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Monday, May 4, 2015

How Much Is F-Squared Worth?

News summary by MFWire's editors

F-Squared is reportedly on the block, and there's no public word on pricing. Investment bankers use pricing multiples from comps (comparable deals) to help gauge how much a business is worth, and three different comparable deals ("comps") give three different pictures of just how much someone might pay for the Wellesley, Massachusetts-based ETF strategist in the wake of its performance reporting scandal and subsequent SEC settlement last year.

As an ETF strategist, F-Squared is a kind of manager-of-managers: it invests the underlying assets on the portfolios it manages (and the Virtus mutual funds it subadvises) not directly into stocks or bonds but into ETFs managed by other asset managers. F-Squared is privately held, so its earnings figures aren't widely available, so we'll use its assets under management, $15.2 billion as of March 31, 2015, as a proxy, since asset managers' fees are asset-based, and thus their profits are AUM-driven. And for a perspective on what F-Squared might be again if it recovers from the scandal, we can use its $28-billion AUM level from when the scandal broke last year.

Comp 1: Russell

The LSE is trying to sell the manager-of-managers side of Russell Investments, which caters largely to institutional clients but also offers mutual funds to gain better 401(k) channel access.

Russell has $273 billion in AUM, and reports offer pricing estimates ranging from $800 million all the way up to $1.5 billion. That translates into a multiple of up to 0.55 percent of AUM.

Using that Russell multiple on F-Squared's post-scandal AUM brings us to a pricing estimate of $83.6 million. With the pre-scandal AUM figure, that rises to $154 million.

Comp 2: American Beacon

Last week a pair of private equity firms closed on their purchase of American Beacon, another manager-of-managers focused on the institutional space but with its own mutual funds, too.

As of March 31, American Beacon had $62.9 billion in AUM. No pricing data is publicly available, but reports in the fall put the price of the deal at $600 million or more. That translates into a multiple of 0.954 percent of AUM.

If you apply that American Beacon multiple to F-Squared's most recent AUM figures, you get a price estimate of $145 million. With the higher AUM figure from the fall, that price estimate rises to $267.12 million.

Comp 3: Windhaven

Like F-Squared, Windhaven is an ETF strategist, so the pricing match here may be closer. Yet the deal closed four and a half years ago, which makes the pricing more dated.

Brokerage giant (and mutual fund shop) Charles Schwab shelled out $150 million for Windhaven, which had $4.24 billion in AUM about a month before the deal closed in November 2010. That translates into a much higher multiple than the two deals above: 3.54 percent of AUM.

This comp would put F-Squared's price now at $538.08 million (with the 3/31/2015 AUM figure) or $991.2 million (with the 9/2014 AUM figure).

Do the Comps Apply?

The elephant in the room with F-Squared, though, is what are you buying? F-Squared subadvises several formerly high-flying mutual funds for Virtus, so buying F-Squared may give you access to Virtus' distribution ... if an F-Squared sale doesn't automatically trigger some kind of "get-out-of-the-subadvisory-deal" option for Virtus. (And Virtus faces lawsuits over the F-Squared scandal.) You buy a brand, tarnished by a performance-reporting scandal, though with the threat of the SEC ended thanks to a whopping $35-million settlement. And you're buying a firm still suffering outflows that recently had to cut up to 25 percent of its 161-person workforce; you can reasonably worry that that $15.2 billion AUM figure will probably continue to fall, at least in the short term.

So maybe all of the above F-Squared pricing estimates would have to be discounted, as those comps above did not involve firms trying to rise after scandals.  

Edited by: Neil Anderson, Managing Editor

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