Advent Software to Acquire Black Diamond for $73 Million

Portfolio management software firm says Black Diamond’s management will drive its RIA strategy

Advent Software announced late Thursday that it would acquire Black Diamond Performance Reporting for $73 million, and that Black Diamond’s management team, led by founder and CEO Reed Colley, will operate as an independent business group that will “lead Advent’s advisory strategy.”

The acquisition is expected to close in the second quarter of 2011, and Advent says it expects Black Diamond—which has grown revenues by more than 40% over the last two years, according to the announcement—to contribute about $1 million per month of recurring revenues to Advent. The acquistion thus would value Black Diamond at about six times revenue.

Colley will become general manager of the Black Diamond group and will report to Peter Hess, Advent’s president.

In a statement, Colley said that with the acquisition by Advent, “Black Diamond now gains access to resources to accelerate both our product development and growth,” while Advent pledged to “continue to invest in and evolve the Black Diamond platform, as well as its Advent Portfolio Exchange (APX), Moxy, Advent OnDemand, Axys, and Geneva platforms, with each serving distinct client segments.”

In an interview on Friday with AdvisorOne, Colley (left) placed the acquisition in the context of Black Diamond being able to provide a “positive impact on the marketplace,” and that part of the attraction with Advent was its ability to take advantage of its “resources and knowledge; working with somebody who’s been doing this for 28 years, to really do great things for advisors.” He said that Black Diamond has conducted about the same amount of due diligence on Advent as the public company had done on Black Diamond to ensure that it could maintain its culture of innovation and service to advisors.

In that same interview, Hess said the acquisition was designed to “bring an even better solution to the advisory marketplace.” Hess said Advent had learned in particular with its Geneva platform, which serves the hedge fund industry, that focusing on a specific vertical market paid dividends in multiple ways; that business now accounts for a third of Advent’s business, he said. In its due diligence on Black Diamond, Advent “gained such an appreciation for Black Diamond’s culture and innovation.” Hess said that when you partner with a vendor, “it’s always about the journey; we’ll all be riding the Black Diamond train. Colley said “it’s not in Advent’s interests to squash our culture.”

Dan Skiles, executive VP of Shareholders Service Group, the RIA custodian and services provider, and a long time participant and observer of advisor technology, called the acquisition a positive sign for advisors that showed there’s “a lot of value in serving advisors, especially RIAs.” In addition, he called the acquisition a “fantastic entrepreneurial story,” lauding Colley and his management team for building great technology and a company that has experienced rapid growth since its founding in 2003. “The entrepreneurial spirit serving advisors is alive and well,” he said.

As for Black Diamond’s future, Skiles (left) suggests that Advent was smart to keep a “great entrepreneurial management team together,” and that Colley’s decision to sell to Advent was likely meant to “benefit his current and future clients.” For Black Diamond’s competitors, says Skiles, the deal should also serve as a “shot in the arm” that helps validate their offerings, that “what I’m doing is valuable,” but also impart a “sense of urgency” to improve their own products.

One of those competitors is Orion Advisor Services, whose founder and CEO, Eric Clarke, took a more cautionary approach to the news. “I was surprised,” Clarke said in a Friday interview. “I see all the reasons why Reed [Colley] made the decision,” but to Clarke, “it looks identical to the TechFi situation.” Clarke was referring to

Advent’s purchase of entrepreneurial TechFi , founded by Matt Abar, in 2002. After making that acquisition and promising to support its portfolio management and reporting software—and its advisor users—Advent eventually let TechFi die on the vine, withdrawing support of the product and angering many advisor users of the innovative platform. “it looks too much like the TechFi agreement to say it will be different this time around,” warns Clarke.

“For whatever reason,” says Clarke, “some advisors struggle to do business with Advent, and they want other options. We want to be one of those options.”

TechFi? Not This Time, Promises Advent

Hess and Colley addressed the TechFi allusion directly in the interview. “We’ve been effective,” Hess (left) said, in many markets, but “not so much in the advisory space. That was one of the attractions of Black Diamond.”

As for whether Advent will acquire Black Diamond and then kill it, Hess says flatly, “It’s not going to happen this time around.” While saying he appreciates many advisors’ skepticism on Advent’s motives, he also says “It was a different time, a different management team, and a different understanding of the market.” Advent, he said, has a “whole new set of intentions; We will prove it to people.”

Colley takes a different tack, saying that in 2002, there weren’t that many options for portfolio management and reporting. Now, he argues, “there are a number of good options. This deal for me represents more choice, better choice” for advisors.

While Orion's Clarke agrees that "It’s critical for advisors to have choice," he aslso said that "every advisor we work with has different business models—it’s critical to customize our offerings to fit an advisor’s business model, rather than the other way around." Referring to the Black Diamond acquisition, Clarke said that "Having one less choice is a net negative" for the advisor community.

Skiles said the deal is “exciting for Reed and his management team,” but using a sports analogy, “they have to play out the season. They did it as an independent company,” but now have to perform as part of a larger organization. While he also notes, alluding to TechFi as well, that “everybody can speculate on what it means for advisors but nobody really knows. You have to see where they go.”

On April 26, Advent reported first-quarter net income from continuing operations of $7.9 million, an 86% increase from earnings in the first quarter of 2010. Revenue in Q1 2011 increased 13% from the prior year to $75.3 million. In 2010, Advent posted a 9% increase in revenue to a record $283.5 million,

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