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#Broker / Analyst Views
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Last edited 4 years ago
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#Boutique Investor Investments
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Added 3 years ago

The Case for Pacific Current (PAC)

I have been a long term holder of PAC. You may well ask, why? Some of those companies in or near its peer group include Pinnacle Investments (PNI) and Magellan (MFG.). Let’s look at the last 5 years. While PNI is up around 800% and MGF has risen 100%, PAC has risen from about $4.80 to $5.80, or about 20%. So for the last 5 years, PAC has been the perennial under performer.

The reason I still hold it is that it has been a good dividend yielder and I need a few of those in our SMSF. But is it a value trap? Well, it has not gone down in value, but neither has it gone up much. It has always looked like it was on the threshold of doing something well, but falls over at critical times. It has made some great boutique fund manager investments – its core business, but has also had some very poor selections.

A little bit of history – the company grew out of a merger around 2015 between Treasury Group and Northern Lights. Treasury Group was Australian listed and had a portfolio of well-known Australian based boutique fund manager investments, for example Investors Mutual (Anton Tagliaferro). In an effort to broaden its base, it went looking for an overseas partner and chose Northern Lights, a privately owned US based organization with a portfolio of US boutique fund managers. There were initially some teething problems such as who would drive the company forward, and who received the best deal. I think Australian investors felt that they came off second best, and they were probably right. But over the last 5 years, a number of the boutique investments have been sold off at substantial profits, non-performers have been sold back to their original owners at around what they had been bought for, and the worst performers have been shut down or virtually given away. The proceeds of these sales, which have dramatically outweighed the losses, have been reinvested in other fund managers.

The wash out is that the business has become progressively more US focused, but also with some European investments. The ownership/profit sharing arrangements with all of the more recent purchases have been individually tailored to each transaction. The nature of these arrangements is rarely revealed. This means that there is a lack of ability for investors to be able to do any worthwhile prediction of earnings. Brokers have also nearly given up on covering PAC. The only one left standing is Ord Minnett, who have not provided an update for 6 months. Their target price has drifted back from over $8 to $6.70 over the last couple of years. Due to the complexity of all these various shareholdings, PAC has had trouble with reporting in the required time frames. They usually only get there on the very last day and a couple of years ago they had to restate their earnings. This led to a change of CFO and since then there has been some improvement.

So PAC is a bit of an orphan. We are predominantly in the hands of US based CEO Paul Greenwood, who prior to Covid, has gone out of his way to spend time in Australia. Paul seems to have spent the majority of his career selecting and advising on the selection of boutique investments for companies such as PAC. From my observations with PAC he has had maybe a 75-80% success rate. He has brought together a portfolio increasing based on closed ended FUM, non $AU earnings, and managed funds that are not equity based (such as property, private equity and lending organisations)

So to invest in PAC, you need to have a belief in Paul Greenwood. He has some pretty generous incentive options which run out in over the next 12 months, so his mind is focused on some outperformance. From my reading independently and in PG’s briefings most of the current portfolio seem to now be firing. As a bit of insurance the PAC portfolio has gone from being 100% Australian based prior to the merger, to 6% $AU, 92% $US, all done when the $AU was in the 80c to 100c $US range. With the $AU headed to sub $US 0.70 in next couple of months we will have the exchange currency working in our favour in regard to repatriated earnings.

On this basis, I am prepared to hang in there a bit longer.

Cheers Gingerbeer

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#Bull Case
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Added 3 years ago

PAC owns a 5% equity stake in GQG partners.

GQG Partners is looking to IPO on the ASX shortly.

If it goes through it would value PACs stake at around $300m.

The current EV of PAC is around $350m. 

Could be a good trade to make 30-50% return in the next couple of months if everything works out

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#Bull Case
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Last edited 2 years ago

PAC was already my largest position but I was busily buying up as many as I could this morning.

PAC is similar to PNI and owns stakes in Fund Managers. Their largest holding is 5% stake in GQG which yesterday confirmed it is listing on the ASX in late Oct. They are raising 1.2bil and have confirmed bids of 800m from cornerstone institutions with the prospectus going out to the wider market today.

The price range for the IPO is 2 – 2.20 but with demand clearly strong I think the top end is likely. PAC are selling 20% of their stake at the IPO price.

At a price of 2.18 GQG will be worth around 6.3billion and PAC will receive $65million in cash and $250 million in GQG shares. The remainder of PACs holdings are worth ~$265mil. 

IPO bids will likely be scaled back and it is a decent chance that PAC will likely enjoy further value from GQG opening at a small stag profit on day 1.

At $8 PACs market cap is currently around 400mil and using the ballpark calculation above it is worth around 600mil.

Not many people have heard of PAC but over the next 3 weeks The GQG IPO will get a lot of press in the AFR and other mainstream circles, so I expect they will know it shortly. I think this quick rerate will continue playing out and the SP will head toward $10+ as the GQG IPO date approaches.

