How to make $30 million from SMSFs
One of the interesting aspects of the rise of SMSFs is how it has allowed non-traditional players to enter the wealth management industry, and to make a lot of money in the process.
These entrants include everyone from accountants to real estate agents to art galleries. My sister works in bullion dealing, and SMSFs are a big customer segment for them as well.
The success of entrants contrasts with traditional wealth management players, few of which have had meaningful success in targeting their products at SMSFs. The industry’s intermediary focused model has struggled to adapt to the rise of significant segments of self-directed or validator investors who are not dependent on an adviser.
In a week where much of the news related to restructurings and job losses at Fairfax and News Ltd under the assault of the internet, tucked into this was the acquisition of Australian Independent Business Media (AIBM) by News Ltd for $30 million.
AIBM’s shareholders included journalists Alan Kohler, Robert Gottliebsen, and Steve Bartholomeusz. Its main products are the online business news website Business Spectator (and spin-offs Climate Spectator and Technology Spectator), and online investment website Eureka Report.
The acquisition has been seen largely in a “new media” context; ie general print media is losing and focused online media is winning. And indeed News Ltd may have well have purchased AIBM for this reason, or to take out a free news competitor to The Australian as it builds a paid online content business.
But we think this is the wrong way to look at it. AIBM is really an SMSF play. That’s both revealing, and raises an interesting question – what could a player with extremely deep pockets like News Ltd do with it?
Our view of AIBM as an SMSF business is based on the financials from a leaked prospectus which have been extensively reported. Overall, AIBM is reported to have made a profit only about $250,000 in 2011 – which is why the deal is being reported as 50x earnings. But it’s a story of two parts:
– The news websites les by Business Spectator lost nearly $1.7m. Apparently the loss was inflated by heavy investment, but even allowing for this, it doesn’t appear that this is a very profitable business.
– The Eureka Report on the other hand made profits of $1.9m. Eureka Report makes money from selling subscriptions to investors at $385 pa, and online advertising. What’s its primary target segment? SMSFs of course.
Assuming the news websites can break even, AIBM looks more or less like this:
– An online financial news business which makes nothing.
– An SMSF business which makes ~$2m pa.
So you could look at this as News Ltd having bought a breakeven online news competitor for nothing, and an SMSF business on 15x earnings. In fact, if it weren’t for the profits derived from Eureka Report, perhaps AIBM might have gone bust by now rather than selling for $30 million.
There are some important messages here:
– For all the old media vs media debate, it’s still very hard to make money from free online news, no matter how good it is.
– There’s clearly a stack of money to be made from SMSFs in a wide variety of ways. AIBM’s value without Eureka Report and its SMSF subscriber base would surely have been vastly less than $30 million. A better comparison is Crikey, which sold for $1m (to the chairman of AIBM in fact) in 2005.
– In a wealth management industry showing little growth, traditional players are increasingly forced to engage with SMSFs, regardless of any misgivings.
– Forget what News Ltd will do with Business Spectator – what could it do with its newly acquired SMSF business? For years we’ve speculated about whether a major enterprise from outside wealth management might enter, and what impact that would have. News Ltd may have no such agenda – but it now has an investment in the SMSF segment, and a profitable one at that.