18th Dec 2019 14:53
(Alliance News) - Shore Capital said Arrow Global Group's third-party capital commitments raise on Wednesday marks a "significant milestone" in the company's development.
Shares in the asset manager focused on loans and real estate were up 17% at 263.20 pence in London on Wednesday.
Arrow Global has raised EUR838.0 million, with EUR628.5 million of that coming from third-parties, including "some of the largest and most sophisticated" global investors. The money will be used to set up a new fund which will invest in European credit. It is targeting EUR2.0 billion of assets under management by the end of 2020.
Shore said that this is an "impressive performance" that "demonstrates Arrow's compelling offering and track record of generating returns on its investments".
The finer details of the revenue model have not been disclosed, but Shore would expect the third-party element to generate fund management fees for the group as well as servicing income.
Shore's base-case assumption is that the fund management fee element will equate to around 1.5% per year of third-party assets under management, with performance fees equivalent to 20% of any returns generated over an 8% hurdle, which would be broadly consistent with the industry standard for 'alternative' assets.
In addition, the broker would expect the servicing element to equate to around 3.5% of assets.
For every EUR1 billion in assets under management, Shore expects revenue of EUR50 million per year and operating profit of EUR13 million.
This implies that Arrow Global will need to build incremental third-party assets under management to around EUR3 billion to EUR4 billion if it is to achieve management's medium-term target of doubling revenue from the Asset Management & Servicing Business, while also increasing the operating margin to 25%.
"Overall, we view this announcement as a significant milestone in Arrow's development as it looks to transition its business model from that of a capital intensive own balance sheet investor to a capital-light manager of third-party investments," said Shore.
This should drive an improvement in earnings quality over time and open up the potential for "shareholder friendly activities"- such as share buybacks - in the future.
Shore retained its Buy stance on Arrow Global, believing its shares offer "excellent value".
By Lucy Heming; [email protected]
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