Sustainable ETFs: A Polarized Global Market with Europe as the Leading Region

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Sustainable ETFs have experienced extraordinary growth, reaching $550 billion in assets under management by the end of 2023, according to a report published by State Street and JP Morgan AM, which outlines the key trends in the passive management industry. One of the main conclusions of this document is the significant disparity between the situation and evolution of ESG ETFs on both sides of the Atlantic.

The report explains that ESG ETFs have undergone substantial development over the past decade. The most pronounced increase occurred during the pandemic years, 2020 and 2021, when assets under management grew by $335 billion, a 275% increase compared to 2019. “The COVID-19 pandemic greatly accelerated ESG investment, highlighting the importance of addressing global challenges such as pandemics, climate change, and biodiversity loss. This period emphasized the need for a more comprehensive investment strategy that integrates traditional financial analysis with a broader consideration of a company’s social and environmental impact,” the report explains.

Europe Reigns Supreme

The growth and development of this segment of the industry have been uneven on both sides of the Atlantic. According to the report, European investors have consistently led the adoption of ESG ETFs, driven by strong legislative frameworks such as the SFDR (Sustainable Finance Disclosure Regulation) and a deeply ingrained cultural emphasis on sustainability.

As of 2023, the region maintains a dominant advantage, representing nearly three-quarters of the global ESG ETF market, with assets totaling $402 billion. While North America has slightly lagged behind Europe in the growth of ESG ETF assets, it has still maintained a strong presence, with total assets currently at $131 billion, just $10 billion less than its peak in 2021. The report indicates that this trend was supported by an increase in U.S. corporations adopting ESG standards and favorable changes in U.S. government policies, making ESG funds more attractive to retirement plans.

The Asia-Pacific region, while considerably smaller in scale compared to Europe and North America, has shown notable growth. From a modest start with $385 million in ESG ETF assets in 2014, the region expanded its portfolio to $15 billion by 2023.

According to the report’s data, from 2014 to 2023, the number of ESG ETFs globally skyrocketed from 148 to 1,826, highlighting a shift towards sustainable investment. “The EMEA region led this growth, with ESG ETFs expanding from 107 to 1,281, demonstrating a strong commitment to ESG principles. North American ESG ETFs grew from 34 to 430, reflecting an increasing interest in sustainable investment, although at a slower pace than in EMEA. The APAC region, starting from a smaller base, saw a steady increase from 7 to 115 ESG ETFs. The recent trend in ESG ETF launches, especially in North America, is quite distinctive. Despite a general slowdown in new ESG ETF introductions in 2023, the sharp decline in North America is particularly noteworthy,” the report adds.

After a period of robust growth culminating in 115 new funds in 2021, North America experienced a sharp decline to just 13 new launches in 2023. This drop starkly contrasts with the previously buoyant trend and reflects broader shifts in investment priorities.

Flows Tell the Full Story

The full stance of North American (NORAM) investors on ESG, as the study shows, is clearly illustrated through ETF flow trends, highlighting a significant move away from ESG investments in the region. “In 2020, global net flows into ESG ETFs soared to $93 billion, reaching a peak of $165 billion in 2021. During this peak, the EMEA region contributed an impressive $109 billion in net flows, representing 65% of the total, while NORAM also saw a significant increase with approximately $51 billion,” the report indicates.

However, this upward trajectory in North America changed notably in the following years. By 2023, net flows in this region not only decreased but also turned negative. The report explains that this sharply contrasts with the steady growth in EMEA, which recorded nearly $50 billion in net flows during the same period. “This shift dispels the previous assumption that North America was rapidly scaling and poised to surpass Europe in the ESG ETF space. Current trends, according to the report, point to a reevaluation of NORAM investors’ strategies towards ESG investments, particularly in the United States,” the document states.

A key conclusion is that the decline in ESG investment, particularly in the U.S. in recent years, can be attributed to several factors, with a significant one being the rise in anti-ESG legislation driven mainly by political changes. This trend began gaining momentum in 2021 and reached new levels in 2023, with over 150 anti-ESG bills and resolutions introduced in 37 states. Although many of these proposals were rejected or stalled, by December 2023, at least 40 anti-ESG laws had been passed in 18 states, according to Harvard Law School. Conservative factions have also initiated boycotts against brands they consider overly progressive, resulting in considerable opposition to such brands and the ESG initiatives they support.

