Don’t have the necessary approvals from the SEC to launch actively-managed ETFs? Don’t have that long awaited exemptive relief to launch Active ETFs to get your product plans on the road, even though you’ve waited patiently for 1-2 years? Well, then find and someone who has all that, and then buy them. That appears to be the line of thinking that several of the larger fund companies trying to enter the Active ETF landscape have now adopted.
The new year started off with Grail Advisors making a filing that indicated a pending acquisition of the company will be taking place, as a result of which ownership and management of its five existing actively-managed ETFs would transfer to the new owner. Who the suitor is still remains undisclosed. Next came U.S. One, announcing that it has entered into an agreement with Russell, which will be buying out the company and will retain Paul Hrabal, President at U.S. One, as a consultant. As with Grail, ownership and management of U.S. One’s sole actively-managed funds – One Fund (ONEF) – will transfer to Russell.
The Biggest Benefit: Instant Green Light
The biggest gain for Russell and the undisclosed purchaser of Grail Advisors will no doubt be the instantly acquired ability to launch their own actively-managed ETFs. The existing assets of both U.S. One and Grail Advisors are likely too small to be of any significance to the acquirers, though their product pipelines hold some potential. What is more important and valuable is the exemptive relief from the SEC that these firms possess to launch actively-managed ETFs in the US.
We are seeing what happens when regulator’s actions hold off the growth plans of large companies – the enterprising ones find ways to move ahead nonetheless. In this case, Russell had first applied for exemptive relief with the SEC to launch Active ETFs back in August 2009. It was an application that requested for a broad-ranging relief that would allow the funds to invest in equities or fixed-income, in both US and non-US markets. As with many other fund companies who have lined up to launch Active ETFs – such as Eaton Vance (EV), Legg Mason (LM), T. Rowe Price (TROW) – Russell has not received approval close to 1.5 years later. There is little doubt that such regulatory delays wreak havoc with the product development plans of these large firms and may often turn them off the market all together because of the regulatory uncertainty.
Now, with ownership of ETF issuers that already have the necessary reliefs from the SEC to launch Active ETFs, these companies will be able to skip ahead of many potential competitors in the Active ETF space who continue to wait in line for the SEC’s green light. Russell already has $34 billion in assets within mutual funds and managed accounts and ETFs would be a natural extension to their product line-up. Speaking to InvestmentNews, Jim Polisson, Managing Director of Russell’s global ETF business, said that:
By acquiring U.S. One, we can more immediately leverage our proprietary research to extend the options to investors and include ETFs in our suite of products that we deliver to the marketplace.
1.5 years is a long time to wait just for an approval, especially in an area as competitive as the ETF industry, so Russell’s move makes a lot of sense. While Grail Advisor’s acquirer is yet to be disclosed, with Bill Thomas, CEO of Grail Advisors, only saying to InvestmentNews that the company is a “well known firm in the money management space that is just as excited about the active ETF space as we are,” it is quite likely that firm has also been considering how to enter the Active ETF space for a while.
More Acquisitions Coming Up?
The smart move that the acquirers made in each of the two cases was to snap up the relatively smaller Active ETF issuers that have obtained exemptive relief from the SEC. After all, an exemptive relief provided to a start-up is just as effective as one provided to a large fund company. Of course, the specifics of the type of relief granted makes a difference, but ultimately these acquirers likely got a good deal from both Grail Advisors and U.S. One. The terms of either deal have not been disclosed though.
It’s safe to say Grail Advisors was under distress as the filing clearly indicated that if the pending acquisition is not realized, then the company’s five actively-managed ETFs may well have to be liquidated. Grail has been responsible for funding operating expenditures and providing fee waivers on the funds. So while Grail was likely able to demand some value for the exemptive relief it holds, the acquirer likely held some leverage too. In the case of U.S. One, while not distressed, the company was just a start-up managing about $11 million in assets in one ETF. So again, Russell likely got a good deal, especially considering how important the exemptive relief that U.S. One holds would be going forward for Russell to get a head start over competition.
U.S. One and Grail Advisors were two of the three “independent” actively-managed ETF issuers. By independent, I mean, they were not part of a larger fund company or ETF complex such PowerShares, WisdomTree or BlackRock iShares. These ETF companies would not make very good acquisition targets, of course, given their size.
So for other potential fund companies that might have gotten ideas from Russell’s move, the only Active ETF issuer left in that “independent” category is AdvisorShares. AdvisorShares though has done very well over the last year and now has five actively-managed ETFs, with assets exceeding $150 million. They also have a strong pipeline of unique strategies coming through that would be valuable to the company. Ultimately though, AdvisorShares would be the next “cheapest” target in the Active ETF space – and after all, there is a right price for everything.
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