Private equity firms target ETF portfolio managers

Wed Jun 13, 2012 3:55pm EDT
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By Jessica Toonkel

NEW YORK (Reuters) - Private equity investors have found another way to get into the growing U.S. exchange-traded fund (ETF) market: investing in firms that manage ETF portfolios.

Seven years ago, venture capitalists clamored to invest in start-up ETFs - investment funds that are traded much like stocks. But with over 1,460 ETFs now available in the United States, the landscape is crowded. That has led to a growing interest in ETF model portfolio firms - the companies that manage a portfolio made up solely of ETFs.

The model portfolio invests in a selection of ETFs, rather than individual securities. On the other end, a retail investor gets exposure to a basket of index ETFs. The portfolio manager actively manages that basket and can switch in and out of ETFs.

FTV Capital, Aquiline Capital Partners LLC, Century Capital and Grail Partners are among the private equity firms actively looking to acquire or make investments in such firms.

Model ETF portfolios have become more popular as people turn away from traditional mutual funds in search of less expensive and more transparent options, said Andrew Gogerty, an ETF managed portfolio strategist at Morningstar.

Unlike mutual funds, which often pay brokerage firms to sell their portfolios at-cost to investors, ETF portfolios only charge investors management fees, which means they are cheaper and there are fewer potential conflicts of interest, Gogerty said.

Equity mutual funds saw $2.5 billion in outflows in the first quarter of this year while equity ETFs saw $22.6 billion in new money, according to Lipper.

BlackRock's BLK.N iShares ETF business keeps one of the most comprehensive lists of model ETF portfolios available today. Called the iShares Connect Program, it includes the majority of providers in the United States, with more than 200 strategies run by 104 managers with a total of $46 billion in assets.   Continued...