Many international asset managers have spent years building successful investment businesses in the United States through private funds. Some may not realize that there could be elements in place that support a move into one of the world’s largest and fastest-growing investment product markets: U.S. exchange-traded funds ETFs. For European and other international managers with established U.S. private fund strategies, there is a more efficient path to launching a U.S. ETF than starting from scratch, depending on the facts and circumstances.
The U.S. ETF Opportunity
The U.S. ETF market continues to attract significant investor attention as advisors, institutions, and retail investors increasingly favor vehicles that offer transparency, liquidity, tax efficiency, and ease of access.
For asset managers, ETFs may provide:
- Access to one of the deepest pools of investment capital in the world
- A rapidly growing distribution channel utilized by RIAs, broker-dealers, wirehouses, and institutional investors
- Daily visibility and transparency
- Operational efficiencies compared to many traditional investment vehicles
- Opportunities to expand brand recognition and gather assets beyond existing private fund investors
Historically, many international managers viewed the U.S. ETF marketplace as difficult to access because of regulatory complexity, distribution challenges, and operational requirements. Today, there are established pathways that may make entry more efficient.
An Underappreciated Tool: Section 351 Exchanges
For managers already operating private funds in the United States, one potential avenue worth exploring is a transaction structured under Section 351 of the U.S. Internal Revenue Code. Depending on the structure and the specific facts involved, Section 351 may allow certain investment assets to be contributed into a newly created ETF in exchange for ETF shares without immediate recognition of taxable gain. This treatment is not automatic, and whether it is available will depend on a detailed legal and tax analysis of the particular transaction.
In practical terms, this can create several potential advantages in some situations:
Come to Market with Scale
One of the most difficult aspects of launching an ETF is gathering initial assets. Rather than launching with minimal seed capital, certain managers may have the opportunity to contribute existing portfolio assets into an ETF structure, allowing the fund to begin operations on a meaningful scale.
Leverage an Existing Investment Strategy
Managers that have already demonstrated success through a private fund may be able to bring an established investment process into an ETF wrapper that is accessible to a broader investor audience.
Potential Track Record Considerations
In some circumstances, managers may be able to reference aspects of an existing investment strategy’s performance history when marketing a new ETF.
Any discussion of performance portability, track record use, or related disclosures requires careful legal, tax, and regulatory analysis, and there is no assurance that prior performance can be used in a particular case. Even so, the ability to demonstrate an established investment process may be a meaningful differentiator compared with launching an entirely new strategy.
Expand Distribution Opportunities
Converting or transitioning assets into an ETF structure can open access to distribution channels that may not be available through traditional private fund structures, including financial advisors, platforms, and brokerage networks.
Why Expertise Matters
Successfully evaluating a Section 351 transaction requires coordination across multiple disciplines, including:
- Fund structuring
- Regulatory compliance
- Tax considerations
- Distribution strategy
- Governance and oversight
- Operational infrastructure
This is where institutional support becomes critical. The Centralis Group and its affiliate, Pine Advisor Solutions, work with asset managers seeking to access the U.S. registered fund marketplace.
Together, our organizations provide the governance, compliance, regulatory, distribution, and operational expertise needed to help managers evaluate ETF launch opportunities and navigate the complexities of entering the U.S. market. Each situation requires its own legal, tax, and regulatory analysis.
Whether you are considering a new ETF launch, evaluating a Section 351 conversion strategy, or simply exploring how your existing U.S. private fund business could be leveraged to access a broader investor base, understanding your options is the first step.
Is Your Existing U.S. Private Fund the Foundation for Your Next ETF?
Many international asset managers have already done the hard part - developing a compelling investment strategy and building assets under management.
The next question may not be whether you can enter the U.S. ETF market. It may be whether you are closer than you think, subject to the legal, tax, and regulatory considerations that apply in your particular situation.
To learn more about ETF launch strategies, Section 351 exchange opportunities, and the operational and regulatory considerations involved, connect with the teams at Centralis Group and Pine Advisor Solutions.
Author: Kerric Kynard, Business Development Director at Centralis Group.