F-Squared Investments and Virtus Investment Parters have parted ways, so where does that leave the F-Squared sale?

The beleaguered, Wellesley, Massachusetts-based ETF strategist is reportedly being shopped with some help from PL Advisors. Last week MFWire took a stab at estimating possible price tags for F-Squared based on three different comps. Yet things have changed since then, and not in a good way for F-Squared's valuation.

"The impairment on them [F-Squared] is fairly significant," one industry insider tells MFWire. "What exactly am I buying and what should I pay for it?"

When you buy an asset manager, there are a number of things you can get in the deal. Yet F-Squared may not offer all of them, meaning that the price guesses MFWire offered last week (ranging from $83.6 million to a whopping $991.2 million) may need to be discounted, perhaps heavily.

Taking those different deal components in turn, here's what you get:

Brand

Name recognition takes time, money, and effort to build, with advisors and with investors, so buying a brand that people already know is no small thing in asset manager M&A (and M&A in other industries, too).

Yet F-Squared's brand is tarnished thanks to the performance reporting scandal that broke last year. The settlement with the SEC doesn't erase the scandal from the minds of advisors.

AUM

Assets, like brand, take time, money, and effort to build up. Even F-Squared didn't rise to its $28-billion pre-scandal high overnight; that took years.

Yet here, too, what F-Squared offers may need to be discounted. F-Squared has suffered what one fundster calls "positively breathtaking" outflows since the scandal news broke in the fall, with assets under management falling $13 billion (more than 40 percent) in the first seven months. Virtus just switched away from using F-Squared as a subadvisor, and its a safe bet that, at least in the short term, F-Squared's outflows may continue.

Also, as an ETF strategist, F-Squared is a manager-of-managers, so it has to pay management fees on the ETFs it uses within its portfolios. So it doesn't keep as high a percentage of its fees as a proprietary asset manager would.

Distribution

This is no small thing. Without sales and marketing and key account relationships, no one will buy, or hear of, or even have the chance to see, your next fantastic investment product.

Pre-scandal, F-Squared grew to be the biggest ETF strategist in the business. Part of that came through its just-ended relationship with Virtus, and part came directly from advisors and other investors. A buyer would gain access to F-Squared's distribution, though the taint of the performance reporting scandal still hurts here, and F-Squared's relationships with multiple broker-dealers and RIA platforms have already been affected.

People

Doing a deal often means you gain a whole bunch of employees, people who already know the business and may be able to help you grow or integrate it.

F-Squared has already suffered significant layoffs, and given its continued outflows more layoffs may be on the horizon. But a buyer would gain at least some of F-Squared's existing team. Yet it's worth noting that that team no longer includes F-Squared's co-founder, Howard Present.

Secret Sauce

If an asset manager has a technique, black box, or style that you can't figure out or replicate on your own, you may just buy them to get at it.

The algorithm behind F-Squared's flagship AlphaSector strategies was, the SEC says, actually created by an intern at another firm, Newfound Research, in 2007. Yet F-Squared later replaced that algorithm with its own signals.

Liability

F-Squared settled (for $35 million) the civil claims brought by the SEC, not any private individuals or companies. The case against Present is still open. And former ally Virtus faces lawsuits over the scandal, too.

If F-Squared is the target of more litigation, that would mean more legal costs, and possibly more settlements or legal losses, for F-Squared (and F-Squared's buyer, if one steps in). And more litigation would also be a distraction for F-Squared's senior management, unless it ended quickly. 

Edited by: Neil Anderson, Managing Editor


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