iShares sale ignites ETF interest

Barclays' sale of iShares to a private equity group earlier this month exemplifies two trends in the financial services industry in the recent crisis.

First, banks selling off non-core divisions such as asset managers to raise capital - even if, like iShares, that business is the world's largest provider of exchange traded funds.

Second, private equity groups circling financial services assets and buying into them on select occasions. Examples include Texas Pacific Group's investment in US bank Washington Mutual, which eventually filed for insolvency, and JC Flowers' stake in German bank Hypo Real Estate.

However, until the iShares transaction, private equity's appetite for fund managers had been muted. New Star Asset Management was sold to Henderson Group after a debt-for-equity swap with its bank. Aberdeen Asset Management bought Credit Suisse Asset Management in exchange for shares.

Private equity interest in iShares has been much more intense, with CVC Capital Partners eventually coming out on top.

It is a measure of how attractive the ETF industry is in the short term that private equity contenders hired experts to help them bid for iShares. For CVC Capital Partners, iShares marks its first pure financial services acquisition in 15 years, according to company records. The group formed a global financial institutions sector team only weeks before the collapse of Lehman Brothers last year.

Rory Tobin, chief executive for Europe at iShares, says he remains neutral about being taken over by a group with such a short track record in financial services.

"Some private equity firms have made investments, but the track record has been a little bit spotty - having a strong track record in financial services investing may not position you any more strongly," he says.

According to Mr Tobin, any risk is mitigated by the fact that few investors have a complete grasp of the ETF industry to start with.

"The ETF business is something of a new business," he says. "There are nuances that are new to many people, and nobody understands it very well."

There is no indication as to whether CVC will try to restructure the business, Mr Tobin notes. He is unable to speculate as to whether CVC will merge iShares with another provider to reduce costs and encourage economies of scale.

For iShares, the acquisition is an opportunity to fund expansion in new areas more quickly than would have been possible with its previous parent, he says.

"In a large organisation, you're constantly competing for resources. We haven't been able to move into Asia or Latin America as quickly as we'd like to."

He adds that he would like to add Spain and Portugal to the six countries iShares sells to in Europe and venture beyond into the Middle East.

But Mr Tobin's plans will depend on whether the deal with CVC changes during the current window when third parties can approach Barclays with a higher offer.

"Is it likely anyone will approach Barclays? It is," he says. "Whether they will put in a bid is another question."

Nick Rice is chief investment reporter at Investment Adviser and FTAdviser.com