|Shares Out. (in M):||629||P/E||18x||16x|
|Market Cap (in $M):||4,940||P/FCF||-||-|
|Net Debt (in $M):||-190||EBIT||0||0|
|TEV (in $M):||4,760||TEV/EBIT||-||-|
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Allfunds is the largest B2B fund platform in Europe. I’m recommending it as a long.
What is a “B2B fund platform” you might ask?
In the mutual fund industry in Europe, there are four major distribution channels:
1) “Captive” (~55% of the market): This is where a bank or insurance company will offer its clients only its own in-house mutual funds.
2) “Open In-House” ( ~25% of the market): This is where a bank or insurance company will directly contract with third-party fund managers in order to offer its clients a menu of third-party funds in addition to any in-house funds offered.
3) “Open Outsourced” (~15% of the market): This is where a bank or insurance company contracts with a B2B fund platform such as Allfunds in order to offer its clients a menu of third-party funds (again, in addition to any in-house funds offered).
4) “D2C” (~5% of the market): This is where clients, rather than working with a bank or insurance company, have an account with a D2C platform whereby they can choose from a large menu of third-party mutual funds and other investment options. This channel is very popular in the US and UK, but for cultural and historical reasons, it is much less prevalent in continental Europe.
Historically, wealth management clients in Europe have been stuck with the captive model. Clients face high fees and a limited menu of mutual fund options.
Slowly but surely however, more and more banks and insurance companies in Europe are being forced by competition to offer their clients a wider menu of investment options, not just their own in-house mutual funds. When such a bank or insurance company decides to start offering third-party funds to its clients, it faces a problem.
Establishing a business relationship between a distributor (typically a bank or insurance company) and a fund manager is a hassle. The two parties have to agree to a Global Distribution Agreement (GDA) covering economics (fee rates and fee splits), regulatory compliance (anti-money laundering and know-your-customer processes), operational details (keeping track of shareholder votes, dividends, etc.) and how to connect and share data. Negotiating a GDA and onboarding a new relationship between a fund manager and a distributor typically takes 3-6 months. That’s for each individual relationship.
B2B fund platforms like Allfunds solve this problem. Allfunds has already negotiated master GDAs with >2000 fund managers. So if a bank or insurance company wants to switch from a captive model to being able to offer its clients a broad menu of funds, they can sign a single GDA with Allfunds and immediately gain access to all 2000+ fund managers on Allfunds’ platform.
The Allfunds value proposition for distributors (typically banks and insurance companies) is compelling:
1) Provide better service to one’s wealth management clients by offering the broadest range of funds
2) Lower costs: The base service is free to distributors (Allfunds primarily makes money on fees charged to fund managers). Moreover, Allfunds takes care of transaction processing, custody, rebate and fee calculations, reporting, regulatory services, etc., thereby minimizing the burden on the distributor’s operations department.
3) Retain greater share of total management fees: Due to its scale, Allfunds can often negotiate better fee splits between distributors and fund managers than distributors could negotiate on their own.
The Allfunds value proposition for fund managers is also compelling:
1) Generate higher inflows via access to more distributors
2) Lower costs: Allfunds take care of transaction processing, custody, rebate and fee calculations, reporting, regulatory services, etc., thereby minimizing the burden on the fund manager’s operations department.
Allfunds monetizes these services by charging fees to fund managers that are ~75% based on Assets under Administration (AuA) and ~25% based on transaction volumes. These platform fees in aggregate typically total 3-5 bps of AuA. These platform fees comprise ~95% of revenue currently with the remaining 5% from subscription fees charged to fund managers and distributors using premium versions of Allfunds’ data portal.
Allfunds is not the only B2B fund platform in existence. Deutsche Borse owns a competitor called Clearstream Fund Centre (part of Deutsche Borse’s “IFS” segment), and Euroclear owns a competitor called MFEX. But in a business with obvious network effects and scale benefits, Allfunds has more distributors, more fund managers, and more AuA on its platform than its competitors:
*From company disclosures. AuA for each company only includes fund distribution AuA (not custody or execution-only AuA)
And while Allfunds is the biggest B2B fund platform, it has still penetrated less than 10% of its addressable market. There is over €14 trillion of addressable AuA in the geographies in which Allfunds competes. Allfunds has a trillion of this, its major competitors another ~€1.5 trillion. There is nearly €4 trillion of AuA in the “Open In-House” channel, and more than €8 trillion in the “Captive” channel. Allfunds’ management is targeting “low teens” organic revenue growth over the “medium-term” driven in large part by it taking share from the “Captive” and “Open In-House” channels (over the last 5 years, Allfunds has averaged 17% organic revenue growth).