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#PAC Update
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Added 2 years ago

Pacific Current Group – Why the recent increase in share price?

By Gingerbeer, 9 Oct 2021

 

Further to my straw a couple of months ago on PAC, and as detailed in a couple of other straws (ArrowTrades and steno and apologies for any duplication), one of PAC’s boutique investments has turned out to be a huge winner. Back in 2016 when Treasury Group merged with US based Northern Lights, Northern Lights won out in eventual management team appointments. Tim Carver, former CEO of Northern Lights, became CEO of PAC and Paul Greenwood also from Northern Lights became CIO. Just after this had been bedded down, Tim Carver was approached by his mate Rajiv Jain (ex  Vontobel, where he had increased FUM from US$400m to US$50b over 20 years) to join him in a new fund management start-up to be called GQG Partners.

Tim was keen to join Rajiv. So the deal was that he would leave and become GQG CEO, Paul Greenwood become joint CEO and CIO of PAC, and for a US$2.7m/ AU$3.6m investment, PAC would receive a 5% stake in GQG. So 5 years has passed and GQG has grown from zero FUM to US$86b/AU$118b of FUM – an extraordinary performance. Now they seeking to list and their preference is on the ASX.  Based on similar ratios to Magellan Financial Management and Pinnacle, GQG is now valued at around AU$6.5b. The intention is to float 20% of the business. PAC will contribute 1% of its 5% holding to the float and continue to hold the other 4%. If the float goes according to plan, PAC’s investment will be worth around AU$320m. Not bad for an investment of around $3.6m 5 years ago.

Prior to the press release of an IPO for GQG in early September, PAC was trading at around $6.00/share, and with 50m shares on issue, giving the company a valuation of $300m. GQG was valued on the books at $115m. So the rest of the boutique assets were valued at around $185m. Add on the revised value of GQG at $320m, you can make a new valuation for PAC of $505m or just over $10/share. Hence we have already seen an increase to $8.00/share and as the IPO progresses, there should be a re-rate to $10.00/share.

Thus my valuation of $10/share

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#ASX Announcements
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Added 2 years ago

Pacific Current Invests in Banner Oak Capital Partners Pacific Current Group Limited (ASX:PAC, Pacific Current), a global multi-boutique asset management firm, is pleased to announce it has purchased a 35% stake in Banner Oak Capital Partners (Banner Oak), a private equity real estate firm.

Banner Oak is a Dallas-based alternative investment manager offering a private equity real estate strategy focused on the creation and growth of fully integrated private real estate operating companies. Currently, Banner Oak manages approximately $5.7 billion in assets across its platform. Banner Oak launched as a standalone investment advisor after spinning out of Hunt Realty Investments in 2016. Since its inception, Banner Oak has been engaged with a prominent US pension fund to provide investment capital into numerous real estate operating companies and the real estate projects these operating companies are developing.

PAC is making an initial investment of US$35.0 million (A$48.2 million). The agreement also includes an “earn out” provision that could result in Banner Oak receiving additional consideration of up to US$5.0 million. PAC will receive 35% of the management company’s earnings, excluding carried interest. The agreement also includes provisions that will provide PAC with more than its 35% pro-rata share of Banner Oak earnings in the initial years of the investment. PAC classifies Banner Oak as a Tier 1 investment, and estimates its contribution to PAC over the next 12 months to be approximately 25% of PAC’s FY21 underlying NPBT. PAC has acquired a passive, non-voting minority interest.

The transaction will have no impact on the day-to-day management or operations of Banner Oak. PAC MD, CEO & CIO, Paul Greenwood stated that, “Banner Oak is a unique manager with a distinctive value proposition and a stellar track record. We believe the manner in which institutional private real estate investing is evolving bodes very well for Banner Oak’s approach of partnering with real estate operators.” Banner Oak founder, Patricia Gibson, noted that, “We are extremely pleased to be entering into a strategic relationship with Pacific Current. Their long term approach to the investment management business, strong culture and deep expertise represent an excellent fit for Banner Oak. As we enter the next phase of Banner Oak’s evolution, we believe this relationship will position us to achieve the next level of disciplined growth.” 2 Berkshire Global Advisors served as the exclusive financial advisor to Banner Oak on this transaction.

A conference call will be held today at 11.00am AEDT. The Presenters will be Paul Greenwood, MD, CEO & CIO and Ashley Killick, CFO. The dial-in details and Investor Presentation will be provided shortly.

***

This minority stake of investment is typical for PAC and does make it difficult to analyse this company. To a large extent you do just need to sit back and hope management know what they're doing, but given it's very choppy history that can be difficult to do. A lot of its recent performance can be attributed largely to its investment in GQG. I don't know why they didn't address how this would be funded - seems an obvious omission.

[Held in RL only, without massive conviction]

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Valuation of $11.50
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Added 2 years ago
Will go with 11.50 which is a slight discount to factor in the complexity of their holdings outside of the very simple GQG holding. See straw for details.
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