Alternative manager with balance sheet support

DeA Capital 10 June 2019 Outlook
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DeA Capital

Alternative manager with balance sheet support

Company outlook

Financial services

10 June 2019

Price

€1.26

Market cap

€327m

Holding company net financial position (€m) at 31 March 2019

92.5

Shares in issue (excluding treasury shares)

259.2m

Free float

24.4%

Code

DEA

Primary exchange

BIT

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(17.4)

(9.2)

(1.9)

Rel (local)

(14.0)

(7.3)

5.6

52-week high/low

€1.6

€1.2

Business description

DeA Capital, a De Agostini group company, is Italy’s leading alternative asset manager of real estate, private equity and NPLs, with AUM of c €11.9bn at 31 March 2019. The investment portfolio, including co-investment in funds managed, investment in the asset management platform and direct investment, amounted to c €372m.

Next events

Half year 2019 results

5 September 2019

Analysts

Martyn King

+44 (0)20 3077 5745

Andrew Mitchell

+44 (0)20 3681 2500

DeA Capital is a research client of Edison Investment Research Limited

As DeA Capital targets growth in its alternative asset management operations, where it is already a leader in Italy, the past year has seen it eliminate the minority interest in its key real estate subsidiary and take its first steps towards building out a pan-European real estate platform. New fund launches across private equity, real estate and credit have more than offset the impact of maturing fund of funds.

Year end

Closing AUM (€bn)

AAM fees* (€m)

NAV/share
(€)

DPS (declared) (€)

P/NAV
(x)

Yield
(%)

12/17

11.7

59.8

1.92

0.12

0.65

9.6

12/18

11.9

63.3

1.84

0.12

0.68

9.6

12/19e

12.2

62.4

1.73

0.12

0.72

9.6

12/20e

12.6

61.4

1.65

0.12

0.76

9.6

Note: NAV as reported, including goodwill. *Divisional AAM fees before group consolidation adjustment for own funds managed.

Building out the AAM platform

DeA is a leader in AAM in Italy, providing an integrated platform comprising private equity, real estate and credit funds, with AUM of €11.9bn. Its strategic focus is to consolidate this strong domestic market position, while selectively exploring opportunities for expansion into other European markets. It seeks to benefit from the growth in the alternative asset subsector within the wider asset management industry, while further expanding its base of investors, as well as broadening its product range. 100% ownership of DeA Capital Real Estate represents a simpler, more flexible and potentially more efficient base from which to expand the real estate platform from Italy into broader Europe. The recent creation of real estate advisory and consultancy subsidiaries in Spain and France are the first steps in this development.

With strong balance sheet support

DeA has a strong capital base and cash flow. The end-Q119 net assets (adjusted for the c €31m/€0.12 per share dividend payment in May) were almost €450m, or €1.70 per share. In addition to investments in the AAM platform, it has an investment portfolio of c €170m, comprising co-investments in own funds managed and direct shareholder investments. Management sees potential net divestment of c €100 over the next three years or so, a significant sum, available to support AAM growth through platform investment, support for new fund launches, opportunistic new direct investments and distributions to shareholders. We believe this would be supportive of asset management growth and a higher group ROE.

Valuation: Cash flow for yield and growth

The discount to IFRS NAV has narrowed over the past year, but at c 0.7x DeA still has the lowest P/BV among a range of peers and the highest yield. The discount to our adjusted NAV (see page 8) of €1.75 (ex-dividend) is slightly larger still. A strong balance sheet and cash flow position support an attractive yield, and provide resources for investment to grow AAM further.

Leader in Italian AAM

DeA Capital (DeA) one of Italy’s largest alternative investment operators, with assets under management of c €11.9bn and an investment portfolio of more than €370m as at 31 March 2019. 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 private group owned by the Boroli and Drago families, with operations in the media, gaming and services sectors. De Agostini currently owns 58.3% of the shares but, allowing for the cancellation of treasury shares recently approved by shareholders and due to take effect in August, this will increase to 67.1%. On the same basis, the free float will increase from the current 24.4% to 30.4%.

