Rising Regulatory Risks And European Exposure Will Dampen Outlook

Key Takeaways

• Heightened regulation, fee compression, and European market dependence risk margin erosion and limit revenue growth amid changing investor appetites and tougher competition.
  
• Expansion into new geographies and products poses significant execution and operational risks, potentially increasing earnings volatility and reducing long-term profitability.
  
• Diversified fundraising, focus on long-term trends, innovative products, and disciplined cost management position the firm for sustainable growth, higher recurring revenues, and improved profitability.

Catalysts

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

• Heightened regulatory scrutiny and the increasing burden of compliance requirements across alternative asset management and cross-border investment are likely to drive up operational costs and create complexity in fund structuring for Tikehau, reducing future net margins and hindering scalable revenue growth.
  
• Persistent low or negative interest rates in core European markets threaten to compress yields on alternative investments, making it more difficult for Tikehau to deliver differentiated returns and likely dampening investor appetite, which could result in slower AUM growth and downward pressure on fee-based revenues.
  
• Heavy ongoing reliance on a European fundraising and client base, despite international diversification efforts, leaves Tikehau acutely exposed to a potential stagnation or fragmentation of the European economy, significantly constraining both AUM and management fee revenue growth if the regional outlook turns negative.
  
• Mounting competitive and fee compression pressures, exacerbated by democratization and retailization trends, may undercut Tikehau's ability to sustain existing management and performance fee levels, leading to long-term margin erosion and reduced recurring earnings as new entrants and larger rivals disrupt traditional client relationships.
  
• Rapid expansion into new geographies and product verticals raises considerable overextension and execution risk, with the potential for higher-than-anticipated integration costs, operational inefficiencies, and investment missteps, thereby increasing earnings volatility and lowering return on equity over the medium term.

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 17.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 30.2% today to 38.8% in 3 years time.
• The bearish analysts expect earnings to reach €386.9 million (and earnings per share of €2.23) by about August 2028, up from €184.7 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 11.1x on those 2028 earnings, down from 18.2x today. This future PE is lower than the current PE for the FR Capital Markets industry at 19.9x.
• Analysts expect the number of shares outstanding to grow by 0.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.17%, as per the Simply Wall St company report.

Tikehau Capital Future Earnings Per Share Growth

Risks

• Global and diversified fundraising momentum-including record €10.1 billion in gross inflows and increasing contributions from international markets like the US, UK, Asia, and the Middle East-suggests continued AUM growth, which can help offset pressures and drive higher management fee revenues in future periods.
  
• Tikehau's strategic focus on long-term megatrends such as decarbonization, defense, digitalization, and private market democratization positions the firm to capture structural growth opportunities, supporting sustained expansion in fee-paying assets and increasing net earnings over time.
  
• Strong innovation and differentiated product launches (unit-linked private credit and defense funds, semi-liquid private debt) have driven increasing retail investor inflows, with 30% of net inflows for H1 coming from private investors, providing both diversity and resilience to their revenue base and improving long-term revenue visibility.
  
• Discipline in cost management and demonstrated operating leverage, with asset management EBIT growing 24% and operating costs rising slower than revenues, indicate the potential for future improvements in net margins as fundraising translates into higher fee-related earnings and performance fees crystallize over the coming years.
  
• Robust realized investment performance and a healthy pipeline of value-creating exits (including high gross MOIC and IRRs in private equity and real assets) have enabled the return of significant capital to investors, reinforcing the brand and increasing reinvestment likelihood, which can fuel further AUM growth and help enhance long-term profitability.

Valuation

• The assumed bearish price target for Tikehau Capital is €19.0, 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 €28.0, and the most bearish reporting a price target of just €19.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €997.7 million, earnings will come to €386.9 million, and it would be trading on a PE ratio of 11.1x, assuming you use a discount rate of 9.2%.
  
• Given the current share price of €19.5, the bearish analyst price target of €19.0 is 2.6% lower. 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.