BlackRock predicts rapid ETF growth in Europe

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BlackRock, which emphasised its determination to dominate the exchange traded funds (ETF) market with the acquisition last week of Credit Suisse’s ETF arm, says European listed ETF assets will double over the next three years to some $700bn.

Joe Linhares, European head of iShares, BlackRock’s ETF unit, said ETFs only represented a tiny fraction of the assets held by mutual funds in Europe but that share would increase rapidly because growing numbers of retail investors were becoming aware of the benefits of ETFs.

“Interest in ETFs in Europe by retail investors and wealth management firms is just coming alive,” said Mr Linhares.

Investors ploughed $33.2bn of new cash into European ETFs in 2012, an increase of 35 per cent on the previous year. Inflows this year, said Mr Linhares, could reach $50bn, assuming further healing in the eurozone and ongoing improvement in the global economy.

BlackRock’s iShares enjoyed a commanding presence in Europe with assets of $140bn and a 38 per cent share even before the Credit Suisse deal.

Buying Credit Suisse’s ETF business which had $17.6bn of assets at the end of 2012 will increase iShares’ European market share to 42 per cent, a level that might attract the attention of regulators.

Deborah Fuhr, founding partner at ETFGI, a consultancy that analyses ETF trends, pointed out that the deal would mean that three-quarters of “physical” ETF assets in Europe would be controlled by iShares.

Physical ETFs, which invest in the underlying constituents of an index were strongly favoured by investors in 2012, accounting for 88 per cent of inflows last year, while “synthetic” ETFs that use derivatives have declined in popularity following criticisms of these instruments by regulators.

Mr Linhares said iShares would be working with regulators to close the deal before the end of the second quarter.

He added that the deal would also bring iShares an entry into the Swiss ETF market, allowing it to better serve local investors including private banks, wealth managers, pension funds, insurance companies and individual clients.

The Credit Suisse deal is BlackRock’s second acquisition in Switzerland in the last 12 months. It acquired Swiss Re Private Equity Partners for an undisclosed sum in July 2012.

Both transactions followed the appointment of Philipp Hildebrand, former chairman of the Swiss National Bank, as BlackRock vice-chairman.

Terms of the Credit Suisse deal were not disclosed but analysts said it was relatively small, given BlackRock’s total assets of $3.7tn.

Christopher Harris, an analyst at Wells Fargo Securities estimated a transaction value of around $140m, assuming BlackRock paid a comparable multiple (80 basis points of assets) to its acquisition of the iShares franchise from Barclays in 2009.

Jeffrey Hopson, analyst with Stifel Nicolaus, said the deal would be immaterial to BlackRock’s bottom line but it would help iShares expand in Switzerland, a market where it has historically lacked presence, while also boosting assets and ensuring that rivals were not able to strengthen their competitive position.

The deal to buy Credit Suisse’s ETF operations has similarities to BlackRock’s acquisition last year of the Guggenheim ETF business in Canada, another ETF market which is expanding quickly and where iShares already held a leading position.

State Street Global Investors dropped out of the race to buy Credit Suisse’s ETF business last year. Although SSgA is the world’s second-largest ETF manager, it ranks only 14th in the European market with assets of $4.1bn.

A third party was also rumoured to be considering a bid, following reports that Lee Kranefuss, a former head of iShares, had been appointed by Warburg Pincus to lead the global private equity group’s expansion into the ETF market.

Hector McNeil, co-chief executive of Boost, a new player in the European ETF market said that further consolidation was inevitable with banks in particular likely to exit their ETF operations because of the increasing burden of regulation and pressures on their revenues.

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