In alternative asset management (AAM), DeA is the leading independent (ie non-bank) promoter and manager of real estate, private equity and credit investment funds through its subsidiaries DeA Capital Real Estate and DeA Capital Alternative Funds, both now wholly owned. In addition, 45%-owned associate YARD provides property services to the real estate sector to a range of clients including DeA.

The investment portfolio comprises DeA’s investment in the AAM platform as well as co-investment in its own funds managed and direct investments. The investments are made from the group’s permanent capital base, which allows the group to take a long-term view and avoids any of the pressures to divest within a pre-determined time frame that may occur with a traditional private equity fund.

In recent years, DeA’s strategy has been to recycle the proceeds of divestment from legacy large-ticket private equity investments and reimbursements from maturing fund holdings towards investment in further building the AAM platform infrastructure, supporting new fund launches, and selective direct investment including the sponsoring of Italian special purpose acquisition vehicles (SPACs), while also returning significant amounts of excess cash to shareholders. In our view, AAM has stronger growth prospects, greater earnings visibility and more stable cash flows than direct private equity investment, and has the potential to be more highly valued by the market.

DeA’s net asset value at 31 March 2019 was €471.1m, or €1.82 per share, before the May payment of €0.12 per share (c €30m) in dividends. The net assets of the AAM business (43%), investments in private equity and real estate funds (26%) and a significant net financial position (20%) together represent 89% of the NAV. The direct investment portfolio accounted for most of the balance (8%).

Exhibit 1: Group financial position

31-Mar-19

31-Dec-18

€m

€ per share

€m

€ per share

Alternative Asset Management (AAM)

DeA Capital Real Estate

151.5

0.58

140.4

0.55

DeA Capital Alternative Funds

45.5

0.18

43.4

0.17

Other (inc YARD, DeA Capital RE France/Spain)

5.6

0.02

5.6

0.02

Total AAM

202.6

0.78

189.4

0.75

Private Equity Investment

Private equity/real estate funds

120.9

0.47

125.0

0.49

Kenan Investments (Migros)

17.3

0.07

19.4

0.08

Other (inc IDeaMI, Cellularline)

31.6

0.12

31.6

0.12

Total private equity investment

169.8

0.65

176.0

0.69

Total investment portfolio

372.4

1.44

365.4

1.44

Other net assets/(liabilities)

6.2

0.02

0.5

0.00

Holding company net financial position

92.5

0.36

100.6

0.40

Net asset value (NAV) – before €0.12 per share distribution in May 2019

471.1

1.82

466.5

1.84

Source: DeA Capital

Highly focused on growing the AAM platform

DeA is already the leading independent promoter and manager of real estate, private equity and credit investment funds in Italy, and the group’s strategy is to grow this further while expanding into other countries in Europe. The latter would be targeted at taking advantage at the growth in the alternative asset subsector within the broader asset management industry, while further expanding DeA’s base of investors as well as broadening its product range.

2018 and the early months of 2019 saw two significant developments:

The buyout of minority interests in DeA Capital Real Estate. At the start of FY18, DeA owned c 65% of this key subsidiary, but in two transactions has taken full ownership. We welcome this move, believing it was conducted on attractive terms, increases DeA’s AAM exposure, adds flexibility to the management of the group and simplifies its structure. In November 2018, DeA completed the acquisition of an additional c 29.7% of DeA Capital Real Estate, from minority partner INPS, increasing DeA’s ownership to c 94.0%. The consideration for the acquisition of the stake was €40m, based on the book value of DeA Capital Real Estate, wholly financed from DeA’s significant internal cash resources. In addition, there is a maximum earnout of €4.5m over the three-year period 2019–21 that is subject to DeA Capital meeting undisclosed set targets for new assets under management. In March 2019, DeA acquired the remaining 6%, also at book value, which was owned by Fondazione Carispezia, a private foundation that remains one of the main shareholders in the Italian bank, Credit Agricole Carispezia. The €8m consideration has been settled with DeA treasury shares, which are subject to a six-month lock-up, and the agreement also includes a maximum earnout of €0.9m. The implied value placed on the c 5.2m treasury shares issued was c €1.55, above the market price at the time and now.

