IPO Spotlight: RiskMetrics

BusinessWeek

The Associated Press January 22, 2008, 7:10AM ET

Wall Street has had few bright moments in the New Year as worries about a possible recession continue to mount, but one initial public offering may stand to benefit from the ongoing crisis in investor confidence.

The IPO of RiskMetrics Group Inc., scheduled for next week, "probably couldn't come at a better time," said Scott Sweet, managing director of research firm IPO Boutique.

RiskMetrics provides risk-management and corporate governance services to the global financial markets. Its Web-based RiskManager market-risk system allows customers to measure portfolio risk across security types, geographies and markets.

The company's Institutional Shareholder Services business, which it acquired last January, provides corporations and institutional investors with proxy research, voting and vote reporting service, as well as research reports and analytical tools.

The company is going public after the dramatic collapse of the U.S. subprime mortgage market has spotlighted the importance of risk management and transparency in the financial markets.

RiskMetrics also benefits from broader market trends, including growing global financial markets and investment portfolio complexity, increasing regulatory requirements and a greater focus on corporate governance practices.

The company boasts a significant share of the market for its products. As of Sept. 30, RiskMetrics had about 3,500 clients in 50 countries. Those clients included 70 of the 100 largest investment managers, 34 of the 50 largest mutual-fund companies, 41 of the 50 largest hedge funds and the 10 largest global investment banks. No single client represents more than 1 percent of the company's revenue.

In the nine months ended Sept. 30, RiskMetrics' revenue more than doubled to $172.7 million, from $75.3 million in the first nine months of 2006. At the same time, RiskMetrics' earnings fell to $1.2 million from $12.3 million, as a result of the ISS acquisition.

RiskMetrics said the company's annual subscription model provides it with high visibility for future. In the first nine months of the year, RiskMetrics said recurring revenue accounted for about 93 percent of total revenue, and the renewal rate was 91 percent.

"Their business is fairly transparent, which I like to see," said Francis Gaskins, president of IPODesktop.com.

In addition, RiskMetrics provides its services from a common technology and data infrastructure, which means the company can add clients and services without significantly increasing costs.

"They're in an industry that doesn't require capital expenditures, and you don't want capital expenditures in this debt climate," Gaskins said.

After the IPO, Chief Executive Ethan Berman and the company's major shareholders -- which include General Atlantic LLC, Spectrum Equity Investors IV LP and TCV V LP -- will collectively own a majority of the company's stock.

Before RiskMetrics' spin-off from JPMorgan in 1998, Berman led JPMorgan's risk management services group, which developed RiskManager. In its road show, which was made available online, Berman noted that its management chose not to sell shares in the IPO.The New York-based company expects the IPO to total 14 million shares -- including 4 million shares sold by a group of stockholders -- and price between $17 and $19 each. "I think this will have a solid opening and will price in range," Sweet said.

Based on the expected price range, RiskMetrics would have a market capitalization of $982.6 million to $1.1 billion. The company expects to raise about $164.4 million from its portion of the IPO, which will be used to pay debt and for general corporate purposes.

RiskMetrics noted that the company will continue to have "significant debt service costs" after its IPO, partly from debt used to acquire ISS. Gaskins notes, however, that RiskMetrics' leverage is less problematic, because the company does not have the additional burden of significant capital expenditures.

Credit Suisse, Goldman Sachs and Banc of America Securities LLC are serving as the IPO's lead underwriters. Citi, Merrill Lynch and Morgan Stanley are also underwriting the offering.

David Menlow, president of IPOfinancial.com., said some investors may shy away from any offering related to the struggling financial industry, but noted that he would like the deal to work. "Not that this is the silver bullet, but anything that is going to improve risk management is going to ultimately help market psychology and smaller investors."