About 12 months ago I wrote a blog post about the potential balance sheet impacts of cloud computing and crowdsourcing.
Those impacts stem from the gulf that has quickly opened up between the historical cost of software development (on which many incumbent balance sheets are based) and a new cloud-based, crowdsourced replacement cost.
Much later in the year an article appeared in the business press regarding a Victorian Supreme Court action. This action was brought by a number of disgruntled investors who suffered significant capital losses on a leasing transaction designed and entered into by the defunct investment bank Babcock and Brown.
The investors are suing various B&B executives for breach of fiduciary duty.
Over the coming months these two seemingly unrelated events will collide, with consequences for equity markets that are difficult to predict.
Fiduciary Duty and Disclosure
The basic argument of the investors is that B&B failed to adequately disclose the potential risks of what was a highly leveraged leasing transaction (involving railway rolling stock in the US).
The defence lawyers will no doubt argue that the GFC (which ‘derailed’ the transaction) was a ‘black swan’ event that was not foreseeable by the ubiquitious reasonable man. However the ultimate outcome of the case is not relevant to this blog, which is actually about the Class Super IPO.
Class Super has indicated that it intends to list the company in 2015.
Class Super’s revenues are based on a traditional subscription licensing model, with accounting firms servicing SMSF clients being charged an annual fee per Fund.
With a purely cloud-based architecture the firm has recorded consistent growth and has attracted investment from large financial institutions seeking access to the funds under management in the SMSFs to cross-market their “products”.
Mclowd is using crowdsourced resources and cutting-edge online workflow to create software to rival that of Class and its peers for less than 1% of the aggregate development cost of those incumbents.
The Mclowd SMSF accounting software is free. Alongside the software is a services marketplace where the cost of managing SMSF assets is a fraction of that payable under traditional professional services models. Using a minimal amount of capital, programmers from around the world, and without any office or full time staff, Mclowd has ensured that this ‘Online Community’ as a whole can operate at an extremely low level of monetisation.
Until now the focus has been on use by individual Trustees. However the accounting software has now developed to a stage where we can begin discussions with various accounting firms servicing SMSFs, many of whom are clients of Class Super.
Over the next 12 months Mclowd will continue to develop the software and at the same time release tools to make the migration of assets and data from the incumbent accounting platforms a quick and easy process.
In promoting their IPO the Directors of Class face an unenviable choice:
• They can disclose the rampant price deflation being triggered in the market for accounting software, and then watch their IPO valuation plummet, or
• They can ignore that reality, in which case they face legal and reputational risks similar to those now being experienced by various (former) executives of Babcock and Brown
The Statute of Limitations provides claimants with a six year window (from the date a cause of action arises) to submit a claim.
Given the speed with which this story is unfolding, my guess is they will not need that much time.
Excellent article Ashley. My only point of contention is that Class Super’s directors can disclose the rampant price deflation without any impact on their IPO. Sadly almost no-one reads the risk disclosure section and anyone who does is faced with plethora of boilerplate risks that make determining any real investment risk impossible.