Pinnacle’s Horizons Target Global Growth

Australia | 11:15 AM

Pinnacle's successful business model is growing offshore with a higher leverage to performance fees offering both upside and downside risks for the platform specialist.

-Pinnacle's unique business model positions the platform for growth
-Diversity offers earnings resilence during volatility in public markets
-Exposure to Metrics private credit is causing consternation
-Managing Director share sale raises succession issues (again)

By Danielle Ecuyer

A brief history of quite the success story

Pinnacle Investment Management ((PNI)) was founded in 2006 by Ian Macoun, who remains the Managing Director also owning 6.3% of the issued capital, post the most recent share sale. The company's history goes back to Wilson HTM Investment Group, which was established in 1895. Pinnacle was born out of the separation of Wilsons' brokerage and funds management businesses.

The model is quite unique, as Pinnacle provides the infrastructure to evolve a diversified "family of world-class investment management firms", the annual report states, which are referred to as affiliates. Pinnacle invests and has equity in the affiliates as well as offering seed funding, global institutional and retail distribution, and what the company refers to as "industrial-grade middle office and infrastructure services".

Specialised non-investment services allow the investment fund managers to concentrate on the task at hand, which is managing investments to optimise performance.

At the end of December 2024, Pinnacle had a network of 18 affiliates, collectively managing assets of $155.4bn, up from just over $50bn in funds under management in 2019.

Australian equities represented 67% of FUM as of June 30, 2016, which has since halved to 33% at the end of December 2024. Conversely, global equities over the period have risen to 31% from 2%, with credit in public markets emerging at 10% and credit in private markets at 12%. Real assets, both in public and private markets, have declined to 11% and 3% respectively, from 24% and 7% respectively in 2016.

Under Macoun's stewardship, Pinnacle has created a platform to support a network of autonomous investment businesses. His vision evolved through an expansive work history starting at the Queensland Treasury, before becoming the founding CEO of Queensland Investment Corporation, then going on to Managing Director of Westpac Investment Management and then co-founding Perennial Investment Partners as Managing Director.

Macoun's recent sale of a 1.73% shareholding in Pinnacle has the proceeds being reinvested in Metrics, which is one of the major affiliates.

The changing earnings mix for the group

Historically, Pinnacle has earned income across a suite of activities, notably a share of affiliate profits, service & distribution fees, and seed capital and investments.

Increasingly, the core focus is to increase exposure to performance fee-linked funds under management, as highlighted by RBC Capital, who recently initiated coverage on the stock.

RBC has a positive view on performance fee income as it allows for Pinnacle to benefit from growing funds under management across a diverse mix of affiliates, asset classes, and investment styles; advancing private market strategies, which typically earn higher rates above hurdle fees, and management has a successful track record of exceeding expectations.

While a higher exposure to performance fees can create more earnings volatility during market sell-offs and drawdown events, they can also provide operating leverage and higher net profit growth without notable incremental increases in costs.

Part of the strategy is the extent of diversification on the platform across affiliates, which underwrites varying asset class exposure and non-correlated returns, lowering what investment managers refer to as 'concentration risk' or, more simply, "having too many eggs in one basket".

RBC also points to growing exposure to private markets, a global trend, which due to the way the assets are marked-to-market (or not), can lower the correlation with volatility in public market assets.

The broker forecasts performance fee-linked funds under management to grow at a compound average growth rate of 17% over the next five years as FUM advances for existing affiliates and new strategies are employed with performance fee exposure.

Although performance fees are challenging to forecast, RBC flags a 12% compound average growth rate for the share of performance fees and an average fee margin as a percentage of FUM of 48bps.

March quarter revealed growth and resilience 

The latest FUM update for Pinnacle saw 3% growth for the March quarter on the previous quarter to $159.9bn, which was in line with UBS' estimates and reflected better than anticipated organic growth trends of net flows of $6.2bn against the broker's estimate at $5.3bn. UBS notably points to the resilience of the 3Q25 result given the volatility in markets over the period.

