Privately owned Fintech ICT services players are thriving in spite of market turmoil

With permission from Megabuyte

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As the world’s capital markets go through another period of turmoil and some Fintech vendors are starting to see signs of weakness in the market, there is one group of ICT services companies within the Megabuyte universe which are thriving almost regardless of the condition of the world’s stock markets. This small group of privately owned providers of ICT services, which operate in the investment banking sector, continue to enjoy very strong growth as they develop internationally and grab market share from their larger competitors.

The first company on our list is FDM Group, which provides IT services and flexible outsourcing primarily to the banking sector in Europe and the US. Taken private with capital from Inflexion in early 2010, FDM has thrived under private ownership. Revenues for calendar 2010 increased 58% to £83.7m, EBITDA more than doubled to £11.0m and, importantly, our recent conversations with CEO Rod Flavell suggest that this growth trajectory is continuing.

We then turn to a couple of more traditional IT consulting companies both of which have been growing rapidly in the UK and overseas; Rule Financial and Excelian. Both companies provide implementation services around specialist banking applications such as Murex and Openlink as well as more generic technologies which are relevant to the investment banking sector.

Both Rule Financial and Excelian have been growing very rapidly both in the UK and overseas. Rule has all but doubled its top line through the financial crisis and revenues grew by over 40% to £38.3m in calendar 2010. At the same time, after a flat year in 2009, Excelian’s recently released 2010 accounts show revenues up nearly 90% to £25.2m.

One last point to make on Rule and Excelian is that neither of them has yet had any private equity backing. Although their relatively low margins and limited revenue visibility may be an issue for potential investors, we get the feeling that, with a stronger balance sheet, both companies could grow even faster.

Turning to our next example, Fixnetix is a slightly different animal to the first three companies on our list as it focusses on the network side of the ICT equation. Fixnetix provides low latency information and trading services to financial institutions, to enable them to exploit time advantages in terms of the receipt of market information and execution of trades. The company’s financial performance has been nothing short of stellar with revenues growing from just £1.0m in 2008 to £25.4m in the year to March 2011; and our recent conversations with management suggest that this trajectory is likely to continue.

Last but definitely not least, although it is a software vendor and not ICT services player, a company that we couldn’t help but mention in this context is ITRS Group. ITRS provides software that monitors the performance of applications and networks within investment banks; especially in high performance environments such as trading floors. Although revenue growth last year was a little less dramatic than the other companies on our list, with revenues of £16.4m and EBITDA of £5.8m ITRS has carved out an envious position in the London market from which it aims to build a more substantial international presence. And this attractive position has not been lost on the private equity community culminating in an MBO backed by Carlyle Group announced last week.

So why are these companies performing so well against such a difficult backdrop? We see three main reasons. First, as a generic point, because London is a global financial centre, unlike many UK based technology companies, UK based Fintech players have the ability to reach critical mass in the home market without the cost and risk of developing overseas markets. Second, all of the companies on our list have developed a clear advantage over the larger competitors either by virtue of their sector specialisation or because of their business model. Thirdly, all have focussed on international development although, significantly, they are all are still relatively early in this phase which bodes well for the future.So, whilst it is probably safe to assume that at least some of our group of outperformers will see some slowing of demand this year as investment banks enter another cautious phase, the medium to long term story for all of these companies looks rosy. At a time when many parts of the UK technology sector are shrinking either organically or by takeover, it is encouraging to see these thriving companies building strong businesses based in the UK and growing internationally.