Active Management Key To Pinnacle’s Success

This story features PINNACLE INVESTMENT MANAGEMENT GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: PNI

Analysts praise ongoing outperformance by Pinnacle Investment Management post consensus-beating first half results.

-Pinnacle Investment Management’s H1 beats forecasts
-Strong inflows for fixed income, credit and private markets
-Affiliate strategies outperforming, performance fees jump
-The opportunity in Managed Accounts

By Mark Woodruff

Multi-affiliate Investment manager Pinnacle Investment Management ((PNI)) saw first-half tailwinds in net flows across fixed income, credit, and private markets, though client appetite for equities remains subdued for the period.

Pleasingly, management expects improvement in equities flows going forward, particularly in Retail.

Wilsons’ research update on the manager, “Making Active Great Again”, highlights further near-term upside risk for Pinnacle shares, with the broker expecting a strong second half from a combination of affiliates rather than the outsized contribution from Hyperion’s long-term growth strategy in the first half.

For the medium-term, Wilsons sees a significant upside opportunity in Managed Accounts via the company’s 25% equity stake in Pacific Asset Management, a UK-based investment boutique.

Enthusing about “flawless” first half results, Ord Minnett is equally excited by the opportunity presented by new UK-based global equity affiliate Life Cycle Investment Partners, a London-based boutique investment manager specialising in global equities.

Morgans also believes near-term catalysts look supportive, noting embedded strong growth for the medium-term as Pinnacle’s operating structure is now expanding to facilitate ongoing offshore growth.

Pinnacle Investment Management develops and operates investment management businesses. The business model enables high calibre investment teams to establish a boutique firm via access to capital, institutional grade resources and distribution.

The aim is to actively diversify asset class offerings and the client base, seeking to work with boutiques managing non-traditional, in-demand strategies such as private capital, absolute returns, credit and ESG.

Impressively, 82% of affiliate strategies are outperforming their benchmark over five years, highlights Macquarie, with 41% of these strategies outperforming by more than 5% per annum.

For the first half, Ord Minnett highlights higher-than-expected earnings, performance fees, net flows, and funds under management (FUM).

Affiliate earnings (ex-performance fees) grew by 9.6% and group core earnings (excluding performance fees and principal investments) grew by 8.4% (pre-tax) to $30.4m.

Funds under management

Pinnacle recorded all-time high FUM of $155.4bn on December 31, 2024, a rise of 55% year-on-year, supported by $6.7bn of inflows, $27.9bn in acquired FUM, while $10.7bn was due to markets/investment performance.

Since June 2024, FUM for Retail, Australian Institutional, and International has risen by 22.9%, 19.6%, and 143.5%, respectively.

Looking forward, UBS believes the trajectory of flows should accelerate given the ramp-up of Life Cycle, combined with management’s optionality to deploy its strong balance sheet into further Horizon 3 opportunities.

Pinnacle employs a strategic framework that categorises its growth initiatives into different horizons, each representing a distinct phase of development and investment focus.

Horizon 3 focuses on longer-term growth opportunities, including the acquisition of strategic interests in new markets or asset classes that complement Pinnacle’s existing operations.

The company’s largest investment partners by FUM are Hyperion, Plato, Solaris, Resolution, Antipodes, Firetrail, Metrics, and Coolabah. In total, there are 25 strategies that have potential to deliver meaningful performance fees to Pinnacle.

Investors may gain access to 15 different asset managers through Pinnacle’s global network of affiliated investment partners, providing a variety of investment options across asset classes. 

Of these 15 affiliates, in the first half 14 grew FUM sequentially, Firetrail the exception.

Horizon 2 affiliate was launched during the first half and generated circa $1.0bn of net inflows. Around 50% is derived from Wholesale/Retail, which UBS expects to ramp-up materially into the second half.

Profitability

Jarden is less enthusiastic about the first half, but like all other brokers mentioned in this article, Jarden has still raised its 12-month target price for Pinnacle.

Despite first half profit of $75.7m beating the consensus forecast by 16%, this broker contends result quality was negatively impacted by materially stronger performance fees (the majority driven by one affiliate, Hyperion) and fair value gains on assets.

Wilsons expects reliance upon Hyperion will lessen with a growing contribution from Five V Capital (specialising in high-growth, technology-enabled companies) and Life Cycle, along with a growing but diversified stable of affiliates each helping out at various points of the market cycle to sustain strong EPS growth.

Excluding fair value gains on assets held at fair value through profit or loss (FVTPL) of $9.2m, the Pinnacle parent produced a net loss of -$4.7m for the half, highlights Jarden, well below the $1.9m profit forecast by consensus.

The Managed Accounts opportunity

Wilsons believes Pinnacle’s 25% equity stake in Pacific Asset Management, which has approximately $11bn in assets under management, offers an exciting new revenue stream in the Australian Managed Accounts market.

Managed Accounts are investment portfolios professionally managed on behalf of an individual or institutional investor. Unlike mutual funds, where multiple investors pool their money, a managed account is tailored to a single investor’s needs and objectives.

Pacific Asset Management is tracking well, notes UBS, with FUM up by 12% only a month after acquisition.

Managed Accounts are benefiting from rising adviser adoption, boosting productivity and efficiency, and have been a key driver in funds under management (FUM) growth for platforms like Hub24 ((HUB)) and Netwealth Group ((NWL)).

Performance and management fees

Performance fees jumped by 92% year-on-year to $111.9m, exceeding the consensus forecast by 40%, though were heavily impacted by those strong results from Hyperion ($80-85m), cautions Jarden.

Pinnacle’s share of these performance fees was $36.4m.

More positively, and implying ongoing performance fee potential, Jarden notes 71% of FUM able to earn performance fees are currently at or above watermarks, up from 58% at June 2024.

While performance fees exceeded Wilsons forecast by 12%, a higher-than-expected tax charge provided a partial offset, leading to a 4% beat against the broker’s underlying EPS estimate.

While base management fees improved by 2.4% in the first half versus FY24, they came in slightly weaker than Jarden’s 3.5% estimate, though higher FUM balances somewhat offset the ‘miss’ from the management fee margin.

Cost Control

Excluding the impact of performance and Horizon 2 cost investment, Pinnacle’s first half cost-to-income ratio within the affiliates of 59.5% was -50bps lower than Jarden’s forecast.

While Horizon 2 investment of -$4.5m (post-tax, Pinnacle’s share) was a slightly larger investment versus the broker’s -$3.0m forecast, the analysts consider this cost investment to be supportive of longer-term growth (e.g. Life Cycle).

Highlighting a strong start for Life Cycle, Wilsons ponders whether the $1bn secured in less than three months is a reflective run-rate.

Outlook

On current consensus forecasts, derived from FNArena’s daily monitored brokers, Pinnacle Investment Management is projected to grow earnings per share by 46% in FY25, followed by 16.1% in FY26. On that basis, the PE ratio is currently 38.4x for FY25, falling to 33.1x in FY26.

Three of these four brokers have Buy ratings and UBS is on Hold. Following first half results the average target price increased to $27.02, suggesting nearly 8% upside to the latest share price.

Outside of daily coverage, Wilsons is Overweight and Jarden Neutral with respective targets of $28.95 and $24.20.

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