First steps in the creation of a pan-European real estate platform. Building on its existing leading position in Italy, DeA established two new majority-owned real estate subsidiaries in France and Iberia in partnership with experienced local management. 70%-owned DeA Capital Real Estate France was established in September 2018 and was followed by 73%-owned DeA Capital Iberia in February 2019. The new companies are partnered with experienced local management and aim to develop real estate advisory and consultancy activities for fund-raising and real estate management.

DeA’s existing AAM platform consists of 198 professionals and provides a wide range of products on a multi-asset platform across real estate, private equity and credit investment funds. It has a proven capability to structure and launch innovative products and benefits from a deep knowledge of, and extensive contacts in, the Italian market. We next look at the main platform components in more detail.

DeA Capital Alternative Funds

DeA Capital Alternative Funds manages private equity funds with aggregate AUM of €2.5bn at 31 March 2019. It manages 12 closed funds of funds, comprised of funds of funds (five), thematic funds (five) and credit funds (two).

Fund launches in recent years have been in the areas of thematic funds and credit funds, driving a gradual shift away from funds of funds, which are of older vintage and in their disinvestment phase, and have in any case proved less popular with investors. Looking forward, DeA anticipates a regular stream of new fund launches, with a seeding commitment of c 10%, consistent with its experience of recent launches.

2018 saw the launch of the thematic fund IDeA Capital Agro Fund in July (€80m commitment), and the shipping segment (‘CCR Shipping’) of the credit fund, IDeA Corporate Credit Recovery II Fund (€170m commitment), in December 2018. IDeA Capital Agro Fund is the first Italian private equity fund dedicated to investments in Italian agricultural businesses with eco-sustainable business models. CCR Shipping is a new segment for the IDeA Corporate Credit Recovery II Fund, dedicated to acquiring shipping loans from banking partners. During Q119, DeA Capital Alternative Funds launched the DeA Endowment Fund, a closed-end fund of funds intended for investment by banking foundations, and was awarded the management of a portion of Azimut Capital-managed ‘Azimut Private Debt’ closed-end fund. Together, these new mandates added €114m to AUM.

DeA Capital Real Estate

DeA Capital Real Estate is the largest independent real estate manager in Italy, with a c 20% share by AUM. It had AUM of €9.3bn at 31 March 2019 comprising 47 managed funds including two listed funds.

DeA Capital Real Estate specialises in core real estate investment strategies, targeting income-producing real estate that is bought and then held for the long term; however, it also offers value strategies. Value strategies look for opportunities to benefit from improving the income stream and value of the property acquired. Overall, it seeks investments in transactions with low-risk, stable returns and low volatility. As a result, its portfolios are focused on good-quality real estate assets in large Italian cities with a significant share of the total represented by office buildings and bank branches.

DeA Capital Real Estate’s appeal to institutional investors such as pension funds, insurance companies, sovereign wealth funds, corporations and banks, both from Italy and from abroad, is enhanced by its strong market positioning in Italy. The investor base comprises c 100 institutional investors, representing c 90% of all investments and more than 70,000 retail investors.

Business development is focused on expanding existing funds, launching new core and value initiatives, and expanding the product range. In 2018, eight new funds were launched raising AUM of €1.0bn.

The investment portfolio supports AAM

DeA’s private equity investment portfolio amounted to €169.8mn at end-Q119, including real estate and private equity fund investments of €120.9m and direct investments of €48.9m. The fund investments are primarily co-investment in nine of the DeA-managed private equity funds, but also include a small amount of investment in three own-managed real estate funds, and a small balance of legacy investment in five externally managed venture capital funds. In addition to the investment portfolio, a c €55m (as at 31 March 2019) investment in DeA managed real estate funds is held within the DeA Capital Real Estate subsidiary.

The end-Q119 direct investment portfolio of €48.9m included:

Migros (via Kenan Investments). Through its 17.1% interest in Kenan Investments, DeA has an indirect interest of c 4.0% in Migros, a large, quoted, Turkish food retailer. The Migros stake was significantly reduced during 2017, from an indirect c 6.9%, at prices significantly ahead of current levels, which have recently been affected by volatility in Turkish capital markets. We believe it is likely that the remaining stake will be exited during the next two years, as the primary investment vehicle in which DeA is a participant reaches maturity. No further sales are reflected in our estimates and our fair value marks to market the existing investment. The investment was valued at €17.3m (€0.07 per share) at 31 March 2019 but has since increased in value by c €1.0m (see Valuation section).

