Bruce Bond (Bloomberg) -- Goldman Sachs Group Inc.’s decision to buy Innovator Capital Management in a deal worth $2 billion is delivering a massive payday to the exchange-traded fund issuer’s founders.
Chief Executive Officer Bruce Bond, who co-founded the firm with John Southard in 2017, owns between 50% and 65% of Innovator, according to regulatory filings. Given that his stake is now worth at least $1 billion, the Goldman deal vaults Bond into the billionaire ranks. Southard, for his part, owns at least 25% of Innovator, filings show.
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The transaction makes Bond a rarity in an industry that runs on razor-thin margins. Even with over $13 trillion in assets, the entire US ETF industry generates just $17 billion in annual revenue, according to Bloomberg Intelligence estimates. The late John Bogle was famously not a billionaire despite founding Vanguard Group in 1975, which revolutionized the investment industry with rock-bottom fees.
Wheaton, Illinois-based Innovator, however, which offers actively-managed and options-based strategies, has been able to sell funds with higher fees than behemoths like Vanguard and State Street, whose lineups are mainly comprised of index-tracking products. Those higher fees and the rapid growth of active funds “likely warrants some degree of a premium,” according to Jefferies analysts, who noted that Goldman’s purchase price was high relative to other industry deals.
“He’s always been extremely good at sales,” said Robert Tull, president of Procure Holdings, who also worked on product development at the American Stock Exchange which helped develop the ideas underpinning Bond’s first ETFs. “He has that vision to say, ‘What are people really looking for?’”
Serial Entrepreneurs
The GSAM deal for Innovator marks the second time in two decades that Bond and Southard have successfully built and sold an ETF business. In 2003, when ETFs were only designed to track basic market-capitalization weighted benchmarks, the duo co-founded PowerShares Capital Management, and created ETFs that tracked quantitative, factor-based indexes. They later sold the company to Invesco in 2006 for an initial purchase price of $60 million with additional contingent payments reaching in the hundreds of millions.
Bond left PowerShares a few years later to enjoy a retirement filled with fishing and hunting. But that proved short-lived.
Story Continues“I have a curious mind. I love to do and learn new things, and so that kind of keeps me busy,” Bond said in a phone interview this week.
He and Southard went on to launch Innovator Capital Management in 2017 and debuted the first defined-outcome ETFs — known as “buffer funds” — which seek to limit investors’ downside risk in exchange for capping upside potential. The products have proved to be a hit with financial advisers and self-directed investors, with the category ballooning to nearly $76 billion in less than a decade.
The 62-year-old Bond said that he and Southard didn’t initially plan on starting another ETF business after the PowerShares sale. But in the same way that PowerShares popularized rules-based investing in ETFs, the pair identified an opportunity in structured payouts — a “huge category,” Bond said.
Some on Wall Street have said buffer funds and other options-based products deliver lower returns with more risk than simpler alternatives. Still, investors and financial advisers have plowed roughly $11.4 billion into structured outcome ETFs this year.
What’s Next
Bryon Lake, Goldman Sachs Asset Management’s global co-head of third-party wealth, began his ETF apprenticeship under Bond at PowerShares. Lake worked on the internal sales desk and spent weekends stuffing envelopes with sales materials — a reminder, he said, of how lean the business once was.
“He thinks about where the opportunities to build businesses are and he executes on that and he’s willing to back himself — and he’s done that twice now,” Lake said of Bond. “I can’t think of another person in the ETF space that frankly has been more successful of an entrepreneur than him with the Innovator range.”
As for Bond, when asked about what’s next, and whether he’d consider building a third ETF business, he doesn’t entirely close the door.
“I kind of doubt it, but there’s potential for that,” says Bond.
--With assistance from Tom Maloney.
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