Annual Report 2019 - Pinnacle
AnnualReport2019
FinancialCalendarFinal dividend record date 20 September 2019Final dividend payment date 4 October 2019Annual General Meeting 31 October 2019Interim Results announcement 21 February 2020Full Year Results announcement 5 August 2020The Company reserves the right to change these dates.AnnualGeneralMeetingThe 2019 Annual General Meeting will be held at 9am on 31 October2019 at Pinnacle’s Sydney office at Level 35, 60 Margaret Street,Sydney NSW 2000.Notice of the Annual General Meeting will be forwarded to allshareholders separately.CorporateGovernanceThe corporate governance statement for PNI can be found investor-centre/Annual Report 2019
Pinnacle Investment Management
Annual Report 2019
Contents01Pinnacle Glossary 0202Chair’s Letter 0503Overview, Operating and Financial Report 0804Community 2005Directors’ Profiles 2206Directors’ Report 2607Auditor’s Independence Declaration 4808Financial Statements 5109Directors’ Declaration 10110Independent Auditor’s Report 10211Shareholder Information 11012Corporate Directory 11318/19FYPinnacle Investment Management01
01/12PinnacleGlossary02Annual Report 2019
TermMeaning2018 Annual Reportthe Group’s annual report for the 2018 financial year.2018 financial yearthe period 1 July 2017 to 30 June 2018.2019 Annual Reportthis document.2019 financial yearthe period 1 July 2018 to 30 June 2019.Affiliates or Pinnacle AffiliatesPinnacle’s thirteen affiliated investment managers, being Antipodes, Firetrail, Hyperion,Longwave, Metrics, Omega, Palisade, Plato, Resolution Capital, Riparian, Solaris,Spheria and Two Trees.AntipodesAntipodes Partners Limited.ASX Principlesthe Corporate Governance Principles and Recommendations, 3rd Edition, published bythe ASX Corporate Governance Council.AuditorPricewaterhouseCoopers.Boardthe Board of Directors.Board Committeesthe Audit, Compliance and Risk Management Committee and the Remuneration andNominations Committee.ChairAlan Watson, the Chair of the Board.CompanyPinnacle Investment Management Group Limited.Company SecretaryCalvin Kwok, who held the position during the 2019 financial year.Corporations ActCorporations Act 2001 (Cth).Deutsche AustraliaDeutsche Australia Limited, which held an 18.8% shareholding in the Company at thestart of the 2016 financial year. As at the date of this report, Deutsche Australia nolonger has any shareholding in the Company.DirectorsDirectors of Pinnacle Investment Management Group Limited.EOSPPinnacle Investment Management Group Employee Option Share Plan.FiretrailFiretrail Investments Pty Limited.Foundationthe Pinnacle Charitable Foundation.FUMfunds under management.Group or Pinnacle GroupPinnacle and the entities that it controlled during the 2019 financial year.HyperionHyperion Asset Management Limited.Key Management Personnelthe individuals identified as such on page 30 of the 2019 Annual Report.LTIlong-term incentives offered to individuals who are staff of the Group.LongwaveLongwave Capital Partners Pty Limited.Managing DirectorIan Macoun, who was appointed as an executive director on 25 August 2016.Metrics or MCPMetrics Credit Partners Pty Limited.New Loansis a reference to the loans more fully described at page 43.Pinnacle Investment Management03
01Pinnacle Glossary (continued)TermMeaningNPATnet profit after tax.NPBTnet profit before tax.NTAnet tangible assets.OmegaOmega Global Investors Pty Limited.PalisadePalisade Investment Partners Limited.PIMLPinnacle Investment Management Limited, the principal operating subsidiary ofthe Group.PIML Acquisitionthe transaction approved by shareholders on 16 August 2016, pursuant to which theCompany acquired the 24.99% equity stake in PIML it did not already own.PIML LTI Schemethe long-term incentive scheme described on page 32 of the 2019 Annual Report.Pinnacle or PNIPinnacle Investment Management Group Limited.Pinnacle Omnibus Planthe Pinnacle Omnibus Incentive Plan described on page 32 of the 2019 Annual Report.PlatoPlato Investment Management Limited.Principal Investmentsinvestments made by the Group in listed and unlisted equities and unit trusts on itsown behalf.Resolution CapitalResolution Capital Limited.RiparianRiparian Capital Partners Pty Limited.Securities businessthe corporate finance, equity capital markets, institutional sales, research and privatewealth management businesses previously owned by the Company and now known asWilsons Advisory.Sellerseach of Macoun Superannuation Fund Pty Ltd as trustee for the MacounSuperannuation Fund, Macoun Generation Z Pty Ltd as trustee for the MacounGeneration Z Family Trust, Usinoz Pty Ltd as trustee for the Ihlenfeldt Family Trust,AJF Squared Pty Ltd as trustee for the AJF Squared Family Trust, Andrew Chambersand Fleur Chambers as trustee for the Andrew C Chambers Family Trust, AdrianWhittingham as trustee for the Whittingham Family Trust, Mark Cormack and MelanieCormack as trustee for the Cormack Family Trust and Dellreid Pty Limited as trusteefor the Dell Family Trust.SolarisSolaris Investment Management Limited.SpheriaSpheria Asset Management Pty Limited.STIshort-term incentives.Two TreesTwo Trees Investment Management Pty Limited.04Annual Report 2019
