EFTA01452622.pdf

28 January 2014 Brokers, Asset Managers & Exchanges Alternative Asset Manager Initiation Figure 2' Average Forward Pits (NTM) for Alts vs. Asset Managers 20x 1.8x 16x 14x 12x 10x 4%CsS*14''CiG Cis?' 41e s cSs.\\410 41 41 .;e# 04' 41 O~ , ci , 0 cs" ," ci s, n.s. ,,,\ tx % 4 e41 4 4 Ne N 1',," 4 —Alt's —AM's ••••••58iP 500 Sans TheseRoanOwlDal. Int Five key themes to drive the stocks this year Within the industry section of this report, we attempt to answer what we view as the five most important questions/themes for the outcome of these stocks over the next 12 months - summarized below. Theme I: How should the alternative asset managers be valued & does it portend multiple expansion? Our answer: we think the Ms will be increasingly valued on total DE (distributable earnings-a proxy for cash flow) which should improve Ms as the current realization cycle provides a catalyst for stronger growth In DE vs. lower-valued ENI (economic net income) that forms Consensus estimates. With relatively short public histories for these stocks (not even a full economic cycle), combined with complex modeling and volatile earnings, we think the market continues to struggle with valuing these companies, albeit has come a long way over the past 1-2 years. Although the modeling will remain complex and earnings results volatile, we think investors will increasingly shift from a sum-of-the parts approach that values the more-stable fee-earnings on a P/E basis, and the more-volatile carried interest earnings on a hybrid PIE and P/B basis (the valuation on this latter part has increased significantly over the last 1-2 years, a function of becoming a 'plug' in response to higher stock prices). In contrast, we attempt to assign more comparable P/Es (still at a substantial discount to asset managers) to the longer-term distributable earnings (from which cash distributions to unit holders are made), of which unrealized carried interest can be a leading indicator. The thrust of our view is that the Alts should be valued on a longer-term basis consistent with their investing mandates that fundamentally drive their earnings profiles. We think investors will increasingly embrace this, and it augers well for PE expansion this year, a key component of our investment thesis. Page 4 Deutsche Bank Securities Inc. CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0109771 CONFIDENTIAL SDNY_GM_00255955 EFTA01452622