The Motley Fool

Are VGI Partners Limited shares a buy?

Sydney-based hedge fund VGI Partners Limited (ASX: VGI) today revealed it expects to harvest $32 million in performance fees before tax for the year ending June 30, 2019, compared to $44.9 million won over calendar year 2018. Confusingly VGI doesn’t clarify whether the $32 million in performance fees are for the six-month or 12-month period to June 30 2019, but on the assumption they’re for the six-month period this is a strong result.

The fundies also flagged that they intend to payout 50%-75% of normalised profit after tax in dividends going forward, but will make an exception for the maiden dividend as a listed business in paying out $16 million, which is an amount solely based on close to 75% of the total post-tax performance fee revenue. 

VGI shares have gone gangbusters since its June IPO when it handed out 13.6 million new shares at $5.50 a pop to an exclusive group of investors reportedly made up of friends and high-roller associates.

The dividend will represent another 24 cents per share in gains for early investors for a stock now changing hands for $12.50.

This is notable as the company now has a market value around $838 million when using 67 million shares on issue. 

This places it on around 24x calendar year 2018’s net profit of $34.9 million, which is high but investors need to account for this being a trailing metric. 

More notably the group revealed it earned the $32 million in performance fees on just $2.6 billion of funds under management as at June 30 2019.

By comparison Magellan Financial Group Ltd (ASX: MFG) just reported full year performance fees of $83 million, but on $86.7 billion of FUM as at June 30, 2019.

You can see then just how profitable and important performance fees are to VGI and how today’s investors probably need this exceptional outperformance to continue. 

VGI may be able to juice its performance fees as it takes speculative short bets on single stocks falling in value, rather than buying short call options for “hedging purposes” as a more vanilla fund manager like Magellan would typically do

VGI’s most famous short bets are against listed tort law firm Slater & Gordon Limited (ASX: SGH) and travel platform provider Corporate Travel Management Ltd (ASX: CTD)

It also runs the listed VG1 Partners Global Investments Ltd (ASX: VG1) fund and its January 2019 investor letter reveals some of its long positions include Amazon, SpotifyMastercard and derivatives exchange CME Group. 

As such we can see VG1 has some focus on “blue-chip tech” in a similar way to Magellan. 

However, given a valuation that appears to include an expectation for more strong performance fees I’m not a buyer of VGI shares. 

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Tom Richardson owns shares of Amazon and Magellan Financial Group.

You can find Tom on Twitter @tommyr345

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Amazon and Mastercard and may also own or recommend Spotify, CME Group or any other security mentioned in this article. The Motley Fool Australia has recommended Amazon and Mastercard. 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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