OceanSound Partners is lining up its portfolio company CFM to tap into the growing demand for digital transformation from banks and credit unions, said Ted Coons, partner and co-founder of the New York-based PE firm.
CFM, a Tempe, Arizona-headquartered company recently merged with NXTsoft and IMM, all fintech companies that provide banks and credit unions with API connectivity, workflow automation and data analytics software.
“Our combined platform is experiencing increased demand as financial institutions are under pressure to simultaneously accelerate fintech adoption and reduce operating costs. We help them expedite their digital transformation,” said Coons.
CFM said it works with over 2,500 banks and credit unions in North America. To strengthen its operations, the company appointed Stephen Baker as its new chief executive, effective May 1.
Baker has over two decades of experience scaling enterprise software companies, according to the press release announcing his appointment. His previous roles include president and general manager of Zego, a provider of real estate software and payments solutions, following its acquisition by Global Payments.
The CFM business feeds into a highly regulated sector, an attribute that is appealing to OceanSound’s investment thesis. Government funding tends to be more stable and long- term in nature, added Coons.
“If you look at remittances flowing back into government and highly regulated enterprise sectors, it’s very stable. We prioritize defensive sectors that aren’t exposed to the cyclicality that’s in boom-and-bust technology sectors like consumer,” said Coons.
What made the CFM platform more attractive to OceanSound is the fact that financial institutions are embracing fintech to have more connected experiences for their employees and clients. “Our products help accelerate fintech adoption through API connectivity to core banking systems used by over 99 percent of US financial institutions,” explained the firm’s partner.
Opportunities for CFM are twofold, first coming from the credit union side and then on the banking side.
Even though there is concern about the state of the economy and how it will affect smaller banks, Coons said it’s too early to tell if current demand for digital transformation will slow down.
An ocean of banks
If banks consolidate to build stronger capabilities, that could also increase demand for CFM’s products. The US has several thousands of banks on the market.
“When banks grow via acquisition, it heightens the need for our connectivity solutions as they need to migrate data, standardize their IT systems and conform their fintech strategy. They end up paying us more because of our pricing model, which is based on amount of assets or number of branches,” he said.
As for credit unions: “They are required to invest all their dollars back into their business to serve their members. As a result, they embrace innovation, making them excellent customers for the combined platform,” he said.
Regarding the growth strategy, Coons said the priority is to integrate the three businesses, CFM, NXTsoft and IMM, to enhance the product offerings and streamline operations. “We are focused on driving sustained organic growth, but are open to M&A to deliver additional value to our customers.”
There is also an opportunity to cross-sell. “With over 2,500 banks and federal credit unions as customers, the combined platform serves one out of every four US financial institutions. There is an immense opportunity to deliver enhanced value to our customers via cross-sell.”
The expectation with this investment, according to Coons, is to produce “outsized returns.” The secret to OceanSound’s strategy is to identify high-quality businesses that are founder-owned and which operate in sectors that have high-quality and long-term secular trends but are oftentimes underpenetrated.
CFM, NXTsoft and IMM were predominately founder owned.
“Our investment approach is to work closely with founder-owned businesses to drive profitable growth via operating and strategic initiatives, including add-on acquisitions,” he said. “Our team helps build businesses with enduring value. That’s the secret sauce at OceanSound.”