Ellerston Capital portfolio manager Chris Kourtis has put his biggest bet on embattled Perpetual – picking one of the most hated stocks on the ASX – that he believes will soon be the ‘cheapest listed asset manager of scale in the universe’.
Speaking at the Sohn Australia conference in Adelaide on Friday, Mr Kourtis lifted the entertainment quotient with his inimitable presentation style, all while donning a doctor’s white coat.
The well known avowed contrarian investor, with over 40 years experience, last year picked then unloved stock ResMed, which has gained more than 60 per cent in the last 12 months to currently trade close to $36 on the ASX.
Ellerston Capital, headquartered in Sydney, has over $5bn invested in traditional and alternative assets and Mr Kourtis told the conference his fund’s single biggest position is in Perpetual.
“The patient I’m diagnosing today, is suffering from a severe case of shareholder wealth destruction – it’s Perpetual!” he said at the conference, which raises money for medical research. “Perpetual is at a 20-year low. It wasn’t that long ago the stock was at $80. The problem has been very poor leadership at the very top, poor capital allocation and woeful execution.”
Recent deals, including the $2bn acquisition of rival fund manager Pendal that was completed in early 2023 left the asset manager saddled with debt.
Perpetual in May inked a deal with private equity giant KKR to sell its wealth and corporate trust divisions, along with the 138-year-old Perpetual name, in a deal still to be voted on by shareholders.
Last month, Perpetual received a first strike against its executive pay, with Mr Kourtis saying “we’re not going to reward for poor execution”.
Perpetual is now working through a $2.2bn deal with global equity giant KKR. Perpetual will sell its name, along with its prized wealth management business to KKR and focus on a streamlined asset management function.
Perpetual’s corporate trust business will also be part of the KKR deal, with proceeds being used to pay off debt for the group which was worth $771m as of the end of April and the rest returned to shareholders.
“There’ll be some debt repaid, separation costs, net adjustments – but at the end of the day, shareholders are going to receive about a billion dollars,” Mr Kourtis said. “What does that leave us with? A high quality operating platform, $222bn assets under management, we all know the brands. Importantly 70 per cent of their funds under management, is about to overperform the benchmark.”
He said Perpetual’s problem was its “empire building” likening its Pitt Street office in Sydney to “the Taj Mahal, fit for a Saudi prince”.
“That’s going to get sorted out.”
“It will be the cheapest listed asset manager of scale in the universe … The implied enterprise value of Residual Co is going to be under 4x EBITDA. That is cheap!”
He is backing new chief executive Bernard Reilly, who is prioritising fixing its operating model and cost base. “Bernie understands cost-cutting and if they can’t take 10 per cent out of that cost base … I’ll give up my doctorship”, he said
Mr Kourtis said “lots could go wrong” with his bet, including issues with the approvals or the tax relief ruling despite his “serious regression analysis”.
But investors would still be “back to the future” with a “pretty decent fund manager”. “You are basically getting a fund manager for nothing.” 75 per cent of their strategies have outperformed over a three-year period and is good track record, he said. “The problem hasn’t been performance. It has been with the board, the ex-CEO (Rob Adams) and the execution strategy”.
He said his tip came with an important disclaimer – “we accept no liability for nothing”. “It really is a gift”, he said, revealing he is “long 10 per cent higher”. “I am giving you all a fighting headstart”.
Watch the full presentation here.