Grail Advisors is in talks to sell part or all of the firm and expects to make an announcement in the next two to four weeks.
The provider of active exchange-traded funds is in talks with a “well-known firm in the money management space that is just as excited about the active ETF space as we are,” said William M. Thomas, Grail Advisors’ CEO. He declined to name the firm, but did say it wasn’t a firm that currently does business with Grail.
Grail first disclosed news of a potential sale in a Jan. 5 filing with the SEC. In that filing, the firm wrote that it had “entered into a letter of intent concerning a transaction involving its ownership interests in order to enable it to continue its operations, including paying its future obligations under its fee waiver and expense reimbursement agreements.” If the transaction falls through, Grail may have to liquidate its ETFs, the filing states.
But in an interview, Mr. Thomas said the firm has no plans to close down its business. “We always look at our product line and if we need to liquidate funds,” he said. “We remain committed to our product set and our planned launches.”
While many fund companies, like T. Rowe Price Group and Eaton Vance, have filed with the SEC to launch actively managed ETFs, it’s more likely that a firm talking to Grail is one that hasn’t done any work yet or spent money on SEC filings to get into this business, said Scott Burns, an analyst at Morningstar. “It could be a very quick way for a fund company to jump-start this process because they would instantly get the exemptive relief from the SEC,” he said.
In that respect — despite its small size — Grail is a great acquisition for an asset manager that missed getting into the ETF market early on, said Tom Lydon, a registered investment adviser and president of Global Trends Investments.
It can take months if not years for the SEC to approve exemptive relief for active ETFs. “Grail holds the goose that lays the golden egg and that is exemptive relief for active ETFs,” he said.
And Grail has very extensive exemptive relief, Mr. Thomas said. The firm has received the nod from the SEC to launch both equity and fixed-income active ETFs, as well as commodity-based active ETFs, he said. “We have very broad-based exemptive relief,” he said.
But Grail, which launched its first actively managed ETF in May 2009, has had a tough time gaining assets. In August, Grail closed two of its ETFs: Grail RP Financials and Grail RP Technology. The funds, which were launched in September 2009, were managed by RiverPark Capital and had $2.5 million in assets each. Grail currently has five funds with a total of $20.8 million in assets. “I don’t think this is an indictment of active ETFs by any means, but rather an indictment of small fund boutique shops,” Mr. Burns said.
The potential implications of a Grail acquisition on active ETFs will depend largely on who buys them, said Noah Hamman, CEO of AdvisorShares, an active ETF provider.
“No one wants to see a firm go out of business or close products so soon,” he said. “But if a big institutional firm picks them up, saying they realize the value of what they are doing, that would be great for the industry.”
Jessica Toonkel writes for InvestmentNews, a sister publication of Pensions & Investments.