Commerzbank hires Rothschild to advise on ETF sale
German bank is spinning off its exchange traded funds unit as part of a restructuring
Commerzbank has hired Rothschild to advise on the sale or initial public offering of its exchange traded funds business, EMC, which the German bank is spinning off as part of a restructuring plan that will cut a fifth of its workforce.
Two people with direct knowledge of the matter said that Rothschild had been retained to advise on EMC. One said the initial work suggested an IPO was more likely than a sale, a position supported by market insiders.
Commerzbank declined to comment on its hiring of Rothschild, but pointed to comments made after its results on Thursday when executives said that both a trade sale and IPO were still on the cards. Rothschild declined to comment.
The ETF business directly employs about 330 people, including some 200 in Frankfurt and 130 in London. More staff than that will be part of the standalone ETF business, since it will also include back-office staff. Commerzbank is still working on the figures, which will be part of the approximately 10,000 employees being let go as the bank seeks to cut €1.1bn from its cost base and improve profitability.
On a conference call last week, Stephan Engels, Commerzbank chief financial officer, said that the bank decided to separate out the business because it was too capital intensive under incoming Basel regulations, and because it was so complex.
“We believe that there might be more appropriate owners than a bank for this kind of business,” he said. “We will take the necessary steps this year to separate the business operational and technical and apply for the licences and then, going to market in the medium term.”
Commerzbank’s ETF business had $6.4bn in assets under management at the end of December, according to ETFGI, a London-based consultancy. It ranks as the 11th largest ETF provider in Europe but only has a market share of 1.3 per cent.
“Finding a trade buyer for the business could be a challenge,” said a senior executive at a rival asset manager that did not want to be named. “Who will want to buy it? There are no unique selling points in the product range which comprises mainly of vanilla index trackers. This put Commerzbank at the wrong end of the ETF price war being pursued by the large players in Europe.”
Warburg Pincus’s ETF Source, which is three times the size of Commerzbank’s, has been on the market since October and has so far failed to attract a trader buyer.
Like many other midsized ETF managers, Commerzbank is struggling to compete with BlackRock, the dominant operator in Europe, and the growing presence of Vanguard and State Street.
The German bank registered net withdrawals of $508m from its ETF business in 2016, an unwelcome reversal from the previous year when it attracted positive inflows of $1.4bn.
It is not alone in its difficulties. The ETF operations of Deutsche Asset Management, Lyxor, Amundi, UBS and HSBC all had a disappointing year in 2016 while Source, the London-based provider, was unexpectedly put up for sale last year by Warburg Pincus, the US private equity manager.
Commerzbank also plays an important role as one of the largest ETF market makers in Europe. This distinguishes it from many of the other managers in Europe (who focus on product development and investment strategies built around ETFs). However, winning business in this part of the ETF industry is also very tough as there are a number of highly competitive specialist trading shops/market makers also operating in Europe including Susquehanna, Jane Street, Virtu and Flow Traders.