Source Deal Could Trigger More Consolidation

February 03, 2014

According to the incoming executive chairman of exchange-traded funds issuer Source, Europe’s ETF business has become too concentrated and is in need of change.

“The European ETF industry is at an inflection point because of its structure,” Lee Kranefuss told

“One player has around half of the market and there are no competitors of equivalent scale—the next-largest issuer has around 12 percent market share,” said Kranefuss.

“Variety and competition are good as they provide more choice for investors.”

Earlier this week private equity firm Warburg Pincus announced that it had acquired a majority stake in Source, which manages $15 billion in exchange-traded products. Kranefuss, an ETF industry veteran and formerly global CEO of market leader iShares, had been searching for acquisition opportunities for Warburg Pincus since late 2012.

Source ranks sixth in a table of European ETF providers, with a market share of 3.4 percent. But despite recent growth it ranks firmly in the second tier of ETF issuers, with nearly three-quarters of Europe’s ETF assets managed by only three firms.

iShares grew its market share to over 50 percent last year as a result of cash inflows and its acquisition of Credit Suisse’s ETF business. Second- and third-placed issuers db x-trackers and Lyxor control 12.5 and 11.1 percent of the European ETF market, respectively.

In a telephone interview, Kranefuss suggested that Source may now focus on possible consolidation with firms in Europe whose growth has failed to meet targets, or whose owners have stalled on expansion plans.

“It’s relatively easy to get started but hard to keep going. New issuers can typically source a few billion of assets from internal sources, but there’s a challenge in building a sustainable, long-term platform,” said Kranefuss.

“Now that Credit Suisse has exited the market, we’ll see others more realistically evaluating their chances of success.”

According to a senior executive at another European ETF issuer, who requested anonymity, Source’s open swap platform should make it relatively easy to target another bank-owned ETF firm in a future bolt-on acquisition.

Since its inception Source, which was set up by a consortium of investment banks in 2009, has worked with a variety of counterparties to track indices or replicate market exposures.

“Source’s acquisition could trigger a wave of consolidation amongst the smaller ETF issuers in Europe, who may not be making any money,” said the executive.

“Source is an open swap model and they could easily link up with another bank-owned ETF provider, for example.”

Source may also continue to attract firms that wish to participate in the ETF market without setting up their own capital markets operations, said Deborah Fuhr, founding partner of consultancy ETFGI.

“Source offers an attractive platform, given that many firms are interested in getting involved in ETFs but may not have the desire or the resources to develop a distribution capability of their own,” said Fuhr.

Source has recently collaborated with several third-party asset managers, including PIMCO, Man GLG, Legal and General Investment Management and CSOP, to launch exchange-traded versions of their funds.

The partnership model is also becoming more popular in the US ETF market, where recent link-ups between asset managers and ETF issuers have included those between Blackstone/GSO and MFS with State Street, Western Asset Management with WisdomTree and TCW group with Emerging Global Advisors.

“Source has been quite thoughtful and diligent in deciding who they’ll work with and what products they’ll bring to market. It will be interesting to see whether they take their concept to other markets, or whether they partner with or acquire other firms,” said ETFGI’s Fuhr.



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