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Is The VGI Partners (ASX:VGI) Share Price Trading Cheap?

Should you start buying VGI Partners Ltd (ASX: VGI) shares following today’s Funds Under Management update?

About VGI Partners

VGI Partners is a high conviction global equity manager. VGI manages capital for high net worth individuals, family offices and consists of a team of 11 investment professionals based in Sydney, New York and Tokyo.

VGI Partners was founded in 2008. Their flagship fund, the VGI Master Fund, has returned 15% per annum net of fees. The fund was established in 2009. Another strategy they manage is the ASX listed VGI Partners Global Investments Limited (ASX: VG1).

VGI’s September FUM update

In today’s update, VGI announced they were managing $2.6 billion as at 30 September 2019. This doesn’t include the funds they will manage under the initial public offer of the new listed investment company (LIC) they are launching, VGI Partners Asian Investments Limited (ASX: VG8). To date, applications for the IPO exceed $500 million.

As the name of the new LIC suggests, the company will be investing across Asia. VGI Partners believe that it is a good time to establish a portfolio of companies in the Asian region. VGI will use the same investment philosophy and process to buy and hold 15 to 30 long investments and opportunistic short selling of low quality and materially overvalued shares.

VGI Partners intends to take up a $20 million investment in VG8 and will also meet all of the costs of the offer. Similar to their first LIC, they will reinvest into VG8 their pro rata share of all performance fees that are paid as dividends.

In yet another pioneering strategy, VGI are using alignment shares in VGI to provide a meaningful uplift and reward to new shareholders in VG8.

I applaud VGI for their pioneering approaches to the listed investment company space. Their shareholder friendly approach with their first listed investment company, VG1, saw them absorb the establishment costs of the offer.

In a win for shareholders, this approach was then adopted by most new initial public offers for listed investment companies.

Is It Time To Buy VGI?

The new alignment structure will provide a short-term dilution to VGI Partners Limited, due to the cost of the alignment shares. However, shareholders may be wise to take the long view, as a LIC structure provides locked-in money, and VGI will benefit from the management and performance fees from managing VG8 for many years to come.

VGI Partners reports its financials on a calender year basis. For the half year to 30 June 2019, VGI reported a normalised profit of $24.6 million on average FUM of $2.2 billion.

While VGI has a successful history of managing money and I expect this to continue, predicting profits is a difficult exercise. Performance fees for fund managers tend to be lumpy in nature. For example, in 2018 VGI earned a performance fee of almost $45 million, almost 2.5 times management fee revenue of $19.2 million. That helped boost the revenue line.

I think they will continue to earn performance fees in the future, but keep in mind that performance fees can be lumpy in nature from one year to the next.

Other ASX-listed fund managers that you may consider buying shares in include the well-known Magellan Financial Group Ltd (ASX: MFG)Platinum Asset Management Ltd (ASX: PTM) or Pendal Group Ltd (ASX: PDL).

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At the time of writing David owns shares in VGI Partners Ltd (ASX:VGI), VGI Partners Global Investments Limited (ASX: VG1) and has subscribed for shares in the IPO of VGI Partners Asian Investments Limited (ASX: VG8).

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