Investor dissatisfaction is another important factor in the declining interest in ESG initiatives. There is a growing preference for strategies that emphasize financial returns and a profit-centric approach, leading to less focus on social causes that do not produce immediate economic benefits.

According to the report, as a result of these dynamics, companies, including ETF issuers, have started to downplay ESG discussions, leading to a decrease in the promotion of related products and a subsequent decline in net flows into ESG ETFs compared to previous years. This divergence in investment philosophy has allowed ETF issuers to introduce Anti-ESG funds, which have seen increased interest over the past year. These Anti-ESG funds emphasize a more traditional profit-focused approach, attracting investors who prioritize financial returns over broader ESG goals.

While Europe, according to the report, exhibits a less polarized approach to ESG investment and has largely set a global example in ESG adoption, the past few years have seen a slight slowdown compared to the momentum of 2020 and 2021. Despite significant investment flows in 2022 and 2023, European interest in ESG has somewhat waned due to economic uncertainties, high interest rates, inflation, and geopolitical tensions, which may have led investors to shift towards other investments.

Moreover, the underperformance of certain ESG strategies, particularly in thematic areas like renewable energy, affected by rising financing costs, material inflation, and supply chain disruptions, among other factors, has played a role in fostering this cautious sentiment. Additional concerns about greenwashing and evolving regulations, covering issues such as fund reclassification and SFDR implementation, have created uncertainty for ESG investors, potentially causing them to temporarily pause investments until greater clarity emerges.

The Active Approach

The analysis of NORAM’s negative net flows in 2023 reveals a distinctive pattern: $6.6 billion in outflows predominantly came from passive funds, while active ESG ETFs were in demand, attracting $5.3 billion in new capital. This shift indicates a growing preference for active management in ESG investment. Investors, according to the study, appear to be moving towards strategies that offer greater flexibility and alignment with their specific investment goals, diverging from the constraints often associated with passive funds. For some investors, active ESG investment could offer a more dynamic approach, allowing them to have a potentially greater social impact and more direct influence over corporate behavior through activism.

According to the report, this involves deep analysis and engagement with companies in the form of activism, although it typically carries higher fees than passive strategies. By the end of 2023, the proportion of actively managed ETFs within the total AUM of ESG ETFs in NORAM had significantly increased to 13%, compared to just 3% in 2018. This notable growth underscores a substantial shift in investor preference towards active management in the ESG space over the past five years.

In Europe, passive ESG ETFs remain the predominant choice for investors, holding a significant 94% share of total ESG ETF assets. They also maintain a dominant position in terms of annual net flows. This trend persists despite a general decline in inflows into ESG ETFs on the continent that leads in ESG.

The acronym ESG stands for environmental, social, and corporate governance, introduced by the United Nations in the 2004 document titled “Who Cares Wins.” This document marked a crucial moment, advocating for the integration of these critical factors into financial analysis and decision-making. Over the subsequent 19 years, ESG has transformed from a niche concept into a central element of corporate strategy, permeating every sector of the industry, including financial instruments like ETFs.

ZEDRA Will Expand Its Corporate and Fund Services Offering

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ZEDRA, a global specialist in Active Wealth, Corporate and Global Expansion, and Fund and Pension & Incentive Solutions, together with CreaPartners, an independent provider of corporate, investment fund, and family office services based in Luxembourg, have announced their plan to embark on a new collaboration project. This partnership will merge the strengths of both organizations, marking a pivotal moment for ZEDRA as it expands its corporate and fund services offering.

With over 1,000 current employees in 16 key locations and 28 offices, this latest development further underscores ZEDRA’s ambition to be recognized as an international leader in corporate and fund services, the company explains in a statement.

With nearly twenty years of experience, the CreaPartners team, consisting of 25 professionals, has been providing central administration services for corporations, developers, investors, alternative fund managers, issuers, securitization vehicles, wealth managers, high-net-worth individuals, and family offices.

Ivo Hemelraad, CEO of ZEDRA, comments: “The synergies between CreaPartners and ZEDRA further consolidate our joint approach of being the preferred partner for clients in the corporate and fund sectors. We look forward to working with the CreaPartners team. I am confident that this advancement will add great value to our clients and employees worldwide, who will benefit from the wealth of knowledge and experience that the CreaPartners team brings.”