02/12Chair’s LetterDear Fellow ShareholdersAt Pinnacle, we are not soothsayers of financial markets.What we are seeking to do on your behalf is developa business that will continue to prosper in all marketconditions, and which, whilst not being immune to achallenging environment, will be increasingly resilient to it,and thus allow shareholders to benefit across the wholecycle. We believe this resilience is enhanced when weincrease our diversity of asset classes under management,increase the diversity of sources of funds undermanagement, retain a healthy percentage of funds undermanagement exposed to performance fees, and maintaina robust balance sheet which would assist us to consideropportunities that would be expected to present themselvesin challenging market conditions. With this in mind, beforecommenting on the specific detail of the past year’s results,it may be useful to reflect on the medium-term mission thatPinnacle described to its new shareholders when it becamea pure play listed Funds Management Group in 2016, andconsider our progress towards those goals over the pastthree years.In an Investor presentation dated 2 June 2016 (available onour website) it was stated that: Pinnacle was a multi-affiliate investment management firmwith a mission to establish, grow and support a diversestable of world-class fund managers. FUM was 19.25 billion as at 30 April 2016. Pinnacle’s net profit after tax 1HFY16 was 4.7 million.And that Pinnacle’s strategy was to: Continue to provide high-quality distribution, ResponsibleEntity and infrastructure services. Support its affiliated fund managers’ high standards. Remain focused on investing, to enable continued strongperformance and FUM growth. Grow retail FUM. Continue to assess third-party distribution and newboutique opportunities.It is for shareholders to judge our progress, but it shouldbe noted that as at 30 June 2019 Pinnacle consisted of13 Affiliates, offering a wide range of asset classes, withaggregate FUM of 54.3 billion, and FY19 NPAT of 30.5 million. In FY19 shareholders will benefit from15.4 cents of fully franked ordinary dividends per share,which compares to 3.3 cents of fully franked ordinarydividends per share in FY16, a compound growth rate of67% pa over the period.Turning to the specifics of the 2019 financial year, Pinnaclecontinued its strong growth, with FUM, earnings anddividends all growing substantially. Existing Affiliates havegrown their FUM (Horizon 1), additional Affiliates andinvestment strategies have been added (Horizons 2 and 3),and resourcing levels have been prudently expanded to caterfor current and future growth, including in new markets.NPAT from continuing operations was 30.5 million (up32% from the 2018 financial year), which represented basicearnings per share of 18.3 cents, up 28% from the 2018financial year. Similarly, total fully franked dividends declaredfor the year rose 33% to 15.4 cents per share. In addition,Pinnacle retained a strong and flexible balance sheet, withcash and principal investments of 51.2 million at the end ofthe year (up from 31.4 million at 30 June 2018).Aggregate Affiliate revenues grew 41% to 236.8 million.Performance fees represented only 6.5% of Affiliates’revenues this year. 94% of the Affiliates’ strategies andproducts that have a track record of at least five yearsoutperformed their benchmarks over the five years to30 June 2019, although shorter term investmentperformances were more mixed, ranging from some verystrong performances to some weaker performances overshorter time periods.Further details of funds flows can be found within thereport itself but, in summary, net funds inflows totalled 6.5 billion, including 2.9 billion of retail net inflows,and overall aggregate Group FUM increased 43% toPinnacle Investment Management05
