Private equity role seen small in exchanges

NEW YORK (Reuters) - Private equity firms will likely push deeper into the global exchange sector but with limited impact, exchange chiefs said this week, kept at bay by ownership rules, regulations, and complexity in the rapidly consolidating industry.

Speaking at the Reuters Exchanges and Trading Summit in New York, chief executives from the major exchanges said the sector will likely remain one of the few where buyout firms either keep their distance or keep their investments small.

"Private equity folks can get you the capital but they can't get you the business," Philadelphia Stock Exchange CEO Sandy Frucher told Reuters. Frucher said the key to an exchange's success is simply order flow.

Private equity firms are experts at improving cash flow and efficiencies, but certain things, such as order flow, remain largely out of their hands.

"They don't necessarily bring some of the strategic benefits that other entities bring," American Stock Exchange CEO Neal Wolkoff told Reuters. Foreign bourses, however, can diversify exchanges across borders and asset classes in a way that a private equity owner could not do.

"Clearly, equity investment firms have been in the space talking," said Wolkoff, but he questioned whether they would make a good partner.

That does not mean a leveraged buyout of an exchange is impossible, executives said. Private equity buyers are showing that few assets are off limits, as proven by the $25 billion leveraged buyout of student loan company SLM Corp., (SLM.N) also known as Sallie Mae, last month.

Seth Merrin, CEO of alternative trading system Liquidnet, envisions a buyout firm consolidating several smaller exchanges into a single platform, with the aim of selling the combined entity.

"You could potentially see private equity buying the Amex cheaply and then consolidating some of the regional exchanges into a larger options exchange," he said. "They could package it up, make it look pretty, and sell to some global exchange."

Nasdaq Stock Market Inc. (NDAQ.O) CEO Robert Greifeld told the summit: "Private equity has obviously done incredibly well, and I wouldn't be surprised if they played a role in the exchange space going forward." Private equity firms Hellman & Friedman and Silver Lake are shareholders.

For now, private equity investments remain minority holdings.

"Private equity folks are there. They are just in a little different form," NYSE Euronext (NYX.PA) CEO John Thain told Reuters.

Thain added that the high degree of regulation at an exchange may have deterred potential leveraged buyouts.

"They are not trying to buy 100 percent of the entities because most of the exchanges have provisions in them that prevent single buyers from owning 100 percent of the stock."