2. Asset Manager Outlook
Primary Trends
Credit, non-US stocks gain flow share in 4Q – equity funds remained in the outflow mode, shedding another $3bn,
which was once again led by domestic funds
Bond Funds – flows remained solid at an estimated $7.4bn for the current week
Money Market Funds – outflows accelerated once again, reaching $21bn for the current week
Gross Sales – October marked the first month in the past 13 in which average growth was positive for the group and
follows the general trend of sequentially improving results
Poised to Outperform – The retail asset managers have underperformed the S&P/TSX Financials Index since the
market peaked on September 22nd. Given their beta sensitivity, the asset managers would be the key beneficiaries of
a market rally
Valuation – trends signal an attractive entry point for investors – the group is trading below their historical average
EV/EBITDA
Moreover, the group is trading below their historical market premium to the Canadian banks on a forward P/E
basis – current market pullback presents a buying opportunity for asset manager stocks
3. Asset Manager Outlook
Drivers
Benefiting from Trends in Wealth Management – with the baby boom generation currently passing through their
peak earnings and savings years and beginning to plan for retirement, this has spurred a significant expansion in the
flow of assets into both stand alone funds and asset managers
Managed Asset Growth – increases in managed assets has been a result of the increasing demand from investors for
investment counseling and advice, placing a greater emphasis on investment services rather than individual products
or funds
Private Investment Counsel – represents the bulk of the managed asset market and is the sub-segment under which
Gluskin Sheff falls. GS+A has been at the forefront of sector growth with its assets under management growing at a
cumulative average annual growth rate of 77%
4. Sector Segmentation
$MMs
$140 $132
$120
$100
$100
$80
$65
$60 $47
$40 $28
$26
$21
$20 $7 $10
$-
MMFW HEFW FBB SMW IHMW AM PIC E&T UL
MMFW: Mass Mkt Fund Wraps SMW: Separately Mgd Wraps PIC: Pvt Investment Counsel
HEFW: High End Fund Wraps IHMW: In-House Mgd Wraps E&T: Eestates & Trusts
FBB: Fee-Based Brokerage AM: Advisor Mgd UL: Universal Life Ins.
Source: Equity Research
6. Company Overview
Founded by Ira Gluskin and Gerald Sheff in 1984 with a primary focus on the high net worth (HNW) private client
market
Since launching with an initial $26mm in assets under management, GS+A has grown to become one of the
preeminemt wealth management firms in Canada with $5bn in AUM, spread across a diverse range of investment
portfolios
Beginning in 2000, several strategic initiatives were pursued to grow the scope and scale of the firm and broaden the
equity ownership beyond its two foundations
This ultimately culminated in a public listing in 2006 which consisted solely of a secondary offering by existing
shareholders, issuing 7.6MM subordinated voting shares while employees retained 21.6MM multiple voting shares
- this has resulted in employee interests remaining closely aligned with the rest of the shareholders while
providing for a gradual increase in the float as multiple voting share are released
GS+A has also been careful to operate in a manner that keeps client interests at the forefront. This includes
employees investing a significant portion of their wealth in the company’s portfolios. The fee structure of the
various portfolios has been structured such that the Company benefits from positive investment returns through
performance fees while also sharing in the pain during periods of weak performance fees while also sharing in the
pain during periods of weak performance in the form of minimum return hurdles
GS&A stands to benefit from the growing demand for the provision of investment counseling to high net worth
individuals along with the continued popularity of hedge fund style of investments
7. Company Overview
Revenue Segmentation: 2008-2011E Attribution by Asset Class
$140
$120
$36
$100
$20 $27 33%
$80 $6 44%
$60
$93
$40 $83 $78
$64
$20
23%
$-
2008 2009 2010E 2011E
Base Fees (MMs) Performance Fees (MMs) Fixed Income Alternative Strategies Long Equity
Source: Equity Research
9. Growth Opportunities
AUM Growth Continues to Impress – the key surprise of the quarter was the continued strength in fund sales,
backstopped by ongoing market appreciation of funds, which together boosted AUM by 12%, both sequentially and
Y/Y to $5.0bn – however, lower MER
Potential for Hedge Fund Performance Fees – Another positive development from the quarter was the strength of
the Alternative Strategies funds and the credit arbitrage funds, which have performance fee year-ends in December
Expansion into Western Canada – David Vankka, formerly a managing director & founder at Tristone Capital has
been hired to lead these efforts
Potential Dividend Increases – significant cash position that could contribute to a growing payout ratio
Market Share – 5%; significantly expand AUM with only modest expansion in market share
10. Riding The Hedge Fund Wave
Rapid growth in hedge funds
For the portion of the Baby Boom generation approaching retirement, there has been a greater focus on seeking
