Backing up the Truck on RMG

RMG Ipo tomorrow was just priced at 17.50 per share. The last IPO to be up was December 18th. There are 7 IPO's tomorrow and all are easy to get due to low demand. I have picked RMG and have put 300k in. Here is why:

RiskMetrics has been in the business of quantifying risk since its inception in 1992 as an internal risk methodology at JPMorgan. In the years since, as global financial institutions have developed increasingly complex and diverse portfolios, RiskMetrics established its position as the premier provider of multi-asset class risk management analytics. Utilizing a broad database of global securities and a comprehensive set of analytical models, the RiskManager platform allows clients to evaluate their portfolio risk through a variety of simulations, sensitivity analyses and stress tests. In 2007, RiskMetrics acquired ISS, an industry leader in proxy voting services and corporate governance research. The company hopes to leverage its existing technological and service platform while introducing a qualitative dimension to its risk analysis offering. The planned offering is 14 million shares at a range of $17 - $19. Credit Suisse, Goldman Sachs, and Banc of America are the joint book runners on the deal.

1. A market leader

Following its combination with ISS, RiskMetrics has a diversified base of 3,500 clients including 70 of the top 100 investment managers, 41 of the top 50 hedge funds, 16 of the 30 OECD central banks and all of the top 10 investment banks, demonstrating the leadership position of its two core brands. Its RiskMetrics business consists mainly of its RiskManager platform, which is considered to be the market’s most comprehensive solution for managing multi-asset class risk. Its ISS business is the largest provider of outsourced proxy research, voting and notification services to institutional shareholders and corporations. The company also offers fundamental research and analytics, social and governance solutions, M&A proxy analysis, compensation modeling tools and forensic accounting research, the latter stemming from its acquisition of CFRA in August 2007.

2. Strong business model

The company generates 93% of revenue from subscription-based contracts with a historical renewal rate of 88-91%, which provides the company with exceptional visibility, and no single client accounts for more than 1% of sales. Profit margins for the business are impressive with gross margins in the 67% range and operating cash flow margins nearing 30%. The model also generates incredibly strong free cash flow, since most contracts are paid up front and required capital expenditures are minimal. Pro forma for the acquisition of ISS, revenues grew 16% in the first nine months of 2007 to $176 million, while operating cash flow or EBITDA increased 23% to $52 million.

3. risk profile

The company faces execution risk in integrating sales forces and information systems after the ISS acquisition. In addition, there has been attrition of key ISS personnel, including the former CEO. Although recent troubles in financial markets may not necessarily mean trouble for the company’s growth prospects, launching the IPO in a sluggish market may be a drag on the stock’s performance. Having said that, I would point out that many of the best IPO investment opportunities present themselves in periods of broader market duress.

4. Outlook

RiskMetrics’ publicly traded peers, which include data solutions providers with strong growth and cash flow characteristics, have held up well despite the broader market downturn. This peer group includes recent IPO MSCI (MXB) which is up over 60% since its November debut. Because RiskMetrics focuses on larger, multi-strategy clients, the company should be insulated from fund closures among smaller managers. Its business should be able to whether any economic downturn due to the strong secular demand for its products, which is benefiting from increasing requirements among shareholders and regulators for portfolio risk transparency. With its strong fundamentals, attractive growth prospects and a valuation that leaves room for upside, we expect RiskMetrics’ to measure up well in the current environment.