Anybody who takes a look at my portfolio will see I’m a huge fan of Brookfield Asset Management. I’m a big believer in Bruce Flatt and know that I want him responsible for a lot of my portfolio’s returns. But BAM.A is huge. I salivate at the thought of having invested back when it was Brascan. Integrated Asset Management may give me a chance to turn back the clock so to speak.
Integrated Asset Management (IAM) is an alternative asset manager for institutions and private clients, just like Brookfield. Where Brookfield focuses on private equity, real estate, infrastructure, and renewable energy; IAM focuses on private debt, real estate, and infrastructure.
The process at Integrated goes like this – management sees a desire in the market for a fund in a certain sector, let’s say private debt. They see there’s a dearth of private debt funds, and they believe certain institutions would be willing to invest money into one for ~5% return. So they open a new private debt fund, and go about fundraising, asking pension funds, insurance companies, and other large investors to commit capital to this. Once they reach a sufficient amount of money to fund their investments, they close the fund. Then they are able to go around investing the money they just raised. This press release shows an example of an investment they’d make, loaning $40 million to Fortress Paper. The fund goes on for a certain amount of time, after which the fund is discontinued.
There are certain characteristics of IAM that you need to understand to understand the thesis on this one. First, as an asset manager will, IAM earns management fees on their assets under management (AUM). IAM realizes the fees once the assets are invested though, not committed. So news releases like the one above tell you right away that IAM now has another $40 million invested earning management fees.
At this time, AUM are $2.525 billion, while invested capital is ~$1.732 billion. Three months into 2017 and management has closed four private debt deals worth approximately $100 million, showing that demand is there for what the company is offering. It also shows that there’s a good chance the remaining $800 million should be invested without much problem in the next year or two, significantly increasing capital contributing to revenue.
The second unique trait is the performance fees IAM earns. IAM earns a performance fee when a fund returns above a certain benchmark. But most of these fees go unrealized until near the end of a fund’s life. The performance fee can also disappear entirely if the fund under performs, so it’s not a sure thing to count on them. But the company is earning money which goes unrecognized until they are about to wind up a fund. At the end of fiscal 2016 management reported estimated unrealized performance fees to be $11,396,000, to be realized by 2024. Their 10th real estate funds winds up in 2018, and they expect to realize almost $700,000 next year in performance fees.
Performance fees are no sure thing but they should be taken into account somehow. I discount the estimate of next year’s realization by 20%, so I count on IAM earning $555,200 in performance fees, compared to $446,000 in 2016 (which came from a discontinued operation).
There are some encouraging numbers coming out of IAM right now. Over the past year, AUM increased $207 million (9%). Invested capital has increased by $216 million (14%). These increases have contributed and will continue contributing to revenue and profitability improvements.
All we have are numbers for the first quarter of their fiscal 2017, but they still look good. Revenues excluding investment gains/losses grew 11%. EBITDA was $81,000 compare to -$628,000 in Q1 2016. In Q1 2016 IAM realized proceeds from the sale of a discontinued operation of $401,000. If you take that away, net income improved from -$236,000 to -$30,000, which turns out to be a negligible loss per share.
I’m a big fan of management teams that are able to trim fat from the expense side while maintaining and increasing sales. With 29,219,295 shares outstanding (including all stock options), $300,000 works out to be about $0.01 per share. When you see that management has been able to cut $800,000 of expenses, and expect that this new expense level represents the new normal, profitability is increased by almost 3 cents per share indefinitely. In my valuations I use the new expense level for my estimates going forward.
IAM pays out a $0.06 dividend once a year, which works out to a 4.5% yield at today’s $1.32 share price. This is $1,753,158 per year, compared to over $10 million of cash. This dividend will not be cut, and could be increased with the improved results that I’m expecting. That total number also assumes all options are exercised today (not the case), so actual expenditure is ~$100,000 less.
Let’s make some guesses about 2017 and 2018 shall we?
