Warburg Pincus Buys Stake in European ETF Concern01.21.2014
Source, a European exchange-traded fund provider, has sold a majority stake to private equity firm Warburg Pincus, where Lee Kranefuss, former chief executive of iShares, is an executive in residence.
Source said in a statement it had sold a stake to Warburg Pincus with existing shareholders, including Bank of America Merrill Lynch, Goldman Sachs, JP Morgan, Morgan Stanley and Nomura, continuing to own minority stakes.
Kranefuss will join Source as executive chairman to work closely with chief executive Ted Hood.
Michael John (‘MJ’) Lytle, chief development officer and founding partner at Source, told Markets Media: “It is fantastic to have Lee joining Source as executive chairman. The deal with Warburg Pincus also gives us the firepower to expand and emphasise our independence. In five years we have gathered $15bn of assets but this provides the resources to take the business to another level.”
Kranefuss oversaw the launch of iShares in 2000 at Barclays Global Investors and left a decade later when the business was sold to BlackRock after accumulating more than $600bn in assets.
After helping the iShares business transition to BlackRock Kranefuss joined Warburg Pincus in December 2012 to help identify investment opportunities in ETFs, index investing and asset management in Europe, Asia and Latin America. ETF assets have been growing and last year reached a record $2.4 trillion globally according to preliminary findings from consultancy ETFGI’s global ETF and ETP industry insights report.
Kranefuss told Markets Media: “At Warburg Pincus, when we look at Source we see opportunities across the global markets. Most ETFs already have a multinational customer base so a successful ETF provider will optimise their products in each location.”
Whilst at iShares Kranefuss said he learnt that the most important factor for success in ETFs is a long-term commitment and a realisation of the breadth of different applications.
“If you focus on the latest hot dot product you lose assets when if falls out of favour,” he said. “Source has outstanding distribution and very innovative products, which are not based on one hot fund, so I am very excited. I think that in time they will be a successful long-term market leader in the ETF market.”
Lytle said: “We see the need for innovation in many forms. Even when delivering plain vanilla market exposure, we can provide differentiated products. We do not just pick an index and track it.”
For example, this month Source and Hong Kong-based CSOP Asset Management listed the first RQFII ETF on the London Stock Exchange. China’s Renminbi Qualified Foreign Institutional Investor (RQFII) programme allows institutional investors with offshore Renminbi deposits to invest back into the domestic Chinese market. CSOP has been granted a quota specifically for the new ETF which is denominated in renminbi and trades on London Stock Exchange in US dollars and sterling.
“We look for the best partners for new areas into which we want to enter,” said Lytle. “For example, with CSOP, they are experts on China and we have a deep understanding of European distribution.”
Source and Pimco also listed the first actively managed bond ETF for covered bonds this month on Deutsche Börse.
Lytle expects assets to continue to grow in Source’s fixed income products despite the expectation of rising rates.
“We expect continued flows into fixed income ETFs, but probably not traditional government bond products,” he said. “The bond market is not either on-or-off. Finding value requires an awareness of relative value across sub-asset classes. Our clients expect us to provide insightful analysis and outstanding products. Pimco is an invaluable partner helping us to deliver excellent client solutions.”
Lytle also expects continued growth of Source’s short duration fixed income funds and cited the success of its short duration funds in both high-yield and emerging market local currency.
In addition to Pimco and CSOP, Source has partnerships with other asset managers including Man GLG and Legal and General Investment Management.
“Our partnership with Man GLG has given us outstanding equity outperformance products and we have provided incremental distribution resulting in $1bn of assets,” said Lytle.
Lytle said the deal with Warburg Pincus will allow Source to add other partners and hire staff to add to its 50 people in London.
Kranefuss said: “The growth at iShares was tremendous and I am very proud of that but most ETF markets outside the US are very fragmented with one player having about 50% market share and 20 or 30 players underneath. The natural trajectory is to have three or four firms who can operate at that scale and provide innovative products.”
He said there are lots of opportunities within the ETF sector for both organic growth and mergers. “However the ETF market is not like the residential estate market where there are always the assets you want on sale,” Kranefuss added.
Kranefuss told Markets Media that this is the first announced transaction since he joined Pincus. “The firm has a long-term commitment to companies and is growth-oriented so this is the beginning and not the end,” he added.