The board of directors of CreaPartners Sàrl welcomes this new collaboration and comments: “Our clients recognize us as a preferred partner thanks to our working model, advanced technology, and our deep understanding of the legal, regulatory, and tax environment in Luxembourg and internationally. We are delighted to collaborate with ZEDRA as we evolve our operations in the alternative investment sector.”

North American Managers Opt for the European Passport as a Way to Reach Clients in the Old Continent

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North American managers plan to create European funds and use the passport to attract investments in Europe ahead of reverse solicitation and National Private Placement Regimes (NPPR), according to a new study by Ocorian. The study surveyed executives in venture capital, private debt, real estate, private equity, and infrastructure fund management in the US and Canada, responsible for $1.591 trillion in assets under management.

The latest survey reveals that 41% chose the passport for future fundraising in Europe, compared to 25% who selected NPPR and the same percentage who opted for reverse solicitation as their preferred methods for fundraising in the study of passports, reverse solicitation, and NPPR.

The study shows that 61% will use placement agents to raise capital in Europe over the next 18 months, nearly half (49%) will also use direct sales teams, and 47% will rely on third-party distributors. Around 28% will use private banks. Approximately 63% have used reverse solicitation in the past to raise funds in Europe, while 40% have turned to the passport and 36% to NPPR, with one in eight (12%) using all three methods.

When asked what makes the passport more attractive, 56% chose market perception and the ability to reach more investors in more countries among their top three reasons, while 44% rated efficiency as a key attribute. The same question about NPPR found that 70% cited cost-effectiveness and 64% flexibility as the two main reasons for using it, while 69% said the amount of capital they have raised from European investors through reverse solicitation has increased over the past two years.

The research found that 82% of North American fund managers are likely to increase pre-marketing activity in Europe over the next two years, with 73% saying it is much or more attractive to pre-market in Europe due to the lower initial investment before fully establishing. However, the study found varying levels of understanding regarding the pre-marketing changes implemented in Europe in June 2021, which included specific changes to the cross-border distribution of collective investment funds under the AIFMD and UCITS Directives in the EU. Only 38% said they understood them very well, while 58% said they understood the changes fairly well.

“There is a strong appetite among North American fund managers to raise capital in Europe and a growing debate about the best methods to do so. At Ocorian, we have supported several managers seeking to test European appetite for their strategy and proposed product through pre-marketing. It is a cost-effective way to decide whether to launch an EU-authorized AIF and use its passport to conduct distribution activities across the region. We only see demand for this service increasing as North American managers conclude that the passport is the most attractive distribution method for the future,” notes Paul Spendiff, Head of Business Development and Fund Services at Ocorian, in light of these findings.

State Street Names Dagmar Kamber Borens Head of Global Markets for Continental Europe

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State Street Bank International (SSBI) has appointed Dagmar Kamber Borens as Head of Global Markets for Continental Europe. Borens will report to Anthony Bisegna, Head of Global Markets at State Street, and Andreas Przewloka, CEO of State Street Bank International.

According to the company, Borens will also join the Global Markets Executive Management Group and will retain her current responsibilities as Country Head for Switzerland, in addition to continuing as a member of the SSBI Executive Management Board. “Borens’ professional experience and progress in developing our business in Switzerland make her the ideal candidate to take on the role of driving our growth in the broader region,” stated Andreas Przewloka, CEO of State Street Bank International.

Anthony Bisegna, Head of Global Markets at State Street, added, “State Street’s markets business continues to grow, so it is critical to have the right team structure in place to support the changing needs of our clients in Europe and globally.”

In her role, Borens will be responsible for delivering the bank’s global market strategy for Continental Europe, as well as collaborating with stakeholders in Global Markets and Investment Services to enhance client engagement. “European institutions and investors are facing challenging times and are looking more than ever for partnerships that help them achieve their goals. Deepening our client relationships while continuing to drive an innovative approach to developing client solutions is essential to our ability to help European clients continue to meet their growth ambitions in a volatile environment,” concluded Borens.

