CTRM has been Ionized! (and I didn’t realize it)

As many of my fellow readers know, I had a hiatus of just about 2 years from the commodities world (ah the beauty of the fashion industry…No!). Few days ago I took back form my archive a benchmark study we did for a client with regard of Commodity trading systems.

To put it simply, it was a catalog of available CTRMs (Commodity trading Risk Management Systems: practically those pieces of software that are used to capture, evaluate, control and settle commodities transactions, both physical and paper)

My aim was to update the list and strike out the one that were not available, update the functionalities of existing one and turn the thing in an on-line resource for this blog.

Little did I know that a secretive group, led by an Italian guy who would like to be the new Bloomberg (at least according to the Financial times…) had gobbled up a substantial part of the upper echelon of the industry…

I started to (try to) gather information on this company, called the Ion group and effectively there is not much available online.

I learnt that is a group led by an Italian entrepreneur who cut his teeth in the Italian sovereign bond trading that goes by the name of Andrea Pignataro.   The group has grown through a series of leveraged acquisitions by gobbling up a few key players in the securities trading like Dealogic and Fidessa. Both transaction were well above 1 billion GBP and were financed, according to the FT, through debt.

Now, I was never too interested in the debt or securities markets, however this few key facts point out to a clear strategy on the behalf of ION: compete against niche software firms, buy them out via debt financed acquisitions, and enjoy the cashflow afterwards.

And, I have to say, considering that this firm has been around for over 15 years, has acquired more than 20 companies since 2005, and it has managed to stay private, must be quite successful.

Which explains why it went on an acquisition spree in the commodity space, where most firm were in fact boutique firms operating in very specific corner(s) of the market and enjoying fairly decent margins, if not a spectacular growth(especially after the end of the commodity super cycle in the first half of the mast decade).

What I find interesting in this space is what kind of portfolio ION has put together and the potential implications for its clients, current and perspective.

As per the ION website, its product portfolio in the commodity space is the following:

1. Algosys
2. Allegro
3. Aspect
4. Openlink
5. QMASTOR
6. RightAngle
7. Softmar
8. TriplePoint
9. WAM

It spans the very niche players (like algosys and WAM), the purely shipping oriented (softmar) and the “big names” (Allegro, Triplepoint, RightAngle)

And here comes the first question: Why put together such an overlapping portfolio of companies?

My educated guess is that ION was after the solid margins that the likes of Allegro and Openlink were enjoying. However these CTRMs are competing against each other, which means that potentially, in the long run, once they are under the same roof they could, and should be consolidated. Simple financial sense.

However, from what I hear in the market this is not what is happening.  Ion seems to take a very draconian approach to cost-cutting, which means inevitably a cut in employees and in the level of service, which in turn will hurt profitability in the long run. Nothing wrong with that, at the end of the day ION is an investor looking for returns. But for the firms operating in the commodity space, and that are locked in with these products (development of these complicated and integrated software is always a long-term affair) this will not be optimal.    

Even leaving aside the loss of jobs and competneces, the strategy ion is following does not also look very well in terms of investment in innovation. At the end of the day, if you use a product or service as a cash-cow, investment in innovation is not very high on your priority list, usually.

However there is a silver lining to this: Markets do not like vacuum. If the main players are not innovating, someone else will, and will take market share.

Which means that there is an opening for start-up and nimble firms to improve the quality of CTRM and to create “next generation” software that might make integration with other fin-tech iniatives less of a wish, and more of a reality.

As usual for everything there is always a silver lining. And the silver lining I see is two-fold: more space for innovation and…a decommoditisation of commodity software. Whoever has worked with CTRM knows that the one size fits all of the big players was very often a gigantic pain in the ass.

So next generation software is going to be probably more specialized, and less trying to be good at everything. I second that.