Active shops see ETF acquisitions as good way to get into market
Small ETF providers might have little market share, but that hasn't stopped them from being acquired by larger active money management firms looking for a quick way to enter or expand their exchange-traded funds business.
Hartford Funds, Radnor, Pa., announced May 17 its purchase of Lattice Strategies, a San Francisco firm known for its smart-beta ETFs. Just a week earlier, Columbia Threadneedle Investments, Boston, said it would acquire New York-based ETF provider Emerging Global Advisors.
The two announcements by money management firms are the latest in a string of deals that began in late 2014.
At least two more ETF providers will be sold in 2016 to money managers, predicted investment banker Donald Putnam, a managing partner at San Francisco-based Grail Partners LLC. Mr. Putnam said likely buyers will be firms with 20% to 40% of assets under management in mutual funds. “A lot of it has to do with pivoting existing mutual funds into ETF clones, a lot of it has to do with taking asset management styles that are not in mutual funds and putting them in ETF form initially rather than in old-fashioned mutual fund form,” he said.
Mr. Putnam wouldn't say which ETF companies he believes are ripe for acquisition, but Reggie Browne, senior managing director and head of ETF trading at Cantor Fitzgerald LP, New York, said potential acquisition targets include AdvisorShares Investments LLC and WisdomTree Investments Inc., New York.
AdvisorShares, Bethesda, Md., with $1.2 billion in assets under management, is the more typical size of ETF managers being acquired. Publicly traded WisdomTree, on the other hand, is the largest independent ETF company in the U.S., with $42 billion in assets under management.
Jan van Eck, president and CEO of New York-based VanEck Global, an ETF company with $23.7 billion in U.S. ETF assets, said in the past year he has talked to at least 10 managers interested in acquiring an ETF company. “We stay in touch with potential strategic partners and investors, but we don't see a reason for a transaction,” he said. “We think we can grow sufficiently as an independent company.”
Capture a slice
Todd Rosenbluth, a New York-based senior director and director of ETF and mutual fund research at S&P Global Market Intelligence, said as asset flows continue to move from active management and into areas such as ETFs, active managers are trying to position themselves to capture a slice of the growing business.
“More and more money managers are looking at a way to get into the ETF marketplace,” he said. “The fastest way to do that is through an acquisition; buy something already out there.”
Ryan Sullivan, the Boston-based vice president of global ETF services at Brown Brothers Harriman & Co., said money managers looking to enter the ETF business want firms offering smart-beta ETF strategies, which structure investments on factor-based indexes rather than capitalization-weighted indexes to distinguish themselves from purely passive investment strategies.
He said the focus on smart beta is a necessary because the three dominant U.S. ETF providers — BlackRock (BLK) Inc. (BLK)'s iShares, Vanguard Group Inc. and State Street Global Advisors — have locked up the passive index market.
“One segment of the market that is really closed off to new entrances is your traditional cap-weighted space; that side of the passive lineup is controlled by the legacy ETF firms,” Mr. Sullivan said. “They are offering these things (passive strategies) at a price point that makes it hard to compete.”
Mr. Putnam said active managers looking to expand into ETFs have two choices: buy an existing company or build a franchise organically. He cited Franklin Resources Inc. as one manager that built internal capabilities to launch a lineup of ETFs this year. Franklin, however, had organizational capabilities that most managers don't have and has spent several years planning its entry into the market, he said.
Buying easier than a startup
Most money managers find it easier to buy an existing ETF provider, he said. With acquisitions, firms “really save the risk associated with a startup where you don't know what you don't know,” Mr. Putnam said.
ETF companies have Securities and Exchange Commission approval for their strategies, as well as investment and distribution teams already in place. That is attractive for a manager trying to get into the ETF business quickly, he said.
“One of the most avoidable ways to damage a franchise is to build everything yourself,” Mr. Putnam said. “It's managerial arrogance.”
Some ETF providers being acquired by money management firms are quite small. San Francisco-based Lattice Strategies had only $81 million in assets under management in four ETFs when its acquisition was announced on May 17. Hartford Funds Chief Finance Officer Gregory Frost said executives were impressed with the strong investment background of Lattice's senior leadership.
Theodore Lucas, Lattice founder, managing partner and chairman of the investment committee, had been head of U.S. strategy for Barclays Capital from 1994 to 1998. Managing Director Darek Wojnar, was managing director and head of BlackRock (BLK)'s U.S. iShares business. And William Hoyt, managing director of research and portfolio management, previously served as head of quantitative equities for Fidelity Investments' institutional asset management division.
Mr. Frost said the acquisition of Lattice gave Hartford entry into the ETF segment most likely two to three years earlier than if it grew a business organically. Mr. Lucas in an interview said that Hartford gives Lattice better distribution of its ETF strategies, an area the firm was “very light on” before.
The purchase price of the Lattice acquisition was not disclosed, although Mr. Putnam said it would not be based on Lattice's AUM, but rather its future AUM potential.
In December, OppenheimerFunds closed on a deal to acquire VTL Associates LLC, owner of the RevenueShares brand of ETFs with $1.7 billion in assets under management. In April, Sharon French was named head of beta solutions at OppenheimerFunds. Ms. French served as head of private client and institutions for BlackRock's iShares unit and later was senior strategic adviser to the CEO and president of BNY Mellon Investment Management, focusing on ETF and multiasset business growth.
Ms. French said OppenheimerFunds plans to expand ETF operations beyond the RevenueShares team and is exploring whether to build a second ETF team internally or make another acquisition.
Columbia Threadneedle Investments, another new entrant in the ETF business, announced May 11 it was acquiring Emerging Global Advisors, with $891 million in emerging markets ETF strategies. But Colin Moore, Columbia Threadneedle global chief investment officer, said the firm was acquired only after determining that executives could manage ETFs beyond their emerging markets specialty. “We did not want to define the business in such a narrow way,” he said.
The purchase price for Emerging Global Advisors was not disclosed.
Janus Capital Group, Denver, paid $32.7 million up front to buy Darien, Conn.-based VelocityShares LLC in December 2014. The firm had around $2 billion in exchange-traded products at the time and subsequently has launched a line of ETFs.
Velocity's top officials received an additional payment of $10 million in November 2015 for meeting revenue targets and are expected to receive another $17.6 million in the next several years, said Janus' 2015 annual report. n
This article originally appeared in the July 11, 2016 print issue as, "Big managers not above swallowing tiny ETF firms".