Pinnacle applies a high-water mark (HWM) for performance fees, which means during periods of under-performance, fees will not be charged until the fund returns to the previous peak, i.e. fees are earned on new profits, not recovering prior losses.

In relation to the last market update, the analyst pointed to an upbeat outlook with rising equity markets for 4Q25 (which has since transpired), and 74% of the funds eligible for performance fees were within 2% of reaching their HWM, meaning if markets continue rising even slightly, those funds may cross their HWM, which would trigger performance fee revenue; a high-margin earnings boost.

Jarden explained the $6.2bn in net inflows was split retail/wholesale: $2.2bn, institutional: $2.2bn, and international: $1.4bn. Macquarie highlighted FUM growth of 3.4% for retail, 5.6% for international, and domestic institutional of 0.8% for the quarter.

Breaking down the flows, Life Cycle was identified as the "stand out", with over $3bn net inflow estimated for FUM of $4bn at the end of the March quarter. Life Cycle is a boutique London-based investment manager which specialises in global equities. It was established in 2024 by former Head of Equities at Royal London Asset Management, Peter Rutter. It is majority employee-owned with Pinnacle holding a 26% stake.

Pinnacle had around $235m to $300m in available funds as at the end of the quarter, post a $400m equity raising last November, which can be employed for seed capital initiatives like Life Cycle.

The platform categorises its strategic classification framework under the term 'Horizon'. The Horizon framework is a strategic lens which enables management to organise and communicate its investment priorities and growth plans.

Horizon 1: represents the core earnings business with mature affiliates that function much like the cash cow for Pinnacle, offering low but stable returns.

Horizon 2: represents the emerging growth opportunities, such as early-stage affiliates like Life Cycle.

Horizon 3: is the long-term expansion and transformational opportunities across global expansion or major acquisitions. Two examples are Pacific Asset Management or PAM (UK) and VSS Capital Partners (US), in which Pinnacle acquired stakes in 1H25.

PAM has a similar model to Pinnacle in the UK, with a range of model portfolios to the UK private wealth market at $11.2bn in assets under management. RBC stresses the opportunity in this market is extensive, with an estimated GBP1.2trn in the UK private wealth market. At the recent quarter update, PAM delivered around $1bn, as noted by Jarden, reflecting continued momentum.

For context, other well-known affiliates include Coolabah, Hyperion, Five V, Antipodes, Plato, Firetrail, and Metrics.

Private credit concerns overblown?

Addressing any private credit concerns, Pinnacle has 12% of FUM exposed to private credit via Metrics Credit Partners ($22.4bn), which stands as the largest affiliate at 14% of aggregate FUM. Increased regulatory scrutiny by ASIC on private credit has garnered considerable media attention on Metrics, which is noted by RBC as being a leader in the Australian market.

Private credit is estimated at between $40bn by the RBA to $188bn by EY and has evolved out of stricter banking regulations post-GFC. Private credit has grown at a compound average growth rate of 20% over the past four years and exceeded growth in other alternatives. The RBA views the asset class as having low systemic risk.

RBC is not concerned about Pinnacle's exposure to Metrics due to the diversification throughout Metrics. Over 90% of its corporate lending is syndicated through multi-bank arrangements, with its real estate exposure concentrated in development assets rather than office or retail, and the loans are generally senior secured. Most of the insolvencies in construction are below assets of $5m, which is outside of Metrics' fund exposure.

Macoun's share sale and reinvestment in Metrics may raise more questions than it answers. Is the Managing Director looking to instill investor confidence in Metrics, or is he diversifying his own earnings stream and risk profile? 

One large question that overhangs the stock is the succession issue which was addressed again by the Chairman Alan Watson at the recent share sale;

"I can confirm that his retirement is not imminent, and that both the Board and Ian continue to approach the subject in a deliberately flexible manner. Over the past few years, Ian has been consistent that he would neither overstay his tenure as Managing Director, nor would he leave the role in circumstances which might set back the ongoing success and growth of the business, and this continues to be the case."

No doubt brokers and investors will be seeking more clarity on these issues coming the FY25 earning release on August 6 and the subsequent AGM.