02Chairman’s Letter (continued)Pinnacle continued its strong growth,with Funds Under Management,earnings and dividends all growingsubstantially. 54.3 billion at the end of the year (an increase of 25%if the ‘acquired’ FUM is excluded). Retail net inflowsincluded 1 billion raised in LICs/LITs during the year.Early in the financial year (in late July 2018) the acquisitionsof a 35% interest in Metrics Credit Partners, and 40%of Omega Global Investors were completed. Metrics inparticular has had a busy and successful year, having grownFUM by 50% to 3.8 billion, including raising 845 million inLIT funds, launched several new products (the MCP CreditTrust, MCP Income Opportunities Trust (ASX: MOT), MCPWholesale Investment Trust and the MCP Wholesale IncomeOpportunities Trust), and deployed significant growthcapital. Currently all Metrics funds have outperformed theirbenchmarks over all time periods. Metrics will be expandinginto new distribution channels in the coming year (launchingan unlisted retail managed fund for the ‘intermediatedretail / platform market’ and creating an offshore fund forinternational institutional investors). The market opportunityfor non-bank lenders continues to grow as banks faceincreased regulatory headwinds and the investment appetitefor private debt accelerates, both in Australia and offshore.These acquisitions were funded by an institutionalplacement of new equity in July 2018, raising 60 million,and a 10 million Share Purchase Plan.Whilst we comment in the Overview, Operating andFinancial Report on individual Affiliates in detail, it is worthnoting that recently established Affiliates, Spheria andFiretrail, have both grown rapidly since inception, withSpheria, a small cap manager, having grown to FUM of 1.2 billion (up 70% during the 2019 financial year) andFiretrail having achieved FUM of 4.4 billion from just 74 million at the beginning of the financial year. All of ourlonger established Affiliates have also experienced FUMgrowth during the year, assisted by equities markets, bothdomestic and global, which finished the year significantlyhigher than they began the year, notwithstanding thesubstantial drop during the September – December 2018period. Firetrail and Spheria were both profitable duringthe year and now pay Pinnacle for the Pinnacle services ofwhich they avail themselves.There has been substantial media comment this yearon challenges confronting Australian institutional fundmanagers, driven by continuing amalgamations of large06Annual Report 2019Australian superannuation funds, the ‘insourcing’ of fundsmanagement functions by some of those funds, someincreased adoption of index funds, and ongoing pressurefor reductions in the fees paid to fund managers. Indeed,during the 2019 financial year a number of Australian fundmanagers have ‘closed their doors’, with these trendspartly blamed for the failure of some of those firms. Itis reasonable for shareholders to ask whether theserepresent serious problems for Pinnacle and PinnacleAffiliates. Whilst these trends do impact us to somedegree, we believe it is important that shareholders seethese in perspective and recognise that their impact onPinnacle is likely to be modest over the foreseeable future.That is not to say that we are complacent or obliviousto them – on the contrary, we have for some years beenvigilant in relation to them, and we continue to be verykeen observers of (indeed, participants in) those markets,and our strategies have been designed with these trends inmind. Pinnacle will continue to evolve both in response toand in anticipation of these market developments, and wewould note: We have a very diversified client base (78 institutionalseparate account clients, 95 institutional separateaccounts across our Affiliates). Retail FUM continues to grow, both in absolute termsand as a proportion of our total FUM. Given the strong growth in FUM in our industry(especially large superannuation funds) it is notunreasonable, and very manageable, that basis pointfees may trend lower – however, aggregate fees continueto grow with growing FUM. Our Affiliates restrict capacity wherever appropriate, andconsequently are better placed to receive higher fees incapacity-constrained strategies. Large superannuation funds continue to be willing to paysubstantial fees for investment strategies and managersthat produce attractive investment performance. Performance fees can often be a ‘win-win’ and provideattractive economics for our strongly performing managers. We continue to diversify our asset class offerings. We are diversifying the markets into which we areoffering our investment strategies.
