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Pinnacle Investment Management Group Ltd (ASX:PNI) targets this $700b market

Pinnacle Investment Management Group Ltd (ASX: PNI) had lots of news to announce to the market this morning which included their FY 2018 results update, the acquisition of a 35% and 40% equity stake in two fund managers as well as a $60 million capital raising to fund the acquisitions.

Here are the highlights from the announcement.

Double-digit profit & FUM growth

The company announced that it expected (subject to audit) the following results for FY 2018:

  • A 93% increase in net profit after tax to $23.1 million
  • A 77% increase in earnings per share to 14.3 cents
  • An 18% increase in Funds Under Management (FUM) for the company’s 9 affiliates to $38 billion
  • A fully franked dividend of 7 cents per share payable in October

A new $700 billion ‘alternative’ asset class

Pinnacle also announced a 35% equity investment in Metrics Credit Partners (MCP) for $46 million as well as a 40% equity investment in Omega Global Investors for $2 million.

The acquisitions will be funded via a $60 million capital raise at a placement price of $5.50 per share, a 3% discount to the closing share price on 23 July 2018.

The investment in MCP is expected to increase Pinnacle’s gross FUM by 6.5% and is forecast to be EPS accretive in the first 12 months.

MCP’s focus on the private debt markets is particularly interesting as it is an asset class that Pinnacle hasn’t had exposure to before.

The company estimates that the Australian corporate loan market is larger than $700 billion and that a significant gap is about to develop in this market.

This is because the big banks, Commonwealth Bank of Australia (ASX: CBA)Westpac Banking Corp (ASX: WBC)Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB), that have traditionally funded the market off their own balance sheets might not have the capacity to do that anymore as Basel III regulatory changes increase their capital requirements.

This ‘funding gap’ could create opportunities for non-bank lenders such as MCP.

Foolish Takeaway

Outside of the property secured lending market that has been cornered by the big banks, there is a huge debt/lending market for both corporate borrowers and even individuals as Afterpay Touch Group Ltd (ASX: APT) has proven.

The challenge, of course, is that loan defaults could rise significantly if the economy turns and that’s something shareholders will need to keep an eye on.

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Motley Fool contributor Kevin Gandiya has no position in any of the stocks mentioned.

You can find Kevin on Twitter @KevinGandiya.

The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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