Money Does Grow On Trees... WisdomTrees

WisdomTree Investments raised $56.4 million in new financing last week, issuing 18.8 million shares of stock to a consortium of investors led by AIG-Investment Group (AIG) and Atlantic-Pacific Capital. Atlantic-Pacific was so enamored with the deal that its CEO, James Manley, personally contributed to the deal, and then tossed in this gem of a quote for the press release.

Having raised more than $28 billion in the last decade for private equity and hedge funds, we have seen many innovative ideas and few have caught our imagination like WisdomTree. This is the largest principal investment Atlantic-Pacific Capital has made to date.

You don’t get much better than that.

Of course, Manley and the other investors turned a handsome … and immediate! … profit on the deal. WisdomTree is a publicly traded stock, with shares trading hands on the Pink Sheets under the ticker WSDT. At the time of the deal, WSDT was trading for about $8/share. The new financing, however, was priced at just $3/share, giving investors an instant 260 percent profit. That’s catch my imagination, too.

Indeed, it’s curious that the stock market didn’t react negatively to the pricing: shares of WSDT have bounced around the $8 mark ever since. Usually, when companies price secondary offerings at a severe discount –WisdomTree’s stock hasn’t traded for $3/share since February 2006 – shareholders react negatively. But everyone’s enamored of WisdomTree, and the stock barely budged.

Regardless of the pricing, however, the fundraising was still a good decision on WisdomTree’s part. For one, it gives the company the operating room to finance its growth, including its impressive roster of executive talent and its push to market to the advisor community. The company currently manages about $1.5 billion in assets. With expense ratios averaging around 40 basis points, that translates into $6 million in annual revenues … not enough to support the business. The new financing gives WisdomTree the chance to grow into its potential.

The $56 million, however, is about more than that. No matter who it hires, WisdomTree can’t get its burn rate anywhere near $56 million. In some ways, $56 million is a statement that says: “We’re in it for the long haul.”

Some investors had expressed concern about WisdomTree’s financial stability. After all, the company does trade on the “Pink Sheets,” and has been investing very heavily in its growth. There was some worry that the firm would fizzle out, and that the funds would be liquidated before they got off the ground. $56 million more-or-less erases that fear.

Compared To PowerShares
The obvious comparison for this deal is the $60 million AMVESCAP paid in January 2006 to acquire PowerShares. That deal had incentive clauses worth up to $670 million additional dollars, based on asset growth at the PowerShares family. Still, considering that PowerShares was a larger company at the time ($3.5 billion in assets), and that it had high-profile partnerships with folks like Rob Arnott, that $60 million up-front purchase is looking like a good deal.

In comparison, even with the enormous discount to public prices, the $56 million acquired just 16 percent of WisdomTree.

Investors have tuned into the explosive growth in the ETF space since the PowerShares deal went through. According to a recent article in Pensions and Investments Online, we can expect to see a number of large-scale ETF VC investments in the near futures. This WisdomTree deal may just be the tip of the iceberg.

WSDT 1-yr chart: