Deal in Focus: Synova invests in Merit

Synova Capital recently led a growth capital investment in London-based financial technology developer Merit Software, alongside US-based investor FiveW Capital. FiveW is led by Randall Winn, the co-founder of Capital IQ, who joins the company as director.

Merit CEO Kerril Burke and CTO Paul Burke also invested in the deal. And as part of the transaction, Peter Little – former CEO and chairperson of Cadis Software and co-founder of Braid Systems – joined the business as chairperson.

According to Philip Shapiro, a managing partner at Synova who has also become a director at Merit, the GP sourced the deal through its focus on the fintech market: "We have mapped out this sector and through that we had approached a number of management teams – one of them being Merit." However, unlike the majority of Synova's deals that have been originated entirely off-market, Merit's management team brought in an adviser after talks with Synova, and a limited process was set up.

Winn/win situation
But it would seem the key to this deal has been Synova's smart partnership with FiveW's Winn. The GP came into contact with Winn through one of the LPs in its first fund. Says Shapiro: "He built up Capital IQ and also teamed up with Carlyle for its acquisition of Dealogic in late 2014. He is very well known for analytics and will be coming on board to beef up Merit's capability in this area, as well as to increase its US presence."

These two areas will form the bulk of Merit's growth strategy. The company's main offering focuses on automating bank trades that are yet to clear. Banks sit on a large number of trades that have not yet cleared – often millions in one day – and these are typically dealt with by back office staff. When a trade does not close, the bank has to hold regulatory capital against that trade. Merit's software automates this process, meaning that significant numbers of back office staff are no longer required.

Furthermore, Merit's software captures every trade a bank does. Surprisingly, banks are often unaware of a large number of their trades, and as US banks in particular are increasingly concerned with analytics, the ability to capture every trade and then analyse that data will assist banks in better understanding trades.

Judged on its merits
It is thanks to these burgeoning offerings that Merit has grown impressively since setting up in 2000, and currently works with tier-one investment banks. With the majority of large investment banks having developed their own software in the past, as post-crash regulation comes into play these in-house systems are increasingly not fit for purpose.

Merit has embedded its software with major banks, having sold its software on one-year licences, which according to Shapiro mitigates downside risks.

As well as increasing its US presence and boosting its analytics offering, Merit is also launching a joint venture with Euroclear. The partnership will aim to create utility where all trades are handled by Merit's software with all banks plugged into one central hub.

In terms of exit strategies for a company such as Merit, it is likely that big clearing houses such as SunGuard would be keen to pick up on an offering that is not only cost-effective for banks but also allows these institutions greater analytical capability.

People
Synova Capital – Philip Shapiro

Advisers
Equity – EY (Financial due diligence); Oliver Wyman (Commercial due diligence); Barley Cove Partners (IT due diligence); Osborne Clarke (Legal); Arthur Cox (Legal); Carey Olsen (Legal); Deloitte (Tax).
Vendor – Icon Corporate Finance (Corporate finance); Grant Thornton (Tax); Matheson (Legal).

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