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April 28, 2017

Comment: The Takeover of Source by Rival Invesco Powershares

by Detlef Glow.

On April 27, 2017, Invesco and Source announced that Invesco Powershares will take over Source for an undisclosed amount of money. The merger itself is not surprising, since the owner of Source—Warburg Pincus—had been looking to sell the company since October 2016. One reason for Warburg Pincus selling off its footprint in the fast-growing exchange-traded fund (ETF) market in Europe might have been a lack of profitability for Source; the company reported a loss of 20 million pounds in its latest annual report (2015). The deal is still pending the approval of the authorities and should be finalized in Q3 2017.

For Invesco Powershares, the ETF arm of Invesco, this takeover makes sense, since the company hasn’t grown as fast as the market in Europe. Even though Invesco Powershares is the fourth largest ETF promoter globally, it is only the sixteenth largest promoter in Europe, holding 2.4 billion euros in assets under management as of March 31, 2017. In contrast, Source—the eighth largest ETF promoter in Europe—holds 12.6 billion euros of assets under management in its own products and another 6.3 billion euros in ETFs managed for PIMCO.

Exhibit 1: Aggregated Assets Under Management in EUR Billion (January 1.2004–March 31 2017)

Merger of Invesco Powershares and Source - Assets under Management

Source: Lipper

The combination of the two companies makes sense not only from an assets-under-management point of view. While Invesco Powershares has a good footprint in the U.S., Source is a well-known ETF promoter in Europe. The combined sales force may accelerate the growth of Invesco Powershares in Europe, since the salespeople may have different client books. After the merger Invesco Powershares will also move from being a promoter that offers ETFs that are mainly based on strategy indices to an ETF promoter that offers a full product range of “plain-vanilla” sector and strategy ETFs. This means the ETFs may become more attractive to large investors looking for a one-stop shop; it will allow them to buy all the products they may need to implement their asset allocation views from a single promoter, easing research efforts at the promoter level and improving the trading of the ETFs.

That said, even the combined product ranges will still have a lot of gaps, especially in the bond segment. Invesco Powershares will need to broaden its product range in order to become a full-range promoter and to profit from the trend toward professional investors using bond ETFs that emerged during 2016 when bond funds were for the first time the best selling product type in the European ETF market.

Even though some market observers may see this merger as the beginning of a trend toward a consolidation of the European ETF industry, for me this takeover is rather a sign of the maturity of the market. The ETF industry is an industry where size matters, so a takeover is one of the ways to gather critical size in the market. In this regard, I am expecting more takeovers over the next few years as promoters of actively managed funds and ETFs look for market entry into Europe. The names of the ETF promoters may change, but I strongly believe the number of ETF promoters in Europe will increase further.

The views expressed are the views of the author, not necessarily those of Refinitiv.

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