Hi AllI have always thought it would be hard to merge PAC with...

Hi All

I have always thought it would be hard to merge PAC with any business and this was why there was a large discount between market value and net assets. Net assets is also a poor valuation for PAC's boutiques as this doesn't consider growth profile, GQG didn't get valued correctly until it was floated. Prior to float it was valued at around $1 per current share due to statutory reporting requirements.

Investing in early stage funds is complex and they pick an Investor as much as who they accept the highest bid from. PAC has been an under bidder on a number of occasions but was selected to invest in the boutique (GQG is one example). This could potentially preclude Regal from buying the business. Tim Carver built PAC with Paul Greenwood so has the know how to grow further and the boutique managers know him.

Acquiring PAC will change the dynamics of GQG (not necessarily for the better) and it will become more of a Tim and Rajiv show, rather than just Rajiv. This changes business in the following way:
1. Will reduce capital allocated to paying dividends. Early stage boutiques require capital (which GQG has).
2. Tim Carver will build more of a profile as an investor within GQG, not just CEO now. As mentioned above, Tim was instrumental in building PAC to where it is today.
3. Diversify Asset Classes - is this a good thing? PAC asset classes are uncorrelated to stock market returns, reason why I own PAC shares. GQG returns are uncorrelated to current market returns due to high portfolio rotation, emerging market strategy and change holdings based on quant data, reason why I own GQG shares.
4. FUM growth profile changes - GQG has spurts of high growth in FUM and performs better than peers. Investment returns are also high. Investing in PAC will level this out. PAC FUM growth is contracted over 5 to 10 year periods and takes at least one year to accumulate for each boutiques FUM, much slower.
5. Will the differences in the business cause a strategic indifference between Rajiv and Tim leading to the dysfunction that existed at the top of Magellan for years? Rajiv is tough on portfolio managers and doesn't like under-performance. Early stage boutiques in non-equity asset classes are not managed the same way as equity portfolio managers are. Slow and methodical, rather than quick and dynamic like GQG.
6. GQG investment selection culture is very different to other fund managers. Will they look to boutiques to employ a similar strategy or leave them to manage themselves? This is one of GQG's stand out qualities, how will this co-exist?
7. High risk of failure of early stage funds (particularly in the US). Will this detract from GQG valuation on the market?

There are some positives, like GQG Sales Team are mostly ex-PAC staff, they know the boutiques really well and know how to help accumulate FUM for the boutiques. This could take away time from GQG, however PAC's current team could equally assist with GQG's growth too.

If Regal takeover PAC, I am assuming Phil King will appoint someone to handle the boutiques in the US. I can't imagine Paul Greenwood would hang around if Regal acquire PAC. The management layer under Paul are very capable, but Paul sits on the boards of most of the boutiques. He will be very hard to replace and Phil King wouldn't be able to replace him. Paul would hang around if GQG takeover PAC.

To me it doesn't really make economic sense to merge either business with PAC. I always thought a US based Private Equity investor would take over PAC or a similar type of company like PAC. Time will tell what will happen.

Best of Luck
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