PE Aurora Capital - Possible aquisition of Nordstock Exchange Group

A good answer, at generalist level, might say:

1. Business mix: NEG is more reliant on cash trading and less on data and derivatives.

- NEG gets 45% of revenue from cash equities trading, compared to 30–35% for peers.

- NEG’s market data & analytics share is only 20%, whereas peers are at 30–40%.

- NEG’s derivatives share is also lower (10%) than EuroNorth (20%).

- Interpretation: NEG depends more on volume-based trading (which can be volatile) and is underweight in more stable, higher-margin data/analytics and derivatives.

2. Growth: NEG has grown more slowly than peers.

- NEG’s 3-year revenue CAGR is 3%, below peers at 5–7%.

- This suggests NEG is not capturing growth opportunities to the same extent as competitors.

3. Trading volumes: NEG’s equity trading volumes have grown more slowly.

- NEG’s average daily equity trading volumes are up +5% vs. 3 years ago.

- Peers are at +12–18%.

- This suggests NEG may be losing market share in trading activity or is less attractive to traders.

4. Profitability: NEG has lower margins and EBITDA than peers of similar or even smaller size.

- NEG: revenue €800m, EBITDA margin 35%, EBITDA €280m.

- BalticEx and EuroNorth have margins of 41–44%, and higher EBITDA. Even MedEx, with lower revenue, has higher margin (42%) and EBITDA (€294m).

- Interpretation: NEG appears less efficient or more costly to run (e.g., outdated IT, higher staffing) and may have weaker pricing.

5. Implications for improvement focus

- Grow higher-margin areas: data & analytics, derivatives products.

- Boost volumes and attractiveness for trading (e.g., better technology, liquidity incentives).

- Improve efficiency and margin through technology upgrades and cost optimisation.

A strong candidate turns the observations into a simple thesis: NEG is in an attractive business but underperforming peers, suggesting clear levers for improvement.

A good answer can separate levers and risks.

1. Revenue Growth Levers

- Expand derivatives offering: Launch new futures/options on indices, sectors, and ESG themes to attract more trading activity.

- Grow data & analytics: Create more detailed and specialised data products (e.g., real-time depth-of-book, analytics dashboards), improve packaging and pricing, and sell more to banks, asset managers, and fintechs.

- Increase listings and trading volumes:

- Attract more companies (e.g., tech, green energy) to list on NEG via targeted outreach.

- Incentivise liquidity providers to improve spreads and depth, making the exchange more attractive to traders.

2. Margin & Efficiency Levers

- Modernise technology: Upgrade or replace the trading and clearing systems to reduce outages, improve speed, and lower IT running costs.

- Streamline operations: Review processes and organisation to remove duplicated work, automate manual tasks, and optimise headcount.

- Tighten procurement and vendor management: Re-negotiate contracts with external vendors (data centres, telecoms, software providers).

3. Key Risks

- Market risk: If capital markets weaken, trading volumes and IPOs may decline, making it harder to grow revenue.

- Regulatory risk: New rules could restrict fees or increase required investments in security and compliance.

- Execution risk on technology: IT upgrades could be delayed, over budget, or cause service disruptions.

- Organisational and cultural risk: Staff and management may resist changes, slowing down implementation.

4. Mitigations (high level)

- Diversify revenues towards more stable, subscription-like products (data and analytics).

- Engage early and proactively with regulators.

- Phase large technology projects, with clear milestones and risk management.

- Assess and strengthen the management team; align incentives with performance targets.

This is all understandable with basic business intuition; no specialised PE terminology is needed.

1. Objective

“Our objective was to assess whether NEG is an attractive exchange operator for Aurora to acquire and improve.”

2. Recommendation

“I would recommend moving forward, but only if we can confirm the improvement potential in due diligence and avoid overpaying.”

3. Key arguments in favour

- Attractive industry with underperformance vs. peers. Exchanges are generally attractive, infrastructure-like businesses. Exhibit 1 shows NEG is weaker than its peers in growth and margin, but that also means there is clear room to catch up.

- Clear revenue and margin levers. NEG is underweight in higher-margin data and derivatives and more reliant on cash trading. There are concrete levers to grow these areas and to improve efficiency through technology and operational changes.

- Meaningful profit upside. A simple scenario with revenue rising to €900m and margin to 40% increases EBITDA by about €80m (almost 30%), which suggests that a realistic improvement plan could materially raise the company’s earnings.

4. Main risks and next steps

- Risks: market downturn, regulatory changes, and execution risk around IT and organisational changes.

- Next steps:

- Conduct focused commercial due diligence on data and derivatives growth potential.

- Carry out operational and technology due diligence to validate the cost savings and margin improvements.

- Assess the management team and design a clear implementation roadmap.

- Use these findings to determine a maximum purchase price that leaves enough upside from the expected profit improvement.