00:00Goldman Sachs will pay up to two and a quarter billion dollars to buy provider Neos Investments,
00:04giving the firm a sizable position in options-based strategies that promise investors income,
00:09downside protection, or other defined outcomes. Joining us now is Neil Seif of Bloomberg
00:13Intelligence to put this acquisition in perspective. When I say up to two and a
00:17quarter billion, it's cash and equity that it's paying, but what is the minimum and what's the
00:23maximum here? Why is there a variable? Yeah, so I think the headline number that you see,
00:27includes earnouts, right? You typically see that with asset manager deals is you're buying both
00:32the strategy and in this case, two very large scaled strategies in the derivatives income active ETF
00:38space, but you're also bringing in the investment talent, the sales talent as well. And so there's
00:43obviously going to be performance thresholds, growth objectives that they hit that can lift that number
00:49to 2.25. So that's a way to sort of hedge some of the risk for a pricey transaction that
00:55we saw here.
00:55So pricey transaction, that was the question I wanted to ask. So how pricey is this? When I
01:00looked at this, we have a note out this morning for my team, this looks like both of these,
01:03Innovator and Nios, were pretty pricey transactions compared to what we usually see in the asset
01:06management industry. Can you just talk about how pricey is it on scale? What are your thoughts on
01:11this? Do you think it makes sense? Yeah, I think it certainly makes sense. And I think you're
01:15right, it is pricey. We have it somewhere between 7% and 8% of assets, which is an easier
01:21top of the
01:22envelope, so to speak, look at valuations. When you look at traditional asset management, when we've seen
01:27large scale oriented type deals and active mutual fund space, those are somewhere 1 to 2% of assets, right?
01:34So we are multiples of that level. When we start pushing towards 7 and even closer to 10, we're usually
01:40talking about the private market space, right? The other flashy category within asset management. So active ETFs is
01:46sort of carving out its new category here. And what we saw with Goldman about eight months ago with Innovator,
01:52they paid a similar level of 7 to 8% of assets. I think when you look at underlying fundamentals,
01:57it can look
01:58almost even more elevated on a valuation basis. But that's because we're talking about a franchise that's been
02:04growing at, or at least the derivative income industry has been growing 70% annually for the past five years.
02:12So when you put any
02:14sort of metric towards something growing that quickly, it tends to have a sky high multiple.
02:18So these options based ETFs, James, they carry higher expense ratios than vanilla ETFs, obviously. Does that make
02:24them more profitable products to offer for the issuance?
02:27I would say so. It definitely does. But also people are willing to pay up for it. I mean, we
02:31call these boomer
02:32candy. Both of these would fit in what we would call boomer candy, right? The defined outcome from Innovator,
02:36you're giving up some upside to get protection on the downside. Here, you're kind of doing that with these covered
02:40call type products, but you want income. So one's protection, one's income. I guess, like, Neil,
02:45you're seeing the same thing, right? It makes sense that people want to do this. And my question is,
02:49like, how much of this is just, you know, Goldman skating where the puck is going? Boomers love these
02:53things, and boomers are aging, and they're going to be buying more of these things.
02:56Yeah, I think that's exactly what they're doing here. And I think they see the expectations moving
03:01forward, right? Active ETFs as a whole is supposed to triple through 2030. When you look at various
03:08surveys out there, active ETFs are the number one product that advisors are looking to increase
03:13their allocation to, actually above private markets. And when you look on the flip side of
03:18that, the category that they're looking to shrink allocations the most in, no surprise, active
03:23mutual funds, right? So you have the tailwind there of active mutual funds funneling into active ETFs,
03:29you know, it's lower cost, intraday liquidity, all those things like that, of course, tax efficiency
03:33with ETFs. So you have those drivers, as well as with Neos and Innovator. These are more solutions
03:39based specialized providers rather than, you know, just broader exposure type ETFs.
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