The purchase last month by Warburg Pincus, the US private equity group, of a majority stake in exchange traded funds provider Source has reignited hopes of a wider shake-up in Europe’s ETF market.
The deal was led by one of the most important players in the development of the ETF industry globally, Lee Kranefuss, executive in residence at Warburg Pincus. Mr Kranefuss was chief executive of iShares from its launch in 2000 until 2010, by which time it had grown into the world’s largest ETF provider with assets of more than $600bn.
“Lee Kranefuss is one of the true ETF pioneers. His views are highly influential,” says one industry observer.
Mr Kranefuss has been planning his return for some time. He first mooted the idea of a company to consolidate “sub-scale” ETF businesses in 2011 before joining forces with Warburg Pincus late in 2012 to lead the $30bn global private equity group’s expansion into the ETF market.
The capital provided by Warburg Pincus, says Mr Kranefuss, would “turbocharge” growth for Source, which he described as “a unique operation with a good suite of products and established distribution capabilities”.
Emphasising that the partnership was intended as a long-term arrangement, Mr Kranefuss says Warburg Pincus wanted Source to become a global player and that further capital was available to fund that ambition if needed.
But he played down the prospects of Warburg Pincus acting as an aggressive consolidator, noting that it was “only occasionally that acquisition opportunities make sense” and that ETF players “tend to follow an organic growth pattern”.
The Warburg Pincus deal follows BlackRock’s acquisition last year of Credit Suisse’s ETF business, which was widely seen as the first step in a broader consolidation process in Europe’s fragmented ETF market. But no further deals materialised even though competitive pressures in Europe intensified in an environment of sluggish growth last year.
Inflows into European listed ETFs (funds and products) fell 40.5 per cent last year to $33.3bn, according to ETFGI, a consultancy. This was a big disappointment, particularly in comparison with the more mature US market where a wide range of providers enjoyed substantial asset gains.
The challenges facing domestic European players have mounted as their larger US rivals BlackRock, State Street Global Advisors and Vanguard have all gained momentum in Europe. One senior ETF market-maker notes that banks in Europe have made considerable investments in their capabilities for trading ETFs but it is unclear if the volume of business being done can justify that spending.
Deutsche Asset and Wealth Management (DeAWM), ETF Securities, ZKB, BNP Paribas (EasyETF), Commerzbank, Swiss & Global all registered net outflows last year, due in part to heavy selling of gold ETFs.
DeAWM insists that underlying momentum for its ETF operations is strongly positive, blaming last year’s performance on a limited number of big redemptions from ETFs linked to the German Dax index by institutional clients taking profits on long held positions.
But others are reticent to discuss the performance of their ETF operations or their long-term plans.
Amundi, the Paris-based asset manager, has indicated it would be willing to consider an acquisition to accelerate growth for its ETF operations but it is the only player to have stated such ambitions publicly.
Mr Kranefuss says he is surprised at the “very muted response” of European providers to competitive threats to their businesses.
“While it is relatively easy to build an initial pool of assets, it can be challenging to build a truly sustainable business when the ETF manager is effectively trapped as part of a larger organisation,” said Mr Kranefuss.
Other private equity players with asset management investments are thought likely to look carefully at Warburg Pincus’ strategy but observers question if they will have the patience required as it remains difficult to create value quickly in an ETF business.
Deborah Fuhr, founding partner at ETFGI, said many European banks were re-examining how they were using their balance sheets and would question if funding underperforming ETF operations was an appropriate use of scarce capital.
“There are a number of European players who might be asking if they should proceed in the ETF business in the long term,” said Ms Fuhr.