Although our institutional client base is diversified, andwhilst we have consistently stated that net inflows from theinstitutional market are very lumpy, our FY19 aggregateAffiliates institutional sales were not as strong as we mighthave expected at the beginning of the year. The reality isthat in any given year a subset of our Affiliates accountsfor the majority of our overall net inflows – this year it wasFiretrail and Antipodes; last year it was Resolution Capital,Solaris and Antipodes. Encouragingly, we enter the newfinancial year with a substantial pipeline of institutionalsales prospects. For one reason or another several largemandates, that we had expected to receive during the 2019financial year, have been delayed and are now anticipatedin the new financial year.We have enteredthe 2020financial year asa substantiallylarger and moreprofitable companythan when wecommenced the2019 financial year.As I mentioned above, equities markets fell substantiallyduring the four-month period to 31 December 2018 (theS&P/ASX 300 index was down 10.8% and the MSCI Worldindex was down 12.9% over that period), although thosemarkets did recover strongly by year-end (in fact, overthe full year to 30 June 2019, the S&P/ASX 300 index wasup 6.8% and the MSCI World index was up 3.6%). As Iindicated in my Chair’s letter last year, whilst it is evidentthat we would not be immune to a severe deterioration inmarket conditions, we recognise that our defence againstsuch an event is to work with our Affiliates to create thebest conditions within them, where exceptional investmentprofessionals can deliver outstanding investmentperformance. Also helpful in this regard is the fact that nowapproximately 30% of all Affiliate FUM has the potential toearn performance fees, with none of those performancefees dependent on the performance of the market (theyare all based on performance relative to benchmarks). Inaddition, we will strive to continue to achieve strong netfund inflows in both the retail and the institutional marketsin Australia, as well as continuing to further develop ourearly distribution efforts in offshore markets.As we have consistently stated, we will continue to investin activities which we believe will bring substantial benefitsover the medium term, whilst recognising that suchinvestment may constrain our profits to some degree in theshort term. In addition, we will remain vigilant to potentialopportunities that may arise, including potentially as aresult of changes in the funds management industries,both domestically (for example, as a result of RoyalCommission fallout) and internationally (for example, as aresult of Brexit, trade tensions and other disruptive forces).We will nevertheless continue to adhere to our ‘high hurdle’criteria in evaluating Horizon 3 opportunities.Pinnacle continues to hold fundamental, that in orderto deliver excellent investment performance for ourclients, we must retain the best people, within both theAffiliates and our Company. These people have electedto work within our business model and culture, which webelieve will continue to deliver long-term benefits bothfor shareholders and for investors in our funds. Given therecruitment and advancement of a substantial number ofnew executives during the past couple of years, the Board,and shareholders, approved a new set of LTI arrangementsduring the year to ensure that the interests of our executivegroup are directly aligned with external, long-termshareholders through common long-term equity ownership.The Board thanks all of the respective teams for theircommitment to the business and the success that they haveachieved to date and remains determined to sustain theenvironment that will allow the continuation of that success.Finally, I would like to thank you, our shareholders, for thecontinued support that you have shown to us throughoutthe year, including in the equity capital raisings undertakenearly in the financial year just completed. We have enteredthe 2020 financial year as a substantially larger and moreprofitable company than when we commenced the 2019financial year.We look forward to welcoming you to the Company’sAnnual General Meeting, which will be held in Sydney on31 October 2019.Yours sincerelyAlan Watson6 August 2019Pinnacle Investment Management07
03/12Overview,OperatingandFinancialReport08Annual Report 2019
Nature of operations and principal activitiesThe principal activities of the Group during the 2019financial year were:Pinnacle is a leading Australia-based multi-affiliateinvestment management firm. Our mission is to establish,grow and support a diverse stable of world-classinvestment management firms. developing and operating investment managementbusinesses; and providing distribution services, business support andresponsible entity services to the Pinnacle Affiliates.Established in its current form in 2006, Pinnacle currentlyconsists of 13 investment Affiliates. At 30 June 2019, thePinnacle Affiliates collectively managed approximately 54.3 billion in assets across a diverse range of assetclasses. Pinnacle provides its Affiliates with:The diagram below shows the Pinnacle Affiliates andPinnacle’s ownership stake in each as at the date ofthis report: equity, seed capital and working capital; superior distribution services, business support andresponsible entity services to allow investment managersto focus on delivering investment outperformance; and23.5%.0%4423.5% independence, including separate managementreporting structures and boards of directors, whilst stilloffering the economies of scale and financial supportinherent in being part of a larger investment %%40.0Note: In respect of Omega, Firetrail, Longwave and Spheria, the percentage represents Pinnacle’s total shareholding in the Affiliate.Pinnacle currently holds (or will hold) less than 1% of the voting shares in the Affiliate. However, it has full economic rights in respect of its holding.Pinnacle Investment Management09
03Overview, Operating and Financial Report (continued)Key financial highlights 236.8million AffiliaterevenuesDuring the 2019 financial year, the Group held shareholdings (through itsprincipal operat
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