IPO Report: Virtu Financial (VIRT)

Francis Gaskins |

Virtu_Financial.jpg

Virtu Financial (VIRT) is a leading technology-enabled market maker and liquidity provider to the global financial markets. It is based in New York, NY.

Six other companies are scheduled for the week of April 13. The full IPO calendar is available at IPO Premium.

VIRT scheduled a $298 million IPO with a market capitalization of $2.5 billion at a price range midpoint of $18 for Thursday, April 16, 2015.Manager, Joint-managers: Goldman Sachs, J.P. Morgan, Sandler O'Neill + Partners, L.P on Nasdaq. SEC filings

Co-managers: BMO Capital Markets, Citigroup, Credit Suisse, Evercore ISI, UBS Investment Bank, Academy Securities, CIBC, Mizuho Securities, Rosenblatt Securities

Virtu Financial Valuation

Glossary

Accumulated deficit (mm)

.

.

-$9

     

Per share dilution

.

.

-$20.93

     
             

Valuation Ratios

Mrkt Cap (mm)

Price /Sls

Price /Erngs

Price /BkVlue

Price /TanBV

% offered in IPO

Virtu Financial (VIRT)

$2,457

3.4

15.5

7.8

-8.9

12%

Ratios annualizing March qtr estimates

     

Virtu Financial (VIRT)

$2,457

3.0

7.3

     
             

COMPARE. Dec 31 results

       

Virtu Financial (VIRT)

$2,457

3.4

15.5

7.8

-8.9

 

KCG Holdngs (KCG)*

$1,320

1.0

21.6

0.9

1.0

 

*created last year in the merger of Knight and Getco LLC,

   
             

Virtu Financial Conclusion

Positive based on March qtr estimates

A leading technology-enabled market maker and liquidity provider to the global financial markets.

IPO is for class A stock, expects to pay on class A stock 5.3% annual yield

P/E based on 2014: 15.5, Compare with KCG, see 'valuation' below
P/E based on annualizing March qtr estimates:  7.3

March '15 qtr expectations vs March '14
Rev +21-30%; Net inc +44-55%; ebitda +40-48%

'14 rev +9%, Low income tax rate of 2.5%

Price-to-book of 7.8; per share dilution of -$20.93 vs IPO mid-range of $18

Note:  VIRT was postponed last year after the release of Michael Lewis' book "Flash Boys: A Wall Street Revolt", which questioned whether markets were rigged in favor of high-frequency traders

Virtu Financial Business

VIRT is a leading technology-enabled market maker and liquidity provider to the global financial markets.

Virtu Financial Market neutral

VIRT refers to its market making activities as being "market neutral," which means that VIRT is not dependent on the direction of any particular market and VIRT does not speculate.

Market making activities are designed to minimize capital at risk at any given time by limiting the notional size of positions. Strategies are also designed to lock in returns through precise hedging in the primary instrument or in one or more economically equivalent instruments, as VIRT seeks to eliminate the price risk in any positions held.

Virtu Financial Revenue

VIRT's revenue generation is driven primarily by transaction volume across a broad range of securities and other financial instruments, asset classes and geographies.

VIRT avoids the risk of long or short positions in favor of earning small bid/ask spreads on large trading volumes across thousands of securities and financial instruments.

VIRT alsos generate revenue from interest and dividends on securities that it holds from time to time in connection with market making activities and, beginning in 2013, from the sale of licensed technology and related services.

Revenues are also impacted by levels of volatility in a given period. Increases in market volatility can cause bid/ask spreads to widen as market participants are willing to incur greater costs to transact, which VIRT benefits from.

Virtu Financial Broad Range of Securities

VIRT stands ready, at any time, to buy or sell a broad range of securities and other financial instruments, and VIRT generates revenue by buying and selling securities and other financial instruments and earning small bid/ask spreads across a large volume of transactions.

VIRT makes markets by providing quotations to buyers and sellers in more than 11,000 securities and other financial instruments on more than 225 unique exchanges, markets and liquidity pools in 34 countries around the world.

VIRT believes that its broad diversification, in combination with VIRT’s proprietary technology platform and low-cost structure, enables VIRT to facilitate risk transfer between global capital markets participants by supplying liquidity and competitive pricing while at the same time earning attractive margins and returns.

Virtu Financial Increases Liquidity

VIRT believes that market makers such as VIRT serve an important role in maintaining and improving the overall health and efficiency of the global capital markets by continuously posting bids and offers for financial instruments and thereby providing to market participants an efficient means to transfer risk.

All market participants benefit from the increased liquidity, lower overall trading costs and enhanced execution certainty that VIRT provides.

While in most cases VIRT does not have customers in a traditional sense, VIRT makes markets for global banks, brokers and other intermediaries, in addition to retail and institutional investors, including corporations, individuals, hedge funds, mutual funds, pension funds and other investors, all of whom can access VIRT’s liquidity on exchanges or venues in order to transfer risk in multiple securities and asset classes for their own accounts and/or on behalf of their customers.

Virtu Financial Intellectual Property

None

Virtu Financial Competition

A range of market participants may compete with VIRT for revenues generated by market making activities across one or more asset classes and geographies, including large broker-dealers, such as Bank of America Merrill Lynch, Citigroup, Goldman Sachs, Morgan Stanley and UBS, and other participants, such as Citadel, DRW Holdings, Hudson River Trading, IMC, KCG Holdings, Optiver, Susquehanna, Timber Hill and Wolverine Trading.

Some of VIRT’s competitors in market making are larger than VIRT is and has more captive order flow in certain assets.

VIRT believes that the high cost of developing a competitive technological framework is a significant barrier to entry by new market participants.

5% Shareholders Pre-IPO

TJMT Holdings LLC       59.1%

Silver Lake Equityholders          10.7%

Temasek Post-IPO Stockholder             9.2%

Virtu Employee Holdco LLC       12.2%

Vincent Viola     71.3%             

Virtu Financial Dividends

Subject to the sole discretion of its board of directors, VIRT intends to pay dividends that will annually equal, in the aggregate, between 70% and 100% of its net income.

VIRT expects that its first dividend will be paid in the third quarter of 2015 (in respect of the second quarter of 2015) and will be $0.24 per share of its Class A common stock.

Virtu Financial Use of Proceeds

VIRT expects to receive $277 million from its IPO and use it for the following (primarily to buy stock from shareholders).

VIRT estimates that the offering expenses (other than the underwriting discount) will be approximately $10.2 million. All of such offering expenses will be paid for or otherwise borne by Virtu Financial.

VIRT intends to use the remaining approximately $253.5 million of the net proceeds from this offering (or $262.8 million if the underwriters exercise their option to purchase additional shares in full) to repurchase 3,470,724 shares of Class A common stock from the Silver Lake Post-IPO Stockholder and 11,672,659 Virtu Financial Units and corresponding shares of Class C common stock from certain of the Virtu Post-IPO Members, including 4,862,609 Virtu Financial Units and corresponding shares of Class C common stock from the Silver Lake Post-IPO Members and 6,810,050 Virtu Financial Units and corresponding shares of Class C common stock from certain employees (or, if the underwriters exercise their option to purchase additional shares in full, 3,470,724 shares of Class A common stock from the Silver Lake Post-IPO Stockholder and 12,228,215 Virtu Financial Units and corresponding shares of Class C common stock from certain of the Virtu Post-IPO Members, including 4,862,609 Virtu Financial Units and corresponding shares of Class C common stock from the Silver Lake Post-IPO Members and 7,365,606 Virtu Financial Units from certain employees) at a net price equal to the price paid by the underwriters for shares of VIRT’s Class A common stock in this offering.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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