The Fenergo Story, via The Sunday Business Post: It’s 2008. The world’s economy is collapsing around everyone’s ears thanks to the failure of Lehman Brothers. It’s a really bad time to be involved in providing services to the banking industry.
Unfortunately for Marc Murphy, he happens to be involved in providing services to the banking industry at precisely that moment.
He’s sales director for Ergo, John Purdy’s IT services company, and the whole financial system is panicking and he’s watching his entire roster of clients with horror.
“Ergo’s business then was very focused on Ireland and the software business I ran had a big financial services arm to it,” he says. His clients at the time were the likes of Anglo Irish Bank and a host of subprime mortgage lenders. “Nine out of ten of those names are not here anymore,” he says.
“It was at that time I called John and I said, ‘Listen, we’re in trouble here. We really are in trouble. The business as we have known it has gone.’ It really had disappeared; evaporated overnight.”
Instead of folding up the business, Purdy and Murphy decided to gamble. But it didn’t come without risk, or cost. “We were all very well paid people, we had all very nice lifestyles, and that basically changed overnight,” he says. “The new deal with John was that all our salaries were halved. The business as we knew it, John had moved across into a different part of Ergo to run down, and we basically started with a blank sheet of paper, so it was a big jump in the dark.
“So after that phone call, I brought the core team away for a couple of days to brainstorm and say, right: John says we’re on life support, but he’s willing to leave it on. He’s willing to give us the funds to try and create something out of those ashes.”
For Murphy, that thing was regulation. For those banks that would survive the crisis, the price would be a heavy burden of new rules from governments fearful of another Lehman-style collapse.
“We knew that this regulatory storm was going to hit. People were starting to talk about the Dodd-Frank laws in the US. We were on the third anti-money laundering directive. People were starting to talk about Fatca, the foreign account tax laws.”
The expansion was rapid, but luck played its part – and luck breeds confidence. “In 2008 and 2009, we were doing research and development and trying to come up with the idea,” he says. “We had a core team of about ten people and the ten of us had spent about two years researching the space so we became the experts.
“In 2010, we launched, and we picked up two clients – Lloyds in the UK and Investec in the UK,” he says. “Both of those clients really became the catalyst for more growth.
“Looking back now, that year was a very critical and significant year. If we hadn’t got those clients I don’t think John’s wallet would have given us any more.”
For Murphy, it was equal parts luck, foresight and smarts. “We made a bet in 2008 that banks would be consumed by this new regulation that they’d be forced to spend millions solving,” he said. “We made a prediction and it came off.”
It certainly did – last week, Fenergo secured $75 million in investment from American backers. It is one of the Irish corporate deals of the year and values the company €110 million.
So what does Fenergo do, exactly?
Well, according to the firm’s only public relations bumpf, it provides client lifecycle management software solutions for investment banks, capital market firms and private banks. If that’s not immediately clear, Murphy has a more digestible version for the layman. Once again, like the origins of Fenergo itself, it all goes back to Lehman Brothers. “You’ve got to go back to 2008, when the music stopped in terms of the financial crisis, to understand why all this is done,” he says. “The biggest failure in 2008 was Lehmans. That’s why everyone calls it the Lehmans crisis, because it’s when the music stopped, Lehmans couldn’t tell you who were the actual clients they were dealing with. That is: where does the risk actually sit?” In short, who really owns a company.
“Let me start with a simple – hypothetical – analogy. Let’s say here in Ireland, let’s take Bank of Ireland. And let’s say one of their biggest clients wants to do a deal.”
If Bank of Ireland wanted to carry out even an averaged-sized transaction for this client, they first thing they’d need to do, Murphy says, is find out who’s behind the company.
“What they will have to do is based on the new regulatory regime – they will have to do perform ‘know your customer’ and anti-money-laundering checks on every director, shareholder, of the business that owns more than 10 per cent of that company.
“What they’ll find is that one of those owners is, say, a major institutional investor in New York. Now, who’s behind it? So they’ll have to do the checks on all of the owners.
“Then, perhaps, some of the ownership of the business is sitting in a fund. And perhaps some of that fund is going through the Cayman Islands. So you’ve got all of these trusts that are set up for tax reasons and our job is to try and decipher or take away the sort of protracted nature of getting underneath where the money actually sits.”
