In a research note ahead of Platinum’s 22 September vote, Ler doesn’t overhype the deal, but he makes it clear – doing nothing would be worse.
“We think the merger is sensible for a business facing organic decline like Platinum,” Ler said. “The merger with L1 Capital would arrest Platinum’s earnings decline by combining with another asset manager with better-performing products enjoying inflows, while allowing duplicate costs to be cut.”
The merger terms are straightforward: L1 Capital shareholders will own about 74 per cent of the new L1 Group, Platinum shareholders the remaining 26 per cent.
That may seem like a steep drop in control for Platinum investors, but Morningstar thinks it’s worth it – particularly given that Platinum shareholders will still benefit from a slice of L1’s performance fees.
“Platinum shareholders are guaranteed a share of performance fees from L1 Capital’s Long Short funds and mandates, based on the first 3.5 per cent of annual absolute returns. This helps Platinum shareholders receive a more stable income stream from these performance fees rather than being exposed to the full ups and downs of fund performance,” the analyst said.
Ler pointed out that the real upside here isn’t in the structure, but in the operating lift, namely Platinum has struggled to keep clients and performance aligned for years. Its flagship International Fund, which makes up 44 per cent of assets, has underwhelmed, meaning that giving L1’s team the reins could shift that trajectory.
“Another avenue for value accretion comes from L1 Capital taking control as investment adviser for Platinum’s underperforming products, most notably the flagship Platinum International Fund, which makes up 44 per cent of Platinum’s funds under management. This could improve performance and reduce Platinum’s outflows,” Ler said.
There are also practical benefits, he noted. Duplicate roles can be cut, back office functions streamlined, and new products launched more efficiently – all of which matters more in a business where margins are under pressure.
“The combined entity will have greater asset class and client diversity, facilitating cross-selling and customer retention. This should help stabilise FUM and improve earnings, mainly from cross-selling L1 Capital’s products to Platinum clients,” he said.
But there are risks. Staff departures, cultural mismatches, and tougher competition from ETFs and passive funds are all in play, according to Ler who ultimately noted they’re already baked into the current share price.
Morningstar is keeping its 0.70 cents fair value on the combined entity – not because they expect miracles, but because the merger brings just enough momentum to justify it.
The independent expert’s report sets a wider valuation range, up to 0.95 cents, but Morningstar isn’t banking on L1’s recent performance continuing at that pace forever.
Ultimately, Ler said: “We ascribe a 100 per cent probability to the merger proceeding.”
He defended the move as a lifeline for the struggling fund manager and “a good deal for shareholders”.
Shareholders will vote on the transaction at an extraordinary general meeting on 22 September.
The urgency of the merger is underscored by Platinum’s recent client exits. Namely, on Tuesday, it was revealed that Platinum had recorded its third major client exit this year, with a large investor set to redeem $580 million by November.
This marks Platinum Asset Management’s third major client withdrawal this year – precisely the kind of setback Morningstar believes the merger is designed to halt.
