When Burnaby, B.C.-born Lance Uggla left his job with TD Bank in England to launch a financial data startup, he probably didn’t have the Canada Pension Plan’s investment arm in mind as a future investor.
But that’s exactly what he ended up with.
One day after Mr. Uggla’s company, Markit Ltd., raised US$1.3-billion in its initial public offering, Canada Pension Plan Investment Board said Thursday it invested US$250-million to acquire a 6% stake in the company. There was clearly no shortage of demand for the offering, as shares surged more than 11% in the first day of trading to close at $26.70 on the Nasdaq.
CPPIB’s investment makes it one of Markit’s top shareholders, and gives it the right to nominate a director to the board.
And it all came from Mr. Uggla’s realization that there was a market for clear, transparent data about the credit default swap industry – a market that has grown, now that regulators are demanding more information following the subprime loan crisis of 2008.
“These regulatory changes have required a couple of very key changes to the marketplace, especially for derivatives, that have been a boon to Markit’s growth,” Mr. Uggla said. “That’s been a growth area for the firm and will continue to be as those requirements move to other asset classes.”
The credit derivative industry, in which lenders who are concerned customers won’t be able to repay their loans can transfer the risk to someone else, came under the microscope after the financial crash. In Europe and North America, derivatives now have to be centrally cleared and trades have to be reported to a regulator.
That creates a cost for financial institutions and an opportunity for Markit to provide a solution. Today, the company has expanded to 20 offices worldwide providing a range of data and services.
Mr. Uggla said a difference between Markit and its competitors is that his company produces its own data, whereas companies like Reuters and Bloomberg focus on distributing it. In fact, Markit provides some data to Reuters and Bloomberg for distribution, he said.
“We do compete, but in all financial information and services, there are many participants doing some things the same and some things quite differently,” Mr. Uggla said. “If you are a market participant that respects its competitors, there are also opportunities to be partners.”
Mr. Uggla said Daniel McCarthy, a banker with Credit Suisse Canada, introduced Markit to CPPIB. Credit Suisse was one of the underwriters of the IPO.
Sources familiar with the matter said early in 2013, Mr. McCarthy approached Scott Lawrence, CPPIB’s vice-president of relationship investments, reasoning Markit would be a good fit with the pension fund’s strategy of long-term investment in growing companies. But Markit didn’t go public right away, raising capital by selling a large stake to the Singapore investment firm Tamasek that spring instead.
Mr. McCarthy continued to encourage Markit and CPPIB to get to know each other, eventually arranging a dinner meeting in London in January. The meetings and research continued for months, the source said.
In a regulatory filing in early June, CPPIB indicated an interest to purchase up to $450-million of shares.
Mr. Lawrence said $450-million was an upper limit. “The demand for the stock was so high, it made sense to give additional stock to some of the other interested investors to generate more liquidity in the stock and facilitate trading,” he said.
The Markit deal is characteristic of a more aggressive investment approach CPPIB has been taking, which comes with higher potential rewards but also higher risk. Mr. Lawrence said he’s confident Markit was a good buy – and that having a hand-picked director on the board will help ensure the company is making good use of Canadians’ future retirement funds.
“We think it’s appropriate when you have a large enough stake to have governance go alongside it,” Mr. Lawrence said. “I think it speaks to our conviction in the future prospects of Markit and our belief that the company has a fantastic growth opportunity far into the future.”
Mr. Uggla said CPPIB’s investment is a point of pride for Markit.
“Their investment in us is a real testament to our company. They did a substantive amount of due diligence and we’re quite proud that they made the decision to participate in this offering,” Mr. Uggla said. “I think they help our brand and credibility, not just in Canada but around the world, as a well-known, prolific investor.”