Group Co.
Inside the Virtu BondPoint Sale
Traders Magazine Online News, August 30, 2017
It had long been an open secret that KCG was attempting to offload their corporate bond trading platform, BondPoint. Before the Virtu acquisition, KCG went through a multi-year process of selling off all the “non-core” assets that it had accumulated over the years including a reverse mortgage business, a futures clearing merchant, an options market making group, a large stake in BATS, two NYSE floor trading businesses, and Hotspot, a currency trading venue (whew!). BondPoint was next on the auction block, but discussions were halted when the KCG-Virtu merger was announced in April 2017.
Recently, Virtu, having closed on its acquisition of KCG, re-started the bidding process for BondPoint. Virtu took on a lot of debt to complete the acquisition, which Virtu is looking to pay down as fast as possible (especially with shrinking revenue due to low volatility). Virtu hopes to raise $400 million in the sale.
In this week’s newsletter I walk through the history of BondPoint, the economics of the business, and how BondPoint might be accretive to different acquirers. I spoke with five sources with intimate knowledge of the sale, all of whom asked to remain off the record to speak more freely.
The History of BondPoint
BondPoint (then ValuBond) was started all the way back in 1999 at the peak of the internet bubble. Stock trading had gone online five years earlier with firms like E*TRADE commanding multi-billion dollar valuations. Bonds were next, or so the founders believed. The firm, based as far away from Wall Street as you can get in Atlanta, Georgia, was backed by a number of prominent FinTech venture capitalists. It raised over $25 million before being acquired by Knightin 2006 for $18 million.
Like many of its peers, Knight never integrated any of the many acquisitions it made over the years and operated nearly all of them, including BondPoint, as separate businesses under the larger holding company. This strategy allowed Tom Joyce, Knight’s CEO, to grow revenues quickly, but it resulted in a bloated company with many duplicative front-office and back-office systems.
For many years, BondPoint operated as an afterthought inside of Knight. The firm never generated much revenue, but it took few resources to run. When the financial crisis happened, there was renewed hope that corporate bond trading venues would become more popular as banks reduced trading staff and the industry electronified.
KCG was formed when GETCO bailed out Knight (and effectively its BondPoint subsidiary) in 2013 after Knight lost $440 million in 45 minutes. KCG’s management team promised investors that the acquisition would be successful because they would streamline the company’s bloated infrastructure and finally do the hard work of moving everything onto a single technology platform. Part of the original plan included moving BondPoint off its 15+ year old code base to take advantage of the newer technology that underlies KCG’s dark pool.
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