Description

Reinet Investments S.C.A. is a holding company with a market cap of €3.25 billion. It trades under the ticker REINA in Amsterdam. I wrote it up in 2018 as well. It did not work out very well. Mainly because British American Tobacco declined a lot in market value. The holding company has a bit of a convoluted management structure that likely contributes to the undervaluation. The best reason I can give you to look at this company is that its fastest-growing holding is now also its largest holding. The growth rate of the fastest-growing piece should start impacting net asset value in a big way. Because this is a private market asset the market within an unloved structure trading on some backwater exchanges the market could be overlooking this dynamic. 

Reinet Investments was demerged from Richemont in 2008. Richemont could focus on its luxury activities and the primary value within Reinet - a large package of 84.3 million British American Tobacco shares - could slowly be monetized and reinvested. 

There are a large number of assets within the structure but only a few that REALLY matter:

1. BTI - The fund today still holds 56.1 million shares of British American Tobacco. At market value that's roughly 1.7 billion euros in value right there.

2. PIC - The largest piece of value - by Reinet's calculations and my own - is its 49% stake in Pension Insurance Company. Sounds boring but this stake could be worth 2.6 and up to 5.4 billion euros.

3. Trilogy Capital Partners - In January 2009 Reinet purchased a 49% stake in the private equity business of the infamous Lehman Brothers out of its bankruptcy estate.

More detail on the three most important holdings. In my previous write-up, there is additional detail on some of the smaller holdings but I don't believe these make a huge difference.

BTI 

BTI can be marked at market value. 

Pension Insurance Company 

This is a specialized insurance company that's focused on defined benefit pension plans. The company has £40 billion of assets under management. It has been called into being back in the mid-2000s when the U.K. rolled out the pension act of 2004. This act basically said that defined benefit schemes are a hard liability. Previously these were managed on a best-effort basis. U.K. companies are now facing 2 trillion pounds of hard liabilities and they'd love to get rid of these.

PIC has been set up by ex-Goldman people to do exactly that. CEO Tracy Blackwell had left the investment bank three years earlier to leave finance. Her former colleagues looked her up and asked her to run the venture. That's what she's been doing and to great success.

Today Reinet owns 49% of the private insurer after it took part in another round of funding recently. This happened through raising funds from existing investors at a valuation implying the company is worth €4.48 billion. That’s not a terrible number but I believe this valuation is too low and it should be thought of as more valuable.

The company also discloses an MCEV valuation of roughly €5.4 billion Euro, an adjusted equity value of €6.91 billion and an IFRS net asset value of €4.8 billion The market consistent embedded value is the most interesting.

It is calculated by adding the present value of future profits of a firm to the net asset value of the firm's capital and surplus. But this valuation doesn't include the firm's ability to win new business and/or expand into new types of insurance lines.

There is a long growth runway. The addressable U.K. pension market (there could be some business outside of the U.K. over time) measures about 2.3 trillion worth of assets. PIC tends to take around 25%-30% market share. It's not higher because Blackwell doesn't want to grow at the expense of writing unprofitable business. Note that when she started to run the business around 2006 initially they wrote very few or even no policies. According to Blackwell they're investors first and foremost and didn't like the prices at that time.

One thing to note, related to the MCEV valuation, is a lot of trustees will not get rid of a pension liability all at once. Instead, they like to decrease the liability over time. A beachhead could be quite valuable and because of that existing business is somewhat predictive of future business success. I'm not sure it is a huge stretch to value the business at 2x its MCEV. In any case, the MCEV value of around €5.4 billion seems overly conservative.

Trilogy Partners

A third piece that isn't as material as the other two major pieces (but still deserves breaking out) is Trilogy Capital Partners. In January 2009 Reinet purchased a 49% stake in the private equity business of the infamous Lehman Brothers out of its bankruptcy estate for around $10 million. This is now called Trilantic Capital Partners. The company also put $230 million in fund IV.

These days TCM manages $6.1 billion as per filings earlier this year. There are also a fair bit of capital commitments that likely boost AUM in the short to medium term. Historically, they ran 6 instead of 5 funds with around $9.7 billion committed. I'm not sure if the firm has lost some business or they are merely in the process of getting one of the funds up and running again. Reinet's main capital outlay has been directed towards fund commitments (currently having funds in ~6 funds). Reinet doesn't pay management fees nor carried interest. In fact, it receives a share of carried interest above certain hurdle rates. Reinet carries its interest in the GP on the books valued at 2 million euros. I'd venture equity in a PE business (given the fee structure and stickiness of the commitments) is roughly worth around 10% of assets under management(my comp set is worth between 6%-12%). That means Reinet's GP stake should be worth roughly $300 million instead of € 2 million.

Back to Reinet

I'm not sure why this company is as undervalued as it is but I can guess at it; convoluted structure, not trading on the more important exchanges, boring holdings, hard to superficially estimate true NAV because there are lots of private assets. The company executed on a major buyback but hasn't put in place a new program.

If I use 184 million shares outstanding and put PIC at embedded value, value the asset management stakes at the valuations they are booked for, mark-up the stake in Grab Holdings by $100 million (based on the recent SPAC transaction with Altimeter Growth), and use market value for BAT... I get to a net asset value of €29 per share.  The company recently reported a net asset value of € 30.11. It is trading at a 38% discount to my estimate of net asset value.

If I look at a more optimistic scenario assuming 2x MCEV for PIC, mark up the LP and GP stakes by $230 million (based on the underrepresented TCM stake), mark-up GRAB Holdings by $100 million and this is trading at an unbelievable 59% discount to a net asset value of around €44.

These vehicles at huge discounts are all good and well but if they contain "meh" assets they can be value traps. But I think the major (and some of the minor) assets are really great assets.

I'd like to mention British American Tobacco has been written up on VIC not too long ago and the write-up received high marks. This suggests the shares could be undervalued. P/E of 10x and 7x free cash flow, 8x EV/EBITDA. Especially with peers like Altria and Philip Morris at meaningful premia. And I'd say these look undervalued as well. No undervaluation is factored in my numbers though.

There is no hard catalyst here and that's a big weakness of this idea. I've invested (and unfortunately written it up) in prior years and it just didn't go anywhere. That can happen again. In fact, there's no buyback program right now. There have been a few insider purchases in September. I'm interested primarily because PIC is doing so well, there's still a long runway there and its growth rate should start to have an impact on the entire structure. Over the next few years, PIC growth could be its own catalyst. However, PIC could grow in fits-and-starts. 2020 was a pretty disappointing year for good reason. There's no guarantee the market is going to start scrutinizing this vehicle and PIC closer any time soon. Listing PIC could help a lot but I have no good reason to expect an event like that in the near future.

Catalyst

Further growth at Pension Insurance Company