Private equity house CVC Partners will pick up a rare commodity if it pulls off a purchase of Barclays' iShares exchange traded fund (ETF) unit, which analysts say has strong growth potential.
A clear leader both in the U.S. and European markets, the unit saw record net inflows of $89 billion last year as conservative ETFs -- which can mimic moves in market indices -- found favor among jittery investors.
Barclays is selling the business to raise capital, (not) because there's anything wrong with it. For CVC or any other buyer, buying iShares is a growth opportunity, said Loren Fox, an analyst at Strategic Insight.
Last week, Barclays (BARC.L: Quote, Profile, Research, Stock Buzz) said it had chosen CVC as preferred bidder for iShares, which has about 220 billion pounds ($322.8 billion) in assets under management, in a deal analysts said was worth about 3 billion pounds ID: nLV453545.
San Francisco-based iShares, part of Barclays Global Investors, has a relatively low profile in the funds sector, in common with the passive nature of its investment products.
Its only brush with notoriety came in 2006 when it dropped a sponsorship deal with the professional cycling team of Floyd Landis after he was accused of doping in the Tour de France, causing the team to disband.
The business -- which now pursues less controversial sponsorships with Cirque du Soleil and a yachting competition -- sells products designed to give investors easier and cheaper access to a broader range of asset classes.
They can be built to mimic performance of equity and bond indices across global markets and are a popular way of accessing commodities investments.
The iShares unit was among the first firms to develop ETFs during the early 1990s, sparking rapid growth.
The ETF market in the U.S. and Europe will top $1 trillion within the next two years, according to New York-based investment management research firm Strategic Insight.
In Europe, iShares' had a market share of 39 percent at the end of 2008, compared to Lyxor's (SOGN.PA: Quote, Profile, Research, Stock Buzz) 28 percent, and 16 percent for Deutsche Bank's (DBKGn.DE: Quote, Profile, Research, Stock Buzz) ETF business, db x-trackers, the consultant said last month.
At the end of February, iShares' had 47.4 percent of the $455 billion U.S. market, followed by State Street (STT.N: Quote, Profile, Research, Stock Buzz), with 28 percent, and Vanguard with 9 percent, it said.
Buyout firms are normally in the business of turning round struggling companies, finding value in divestments and revisiting failing business models, so a sale of iShares to CVC would be unusual because the business is so healthy.
Yet the buyout sector is expected to play a big role as financial groups are forced to offload business units to boost their finances.
Private equity firms Hellman & Friedman and TA Associates were this week reported to be among the interested parties in U.S. insurer AIG's asset management business.
CVC alone closed an 11 billion euro ($14.51 billion) fund at the start of this year, and has about 16 billion euros available including money available from previous funds.
Analysts welcomed a possible deal with iShares.
This is not a situation where a private equity firm has to come in and cut costs and sell off pieces of an underperforming business ... We'd expect any owner to invest in and take advantage of growth opportunities, said Fox.
The iShares unit has the potential to double assets over the next five years, she said.
(Additional reporting by Raji Menon and Steve Slater; Editing by Hans Peters)