Firms that have been successfully developing alternative products are now targets for traditional fund giants, as demonstrated by New York Life Investment Management's December acquisition of liquid alternative exchange-traded fund provider IndexIQ.
But one such firm, Denver-based 361 Capital, isn't seeking merger offers. 361 Capital's president and CEO, Tom Florence, explains in a conversation with Money Management Executive that his firm would rather focus on product development than deal with the potential pitfalls of being swallowed up by a larger corporate entity.
As a boutique firm specializing in alternative products, 361 Capital has already had suitors, correct?
It's a really interesting time in alternatives. Everybody is trying to get into them, from private equity firms that want to invest in firms like 361 Capital, to big investment management firms that want to own a part of or all of alternative firms because they want to create product. You've got all these dynamics happening at once. I've been in this business 29 years and I've never seen anything quite like it. The driver behind it all is that for the first time we're looking at a potential change in the industry. It's always been stocks, bonds and cash. And now we are adding this thing called alternatives.
How do you approach that from a leadership perspective?
As a general business practice, when you have something like this going on, you'd better have a focused strategy and stick to it. Because it would be so easy to one day get really excited about this project over here, and the next day get interested in another. There's so much happening, you could spend a lot of time, energy and money, and then do nothing over two to three years. So the challenge is to find what is going to work for the company, focus on it and stay disciplined.
But the opportunity is there to get a nice payout and become part of a larger firm. Why stay independent?
Well, I think we've got a long way to go. You can innovate quicker as a small boutique firm. We can take advantage of momentum in the space, certainly from a product standpoint. And [at some point] we can decide what the right path is for 361 Capital, whether it is to be owned by somebody, wholly owned, partially owned, or partnered with. But part of the fun right now in what we do is that we've got all this opportunity in the marketplace, and all of this innovation happening and we can take advantage of it. And it would be really frustrating to be in an environment where we couldn't do that.
Would a large firm really acquire a company like yours and gum up the works? They wouldn't allow you to continue to pursue product innovation?
I think a lot of times what happens is that everybody enters the relationship in the transaction with the best of intentions, but there are a lot of potential obstacles to success that challenge that merger. Mergers and acquisitions and strategically understanding how businesses sit together takes a lot of time. I think the real opportunity is over the next two to three years. Right now I've got a platform and an environment where I'm exclusive. I just focus every single day on alternative investments. You can get bogged down in an acquisition by a big company, somebody that wants to have alternatives in their product quiver, but then they completely dilute what we do from a marketing standpoint. If we've just got a three-year runway to take advantage of market growth in alternatives, then I'd rather come in every day and not have to worry about that other stuff.
From a value perspective, you feel your company has the platform to build a better alternative product than many of the large, traditional firms?
They don't have the expertise, number one. We've been around in the alt space since 2001. Two, they have to be very careful because if they have other areas that have been responsible for revenue heretofore, then they don't want to alienate those people if they suddenly bring in alternatives. They run the risk of challenging other parts of the company that make up, frankly, huge parts of their revenue. Not only from an investment management standpoint, but also from a distribution standpoint. You've got your sales organization that has been used to selling traditional products. Now you bring in these alternatives, and a lot of these organizations are saying, 'Our guys aren't sophisticated enough to sell these products, we're going to have to hire people to do that.' That upsets your sales team. So you create these internal challenges.
They have the resources, though. Is that why larger firms are going the acquisition route?
If the research says alternative assets are going to go from $250 billion to $2.3 trillion in the next five years, these companies are thinking that they could start from scratch, but they would be better off if they had product that could plug in today into their distribution network that has a track record and history, and they don't have to convince people that they've been good at long all their lives, and now they're good at long/short.
What's the discussion among your peers? Is there acceptance that consolidation will happen?
Folks that I talk to that maybe are good at one strategy, and they started a mutual fund and they've been running it for a while, and it may be good enough but they don't have the capital or the experience to build out that business, they're going to sell.