Software Firm Avaloq in Private Equity Hands?

Avaloq, Francisco Fernandez, private equity, KKR, BPO, Deutsche Bank

Francisco Fernandez, founder and CEO of Avaloq (Picture: Keystone)

Swiss banking software firm Avaloq is facing financial difficulties including a stumble in Singapore and has begun talking to private equity investors. Founder Francisco Fernandez risks losing his independence.

The Zurich-based IT house is talking to several private equity firms over a partial sale, several people familiar with the matter in London and Zurich told finews.com. Among them is New York-based KKR. Avaloq didn’t comment.

The clock is ticking: founded and led by Francisco Fernandez, Avaloq is having trouble finding funding, and is fighting on too many fronts. «Fernandez has overextended existing capacity,» one person familiar with the private equity talks told finews.com.

Huge Raiffeisen Project

«It’s not actually that many,» Fernandez told finews.ch (in German) roughly a year ago when asked whether he has spread himself and his firm too thin with too many projects.

The Avaloq owner outlined his strategic plans to build the business process outsourcing (BPO) business into a key revenue contributor for the firm, expand the globalization of the firm’s business with the core banking system Avaloq banking suite, enter the U.S. market, develop new fintech products and build an open platform, and reach into a new market segment: external asset managers.

Last but not least, the firm faces the biggest project in its history with the migration of Swiss bank Raiffeisen’s IT into a new Avaloq system. The project, Fernandez admitted, «ties up a lot of resources».

Cancelled Projects

Financial resources in particular: Raiffeisen had to step in financially in December of last year, purchasing 10 percent of Avaloq’s treasury shares for an undisclosed price.

But Raiffeisen isn’t the only problem that Fernandez has had to cope with in the last 12 months: French bank Oddo & Cie recently halted the introduction of an Avaloq core banking system for German subsidiary BHF, as finews.ch reported at the time.

The financial effects of the move for Avaloq are unknown. Generally, software firms provide project financing themselves, which can tie up double-digit million franc sums until the project is billed.

Temenos Wins Clients

The BHF project is eerily similar to another project in Luxembourg two years ago: BIL reversed an initial approval for a joint outsourcing center, «because we couldn’t agree commercially».

The loss of Julius Baer, which ultimately decided to update its IT through Geneva-based Temenos, was also a painful setback for Avaloq.

B-Source Losing Revenue

Temenos has made Avaloq’s life difficult in other ways too, successfully competing for business from newly-merged EFG International and Banca della Svizzera Italian. This translates into a massive loss of revenue for Avaloq unit B-Source, which several sources said had relied on Ticino-based BSI for as much as 60 percent of its revenue.

Avaloq said it nevertheless expects a record result this year. Its BPO Center in Bioggi was conceived as a joint venture between Avaloq and BSI, but the private bank sold its 49 percent stake back to Avaloq in February.

Singapore Woes

A further, undisclosed source told finews.com that Avaloq's BPO strategy is is faltering. Fernandez wanted to globalize the business, and opened sites in Singapore and Germany with delays. Further BPO sites are in planning.

Deutsche Bank is a major B-Source client in Singapore, but the cooperation isn't going smoothly: the German bank is still carrying out the majority of its business processes in-house because the BPO site «isn’t working», this person said.

If Fernandez said one year ago that Avaloq could finance its own growth, the entrance of Raiffeisen shortly afterwards proved the opposite.

Now, Fernandez is forced to ask for help from private equity. His main problem: Avaloq’s valuation has tanked in the last 12 months as a result of the mounting difficulties and setbacks.

Loss of Majority Stake?

Avaloq was an IPO contender until recently, and was estimated by experts to attain a market capitalization of 1 billion Swiss francs. The firm’s current value is seen as considerably lower, due to the risks attached.

The entrance of a private equity player with a three-digit million cash injection could mean that Fernandez is no longer able to keep a majority of the firm. While KKR or another private equity firm, and not Fernandez, would control Avaloq, it would secure the firm’s growth strategy – still a key goal for firm and owner.

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