LSE is one of the oldest stock exchanges founded in 1801. Whilst stock exchanges were highly profitable monopolies in the past their original core business has now been commoditised with the matching of buyers and sellers not very profitable and not having great prospects. Today, LSE is not really a stock exchange any more. The business has been transformed with the bulk of its business no longer based on shares nor on trading but on other securities and activities.
One of its biggest operations is clearing — taking care of the contracts after trades are done. Its SwapClear division now clears 95 per cent of the global market in over-the-counter interest rate swaps (private interest rate contracts reached by banks). This is less exciting or visible than equity trading but bigger and more profitable; SwapClear often clears $1 trillion of swaps daily.
Over the past 5+ years LSE’s management has transformed the group from a mostly commoditized, cyclically driven business to a highly attractive, structurally growing business with pricing power and high barriers to entry. Through a series of acquisitions the business mix has shifted from being more than 50% exposed to equity capital markets activity towards close to 80% of profits being generated from mission critical market infrastructure and indices. Whilst the cash equities and listings business has been flat for the past 5 years, the market data, connectivity and the clearing business have been growing at double digit rates.
Insync’s focus is to invest in highly profitable businesses with structural growth drivers that are good allocators of capital. In the most recent half yearly results LSE announced a dividend increase of 20% on the prior corresponding period and a 200m pound buyback.