Why VGI wants to merge with Regal Funds Management
Global equity manager, VGI Partners Limited (ASX: VGI), has agreed to a merger with unlisted investment manager Regal Funds Management. The new firm will have combined funds under management of over $6 billion. The move follows a number of similar mergers by fund managers in recent years.
VGI has entered exclusivity and signed a non-binding term sheet with Regal Funds Management.
The 40 per cent interest / 60 per cent interest merger uses the playbook from the publicly listed Hunter Hall International Limited (27 per cent interest) acquisition of the unlisted Pengana (73 per cent interest) of nearly five years ago.
VGI has a market cap of $323 million. The proposed merger values Regal Funds Management at $484 million and the merged entity at $807 million, or around 13 per cent of their combined funds under management of over $6 billion.
For context, Magellan Financial Group (ASX: MFG), with a market capitalisation of $3.43 billion is selling at 3.6 per cent of its $95.5 billion of funds under management (at 31/12/21), whilst Platinum Asset Management (ASX: PTM), with a market capitalisation of $1.45 billion is selling at 6.6 per cent of its $22.0 billion of funds under management (at 31/12/21).
Obviously, this valuation comparator is simplistic, as it does not consider the underlying performance – both in absolute and relative terms – of the funds in question; the average fee being charged by those funds and the relevant margin on that fee; and underlying growth of the business, or lack thereof.
With the Hunter Hall International transaction, the company’s name changed to reflect that of the senior partner – Pengana Capital Management – which incidentally is 40 per cent owned by Washington H Soul Pattinson. Likewise, if the transaction is consummated, I would expect VGI to change its name (and ASX ticker) to reflect that of the senior partner, Regal Funds Management.
I would expect the playbook for the proposed merger to play out as follows:
- Regal Fund Management is the senior partner, so they will be calling the shots. Starting with the Board of Directors, VGI will likely have no more than three representatives (from eight);
- The Regal Funds Management team will be responsible for of all things operational, meaning there likely will be severe cuts to VGI’s headcount and expenses. The idea here is to put the revenue from Regal’s $3.5 billion of funds under management together with the revenue from VGI’s $2.5 billion of funds under management, whilst simultaneously minimising all duplication, particularly that of labour; and
- Initially attain earnings (per share) growth through cost-cutting. If the merger demonstrates positive cultural alignment together with strong underlying performance for the clientele, then earnings growth can become more sustainable.