Elkhorn Acquisition Falls Through

April 09, 2018

In a rather stunning development, the acquisition of Elkhorn Investments by Turner Investments (now known as Veracen) fell through at the last minute. The deal was originally announced in August 2017 and was officially pending until March 31.

Elkhorn was founded in 2013 by ETF industry stalwart Ben Fulton after he left his position as head of Invesco PowerShares. In the past five years, Elkhorn had brought to market 16 ETFs, but only four remain.

Now, without a deal, Elkhorn will be left with no ETFs at all. Its investment advisory contracts, which were set to expire on March 31, were not renewed by the funds’ board of trustees. Veracen only acknowledged that the deal would not go through the day the voting was set to take place, but said little else.

According to Fulton, his firm was released from its exclusivity agreement that prevented him from discussing the sale of Elkhorn with any other potential purchaser only the day before. That left him with very little time to try and find an alternate deal.

“All of us had been in conversations with the Veracen team and were given confidence this was all going to work out,” Fulton said.

Just a few days earlier, Veracen had confirmed its intention in writing to go through with the deal the week of the scheduled board vote. As of now, Veracen has yet to provide an explanation as to why the deal was never completed, Fulton says. However, in a statement to MutualFundWire.com, Veracen said that the price for Elkhorn had become “prohibitive.”

Fallout

Elkhorn only has four ETFs currently trading. Innovator Funds, led by PowerShares’ original founders, is taking over two of those funds as the interim advisor: the $201 million Elkhorn Lunt Low Vol/High Beta Tactical ETF (LVHB) and the $20 million Elkhorn S&P High Quality Preferred ETF (EPRF). According to Innovator CEO Bruce Bond, those funds will be rebranded with the Innovator name.

The $2.6 million Elkhorn Commodity Rotation Strategy ETF (DWAC) and the $12.8 million Elkhorn Fundamental Commodity Strategy ETF (RCOM) will both be liquidated. Creations will halt after the close of trading on April 13. Trading will halt Monday, April 16.

According to Fulton, the commodity funds have already moved all of their positions to cash holdings.

“It couldn’t be worse timing,” Fulton said of the closing of the two commodity funds, noting that a resurgence in the long-depressed commodity space is expected to occur due to anticipated increases in interest rates.

“It’s very frustrating that way,” he added.

Innovator’s Opportunity

While the failure of the Elkhorn-Veracen deal is all but a death knell for Fulton’s firm, the situation represents a genuine opportunity for Innovator. The new firm, which currently has just two ETFs trading, will be doubling the size of its offering and growing its assets in one fell swoop, while also adding another dimension to the scope of its coverage.

“One reason we were interested in them is that both of the funds are really additive to the overall offering that Innovator has,” Bond said. “We think it really helps to round out our offering, and gives us fixed-income as well as some tactical equity-type products to complement the IBD products that we have.”

According to Bond, Innovator has also been in conversation with Lunt Capital Management, looking for ways to collaborate in the future. Lunt is behind the index and much of the assets associated with LVHB, and the firm was one of the investors in Elkhorn.

ETF Impact

Both LVHB and EPRF likely suffered due to the drawn-out and ultimately failed acquisition process, Bond says.

“When things are in limbo like that, it makes it difficult to really grow assets, and it’s difficult for the funds to be put on new platforms by firms that know there could be a change coming. It tends to put them a little bit in a no-man’s land,” he noted.

“We hate to see it turn out like it did, but we’re glad that we’re able to continue to support the shareholders in the funds that are going to continue on,” Bond added.

His firm, which was appointed as the interim advisor for the two funds, still must be confirmed as the advisor by a shareholder vote, which will occur in the coming weeks, as will the rebranding of the funds.

Fulton, who still has the Elkhorn brand and its associated exemptive relief, is considering his options regarding partnerships and positions at other firms, and has promised he will not be leaving the ETF industry any time soon.

Contact Heather Bell at [email protected]

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