PE-backed Broadmeadow Capital bids on assets of bankrupt F-Squared

F-Squared filed for Chapter 11 protection earlier this month and entered into a stalking horse arrangement with Broadmeadow on July 3 that calls for F-Squared to sell substantially all its assets for $5 million cash plus earn-out payments on the first and second anniversary of the deal’s close, according to bankruptcy court filings. The $5 million can be reduced if F-Squared’s assets under advisement that can be transferred are below $2 billion, the court filings said.

Broadmeadow is aiming to buy F-Squared’s intellectual property, investment strategies and “substantially all” of its investment management contracts, it said in a statement.The Broadmeadow transaction “sets the floor, or minimum acceptable bid” that is subject to Bankruptcy Court approval and certain other conditions, the statement said.

Boston-based Broadmeadow is a unit of Cedar Capital, which itself is backed by FTV Capital and LLR Partners. Broadmeadow, a quantitative asset manager, is led by David Cabot and Eric Biegeleisen.

F-Squared is a so-called tactical exchange-traded fund (ETF) manager. Such companies advise customers on when to buy and sell ETFs using computer models, Fortune reported. F-Squared, the biggest of such managers, was a sub-advisor on several popular mutual funds from Virtus Investment Partners Inc

The Sale 

Once wildly profitable and the biggest advisor that markets ETF-only investment portfolios, F-Squared’s fortunes changed late last year. 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 Globe said.

F-Squared in March cut 25 percent, or 40 positions, from its 161-person workforce, Investment News reported. The firm’s assets under management totaled $15.2 billion in March, according to Morningstar, down from $28 billion as of September 2014, according to press reports. 

Based in Wellesley, Massachusetts, F-Squared was put up for sale in April. PL Advisors was tapped to find a buyer. The F-Squared auction was expected to draw the interest of private equity, especially firms that have invested in the ETF space. PL Advisors sent out “teasers” to 51 interested parties, which resulted in the execution of 26 non-disclosure agreements, according to court filings.

Several PE firms were interested in F-Squared, but many pulled out of the auction after Virtus dropped F-Squared as a fund manager in May, a source said. The sale became more focused on strategics after Virtus cut ties, the source said.

Four parties in May submitted letters of intent to buy F-Squared, court filings indicate. But F-Squared’s liabilities were “too great,” and all potential buyers insisted the firm file voluntarily for bankruptcy, the source said. Broadmeadow was chosen because it produced the “the best overall package for the company financially,” the source said. 

Broadmeadow is owned by Cedar Capital, which offers sales and distribution for outside firms as well as its affiliates. In 2013, FTV and LLR Partners invested in Cedar. FTV, a growth equity firm, currently owns ETF Securities. It sold IndexIQ to New York Life Investment Management in April.  FTV has also invested in PowerShares, which is now owned by Invesco, and VelocityShares, which Janus Capital Group acquired last year. 

With offices in San Francisco and New York, FTV targets companies in sectors such as enterprise solutions, financial services and payments/transaction processing. The growth equity firm closed its fourth fund at $700 million. Performance data for Fund IV was not available. 

Executives for PL Advisors declined comment. Broadmeadow, FTV and F-Squared couldn’t be reached for comment.