BUSINESS DESCRIPTION

Sovos Compliance (‘Sovos’) is a global provider of compliance solutions, managing all aspects of the tax compliance process, from tax calculation, forms completion and ultra-high-volume filing to secure funds transfer to state and local revenue departments. At the heart of Sovos’ software suite is a powerful tax calculation engine that leverages the industry’s most comprehensive repository of more than 210 million tax rules in over 13,500 jurisdictions, across more than 200 countries. Headquartered in Boston, USA with a presence also in Europe and Latin America, the majority of revenue is generated in the US from a customer base of c. 4,500 corporates.

WHY DID WE INVEST?

HgCapital’s TMT team tracked Sovos (previously Taxware) for two years, as we identified the company as a scale specialist in tax compliance for enterprise customers. We also saw the potential to expand the company outside the US market.

Sovos sits right in the HgCapital ‘sweet spot’ with a strong and predictable business model, including: 96% contractually recurring revenue; a fragmented, yet loyal customer base; high margins; and robust cash conversion. Sovos’ largest, core products have achieved consistent double-digit organic revenue growth.

HOW DO WE INTEND TO CREATE VALUE?

In addition to continuing to grow revenues organically, Sovos has a strong track record of acquiring and successfully integrating tax compliance software companies. The market remains fragmented and hence we believe there are many attractive opportunities for Sovos to grow by acquisition. There is additional potential through further margin improvement.

WHAT HAS BEEN ACHIEVED?

In June 2016, Sovos announced the acquisition of Invoiceware International, based in Atlanta and Sao Paulo. This expands the company’s capabilities in Latin America and adds the industry’s only solution for handling electronic invoicing and fiscal reporting in multiple countries from a single platform. A new Chairman and CFO were also recruited over the year.

HOW IS IT PERFORMING?

Sovos has seen rapid growth since our investment in early 2016, driven by strong organic growth in its core products. Our current valuation has also benefited from the weakness of sterling against the dollar since the time of our investment. We are carefully monitoring the potential impact on Affordable Care Act (‘ACA’) revenues following the outcome of the US elections.

The material, £19 million, increase in the Company’s valuation of its stake in Sovos over the year has reflected strong acceleration in profit growth.

HOW WILL WE CRYSTALLISE VALUE?

We believe Sovos will be an attractive acquisition target for private equity buyers, as it demonstrates high levels of organic revenue growth, high EBITDA margins and strong market positioning. However, we also see an IPO as a potential route to exit, given the strong cash generation and increasingly international reach. Lastly, there are several notable potential trade buyers.

Sector Location Date of Investment Residual cost £’000 Unrealised Value £’000
TMT USA March 2016 24,284
43,272