Navigator Global Investments (NGI) held its AGM last week, giving us an opportunity to review our investment thesis.
NGI was an early Model Portfolio holding within the Small Cap sub-portfolio, and one for which we have enjoyed a successful return outcome. However, we continue to see opportunity in NGI’s growth options.
NGI is the parent of Lighthouse Partners, a multi-manager fund based in the US. A couple of years ago, under its previous moniker of HFA Holdings, NGI was a turn-around/value play that was effectively priced for no growth despite a sticky existing base of institutional clients (such as pension funds and ), an international pipeline of international mandates in Asia, Europe and the Middle East, and a cash-laden balance sheet fed by a highly cash generative business model.
Today NGI trades more-or-less in-line with global asset manager peers at an ex-cash multiple of 12 times FY19 earnings. Superficially the stock longer appears as a “value” type of investment in the sense that it no longer trades at a single digit PE. Nevertheless, we think the prevailing $4.47 share price is attractive relative to the growth NGI is likely to achieve in the next 5 years.
NGI’s three growth pillars, on which we will elaborate below with information coming out the AGM, include:
- Further institutional mandate wins. NGI achieved organic Assets Under Management growth of 15% in FY18, driven by net inflows US$1.4bn resulting from mandate wins in new distribution markets of Japan and the Middle East. NGI AGM’s commentary was upbeat, with management continuing to see these regions as key growth drivers.
- Mesirow (MAS) synergies. On July 1, 2018, NGI acquired Mesirow Financial’s hedge fund division encompassing US$5.4bn AUM, which effectively added 50% on pre-acquisition AUM. It is typical for mergers of such asset managers to see some AUM attrition in early stages. MAS AUM stood at US$4.8bn as of 30 September, and per AGM commentary, management expect AUM to stabilise at approximately 75% of the initial amount, or approximately US$4.1bn. Assuming AUM stabilises at these levels the growth opportunity within MAS comes from cost: 54 MAS staff moved across in the transaction, and their average remuneration is (on our numbers) close to 50% higher than that of NGI. Bringing MAS costs in-line with the rest of NGI is a US$10m opportunity, representing about 25% EBITDA growth.
- Managed account platform product sales. AGM commentary also highlighted NGI’s increasing focus on growing the NGI’s new “Platform” services business. Essentially Platform clients will utilise NGI’s Managed Accounts system assist with management across their entire asset base. The platform collects real-time data on portfolios and tracks managers’ adherence to mandates, which improves governance. It also provides a “look-through” on net positions across multi-manager portfolios, enabling more efficient capital allocation and risk management. With an addressable market of over US$100bn in assets, this is a significant opportunity. Managed accounts has single digit penetration in the US, and NGI is one of only one of two providers. Assuming a platform fee of 15 basis points on Funds Under Administration, capturing half of the opportunity would translate to US$75m or +60% additional revenue, at 80% incremental margin.
With no debt and cash and investments totalling US$55m (A$75m), the company is well resourced to execute on these growth opportunities. On our numbers, the stock is worth over $6.
The following graphics taken from Lighthouse’s website help with visualising the function and value proposition of the Managed Accounts platform.