Euroclear Looks a Tough Gig for Private Equity

(Bloomberg Opinion) -- A critical piece of Europe’s financial market infrastructure could soon be available to buy. Brussels-based settlement house Euroclear Holding SA is a unique asset with stable revenue and potential to raise its game. Despite that, it’s not easy to see a large number of suitable and eager predators emerging.

Euroclear’s core business is sorting out the last piece of the trading chain, ensuring that securities and cash reach the respective counterparties in transactions. The company is mainly owned by a group of investment banks who are also its users. They want an exit, and Euroclear has been exploring the options. In the meantime, some of the banks have already sold small stakes to London Stock Exchange Group Plc and Intercontinental Exchange Inc.

Critical infrastructure with fragmented ownership and therefore a lack of singular commercial vision can be a great opportunity. Just look at the payments business: private equity firms Advent International Corp and Bain Capital made stellar returns from Nets A/S after buying the Scandinavian payments processor from a group of banks that appeared uninterested in driving it as a business in its own right.

Could Euroclear be the same? It has been presenting a more commercial face to the world by posting results and talking about strategy and growth. But it still looks hampered by its quirky governance.

There are two snags. The first is that the structural growth story for Euroclear isn’t obvious. People are making electronic payments wherever you care to look. Is securities trading expanding at the same clip? The stories coming out of trading desks are about firing not hiring. Regulators are trying to make trading a more expensive business to be in. Euroclear's top line has been growing at about 4 percent annually. What’s more, the organization is effectively a bank so there’s no scope for juicing returns with extra leverage.

While Euroclear still has restructuring potential, that alone may not be enough to lure a buyout firm. What about strategic owners? They would enjoy some synergies. Analysts at Exane BNP Paribas suggest 15 percent of Euroclear’s cost base could be cut in a deal with London Stock Exchange. The risk is that users balk at vertical integration – notwithstanding the London market’s stated commitment to an “open” model – or European regulators recoil at the idea of the company being controlled by an entity based outside the European Union.

Euroclear is probably best seen as a steady-growth utility that belongs in a dedicated infrastructure or sovereign wealth fund. Finding one willing to pay a decent price while assuaging political and regulatory concerns may be more difficult than meets the eye.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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