Fund managers, page-21

Hi @saintex, as always thanks for the questions . Someone mentioned the other day they were analysing more during our lockdowns.

Regarding Pinnacle I have read through the Annual Report and have the following points:

Performance for the year for each fund is as follows:

This is a positive sign that underlying FUM is growing so quickly.


Cash generated from funds FUM are these rows on balance sheet:

Good numbers.


Profit and Loss:

All looks good too.

Financing Activities

Large increase in borrowings and capital raising, added $91M. I know they will use some of this to invest or acquire another company, but they theoretically only have $5M left to pay dividends. This is something to monitor and to be super cautious about. It may trigger a concern in the market (like what Cardno-CDD was doing pre-2013, share price didn’t drop until 09/2014 high was $5.58 to a low of 20c). I haven’t noticed this in PNI’s or any ASX listed Fund Manager accounts before. When I have seen it on other balance sheets it is normally a bad sign.

Don't think it is too much of a concern as they are still positive cashflow, definitely something to watch.

Performance Fees

I worry that people read headlines for Performance Fees and get confused between Aggregate performance fees of $86.2M and Pinnacle’sshare of performance fees of $19.5M.

Pinnacle’s share of performance fees were only $19.5M or 22% of the pool of performance fees.

Pinnacle owns 38% of the FUM ($34.112B/$89.373B), why was there such large leakage of their share? I assume this is because a lot of the performance goes to the Fund managers (not undeservedly, they perform for it).

Regarding PNI moving offshore - US v UK v Europe

Research LPLA:NAS, market cap $USD11.8B

ØTop RIA custodian(Cerulli Associates, 2019 U.S. RIA Marketplace Report); No. 1 IndependentBroker-Dealer in the U.S (Based on total revenues, Financial Planning magazineJune 1996-2020); No. 1 provider of third-party brokerage services to banks andcredit unions (2020-2021 Kehrer Bielan Research & Consulting Annual TPMReport); Fortune 500 as of June 2021

Try and find this report somewhere, key players in US are outlined here:
https://kehrerbielan.com/original-award-winning-research/annual-tpm-report-2020-2021/

Research Frontier Partners (Magellan subsidary) – brought in $12.8B in FUM for Magellan in the US. Sounds good, however this was over 7 years (2018, time of Magellan acquisition). Magellan and Frontier Partners formed a relationship in 2011.

Frontier Partners counts Hyperion as one of its customers too. Do you know how much has been gathered by Frontier Partners from US sources via Frontier Partners?

Compare this to GQG’s partnership with Goldman Sachs, $USD20B+ in the space of 18 months of a $USD85B Fund. GQG have their own distribution network for endowments, pension funds, other institutions and Retail, but they are utilising Goldman Sachs, Nationwide and their may be others coming on board soon – would expect GQG to announce other distribution partnerships with JP Morgan and others this year.Research Fidante Partners (Challenger CGF:ASX subsidiary). They have a very good European distribution capability.
Research Natixis (they own a majority of Investors Mutual, purchased from PAC). They are very big in Europe and US too.
Research iM Global. They are looking to scale up across the US and have recently made a few good purchases (Richard Bernstein the latest). They have strong financial backing and have recently raised $USD100M to expand from Barings Bank (similar to PNI from CBA).

The US market is very fragmented and the markets are being disrupted by technology platforms. As an example, one of PAC’s investments was in a company called Independent Financial Partners (https://ifpartners.com/) These guys had a falling out with LPLA:NAS and suffered as a result (market dynamics favoured LPLA at the time, prior to PAC’s investment). See the following articles:

https://ifpartners.com/ifp-announces-termination-of-lpl-contract/

https://riabiz.com/a/2019/6/17/after-the-storm-of-divorce-lpl-financial-leaves-independent-financial-partners-diminished-in-size-beyond-imagining

This highlights how competitive the market is over there. PAC partnered with IFP once the damage had been done to build a technology platform that replicates LPLA for approximately $USD4M for 24.9% ownership in the business. IFP are growing again, they have $5 of AUM (not FUM). They are a back end platform provider for Advisors in the US. Digital access into custodian platforms for share and fund management investing is where the market is heading and there isn't a need to invest too much in these platforms.

When PAC merged with Northern Lights there were two business units that were shut in the US & UK and outsourced to DST at the time (now SSNC:NAS, mkt cap $USD19.6B). The Business Porcess Outsource market for distribution in US is very large and you can't do it cheaper than the big players.

Think the UK is ripe for cracking into. Laws and model is very similar to Australia, the advantage required is to know the market and if PNI can buy into a good provider, then this will be a good outcome for shareholders.

Final thoughts on PNI moving offshore - hopefully PNI can buy into a Fund Manager and then help them with growing FUM through their Distribution expertise. Key is to find the initial investor that wants to invest with the Fund Managers strategy. PNI management will have received approaches already, but the amount of money they need to invest doesn't need to be significant to achieve a positive result for shareholders. In the US or UK, the going will be tough, but PNI can take a number of bets and achieve a positive outcome. The alternative is to outsource to one of the bigger players in the market which would be much cheaper and PNI shareholder funds used to buy a boutique fund manager. There are a lot of software options, but not likely to propel any of the boutiques that they buy into the big leagues.

Best of Luck
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