PNI FY 26 -Top 10 position-- International building Blocks in Place
PNI FY 26 Result
My thoughts
At the high level, PNI continues to advance in broadly a
consistent and positive direction. The platform now extends successfully across
geographies and asset classes, which opens up a huge TAM.
There were a few issues in the results, with FUM being a bit
shy of my estimation (act. $229B +28%), mainly due to market movements and
lower acquired FUM; flows continue to be good. Net flows were a record $33B and
spread relatively evenly across Australian retail, Australian Insto and
International sourcing, a healthy spread. Secondly, with the acquisition of PAM,
being a wealth platform, the accounts are quite complex because PAM is an
operating business more than a fund manager. That has implications for margins,
growth, etc and was consolidated for a couple of months. The acquisition of
100% of PAM included a non-cash MTM in the result; the result also included
losses on MTM on principal investments when seeding strategies. Complicating the
analysis.
The underlying NPAT growth was 21%, and eps growth was 15%,
showing the extent of dilution that comes with M&A growth. Ongoing dilution
is a bear point and is due to the acquisition of the initial equity in the managers,
which, after the initial acquisition, becomes a low-capital-requirement cash-generating
business. The initial purchase needs to be made by PNI and is funded by debt
and equity. Cash generation is back-ended as FUM accelerates over time.
The value is added by PNI marketing the funds and increasing
FUM. PNI gave examples of some of the greatest successes of this strategy being
Metrics with $3B FUM when acquired, now a $40B FUM; Resolution $3B to $12B,
Coolabah $3B to $20B and Five V $1b to $3B; of course, not all work out that well.
Some affiliate yearly profit growth numbers were disclosed. The
largest affiliates' profits declined by $28m. Mainly due to Hyperion declining $63m
as performance fees (PF) dried up and FUM shrank a bit as the growth style
struggled. Coolabah, Metrics and Resolution increased profits by $35m. The
ability of PNI to show a profit increase with one of its major affiliated
profits falling 59% is a testament to the diversity now across the group.
PNI lauded the growth in Life Cycle (UK FM), which is now a
$42B fund manager and PNI’s largest, from nothing a couple of years ago. There was
some questioning about capacity and fee dilution, but management played these fears
down. They also commented that as capacity is approached, the fee mix will move
towards promoting higher fee strategies. At least fee bp maintenance is expected.
Net debt continues to climb and at balance date was $163m
($73m pcp). Post-balance sheet purchases of AVI L40m ($77m) and a further $ 100
m in Metrics were made, increasing debt further. The ability to acquire more
managers will likely include equity, which increases dilution.
Other areas mentioned included that affiliate fund
management margins had increased 10%, indicating operating leverage and cost control.
Funds originated outside Australia are now 33% of FUM and growing; FUM exposed to
PF’s are 27% and growing, and high-margin retail FUM is 22% of total FUM and
growing. All healthy metrics.
PNI spoke about the revenue increase to the parent company, which
usually operated at a breakeven, cost-recovery model. Revenues were 50% higher at
$76m and grew faster than costs. Management stated that now international distribution
was at scale, returns are accruing faster with extra spend. The growth in revenues
is more than adequate to fund distribution growth.
PAM spoke about their ambitions to grow the model portfolio business
and also replicate portfolios for affiliate portfolios in ETF’s, LIC, LIT’s and
managed accounts. The UK Model portfolio market is growing strongly, and they
mentioned Australia and the US as promising, with South Africa, the Middle East
and Canada as longer-term opportunities.
The CFO highlighted four areas which should underwrite growth
into 2027 outside of organic and M&A growth. The first is that closing FUM
finished 14% above average FUM. Secondly, the affiliates' profitability is
improving from operating leverage and base fee rates remaining firm. Thirdly,
100% ownership of PAM will be accretive over 2027, with the business growing
well, and lastly, the revenue growth of the PNI parent company should add to earnings.
The issue is that the last two are difficult to model with current disclosures,
but certainly the narrative is positive. Better disclosure was mentioned on the
call.
Summary and Valuation
2026 was a year of significantly increasing the capabilities
of the international growth engine and also navigating the decline in profitability
of large affiliate Hyperion, where the growth style has fallen out of favour. The
breadth of the business is becoming more resilient, which is a good sign.
Debt is higher, but the acquisitions are now in place. The narrative
was positive regarding profitable momentum, but with the new PAM business
contributing a meaningful delta to growth, forecasting until we get more disclosure
is difficult.
With PF at the long-term average, there should not be a huge
tail or headwind to profits from PFs over the longer term. Using the underlying
eps of 61c and assuming 15% eps growth over 5 years and a 20X exit multiple gives
a 10% return at $18 and a full price or lighten around $25. The uncertainty around
assessing the growth drivers would make me expand that range. The next result
(s) should add clarity and allow the valuation to be fine-tuned. The story
remains positive IMO.
A strong record of growth and diversifying the growth
drivers.
