As Barclays sells off its iShares business to private equity, the market for exchange traded funds (ETFs) is going from strength to strength.
Investors could be forgiven for thinking that the entire financial services sector is a disaster at the moment, but the fact is that the industry covers a huge range of activities, many of which are doing very nicely.
One area in particular that is going from strength to strength is the provision of exchange traded funds (ETFs), which were originally introduced to the British market in 2000. Last week the London Stock Exchange announced the launch of another seven ETFs, bringing the total available to 200. In addition to these, there are 123 exchange traded commodities (ETCs) -- investment vehicles similar to ETFs, but providing exposure to commodity prices. More than £12bn worth of ETFs have been traded this year to date.
The latest entries
While the first ETFs tracked the main market indices, these latest entrants show just how much the range has expanded, allowing investors to buy into very specific geographical regions, and government bonds:
- iShares MSCI Pacific ex-Japan
- iShares MSCI Europe ex-EMU
- iShares FTSE Developed World ex-UK
- iShares Barclays Government Bond 5-7
- iShares Barclays Government Bond 10-15
- iShares Barclays Euro Treasury Bond
- iShares FTSE Gilts UK 0-5
As you might guess from this list, the dominant player in ETFs is iShares, which is owned by Barclays (LSE: BARC). Other players include ETF Securities, which is also the main provider of ETCs, Lyxor, PowerShares (owned by Invesco), db x-trackers (owned by Deutsche Bank), and SPA.
Big business
And it's a good business to be in; last year, iShares made profit of $440m. For this reason, Barclays had no difficulty finding a buyer for its iShares division when it needed to raise capital. CVC Capital Partners, the private equity group, has agreed to take it off its hands for $4.2bn, a price/earnings multiple of roughly ten.
This is not yet finalised, as Barclays was allowed 45 days to shop around for better offers, subject to a penalty of $175m if it does the deal with someone else. For a growing and relatively low-risk operation, it's not unrealistic to think that it may be able to find a better deal. Barclays' shares are up 25% since the announcement, and have quadrupled in value in recent months, taking some pressure off the board in advance of Thursday's AGM.
An interesting twist for private investors is that, if the CVC deal goes ahead, a likely exit route for CVC would be to float the iShares business on the stock market, when conditions are conducive to that sort of thing. Not that we should necessarily jump all over it when it happens, as it will depend on the asking price, but I can certainly see the potential attraction of this business.
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