Grail Advisors lines up suitor; five ETFs on the line

If firm doesn't find buyer, it may be forced to shut down funds; potential purchaser said to be marquee name

Jan 6, 2011 @ 3:23 pm

By Jessica Toonkel

Grail Advisors LLC is in talks to sell part of or the entire firm and expects to make an announcement in the next two to four weeks.

The San Francisco-based provider of active exchange traded funds is in talks with a “well known firm in the money management space that is just as excited about the active ETF space as we are,” said William M. Thomas, Grail's chief executive. He declined to name the firm, but did say it wasn't a firm that currently does business with Grail.

Grail first disclosed news of a potential sale in a Jan. 5 filing with the Securities and Exchange Commission. In that filing, the firm wrote that it had “entered into a letter of intent concerning a transaction involving its ownership interests in order to enable it to continue its operations, including paying its future obligations under its fee waiver and expense reimbursement agreements.” If the transaction falls through, Grail may have to liquidate its ETFs, the filing states.

But in an interview with InvestmentNews, Mr. Thomas said the firm has no plans to close down its business. “We always look at our product line and if we need to liquidate funds,” he said. “We remain committed to our product set and our planned launches.”

While many fund companies, like T. Rowe Price Group Inc. and Eaton Vance Corp., have filed with the Securities and Exchange Commission to launch actively managed ETFs, it's more likely that a firm talking to Grail is one that hasn't done any work yet or spent money on SEC filings to get into this business, said Scott Burns, an analyst at Morningstar Inc. “It could be a very quick way for a fund company to jumpstart this process because they would instantly get the exemptive relief from the SEC,” he said.

In that respect—despite its small size—Grail is a great acquisition for an asset manager who missed getting into the ETF market early on, said Tom Lydon, a registered investment adviser and president of Global Trends Investments.

It can take months if not years for the SEC to approve exemptive relief for active ETFs. “Grail holds the goose that lays the golden egg and that is exemptive relief for active ETFs,” he said.

And Grail has very extensive exemptive relief, Mr. Thomas said. The firm has received the nod from the SEC to launch both equity and fixed income active ETFs, as well as commodity-based active ETFs, he said. “We have very broad-based exemptive relief,” he said.

But, Grail, which launched its first actively managed ETF in May 2009, has had a tough time gaining assets. In August, Grail closed two of its exchange-traded funds: the Grail RP Financials Ticker:(RFF) and Grail RP Technology Ticker:(RPQ). The funds, which were launched in September 2009, were managed by RiverPark Capital and had $2.5 million in assets each. Grail currently has five funds with a total of $20.8 million in assets. “I don't think this is an indictment of active ETFs by any means, but rather an indictment of small fund boutique shops,” Mr. Burns said.

The potential implications of a Grail acquisition on active ETFs will depend largely on who buys them, said Noah Hamman, chief executive of AdvisorShares Inc., an active ETF provider.

“No one wants to see a firm go out of business or close products so soon,” he said. “But if a big institutional firm picks them up, saying they realize the value of what they are doing, that would be great for the industry.”

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