Treasure Chest: Generation Development

This story features GENERATION DEVELOPMENT GROUP LIMITED, and other companies.
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FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Today's idea is on financial services provider Generation Development.

By Greg Peel

Whose Idea Is It?

Petra Capital

The subject:

Generation Development’s ((GDG)) relationship with the world’s largest funds manager, BlackRock.

More info:

Generation Development Group is a diversified financial services business. The group has three divisions: Generation Life, which offers investment bonds and lifetime annuities; Lonsec, a leading qualitative financial research house; and Evidentia, a leader in self-managed accounts (SMA).

Generation Development acquired its first 37% equity stake in Lonsec in September 2020. It become the sole owner (100%) in mid-2024. Evidentia was acquired in early 2025. The group’s FY25 result release in late August featured the first full year of Lonsec’s contribution and a part year of Evidentia.

Generation Development’s FY25 saw revenue up 191% year on year, underlying profit up 170%, investment bonds up 33% and managed accounts up 48%. Underlying profit beat consensus by 13%, Lonsec outperformed, but most other metrics were in line with expectations.

Lonsec delivered a particularly strong earnings margin increase in the second half over the first (49.8% versus 41.7%). Gross profit margins in both key Lonsec sub-businesses (Research and Ratings and Lonsec Investment Solutions) increased by 5%-8% sequentially.

Evidentia missed its funds under management (FUM) target for the year but the business still grew revenue by 63% year on year, while more than doubling profit. Management noted the integration of Lonsec and Evidentia had provided some impediment to near term growth, while importantly, Morgans suggests, indicating Evidentia was achieving its targeted 60% client FUM to funds under administration (FUA) conversion rate.

[FUM are funds for which Evidentia charges an investment margin/management fee. FUA means Evidentia charges an administration fee, which reduces dependence on performance-linked flows but is also typically lower margin.]

Management acknowledged the strong performance of the Lonsec business will see Generation Development having to pay close to the maximum possible acquisition earn-out payment (-$55.7m), but noted  the company is well capitalised to cover this payment having $105m of cash on balance sheet and having just opened a $50m debt facility with a major bank.

Generation Development will provide a first quarter FY26 update in late October. Given the fourth quarter FY25 performance and July platform net inflows/FUA growth, Morgan Stanley (Overweight; target $7.50) expects a strong start to FY26.

Morgan Stanley suggests proposed Division 296 legislation and the then certainty of a cash tax liability from unrealised superannuation capital gains could drive a step-change in investment bond demand (though the government’s plan has become less straightforward), while further catalysts can come from meaningful managed account wins as well as further progress on managed accounts integration, synergies and pipeline.

Division 296 refers to Jim Chalmers’ controversial proposed additional 15% tax on earnings attributable to the portion of an individual’s total superannuation balance that exceeds $3m. It further proposes a tax on unrealised (“paper”) gains on investment (but no refund on losses – only a carry-forward tax loss against future gains).

Moelis (Buy; $8.12) suggests Generation Life continues to benefit from legislative tailwinds and rising adviser adoption, while the BlackRock partnership supports innovation in retirement income. The world’s largest asset manager, BlackRock, took a minority stake in Generation Development earlier this year and will partner with Generation Life to lead innovation in Australia’s retirement income sector

The full consolidation of Lonsec and acquisition of Evidentia create scale in managed accounts at a time of strong structural growth, Moelis notes. With predictable earnings streams, sector-leading positions and a capital-light model, Generation Development is seen as well placed to compound earnings and deliver long-term shareholder value.

While the share price has increased strongly over the last year, the re-rating has been supported by improving overall fundamentals, in Morgans’ (Accumulate; $7.49) view. Morgans has been impressed by the recent step up in the investment bond sales trajectory, while the acquisitions of Lonsec and Evidentia give the company a market leading position in the fast-growing SMA space.

Petra Capital has this week reinstated coverage of Generation Development with a Buy rating and unchanged $7.17 target. A prior Hold rating was largely a function of concerns the Evidentia acquisition would take longer to bed down. Given the market has digested this point, the risk reward is back in favour and Petra is comfortable with a Buy rating.

Generation Development has been successful as a “challenger” brand, taking share in investment bonds to become the number one player over the past five years, Petra notes. The company is a “challenger” to Challenger ((CGF)), which controls 75-80% of Australia’s annuities market. According to PwC, less than 2% of superannuation assets were allocated to an annuity as at June 2024.

The BlackRock Lifepath Paycheck annuity product closed 2024 with US$16bn in assets under management which is materially higher than Generation’s Lifeincome product at AU$59.5m. Tailoring this product for the domestic market could be a gamechanger for Generation Life’s annuities value proposition, Petra suggests.

Given the ongoing investment in annuity products with BlackRock, Petra expects to see early progress with an anchor customer during FY26.

The broker believes if well executed, annuities could be a far larger opportunity than investment bonds.

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