Ever since it handed out 13.6 million new shares at $5.50 a pop at the initial public offer stage to a select group of high-rolling associates and mates the VGI Partners Limited (ASX: VGI) share price has gone gangbusters to hit $12.75 today.
This morning the hedge fund operator announced plans to launch another listed investment company know as VGI Partners Asian Investments Limited (ASX: VG8).
VGI is aiming to raise up to $1 billion for its new Asian fund and is taking a leaf out of Magellan Financial Group Ltd's (ASX: MFG) playbook in an effort to raise as much as possible.
Back in 2017 Magellan offered existing shareholders in its exchange traded managed funds and the holding group itself free or "bonus units" if they subscribed to its massive Magellan Global Trust (ASX: MGG) capital raising of more than $1 billion.
VGI is offering similar inducements to existing investors in its funds or VGI itself and new investors by offering what it calls 'alignment shares' in VGI Partners itself on a 1 for 15 (existing investors) or 1 for 25 (new investors) basis to anyone who subscribes to the Asian Fund IPO.
Notably, VGI's existing scrip at $12.75 today is trading on around 24.5x calendar year 2018's net profit of $34.9 million based on 67.07 million existing shares on issue. This is a historical metric, but is high for a fund manager and the frothy valuation probably encouraged management to offer free shares as a way to incentivise subscribers to its Asian Fund.
VGI is also running the small risk that subscribers try to 'game' the system by selling their freebie VGI shares at an instant profit, which could create some short-term distortions in the valuation.
Like Magellan, VGI has also agreed to meet all the costs of the offer to ensure the net asset value of the fund matches the opening share price. This is important as potential subscribers may be put off or advised otherwise it they feel the share price will instantly trade at a discount to the NAV.
Magellan has also shown for investors how funds management is a scale game with it pioneering actively exchange traded managed funds that VGI now offers under its VG1 Partners Global Investments Ltd (ASX: VG1) fund, with the new Asian fund set to follow.
Idle observations aside, the goal for everyone in the market is making money, and one question is whether VGI Partners has the potential to be a gigantic share market winner like Magellan?
Currently, it only has around $2.6 billion in FUM, although that could soon nearly rise by 40% if the Asian Fund is a success.
However, it's still a long way off the $87 billion odd run by Magellan or even another independent manager like Perpetual Limited (ASX: PPT) at $27 billion.
As far as I'm aware VGI is not in the business of winning large institutional mandates either as it runs hedge funds and does not have the operational capacity or inclination to seek to win this kind of business anyway.
If you want to build a really big fund manager you need large and effective institutional business development and retail distribution teams in place. As far as I can see VGI's clients currently are retail investors and high net worth types.
For now VGI's valuation is also flying close to the wind given the reliance on huge performance fees to generate a lot of its profits.
For example in 2018 performance fees contributed $44.9 million of $64.9 million in total revenue generated on just $2.1 billion of FUM. The performance fees are also very high margin depending on how you account for the mainly investment staff costs generating them.
By comparison Magellan just reported full year performance fees of $83 million, but on $86.7 billion of FUM as at June 30, 2019.
While the comparison is somewhat nugatory given one is a hedge fund and the other a vanilla blue-chip buy-to-hold asset manager it does show how leveraged VGI is to performance fees and how it could work both ways.
Essentially, an investment verdict depends on how confident you are VGI can keep generating strong performance fees. It recently announced it generated $32.9 million generated to June 30, 2019.
For now then I'd still prefer Magellan's all round capabilities and vanilla investment offerings, but VGI is one to keep an eye on given its founder led nature that brings similar strengths to Magellan.
