Understandable business.

The PNI model is based around servicing the needs of successful investing fund managers that have yet failed to generate FUM that would be expected given their investment track record. That occurs because not all great money managers are great at marketing, good performance numbers will not always generate good FUM numbers, usually far from it. Secondly, that investment products are sold not bought, that means having relationships into the buying institutions and experience in GTM is critical. Thirdly, Fund managers are very fragile organisations, they depend on people, usually not many people, and there can be uncertainty over the structure and stability of how wealth will be distributed amongst the team especially as success is gained. That can be incredibly destructive in certain cases. That can be broadly described as the monetisation issue.

How does PNI solve these issues?

Firstly, they bring stability into the structure. Everyone knows where they stand and the shareholders agreement, I suspect, is clear. PNI as a shareholder in the underlying business is aligned with those that want to generate long term value.

Secondly, PNI bring professional management in terms of outsourced functions and most importantly, experienced sales teams with existing relationships and expertise.

PNI are reliant on being able to accurately assess the potential of businesses they invest in, working with the investing team to grow the business. PNI buy strong investment cultures and pay FV, then grow the FUM and as a shareholder reap the benefit from the attractive economies of scale that these businesses can generate.

PNI strategy has evolved from its base as backer of Australian Domestic fund managers. The mix has grown with International global mangers being a large growth area and private markets and alternative investments also being a focus of growth. PNI can now point to many success stories to sell to fund managers wanting a solid and reliable backer.

PNI can also act as a banker to add liquidity when old partners retire, and new partners emerge. Adding a degree of predictability around a sensitive time in the life of a fund management organisation.

The largest managers with five year association are listed below. We can see that Australian domestic equities have struggled due to the dynamics within the Australian industry, eg industry funds in-sourcing FUM and crunching fees. PNI strategy of investing overseas and into other asset classes makes a great deal of sense. Growth in FUM over the last five years by manger:

Theses numbers point to a successful track record.

PNI ownership varies between 24% for Antipodes and 50% for Hyperion, with most being 30-40%.

Operating History.

The accounting for PNI is complex giving the part ownership of many affiliates.

There are sizeable current investments being made by the group through the affiliates. These investments are a charge on profits but already there are signs that positive momentum is emerging from these investments.

Management estimated that the cost of these investment  being ($11.5m) to PNI for FY24, -5,7cps, on 45.5cps declared.

At scale, funds management businesses are highly profitable, as long as the cost base is grown by a lesser amount. By delivering their services across many managers PNI can leverage these services and generate economies of scale, improving the operating cost ratios of the affiliates.

The strategy is to increase several areas of the business that offer better yields (fee/FUM). These strategies are preferring retail over institutional business, secondly focusing on international business which offers enormous growth and better fees, and finally a focus on private markets as opposed to publicly traded markets. Overall these strategies offer better yields, higher growth and more diversification.

Already we can see all these strategies showing positive momentum. Retail has moved from 22% to 26% of total fum in the last five years and International moved from 11% to 17% in the last year.

Performance fees play an ongoing part of profitability and made up $31m of the $91m reported by PNI, PF were 17% of revenues (100% basis)in 2024, with an average of 12% over the last 8 years. PF can be expected to be an ongoing part of NPAT for PNI. The level of PF’s will vary from year to year but should grow with FUM as the sources are diverse and sustainable.

Management

Management is important in this business in building trust and respect with the affiliates, that FUM growth and efficient service can be delivered. Management understands the relationship between being the capital and governance provider and the investment skills supplied by the affiliates. It is a fine balance but growth is dependent on quality fund managers wanting to partner the group and being aligned on strategy and the growth outlook.

The flip side to this is that changes in the management at PNI could shift the balance between affiliates and the new PNI management and cause ructions. Fund management businesses can be fragile if alignment diverges.

Balance Sheet

PNI pay out most of their earnings as dividends, which is unusual given any large investments in bigger than usual affiliates usually would have to be funded in cash. The company has a $100m CBA facility that has been fully drawn down. These large acquisitions are not a major part of the strategy but can occur from time to time and may have to be equity funded. Therefore thya have to be very attractive to make sense.

Other

The market is attempting to understand the extent and speed of international expansion. As well as the speed and size of growth in the private market managers. The volatility and the size of PF’s is of interest. These areas clearly offer the largest growth, however, existing growth initiatives inside domestic affiliates are also a growth area such as Hyperion Global and various secondary strategies within affiliates.

Risks could arise from a failure in one of the major affiliates, that could happen from in a style becoming unpopular, or the private market investments not proving sound. Although that would be a poor outcome PNI is protected somewhat by the diversity of managers. Metrics is the largest at 17% of FUM, with the largest five comprising 63% of FUM, being Metrics, Resolution, Hyperion, Plato and Antipodes. Note no large global equity managers here, likely they will be the largest in time. PNI is also exposed to poor markets, although diversity will dilute the impact.

CONCLUSION – VALUATION

The strategy here is quite clear and there are growing signs that the tilt towards diversification, international and retail growth are succeeding.

An upside valuation could involve success in the enormous global equity markets and more growth in the non-equity and non-public markets. That could see FUM double over the next 5 years from $110B to $210B. with the growth in FUM will come economies of scale and better cost/income ratios. There is a steady uptrend in basis points (revenue/FUM) as the mix moves towards less competitive and higher fee areas described above. The better expense ratios, much higher FUM and better Bp all propel NPAT higher.

Of course they are many scenarios that can be generated under various assumptions but I am not willing to be too conservative with my assumptions as the strategy is playing out. A share price above $20 is quite possible and defensible given the momentum in the business.

Below is a bull scenario with International growing strongly, slower growth for the rest, economies of scale developing and bp rising slowly over time with the mix impact.