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Simon Thompson 3 September 2020

Growth Capital Partners (GCP) recently invested in CubeLogic, a leading provider of enterprise risk management software solutions for the energy, commodities and financial markets. Armstrong Transaction Services acted as the exclusive commercial due diligence (CDD) advisor on the deal. Richard Shaw, partner at GCP, Lee Campbell, CEO at CubeLogic and Mike Callow, head of technology at Armstrong explore how critical CDD can be in the rapidly shifting enterprise risk technology sector, and how a collaborative and in-depth due diligence process can set up a portfolio company for strategic value creation for years to come.

Why is tech CDD so critical within this sector and for this deal specifically?

Richard Shaw: There’s a lot of hype in the technology sector, particularly around FinTech and RegTech. As an investor, you need to get to the crux of what a business is actually doing for its clients and how it has differentiated itself versus the other technology providers. CubeLogic is a highly resilient business with a differentiated technology, in a market where there are big shifts towards the use of data analytics for better informed decision making, automation and digital transformation to replace legacy technologies.

The strong sales momentum and success of the business to date suggested that the business was well placed to continue to benefit from these trends, but the CDD exercise validated our assumptions and helped to build conviction in the deal. It identified that even through Covid-19, the business was massively outperforming; it had 60 per cent year-on-year growth for the first half of the year.

Lee Campbell: We knew that our company was a great opportunity for a PE investor, but the CDD process was really able to underline and emphasised a lot of what we’d been saying about CubeLogic. The CDD process revealed that we’d actually underplayed the upside of our core market and offering. It helped us validate our offering, in an independent way, which is what CDD is about at the most basic level.

What were the most valuable takeaways from Armstrong’s process?

Shaw: It really came down to fully sizing the market and helping to identify the core priorities for the next stage of growth. For the best investment opportunities, there’s almost too much these companies can do. If you’ve got a business with fast growth, a good software product range and service, there are so many different areas they could go into, especially if it is a growth market. The process helped us to collaboratively discuss the business plan with Lee and his team early in the deal process and collectively identify key further areas for investment to give us a head start on the value creation plans.

Mike Callow: The business historically focused on the energy and commodities markets, but there was an initial expectation that it would need to quickly expand into the much larger financial services market. Our due diligence fieldwork helped GCP to get comfortable with CubeLogic’s exceptionally compelling product/ market fit, deep domain knowledge, and very strong customer relationships. We found that CubeLogic still has a big opportunity in its core markets and is well positioned to continue its strong growth there, while developing a more deliberate strategic plan to address the financial services market. 

Campbell: The CDD report led us to two things: obviously to continue to focus where we’re strong and where there was clearly a lot of growth potential, but also to look at the opportunities for our trade surveillance software module and the significant opportunities across our core markets and financial services for this capability. There was a lot of good and helpful feedback from all our clients that Armstrong spoke to; testimonials, great quotes and such. We are using and developing that, it is already informing our sales and marketing strategy and key account management plans going forward.

What was the value add of Armstrong’s style and approach to CDD?

Shaw: You can go into some processes where stakeholders see it as a tick box exercise. Armstrong engaged in a much more open and collaborative way, which is their general style and this was ideal for the partnership investment situation with Lee and his team. In terms of tech and market expertise, Simon Hemsley, head of financial services at Armstrong, has actually worked with risk technology in industry, with direct experience of the competitor technologies. This meant we were already starting from a level of deep market experience and knowledge. Simon’s input really enabled us to understand how to approach the opportunity in financial services, one of the key markets we were testing. 

Callow: What made this deal really stand out from our side is that it was a collaborative effort between GCP, CubeLogic, and Armstrong. When CDD doesn’t go so well, it is often because it is seen as a potential block to getting a deal done or just a hump to get over. This was different, as management really engaged with us and saw huge value in the CDD process. We all worked together to debate findings during our fieldwork, and then to develop and refine GCP’s investment hypothesis. This allowed us to deliver a tailored, granular CDD report with detailed recommendations for GCP and management to consider post-deal.

What has been the value of CDD post deal?

Shaw: The whole focus of the CDD was to do a piece of work that would help validate the market position of CubeLogic and the priority areas for future growth to inform management’s strategy post transaction. A key part of the way we do deals is to ensure that we have alignment with the teams we back from day one and to ensure that the CDD exercise is a valuable tool to help us to hit the ground running on growth plans post transaction. We all found it a useful exercise and the key test is whether the work is used post deal to help with strategic planning, which I’m glad to say it is

Categories: Insights Expert Commentaries

TAGS: Armstrong Due Diligence Growth Capital Partners Private Equity

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