The business of being a stock exchange has been a moving target to various degrees. With dark pools and renegade entrants eroding the business “moat,” the once dominate exchanges have been looking to diversify revenue models. Rather than just rely on exchange transaction fees, exchanges have been licensing their technology, selling compliance and risk management services as well as leveraging data sales to boost revenues. Into this landscape walks Nasdaq, which announced Monday that is was acquiring eVestment, a data analytics provider to the asset management industry, for $705 million.

eVestment Hedge Funds
eVestment chart

Exchanges look beyond transaction-based revenue for growth to achieve higher price earnings multiples

The exchange business has evolved to become as much a technology business as it is connecting buyers and sellers of financial instruments. The London Stock Exchange, for instance, earns 34% of its revenues from information services, including market data and index licensing.

Vikas Shah, managing director of investment banking at Rosenblatt Securities, noted that exchanges that rely solely on transaction volumes receive low price earnings multiples.

“In a volatile environment, you don’t get good numbers if you are levered to the volumes in the market,” he told Information Week. The winning strategy is “entering businesses with steady growth and stable earnings, and that comes from technology-based services because you’re charging subscription-based fees,” he says, which includes surveillance, risk management and market data and other areas which produce recurring fees. This fits the eVestment profile, which Nasdaq recognizes.

“The investment management community is relying increasingly on independent data and advanced analytics to drive their key business decisions, including asset allocation and investment choices. eVestment is the definitive source for asset managers of critical fund-level and investment-level data and analytics to enable asset owners to make informed decisions,” Adena Friedman, President and CEO, Nasdaq, said in a statement.

Acquisition motivation: eVestment strong growth combined with complementary product offering plus overlapping customer base

The eVestment data suite provides coverage on both traditional and alternative investments, including over 74,000 investment vehicles. The acquisition is not only expected to integrate from product perspective, but also overlaps with the firm’s existing sales coverage.

“The strategic alignment of eVestment with Nasdaq’s complementary technology and services to the global institutional investment industry, including our surveillance technology, SMARTS, our recent Analytics Hub launch, as well as our long standing operation of the Mutual Fund Quotation Service, will further expand our buy side relationships, accelerate our growth opportunities, and advance our objectives to deliver proprietary analytics to our clients,” Friedman said.

While the product and sales integration was appealing, so to was the consistent growth that traditional stock exchanges pine for as the transaction markets approach a saturation point. In 2014 Tabb Group predicted a plateau in transaction growth for certain stock trading venues.

Likewise, trading volume in 2017 has been noticeably slower. Recent New York Stock Exchange monthly volume slipped to an average of 2.91 billion shares versus a daily average of 3.48 billion year over year.

This is juxtaposed to eVestment, which has experienced a 12% growth rate since 2013 and has more than 2,000 clients, including 92% of the top asset managers, 76% of the top consulting firms and 80% of the top 20 pension funds.

Jim Minnick, Chief Executive Officer and Co-founder of eVestment, eyes growth as a motivator. “We expect to produce new and expanded opportunities for our clients by combining our proprietary capabilities with Nasdaq’s core information services offerings.”

The deal is expected to close in the fourth quarter of 2017. In early afternoon trading, Nasdaq stock was trading at $74.52, down 1.13% on the day.

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