Sector

Financial Services

Background

Nick Shenton is a fund manager at Artemis Investment Management. We cover LSEGs expansion from a regional stock exchange to a global financial infrastructure business, their mega acquisition of data business Refinitiv, and how the business is able to earn 90% gross margins.

Cover

Date

December 22, 2021

Episode Number

40

London Stock Exchange Group (LSEG) Business Breakdown

Background / Overview

The London Stock Exchange Group (LSEG), with a market capitalization of approximately £40 billion, is a pivotal player in global financial market infrastructure and data analytics. Tracing its origins to 1698 at Jonathan’s Coffee House in London, where stock and commodity prices were first posted, LSEG officially became the London Stock Exchange in 1801. Over its 300-year history, it has evolved from a regional stock exchange into a global financial market infrastructure (FMI) and data platform, operating in 190 countries and serving over 40,000 organizations, including sell-side firms, buy-side firms, private equity, issuers, wealth managers, and regulators.

The modern LSEG emerged significantly during the 2007–2009 period, marked by regulatory changes and competitive pressures. The appointment of Xavier Rolet as CEO in 2009 was a turning point, shifting the company from a struggling exchange to a diversified, technology-driven platform through strategic acquisitions and operational efficiencies. Key milestones include the 1980s deregulation (“Big Bang”), the 2000 demutualization, and the 2007 regulatory shift that exposed LSEG to competition, prompting a transformation into a global, multi-asset, data-centric business.

LSEG’s business model spans the entire financial market value chain, from primary capital raising to post-trade clearing, with a heavy emphasis on data and analytics. The acquisition of Refinitiv in January 2021, valued at £27 billion, doubled LSEG’s enterprise value and revenue base, positioning it as a leading global FMI. The company employs approximately 25,000 people, reflecting the scale-up from its pre-Refinitiv workforce of 5,000.

Ownership / Fundraising / Recent Valuation

LSEG is publicly listed with a market cap of around £40 billion. The Refinitiv acquisition, priced at approximately 4x EV/sales and 12x EV/EBITDA, was a transformative deal, significantly expanding LSEG’s scale and capabilities. LSEG owns a 53% economic interest and 80% voting rights in Tradeweb, a Nasdaq-listed trading venue with a market value of $12 billion, representing 25% of LSEG’s market cap. No specific details on recent fundraising or private equity ownership changes beyond the Refinitiv deal (previously owned by Blackstone) were provided, but LSEG’s history includes at least 11 merger or takeover attempts since 2000, underscoring its strategic importance.

Key Products / Services / Value Proposition

LSEG operates four primary modules, each addressing distinct parts of the financial market value chain:

1. Primary Capital Markets (~10% of revenue): Facilitates capital raising through listing fees and capital-raising activities, primarily via the London Stock Exchange, the most global stock market with companies from over 100 countries. Listing fees are in the low hundreds of thousands of pounds annually, with additional revenue from capital raisings (e.g., Deliveroo’s IPO in 2021).
2. Secondary Capital Markets (~10% of revenue): Encompasses trading venues for equities (3%), foreign exchange (FX, 3%), and fixed income/derivatives (13%, primarily Tradeweb). FXall handles $450 billion of the $6.5 trillion daily FX market, generating ~$1 million daily at a fraction of a basis point per transaction. Tradeweb generates variable transaction fees (e.g., $2 per $1 million in rates, $50 in credit), subscription fees, and market data revenue, with EBITDA margins around 50%.
3. Data and Analytics (~70% of revenue): The largest segment, generating ~£5 billion annually, includes:
• Enterprise Data Solutions (17%): Provides mission-critical datasets for trading, analytics, portfolio management, and risk management, used by the top 30 banks and top 10 asset managers globally.
• Investment Solutions (17%): Powers investment strategies via FTSE Russell Indices, benchmarking $18 trillion in assets, with a TAM of £10 billion growing 5–7% annually.
• Trading and Banking (20%): Offers content, analytics, and workflow solutions, including the ICON Premium desktop (~33% of segment revenue), competing with Bloomberg but facing challenges due to poor product-market fit.
4. Post-Trade (~10% of revenue): Managed by the London Clearing House (LCH), it clears over $1.1 quadrillion in notional interest rate swaps annually, with a 20% revenue CAGR over the past decade and margins expanding from 30% to 55%. Revenue comes from membership fees and trade compression services, saving partners over $30 billion in regulatory capital in 2020.

Value Proposition: LSEG’s services are mission-critical, deeply embedded in customer workflows, and account for a low proportion of customer costs (low single-digit % of total costs) while creating significant value. The open-access model, high recurring revenue (70%), and global distribution enhance stickiness and scalability.