For the full year of 2017, I’m going to assume:
- Expenses of $10 million, a bit higher than if Q1’s expense level is repeated each quarter.
- No more funds close, so AUM stays flat.
- No performance fees are realized
- Of the $800 million committed but not invested, only 10% is invested
- Dividend remains the same
- Managed futures sale closes, increasing the company’s cash by $3.3 million
- Management fees per dollar invested remains flat. Using year end numbers for invested capital and full year management fees (flawed I know) this has been ~0.75 cents per dollar invested.
Given the above,
On September 30, 2017 the company should have $1.812 billion invested, leading to management fees of $13,590,000, up over 11%. With no performance fees or investment gain/loss and interest income flat with 2016 (conservative I think), this will lead to revenues of $13,859,888.
With total expenses of $10 million this means the company should have EBITDA of $0.13 per share. If the company pays out $1.7 million in dividends, receives $3.3 million from the managed futures sale, and has zero cash flow from operations (very unlikely), it will end 2017 with no debt and $12.8 million in cash. Today the enterprise value of IAM is ~$27.4 million, so it is trading at an EV/EBITDA (what I expect for 2017) of 7x. Unfortunately I’m writing this about one month late as very recently IAM was trading at 5.7x EV/EBITDA using my estimates.
It’s tough to find peers for this little Brookfield, but this well reasoned post estimates that IAM should trade at 8x EV/EBITDA due to the high quality institutions that are invested with them. If my estimates are anywhere near right and IAM trades up to EV/EBIDA of 8x, IAM could be trading at $1.49 on September 30. Include your dividend and you’re looking at a potential 17% return in six months.
Estimating out two years is tougher but I’ll give it a shot. I’ll assume:
- Expenses increase to $11 million. Expenses may increase due to bonuses, etc, but this estimate should still be on the high side
- Invested capital ends the year at $2 billion invested. With $800 million in dry capital and 18 months to invest it this should be reasonable
- Management fees per dollar invested stays 0.75 cents
- Performance fees of $555,200, which should be conservative
- Interest income stays flat
Given these assumptions, EBITDA should be $4,825,088 (16.5 cents per share). If we somehow assume IAM ends 2018 with $12.8 million in cash again after paying a 7 cent dividend, and trading at 8x EV/EBITDA we get a share price of $1.76. That would give a 22.8% return in 2018, after your 17% return in six months of 2017.
There are many reasons why insiders might sell their company’s stock, but there’s is only one reason they buy. CEO John Robertson was a buyer last week at $1.30.
Management and insiders own a stupid amount of stock, aligning their interests with yours and mine. Veronika Hirsch, frequent BNN guest and former manager of an IAM retail management business, owns almost 5 million shares. That link has a pretty fun and forgotten story about Hirsch. The founder and chairman Viktor Koloshuk owns over 9.5 million shares. Those two alone make up almost half of the outstanding shares and options.
There is also a chance this company gets bought out. A similar company was purchased by Fiera Capital for 10% of AUM. That premium is partly to do with Fiera’s familiarity with Centria as Fiera clients had a lot of money invested with them. It’s also possible Centria was more profitable than IAM. But if we take a potential $2.00 buyout price, the acquiring company would only be paying 2.3% of AUM and ~15x EBITDA. With such high inside ownership there’s little chance any attractive deal would fall through, and you can be sure that it would be the best deal for shareholders.
Integrated Asset Management has the potential to be a tiny Brookfield. But you actually have a chance to buy this company while it is being undervalued by the market. AUM is growing, invested capital is growing, which means EBITDA is growing. The company has no debt, a generous dividend, and based on my very conservative estimates will be making much more money in the next two years, which will lead to a higher share price. I expect this stock to be $1.50 by the end of this year, and likely $1.80 by the end of 2018. Management owns most of the company, and their interests are aligned with yours. IAM is a great value here even after the run up the past month, and now you are buying a value company with momentum behind it.
Disclosure: I have no position in IAM but plan to buy in the next 72 hours.