Asset Based Lending Expansion Will Drive Long Term Earnings Power And Resilient Fee Streams

Catalysts

About Pollen Street Group

Pollen Street Group is a specialist asset manager focused on private equity and private credit strategies in financial and business services.

What are the underlying business or industry changes driving this perspective?

• Acceleration in global asset based lending, a market expected to reach 7 trillion dollars by 2027, positions Pollen Street’s leading European platform to compound fee paying AUM and drive sustained double digit revenue growth.
• Rapid structural change across payments, wealth, insurance, tech enabled services and lending is expanding the opportunity set for Fund V’s specialist mid market strategy. This is supporting higher quality exits, stronger performance fees and rising earnings.
• The shift toward contractual, recurring management fees, which now represent over three quarters of group revenues, is creating a more visible and resilient earnings base. This is enabling continued margin expansion and faster growth in net income.
• The broadening of the global LP base, particularly in North America, the Middle East and Asia, combined with co invest capacity, is supporting larger fund sizes and mandates over time. This is lifting management fee revenue and enhancing operating leverage.
• Proven operational gearing, with fund management income growing much faster than operating expenses, is expected to continue as additional AUM is added to an already scaled platform. This is driving further improvement in EBITDA margins and earnings per share.

Assumptions

This narrative explores a more optimistic perspective on Pollen Street Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Pollen Street Group's revenue will grow by 10.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 42.2% today to 40.1% in 3 years time.
• The bullish analysts expect earnings to reach £69.8 million (and earnings per share of £1.18) by about December 2028, up from £54.0 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 bullish analyst cohort, the company would need to trade at a PE ratio of 12.2x on those 2028 earnings, up from 10.4x today. This future PE is lower than the current PE for the GB Capital Markets industry at 12.6x.
• The bullish analysts expect the number of shares outstanding to decline by 1.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.45%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A large part of recent profit growth has been driven by fundraising outperformance, including catch up fees and strong demand for Fund V and Credit IV. If the current supportive fundraising cycle slows due to weaker markets or investor risk appetite, AUM growth could decelerate and reduce the momentum in management fee revenue and earnings growth.
• The strategy is increasingly concentrated in private credit and private equity themes such as payments, wealth, insurance, tech enabled services and lending. If long term disruption in these verticals favors lower fee passive solutions, new regulatory constraints or margin compression in underlying portfolio companies, it may dampen realizations, weaken performance fees and pressure group net margins.
• The model depends on scaling asset based lending in a market expected to grow to 7 trillion dollars. Should credit cycles turn, with higher defaults in SME lending, real estate or other collateral backed exposure, it could raise loss expectations, hurt alpha delivery, slow deployment and ultimately weigh on fee paying AUM and investment income.
• Operational gearing has boosted EBITDA margins as revenues have outgrown administration costs. However, management is guiding to continued OpEx investment in business development, investment teams and placement related costs. If revenue growth normalizes while cost growth remains in low double digits, the targeted 50% fund management margin may not be achieved, limiting future profit and earnings expansion.
• The group is using leverage on its balance sheet and returning significant capital via dividends and buybacks. If market conditions deteriorate, realizations slip or investment returns disappoint, this combination of higher net debt and capital return commitments could constrain strategic flexibility and slow growth in net income and earnings per share.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Pollen Street Group is £11.2, which represents up to two standard deviations above the consensus price target of £10.66. This valuation is based on what can be assumed as the expectations of Pollen Street Group's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be £174.2 million, earnings will come to £69.8 million, and it would be trading on a PE ratio of 12.2x, assuming you use a discount rate of 9.5%.
  
• Given the current share price of £9.28, the analyst price target of £11.2 is 17.1% 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.