A series of agreements with Quaestio Group and its main shareholders mark a further important step in the development of DeA Capital (BS:DEAm)'s alternative asset management (AAM) platform. Upon completion, the agreed transactions will increase AUM, enhance DeA’s NPL management offering and broaden its investor reach. The planned strategic agreement between the two companies will add the capability to provide added-value investment solutions and capital allocation strategies.
The agreements with Quaestio
DeA has agreed the acquisition of the NPL management business of Quaestio SGR, a Milan-based independent asset management company, mainly comprising the management contracts for the Atlante and Italian Recovery Funds. DeA also plans to acquire a stake of up to 44% in the Quaestio SGR holding company from its founder and minority interests. This will make DeA the single largest investor, cementing a product and marketing partnership between the two companies whereby Quaestio will offer DeA’s alternative asset management products and DeA will offer Quaestio’s liquid asset based product. DeA will gain access to Quaestio’s added-value investment solutions and capital allocation capabilities.
A significant boost to AAM development
Completion is expected in early 2020, subject to regulatory and investor approval (for the transfer of the NPL asset management contracts to DeA). DeA will acquire c €2.5bn of NPL AUM directly and significantly broaden its capabilities. The Quaestio Holdings stake will be equity accounted but including the traditional liquid AUM retained by Quaestio SGR, the broad DeA group AUM will increase to more than €20bn. The near-term profit impact is unclear at this stage but should be accretive. Quaestio SGR earned €2.9m in net profit in 2018 and DeA plans to fund its c €25m investment from its substantial cash resources (€92.5m at end-Q119), which currently contribute little to earnings. In the longer term, DeA hopes to benefit from its additional scale in alternative AUM, broader product capabilities, enhanced investor reach and both directly and indirectly (through its equity investment) from the product and marketing partnership with Quaestio.
Valuation: Low P/NAV and high yield
At c 0.7x DeA has the lowest P/NAV among a range of peers and also has the highest yield. Our forecasts are unchanged for now, but this transaction has the potential to lift the valuation by increasing the scale and growth prospects of AAM while lifting sustainable ROE.
Business description
DeA Capital, a De Agostini group company, is Italy’s leading alternative asset manager of real estate, private equity and NPLs, with AUM of c €11.9bn at 31 March 2019. The investment portfolio, including co-investment in funds managed, investment in the asset management platform and direct investment, amounted to c €372m.
Background and details
Quaestio: A complementary independent asset manager
The Quaestio Group is a Milan-based asset management company, founded by its chairman, Alessandro Penati, in 2009. Its main operations comprise asset management and non-performing loan (NPL) management through its wholly owned subsidiary Quaestio SGR and NPL servicing through Quaestio Cerved Credit Management, a 50.1% joint venture with Cerved Group, a large Italian credit rating agency and information provider.
Quaestio SGR has assets under management of c €10bn and is a leading provider of investment solutions for institutional and professional investors only (no retail), based on its range of UCIT and alternative investment funds (AIF) products provided through its multi-asset/multi-manager platform. The platform allows it to structure customised investment solutions, tailored to the specific risk and return objectives of the investor, and offering administrative, accounting and tax simplification.
Up until 2016 Quaestio had focused on tradeable, liquid assets such as domestic and international equities and bonds. From 2016 onwards it diversified into non-performing loans through the launch of two AIFs, Atlante Fund and Italian Recovery Fund, established to invest in and support the capital strength of a variety of Italian banks by contributing to share capital increases and acquiring securities representing the junior tranches of non-performing loans. Investors in the funds include the Italian banks themselves, banking foundations, and a range of domestic and foreign institutions. The Italian Recovery Fund was established in 2018 with an initial investment in the mezzanine tranche of the securitisation of €25bn gross of distressed loans held by Banca Monte dei Paschi di Siena. It is the largest investor in the Italian NPL market and is currently invested in four NPL securitisations with a gross book value of c €30bn.
More recently, Quaestio has signalled its intention to refocus on the traditional asset management segment, which the sale of the NPL business to DeA will achieve. The additional investment by DeA into the holding company will additionally facilitate a reorganisation of the ownership and structure, facilitating the exit of the founder and introducing a strong and stable long-term investor to support its continued development.
