Ann: PAC increases stake in Roc Partners, page-5

Hey Muscat

Yes you are right, looking into more deeper, it is confusing on two fronts:

1. What are the earnings?
2. What is the capital structure of the new deal with ROC Partners?

What are the earnings?They should definitely give better guidance. It is also very hard to tell because they keep moving boutiques around year on year. Hopefully this year the reporting will stabilise, but not sure given the change in management. Here is a brief summary of the changes:
1) At the end of full final year report in 2018, the Tier 2 boutiques of 2019 were made up of the Growth and the other Boutiques. In 2018, this included GQG, 2019 presents GQG in Tier 1 boutiques (obviously due to growth).
2) In the Full Year 2018 report, PAC's share of revenue for the growth boutiques ($4.6M-includes ROC and GQG) and other boutiques ($3.9M), total including GQG was $8.5 Million, see pages 16 & 17 here:
https://paccurrent.com/wp-content/uploads/2018/08/FY2018_Results_Announcement_Investor_Presentation_2018_08_31.pdf
3) We know PAC's share of the Tier 2 boutiques earnings is $1.1 Million for the 2019 half year (includes ROC), see page 16 here:
https://paccurrent.com/wp-content/uploads/2019/03/1H-FY2019-Results-and-Investor-Presentation.pdf
4) In 2019, Tier 2 boutiques include Alphashares, Blackcrane, CAMG, Nereus, Northern Lights, ROC Partners, Strategic Capital Investors, EAM Global Investors and FIM.
In 2018, Growth and Other boutiques include 2019 Tier 2 boutiques and GQG.
5) In 2018, the first half was low and jumped up toward the end of the full year as most of these boutiques pay earnings once per annum.
6) In the half year report of 2018, growth boutique PAC's share of earnings was $0.5M, then grew to a full year of $4.6M. Recollection of notes at the time are that GQG delayed paying until the full year.

In short, due to the nature of ROC Private Equity/Real Asset investment style, the share of income is likely to be earned annually, therefore the annual figures are the best ones to be used.

If you look at it another way, assume ROC earns 1% on FUM once deal concludes (competitive markets of Australia, Hong Kong and Shanghai). Revenue generated on $6.4 Billion in FUM, is $64 Million. 32 staff and offices in Sydney, Hong Kong and Shanghai. (information source: https://www.rocp.com/our-firm/). If employed managers earn an 18-20% over 10% return, then PAC's share of revenues will drop dramatically.

I think the structure of the partnership leads to lower returns, despite any dividends being paid once at the end of the year. It is a bit blurry with the funds changing around too.

In simple, my guess is that the board should be investing for a 15% return minimum - increase in earnings will be approximately $1 Million.

What is the capital structure of the new deal with ROC partners?
The announcement quite clearly says that PAC will invest $6.8 Million in ROC Partners Pty Ltd, not ROC Group. This is one part of three companies of the ROC group. Million dollar question is, what are the economics of investing in ROC Partners Pty Ltd instead of the ROC Group.

Historically the ownership structure has been quite complex. Here is a snippet from the 2017 Annual Report, page 73:
ROC Group includes ROC Partners Pty Ltd, ROC Management Services Trust and ROC Partners (Cayman) Limited. Ownershipin ROC Group constitutes shares or units held in these three entities. The Trust’s ownership interest changed to 17.59%effective February 2017. Prior year ownership in the three entities were 31.10%; 15.03% and 15.03% respectively.

In the 2018 Annual Report it presents PAC as owning 17.59% of ROC Group across all companies on page 81. Here is ROC note 11 from the 2018 Annual Report, Page 81:
ROC Group includes ROC Partners Pty Ltd, ROC Management Services Trust and ROC Partners (Cayman) Limited. ROC Partners is a leadingalternative investment manager specializing in private equity in the Asia Pacific Region.

Hopefully the board of PAC can elaborate a bit more on the terms of this deal.

Best of Luck
Lost