Description
Van Lanschot is the oldest Dutch independent bank with a history going back to 1737. It is partially family owned and well underway pivoting away from banking towards specialized, independent wealth management. Before the financial crisis shook things up van Lanschot attempted to take on the Dutch big boys like Rabobank, ABN Amro and ING in every area of banking. I guess the crisis sobered them up, at the time they were referred to as “van Longshot” even though they didn’t take government capital, and today the firm does private banking, asset management and merchant banking.
The firm is very much focussed on growing the specialized niche asset management part of its business. Pro forma several announced transactions the firm has in excess of €60 billion of client assets under management. About €10 billion are private banking deposits. The other €50 billion are assets under management with the majority entrusted to subsidiary van Kempen & Co. I believe the company is worth much more than its €820 million market cap.
There are several reasons the firm’s value is underestimated by the market.
Due to the firm’s small size and large stakes owned by strategic shareholders and/or family float has been limited and consequently not always worth the time and effort for professionals to evaluate it properly. This may change in short order.
Earnings are lower than they could be. Driven by the strategy change and a cost cutting program, with a focus on reducing wage costs, IT costs and SG&A, expenses are temporarily inflated. Most investors evaluate investments based on earnings and at 10x EPS the firm does not stand out as particularly cheap.
If investors evaluate by book value; Van Lanschot is synonymous with private banking and I believe investors may be consistently underappreciating how large its wealth management business really is. With private banking deserving a lower price to book multiple compared to wealth management consequently value is underestimated.
Finally, there is the threat of Delta Lloyd liquidating its 30% stake that hangs over the market. Delta Lloyd is a large insurance operation that is currently scrambling for capital and it would like to dispose of its van Lanschot stake (If you invest in size and like this idea, I would guess they would welcome your call). Delta Lloyds stake nor its financial troubles were a secret and people may have anticipated a liquidation which would put a lot of pressure on the stock price. The latest news is that the Delta Lloyd is looking to sell its stake to a syndicate of institutional investors.
Kempen strategically limits itself to a number of niche strategies: small cap, property, high-dividend equity, fixed-income security and fund of hedge funds. Morningstar lists no less than 72 entries funds under the van Kempen brand which are a critical part of the firm’s AUM and awarded five of them five stars. Eleven were awarded a gold star and fifteen of them a silver star. Gold and silver star funds included European credit funds, several different high dividend funds and European small cap funds. Over the last period the firm reported modest net inflows.
The firm also launched an interesting wealth management product called EVI. The advertising campaign is compelling in my opinion and aimed at a younger generation of prospective clients, possibly more towards women. EVI gathered a € billion of assets within one and a half year after launching. A sizeable number given the size of the Dutch market and the targeted demographic.
The easiest way to illustrate the undervaluation of the firm is by valuing its asset management business. Pro-forma transactions that have been announced in press releases but aren’t reflected in the financials yet; the acquisition of the U.K. pension fund MN and both the Dutch Univé and the French Fonds de Reserves entrusting the firm with another billion, assets under management are in excess of € 50 billion.
In a September publication on asset management valuation PWC calculates a median value of global asset management firms of 2.9% of AUM. A number that’s a little bit below the median for U.S. asset management companies but in general asset managers as a category are valued on the low side of the historical norm. No doubt in part due to the self-defeating migration from active towards passive. The average EV/EBITDA multiples for diversified asset managers and mutual fund management companies have not been as low since respectively 2009 and 2011. Asset management companies with a higher percentage of high fee business; active management, hedge funds, retail funds, equity funds, niche strategies tend to trade at higher multiples. I could argue the van Kempen asset management company deserves a higher valuation but to be conservative I’ll go with 2.9% for the total firm’s assets under management. A number like that translates to a € 1.45 billion firm value.
Already representing 72% upside from the € 820 million the market pegs the firm at we shouldn’t forget about the well known 200+ year old private bank with over € 10 billion of deposits and the van Kempen merchant bank (investment bank) which generated € 20, € 30 and € 40 million in commission income over the past three years. Currently, income is likely to be inflated because of the high activity in the M&A markets. It wouldn’t surprise me if this segment would disappear over time. It is a small player and may have trouble sustaining its momentum in tougher times. These, admittedly small, pieces are thrown in for free with what is already a good deal.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Van Lanschot can appreciate 72% before hitting fair value. There are identifiable reasons why the firm may be trading below fair value and the overhang from the Delta Lloyd stake could disappear soon enough. If this results in increased liquidity that could help the valuation of the firm to stabilize. Other catalysts will manifest over time as the firm rightsizes its cost structure. A takeover of the entire company is unlikely given the company’s proud profile as an independent, the family’s 10% stake and board seat. It is possible pieces are sold, making it easier to see the value of the wealth management business but I’m not counting on it. Shares are best traded in Amsterdam but I couldn't select Netherlands as a country in the drop-down menu.