Waters Wrap: Numerix, Fincad and the new world of M&A

When Steve O’Hanlon was named CEO of Numerix back in February 2013, the press release announcing his ascension from president and COO to the top spot noted that he “has been credited with … consolidating the product stack into a single cross-asset analytics engine, creating the Numerix partner channel, [and] focusing on key acquisitions,” among several other things.

A year later, the pricing and risk analytics specialist planned to expand its business and product offering by targeting an initial public offering to fund acquisitions after creating a corporate development department to identify potential takeovers. “We want acquisitions to be a critical element of this company, which has so far grown organically. … We want to get bigger a lot faster,” O’Hanlon told WatersTechnology back at the start of 2014, with a focus on mortgage analytics and services complementary to counterparty risk. (The press release announcing O’Hanlon as CEO also noted that he had “contributed to a number of successful IPOs” earlier in his career; he has overseen three successful IPOs.)

Here’s the thing—the IPO and acquisitions never transpired. I went through all the company’s press releases dating back to 2013. While the partnerships have been numerous, the only acquisition I could find was the 2017 addition of TFG Financial Systems, a risk, P&L and position management system.

It should also be noted, though, that if you go through those same press releases, product rollouts and enhancements—especially when it comes to valuation adjustments (XVA) and the Fundamental Review of the Trading Book (FRTB)—have been consistent. Additionally, the industry awards won have been plentiful (including from WatersTechnology and our sibling publication, Risk.net). I don’t know how indicative that is of success—the Forbes 30-under-30 award has an interesting history—but what I can say is that the people that I speak with about Numerix tend to have a high opinion of its product offering. The point being that despite the lack of acquisitions, it hasn’t hindered the company, at least on a cosmetic level.

So it caught my eye when it was announced in mid-April that Numerix had acquired Fincad. Now, I’ve been on vacation, and it’s taken me some time to write about this deal, but I want to address it here because I think it’s an interesting one and could be indicative of what we’re seeing across the financial technology sector.

Ahead of the curve

Let me first refer again to the aforementioned press release that announced O’Hanlon’s rise to CEO—“[he] has been credited with … consolidating the product stack into a single cross-asset analytics engine.” Mind you, he started this work after he joined Numerix in 2002. (His career in technology started in 1980, at least according to LinkedIn.)

In today’s financial markets, banks, asset managers, exchanges and vendors are all struggling with how to shift their legacy systems to the cloud; gone are the days of monolithic, walled-off systems; and interoperability and software being delivered as a service (SaaS) or as a managed service is the way forward. API development to deliver information and services is growing more prevalent. Firms are doing this, in part, so they can embrace open-source tools to utilize machine learning better and build more sophisticated analytics systems, because it’s becoming increasingly important to provide context around data, rather than say, ‘Here’s the data…figure out what to do with it.”

These are themes that everyone talks about today, but in 2013—much less 2002—while cloud, APIs, machine learning and open-source all existed, they certainly were not prevalent, at least in the wholesale capital markets.

Relatively speaking, in 2012, Numerix was an early mover in embracing the cloud and SaaS to connect its front- and middle-office services to provide “an integrated view of risk”. This could then certainly be seen with the 2016 release of Oneview. “We believe that it was the right time to create a single database for both XVA capabilities—all of the risk measures—as well as market risk, and provide a solution that straddles the front and middle offices,” O’Hanlon told WatersTechnology at the time.

The foundation was put in place, but it would take a while for the acquisitions. Then, last August, Numerix was acquired by private equity firm Genstar Capital. At the time, Tony Salewski, a managing partner at Genstar, said that the deal would help to “supplement [Numerix’s] strong organic growth with strategic acquisitions…”.

Sure enough, a little over seven months later, Numerix added Fincad to its stable. And it sounds—once again—that there’s more to come.

“The premise around the acquisition of Numerix was [Genstar] saw us as a platform company from which we would be able to find and buy other companies that would fit within our ecosystem,” O’Hanlon told me a few days after the Fincad deal was announced.

A missing puzzle piece

Before looking at the broader industry implications, let me delve a bit into the Numerix and Fincad offerings, as I understand them, anyway. (Skip to “This is the way” below if you don’t care about this piece.)

Fincad fills a gap for Numerix, as it’s a fixed-income specialist. “When you think about the pricing layer of our product, one of the areas that we were weak up until Fincad was the fixed-income area,” O’Hanlon said.

Regarding integration, there are a few things to remember about Numerix. As O’Hanlon told me, “Everything we do every single day is to simplify the use of product at the Oneview level.” Now, Oneview also leverages Python-based NxCore, its cloud-based development platform, which allows users to build, test and deploy apps into the Oneview user interface. “It means they can go out to other data sources within their organization and pull that data in and provide a much richer offering,” O’Hanlon said.

Then, of course, there’s Numerix’s “legacy” platform, CrossAsset, its derivatives pricing and risk management analytics offering that allows users to structure, price and manage complex derivatives. Again, as I understand it, here’s how the Fincad piece comes in: CrossAsset was built to focus on exotic derivatives, but it’s the “vanilla use cases”—which require speed of execution—that Fincad covers, O’Hanlon said, adding that Fincad’s recent work around mortgage analytics will also be useful going forward. (Going back to that 2014 interview we published about O’Hanlon’s acquisition strategy, he said mortgage analytics would be an area of focus for future deals.) The Fincad piece will be bolted on and flow up to Oneview.