products that can offer equity-like returns while also protecting capital in case of a market downturn
Institutional investors have also begun to expand their participation in hedge fund investing as large pension plans
seek out investments with less sensitivity to the volatility of stock markets
The result has been strong demand for hedge fund products that span the spectrum from market neutral to high-
alpha strategies, with recent studies indicating the hedge fund assets growing at a rate in excess of 30% per year
Gluskin Sheff has been growing its hedge fund offerings – three to date: Multi-Strategy Fund, Multi-Strategy
Opportunities Fund & Long/Short Portfolio
Ten Largest Single-Manager Hedge Fund Sponsors
Barclays Global Investors Polar Securities
Dynamic Mutual Funds Salida Capital
Front Street Capital Sprott Asset Management
Gluskin Sheff & Associates Trapeze Asset Management
Goodwood Vertext One Asset Management
Source: Equity Research
11. Ability to Weather Cyclical Pressures
Gluskin Sheff is well positioned to benefit from the secular growth in demand for both wealth management services
and hedge fund offerings – however this is only half the story
Given the recent weakness in the capital markets, the strong players in the asset management sector will be those
that are able to continue to attract new client assets or at least avoid net outflows of funds under management
Believe that Gluskin Sheff’s focus on the HNW segment provides it with a greater level of stability in terms of AUM
In the case of firms providing personalized services and advice to wealthy individuals, these relationships often
stretch over many years and involve a significant amount of trust being placed in the fund manager
Strong Core Earnings with Upside Potential
As a fee-based manager providing investment counseling services to high net worth investors and institutions,
Gluskin Sheff & Associates depends on sustaining and growing its AUM in order to support its revenue and earnings
The base management fees have provided a steady and growing base of revenue for Gluskin Sheff thanks to the
continued inflow of client assets over the last five years – it is the base fee revenue that provides strong underlying
support to the company through the ups and downs of the market
12. Valuation & Comparables
Premium Franchise Warrants Premium Valuation
GS is currently trading at 10.1x 2010 Base EV/EBITDA, which represents a 30% premium to the average retail asset
manager – believe that premium is justified by its superior AUM growth profile and relatively stronger long-term
growth characteristics
The 42% discount to Sprott is excessive given GS’ superior growth profile, margins and business mix
Believe that GS+A warrants a valuation at a premium to the asset manager peer group given
Exposure to the key growth trends in the wealth management industry
Solid base of clients and strong long-term performance track-record
Public comparables in the sector are weighted towards companies with a primary focus on retail funds, whereas
Gluskin Sheff’s focus is on the high net worth segment
13. Valuation & Comparables
EV/EBITDA EV/Fwd EBITDA
Asset 9-Year Implied Target
Managers Current Average Trough Peak Current Multiple
AGF Management 7.1x 6.8x 2.3x 11.6x 8.2x 6.2x
CI Financial 11.8x 9.5x 5.1x 15.1x 10.4x 9.5x
IGM Financial 7.4x 7.9x 5.1x 10.7x 8.3x 8.9x
Gluskin Sheff & Associates nmf nmf nmf nmf 14.7x 8.8x
Sprott nmf nmf nmf nmf 19.7x 8.6x
Average 8.8x 8.1x 4.2x 12.5x 12.26x 8.4x
Market Cap EV AUM EV/AUM P/E EV/EBITDA Yield
Large Cap (mm) (mm) (mm) (%) LTM 2009E 2010E LTM 2009E 2010E (%)
AGF Management $1,467 $1,365 43,343 3.20% 21.0x 19.7x 12.8x 7.7x 8.2x 6.6x 6.1%
CI Financial $5,464 $5,951 $63,698 9.30% 18.9x 22.8x 16.4x 10.5x 10.4x 8.9x 3.2%
DundeeWealth $1,961 $1,866 $33,333 5.60% nmf nmf nmf 13.0x 11.1x 8.3x 1.1%
IGM Financial $10,508 $9,907 $115,990 8.50% 18.0x 16.9x 13.9x 8.6x 8.3x 7.2x 5.2%
Large Cap Average 19.3x 19.8x 14.4x 10.0x 9.5x 7.8x 3.9%
Small Cap
Gluskin Sheff & Associates $584 $533 $4,981 10.70% 49.2x 40.3x 16.8x 16.5x 14.7x 10.1x 2.5%
Sprott $660 $617 $4,338 14.20% 35.2x 34.4x 30.9x 19.4x 19.7x 17.2x 2.3%
Small Cap Average 42.2x 37.4x 23.9x 18.0x 17.2x 13.7x 2.4%
Source: Equity Research
14. Investment Risk
Firm Specific
Loss of Key Employees
Unpredictability of Performance Fee Revenue
Relationship with Sub-Advisors – Marret Asset Management
Poor Investment Performance
Sector Specific
Negative investor sentiment
Slowed pace of asset growth
Potential for weaker earnings
Compressed valuation multiples
15. Investment Thesis
Strong long-term investing track record with the majority of portfolios beating the relative indices over both the
short and long-term
Size and reputation make it well positioned to benefit from the growing demand for wealth management services
Able to tap into the strong demand for alternative investments through its hedge fund portfolios
Stable and growing AUM combined with base management fees provides a solid and growing base of earnings
Performance fees create potential upside to our estimates
Low correlation to the index looked at favourably
Valuation premium – justified given superior growth prospects and higher margins
Geographic expansion