As this is a scalable business, Allfunds generates very high EBITDA margins (73% adjusted EBITDA margin in 2021) and operates with little capital intensity (capex was 5% of sales in 2021).
*Note that Allfunds effective adjusted tax rate jumped up to 41% in 2021. Long story short, mgmt has guided to a ~27% effective tax rate going forward
To sum up the positives, Allfunds is the #1 player in a business where scale matters. It generates recurring revenue and exceptionally high margins. It has a track record of double-digit growth yet has penetrated only a small portion of its TAM.
Despite these positives, the stock has performed poorly of late. First, a little background on the company history. Allfunds was established within Santander back in 2000. In 2017, Hellman & Friedman bought Allfunds from Santander for €1.8 billion. In 2019, Allfunds merged with Credit Suisse’s B2B fund platform, and then in 2020, Allfunds merged with BNP Paribas’ fund distribution assets. Allfunds IPO’d in April of 2021, with the IPO priced at €11.50. The stock traded up on the first day of trading and remained high in 2021 as the company put up good numbers and the market environment remained supportive. There was a secondary offering at €16.00 in September of 2021. Post the secondary, Hellman & Friedman owns 39% of the company, BNP Paribas owns 14%, Credit Suisse owns 8%, and free float is 39%.
Year-to-date so far in 2022, Allfunds is down more than 50%. Why the weak performance? There are several culprits:
1) Market environment has turned from a tailwind in 2021 to a headwind in 2022:
There are three levers for Allfunds to grow AuA organically. First, it can sign up new banks or insurance companies, which bring their clients’ mutual fund assets onto the Allfunds platform. Secondly, clients of existing banks or insurance companies already on Allfunds’ platform can allocate more/less of their savings to mutual funds, resulting in inflows/outflows for Allfunds. Lastly, existing AuA on the Allfunds platform grows/shrinks with the market. In 2021, the environment was especially favorable for levers #2 and #3. Stock markets were up, investors were plowing more money into investment accounts and mutual funds. That is now reversing in 2022. Markets in Europe are down, and overall mutual fund flows are turning negative.
This was apparent in Allfunds’ 1Q22 quarterly update on AuA. In 1Q22, Allfunds performed well on lever #1. They added 18 new distributors to their platform – a third came from competitors, a third came from “open architecture” distributors switching from in-house to outsourced, and a third came from distributors switching from a captive model to an open outsourced model with Allfunds. Flows from these new distributors were €10 billion (4% flow rate annualized) and are evidence that Allfunds continues to take market share.
Levers #2 and #3 were headwinds in 1Q22, however. Flow from existing distributors were negative €13 billion. This isn’t a case of Allfunds losing market share – rather, the retail accountholders of Allfunds’ distributors took money out of mutual funds (both equity and bond funds) and put it in cash, used it for spending, etc. And then market depreciation had a negative €56 billion impact to Allfunds AuA in the quarter.
2) Allfunds carried a high valuation into the year, so it’s multiple has been hit hard by higher interest rates:
Heading into 2021, Allfunds was trading at a high-30s multiple of 2022 EPS; like a lot of other higher-multiple (and therefore longer duration) names, higher interest rate expectations have not been kind to its multiple.
3) Complexity in understanding business model and reporting:
Allfunds isn’t the easiest business model to understand (how many people know what a B2B fund platform is?). To make matter worse, there is some acquisition-driven complexity. Currently, Allfunds has about €1.4 trillion of total AuA. Two-thirds of this is “Traditional Platform Service” AuA, where Allfunds acts as a a full-service B2B fund platform and generates revenue of ~5 bps on this AuA. The other one-third of this total AuA is “Dealing & Executive Only” – this is AuA where Allfund only provides a limited menu of more commodified services and earns a mere 0.1 basis points in revenue (this segment came with its 2020 acquisition of assets from BNP Paribas). Since its IPO, Allfunds has changed the definitions of these two segments, which has made tracking organic growth and fee rates more of a pain-in-the-ass than it should’ve been. I don’t think Allfunds is trying to hide anything here – but anything that makes a company more of an analytical headache to track makes the stock more likely to trade down in a tougher market environment.
4) Low float/liquidity:
Allfunds sports a decent-size market cap (~€5B), the float is only 39% and trading volume has been relatively low. So in practice, it has traded more like a small cap (and therefore less “efficiently”, IMO).
These issues notwithstanding, nothing about the company’s competitive position or addressable market has changed. Allfunds is still a very high-quality company that I believe has compounder characteristics. It does have plenty of “fundamental” beta to the market. And who knows when the market environment turns for Allfunds, but it won’t be a headwind forever. At the end of the day, I view its current valuation as quite reasonable given both the business quality and where comps trade:
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