So if the business wanted to carry out a transaction worth, say, €100 million, thanks to all those new rules brought into effect in so many countries and jurisdictions after the financial crisis, a relatively simple transaction now requires reams of paperwork and due diligence to establish precisely who is behind the transaction.
According to Murphy: “You can either throw thousands of people at it, which the big banks would do. Or you go with Fenergo, which has built all the power to do that in a very sophisticated way.”
Fenergo’s focus, though, is not just Ireland.
“All the thinking is done in Dublin, all the research is done in Dublin, all the firepower is here in Dublin, but our clients are in Toronto, New York, Boston, Sydney, Madrid, London, Frankfurt, Amsterdam.
“I live in Drumcondra. In the morning the question is, do I turn left to come into work, or turn right and go to the airport. And more often than not, it’s turn right to go to the airport.”
Murphy is unstinting in his praise for Purdy, whose faith allowed Fenergo to be born, and whose wallet kept Fenergo afloat while the company was essentially in research and development mode through the difficult days of the financial crisis, while Marc was building the business. But he also gives glowing praise to Paul Kerley, who founded financial crime and compliance software firm Norkom in Dublin in 1998. Murphy met Kerley at an Enterprise Ireland event in 2010 and asked him for advice. Advice soon expanded into more than that.
He remembers Kerley’s first meeting with the Fenergo team vividly. “He spent two hours with me and the team and after it he said, ‘Lads, you know this is a slog in a bog?’. And I’ll never forget that. He said, ‘This is bloody tough work. Are you really ready to take this on? If you’re ready and I’m going to get 100 per cent of your commitment I’ll come on the ride with you.’
“So we did a deal where Paul bought into the company, he wrote a seven-figure cheque and came on board as chairman and coach to the chief executive.
“You don’t appreciate it then probably as much as you do today when you’ve had three solid years of it behind you. The thing is, with Paul, 19 of 20 things he tells you come true, and that’s a bit scary,” Murphy says. “Revenues have grown 100 per cent year on year since then.”
The $75 million (€69 million) investment in the company announced last week by billion dollar New York venture capital firm Insight Venture Capital Partners will give them a 65 per cent stake in the business, and values Fenergo at €110 million. It also gives a lot of the people who supported the company a reward for that support.
Purdy and his Ergo team, including the likes of Mark Kenny and Frazer Furlong, will now depart Fenergo with a healthy profit. Having injected around €4 million over the course of his time in the company, Purdy will leave with a return of nearly five times that. “Remember, John took a much riskier bet [back in 2008] when no one had a pot,” Murphy says.
Meanwhile, Investec Ventures – formerly NCB Ventures – put €3.5 million into the company and they will get a return of €14 million from Insight’s investment. And while Kerley will get what Murphy calls a ‘sweetener’ from the deal, he’s rolling the majority of their shares over, he says. “I think we really have a great opportunity with the right dynamics with the space we’re in,” Murphy says. “This is a mandatory spend. Banks have to do this. You’re not trying to convince them of a nice to have: It’s a must have.”
The future for Fenergo is flotation. Just seven years after their clients evaporated, their salaries were halved, and their futures became a gamble, the company’s founders are now on a rapid escalator to the stock markets.
“The growth strategy we’ve built with Insight sets out a three-year spectrum where we believe we can get the revenue to €100 million,” he says. “And of that €100 million, 65 per cent would be recurring revenue, which means at the start of every year you’ve already booked 65 per cent of your revenue. The contracts that you do are multi-year – it’s like signing up with Vodafone for your phone, so you’re locked in for three years.”
The problem for Fenergo is name recognition. “The biggest challenge is that people don’t know about us,” he says.
The firm recently debuted on an industry research paper run by consultancy firms EY and Chartis. “It lists the top 100 technology companies in regulation. And we debuted in that top 100 this year,” he says. IBM were number one and SAP were number two. Fenergo were a creditable 70th. “We were proud of that, and we’ll be better this year,” he says.
Where they scored well was on the business side – quality of the product and delivery to the banks – while they fell down on market awareness. To that end, they’ve ramped up their marketing budget, quadrupled their sales team, and invested heavily in what he calls a ‘Fenergo University’, where people can get up to speed on the company’s technology. That’s just the first step.
“For the IPO it’s going to be incremental steps over the next few years,” he says. “So if we keep going at the rate we’re going we’ll get there.”
Originally published in The Sunday Business Post.