Cellularline. DeA has a 4.4% minority shareholding in Cellularline, with a market value of c €6.2m, resulting from the business combination of Crescita SPAC and Cellular Group. DeA had originally acquired a stake in the issued shares of Crescita, an Italian special purpose acquisition vehicle (SPAC) when it launched in early 2017, for €8.1m.

IDeaMI. Together with Banca IMI, DeA sponsored the launch of this SPAC in December 2017, taking a 9.7% interest in the total shares issued. In addition to ordinary shares in the SPACs, DeA owns special shares that may be converted to ordinary shares on beneficial terms, following a business combination with a suitable target within 24 months of listing. IDeaMI’s objective is to create a business combination within 24 months of listing. In December 2018, IDeaMI shareholders rejected a proposed combination with Agrati Group.

The legacy large-ticket private equity investment operations have been substantially liquidated and the remaining investments refocused in recent years in a way that can be summarised as follows:

Sponsoring the new initiatives of the AAM fund platform with an expected seeding commitment of c 10% of total commitments, lower than in the past. Due to the heavier commitments to earlier funds, it can be seen that, on average, DeA’s commitments to the existing managed funds is closer to 20%.

Sponsoring new Italian SPAC initiatives, as market conditions and investor demand allow.

Selectively investing in new private equity transactions but, in contrast to earlier transactions, on a co-investment/club basis with a smaller (€25–30m) ticket size.

The primary purpose of the division is to support the development of the AAM activities and enhance the returns on shareholder capital. On balance, the amount of capital committed to the operation is likely to continue to reduce, providing significant net cash flow to support continuing shareholder distributions.

Financials

Key drivers of value

A summary of the historical and our forecast group financial statements (prepared under IFRS) is shown at the back of this report in Exhibit 9. The IFRS results include changes in the fair value of DeA’s fund and direct investments, and this contributes to significant volatility. We continue to suggest that investors focus on:

trends and performance within the AAM division;

the development of NAV total return, including the profit contribution from AAM, but also changes in the value of the investment portfolio; and

cash flow and dividend-generating capacity after investment.

AAM division forecasts

The AAM division segmental reporting in the DeA group accounts includes the core AAM platform comprising DeA Capital Real Estate and DeA Capital Alternative Funds, but also other activities including 45%-owned property services associate YARD and the investments being made in the European real estate platform in France and Spain. We model the AAM activity in line with the group segmental accounts and the financial results should not be directly compared with management’s comments about the (‘core’) AAM platform result.

Our forecasts for this year and next look for broadly flat AUM in alternative funds and steady growth in real estate. In alternative funds, AUM is defined as total investment commitments, whereas the actual basis for management fees may be AUM or the fund-level NAV, or in some cases other arrangements also exist. Similarly, in real estate, there is a difference between published AUM, based on the gross assets managed, and the fee earning asset base. In real estate the difference mainly arises because some funds generate fees based on net asset rather than gross assets. DeA has recently begun to publish the ‘asset base’ on which fees are generated on a regular basis and at end-Q119 this was €1.7bn for alternative funds (c 70% of AUM) and in real estate it was €8.6bn (c 92% of AUM). We expect broadly stable fee margins, although the picture is distorted in alternative funds by the recent additional performance fee income that has been earned on the Investitori Associati IV private equity fund, originally promoted by Investitori Associati SGR but managed in run-off by DeA Capital Alternative Funds since 2015. We understand that this was c €2.5m in each of Q418 and Q119. We do not forecast further performance fees given their non-recurring nature and the difficulty in doing so (this is why our forecast management fees are lower in FY20), although DeA management is hopeful that the continuing run-off process will generate further payments, while over the medium term it hopes to benefit from performance fees/carried interest in other funds.

