Private Credit Comp Suggests Very Attractive Margins and...

Private Credit Comp Suggests Very Attractive Margins and Valuation Upside for MAF

A recent AFR article (“US private debt house Monroe Capital to open Australia office”) provided some high level metrics that could better inform MAF shareholders on the financial opportunity available in private credit.

Midway through the article was the following passage:

“The company was founded in 2004 by businessman Ted Koenig and manages $US20 billion of assets across over 45 investment vehicles. French investment company Wendel took a 75 per cent stake in Monroe last year for $US1.13 billion.”

Using these data points allows us to estimate a total value of Monroe at US$1.507b (the US$1.13b received divided by the 75% stake sold).

Further, Monroe is valued at roughly 7.5% of its AuM (valuation of US$1.507b divided by AuM of US$20b).

Referencing a study of 50 listed US and European asset management firms (without any activity other than asset management) over the period from 2008-2017 (abstract below), this suggests Monroe’s valuation is more than twice that of the listed asset managers in the study (Monroe’s 7.5% of AuM versus the study group’s valuations at 3.01% of AuM).

Using the study’s conclusion “higher values are found to be significantly positively correlated with a higher earnings margin and a higher level of fees on AUM”, data from the study would further suggest Monroe’s:

- EBIT margin, the ratio of EBIT to revenues, would be almost 70% (versus 28% for the listed managers),

- earnings margins, the ratio of earnings to revenues, would be 42% (versus 17%), and

- average yearly fees, revenues divided by AuM, would be 2.59% (versus 1.04% of AuM for the study’s listed managers).

For MAF, these favourable metrics suggest very attractive financial outcomes that MAF seem well positioned to capture.

The study’s abstract:

“After reviewing the main valuation frameworks of asset management firms, we ran empirical research on 50 listed US and European asset management firms in the 2008-2017 period. Our results find that such firms are characterized by a high EBIT and earnings margin, respectively equal, on average, to 28% and 17% of revenues, represented by fees. The average yearly fees are equal to 1.04% of assets under management (AUM) and the average firm value is equal to 3.01%, confirming the values at which these companies are typically acquired on the market. Higher values are found to be significantly positively correlated with a higher earnings margin and a higher level of fees on AUM.”