Segments and Revenue Model

LSEG’s revenue model is segmented across its four modules, with distinct economic characteristics:

• Primary Capital Markets: Transactional and subscription-based (listing fees, capital-raising fees).
• Secondary Capital Markets: Transactional (low basis-point fees), subscription (fixed access fees), and data sales. FX and Tradeweb are high-growth, driven by electronification.
• Data and Analytics: Primarily subscription-based (70% recurring), with enterprise data and investment solutions offering stable, predictable revenue. Trading and banking face headwinds from ICON Premium’s decline.
• Post-Trade: Membership fees and service-based revenue, highly profitable due to regulatory demand and operational efficiency.

Revenue Mix:

• Geographic: 40% Americas, 40% EMEA, 20% Asia.
• Product: Data and Analytics (70%), Capital Markets (20%), Post-Trade (10%).
• Customer: Broad, including banks, asset managers, hedge funds, central banks, corporates, and academia.
• Channel: Direct sales and partner applications (1,200+ partners, e.g., BlackRock Aladdin).

Mix Shifts: Historically, capital markets accounted for over 60% of revenue a decade ago, with equities dominant but stagnant. Today, equities are only 3%, with data and analytics driving growth. The Refinitiv acquisition amplified the data segment’s dominance, increasing recurring revenue and global exposure.

Headline Financials

Revenue Trajectory: Revenue grew from £2 billion pre-Refinitiv to £7 billion post-acquisition, with a 5–7% organic growth target. Data and analytics (£5 billion) is the primary driver, growing 6% in Q3 post-Refinitiv integration. Capital markets (high single-digit growth) and post-trade (20% CAGR) are strong contributors, while equities (3% of revenue) are stable but less significant.

Cost Trajectory:

• Variable Costs: Minimal due to digital production (90% gross margin). Costs include data processing and platform maintenance.
• Fixed Costs: Significant, including technology infrastructure, R&D, and 25,000 employees. Operating leverage is high, with potential to drop contribution margins to EBITDA as revenue scales.
• EBITDA Margin: Mid-30s, with peers at 40–50%. Margin expansion is targeted through technology efficiencies and Refinitiv integration synergies.

Capital Intensity: Low, as growth is technology-driven rather than asset-heavy. Maintenance capex is minimal, with growth capex focused on tech upgrades (e.g., MillenniumIT acquisition reduced platform costs by 90%).

Free Cash Flow (FCF): High cash conversion due to low capex and strong EBITDA. Exact FCF figures are not provided, but the business’s low capital intensity and high recurring revenue suggest robust FCF margins.

Value Chain Position

LSEG spans the entire financial market value chain:

• Upstream: Primary capital markets (capital raising).
• Midstream: Secondary capital markets (trading) and data/analytics (decision-making tools).
• Downstream: Post-trade (clearing and settlement).

Primary Activities:

• Inbound Logistics: Data aggregation from hundreds of thousands of sources.
• Operations: Platform management, trade execution, clearing, and analytics delivery.
• Outbound Logistics: Data distribution via cloud and on-premise solutions.
• Marketing/Sales: Global salesforce (2,500+) and partner ecosystems.
• Service: Workflow integration and customer support.

Go-to-Market (GTM): LSEG leverages its global presence (70 countries), open-access model, and partner ecosystem (1,200+ partners) to distribute services. The salesforce targets diverse clients, from banks to corporates, with tailored solutions. The cloud transition enhances scalability and customization.

Competitive Advantage: LSEG’s value-add lies in its scale, network effects, and data depth. The open-access model fosters customer trust and flexibility, unlike competitors’ closed silos. The Refinitiv acquisition enhanced data assets and global distribution, strengthening LSEG’s midstream and downstream positions.

Customers and Suppliers

Customers:

• Types: Banks (top 30 globally), asset managers (top 10), hedge funds, central banks, wealth managers, corporates, academia.
• Scale: 40,000 organizations, 400,000+ end-users.
• Stickiness: Mission-critical services embedded in workflows, with low churn due to high switching costs.

Suppliers: Primarily data providers (hundreds of thousands of sources) and technology vendors. LSEG’s scale enables favorable terms, though specific supplier dynamics are not detailed.

Pricing

Pricing varies by segment:

• Primary Capital Markets: Listing fees (~£100,000s annually) and capital-raising fees.
• Secondary Capital Markets: Transaction fees (fractions of basis points, e.g., $2/$1M in rates, $1M daily on $450B FX volume), subscription fees, and data sales.
• Data and Analytics: Subscription-based, with costs estimated at low single-digit % of client budgets. ICON Premium is priced lower than Bloomberg’s ~$20,000/terminal.
• Post-Trade: Membership fees and service fees (e.g., trade compression).

