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Why exactly has BlackRock bought Credit Suisse's ETF business?

Why exactly has BlackRock bought Credit Suisse's ETF business?

BlackRock’s Joe Linhares, head of iShares EMEA, talks about the strategic importance of buying Credit Suisse’s $17.6 billion exchange traded fund (ETF) arm, as part of its plans to conquer Europe.

Speaking to Wealth Manager, Linhares explained how the deal provides the most efficient way for iShares to enter the Swiss market, in which Credit Suisse has historically had a stronghold.

‘In Switzerland we have had zero market share in the local Swiss ETF market,’ said Linhares. ‘This is an opportunity to enter Switzerland and acquire a product range – this market is important strategically for BlackRock.’

The asset management behemoth, which has blazed the acquisition trail over the last few years, has ambitious expansion plans for the European ETF market, which Linhares says is still at the early stages of growth versus its older US counterpart.

The European ETF market, which is estimated to be around 3% of the whole Ucits funds industry in the region, is also set to benefit from the changing regulatory environment, which is seeing commission phased out in the Netherlands, the UK and potentially other countries in the continent.

‘Another important element to think about,’ said Linhares, ‘is what’s happening in the retail and wealth market across Europe. Demand for these products is rising, while retrocessions are coming down. We think this is a massive opportunity over the next 10 years.’

He added: ‘We see the possibility of doubling our business in the next three years.’

While the acquisition of Credit Suisse, which is arguably of greater strategic importance than of economic or financial benefit, is the latest move for the asset manager, it has many other strategic partnerships on the go, or in the pipeline.

Linhares said iShares worked last year with an Italian Private Bank as part of a move to distribute ETFs and is currently working with multiple entities across Europe to deliver its ETFs to a wider client base, via a range of channels such as funds of ETFs.

Making strategic partnerships and gaining a local presence in the diverse markets constituting Europe is the route to tapping the growth potential in the continent. ‘The amount of retail flow in the US will play out in other parts of the world,’ said Linhares. ‘Europe will be the next to drop.’

Consolidation, staff cuts and Dan Draper

The transaction with Credit Suisse is not expected to complete until the second quarter, but it is possible there will be a level of consolidation on the cards across the fund ranges, as well as potential staff cuts.

There is speculation over Dan Draper’s role, although he is believed to have been on the plane on his way to Zurich and is still part of the process of fleshing out how the merged entities will work, Wealth Manager understands.

Draper, who is global head of ETFs at Credit Suisse, previously worked at iShares before moving over to Lyxor Asset Management in 2007 for three years. It will only become clear as to his role over the coming months as the transaction completes.

Last year, Linhares explained in a comment for Wealth Manager how there is more consolidation down the line, with many of those ‘me-too’ products with a small amount in assets under management closing or being merged.

‘We think consolidation is inevitable and we are proponents of it. We have a fractured industry with more than 40 providers, which means liquidity is fragmented,’ Linhares said at the time. ‘We think consolidation is good for investors over time, because it will lead to greater liquidity and more focus on a handful of fund groups.’

The deal will see iShares control nearly three-quarters of assets in the European physical ETF space. Upon completion, the expanded iShares EMEA ETF range will comprise 264 ETFs with $157.6 billion in assets under management, according to ETFGI.

The consultancy firm headed by Deborah Fuhr said last year that if iShares bought Credit Suisse’s ETF arm, its market share would rise from 64.4% to 73.1%. Such dominance dwarfs other providers in Europe, beating off competition from other physical issuers, particularly new entrant Vanguard and State Street Global Advisors.

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