And for Fincad and its users, Russell Goyder, who comes over from Fincad (well, technically, Zafin, which acquired Fincad in January 2022 and adopted the Fincad branding for the merged entity, but he was with Fincad for 15-plus years prior, so let’s just say Fincad), Numerix has built a foundation that will allow the acquired company to tap into quickly.

“We’ve wanted something like an NxCore cloud, which is a data analytics playground. And we’ve wanted something like Oneview. We were not resourced, set up to fully realize those visions,” said Goyder, who is now senior vice president of fixed-income product development at Numerix.

Christian Kahl, former president of Fincad and now senior vice president of global strategy at Numerix, added that Fincad—which has largely focused on the buy side—will now have the development resources to have an improved user interface. “The aspect of a platform is something that we’re short of that we can offer to existing clients and new prospects.”

This is the way

Fincad has built out an API ecosystem, a Python software development kit (SDK), and connects easily into Excel workbooks. O’Hanlon notes that Numerix intends to fully integrate the product offering into Numerix, rather than have it run as a standalone, which he said is what the “SS&Cs and FISs” of the world tend to do (and I’ll throw in Ion). “We want to find companies that fill technological and business gaps within our stack so that we can then make sure that that technology gets integrated from a product perspective into our stack and fulfills the entire ecosystem across both pricing and risk.”

Sure enough, Mark Feeley, brand director for Chartis Research, said that while Numerix hasn’t been a heavy acquirer in the past, when they have made deals, those pieces have been fully blended into the Numerix product base.

“When they have acquired, they have integrated it. It’s not a collection of misfit toys—absolutely not,” he told WatersTechnology recently. (Full disclosure: Chartis is owned by the same company that owns WatersTechnology.)

Feeley said that while some competitors looked at this deal “with confusion,” he thinks the pieces fit.

“If you’ve got some highly-complex structures, then Numerix is all over it,” he said. “If you’ve got slightly less complex instruments, but you really need high-performance, fast pricing and everything, Fincad’s all over that.”

Arnie Wachs, head of consulting at Cutter Associates, who has also worked at BlackRock, Fidelity, State Street Advisors and Charles River, and has come across the two vendors, concurred. “Both firms have a good reputation for what they do,” he told WatersTechnology. “They’re basically the same kind of companies doing the same kinds of things, although the products are not quite the same.”

From what I can gather, this is a good acquisition because there’s a complimentary nature to it, to be sure. But more importantly, I think it fits together with what I was talking about in the beginning: for the vendor community, there’s pressure to build a robust, cross-asset platform. The phrases “best-of-breed” and “one-stop-shop” are a bit pedantic, but the pace of technological evolution is fast, and gaps in coverage are more easily spotted. At the same time, with the rise of cloud, SaaS, open-source, and APIs, it’s easier for startups to be disruptive and end-users to get wandering eyes.

Even if “best-of-breed” and “one-stop-shop” are marketing terms, scale and coverage certainly matter. For the past decade, O’Hanlon and Numerix have been looking at expanding beyond organic growth and partnerships to acquisitions and integrations. (And it should be noted that after the deal, Numerix now has 519 clients, 66 of which are also Fincad clients, according to a spokesperson.) This isn’t just Numerix’s strategy—getting that cloud/as-a-service infrastructure in place and figuring out a roadmap for easily integrating newly-acquired entities is the battle cry for vendors across the financial markets.

Now, this column didn’t exist when Numerix bought TFG in 2017, so it’s entirely possible I would’ve written something back then to the effect of, “Numerix is poised to get after it with more acquisitions, y’all,” because that’s what my writer’s voice would’ve sounded like back then. This is to say that it’s worth watching two things going forward.

First, is this a one-and-done for Numerix? (I don’t think it is, but if it is, then maybe I’m reading way too much into this deal, which is not out of the question.)

Second, as is true of any acquisition/merger, what happens to the key people involved? During our interview, O’Hanlon spoke glowingly of Kahl and Goyder, and vice versa. I’m a big believer (and I think most of you are, too) that if senior management of an acquired vendor quickly jump ship, it’s a very bad sign. Here’s what O’Hanlon had to say about the two while speaking with me:

Thoughts on Goyder: “Because of this fixed income thing and this whole mortgage capability is so hot in the marketplace, he is reporting directly to me, streamlined to focus on getting this done in Oneview. I saw that much value in him that I wanted him to work directly for me [and] with the rest of my staff.”

Thoughts on Kahl: “He and I spent a lot of time together … the thing that dawned on me is he just lives the technology at Fincad and I see him as a person that’s a quick study. So I think he can learn our stuff real quick and help us on strategy. He’ll get indoctrinated on our M&A strategy and get involved in that, as well.”

One last piece of reckless speculation to chew on: O’Hanlon has four-plus decades of skin in the game, but when I spoke with him in April, he was still as energetic as when I first spoke with him more than a decade ago. He does not appear ready to go anywhere, just yet. With that said, when the day does come and O’Hanlon decides to retire, it will be interesting to see who gets to captain the ship and what their plans are for Numerix, as O’Hanlon has certainly made his mark.

Like I said…I have a lot of thoughts about this acquisition. Now it’s a game of wait-and-see. If you think I’m off base or am missing something, please do let me know: anthony.malakian@infopro-digital.com.

Additional reporting by Rebecca Natale

The image accompanying this column is “View in South Market Street, Boston” by Winslow Homer, courtesy of the Cleveland Museum of Art’s open-access program.