The Performance of U.S. Commercial Offices Will Continue to Decline

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The performance of commercial real estate (CRE) office loans will further weaken as market pressures increase, according to the latest June 2024 edition of Fitch Ratings’ U.S. CMBS Office Dashboard.

“We maintain a ‘deteriorating’ outlook for the U.S. office sector until the end of 2044. Contributing factors include higher and sustained interest rates, slower economic growth in the U.S., a tighter credit environment, and a secular decline in office demand. We expect these conditions to increase refinancing difficulties, resulting in higher loan delinquencies and more loan transfers to special servicing,” states Fitch.

According to the rating agency, the recovery of the office sector will be slower and more prolonged during this cycle than after the global financial crisis, leading to permanent declines in property values, weaker performance, and higher credit losses.

“We have revised our forecast for U.S. CMBS office delinquencies upward to 8.4% and 11% for 2024 and 2025, respectively, from the 8.1% and 9.9% projected at the beginning of 2024,” note Fitch analysts.

Office buildings have the lowest refinancing percentage of any major property type. Urban office performance significantly underperformed expectations with a refinancing rate of 5% year-to-date in May 2024.

“We expect lower refinanceability for office loans maturing through the end of ’24, with a refinancing rate of 16% to 21% according to Fitch’s updated scenarios.”

Office loans account for 22% of the total U.S. CMBS portfolio rated by Fitch. The agency notes that most office loans maturing in the next two years will continue to have positive cash flow. However, Class B/C office properties, generally securitized in multi-borrower conduit transactions, are at greater risk of performance deterioration. Higher-quality single-asset/single-borrower (SASB) office loans have more desirable attributes and higher DSCRs and occupancies.

New Mountain Capital Hires John Camperlengo

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New Mountain Capital, a New York-based investment firm, has appointed John Camperlengo as Vice President.

Camperlengo is a seasoned professional with extensive experience in investor relations and alternative investments, having spent several years in the financial services industry. His appointment was shared by the man himself on his LinkedIn profile.

His professional experience includes managing alternative investments in private real estate, private credit, private equity, and growth equity.

Before joining New Mountain Capital, John Camperlengo also served as Vice President at Blackstone, where he worked for seven years.

New Mountain Capital currently manages over $45 billion in assets and has shown significant dynamism this year, including the previously announced acquisition of Broadcast Music, Inc. (BMI), the world’s largest performing rights organization, in November 2023.

Fundraising in the Private Equity Market Is Expected to Stagnate at $1.1 Trillion in 2024

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Bain & Company has published the latest edition of its Private Equity Midyear Report, analyzing the global evolution of the private equity market so far this year. Up until May 15, 2024, the sector has raised $422 billion, compared to $438 billion during the same period last year.

The report reveals that private equity fundraising could reach $1.1 trillion this year, 15% less than the previous year. Buyout funds are leading, with $199 billion raised, and are expected to reach $531 billion by the end of the year, a 6% increase compared to 2023. Although the activity volume seems to have stabilized, the study notes it remains at historically low levels, especially considering the $3.9 trillion in available dry powder, of which $1.1 trillion is committed capital pending investment from buyout funds.

Bain & Company explains that, as of May 15 this year, the number of buyout deals had decreased by 4% annually compared to the previous year, suggesting that 2024 could see similar figures to 2023. However, the total value of these deals is on track to end the year at $521 billion, 18% more compared to $442 billion in 2023, largely due to the increase in the average transaction size (from $758 million to $916 million).

At the same time, divestitures of buyout fund holdings have seen stable annualized growth. While the total value of these exits is expected to reach $361 billion in 2024, representing a 17% increase from 2023, this year could be the second worst since 2016. Moreover, the stagnation of divestitures is leaving private equity funds with “aging” assets and limiting capital returns to investors, who are pressing for increased distributions on their deployed capital.

According to Cira Cuberes, a partner at Bain & Company, the growing investor interest in a small group of private equity funds is changing the landscape. “For buyouts, the 10 largest funds have raised around 64% of the total capital to date. The largest, EQT X, valued at $24 billion, captured 12% of the total. This leaves most buyout funds vying for the remaining 36% of available capital, with at least one in five of these funds falling short of their fundraising targets,” she notes.