Summary of transcript
Our results to date, together with
what we observe occurring in our traditional markets and in attractive adjacent
markets, give us the confidence to proceed at pace with our growth plans to
stimulate progress whilst at all times preserving the core.
Our distribution capabilities
continue to grow and evolve to cater to both our traditional and additional
areas of demand. And we know how to organise ourselves as we grow to avoid the
growing pains and bureaucracy that stymie the growth of some companies. Our
distribution strength and experience provide us with the intel and insight on
which we plan and execute.
NPAT was up 31% on the prior
financial year, up 21% after adjusting for returns on principal investments and
the non-cash profit recorded on the step-acquisition of PAM. Affiliate
margins on fund management activities before performance fees were 10% higher
in FY '26 than FY '25. Importantly, and I'll elaborate on this later, Pinnacle
Parent's revenues, excluding the PAM and PI adjustments, were up 50%.
These are revenues from affiliates
for the core distribution and operations, risk, tech and RE Services provided
by Pinnacle, which are core ongoing repeatable revenues. These
were up $25.3 million at $76.1 million in FY '26. This revenue comfortably
funds high-quality resourcing, both for our core activities as well as high
levels of business growth, particularly with the efficiency benefits from
growing scale, the use of AI, et cetera, and still contributes strongly to
profit growth.
Pinnacle Parent revenues growing
faster than its costs can continue, notwithstanding that we continue to
strongly grow our resourcing for future growth.
To the second point, record net
inflows. Our overall net inflow number of $33.4 billion for the year was a
record again. The aggregate closing FUM of the affiliates at
30th of June 2026 was $229.4 billion, which is $50 billion or 28% higher
than the aggregate opening FUM at the beginning of the year and 14% higher than
the average FUM for the 2026 financial year. Approximately 1/3 of the
$229.4 billion is now from clients outside of Australia, and 44% of that is
from wholesale and retail investors.
We are at an inflection point as we
work to replicate our domestic wholesale and retail strength in other markets
of the world. It took us years to build that kind of valuable presence in
Australia. Of the $33.3 billion of total net inflows, $10.2 billion was from
Australian retail. That was very much a record, but more in the first half than
the second. And we note that this year's flows represent 26% of the opening
retail fund. $12.3 billion was from clients outside of
Australia, and this was 24% of opening international FUM and $10.9 billion was
from Australian institutions, 12% of opening domestic institutional FUM and not
a bad result, not a bad net result given what has been going on in the Aussie
institutional market last year.
And there are now 35 strategies with
the ability to deliver material performance fees on $61 billion of FUM versus
$50 billion at 30th of June 2025.
Styles such as quality and growth
that have had years of favourable conditions over the past decade or more have
encountered headwinds. It is a testament to the consistently high quality of
Pinnacle Affiliates that we have maintained a very high proportion of
outperforming funds and strategies throughout our history. This
also reflects the diversity of our stable, including style diversity. And we
see that the composition of which affiliates have recently outperformed changes
through time.
evolution to a global platform, $75
billion of FUM from 50-plus countries outside of Australia, of which $33
billion is wholesale retail. Pinnacle's unique supported independence and
value-add platform is resonating strongly across the globe. We have a
demonstrated ability to execute and deliver rapid growth across Horizons 2 and
3 globally. Horizon 3 investment in Japan's largest homegrown private
markets platform, Advantage Partners, initial 5% was completed in January, and
the expanded PAM partnership accelerates our global growth with complementary
distribution platforms to enhance geographic reach, affiliate origination,
product innovation and expansion.
And we have said many times, we have
so much natural growth coming down the pipes from Horizon 1 that we don't have
to undertake Horizon 2 or 3 initiatives.
Also, another happy situation is that
as we add resourcing overseas, the cost of that is generally now added
simultaneously with revenue growth. The extra resources tend to produce
additional revenue quickly these days.
There's more detail in the preso, but
it is stating the bleeding obvious to express our absolute delight at the
tremendous progress already with both Life Cycle Investment Partners and
Pacific Asset Management.
Not only their rapid business
success, Life Cycle had the equivalent of AUD 42.4 billion of FUM at 30th of
June 2026, less than 2.5 years from their effective commencement of business.
And PAM's run rate earnings have grown from GBP 9.4 billion per annum when we
first purchased equity in PAM to GBP 17.9 million per annum when we increased
our holding to 100%. And as you can see from the segment reporting, that run
rate has increased nicely again since then.
Pinnacle's business model is globally
distinct, compelling and sustainable. Equity ownership of high-performing
investment managers, combined with market-leading distribution, continues to
drive strong cash generation.
It is replicable in an expanding
range of asset classes, subclasses and styles, geographies and product formats
such as ETFs, LICs/LITs, managed account solutions and so on. And the total
addressable market, particularly internationally, is, therefore, very large and
growing.
