Platinum Asset Management meekly yields to lowball L1 Capital merger

L1 Capital founders and co-chief investment officers Mark Landau (left) and Rafi Lamm

What a way to go out! Faced with the tough task of rescuing itself, hapless Platinum Asset Management has taken the easy way out and caved to a risible offer from Rafi Lamm and Mark Landau.

Platinum shareholders will walk away with 26 per cent of the merged company, despite having roughly the same funds under management as Lamm and Landau’s L1 Capital – but not, granted, their track record and reputation.

But Platinum is contributing the only cash involved in the merger, and its board has even let L1 keep creaming off the bulk of the extraordinary performance fees that have made the fund manager such a cash cow.

Neither company published current balance sheets with Tuesday’s merger announcement, but Platinum had about $202m in cash and liquid assets at December 30.

Take out around $87.3m for an interim dividend paid in February, and add back in whatever Platinum eked out in profit in the second half of the year, and it should still have about $120m or more left in cash and liquid ­assets.

In comparison, L1 will pay out surplus cash in a special dividend to its own shareholders ahead of the merger. Between them, Lamm and Landau own about 90 per cent of L1.

On top of that, Platinum has given away the bulk of its ability to access L1’s most lucrative cash machine, the extraordinary performance fees that roll in from its Long Short fund (LSF). It ­charges 20 per cent of the absolute return in the fund each year – not, as most other funds do, 20 per cent of returns above a ­selected index.

To make it clear, L1 could liquidate the ASX-listed part of its Long Short fund, bung $2bn into a term deposit paying 3.9 per cent, have a long holiday in Tahiti, and still walk away with $15.6m in “performance fees”.

Despite giving up 76 per cent of the merged company to L1, Platinum will only get the 20 per cent performance fee from the first 3.5 per cent absolute return in the LSF. The rest goes to L1.

So the great minds at L1 don’t even need to beat the RBA cash rate to keep creaming off their own set of fees.

Even the merger documents, designed to put a positive spin on the deal, spell out exactly how badly Platinum shareholders will probably fare.

In 2023, LSF (including the ASX-listed vehicle and a Caymans-registered fund with similar fee structures) generated $94.1m in performance fees. Under the merger arrangements, $21m would go to MergeCo, and $73.1m to Lamm, Landau and L1’s minority shareholders.

In 2024, LSF generated $118.8m in performance fees: $24m would have gone to the MergeCo pool, and $94.8m to the L1 boys.

Oh, and Lamm and Landau will each emerge with 33 per cent of MergeCo, so they’ll get the majority of Platinum’s cut of the fees back anyway.

The fee structure is truly ­bonkers.

And, for his part in negotiating this stunner of a deal, Platinum boss Jeff Peters has just been handed a $670,000 “additional work effort payment”.

It may be true that Platinum was running out of options, given the former heavyweight once had about $30bn in funds under management, now down to about $8bn.

There’s no doubt that the L1 duo are among the hottest fund managers on the block these days. So was Platinum founder Kerr Neilson, back in the fund’s heyday, but nothing lasts forever.

There seems little doubt that L1 will win the day on the Platinum offer. But it still has to deliver, and its recent performance in LSF has been short of the benchmark index.

Curiously enough, there’s something of a deadline. L1’s management contract to run LSF runs out in 2028. If things don’t go well, you might imagine there will be a bit more scrutiny on all of those performance fees that have been extracted.

Austrac’s PEXA deal

Australia’s real estate agents waged a long, bitter and ultimately unsuccessful fight to keep their exemption from anti-money-laundering laws.

Like law firms, accountants, property conveyancers and diamond or other precious stone dealers, next year they’ll join bankers and other financial institutions in playing ball with Austrac and reporting suspicious transactions, conducting proper due diligence on customers and, you know, not helping organised crime launder billions of dollars in dodgy property transactions.

The industry has long argued that it’s all a bit hard and costly for your local real estate agent, already drowning in buckets of red tape etc. But, happily, a far bigger player is offering to step in and help Austrac out with at least some of the problems, according to an unnoticed footnote in a speech by Austrac boss Brendan Thomas in June.

Who else but PEXA, Australia’s private electronic conveyancing near-monopoly, which already has its long tentacles entwined throughout the property industry.

Austrac, Thomas told an anti-money-laundering industry conference in June, was looking into a partnership with PEXA, to help the law-enforcement agency in its efforts to “take in as much external data as we can” to help stop organised crime laundering dirty cash.

We imagine that there will be a few real estate agents around the country that might sweat a little at the prospect of Austrac getting ­access to a slew of transaction data via the electronic conveyancing platform, even if details of any deal are still far away.

Pity there’s no real competitor to threaten to shift their business to.

In fact, given the long standing complaints about PEXA’s near monopoly, Margin Call hears that there are already dark mutterings coming from the direction of would-be competitors, to the ­effect that a deal with Austrac would simply be another way for the company to extend its dominance of the electronic conveyancing market.

What better way to stall a new entrant than to raise concerns about the loss of a key plank in anti-money-laundering efforts, they wonder.

Not that Margin Call believes for a second that such a thought would ever cross the mind of a PEXA executive.

Still, we hear preliminary conversations have already been had with the ACCC – already a long-standing PEXA critic – just in case a deal becomes reality. And, if the Senate committee that launched hearings into PEXA’s place in the industry ahead of the May federal election is reconvened, no doubt the new concerns will get an airing there.

INSIDE MARGIN CALL

Austrac is calling on PEXA to help police real estate