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Thursday, October 31, 2019

Will Joe Sullivan Double Down On This IP Bet?

Reported by Neil Anderson, Managing Editor

Joe Sullivan has until early next year to double down on an intellectual property bet, even as the first products powered by that IP are just over the horizon.

Joseph A. Sullivan
Legg Mason Global Asset Management
Chairman & CEO
Sullivan, chairman and CEO of Legg Mason [profile], expects the first ETFs built with Precidian's ActiveShares structure will hit the market "in probably the early part of 2020." Sullivan shared that tidbit last night on Baltimore-based Legg's fiscal Q2 2020 earnings call (as transcribed by Seeking Alpha) in response to a question from Gabelli analyst Mac Sykes.

The launch of the first ActiveShares ETFs will come about four years after Sullivan unveiled a deal for Legg to effectively buy a 19.9-percent stake in Bedminster, New Jersey-based Precidian. That 2016 deal kept Precidian "predominantly owned by the founding principals" while Battery Ventures kept a stake, too, Precidian founding principal Stuart Thomas said at the time. Yet the deal also gave Legg the option buy a majority stake further down the line.

Now, it's almost time for Sullivan and his team to make decision about that option. Sullivan explained the timeline on the call yesterday, responding to a question from Deutsche Bank analyst Brian Bedell.

"We need to notify them that we are going to be exercising that increase by mid-January," Sullivan said. "And then there's a nine-month due diligence period that follows before we actually formally exercise it or have to formally exercise it."

The SEC blessed Precidian's ActiveShares ETF structure (Sullivan calls it a "semi-transparent active ETF structure," also known in the industry as a "non-transparent active ETF structure") back in April.

"This structure is an evolution in ETFs and a potential revolution in active management," Sullivan said on the call yesterday. "12 firms have licensed the technology through Precidian, 30 more are in various stages of contract execution."

Those 12 firms, Sullivan clarified later on the call, account for "something over 25 percent or so of the U.S. equity mutual fund assets in the marketplace." He also gave insight into the steps remaining for bringing the first ActiveShares ETFs to market.

As for Legg overall, yesterday afternoon before the call the Legg team revealed fiscal Q2 2020 GAAP EPS of $0.74 and revenue of $743.264 million, missing analysts' earnings expectations by $0.08 but beating revenue expectations by $22.47 million. (Legg's fiscal Q2 2020 ended on September 30, 2019.) Legg's AUM rose 0.21 percent in the quarter to $781.8 billion on September 30, despite net outflows of $3.7 billion. 

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