VRTS - Virtus Investment Partners

[Picasso]

http://virtus.investorroom.com/2016-04-29-Virtus-Investment-Partners-Announces-Financial-Results-for-the-First-Quarter-2016

 

Three of the company's alternative funds are in the process of being liquidated and the return of seed capital is expected to generate proceeds of approximately $114.0 million in the second quarter. The company expects to use the majority of the proceeds to support return of capital to shareholders.

 

In the first quarter, the company returned $19.9 million to shareholders, including share repurchases of $15.0 million. As a result of share repurchases, ending shares outstanding decreased to 8.3 million at March 31, 2016, a decline of 7.3 percent from March 31, 2015 and 1.7 percent from December 31, 2015.

 

I've continued to buy more shares and it looks like VRTS will be more aggressive about returning capital as well.  I've been spoiled buying under $70 and it's hard to buy up 13% but it still looks really inexpensive.  If fund flows get worse I can see it going back under $70 but with all the share repurchases it's not a bad thing. 

[namo]

Results of the tender offer:

Based on the preliminary count by the depositary for the tender offer, a total of 599,163 shares of the company's common stock were properly tendered and not withdrawn at or below a price of $82.50 per share [...] The shares expected to be repurchased represent approximately 7.3 percent of the company's common stock outstanding as of May 6, 2016.

 

The tender offer was made pursuant to the company's Offer to Purchase dated May 10, 2016 in which the company offered to purchase up to $75.0 million of its common stock at a price per share no less than $73.00 and no greater than $82.50. While the preliminary results indicate there were not sufficient tendered shares to fulfill the $75.0 million tender, the company maintains its commitment to utilizing the full amount as part of its capital return program.

 

Only about 2/3 of the maximum amount: it's quite strange given that it was trading below the maximum the whole time.

 

I contributed some of my position to the offer, so now I get to buy it back cheaper. (For once, I made an ok call!)

[Picasso]

namo, you still long?  Seemed like no one else liked the idea so I stopped posting but it's doing pretty well.

[Mr Pink]

Long - have appreciated your commentary (here and other threads) - thank you

[namo]

Yes, still long and enjoying the ride up. :)

 

It was perhaps a smaller position for me than for you, though.

 

Since I'm posting, I might as well briefly comment on Q2: AUM is doing fine and, uh, that's it!

I still very much like the simple thesis.

On the other hand, it's not a "hold forever" position for me because:

- (short-term) the markets are high (IMO)

- (long-term) I suspect fund management fees will slowly come down over the years.

 

I've heard BEN is undervalued too, but at first glance VRTS is cheaper; I haven't dug much however.

[Oreo]

Folks,

 

Any strong views on APAM (Artisan Partners)?

Decent, value-focused folks suffering from some of the same problems but paying a decent dividend.

[Picasso]

I'm nervous of any asset manager that doesn't have a strong balance sheet.  Just too much operating leverage going the other direction, it takes time to cut operating expenses when AUM bleeds, you start losing the best talent and performance suffers, market is at all time record highs so that tailwind might go away, which all makes it hard to know the downside risk.  I liked VRTS because 75% of the market value was in cash or investments on the books so you know your downside a lot better.  And their funds were doing pretty well.

 

I looked at APAM briefly but it's valued at a multiple that would make VRTS worth twice the current share price.  I think you'd need strong conviction that their fund flows and perfomance will offset the drag of all this movement towards indexing.

[Green King]

I think the real uncertainty here is future AUM growth.  If it goes with the rest of the industry, down, then you have a melting ice cube and using 2% of AUM or even 8x FCF can be expensive as these are based upon a growing AUM base.  For example if have 3% decline per year then fair value per the Graham formula is 2.5x FCF so an 8x multiple is expensive.

 

The issue with trapped cash is you do not control it so it has to be discounted for that fact.  In private company valuations this can be discounted up to 40%.  Given your level of control I think a similar discount is appropriate here unless management makes a commitment to return the cash.  The one danger here as in OUTR is that VRTS buys back what appears to be cheap stock that is actually expensive given the negative growth profile.

 

Packer

 

Thanks for this answer and this new framework. I've been thinking about the declining earnings problem for at least a year now.

[Green King]

I'm not going to entirely agree with the notion that 2% of AUM is too expensive on a melting AUM base.  There are obviously industry headwinds and VRTS has experienced issues beyond that.  They already experienced a $15B outflow in the past couple years and until this Rajiv resignation, fund flows ex-F-squared were turning positive.  But you have Manning & Napier which manages $30 billion and the market cap or enterprise value is still in the $600 million region.  VRTS isn't anywhere close to $30 billion of AUM yet.  If MN goes down to $20 billion or some level where it's now lacking any meaningful free cash flow and they need to start cutting talent, operating expenses then yes 2% of AUM will look a bit high.

 

So let's use your 40% discount and now it's only $252 million net cash/investments.  Using only free cash flow over the next couple years they can easily use up the rest of their buyback authorization and get down to 7 million shares outstanding.  That would put the market cap at $469 million or a net $217 million for the asset manager.  Now let's say AUM drops all the way down from $46 billion to $30 billion; market losses and outflows.  That puts the asset manager at 0.7% of AUM.  And again there are other asset managers like MN or GAM that trade at multiples of that today.  I think it's already priced in what seems to be consensus thinking that asset managers suck and no price is cheap enough.

 

At one point not too long ago investors were paying $220 for the asset manager business versus $37 today, if we use your 40% cash/investment discount (which I don't entirely agree with either).  I don't agree because there is no complicated ownership structure with VRTS that would prevent a sale.  Someone can simply buy the company and access those assets themselves and wind down non-performing seed funds.  From a buyers perspective the asset manager went from $200 to $16. 

 

I also don't think the cash is too trapped for public investors.  They do pay a dividend and are now aggressively repurchasing shares.  Well, I hope they're still aggressively repurchasing shares.  If they liked it at $115 they should love it at $67.  And Marcato Capital just started buying last quarter and pitched the idea at Ira Sohn in Canada last October.  I'd like to think an activist can help to return more capital to shareholders if fund flows take a turn for the very worst.

 

I am starting to admire your handicap skills. The other path to the declining earnings problem. Thanks for the post. Cheers

[Picasso]

Who said that you can't make money in asset managers anymore...