DeA Capital — Update 17 October 2016

DeA Capital (DeA) is an alternative asset management company with a focus on real estate and private equity. It is majority (58.3%) owned by De Agostini, a group with other investments in the media, gaming and services sectors; De Agostini is in turn owned by the Boroli and Drago families. DeA was previously more of an investment company with substantial investments in quoted Turkish retailer, Migros and French private clinic operator, Générale de Santé. The underlying diluted Migros stake was reduced to 6.9% in 2015 (raising €107.7m), while the investment in Générale de Santé was sold completely in 2014 releasing €195.5m. At the half-year end DeA had direct and fund investments valued at €277.6m, equivalent to 53% of net asset value with the balance accounted for by the book value of the asset management businesses and net financial positions (Exhibit 1).

Included within the alternative asset management activities are 64.3%-owned IDeA FIMIT which manages real estate funds and fully-owned IDeA Capital Funds (Cap. Funds) a manager of private equity funds which, having originally focused on fund of funds has more recently launched a number of thematic funds that now account for nearly half of Cap. Fund’s assets under management (AUM).

Exhibit 2 shows the evolution of AUM by half year since 2013 with a contraction in IDeA FIMIT funds more recently reflecting the reduced appetite among investors for real estate funds but growth in AUM at Cap. Funds through the period shown. We examine how this has influenced fee income in our discussion of DeA’s first half report for 2016.

We start with the alternative asset management activities, setting out the progression of fee income and fee margins in Exhibits 3 and 4. Reflecting the trends in AUM shown above, the overall level of fees has contracted since 2013 with H116 fees 9% below the same period last year. However, within this there is a clear differentiation between IDeA FIMIT where AUM and fees have contracted (18% H116 versus H115) and IDeA Cap. Funds, where fees have increased by 19%.

The movements in average fee margins have also been more favourable at Cap. Funds where the recent strengthening shown below reflects the launch of more focused new private equity funds which command higher fee margins than fund of funds leading to a richer mix. For the half year fund of fund fees accounted for 43% of Cap. Funds’ management fees compared with 54% in H115.

We expect this trend to be sustained as Cap. Funds completed the first and second closings on a new fund, the IDeA Corporate Credit Recovery I Fund (CCR I) in June, with total assets raised of €262.8m and a fee margin of over 100bps. The fund is the first fund in Italy dedicated to the provision of funding to companies in distress (debtors-in-possession finance). It is formed of two segments. The first (€177.6m) acquires existing loans, currently from seven banks (Unicredit, BNL, BNP Paribas, Banca Populare di Vicenza, MPS, BPM and Biverbanca). The second provides fresh loans to help companies relaunch with financing provided by Italian and international investors (€85.2m). The fund has an investment period of six years. Cap. Funds sees good potential for further expansion in this area, given the level of problem loans in the Italian banking system and the search for alternative sources of return among investors. In addition to Cap. Funds acting as manager of the fund, DeA Capital has made total commitments of €15.2m to the fund, which also give it rights to 30% of the carried interest.

Also, since the first half, the third closing of the IDeA Taste of Italy private equity fund was completed in September raising €48.5m and taking the fund’s total commitments to €188.5m (close to the fund target of €200m).

For IDeA FIMIT, fee margins have trended down gently over the period shown, reflecting a combination of mix change and the fact that some fund fees have been capped given a more difficult background for real estate funds. Management expects that the level IDeA FIMIT’s AUM reached in June 2016 will mark the low point and that assets will begin to grow, reaching at least €8bn by year end. The result of the contrasting evolution of AUM and fee rates is that Cap. Funds’ share of total fee income has risen from 15% to 31% between H113 and H116.

Exhibit 5 summarises the P&L for the alternative fund management segment and we pick out a number of features from this:

Exhibit 6 shows an analysis of end-June 2016 net asset value compared with H115 and FY15. Since the year end overall net asset value increased slightly with an NAV per share of €1.98 compared with €1.95, after adjustment for the €0.12 dividend payment in May this year. We note that holding company cash is now at €78.2m and there are no financial borrowings. The largest percentage change in the other assets relates to the partial sale of IRE. Compared with end-June last year, the 5% reduction in NAV mainly reflects the impairments relating to performance fee and asset management company values mentioned earlier. The large reduction in the direct and fund investments between the two half year ends results from the Migros part-disposal, also reflected in the positive swing in the net financial position.

