A stock with Perpetual value

Turnarounds rarely deliver—but when they do, they’re hard to ignore

Most fund managers avoid turnaround stories until the momentum shifts, the share price starts to move, or a corporate transaction reveals hidden value.

Perpetual Limited (PPT) is one such company that’s recently caught our attention, and for good reason:

• Attractive valuation: Perpetual trades at a significant discount to the sum-of-the-parts valuation.
• Hidden Gem: Its Perpetual Corporate Trust business is a high-quality, fast-growing asset—worth the current market cap alone.
• Change Management: A refreshed management team under the leadership of CEO Bernard Rilley is actively working to unlock shareholder value and correct past leadership missteps.

In fact, underscoring the underlying value of its key assets is the several strategic takeover proposals made to shareholders in the last three years:

• Nov 2022: Regal Partners and BPEA Private Equity offered $33.00 per share.
• Nov 2023: Washington H. Soul Pattinson bid $27.00 per share.
• May 2024: KKR proposed $2.1bn for the Wealth Management and Corporate Trust business—implying a 16.3x EBIT multiple.

The Pain of the Past

It’s been a torrid time for shareholders.

Previous management doubled down on funds management, spending $2.5bn on acquisitions that destroyed significant value. The announced sale of the Corporate Trust and Wealth business was scuttled due to a tax ruling, and asset management flows have turned negative.

Things just keep going from bad to worse, which is why the share price has hit a low not seen since 1998.

But today, Perpetual’s market capitalisation is less than the value of just its Corporate Trust and Wealth businesses—offering new investors a rare second chance to own a great business at a compelling price.

In addition to this, shareholders now have a free option on any turnaround (or sale) of the funds management division, which is effectively being ascribed no value at Perpetual’s current price.

Perpetual Corporate Trust: The Visa & Mastercard of Funds Management

The Perpetual Corporate Trust business is one of the most prized assets in financial services or referencing past management “the jewel in the crown”.

Perpetual Corporate Trust delivers fiduciary, custody, agency, admin, and data services to asset managers across $1.25 trillion in debt and equity securities.

This is split across:

• $525bn in Managed Fund Services
• $725bn in Debt Market Services

Its fastest-growing segment is digital and data services—now 14% of revenue which provides securitization data, analytics, and benchmarking. This is a small but hidden SAAS platform that is benefiting from trends in cyber security and outsourcing from financial institutions.

The services that Perpetual Corporate Trust provides are mission-critical infrastructure for asset managers. Within debt market solutions, the average client tenure is 18 years among its top 20 customers, which means a low churn and stable, recurring income.

Why the Trust Business is So Valuable

The Trust business boasts the kind of characteristics that earn premium valuations:

• High barriers to entry (scale, reputation, regulation).
• Oligopolistic market structure with fragmented customers.
• Resilient income due to essential service status.
• Modest pricing (3–5bps) with room for increases.
• Revenue growth tied directly to funds under administration.

The Trust business also enjoys structural tailwinds which is the envy of most financial services companies. Secular trends include:

• $3.5 trillion in intergenerational wealth transfer ahead.
• Rising demand for active ETFs and global asset managers entering Australia.
• Growth of non-bank lending, requiring trust/custody services.
• Increasing regulatory and cybersecurity needs fueling digital expansion.

These drivers support long-term, infrastructure-like earnings driving a premium valuation. For example, from 2019 to 2024, revenue nearly doubled from $92m to $187m, with a healthy 45% EBIT margin.

We believe the next decade will look much like the past, with the Perpetual Trust Business delivering predicable compound growth.

Asset Management: From Missteps to a New Beginning

John Bogle, the father of passive investing certainly killed the rockstar fund manager, much like video killed the radio star.

Perpetual’s prior leadership bet big against the passive investing trend, spending ~$2.5bn to acquire Barrow Hanley and Pendal Group (2020–2022). Since acquiring Pendal, FUM has fallen from proforma $290bn to $221bn, while cost-to-income has risen from 70% to ~75%.

Enter newly appointed CEO, Bernard Reilly.

Reilly brings a refreshed approach, sympathetic to what the investment talent wants, which is autonomy, brand prestige and less distraction.

He’s implementing a decentralized model aimed at empowering Perpetual’s boutique managers which include:

• Preserving distinct investment cultures and capabilities.
• Granting autonomy with clear financial accountability.
• Building scale in distribution, focusing on Asia and U.S. ETFs.
• Delivering $70–$80m in operational savings.

While Reilly can’t control markets or performance, he can create the right environment for managers to thrive. Currently, 62% of strategies are outperforming their benchmarks.

Despite the headwinds facing asset management, there are reasons to be cautiously optimistic:

• The business is now more diversified, reducing key-man and strategy risk.
• A more volatile macro environment (think: Trump 2.0 and inflation-conscious central banks) may favour active managers—especially those focused on valuation rather than momentum.
• Industry pricing has reached a level that is increasing barriers to entry for active managers, underscoring the need for scale.

With most of the asset managers in the Perpetual business having a skew towards value rather than momentum, this new regime of market volatility could well support fund performance and FUM in the medium term.

Valuation: What’s in the Perpetual Price?

At today’s share price, the market is effectively giving away the funds management business.

• Market Cap: $1.8bn.
• Enterprise Value (EV): $1.96bn (cap + net debt - co-investments)
• Implied Multiple: 5.5x forecast FY25 EBIT.

Valuing the Corporate Trust and Wealth Management division at 13x–16x EBIT (based on Equity Trustees’ market valuation and KKR’s bid) implies a value of $1.9–$2.4bn, or $17 to $21 per share, above the current share price.

The Funds Management business is expected to generate $190m in EBIT in FY25. Assigning a conservative 6x multiple, less stranded costs capitalized at the same multiple implies $1bn of additional value  —or $8.50 per share.

This takes the total Perpetual value per share to $25.50 to $29.50.

Clearly the current share price of $15.40 is assigning no value to the asset management division. The market is pricing in a permanent impairment, which may prove overly pessimistic, a world away from trading multiples when Perpetual itself was acquiring managers.

Conclusion

Transformation stories are tough, and Perpetual is no exception. Reilly faces a complex, multi-year journey.

But here’s what we do know:

• The Perpetual Corporate Trust and Wealth Management business is a high-quality, cash-generative asset that’s likely worth more than the entire company’s market cap.
• The Funds Management division still generates ~$200m in free cash flow annually—despite past mistakes.
• If the turnaround gains traction, shareholders stand to benefit substantially.
• Perpetual’s corporate appeal is very high, given the undemanding valuation and the hidden value of the Corporate Trust Business.

Despite the perilous nature (to fund manager monthly performance!) of owning turnaround stories, the investment risk—as opposed to execution risk—is low when one isn’t paying for the turnaround. 

If the recovery in asset management doesn’t materialize, investors will still be compensated through strong free cash flow in the medium term, as well as exposure to a growing and highly valuable business: the Perpetual Corporate Trust, which serves as the rails and infrastructure underpinning asset management.

In short, Perpetual offers investors a rare setup: the opportunity to own an exceptional business at a discount, with a free call option on a recovery in asset management.