Markit IPO Filing Provides Peek Inside Dominant Data Service

Markit Ltd., the financial information company whose price data forms the basis for much of the global derivatives and bond markets, filed for a U.S. initial public offering.

The firm, whose clients include banks, hedge funds, accounting firms, exchanges and central banks, reported operating profit of $230 million on $948 million in revenue in 2013, up from $225 million and $861 million a year earlier, according to a regulatory filing. The London-based company valued the IPO at $750 million, though that’s a placeholder used to calculate registration fees that will probably change.

Markit’s best-known products are a series of indexes tracking credit-default swaps. It licenses them to companies wanting to create and sell derivatives linked to such benchmarks. Founded in 2003, Markit gets about half its revenue from selling data such as prices and indexes, with the rest split between processing trades for over-the-counter derivatives, currencies and loans, and the sale of enterprise software platforms.

“Markit’s been the main source of information about pricing, in particular for a lot of CDS and a series of indices which are benchmarks for the industry, and that has made them very valuable,” Craig Pirrong, a finance professor at the University of Houston, said during an interview today. “In financial markets, information rules, and the people who can collect and disseminate information are valuable.”

$5 Billion

The company, whose major owners include JPMorgan Chase & Co., Deutsche Bank AG and General Atlantic LLC, was valued at about $5 billion when Temasek Holdings Pte purchased a 10 percent stake in 2013, a person with knowledge of the matters said last year. In today’s filing, Markit didn’t specify the number of shares it will offer or the price range.

The IPO comes as industry revenue from fixed-income trading slumps. The five largest Wall Street banks posted $51 billion of revenue from that business in 2013, down 38 percent from 2009, according to data from Bloomberg Industries. A 12 percent drop in fixed-income trading revenue at those firms in the first three months of this year marks the fourth decline in five quarters.

Antitrust Inquiry

The U.S. Department of Justice and European Commission are investigating Markit for possible antitrust issues related to its business in the credit-default swap market. Over the past two years, the firm spent $12.7 million on legal fees related to the two investigations, as well as class action lawsuits, the filing said. While Markit “considers it remote” that a fine will result from the DOJ probe, it’s possible the EC will ask for monetary damages, the filing said.

Markit, led by Chief Executive Officer Lance Uggla, competes with Bloomberg News parent Bloomberg LP in selling information and communications to the financial industry.

Authorities have been examining whether banks controlling the firm colluded to withhold that information to block the development of exchange trading, a shift that could have crimped their profits from handling client transactions. The 2010 Dodd-Frank Act is opening the swaps market to competition and making it easier for new users to participate.

Markit probably won’t face U.S. sanctions for impeding competition in the credit-derivatives market, two people with direct knowledge of the probe told Bloomberg News last year. The investigation is ongoing, Markit said in the filing today. The EC is still preparing penalties in a parallel probe, the people, who asked not to be identified because the reviews aren’t public, said in October.

Markit Takeovers

The company, which has more than 3,000 institutional customers globally, said that about half of its revenue came from U.S. customers last year. It conducts more than 150,000 independent valuations and prices more than 2 million bonds in the corporate, municipal and securitized markets every day, it said in the filing. That service is part of its information division, which was responsible for 48.5 percent of its revenue last year, its largest money maker, the filing said.

Markit has expanded through acquisitions, most notably the purchase of Data Explorers Group, a provider of securities lending data, in April 2012, and Cadis Software Ltd. two months later, according to its filing.

Markit’s shareholders with at least 5 percent stakes include Bank of America Corp., Deutsche Bank, Goldman Sachs Group Inc., JPMorgan and General Atlantic, which bought a stake in 2010, according to the Securities and Exchange Commission filing today.

Bank of America, Barclays Plc, Citigroup Inc. and Credit Suisse Group AG are managing the offering, the filing shows. Markit hasn’t applied to list on a specific exchange.

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