Activist Starboard reveals 5% stake in Clearwater as tech company reviews its options

Company: Clearwater Analytics Holdings (CWAN)

Business: Clearwater Analytics Holdings is a provider of comprehensive cloud-based platforms for institutional investors in global public and private markets. The company’s single-instance, multi-tenant architecture provides real-time data and AI-driven insights throughout the investment lifecycle. The platform eliminates information silos by integrating portfolio management, trading, investment accounting, reconciliation, regulatory reporting, performance, compliance and risk analytics into one unified system. The company serves insurers, asset managers, hedge funds, banks, corporations and governments. The company is also a provider of enterprise risk analytics and developer infrastructure. His capabilities in complex portfolio management in both public and private markets include structured products, private credit and derivatives.

Stock Market Value: $6.37 billion ($21.76 per share)

Activist: Flag Value

Ownership: ~4.9%

Average Cost: no

Activist Comment: Starboard is a very successful activist investor and has extensive experience helping companies focus on operational efficiency and margin improvement. They are known for their excellent efforts and running many of the most successful campaigns. Starboard had previously launched activist campaigns at 59 information technology companies, and their average return from these situations was 36.92%, while the average return for the Russell 2000 during the same period was 20.01%. Additionally, Starboard has run a total of 163 activist campaigns in its history, earning an average return of 21.26% over the same period, compared to the Russell 2000’s average return of 14.34%.

what’s going on

On Dec. 9, Starboard disclosed that it has a roughly 5% position in Clearwater Analytics and is urging the company to pursue a robust sales process if it receives direct interest from potential buyers.

behind the scenes

Clearwater Analytics is a provider of end-to-end cloud-based investment accounting solutions. The company has been steadily gaining share from legacy solutions like BlackRock, State Street and SS&C, which are widely viewed as the premier modern platform. In 2016, private equity firm Welsh, Carson, Anderson & Stowe became the company’s majority investor. In 2020, Warburg Pincus and Permira made minority investments, and about a year later, the three firms took the company public at $18 per share.

Clearwater has performed quite well from its IPO through 2024; underpinned by historically strong margins that have delivered consistent growth and premium valuations relative to peers, and these sponsors have been rewarded accordingly. Warburg and Permira, which owned 22 percent, sold their entire positions, and WCAS, which owned 56 percent, reduced its stake to about 1 percent by November 2024 at prices as high as $29.11 per share.

Shortly thereafter, the company began making a series of acquisitions, including Enfusion, a publicly traded company, and Beacon and Bistro, two privately held businesses. All of these transactions were announced between January and March of this year and were closed over the following few months. As a result, Clearwater went from a clean, high-growth vertical software story with strong margins, premium valuation and net cash balance to a riskier, less clear-cut integration story with nearly 3x EBITDA leverage.

Unsurprisingly, the market questioned the company’s decision to change course so sharply, as well as its ability to integrate these three acquisitions while maintaining its core organic growth story, and the stock sold off sharply, eventually reaching a low of $15.73 per share following its third-quarter earnings report last month.

It was soon reported that Clearwater had engaged consultants to evaluate strategic options after receiving numerous unsolicited offers from firms such as Thoma Bravo and even Warburg Pincus and Permira; Both still had representatives on the board.

These announcements led Starboard to disclose its approximately 5% position in Clearwater and encourage the company to pursue a vigorous sales process if it receives direct interest from potential buyers. But don’t misunderstand Starboard’s purpose or thesis. They are not short-term strategic investors who jump at the opportunity for a quick return. They had probably been looking at Clearwater for months and had acquired it because they liked the independent story and saw the opportunity to create long-term value. But to paraphrase the overused quote attributed to Mike Tyson (but actually said by Cus D’Amato), everyone has a plan until they get hit. And Starboard is as good at throwing a punch as anyone. So when news breaks that the company is considering a sale and two of its board members may be bidders, Starboard does what any good activist would do and ensures there is a fair process to maximize value for shareholders. Starboard will then decide whether that price is better than the risk-adjusted value shareholders could get from a standalone plan to integrate acquisitions and grow the core business. Additionally, a reliable and fair process will likely attract additional bidders, including strategies such as: Black Rock And Nasdaq. While the leveraged buyout math works out at the highs of $20 per share, strategies can push that to 3.

There may be a quick fix here if the board decides to sell to the company and gets an offer that is good for everyone. However, this in itself is a risky activist thesis. What makes this a good activist campaign for Starboard is that they believe the company is an independent entity and see a way to create shareholder value.

If the independent path is ultimately taken, it would make perfect sense for private equity investors, who no longer hold any material positions, to resign from the board and be replaced by industry experts and a shareholder representative who can guide management through an independent plan.

Essentially, there are three potential outcomes of Clearwater’s current pivot: (i) a standalone plan in which the company integrates its acquisitions and grows its core; (ii) after a genuine and competitive due diligence process, the company is sold for a satisfactory premium; or (iii) an abbreviated sales process conducted in part by Warburg and Permira, resulting in a sale to Warburg and Permira. Sanjak will probably be happy with (i) or (ii), and we expect them to do everything they can to prevent (iii).

Ken Squire is the founder and president of 13D Monitor, a corporate research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, an investment fund that invests in a portfolio of activist investments.