DeA Capital — Expanded platform continuing to grow

DeA is the leading independent (non-bank) platform operator in AAM in Italy, providing a broad range of products and services for institutional investors. At 30 September 2020, combined AUM (including c €7.7bn managed by Quaestio Capital Management, in which DeA is the largest shareholder, acquiring a 38.8% stake in November 2019) were c €23.0bn.

DeA shares are listed on the FTSE Italia STAR section of the Milan Stock Exchange and the company is majority owned by De Agostini, a large Italian private group of companies owned by the Boroli and Drago families, with operations in the media, gaming and services sectors. De Agostini owns 67.1% of DeA and the free float is 30.4%.

Within the alternative investment area, DeA is engaged in the promotion, management and development of real estate, credit and private equity funds, as well as multi-asset/multi-manager investment solutions. Its growing AAM platform combines experience, knowhow and market reach to support the sourcing of investments, the structuring of often complex transactions and the ability to distribute these to a broad investor base.

The growth and development of DeA’s AAM business is supported by a strong and liquid balance sheet. The end-Q320 NAV of €426.0m or €1.63 per share comprised the equity of the AAM businesses (€211.5m), a portfolio of alternative investments (€126.0m), mainly ‘platform investments’ or seed capital/co-investment in own-managed funds, and a strong holding company net financial position of €81.7m or €0.31 per share (the consolidated financial position, including subsidiary liquidity, was €118.6m).

The significance of the AAM business, with its growing stream of recurring income, as the driver of the group financial performance and valuation can be seen in Exhibit 2. We examine the progress of the AAM business, with the underlying, core ‘net operating result’ increasing to €13.0m in the first nine months of 2020 (9m 2019: €11.2m), in the following section.

Although the 93.6% growth in combined AUM between the end of Q319 and the end of Q320 significantly reflects the Quaestio transaction in November 2019, organic growth is continuing despite COVID-19, driven by new fund launches. The Quaestio transactions added €2.5bn directly to consolidated ‘credit’ AUM and €7.6bn of multi-asset/multi-manager non-consolidated AUM managed by the Quaestio associate.

During Q320 the DeA Capital real estate segment completed the launch of new funds in Italy and a new project for the Iberian market, adding €200m in AUM. In the credit segment, the seventh and eighth closings of the Corporate Credit Recovery Fund II were finalised, adding €40m to AUM and increasing the fund size to c €615m. New private equity funds were c €400m, of which the largest component was €330m relating to the closing of the Taste of Italy II fund, to which DeA has committed €25m. Just after the period end, a new closing of €20m for the multi-manager DeA Endowment Fund, dedicated to foundations, was finalised.

Consolidated revenues increased by 7.3% in the first nine months of 2020 and 16.2% in Q320, compared with similar periods in 2019. The rate of change in year-on-year change in revenues is below that of AUM because of the significant shift in AUM mix. In Q320, the increase in revenues was above the growth in AUM and was above H120 quarterly average both on a consolidated basis (c €16.3m per quarter) and on a combined basis (c €6.4m per quarter) with the average revenue margin increasing very slightly. We understand that fund launches in Q320 had a positive impact on revenues in the period.

The AAM net operating result shown in Exhibit 2 includes DeA Capital Real Estate, DeA Capital Alternative Funds and DeA’s share of earnings from Quaestio Capital, all adjusted for amortisation of PPA and other non-recurring items, including the investment result from fund holdings. ‘Other’ AAM includes the contribution from the 41%-owned property services associate YARD and the newly created pan-European real estate platform subsidiaries/associates in France, Spain, Germany and Poland, all of which are in the investment phase and loss-making. ‘Other AAM’ also includes (adds back) the adjustments for PPA and non-recurring items that are made to the core net operating result.

The Q320 AAM net operating result was €5.5m compared with €7.5m in H120. The other AAM contribution was a negative €1.5m in Q320 compared with €0.9m in H120 and included reduced revenues (transaction driven) from the pan-European real estate subsidiaries and increased negative valuation adjustments for the platform real estate fund investments.

Our AAM divisional forecasts are little changed from those detailed in our Outlook note. We continue to a forecast AAM net operating result of €15.9m in FY20 and €16.6m in FY21. Within the result, higher AUM and asset management revenues are offset by higher expenses and other items. Within other AAM, our forecast loss is slightly reduced as a result of higher revenues (although lower in Q3, it was above our assumption) and slightly lower costs.

During Q320 the holding company’s net financial position increased from €71.3m at H120 to €81.7m. Including balances within the subsidiaries, the consolidated net financial position increased from €97.2m to €118.6m. During the quarter, capital calls on DeA’s fund commitments were €2.1m (€5.8m for 9m 2020) and capital reimbursements were €3.4m (€10.4m for 9m 2020). Additionally, DeA received €5.7m (making a total of €22.2m) from the liquidation of its investment in the special purpose acquisition vehicle IDeaMI.

Net asset value per share was unchanged in Q320 compared with H120 at €1.63 per share, with the retained earnings of the AAM business offset by the net effect of alternative investment (the alternative investment asset portfolio) and holding costs and a positive tax contribution (Exhibit 2).

The Q320 NAV per share is up slightly on end-2019, adjusted for the €0.12 distribution paid during H120. The NAV total return (change in NAV plus dividends paid) for 9m 2020 was 1.2%.

NAV captures AAM valuation fairly

The current equity of the AAM platform companies is carried at €211.5m, similar to H120 (€207.5m) and includes c €126m of goodwill and intangible assets. This is equivalent to a 13.0x multiple of the FY20e net operating result and 12.5x the FY21e result.

Obviously, an investor cannot access the core platform earnings in isolation so it is reasonable to include the other AAM result, although noting this is burdened by investment costs related to the pan-European real estate build-out. Based on the underlying earnings for the total AAM division (including ‘other AAM’ but excluding PPA, investment gains/losses and other non-recurring items), the AAM equity is equivalent to a 16.0x multiple for FY20 and 15.4x for FY21.

This suggests that in broad terms the AAM equity carried within the NAV of the group fairly matches the underlying fair value of the AAM platform, measured in terms of earnings capacity and fair market multiples.

Our group NAV per share forecasts are little changed and as discussed in our Outlook note, DeA’s P/NAV of c 0.7x is the lowest in its peer group and at c 10% (with distributions supported by a strong holding company financial position rather than recurring earnings) its yield is the highest. This suggests there is significant value potential not captured in the current share price. In part, this reflects a low return on equity (ROE) compared with the peer group (compound annual average NAV total return of 1.1% over the five years to end-FY19), partly but not wholly explained by the depressing effect of high liquidity. A continued successful deployment of resources into the further growth of the low capital intensity AAM platform, while continuing to reward shareholders with attractive distributions, should enhance ROE.

Recognising the significant discount to NAV at which the shares trade, DeA has a share repurchase programme in place with a target of acquiring up to 20% of the ordinary shares outstanding. Since starting the buy-back in November, DeA has acquired almost one million shares, increasing the end-Q320 treasury share position of c 5.6m shares (c 2.1%) to c 6.6m shares or c 2.5% of the total. The shares were acquired at an average c €1.11, a more than 30% discount to NAV. Further accretive repurchases are likely although currently reduced trading liquidity in the shares and limitations on the proportion of daily volumes that repurchases may represent are limitations.