It’s no secret that the active investment management industry has seen better days. Decades of high fees and uninspiring returns have spurred investors to reallocate their dollars to passive index-following strategies. Declining assets under management not only reduces the earnings that active managers collect, but also the multiple at which the market is willing to capitalize those earnings. As the industry continues to struggle, active asset managers have seen their valuations and stock prices decline. And yet, active managers still hold trillions in assets under management. Active strategies aren’t going away any time soon.
You wouldn’t know that from looking at certain asset managers. The heavy pessimism surrounding the active asset management industry has lead the market to price certain managers as if they will soon cease to exist entirely. A prime example is Manning & Napier, Inc.
By any benchmark, Manning & Napier is an extraordinarily successful manager. Founded in Rochester, New York in 1970, the firm grew its AUM to a whopping $50 billion by 2013. At one point, the firm’s flagship large cap equity fund beat the S&P 500 for 11 years running. M&N went public in 2011 with a slightly unusual structure. Manning & Napier, Inc. owns a minority interest in the underlying management company, Manning & Napier Group, LLC. In 2011, M&N, Inc.’s ownership in the management company was 13.2%. It has since increased to 18.2% as owners of the management company have converted their interests to shares of the public company over time.
Unfortunately, the IPO represented the high point for Manning & Napier and its investors. Soon after, the performance of the company’s largest and most important funds began to suffer. The redemptions started coming and they haven’t stopped since. From the peak in 2013, AUM has now declined by more than half to $23.1 billion at September 30, 2018. Over the last five years, Manning & Napier shares are down nearly 90%.
Today, M&N appears to be a mere $25 million market cap speck. In truth, the company is a little larger. Remember that M&N owns only 18.2% of the underlying investment manager. On a full ownership basis, the market is valuing the entire manager at $138 million.
An investment manager with $23.1 billion under management for $138 million. That’s a value of 0.6% of assets under management. That’s low, even for a shrinking company in a despised industry. By way of comparison, Hennessy Advisors is valued at 1.4% of AUM and Silvercrest Asset Management Group is valued at 0.9% of AUM. But that’s not the whole story. Turns out Manning & Napier has a wealth of cash and securities on its balance. The only meaningful liabilities besides normal payables is an $18 million tax liability which will come due over time as the company continues to exchange its shares for additional ownership in the underlying manager. Cash and securities, net of the full tax liability equals $128 million. That makes M&N’s actual market value something close to $10 million. That’s right, $10 million or a mere 4 basis points of AUM buys you $23.1 billion in AUM.
So what’s the catch? There’s got to be some horrible issue facing Manning & Napier. An SEC action, maybe litigation by former employees? No and no, but the company does have some serious cost issues. With half the AUM it once had, it seems M&N has had difficulty cutting costs to match its new reality. And that has had a terrible effect on operating margins. In 2015, the company earned $129 million in EBIT on revenue of $138 million for an operating margin of 40%. In 2017, EBIT declined to $52 million on revenue of $202 million for a 26% margin. Through the first three quarters of 2018, EBIT has continued to plunge far faster than revenues.
I understand Manning & Napier’s reluctance to let go of long-time employees and its desire to maintain a robust infrastructure in hopes of a turnaround. But at some point, there must be a reckoning. The last quarter’s EBIT margin dipped to 11%, and it could go negative in the fourth quarter given the market’s path these last few months. Again, for comparison, Hennessy Advisors put up a 45% operating margin this year, and Silverspring did north of 20% this last quarter. Slightly different models, sure. But the point remains there’s no excuse for earning so little on the revenue stream from over $20 billion in AUM. The glory days are over. They may come again, but for now it’s time to tighten the belts a few inches.
Manning & Napier appears exceptionally cheap, but investors must be comfortable with the risk that the company fails to address its AUM slide or failing that, cannot address its cost issues. On the other hand, solving one or both of these challenges could result in a massive upswing in profits and equity value.
Alluvial Capital Management, LLC does not hold shares of Manning & Napier Inc, Hennessy Advisors, or Silvercrest Asset Management Group. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com.