The transaction details
DeA has agreed with Quaestio Group and its main shareholders, in particular Fondazione Cassa di Risparmio delle Provincie Lombarde (‘Cariplo Foundation’) and Professor Alessandro Penati (the chairman of Quaestio Holding and Quaestio SGR), that it will:
Acquire the NPL management business unit of Quaestio SGR for €12.2m. This consists primarily of the management contracts and team responsible for Atlante Fund and Italian Recovery Fund. The NPL AUM represents approximately €2.5bn of the total Quaestio SGR AUM of c €10bn and in the year ended 31 December 2018 the revenues associated with NPL management were c €7m out of total Quaestio SGR revenues of c €37m. No Quaestio SGR profit split is available although we believe that the NPL activities were a significant contributor to Quaestio SGR net profit for the year of c €2.9m.
Acquire an equity interest in Quaestio Holding, the parent company of Quaestio SGR, alongside the holding company’s existing shareholders. The current shareholders of Quaestio Holding, on a fully diluted basis taking account of outstanding warrants, are:
Cariplo Foundation with a 41.2% interest;
Professor Alessandro Penati and the management team with a total interest of 27.8%;
Other institutional investors, including Cassa Italiana di Previdenza ed Assistenza dei Geometri Liberi Professionisti, Fondazione Cassa di Risparmio di Forlì and Direzione Generale Opere Don Bosco, with a total interest of 31.0%.
The investment by DeA is conditional upon it acquiring a stake of between 35% and 44% by acquiring shares from several minority interests, in addition to all of the shares held by Professor Alessandro Penati. The maximum cash investment (based on 44%) is expected to be €13.2m. DeA will become the single largest shareholder although no shareholder will control the company. Cariplo Foundation will retain an equity interest of at least 24% in Quaestio Holding. The Quaestio NPL activities will be fully consolidated by DeA, through its wholly owned DeA Capital Alternative Funds subsidiary while the minority stake will be held as an associate and equity accounted.
The two transactions involve regulatory approval as well as approval from investors for a reassignment of the management contracts for the Atlante and Italian Recovery Funds and are expected to complete early in 2020.
Significant boost to AAM development and growth
DeA is already active in the non-performing loans sector through its DeA Capital Alternative Funds subsidiary, which DeA believes is the largest Italian multi-bank platform in the ‘unlikely to pay’ (UTP) segment. DeA’s two closed-end credit funds, Corporate Credit Recovery (‘CCR’) I and II funds had assets of €221.8m and €514.6m, respectively, as at 31 March 2019, and aim to help relaunch medium-sized Italian companies that are facing financial difficulties but have solid business fundamentals, sharing the profits between creditors and new investors. Both operate in a similar way, although CCRII recently added a shipping loan segment.
Beyond the immediate addition of c €2.5bn in NPL AUM and c €7m in revenues, more strategically the agreed acquisition of the Quaestio NPL business will extend DeA’s activities into the small-ticket NPL/UTP sector and brings an experienced work-out team with a solid track record of managing these larger-scale portfolios. The transaction also expands DeA’s potential investor base to include a series of major institutional players, including Cariplo Foundation and the shareholder-investors of the Atlante Fund and Italian Recovery Fund.
Although DeA will not consolidate its investment in Quaestio Holdings, it will be the largest single shareholder, and including both the acquired NPL mandates and the c €7.5bn of multi-asset AUM that will be retained by Quaestio SGR, the broadly defined AUM of DeA (both direct AUM and indirect) will increase to more than €20bn.
DeA and Quaestio will also enter into a marketing and product partnership that will see Quaestio continue to focus on ‘liquid asset’ products and DeA on ‘illiquid assets’ such as private equity, real estate and NPLs. Each will market the other’s product. Cariplo Foundation has committed not to acquire equity interests of more than 2% in listed companies and of 5% in unlisted companies engaging in similar businesses in direct competition with those currently managed by DeA and Quaestio.
We will review our forecasts with the interim results
We have made no changes to our forecasts at this stage and will review this with the interim results that are due to be announced on 5 September. Assuming that the deal completes and in the timescale expected, we would expect a positive impact on the alternative asset management division revenues and profits and a positive impact on the group ROE, although there is insufficient financial information available at this stage to forecast this with accuracy. The return on the cash that DeA will invest (up to c €25m) is currently minimal and with a holding company net financial position of €92.5m at 31 March 2019, DeA has ample liquid resources to both invest and maintain attractive shareholder distributions. In the longer term, DeA hopes to benefit from its additional scale in alternative AUM, broader product capabilities, enhanced investor reach and both directly and indirectly (through its equity investment) from the product and marketing partnership with Quaestio that will provide it with the capability to offer added-value investment solutions and capital allocation strategies across both liquid assets and illiquid alternative assets.
