ETF Competition And Rising Regulation Will Crush Returns

Key Takeaways

• Prolonged low interest rates, rising regulation, and competition threaten Tikehau Capital's revenue, margins, and ability to grow or sustain earnings in alternative investments.
  
• Shifts to passive investments and reliance on illiquid strategies expose the firm to fee pressure, muted fundraising, and greater vulnerability to sudden changes in investor sentiment.
  
• Strategic global expansion, ESG focus, and specialized investment strategies position Tikehau Capital for sustained growth, higher recurring revenues, and strong long-term shareholder returns.

Catalysts

An alternative asset management group with €46.1 billion of assets under management (as of 30 June 2024).

• Sustained periods of low or volatile interest rates are likely to compress returns on alternative assets, limiting Tikehau Capital's ability to deliver attractive yields for investors and putting ongoing downward pressure on fee income, ultimately reducing revenue growth and constraining the firm's long-term earnings outlook.
  
• The accelerating shift toward passive investment vehicles such as ETFs and index funds is expected to draw capital away from actively managed and alternative investment strategies, directly threatening Tikehau Capital's AUM growth and resulting in slower or potentially declining management fee revenues over time.
  
• Heightened regulatory scrutiny globally-including increasing compliance demands around anti-money laundering, ESG transparency, and cross-border investments-could significantly elevate operating costs for Tikehau Capital, further eroding net margins and limiting bottom-line profitability even if AUM expands.
  
• Intensifying competition from well-capitalized US and European asset managers in private markets is likely to drive margin compression by forcing Tikehau to lower management and performance fees in order to attract mandates, reducing both current and future operating leverage across its platforms.
  
• Continued overreliance on relatively illiquid asset strategies such as private debt and real assets leaves Tikehau Capital exposed to sudden shifts in investor liquidity preferences; should demand wane, this could stall fundraising momentum, mute fee generation, and result in structurally lower recurring earnings and diminished performance fee realization.

Tikehau Capital Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Tikehau Capital compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Tikehau Capital's revenue will grow by 20.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 27.9% today to 39.4% in 3 years time.
• The bearish analysts expect earnings to reach €385.2 million (and earnings per share of €2.15) by about July 2028, up from €155.8 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 11.4x on those 2028 earnings, down from 21.3x today. This future PE is lower than the current PE for the FR Capital Markets industry at 21.4x.
• Analysts expect the number of shares outstanding to decline by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.58%, as per the Simply Wall St company report.

Tikehau Capital Future Earnings Per Share Growth

Risks

• Sustained global growth in private markets and alternative assets, driven by institutional investor demand for yield and diversification, supports long-term expansion of Tikehau Capital's addressable market and could lead to higher assets under management and stronger revenue growth.
  
• Accelerating preferences for ESG and sustainability investing, as evidenced by a significant increase in Tikehau's SFDR Article 8 and 9 AUM and industry recognitions, allow the company to attract new capital flows and enhance fee income over the long term.
  
• Strategic international expansion-especially into North America and Asia-Pacific-broaden Tikehau's client base, enabling greater scale, new sources of AUM, and contributing to higher recurring revenues and better operating leverage.
  
• Increased focus and scale in specialized strategies such as private debt, real assets, and impact funds, as well as in co-investment opportunities, position Tikehau to benefit from margin improvement, higher performance fees, and growth in recurring fee-related earnings.
  
• The firm's entrepreneurial, founder-led management and alignment through significant insider ownership, combined with a demonstrated track record of AUM and fee-related earnings growth above sector averages, underpin long-term earnings momentum and increasing shareholder returns through rising dividends and potential buybacks.

Valuation

• The assumed bearish price target for Tikehau Capital is €20.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Tikehau Capital'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 €32.0, and the most bearish reporting a price target of just €20.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €978.4 million, earnings will come to €385.2 million, and it would be trading on a PE ratio of 11.4x, assuming you use a discount rate of 8.6%.
  
• Given the current share price of €19.26, the bearish analyst price target of €20.0 is 3.7% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• 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.