Passive Flows Will Hamper Performance Yet Uncover Hidden Value

Key Takeaways

• Fee compression, rising compliance costs, and passive investment trends threaten long-term profitability and margin growth despite strong inflows and diversification.
  
• Limited product range and potential for technological disruption increase exposure to earnings volatility and competitive risk against more digitally advanced global peers.
  
• Structural headwinds from passive investing, fee compression, and digital disruption threaten Regal Partners' revenue growth, margin sustainability, and future client acquisition.

Catalysts

A privately owned hedge fund sponsor.

• While Regal Partners is benefiting from expanding demand for alternative investments and growing wealth in the Asia-Pacific region driving institutional flows, an escalating trend toward low-cost passive investments may ultimately limit the firm's ability to grow its addressable assets and could impede future management fee revenue growth.
  
• Although the platform has delivered strong organic net inflows and diversified into private assets to boost resilience, rising global regulatory and compliance costs, especially related to ESG and AML, are likely to create persistent cost pressures and may compress net margins over the longer term.
  
• While continued low interest rates and a global search for yield have supported Regal's robust inflows and performance in higher-yielding alternatives, sustained fee compression across the asset management industry and increasing investor sensitivity to fees threaten the long-term profitability and risk eroding net margin improvements.
  
• Despite the successful scale-up from platform expansion, acquisitions, and entry into new asset classes, Regal's relatively narrower product suite compared to global peers leaves it more exposed to segment-specific downturns, which may heighten earnings volatility and concentration risk if alternatives lose relative attractiveness.
  
• While Regal's strong track record and distribution success have attracted significant offshore institutional clients and sticky capital, technological disruption and automation in wealth management could shift competitive advantages to larger or more digitally enabled players, potentially undermining Regal's future revenue growth and efficiency gains.

Regal Partners Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Regal Partners compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Regal Partners's revenue will grow by 15.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 17.2% today to 35.4% in 3 years time.
• The bearish analysts expect earnings to reach A$133.0 million (and earnings per share of A$0.3) by about September 2028, up from A$42.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.7x on those 2028 earnings, down from 21.9x today. This future PE is lower than the current PE for the AU Capital Markets industry at 22.3x.
• Analysts expect the number of shares outstanding to grow by 0.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.68%, as per the Simply Wall St company report.

Regal Partners Future Earnings Per Share Growth

Risks

• Growing adoption of passive investment strategies and ETFs, alongside investor scrutiny on management fees, may structurally erode demand for actively managed alternatives and exert downward pressure on Regal Partners' future revenues and impede fee growth.
  
• Regal Partners' exposure to performance fee volatility, particularly with significant assets sitting just below high-water marks and a concentration in products like PM Capital's global fund that crystallize fees only once annually, introduces earnings variability and may result in inconsistent net profits over time.
  
• The company's reliance on expanding into new strategies and asset classes and pursuing inorganic growth through acquisitions can create operational complexity and integration risk, potentially increasing costs and compressing net margins if synergies are not realized.
  
• Fee compression in the wider asset management industry, driven by rising regulatory compliance costs and intensified competition, is likely to challenge Regal Partners' ability to sustain current management fee margins and therefore may adversely impact net margin expansion.
  
• The trend toward digital-first, self-directed investment platforms-favored by younger investors-and the rise of technological disruption present a risk that Regal Partners may struggle to attract new clients and keep pace with required infrastructure investment, undermining long-term AUM growth and revenue stability.

Valuation

• The assumed bearish price target for Regal Partners is A$3.55, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Regal Partners's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$6.0, and the most bearish reporting a price target of just A$3.55.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$375.4 million, earnings will come to A$133.0 million, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 7.7%.
• Given the current share price of A$2.64, the bearish analyst price target of A$3.55 is 25.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.