Deutsche Börse sees great growth potential in its indexing business, and it is willing to give up some of the upside in order to accelerate that growth through acquisitions.
That is the strategy behind the April announcement that the German markets operator had reached an agreement to buy Axioma, a U.S. company that provides portfolio and risk management software to asset managers and other buy-side institutions.
Deutsche Börse agreed to buy Axioma for $850 million, but a big chunk of the purchase price is coming from General Atlantic, a private equity firm with a long track record of successful investments in the financial services sector.
To make the deal work, Deutsche Börse will combine Axioma with its existing Stoxx and Dax index businesses to form a separate business unit valued at €2.6 billion. General Atlantic has agreed to invest around $715 million into the new company, giving it an ownership stake of around 19%.
That $715 million will be used by Deutsche Börse to finance the Axioma acquisition, but it also means that General Atlantic has a vested interest in helping the German company make the most of this new business combination.
The key to the strategy is the potential synergy from combining the two companies. Deutsche Börse's expertise in index construction and marketing--its Stoxx and Dax business units currently offer more than 13,000 indices--matches up well with Axioma's strengths in providing cloud-based investment management solutions to buy-side institutions. Together they can offer a combination of solutions that address the growing demand on the buyside for data and analytics. At the same time, the combination also offers the potential for encouraging more buy-side activity in the index-based derivatives listed on Eurex, Deutsche Börse's main exchange subsidiary.
The deal also is designed to leverage several macro trends in the investment world, such as the shift from actively managed strategies to passive strategies. In the U.S., for example, the amount of money in passive equity funds is expected to surpass active funds this year for the first time. Instead of picking stocks or bonds that will outperform the market, these funds simply track the performance of an index. And the more that money flows into index funds, the more those funds pay to the providers of those indices.
From General Atlantic's perspective, this deal provides a way to profit from this trend. When the deal was announced in April, Gabriel Caillaux, the firm's head of Europe, Middle East and Africa, commented that his firm expects "significant value creation" from the combination of the two businesses. "We have closely followed the development of Deutsche Börse's index assets for many years as we witness the global shift to passive products and the rise of indexed investing strategies," he said. "We are also highly impressed with Axioma's track record and believe this combination provides a strong foundation for future growth."
This is not General Atlantic's first foray into the market infrastructure space. The company made minority investments in the New York Mercantile Exchange and BM&FBovespa before those exchanges went public. The company also has made investments in the international arm of China's Ant Financial, the Chicago-based proprietary trading firm Getco, the financial information firm Markit, and the Brazilian stock brokerage XP Investimentos.
Although General Atlantic will only have 19% of the new company, the private equity firm will be a key strategic partner for Deutsche Börse. The private equity firm specializes in helping firms transform their business models, and will be an "active voice for value creation" over the next several years, according to the Germany exchange operator. In a presentation to investors, the two companies said they are aiming to increase the value of the new business by 15% per year, which means it could be worth €6.6 billion by 2024.
Part of that growth may come from further acquisitions. Theodor Weimer, the chief executive officer of Deutsche Börse, indicated in an April 30 call with investors that he expects the new business to grow through further mergers and acquisitions. Having General Atlantic as an equity partner "helps to crystalize the value of our index business, ensures value generation, and preserves our firepower for further M&A," he said.