Within the private equity funds element of the investment portfolio, first half distributions were €11.3m and arose primarily from two maturing funds (IDeA I Fund of Funds and IDeA Opportunity Fund I), while capital calls left a net cash inflow of €5.6m from private equity funds. Since the end of the period there has been a further net inflow of €12m. There was a net investment of €8.1m in IDeA FIMIT funds, an area where two new funds were launched. ‘Trophy Value Added’ fund is a real estate alternative fund for professional investors and, true to its name, initiated its investments through the purchase/contribution of two central-Rome trophy assets. ‘IDeA NPL’ is also for professional investors and will mainly invest in securitisations of non-performing mortgage loans and, when appropriate, in real estate company equity instruments that are created in the event of a judicial auction (REOCOs).

In terms of performance, DeA noted that the two main investments in Cap. Funds managed funds, IDeA I FoF and ICF II had recorded IRRs of 5.8% and 13.1% since their respective launch dates in January 2007 and February 2009.

Finally, in July, DeA acquired a 66.3% stake in SPC Credit Management a company specialising in debt recovery in the leasing, banking, consumer and commercial sectors in Italy. The investment at the time of the half year announcement was €1m. Given the launch of new NPL-related funds there should be synergies available within the group.

Our financial summary, Exhibit 12 on page 8 shows the consolidated results for DeA and our estimates for FY16 and FY17. In our analysis we have focused on the segmental P&L for the alternative asset management business together with the NAV progression relating to other parts of the investment portfolio as set out in Exhibit 6. Below we summarise changes in our assumptions for AUM and fees for the alternative asset management division together with changes in NAV per share estimates. The adjustments for 2016 are modest, while for 2017e the assumed level of AUM and alternative management fees have been increased by 6% and 4%, respectively. There are modest reductions in estimated NAV for both periods and we have kept our dividend assumptions unchanged.

As in previous notes we focus on a sum-of-the parts calculation as a way of assessing the value of the shares. As shown in Exhibit 8 much of this is in line with the NAV analysis provided by DeA in its half year report and set out in Exhibit 6.

Included within the valuation is the holding company net financial position of €78.2m. In Exhibit 9 we show how this is derived from the group balance sheet.

Elsewhere in the sum-of-the-parts there are two lines subject to variation: the indirect investment in Migros held via a 17% stake in Kenan and the valuation of the two alternative asset management businesses, IDeA FIMIT and Cap. Funds. For the Migros stake we have taken the value from the H116 report for the element which benefits from a put option and applied the market price and exchange rate to the balance resulting in a small uplift compared with the H1 report.

For the alternative asset management business we apply a multiple to net, post-minority, earnings. To guide this we monitor Bloomberg consensus-based P/E multiples for a number of private equity, specialist and conventional equity asset managers in Europe and the US. The incidence of performance fees and other contributors to reported earnings gives rise to a wide range of private equity multiples (from 27.6x to 5.5x for FY16), although the private equity average and the values for other managers are grouped around 15.4x for FY16 and 12.5x for FY17 (see summary in Exhibit 10). Using these figures gives values between €161m and €129m for the DeA business compared with the H1 book value of €158m. We have applied a central value of 14x in Exhibit 8, but note that we would only need to assume 15x to virtually match the balance sheet figure.

Given the alternative asset management business is the focus of development for the group and accounts for approximately a third of the total NAV, the valuation of this segment is important. Our peer comparison is supportive in that it points to a multiple of around 14x, which in turn gives a value broadly in line with the balance sheet valuation.

In our next chart we show how the DeA share price discount to NAV has moved in recent years with the discount for the LPX50 index shown for comparison (LPX50 tracks 50 leading listed private equity funds). This highlights that while both DeA and the LPX50 experienced a broad narrowing of discounts post financial crisis, DeA’s experience has increasingly lagged from late last year onwards. This may reflect concerns relating to the Italian economy and as part of this, the health of the banking system. The absolute level of the DeA discount, at approaching 50%, does appear to build in a very substantial margin for negative surprises given the diversity of DeA’s investment portfolio and the potential for development of the alternative asset management business.