Kranefuss: We're Ready To Stand Alone

April 09, 2009

The iShares chief executive details plans for operating with new owners and focusing its business solely on ETFs.

Lee Kranefuss, chief executive officer of BGI's iShares business, took time on Thursday to discuss with the future of the industry's dominant product line in the wake of a $4.4 billion deal by CVC Capital Partners to buy the San Francisco-based exchange-traded funds provider. (See related news story here.) How will a stand-alone iShares operate in terms of management structure?

Kranefuss: My role will be as nonexecutive chairman. That way I can focus on the transition aspect sat the executive level. That includes working with employees internally to understand what the transition looks like as well as externally with the buyer, regulators and our large network of customers and advisers. Rory Tobin and Mike Latham are co-heading the business. They will be responsible for the day-to-day business of the company as well as the mechanics of the transaction. What does a change in ownership mean for iShares' product strategies going forward?

Kranefuss: I don't see significant change. This is a business that has been working very well. That is its attraction to anyone wanting to own it. We've been bringing out new products and that's where the future is for iShares as a company. We'll keep working with the same network of people. It's just that now, we'll be all about ETFs. Does CVC plan any major management or personnel changes?

Kranefuss: No, CVC's approach is to focus on companies that are working well with effective leadership teams. Their strategy is to help nurture successful businesses forward. Other types of private equity firms take a number of different approaches. But CVC doesn't see itself as a turnaround firm. The value of the deal-which has been valued at around 12times current EBITDA-seems pretty attractive in this market, doesn't it?

Kranefuss: You'll have to talk to the investment bankers who helped put this deal together, for that type of an assessment. But there's little doubt that the attractiveness of the business in this sort of economic environment reflects strongly on its past success and the opportunity for growth in the future. So I think the agreement's price is an incredible endorsement of the iShares brand. It's a business that last year generated $88 billion in net new assets flowing into its products. And half of that was sourced outside of the U.S. Is operating without BGI's institutional asset management arm going to limit your growth?

Kranefuss: You're looking at two very different markets. We plan on running the iShares business and growing it as we always have. We're at sufficient scale now to operate as a stand-alone business very effectively. After all, we're now the fifth-largest fund manager in the U.S. So the quick answer is no. We have every ability and the resources to operate as an independent company. Will this deal impact the development of active ETFs in anyway by iShares?

Kranefuss: I don't think so. The question with active ETFs is more a matter of mechanics and the regulatory approval process. We'll still be able to continue to work on the active ETF front going forward. But we realize there isn't a shortage of active management ideas. The challenge is whether it can work from an operational standpoint. Every active manager has their own way of generating returns. And you can effectively buy it and package it from any number of different sources.

But several key questions remain: How can you get access to active strategies at an affordable price and in a format that will work well for investors overtime? And even if that can be figured out in a way that's beneficial to investors, issues remain with how active management can be packaged through ante structure. Right now, there are a lot of technical challenges with active management and ETFs that still need to be ironed out. The past 18-month period has been a tough environment, hasn't it?

Kranefuss: Yes, but we saw incredible inflows into iShares last year. Whenever there are market challenges, the features that are attractive inters-portability, transparency and low costs-demonstrate the failure of the implicit promise of active management. It really separates how a manager adds value as compared to the market. So market turmoil tends to shine a spotlight on ETFs. In up markets, they're not as sexy as actively managed funds. But in down markets, index-based ETFs have shown their worth.



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