Álvaro Pires, also a partner at Bain & Company, believes the outlook for private equity investment has improved, and the total deal value in 2024 is likely to approach pre-pandemic boom years. However, he cautions that it may take at least 12 months for an increase in divestitures to also shift the fundraising trend. “Even if deal activity picks up this year, we might have to wait until 2026 to see a real improvement. In such a competitive market, companies must adapt to new macroeconomic challenges and fully understand investor expectations to develop comprehensive plans in their portfolios that meet their demands and add value,” Pires adds.

Nuveen Appoints William Huffman as CEO, Replacing José Minaya

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Nuveen has announced the appointment of William Huffman as the firm’s Chief Executive Officer. Huffman, who will chair Nuveen’s executive leadership team and be a member of TIAA’s executive committee, replaces José Minaya.

With over 30 years of experience in asset management, Huffman recently served as President of Nuveen Asset Management and Head of Equities and Fixed Income. In this role, he led a team responsible for managing a global investment business with over $1 trillion in assets across equities, fixed income, municipal bonds, multi-asset, private equity, and financing for the Commercial Property Assessed Clean Energy (C-PACE) program, providing the firm’s clients with diverse capabilities and solutions.

“Bill’s unwavering dedication to the best interests of clients and the development of the firm’s strategy has had a transformative impact on Nuveen’s business and culture, driving growth and innovation over the past 16 years. I am delighted to welcome Bill to this position and am confident that Nuveen will thrive under his leadership. We are grateful for all of José’s contributions and wish him much success in the future,” said Thasunda Brown Duckett, CEO of TIAA.

As part of the firm’s executive leadership team since joining the group in 2008, Huffman has been at the forefront of Nuveen’s evolution and played a key role in increasing the firm’s assets under management to $1.2 trillion from the $800 billion it had in 2014 when TIAA acquired Nuveen. Among Huffman’s expanding responsibilities have been leading multiple major acquisitions and overseeing the investment teams responsible for managing over $1 trillion in both listed and unlisted markets.

William Huffman, now CEO of Nuveen, stated: “I am proud to take on the responsibility of leading Nuveen’s exceptional and dedicated team. We will continue to strengthen our position as a market leader in fixed income, offering clients enhanced capabilities in listed and alternative markets, and investing in our wealth and institutional businesses in key segments such as insurance and pensions. An increased international presence will enable Nuveen to serve its clients in new ways, building on the solid foundation of a diverse and stable business.”

According to the firm, Nuveen’s global operating model is designed to provide specialized investment capabilities across all asset classes, meeting the needs of clients worldwide and throughout various market cycles.

20 years of experience

William Huffman is the executive sponsor of Nuveen’s Philanthropic Steering Committee and the Culture and Inclusion Council, which is responsible for developing an inclusive culture for all associates. He led the acquisition of FAF Advisors (the former asset management division of U.S. Bank), Greenworks Lending, and Arcmont Asset Management, as well as the integration of numerous subsidiaries, including Nuveen Asset Management, TIAA Public Investments, TIAA Private Investments, Symphony Asset Management, NWQ Investment Management, Santa Barbara Asset Management, and Churchill Asset Management.

Before joining Nuveen, Huffman was CEO of Northern Trust Global Investments Limited. He resides in the Chicago area and serves his community as vice-chairman of the board of directors of the Boys and Girls Clubs of Chicago, and is also a member of the Rush System Trustee and the Cancer Advisory Council.

Brian Ruder and Dipan Patel, New Co-managing Partners and Co-CEOs of Permira

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Permira, a global private equity firm, has announced that Brian Ruder and Dipan Patel will become Co-Managing Partners and Co-CEOs, while Kurt Björklund will transition to Executive Chairman, starting September 1, 2024.

According to the company, Brian Ruder joined Permira in 2008 and currently serves on Permira’s Executive Committee, chairs the Permira Growth Opportunities Investment Committee, and co-chairs the Buyout Funds Investment Committee. “Since joining, he has been instrumental in building the firm’s Technology sector team, which he co-led until 2023, and has been involved in several of the firm’s most notable transactions, including Ancestry, Genesys, Informatica, LegalZoom, Lytx, Magento, McAfee, Relativity, Renaissance Learning, TeamViewer, and Zendesk,” they noted.

