AGF Management Limited Part 2
Responding to questions from my readers
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Disclaimer: I am long shares of AGF.B at the time of publishing this post.
Hey Continuous Compounders, I received questions from readers and decided to make a post as these are very crucial questions relevant to the investment thesis.
Here is the former post: AGF Quick Pitch (Q3 Update)
Table of Contents:
Are investments marked appropriately?
Does AGF have an investment edge?
What happens if markets decline?
Is deploying capital on M&A to increase AUM a good use of capital?
How have their prior acquisitions performed?
Doesn’t the transition to FEL funds mean the cost gap between active and passive funds has increased? Wouldn’t this increase flows to lower-fee passive investments?
Conclusion
1) How do you get confidence the LT investments are marked appropriately?
The company mentions in the image below that their long-term investments are accounted for at FVTPL.
*Source: FY 2023 Annual Report. The above breakdown is only provided once a year in the annual report. In the quarterly reports, we are only given the fair value and not the breakdown of “interest held”.
AGF is the first investment management stock I’ve analyzed, and there is still much for me to learn about this industry. I just assumed since the company’s LT investments are accounted for at FVTPL that this constant adjustment to fair value would mean they are fairly valued.
The company states “fair value adjustment is based on the net assets of the fund less the company’s portion of the carried interest that would be payable by the fund upon crystallization.” Deducting carried interest from net assets is closer to fair value than if they had not, as these are legitimate fees owing to the managers of these funds.
“AGF also participates as an investor in the units of the underlying funds it manages. Under IFRS, investments held in the underlying funds are measured at fair value. The fair value of the fund considers carried interest payable to the manager, based on the returns achieved to date. AGF may also receive cash distributions from the underlying funds. These earnings are recognized through ‘Fair value adjustments and distribution income’ on the Consolidated Statement of Income and can fluctuate with the amount of capital invested, monetizations, and changes in fair value”
The company only reports the “interest held”, but doesn’t provide a detailed breakdown of the current value of LT investments in each of the funds it’s invested in. I attempted to look up the current value of each of the funds:
AGF has made a 30mm initial investment in First Ascent Ventures II LP. The fund is focused on investing in emerging technology companies that are building the next generation of disruptive, fast growing enterprise B2B software companies. We could impair this investment to 0 if we want to be overly conservative.
AGF earns “an annual fee of $0.2 million during the commitment period and 11.5 bps on the net invested capital after the commitment period. As at November 30, 2023, the First Ascent Fund fee-earning asset was $0.1 billion (2022 – $0.1 billion) and during the year ended November 30, 2023, the Company recognized $0.2 million (2022 – $0.2 million) of income related to the fee arrangement.”
AGF generates a 0.66% yield on its investment during the commitment period. Post-commitment period, 11.5 bps is on the entirety of the 107 mm fund value (30mm/28% interest) which would be approx. $123,000 annual, or 0.41% yield. If the fund were to increase in value, then the yield would increase.InstarAGF Essential Infrastructure Fund I and II is a private capital fund; hence, no public disclosures are provided. There are disclosures that Fund I started with 740 mm CAD of capital and Fund II started with 1.2 bn USD of capital.
*Those with a Pitchbook account, could you report to me how they are doing if you have access to their returns? I didn’t want to create an account and have my credit card on a website I won’t be using.
AGF’s 13.5% interest in Fund I would indicate an approximately 100 mm CAD of committed capital invested at the inception of the fund.
AGF’s 5.3% interest in Fund II would indicate an approximately 85 mm CAD of committed capital invested at inception.
AGF has committed 50 mm USD to Instar’s Fund III. I suspect that for Instar II to raise more capital than Instar I, Instar I did quite well. Furthermore, for Instar to be in the process of launching Fund III, the first 2 funds have likely done well. Lastly, given AGF receives 7 bps on the AUM of Instar’s third fund, down from 14 bps in the first 2 funds, Instar likely raised more money in its third fund or has some sort of leverage to negotiate a lower rate.
Compared to First Ascent Ventures, essential infrastructure investments are less risky; coupled with the fact that they were able to launch subsequent funds with increasing amounts of capital, this indicates to me that the fair value has likely risen above the value of their committed capital and the fair values are likely representative.The value of the initial investment in Stream Asset Financial LP (private credit) and AGF SAF private credit limited partnership was not reported. Fund data was not found on the internet.
AGF SAF Private Credit Trust has a value of $119.1 net assets as of July 31, 2024. With a 43.3% interest, that is a 51.5 mm value. This credit trust has compounded at 14.1% since inception. Given this trust is 87% invested in the “AGF SAF Private Credit Limited Partnership” and the rest in bonds and cash, this would indicate that the high return is contributed in large part by the “AGF SAF Private Credit Limited Partnership.” In addition, this would further imply the 4.7% interest in the AGF SAF Private Credit Limited Partnership has performed even better than 14.1% as there is no return dilution from bonds and cash. The limited partnership invests in a diverse portfolio of private, secured debt investments targeting the Canadian small and medium enterprise market. As long as these loans aren’t impaired and these enterprises can make payment, the fair value should be representative.
*Quarterly periods are cumulative figures
Since FY2017, roughly 66 mm CAD of net positive fair value adjustments have been made. Positive fair value adjustments have far outweighed negative fair value adjustments.
Based on the above analysis, I believe for the most part the value of LT investments to be fair, but we can apply a discount out of an abundance of caution. LT investments in essential infrastructure should be representative of fair value. In regards to private credit, if I had access to loan data that provides the value of each individual loan, the credit assessments of each enterprise, and payment delinquencies of their clients, I’d have a better picture of just how risky the private credit returns are. Based on the limited information we have at this time, I’d assume private credit is reflective of fair value given the performance. Lastly, out of an abundance of caution, we could impair the 30 mm investment in First Ascent Ventures due to the nature of the investment, as this investment could be subject to manipulation if management decides to delay the impairment of this investment.
All in all, we can take the 314mm in LT Investments and subtract 30mm for First Ascent Ventures making the fair value 284 mm. To be even more conservative, I’d personally discount this value by 10% to account for bad loans and an illiquidity discount given this capital is committed. Factoring both adjustments, the value of LT investments would have a value of 255 mm CAD or a roughly 20% discount from reported value.
I have emailed investor relations for further clarity on this. I will get back to you when they reply. My initial email to them has been ignored. I have followed up and we will see what transpires.
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