From our discussion with the company, we expect that investment in the pan-European real estate platform development will be in the range of c €2.5–€3.0m pa over the next two years and we have allowed for this but have included no immediate revenue benefit. In Exhibit 2 this is reflected in the ‘other’ segment loss, with investment costs partly offset by other activities including 45%-owned associate YARD.

Our adjusted earnings measure tracks the underlying recurring earnings of the segment. It adds back non-cash purchase price amortisation (PPA) relating to the historical transactions that created DeA Capital Real Estate, takes out the notional ‘normalised’ earnings that we attribute to the segment in respect of the real estate fund investments that it holds (see below), and adjusts for other non-recurring items.

Exhibit 2: Summary of AAM segment forecast

€m unless stated otherwise

2015

2016

2017

2018

2019e

2020e

Period-end AUM (€bn)

DeA Capital Alternative Funds

1.643

1.937

2.190

2.430

2.534

2.534

DeA Capital Real Estate

7.884

8.672

9.542

9.451

9.711

10.111

Total period-end AUM (€bn)

9.527

10.609

11.732

11.881

12.245

12.645

Period average AUM (€bn)

DeA Capital Alternative Funds

1.581

1.844

1.944

2.230

2.521

2.534

DeA Capital Real Estate

8.600

8.059

9.282

9.266

9.491

9.911

Total period average AUM (€bn)

10.181

9.903

11.226

11.495

12.012

12.445

Management fees/AUM (bp)

DeA Capital Alternative Funds

107

112

95

105

87

78

DeA Capital Real Estate

55

50

45

43

43

42

INCOME STATEMENT

DeA Capital Real Estate

47,725

40,261

41,381

39,768

40,383

41,626

DeA Capital Alternative Funds

16,947

20,724

18,438

23,483

22,055

19,765

Total alternative asset management fees

64,672

60,985

59,819

63,251

62,438

61,391

Income from equity investments

(359)

531

822

717

1,160

1,189

Other income/expense

(88)

1,088

1,676

(4,212)

2,545

2,267

Income from services

18,549

8,336

703

1,867

3

Revenue

82,774

70,940

63,020

61,623

66,146

64,848

Total expenses

(120,285)

(60,245)

(91,116)

(47,539)

(46,928)

(47,314)

Finance income/expense

616

19

13

(39)

(100)

Profit before tax

(36,895)

10,714

(28,083)

14,045

19,118

17,534

Taxation

(409)

(3,405)

(2,991)

(4,817)

(6,607)

(5,940)

Profit after tax

(37,304)

7,309

(31,074)

9,228

12,511

11,594

Minority interests

16,631

1,178

13,575

(109)

190

Attributable profits

(20,673)

8,487

(17,499)

9,119

12,701

11,594

Adjustments (net of tax & minorities)

PPA

1,042

592

543

688

420

SFP

1,494

2,460

632

Goodwill

24,897

Other income/expense

(1,017)

(839)

2,948

(1,781)

(1,587)

Provisions against investment impairment

Adjusted attributable earnings

10,006

9,611

13,242

11,608

10,427

o/w DeA Capital Real Estate

5,058

5,889

7,103

8,260

8,701

o/w DeA Capital Alternative Funds

3,776

3,153

6,114

4,513

3,177

o/w other (inc YARD and European RE platform investment)

1,173

570

25

(1,165)

(1,451)

Source: Company data, Edison Investment Research

Estimating future changes in NAV

In addition to our estimates for the AAM profit contribution, our NAV forecasts seek to capture at least part of the potential for growth in NAV from the investment portfolio. We assume a normalised growth in the carried value of all of the fund investments (whether consolidated or equity accounted), an approach that differs from the way that these assets are actually managed, which seeks to maximise IRR, but we believe it to be a useful way of capturing at least some of the returns that may be earned over time. We assume:

A 7.5% pa growth in value (fair value gains net of impairment) for all private equity funds. For modelling purposes, we assume that all of the IDeA OF1 returns are unrealised valuation movements, taken to other comprehensive income.

A 4.0% pa growth in value for the real estate funds (Venere and the DeA Capital Real Estate funds), of which we would expect the majority to represent the yield on the assets.

