot more—your Shomik-and-Andrew fully realized trillion-dollar asset manager—it’s very possible that one provider reports the German currency position wrong, and you think you have 5% exposure to Germany when you actually have 10%. That’s a disaster when you’re running $1 trillion.

If these guys are fixing it, they’re fixing it across systems. Your systems are always just a little bit better, a little more integrated. You can just imagine so many ways that it’s an improvement. It’s a cost reduction across multiple angles. I understand this isn’t unique to them, but you can see how that’s flywheel-ish, how it’s encouraging people not to do this internally but to push it externally, how it makes this much stickier, and how they can say, “Hey, switch to us. It’s 1 basis point, but it’s actually going to save you quite a bit of money,” whether it’s external compliance costs or internal headcount.

Yeah. And, by the way, one thing we haven’t talked about with all this data is what naturally feeds well off data: modern AI.

Oh, I actually—it’s funny you said that. I had minimized my questions on the left side of my screen, where I had minimized my AI question, but they are pitching that they’re a huge AI beneficiary.

Okay. So, a couple of different ways. First of all, how is AI currently affecting them? It’s, by the way, kind of similar to how AI is affecting everybody in the market currently, which is mainly customer support, R&D, and just servicing your customers, right? That’s what we’re seeing right now, where they’ve said—and they’ve been able to do this with GenAI—that they’ve been leveraging it.

Now, obviously, with the Enfusion acquisition, that’s different, but they’re going to get some leverage on it pretty quickly because of what they’re doing on the AI side with call transcripts, with when to route certain reconciliations to the India team or not, right? Things like that. That’s kind of where it currently stands, and that’s going to play really well into the P&L margin-efficiency story.

But where I get excited is not necessarily that. I care much more about the growth side of the equation, and for me, the growth side is where I get interested, because what AI is actually quite good at doing is taking documents—OCRing documents. You get a PDF from an investment manager, and it’s got a bunch of line items, German currency, and this and that, and inputting that into a system is really hard to do. It’s manual work; nobody likes doing it.

Right now, you have your team in India that goes and uploads it and makes sure it’s doing that, but if you’re able to leverage AI, one, you get efficiency on that side, but then, two, the AI now has context of those documents—where they’re stored, what database they’re in, things like that—and you can start to run agents on top of that to do different things.

For example, imagine a query—a prompt—that was just like, “I want to understand all of my exposure to Germany, or to the German currency, across my entire asset base.” All of a sudden, that can look at German equities, German derivatives, fixed income, real estate, whatever—everything across everything—and start to give you a report and say, “Hey, here’s where it breaks down,” things like that.

That is so freaking hard to do, because right now, if you were to do that, there are only 2 ways. Either you pay professional services to Clearwater to have their team spin it up for you and do that, or you hire an in-house team, SS&C, or consultants to go and build that out so that you can get that view.

This goes to where I think we talk a lot about back-office and margin efficiency and stuff like that, but me and you, a lot of times, are just trying to understand the portfolio analytics so we can manage our risk and make decisions off of that, right? Especially if you have this massive book across these different assets, it’s really hard to do that. Now, all of a sudden, the investment team can make better decisions.

I’m telling you, when you can sell to the investment teams—to the CIO—instead of the CTO, you can unlock more dollars and more ACV from that, because all of a sudden it’s like, “Hey, I’m actually helping you make better investment decisions.” It’s the equivalent of being a revenue driver for you versus a cost center.

Yes. Yes. No, it’s a great point. Let me ask you one last question. We’ve talked this podcast about how these guys trade cheaply on an ARR basis versus some of the peers. I think you think they’re probably better than a lot of the peers that they trade cheaper than right now, right?

What would a fair valuation here look like? Here’s the crazy thing: everybody knows Excel. If you plug in 20% revenue growth forever, and these guys say, “Hey, our long-term growth algorithm is 20%,” well, guess what? They should be valued at more than the entire U.S. economy, the entire world economy. Obviously, that ends at some point, but how do you think about a fair valuation?

If I had emailed you this morning and said, “Shomik, I’m so excited for the podcast,” and you had said, “Actually, Andrew, when you asked me about the risk-adjusted upside opportunity, I’d say it’s fairly balanced,” how would you think about a fair value here?

Yeah, I mean, again, I look more at the comps. Based on the comps, I actually wouldn’t look at ARR in this case. ARR is great, but ARR is also hard because Toast, for example, has payments in its ARR, right? Gross profit is actually a much easier multiple to go off of, just because it’s more normalized for everybody.

If you look at gross-profit multiples, you can get to, “Hey, this is where I think it should trade at,” even if you cut out the Samsaras and the Veevas of the world. Cut those out because they’re so good, right? Here’s where it should trade at.

But the other thing, by the way, is we don’t get this often in software, so it’s kind of funny, but they actually do have free cash flow. I think this is actually one you can run a DCF on. It is sensitive to the durability of that growth, but as I look at it, I’m like, “Hey, 2 years out, I would pay 30x free cash flow for this.”

1 divided by 30 is a 3.3% free cash flow yield, which I think equates to something in the mid-$20s share price or something like that. That’s not crazy in terms of—I think that’s actually still a very reasonable price to pay.

That’s hence why I’m excited about today, because I’m like, “That’s a reasonable price to pay for something I think has longer durability than the market’s currently factoring in.” Even at that price, I’ll make a really good return IRR-wise, because it’s starting to compound this way.

I’ve thought about it—you can put in all your assumptions and things like that—but I’ve penciled out, in the middle of my range, that I think you look at 25% plus IRRs from this current price at $19.20 or whatever it’s at right now.

Which is probably why those smart friends of yours were emailing me, saying, “Hey, I’ve got a big position in Clearwater.” Shomik, this has been great. I have a hard stop at 3:00, though, so we’re going to have to end here.

I’ve enjoyed having you on for the 3rd time. You know, we’re going to lure you over to the public markets one day, and then you and I will just be doing a podcast once a month on the best undervalued growth stocks. It’s going to be awesome.

But, Shomik, this has been awesome. Looking forward to chatting again in the near future.

I’m liking it, too.

But dude, it’s so awesome to do this with you. And thanks for just doing all this. I will say, I got TerraVest from Chris Waller right when he came on, and that ended up being a quite nice return for me over the past few years. So I love—

Have you reached out to Chris? I’m going to put you in touch with Chris.

I haven't reached out to Chris. Chris is awesome.

Cool. All right, man. We'll talk soon.

All right.