Dipan Patel, on the other hand, is Co-Head of Permira’s Consumer sector team and a member of the Buyout Funds Investment Committee and Permira’s Executive Committee. He began his career at Permira in 2009 in the Technology team before joining the Consumer team in 2018 and has been key in extending Permira’s long track record of consumer investments into the digital age. Dipan has worked on several transactions, including Adevinta, AllTrails, Ancestry, Axiom, Boats Group, Informatica, LegalZoom, The Knot Worldwide, Renaissance Learning, and Yogiyo.

Following this announcement, Kurt Björklund, Executive Chairman of the firm, stated, “Dipan and Brian have been strong leaders and vital contributors to Permira’s strategy, culture, and investment track record for over 15 years. They embody Permira’s values of collaboration, creativity, and integrity and have collectively worked on 22 investments across Permira’s sectors, representing approximately €17.5 billion of capital, including LP co-investments. Appointing Brian and Dipan as Co-Managing Partners marks the next chapter in our long history of successful leadership evolution and reflects our commitment to careful firm stewardship. I am excited to remain actively involved as Executive Chairman and to work closely with them as we continue to grow the firm and enhance performance for the benefit of our investors and our team.”

On their appointment, Brian Ruder and Dipan Patel, Co-Managing Partners and Co-CEOs of Permira, commented, “It is a privilege to be the next leaders of Permira, a firm that has been shaped by the thoughtful guidance of Kurt and previous Managing Partners. Permira’s strategy is to generate enduring investment returns by supporting and building exceptional businesses. Alongside Kurt, our partners, and colleagues in our global offices, we are excited to write the next chapter of our firm.”

Regarding Kurt Björklund, in 2008, he became Co-Managing Partner alongside Tom Lister, who retired in 2022, before becoming the sole Managing Partner in 2021. Over the past 16 years, the firm has expanded its investment focus and range of products in private equity and credit, nearly tripling the size of the team and raising eight private equity funds and over 30 credit vehicles in total, representing approximately €60 billion of capital.

Blacktoro Strengthens Its Advisory Business in the US With Efficient Portfolios, Says Its President

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BlackToro has made headway in the United States with an RIA model that advises clients solely to enhance their portfolios without conflicts of interest, Gabriel Ruiz, president and founder of BlackToro, told Funds Society.

The industry executive commented that the trend will increasingly be to charge for independent advisory services and focus on research and technology to improve client returns without conflicts of interest.

“If I don’t need to make transactions to earn commissions, I have more independence to do my job and improve my clients’ returns,” Ruiz explained.

According to the founder of BlackToro, “the greatest market need is to see efficient portfolios” for the benefit of the client.

Ruiz, who was the founder of Delta Asset Management and also worked for Santander, Scotiabank, and Raymond James, added that the advisory system is a scheme that favors transparency and loyalty to the client.

However, the BlackToro partner clarified that this is not a value judgment against broker-dealers and acknowledged that there are end clients with extensive financial knowledge who are interested in managing their portfolios without independent external advice and only need a broker-dealer to transact and offer specific investment products.

A Multi-Platform Service

BlackToro has several custodians as a possibility of more freedom for the client.

“Being multi-platform allows us to be broader in our offering, but you have to be generating value all the time,” Ruiz clarified.

The partners of BlackToro and their background in asset and wealth management have “a strong focus on investment selection analysis teams.”

According to Ruiz, the study for portfolio creation starts from a macroeconomic perspective and “from macroeconomics, we drill down thanks to our strong team of macroeconomists.”

BT VALO

Just a few days ago, BT Valo was formally registered as an RIA Investment Advisor.

BT VALO is a new company born from a strategic alliance between VALO | Banco de Valores S.A. and BlackToro, aiming to provide investment advice linking the financial markets of the US and Argentina.

The agreement with Banco de Valores is very positive for BlackToro because it has many decades in the Argentine industry and is a service bank, which makes it “very special and professional,” Ruiz added.

In addition, “it is a leader in what it does, debt issuance, trusts, and is a leading custodian of investment funds.”

“The partnership between BlackToro and VALO, which takes on the name BT VALO, is a Miami-based joint venture, with a 50/50 split between the two firms, where VALO handles commercial relationships and BlackToro manages the portfolios,” he concluded.