Researcher Morningstar believes the latest private equity bid for Insignia Financial “vindicates” its longstanding view that the wealth giant has been undervalued by the market.
US private equity firm CC Capital made a bid of $4.30 per share earlier this week, just a month after another US private equity firm, Bain Capital, made a since-rejected $4 per share offer to acquire Insignia.
“The proposal vindicates our view that Insignia was undervalued, and that its earnings outlook looks brighter compared to its 2023-24 levels,” Morningstar equity analyst Shaun Ler explained in an analyst note released on Tuesday.
CC Capital’s bid offered a 21 per cent premium above Insignia’s preannouncement trading price of AUD 3.54 per share and a 19 per cent premium on the researcher’s stand-alone fair value estimate of $3.60 per share.
“Bain’s rejected bid was a modest 11 per cent premium to our stand-alone fair value,” Ler said.
CC Capital’s $2.9 billion offer to acquire all of Insignia’s shares was represented a 7.5 per cent premium from Bain’s $2.7 billion bid.
As shown by CC Capital and Bain’s proposals, Insignia have recently become an attractive target for US-based private equity firms.
Forte Asset Solutions founder Steve Prendeville told Professional Planner “[Insignia] are an obvious target given their size, stock market pricing and recent changes to management”.
Prendeville, an expert on financial services M&A, explains why Australian companies are attractive to US firms such as CC Capital and Bain: “Australia is a preferred target for international capital players with the low exchange rate, known legislative environment, political stability, rise in demand, aging demographics, and absence of Institutional/bank providers of advice creating a void and thus opportunity,” he said.
Ler said Insignia is also recovering from past headwinds that hurt its ability to attract and retain client assets and improve profitability.
“Margin expansion prospects are improving, driven by restructuring initiatives such as migrating client funds to more efficient platforms, reducing nonessential costs, and an expected recovery in fund flows from cyclical lows,” Ler said.
He added the fallout of the Hayne royal commission and the sharp rate rises of 2022-23 had a negative effect on Insignia’s share price.
In 2017 Insignia’s stock was valued over $10, dropping to under $4.33 by the end of 2018. Prior to Insignia’s November 2024 investor day presentation, the share price was $3.29.
“Insignia outlined several growth initiatives at its November 2024 investor day, endorsed by majority shareholder Tanarra Capital, which owns about 15 per cent of Insignia,” Ler said. Other major shareholders include Australian Retirement Trust, Hostplus, MUFG, State Street, Vanguard and First Sentier Investors.
“The firm has stated it wants Insignia to execute its own growth plans, when commenting on Bain Capital’s proposal,” Ler said.
New Insignia chief executive Scott Hartley’s five-year strategy plan had cost reductions and efficiency at the heart of the new direction of the wealth giant. The primary goal was to target $200 million per annum worth of cost savings.
Insignia had divested its self-employed advice licensee channels, leaving its salaried licensees Shadforth and Bridges. Insignia aims to increase clients per salaried adviser from 100 to 140 by 2030 as one of its key methods to lift revenue, which it predicts will lift per adviser revenue from $800,000 to between $1.1 million and $1.3 million.
Morningstar lifted their fair value estimate for Insignia from $3.60 to $3.95 per share and Ler said this estimate reflects “an equal-weighting probability of Insignia being acquired by CC Capital or staying stand-alone”.
Following the CC Capital bid announcement, Insignia shares rocketed up to a three-year high of $3.93 on Monday – a jump of 12 per cent since late November 2021.
This is a 21.5 per cent premium to Insignia’s last closing share price of $3.54 on Friday.
Ler said while Insignia’s board reviews the proposal, they are “likely weighing up the upside from stronger earnings against execution and market-related risks”.
Among those risks Ler cited included strong competition from Netwealth and HUB24 whom benefitted the industry’s structural shift post-royal commission, while Insignia struggled.