Alluvial Capital Management, LLC manages a value investing partnership, Alluvial Fund, LP. If you are a qualified investor and would like more information, please contact us at info@alluvialcapital.com or visit alluvial.capital.
Dave,
I’ve looked at this company before, and I’d really appreciate if you could correct me if I’m wrong, but I have an issue with what you’ve presented here.
“Turns out Manning & Napier has a wealth of cash and securities on its balance. The only meaningful liabilities besides normal payables is an $18 million tax liability which will come due over time as the company continues to exchange its shares for additional ownership in the underlying manager. Cash and securities, net of the full tax liability equals $128 million. That makes M&N’s actual market value something close to $10 million. ”
In the principles of consolidation footnote to the most recent Q, the company discloses: “Manning & Napier holds an economic interest of approximately 18.2% in Manning & Napier Group but, as managing member, controls all of the business and affairs of Manning & Napier Group. As a result, the Company consolidates the financial results of Manning & Napier Group and records a noncontrolling interest on its consolidated statements of financial condition with respect to the remaining economic interest in Manning & Napier Group held by Manning & Napier Group Holdings, LLC (“M&N Group Holdings”) and Manning & Napier Capital Company, LLC (“MNCC”).”
I take this as meaning that the assets on the balance sheet are Manning & Napier Group level and are not freely available to shareholders of the public company. It’s possible that most of this cash is held at the public company level itself, but I don’t see any clear indication that this is case. Have you gotten any clarity on this?
Before insiders started converting their units into shares, the company had a negative balance in NCI for a long time, which struck me as very odd. Even today, the NCI balance isn’t close to the 80% it should be. I think there’s a great deal of complexity to the TRA and unit conversions that obscures these consolidation issues at the company. Would love to hear your thoughts.
You’re correct that the cash and securities are not directly available to public shareholders. They’re held at the subsidiary, not the parent. But the parent company has an 18.2% interest in the subsidiary, so if the subsidiary were to pay a special dividend, the public company would get 18.2% of that. It’s just two different ways of looking at the company. You can assume that 18.2% of the cash and securities are owned by the parent, which has a $25 million market cap. Or, you can treat it as if the parent owns 100% of the subsidiary and has a correspondingly higher number of shares outstanding and market capitalization. Economically speaking, it’s the same.
Ok thanks. I was getting a market cap amount from Yahoo finance that was wildly different from the actual.
I guess my follow up then would pertain to your approximate EV of $10 million.
The assets are shared amongst the public company and private company, while the TRA is only attributable to the public company. That would give an EV of $18 million. (-($147 million in cash and investments * 18.2% – $18.1 million TRA) + $26.7 million market cap).
Again, please let me know if you have a different thought. I appreciate your write-up, as well as your explanation.
Thanks again.
Based on my prior post, the EV of the entire company equals 18/0.182 = $98.9 Million vs. the $10 Million number from your post. At that price, the company is being valued at over 4% AUM from the public company perspective. If you owned the company from the perspective of a private owner, your valuation would be much more favorable.
The obfuscation of how this company is consolidated is why Up-C structures are so dangerous.
A little bit late, but are you sure?
As BasedShark mentioned, the company fully consolidates the underlying manager, but also records a noncontrolling interest on its balance sheet. And that noncontrolling interest is actually pretty small compared to the noncontrolling interest on the company’s income statement and stake in the underlying manager. Looks like the cash is in the public company…
Why not own this or any of the other group mentioned?
Interesting idea; hope it does not have an outcome similar to Calamos Investments, another cash-rich undervalued asset manager with insider control, victim of takeunder a few years ago.
The cash component here is more significant but the management control is just as scary.
Another past example of an asset manager bleeding AUM from a once large and illustrious fund was Artio Global. They were eventually taken under at a tiny multiple.
https://www.pionline.com/article/20130304/PRINT/303049976/artio-acquisition-a-quiet-ending-for-once-bright-star
Thanks for the example. Even with Artio, the $34 million paid in excess of cash and securities was a little over 20 basis points of AUM. Still quite a lot more than where M&N trades.
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