Drivers:

• Mission-Criticality: High value justifies pricing despite low cost share.
• Market Dynamics: Electronification and regulation drive demand, enabling stable pricing.
• Competition: Lower pricing than Bloomberg in some segments, with potential for premium pricing as cloud solutions improve.

Bottoms-Up Drivers

Revenue Model & Drivers

LSEG generates revenue through:

• Subscriptions (70%): Data and analytics (enterprise data, investment solutions) and some capital markets fees (Tradeweb subscriptions).
• Transactional Fees: Capital markets (FX, Tradeweb) and primary market fees.
• Service Fees: Post-trade (clearing, trade compression).

Revenue Drivers:

• Volume:
• Data and Analytics: Growing demand for data (TAM £40–45 billion, 4–6% growth), driven by regulation, passive investing, and digitization. 40,000+ customers and 1,200+ partners expand volume.
• Capital Markets: FX ($450B daily volume) and Tradeweb (mid-teens growth) benefit from electronification and global trade growth.
• Post-Trade: $1.1 quadrillion in notional cleared, driven by regulatory push for centralized clearing.
• Price: Stable, low basis-point fees in capital markets and subscription pricing in data/analytics. Pricing power is constrained by competition (e.g., Bloomberg, S&P) but supported by mission-criticality.
• Mix: Shift toward data and analytics (70% of revenue) and post-trade (10%, high-margin) from equities (3%, low-growth). Refinitiv amplified recurring revenue and global exposure.

Growth:

• Organic: 5–7% revenue growth, driven by data (6% in Q3) and post-trade (20% CAGR).
• Inorganic: Refinitiv doubled revenue; historical acquisitions (FTSE, LCH) boosted growth.
• Mix Shifts: Data and analytics dominance reduces reliance on cyclical equities.

Cost Structure & Drivers

Cost Breakdown:

• Variable Costs: Low, primarily data processing and platform operations (~10% of revenue, given 90% gross margin).
• Fixed Costs: High, including tech infrastructure, R&D, and 25,000 employees. Key drivers are:
• Technology: Investments in cloud migration and platform upgrades.
• Labor: 6,000 data professionals and 2,500 salespeople globally.
• Overhead: Global operations in 70 countries.

Operating Leverage: Fixed costs are spread over growing revenue, with potential for EBITDA margin expansion (mid-30s to 40–50% peer levels). Refinitiv integration targets cost synergies.

EBITDA Margin: Driven by revenue growth and fixed cost leverage. Incremental margins are high due to low variable costs.

FCF Drivers

• Net Income: Strong EBITDA (mid-30s margin) supports profitability, though interest and taxes reduce net income.
• Capex: Low, with maintenance capex minimal and growth capex focused on tech (e.g., MillenniumIT).
• NWC: Not detailed, but high recurring revenue suggests stable receivables and payables, with a short cash conversion cycle.
• FCF: Robust, driven by high cash conversion and low capital intensity.

Capital Deployment

• M&A: Aggressive, with Refinitiv (£27 billion), FTSE (£900 million valuation), LCH, and MillenniumIT ($30 million). Synergies from Refinitiv include revenue growth and cost efficiencies.
• Organic Investment: Tech upgrades and cloud migration to enhance scalability.
• Returns: High incremental ROIC due to low capital intensity and scalable growth.

Market, Competitive Landscape, Strategy

Market Size and Growth

• Total Addressable Market (TAM):
• Data and Analytics: £40–45 billion, growing 4–6%.
• Investment Solutions: £10 billion, growing 5–7%.
• Trading and Banking: £15 billion, growing single digits.
• FX: $6.5 trillion daily notional, growing high single digits.
• Post-Trade: Not quantified, but significant due to regulatory demand.
• Growth Drivers:
• Volume: Electronification, passive investing, global trade, and regulatory centralization.
• Price: Stable, with low capture rates but high value-add.
• Industry Trends: Digitization, cloud adoption, and sustainability standards.

Market Structure

• Consolidation: High, with scale-driven players (LSEG, CME, S&P, MSCI, Bloomberg) dominating due to network effects and high minimum efficient scale (MES).
• Competitors: CME (FX), MarketAxess (credit), S&P, MSCI, FactSet, Bloomberg, Moody’s.
• Regulation: Increases barriers to entry, favoring established players.
• Cycle: Structurally growing, with pockets of cyclicality (e.g., equities during crises).

Competitive Positioning

LSEG is a multi-asset, global platform with a unique open-access model, positioning it as a trusted partner across the value chain. It competes on:

• Scale: Global presence and 25,000 employees.
• Data Depth: Refinitiv’s differentiated dataset, processing millions of sources.
• Network Effects: Liquidity and data attract more users, creating a virtuous cycle.

