Phil King’s double act on Perpetual has set the tongues wagging

Regal chief investment officer Phil King. The Regal Partners annual general meeting is slated for November 23 and it may be worth booking a ringside seat. Picture: Jane Dempster

Within just 12 months, Phil King may achieve not one but two reverse takeovers for investment manager Regal Partners.

The double act would catapult King past Platinum Asset Management and Magellan Financial Group and into the big league of large listed fund managers with a market advantage in King’s capability in Australia and Asia.

The first deal was the merger of Regal with Robert Luciano’s VGI Partners in June – a story in itself. In play now is a tilt at the grand old house of Perpetual, once an empire boasting the likes of John Sevior, Matt Williams and Peter Morgan.

It is early days, but the ambitious yet unflashy Phil King (already a fundie hall of famer) is the buzz of broking and funds management circles.

Do not try to catch the Regal chief investment officer between 10am and 4pm – he is busy trading on back-to-back market calls. Block trade? Call Phil King, he is behind every third trade, just like Sevior in his day, we are told.

As one market player observed, money in the financial services industry is like blood in the body. If you hand out money, that buys a lot of favours.

King’s opportunistic bid for Perpetual has exposed the deficiencies of the Perpetual board’s plan to merge with Pendal, particularly around value.

There are market mutterings that Perpetual directors are more interested in their own positions than their shareholders’ interests.

Rob Luciano of VGI Partners. Picture: Britta Campion

Clearly King sees value in Perpetual. What he may see that others miss is the power of the brand which remained untarnished through the financial services royal commission. Under King’s control, the Perpetual brand could be worth much more.

Where Perpetual has struggled since its hay days is in organic growth. Unlike at Platinum and Magellan, the answer has been growth by acquisition. And those on the board have had far less skin in the game than a Keir Nielsen at Platinum where the business was built from the bottom up.

The strategy to merge with Pendal to expand funds under management has become bogged down and left the door open to King. Ironically the acquiring Perpetual is now a target.

At Perpetual today, the Tony D’Aloisio-led board appears to have no Plan B. It has given short shrift to the joint offer from Regal and private equity player BPEA EQT.

The rebuff could draw out a higher bid from Regal. King could do worse than simply sit out for a while and watch the Perpetual share price. The market is not enamoured with the idea of merging two struggling businesses.

Frustratingly for the board, it has no read on whether the master trader has already built a holding. In September King popped up with 5.5 per cent of Platinum.

The Regal Partners annual general meeting is slated for November 23 and it may be worth booking a ringside seat. AGMs are a rare chance for target companies to shine the torch the other way onto the board and executives.

The market may be in awe of King’s move on Perpetual, but since the VGI merger shares in Regal have slumped from above $4 to $2.85 at Friday’s close. Perpetual shareholders may ask if King is the right fit for the conservative and longstanding Perpetual.

This time last year Regal Funds Management was a private business. The listed Regal Partners was formed in June on the merger (or reverse takeover) of Regal Funds Management and VGI Partners, with $6bn in funds under management offering investors access to hedge funds, private equity and credit and real assets.

Perpetual chairman Tony D’Aloisio. Picture: Hollie Adams

The VGI deal was just as opportunistic as the move on Perpetual. VGI’s two listed investment companies, VG1 and VG8 under co-founder Rob Luciano’s leadership, had performed woefully thanks largely to Luciano’s stock picks that missed the recovery from Covid.

In the words of David Kingston, banker and activist investor in VGI, it was a shotgun marriage. VGI shareholders were diluted to owning just 40 per cent of Regal Partners.

Since the merger both the VG1 and the VG8 LICs continue to trade at a discount to net tangible assets of around 20 per cent.

Listed investment companies have two moving parts: the net tangible asset value or NTA is calculated daily as the market value of the investments, and secondly the discount or premium that the LIC is trading to the NTA.

To get rid of a discount to NTA is not an easy exercise. Demand for the LIC affects how the shares trade, as does the confidence in management and their stock or asset picks. A buyback is one way to tighten the discount, but that reduces funds under management. And FUM, for better or worse, is the biggest game in town.

Shortly after the merger of Regal Management and VGI, King sacked Luciano from the VG8 fund and took over the running himself. Since then the NTA of VG8 has improved by 13 per cent. At the Luciano-led VG1 the NTA is down 19.9 per cent. The discount in both remains stubborn.

Some of the frustrated holders of VG1 and VG8 might see a takeover of Perpetual to create more than $100bn in funds under management as a chance to push for an exit at the NTA value.

One question at the upcoming Regal AGM will be for Lawrence Myers, who is the chair of the VG8 LIC and a director of the VG1 LIC. Myers recently bought more than $1m worth of shares in these LICs at the current discount to NTA. The chairman might argue this demonstrates his faith in the LICs’ future performance. Others could see it as exploiting his own failure to fix the discount. Regardless, there remains the issue of a potential conflict of interest.