Aggregate domestic retail FUM was
$50.7 billion at 30th of June '26, up $11 billion or 28% from $39.7 billion at
30th of June '25. The aggregate affiliate FUM capable of earning performance
fees was $61.3 billion at 30th of June, up $10.9 billion or 22% from $50.4
billion at 30th of June '25.
Aggregate Affiliates' funds
management revenue at 100% was up $251.6 million or 28% to $1,152.4 million, of
which base fee revenues were up $258.5 million or 35% to $1,005.8 million. Performance
fees were down 5% from $153.5 million to $146.6 million at 100%, of which
Pinnacle's share after tax was down from $46.6 million to $35.6 million.
We recorded that one-off accounting
profit on the step-acquisition. The net impact of that in our FY '26 NPAT was
$46.2 million, which could be eliminated as unusual. Also, as explained with
our first half results, there's a second unusual factor in our results for FY
'26, which is that the overall net return we received on principal investments
was very low, negative $2.3 million. This is mainly due to unrealized capital
losses on seed invested in 3 Affiliate strategies, which have experienced
drawdowns during FY '26.
QUESTION
AND ANSWER
Firstly, I think what we're doing in
the U.S. is quite interesting. We've had quite a lot of success in the U.S.
It's a ginormous market. People talk about model portfolios and the SMA market
that's happening in Australia, but really model portfolios are happening all
over the world. And that means, actually, there are fewer and fewer allocators
of capital, and there's more and more capital as everyone moves towards models.
So the ability to tackle ginormous markets like the U.S., I think, is much
easier than it was historically when you may have needed sales teams that were
ginormous.
So, we're working very closely with
Chambo's team in the U.S. on some of the structures that we've mutually got
around active ETFs and CITs and LLCs and Cayman vehicles. So, I think that's a
super exciting opportunity for us. Affiliate origination, working on how we can
take interesting investment capabilities that sit within the Pinnacle Group and
work on how to best distribute outside of Australia, whether that's through
PAM's infrastructure, whether through PAM's quasi-captive distribution through
its own model portfolio business, which is growing. And I guess most obviously
is what we can do in the SMA market in Australia.
And our U.K. business within the SMA
market or model portfolios continues to accelerate. So,
I think we can achieve -- there's a possibility we can achieve what we've done
in the U.K. successfully in Australia when the time is right.
So it was good to see metrics plans
in regard to the bringing together and the streamlining of those asset-backed
lending businesses start to come through in FY '26. And we definitely think
that, that can continue as they continue to get the benefits of the cost rationalisations
from those platforms being combined.
So, there are really 4 things
simplistically that we think about, and this is outside of any organic growth
or any acquisitive or additional growth initiatives we may undertake. So the
first one is the fact that we'll have 100% ownership of PAM for the full year
next year compared to only 2 months this year, with the balance at 25%. There's
the fact that our closing FUM is 14% higher than the average. Importantly, that
FUM is at a consistent fee rate, with the fee rate during FY '26 and FY '25.
So, that will earn, therefore, at similar rates. There's the fact that the
profit margins in Affiliates before performance fees improved by 10%
year-on-year. And then there's the 50% uplift in revenues in Pinnacle Parent,
which will annualize into next year. So, we think each of those 4 things, if
you add them together, that takes you to a significantly improved starting
point for next year compared to this. And as I say, that's before any organic
growth or any acquisitive or additional growth initiatives we may undertake.
I think it's fair to say given where Life
Cycle is at with capacity, that the focus now will be on maximising the revenue
take rather than the absolute flow numbers. So, you should definitely expect
that margin to improve as they cycle out some of that capacity into retail and
as they start to sell out the more high-yielding strategies that Andrew
mentioned, so the select strategy and then also their U.K. income strategy,
which is sold entirely into retail.
I think in the U.K., there's
continued penetration and growth of model portfolios and our business remains
quite differentiated in terms of how we approach that, and that business
continues to accelerate. And we've also embarked on a number of joint ventures,
which I think we will see that continue to grow. Then, of course, the
Australian market is fascinating because the similarities to where the U.K. was
5 or 10 years ago and everything else translates from a sort of technology
build-out from a language perspective, from a regulatory perspective, best
interest duty similar to consumer duty. It's all extremely similar. So, that is
the obvious next stage.
So, I'd say Australia would be the
obvious one. Technology in South Africa is interesting, but Canada is a market
we're starting to do some research and growing our Middle East presence.
We see that as a pretty strong
outcome given the amount of money that came in from institutional clients,
particularly to that lower fee strategy that Life Cycle runs. But
in terms of the trends that we think are underpinning, first of all,
maintaining that fee rate and second, potentially improving it over time,
they're intact.
And they are the growth in wholesale
retail, both in Australia and internationally, growth in private markets assets
and then growth in high-yielding active management strategies, all of which
were well represented. And so we think those trends will perpetuate, albeit the
fee rates will maintain rather than improve this year when you look at the
averages.
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