Hamilton’s 7 Powers Analysis

1. Economies of Scale: High fixed costs (tech, labor) spread over £7 billion in revenue, with potential for margin expansion. MES is large, limiting competitors.
2. Network Effects: Strong in capital markets (liquidity begets liquidity) and data (data begets data). FXall and Tradeweb benefit from deep liquidity pools.
3. Branding: Moderate, with trust in the London Stock Exchange and FTSE Russell brands, though less prominent than Bloomberg.
4. Counter-Positioning: Open-access model contrasts with competitors’ closed silos, fostering customer trust and flexibility.
5. Cornered Resource: Refinitiv’s proprietary data and decades of history are difficult to replicate.
6. Process Power: Technology investments (e.g., MillenniumIT) and cloud migration enhance efficiency and customer experience.
7. Switching Costs: High, as services are embedded in workflows (e.g., 500 bank apps rely on Refinitiv data).

Strategic Logic

• Capex: Defensive (tech upgrades to stay competitive) and offensive (cloud migration for new growth).
• Vertical Integration: Spans the value chain, reducing costs and enhancing customer willingness to pay.
• Horizontal Expansion: Refinitiv expanded into buy-side and corporates, with Tradeweb adding fixed income/derivatives.
• M&A: Disciplined, with high-ROIC deals (FTSE, LCH, Refinitiv). Synergies drive value, though Refinitiv integration poses execution risks.
• MES: LSEG operates at or above MES, with scale advantages over smaller players. Diseconomies are mitigated by a flat, innovative culture.

Risks

• Operational Execution: Integrating Refinitiv (25,000 employees) poses cultural and technological challenges. ICON Premium’s turnaround is critical.
• Disruptive Technology: DeFi and blockchain could disrupt trading or settlement, though LSEG’s scale and regulatory barriers mitigate risks.
• Competition: Bloomberg, S&P, and MSCI challenge data/analytics; CME and MarketAxess compete in trading venues.
• Conglomerate Discount: Complexity may obscure underlying growth, requiring clear communication of Refinitiv synergies.

Valuation

LSEG’s £40 billion market cap reflects a premium for its scale and growth potential, though peers like S&P and MSCI may command higher multiples due to simpler narratives. Tradeweb’s $12 billion valuation (25% of LSEG’s cap) suggests potential sum-of-the-parts value. The Refinitiv deal at 4x EV/sales and 12x EV/EBITDA was strategically priced, with synergies expected to drive growth and margins. No specific valuation multiples are provided, but LSEG’s 5–7% growth, 70% recurring revenue, and high cash flow make it attractive relative to information services peers (e.g., TransUnion, Wolters Kluwer).

Key Takeaways and Unique Dynamics

LSEG’s business model is unique due to:

• Open-Access Model: Unlike competitors’ closed silos, LSEG’s open platform fosters trust and flexibility, aligning with cloud-driven trends.
• Multi-Asset Scale: Spanning equities, FX, fixed income, derivatives, and post-trade, with global distribution in 190 countries.
• Data Dominance: Refinitiv’s differentiated dataset, with decades of history and millions of sources, drives 70% of revenue and high stickiness.
• Network Effects: Liquidity and data create winner-take-most dynamics, reinforced by 40,000 customers and 1,200+ partners.
• Regulatory Moat: High scrutiny raises barriers, favoring LSEG’s established relationships and compliance expertise.

Critical Insights:

• The shift from equities (60% to 3% of revenue) to data and analytics (70%) reflects a strategic pivot to high-margin, recurring revenue, amplified by Refinitiv.
• Post-trade’s 20% CAGR and 55% margins highlight the value of regulatory-driven clearing, with LCH’s Lehman unwind showcasing systemic importance.
• Refinitiv’s integration is pivotal, with early signs of 6% data growth but risks in cultural alignment and ICON Premium’s turnaround.
• LSEG’s low capture rates (fractions of basis points) create significant customer surplus, supporting pricing stability and volume growth.

Critical Dynamics:

• Flywheel Effect: Scale drives efficiency, which is reinvested into innovation or passed to customers, strengthening network effects.
• Cloud Transition: Moving data and analytics to the cloud unlocks new use cases and customer segments, potentially accelerating growth.
• M&A Discipline: Historical deals (FTSE, LCH) delivered high ROIC, but Refinitiv’s scale tests execution capabilities.
• Regulatory Tailwinds: Centralization of trading and clearing, driven by regulation, enhances LSEG’s role and barriers to entry.

LSEG exemplifies a platform business that leverages technology, scale, and regulation to create a defensible, high-margin model. Its ability to execute on Refinitiv and navigate competitive and technological risks will determine its long-term success.