F-Squared goes on the block

F-Squared Investments Inc., the ETF strategist that paid $35 million to settle SEC fraud charges last year, is up for sale, two sources said.

PL Advisors was tapped to find a buyer, the people said.

Middle market private equity firms are expected to be interested in F-Squared, a different source said. PE firms have invested in ETF firms before. New York Life Investment Management earlier this month completed its buy of IndexIQ. FTV Capital was a seller. In 2011, Guggenheim Partners acquired Rydex/SGI.

F-Squared, of Wellesley, Massachusetts, is a so-called tactical ETF manager. Such companies advise customers on when to buy and sell ETFs using computer models, Fortune said. F-Squared, the biggest of such managers, was a sub-advisor on several popular mutual funds from Virtus Investment Partners Inc. F-Squared remains the sub-advisor on five Virtus mutual funds, a Virtus spokesman said.

In December, F-Squared agreed to pay $35 million to regulators to settle civil fraud charges for allegedly misleading investors about the performance of an index strategy, the Boston Globe reported. The SEC also charged Howard Present, F-Squared’s co-founder and ex-CEO, with making false and misleading statements to investors about the company’s strategy, the story said. F-Squared in March cut 25 percent, or 40 positions, from its 161-person workforce, InvestmentNews said.

Present co-founded F-Squared in 2006. He was president and CEO until November when he stepped down. Present owns about 22 percent of F-Squared Investment Management, the SEC administrative order said. Laura Dagan, who replaced Present as F-Squared CEO, is also an investor.

Hard to value

Once wildly profitable and the biggest advisor that markets ETF-only investment portfolios, F-Squared’s fortunes have changed. The company had $28 billion in assets under management as of September 2014, according to press reports. That’s plunged to $15.2 billion AUM as of March 31, Morningstar said.

Such a drops means its hard to value F-Squared or determine what the company could sell for, sources said. “It’s really hard to tell right now because [F-Squared is] shrinking really fast,” the first banking source said.

A second banking source thinks it will be difficult for F-Squared to find a PE buyer. “Private equity likes to invest in firms that are growing rapidly because that is how they make a return,” the second banker said. “Not many PE firms want to get involved in reworking a company, unless it has hard assets. In the money management business there is no such thing as hard assets.”

Present co-founded F-Squared in 2006. He was president and CEO until November when he stepped down. Present owns about 22 percent of F-Squared Investment Management, the SEC administrative order said. Laura Dagan, who replaced Present as F-Squared CEO, is also an investor.

Executives for F-Squared and PL Advisor declined comment.

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