The blended average forecast AFS fund return (private equity plus real estate) is c 6%, which compares with an average 9.0% (fair value movement less impairment) over the past five years. The five-year average return (fair value movement plus net profit) on the consolidated IDeA OF1 has been lower than our assumed 7.5%, at 3.6%.

Somewhat conservatively, we have assumed no changes in the value of (or income from) the quoted investments Migros, Cellularline and IDeaMI.

We forecast continuing strong cash flow

At 31 March 2019, the holding company net financial position (defined as holding company cash and cash equivalents, available for sale financial assets, and financial receivables less current and non-current liabilities) was €92.5m or c 20% of NAV. At a group level, including net financial assets within the subsidiaries, it was higher still, at €137.7m.

Since the end of Q119, the holding company net financial position has benefited from a €22.9m dividend distribution from the AAM business, a significant increase from €7.5m in 2018, and substantially covering the c €31m (€0.12 per share) shareholder distribution in May 2019.

As can be seen from Exhibit 3, the net financial position has been consistently strong over several years, allowing DeA the flexibility to selectively invest in the AAM platform, and fund development and new direct investments while making attractive distributions to shareholders.

Exhibit 3: Net financial position

€m

2014

2015

2016

2017

2018

2019e

2020e

Cash and Bank deposits

55.6

123.5

96.4

127.9

143.8

133.3

133.6

Available-for-sale financial assets

5.1

7.5

4.2

4.4

6.3

13.5

13.5

Financial receivables in balance sheet

2.7

3.5

3.7

1.3

1.3

2.5

2.5

Non-current financial payables

(5.2)

0.0

(0.0)

0.0

(2.9)

(17.3)

(17.3)

Current financial payables

(0.4)

(0.7)

(1.2)

(0.2)

(0.2)

(2.6)

(2.6)

Consolidated net financial position

57.8

133.8

103.1

133.4

148.3

129.4

129.7

Adjustment for holding company tax

(4.5)

0.0

0.0

0.0

Consolidated net financial position

128.9

148.3

129.4

129.7

Subsidiaries

17.2

43.8

23.4

41.1

47.7

25.0

25.0

Holding Company

40.6

90.0

79.7

92.3

100.6

104.4

104.7

Source: Company data, Edison Investment Research

Our expectation of continuing net reimbursements from fund investments is included in the net financial balances shown in Exhibit 3. In 2018, net distributions from own-managed private equity fund co-investments were particularly strong at c €80m, sufficient to fund the c €40m cash consideration element for the purchase of minorities in DeA Capital Real Estate and c €31m in shareholder distributions. We expect net flows to remain strong, although not as strong as FY18, and management looks for a potential c €100m net distributions over the next three years, driven by maturing private equity funds. Specifically, our forecast for FY19 includes net distributions of €21m with a further €30 in FY20. Capital commitments were €103m at end-Q119 and our net distribution figure allows for c €40m of this to be called up by end-FY20. It is likely that a significant part of the balance will not be called as it relates to older vintage funds.

Overall, our forecast for the net financial position through FY20 should be viewed as illustrative, as it assumes no further purchases or sales of direct investments or investments in the AAM platform. We consider both likely and welcome.

No change to FY19 estimates

In this note we have made no revisions to our FY19 estimates, which we updated in our last note following the Q119 results. We have extended our forecast period out to FY20, as summarised in Exhibit 4. It is worth noting that we have factored in the cancellation of 40m treasury shares approved by shareholders at the AGM and effective in August, although this will have no impact on liquidity, NAV or EPS.

Exhibit 4: Estimate update

AUM (€bn)

Fees from AAM* (€m)

Holdco net financial position (€m)

NAV/share (€)

Dividend (€)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

12/19e

12.2

12.2

0.0

62.4

62.4

0.0

84.1

84.2

0.0

1.73

1.73

0.0

0.12

0.12

0.0

12/20e

N/A

12.6

N/A

N/A

61.4

N/A

N/A

84.6

N/A

N/A

1.65

N/A

N/A

0.12

N/A

Source: Edison Investment Research. Note: *Divisional AAM fees before group consolidation adjustment for own funds managed.

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