RE: Valuation Metrics24 Jan 2024 21:16
Agreed on the fact it shouldn't matter either way given the current valuation... I'd say average cash balance growth is a more important driver of interest income than the average interest rate received? I've done some high level work on it which would be good to get some thoughts on;
Preqin (who Alpha regularly reference as the Alternative investment industry go to) estimated global AUM as $16.3t / £13t at end 2023; https://delano.lu/article/preqin-alts-2028-report-indust
In their last annual results Alpha said; "Preqin tracks 160,000 funds globally and we estimate that each fund will have on average ten assets, each requiring accounts". So that would be 1.6m bank accounts at end 2022, which if we assume growth of 10% in 2023, would reach 1.76m
That would put Alpha's market share at 0.37% (vs 0.26% in FY22, 0.12% in FY21), applying this to the industry TAM of £13t tells you that the bank accounts under Alpha's control should contain ~£48b of assets, if they are representative of the industry! Of this total, at end Q4 £2.1b was held in cash, which would equate to 4.36% of assets. To me this seems in line with what I would expect an SPV or fund to hold, and it seems sensible as a model assumption?
Another piece of the puzzle is the average cash balance per client, which has fallen from £458k in FY21 to £383k last year to £323k this year. I think this is likely due to less account migrations, as flagged in the half year report;
"With funds less concerned about offboarding and facing numerous other challenges in this environment, this has understandably pushed account migrations down the priority list for both fund managers, and also the service providers that support them, and who need a good reason to suggest a migration to the fund managers. New SPV creation may be slower in the current environment, but in the long-term remains an enormous opportunity in its own right, with new SPVs opened every year, as existing SPVs come to the end of their lifecycles."
If we take a bit of a leap and assume existing accounts keep a consistent cash balance, then we can say that;
FY22 saw 2454 accounts added, which increased average cash balance by £800m / £326k per new account
FY23 saw 2300 accounts added, which increased average cash balance by £500m / £217k per new account
To me, those figures back up there being less migrations and more brand new SPV / fund account openings, many of which presumably won't be funded / active immediately, and so reduce the average cash balance figure.
If lower interest rates encourage more migrations, more deal activity & more FX transactions then I suspect that net net, ABS revenue should continue to grow strongly, particularly non interest income revenue.
Be great to get others thoughts on this / confirmation that the logic seems on point...
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