What about the rest of PAC?

Hi Everyone

Have been combing through the notes of the recent financial report and this is the third year in a row where the financial reporting from PAC management has significantly improved. We can use a mixture of the notes from (22) Investment in Associates (b) Summarised Financial Information and (24) Related Party Transactions, to determine the growth of the underlying boutiques (even GQG). While these don't show the whole picture and are blended, with some assumptions we can split out and then apply some forecast to how things will look in the next full financial year (not the half year).

GQG Partners
To start with, based on GQG historical growth and GQG management announcement of 32% growth, here are the historical and forecast figures based on what is available in the market:

Summary: GQG as a business will continue to grow and should double its contribution to PAC if management decide to hold over the coming three years. Contribution is exceptional, but is not the only boutique that is growing and able to contribute significantly to PAC this coming year.

Some assumptions for GQG are:
1> They can continue high growth the year after due to addressable market size in US and starting to grow Australian Investor base (have decreased to 30% - which I think is unders)
2> PAC continues to hold GQG as an investment - I believe with the growth forecast by GQG management it is reasonable to assume that we are unlikely to find another investment growing as quickly (not that I am concerned given other growing boutiques as follows)

Victory Park Capital (VPC)
With GQG, we know it is a great growth story. Looking at the combined VPC vehicles next, assuming a lower growth rate (despite growing revenues at a similar pace to GQG, from a lower base), here is their contribution potential:

Summary:
VPC's earning growth is significant compared to a lot of ASX listed Fund Managers. This growth contributed less to the bottom line of PAC due to reinvestment back into the VPC business (it is after all a growing business).

I am anticipating SPAC's to contribute more this year given the VIH and Bakkt merger meeting on 14th of October, this will contribute earnings (performance fees) in the first half of the year for PAC. This should mean a higher dividend payment and will be the first opportunity for us to see what earnings contribution is likely when VPCB (Kredivo) and VPCC (Dave) will have in future financials.

Some of the assumptions for VPC are:
1> Growth expectations and SPAC forecasts come from previous post here: https://hotcopper.com.au/threads/economics-of-victory-park-capital.6108082/
2> Believe growth figures are conservative for VPC

PennyBacker Capital
PAC committed to invest $USD27.5M in PennyBacker ($USD20M and $USD7.5M earnout). The earnings generated from this investment as follows:

Summary:
PennyBacker's contribution is small at the moment, but is slowly growing. The US commercial market is starting to grow and hopefully this will reflect in PennyBacker's ability to grow FUM over future years.

Aggregate Boutiques
Some, but not all of the remaining boutique revenues make up the aggregate revenues and PAC contributions. These again are not on par with ownership levels however they do support the underlying growth story and payments not received yet are being reinvested into each business. Growth in dividends are expected to grow at a higher rate than GQG, albeit off a smaller base, as follows:

The biggest contributor to revenue growth was the inclusion of IFP in the accounts (liability converted into ownership). IFP is a low margin business and has contributed significant revenues in year one. In future years, the new platform that PAC helped to build for Registered Investment Advisors (RIA's) in the US will see the IFP business grow again. IFP is taking on its previous business partner (LPL Financial Planning - LPLA:NAS) and if it restores previous Assets Under Administration (AUA) in 2019 of $USD12B this will be significant growth of current $USD8B in AUA. Quick note here, PAC invested in the business in 2019. At the end of 2017, IFP had $USD50B in AUA. IFP is representative of the potential PAC has in most boutiques, unknown unless you look in the notes and do a bit of googling.

Assumptions are:
1> IFP information is referenced here: https://riabiz.com/a/2019/6/17/after-the-storm-of-divorce-lpl-financial-leaves-independent-financial-partners-diminished-in-size-beyond-imagining2> Note that the market IFP competes in is super aggressive. There is nothing like it here in Australia. LPL previous partner was super aggressive in picking up IFP's Advisers (significantly reducing AUA). If IFP is to grow then they will need to reinvest money for a few years before we see a return. Keep in mind when valuing, LPLA:NAS market cap is $USD12B, has $USD1.16T AUA and generates $USD2B in revenue per annum. This is the opportunity for IFP to grow into now it has a new digital platform to help RIA's service their clients.

So, why do we care about the above? It is because there is significant underlying growth not just in GQG, but the other businesses that PAC has owned for a lesser period. Following are key points:
1> There are what I would call low value bets for high returns. No more so than IFP if it can restore previous AUA figures. AUA figures are not reported in PAC FUM so we need to lookout in the news and SEC website for what is happening in this business.
2> Based on historical growth and factors like boutiques growing exponentially in their early stages (like majority have clearly done), we will see continued higher growth this year.
3> Above does not present Astarte earnings. Given PAC management quoted Astarte as having earnings potential to a Tier 1 boutique, the hits just keep on coming.
4> There will be another boutique investment coming up this year, possibly similar to PennyBacker Capital based on PAC management recent comments.
5> Growth in the US is about to explode with the initial $USD1T Infrastructure Bill passed, we are just waiting for the $USD3.5T to get through the Senate. $USD1T is enough, another $USD3.5T would contribute to significant growth.
6> As Warren Buffett says, "Don't bet against America", Pacific Current will grow alongside America. The question is by how much?

I am anticipating with the high underlying growth from boutiques this reporting period, this will continue to contribute significantly to future financial returns for the PAC business.

As always, keen on feedback.

Best of Luck
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