GFI Group

 

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GFI’s success exemplifies Advent International’s dedicated focus in financial services as well as our expertise investing in global companies with high-growth prospects.

Following our 2002 investment, GFI experienced rapid growth in its businesses in the U.S., Europe and Asia, while building on its industry-leading range of products and services in the over-the-counter (OTC) derivatives markets.

Drawing on our operational and sector expertise, Advent worked closely with management to help the company expand its leadership position and execute its transition to the public equity markets.

The power of technology

Innovative technologies have significantly transformed the equity and derivatives markets in recent years. Recognizing early on the power of technology to change the way securities markets function, Advent zeroed in on GFI, an inter-dealer broker of OTC derivatives.

 

“GFI had the characteristics we seek in businesses in the financial services sector: high growth, strong profitability, superior management and a differentiated market position.”

Chris Pike, Managing Director, Advent International 


It soon became apparent that the company, which had a leading position in the still-developing OTC derivatives markets, represented an exceptional opportunity for Advent to leverage its own skills in the technology and financial services sector – not to mention its deep experience in helping portfolio companies grow their businesses internationally. In June 2002 Advent purchased a minority stake in GFI in a growth equity investment.

“GFI had the characteristics we seek in businesses in the financial services sector: high growth, strong profitability, superior management and a differentiated market position,” said Chris Pike, a managing director in Advent’s Boston office who co-led the investment and was one of two Advent partners to sit on the board. “CEO Michael Gooch and his management team at GFI had developed a visionary new business seeking to deliver integrated services along the lifecycle of a trade – from deal conception through price discovery, trade execution and post-trade processing.”

Serial sector investment

The GFI investment followed close on the heels of two other Advent investments in the brokerage segment, Datek Online and Island ECN. In December 2000, Advent participated in the $670 million buyout and subsequent recapitalization of Datek, a leading Internet-based financial services firm, and its Island ECN subsidiary. Two years later, Datek merged with Ameritrade, and Island merged with Instinet.

To this day, Advent’s interest in the brokerage world remains keen. In June 2006, it purchased a majority stake in BondDesk Group, the leading electronic trading system focused on odd-lot fixed-income transactions.

“We try to put our capital to work in areas where technology can bring improved efficiency and transparency.”
Bob Taylor, Managing Partner – North America, Advent International
“We try to put our capital to work in areas where technology can bring improved efficiency and transparency,” said Bob Taylor, the other Advent partner who sat on GFI’s board.

In some portfolio companies, Advent brings in its own operating partners to streamline, operate and grow the business. In others such as GFI, which already had strong management and a clear vision, Advent’s investment philosophy is to stay involved and have consistent communication, but to recognize that the managers will be executing the plan and building the business. “What we bring is a good external perspective,” Pike said.

In the case of GFI, that philosophy was duly rewarded two-and-a-half years after Advent’s initial investment, when the derivatives brokerage went public and valued the company at more than $560 million. As well as becoming one of the top-10-performing U.S. IPOs of 2005,* the flotation was Advent’s 135th portfolio-company IPO.

* Source: Thomson Financial – IPOs of stock in the U.S. in 2005, after-market performance through Dec. 31, 2005.

An opportunity seized

Founded by Gooch in 1987, GFI employed 600-plus people in 2002 – when Advent made its original investment – a headcount that has grown to over 1,700 today. Headquartered in New York, the company also has operations in London, Paris, Hong Kong, Seoul, Tokyo, Singapore, Sydney, Cape Town, Dubai, Tel Aviv, Dublin, Calgary, Englewood (NJ) and Sugar Land (TX). However, it derives the majority of its revenue from operations in New York and London, the two leading global derivatives centers.

GFI specializes in complex, often new and illiquid derivatives markets. It derives the bulk of its revenue from credit derivatives, but it is also quite active in interest-rate swaps, FX options, equity and commodity derivatives. More recently, it has continued to explore fresh opportunities in exotic markets such as property derivatives in London, as well as freight, weather and environmental derivatives.

Advent’s original investment thesis was a fairly simple one, given the complexity of the products involved. GFI was a market leader in certain high-growth derivatives markets, most notably credit derivatives. The company had a marquee client base including top commercial and investment banks, hedge funds, large corporations and insurance companies. It had substantial international growth opportunities and significant operating leverage due to its historical investment in technology and infrastructure. It functioned as an agency brokerage, which did not commit capital to its brokerage activities. And not least, it had a deep understanding of a hybrid business model in which its highly skilled brokers were able to leverage technology, data and analytics to provide greater liquidity services.

The partnership

Advent was helpful to GFI on several fronts in the four years following its initial investment. Most importantly, it developed the trust and confidence of Gooch, who, along with his managers, retained about a 65% ownership position in GFI. In partnership with Gooch, Advent helped recruit a new, world-class CFO and aided that executive in developing an extremely effective finance department and budgeting/accounting processes in advance of the IPO. It also supported Gooch’s decision to name a president for all of GFI’s brokerage operations and to change the way they managed their businesses by focusing on profitability and strategic planning at the brokerage-desk level.

“Advent was a terrific partner to us over the four years we worked together,” said Gooch. “They took the time to truly understand our business, and their expertise in the financial services sector enhanced the strategic support they provided GFI as we continued our rapid expansion.”

And that growth has been spectacular, both for the derivatives market and for GFI. In terms of notional value outstanding, the global credit derivatives market grew more than 100% a year from 2001 to 2005, mushrooming from a notional value of $1 trillion at the end of 2001 to over $17 trillion at the end of 2005. Meanwhile, GFI’s EBITDA grew 60% annually from 2001 to 2005, surging from $25 million at the end of 2000 to $102 million at the end of 2005.

“Advent was a terrific partner to us over the four years we worked together. They took the time to truly understand our business, and their expertise in the financial services sector enhanced the strategic support they provided GFI as we continued our rapid expansion.”
Michael Gooch, CEO, GFI Group
Not that there weren’t bumps along the way. For starters, the energy derivatives market slumped for an extended period after the Enron Corp. meltdown at the end of 2001. Then there was the challenge of adapting to the huge underlying growth in the very market that was – and is – GFI’s bread and butter: credit derivatives. But Gooch and his team, along with Advent, made several shrewd decisions that enabled the firm to weather the difficulties and prosper during this time. “For example, they recognized that the highest return on invested capital could be achieved by acquiring individual brokerage teams rather than buying brokerage businesses,” Pike said.

The partnership led to the successful transition to the public markets, with GFI completing an IPO on Nasdaq (GFIG) in January 2005. The offering, priced at $21 a share, above the initial filing range of $18 to $20, valued the business at over $560 million. By year end, the stock had risen 126% to more than $47, making it the ninth-best-performing stock of 231 U.S. new issues.*

In May 2006, Advent and GFI completed a successful $167 million secondary offering, which not only marked the end of our formal involvement with the company but also illustrated the benefits of investing in high-growth subsectors such as financial technology.

* Source: Thomson Financial – IPOs of stock in the U.S. in 2005, after-market performance through Dec. 31, 2005.

 

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Chris Pike

Managing Partner, Advent International Corporation, Boston
T: +1 617 951 9400

Bob Taylor

Managing Partner – North America, Advent International Corporation, Boston
T: +1 617 951 9400