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April 1, 2014

Anatomy of an ETF Challenger

Warburg Pincus is acquiring asset manager Source with eyes for more growth down the road in the ETF market space.

By Renee Caruthers

In January, Warburg Pincus announced it was acquiring a majority stake in Source, a five-year-old asset manager that has rapidly developed a unique position among Europe's Exchange Traded Product (ETP) providers. The acquisition, expected to close in April, brings together two firms that have similar philosophies of partnering to develop unique expertise in different segments of the market.

Warburg Pincus is acquiring Source from an $11 billion fund, providing not only the financial muscle to further power Source's organic growth, but also giving it access to funds that it could draw from to potentially grow through acquisition. With the additional firepower behind it, Source aims to carve out an even bigger space for itself in the ETF market.

"No one is directly challenging BlackRock for the number one or even the number two spot. We feel that we want to be the guys to challenge them for that," said Michael John Lytle, Source's chief development officer. (BlackRock has a 50 percent share of Europe's ETF market, according to figures from data provider ETFGI.) "We think that our combination of a dynamic approach to the market, rapid growth, a willingness to innovate, take new tacks and be relatively aggressive-we think that can work. The only thing that was missing was more investment behind it."

At this point, at $15 billion in assets under management, Source is admittedly small in comparison with the giants. But Lytle points out that, while it is still early days, the firm's pace of growth has hovered near top-tier levels. In 2012, Source was second behind iShares in raising assets, and in 2013 it was among the top four. "Ultimately it's not just about the inflows for that year. You have to sum all those up and the total assets need to grow very rapidly," Lytle said. "So we need to outgrow everyone else in order to catch up."



The two firms' similar approaches to partnerships may be what brought Warburg Pincus and Source together, and what makes them compatible. In the case of Source, a partnership strategy has resulted in collaborations with Pimco, to be the distributor of Pimco's fixed income ETFs in the European market, and Man Group, the world's largest publicly traded hedge fund firm, to create a performance equity product, to list a couple of its highest-profile arrangements.

In the case of Warburg Pincus, its partnership strategy involves hiring proven sector leaders as executives-in-residence to identify and develop opportunities in different corners of the market. In the ETF space, Warburg Pincus' executive-in-residence is Lee Kranefuss, the original architect and CEO of iShares at Barclays Global Investors, which he built into the largest global ETF platform, managing $600 billion in assets when it was acquired by BlackRock at the end of 2009. Kranefuss will become executive chairman of Source. Source's existing shareholders-BofA Merrill Lynch, Goldman Sachs, J.P. Morgan, Morgan Stanley and Nomura-will continue to hold minority stakes.