Acquiring Qualitas Funds Will Expand European Reach And Diversify Investor Base

Key Takeaways

• The acquisition of Qualitas Funds will expand P10's European presence and boost revenue through synergies and investor base growth.
  
• Strategic growth plans and operational efficiencies aim to increase fee-paying asset growth and diversify revenue sources, strengthening future earnings.
  
• Heavy reliance on fundraising and acquisitions for growth poses risks to revenue stability and profit margins amidst market dynamics and integration challenges.

Catalysts

Operates as a multi-asset class private market solutions provider in the alternative asset management industry in the United States.

• P10 expects to close the acquisition of Qualitas Funds in Q1 2025, which will establish a European presence, meaningfully grow P10's investor base, and position the company as a leading global multi-strategy private markets firm focused on the middle and lower middle markets. This is likely to impact revenue and potentially increase net margins due to synergies and integration benefits.
  
• The company has launched a strategic growth plan, deepening organic growth through expanding client relationships and leveraging a senior leader dedicated to client solutions. This effort aims to increase fee-paying asset growth, thereby boosting future revenue.
  
• P10 is focused on generating operational efficiencies by implementing world-class systems, which is expected to support strategies and enhance FRE margins over time.
  
• The introduction of SMA (separately managed accounts) relationships is part of P10's strategy to engage with more significant clients beyond traditional commingled vehicles, contributing to diversified revenue sources and higher overall revenues.
  
• The company aims to more than double fee-paying assets under management by 2029, predominantly from organic growth, suggesting a strong future revenue outlook and potential uplift in earnings.

P10 Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming P10's revenue will grow by 7.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.5% today to 15.1% in 3 years time.
• Analysts expect earnings to reach $51.3 million (and earnings per share of $0.39) by about December 2027, up from $12.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 44.5x on those 2027 earnings, down from 123.3x today. This future PE is greater than the current PE for the US Capital Markets industry at 23.5x.
• Analysts expect the number of shares outstanding to grow by 5.96% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.29%, as per the Simply Wall St company report.

P10 Future Earnings Per Share Growth

Risks

• The company's revenue growth relies heavily on fundraising successes, which may not consistently occur every quarter given market dynamics, potentially impacting revenue stability.
  
• The integration of acquisitions like Qualitas Funds is critical to expanding their investor base; any missteps in integration or cultural alignment could harm expected revenue growth.
  
• The reliance on high-margin catch-up fees, which are unpredictable and episodic, can create variability in profit margins and overall earnings performance.
  
• Expanding SMAs (separately managed accounts) at lower fee rates compared to traditional funds may pressure revenue per dollar of assets under management, impacting net margins.
  
• Significant ongoing investments in human capital and technology, while necessary for growth, may suppress immediate net income margins if ROI from these investments takes longer than expected to materialize.

Valuation

• The analysts have a consensus price target of $14.0 for P10 based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $17.0, and the most bearish reporting a price target of just $13.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $340.3 million, earnings will come to $51.3 million, and it would be trading on a PE ratio of 44.5x, assuming you use a discount rate of 7.3%.
• Given the current share price of $13.62, the analyst's price target of $14.0 is 2.7% higher. The relatively low difference between the current share price and the analyst consensus 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.