In other words, unitholders are being offered a 7.5 per cent discount for each unit purchased, and this is funded by Magellan Financial Group.
If the maximum entitlement of $4 billion units is taken up, Magellan would have to invest about $300 million to fund the 7.5 per cent discount.
Unitholders who subscribe for $1 of new units for every $4 held will also receive one Magellan Global Fund option, which is exercisable at a 7.5 per cent discount to net asset value at any time over the next three years.
The options will be separately listed on the ASX and the trading price should reflect the value of global assets in the Magellan Global Fund.
Douglass says Magellan could not find a better investment in the funds management space than funding the 7.5 per cent discount on offer to retail investors.
He says the maths are simple. Magellan earns 1.35 per cent on funds under management. So funds applied by Magellan to fund the 7.5 per cent discount would earn an 18 per cent pre-tax return.
Douglass says if the maximum entitlement of $4 billion is raised, it would cost Magellan about $350 million. But Magellan would earn at least $54 million on that investment.,
“We are buying funds under management at about five times earnings, when most takeovers of fund managers are at 15 to 20 times earnings,” he says.
A further kicker for Magellan shareholders is that if the Magellan Global Fund were to have a performance of 10 per cent a year over the next seven years, then the return on capital invested would be about 36 per cent pre-tax.
One of the wildcards in the capital raising is the prevailing sentiment in financial markets during the period of the offer, which runs from January 18 until February 23.
If markets have a meltdown or some other event occurs that spook retail investors, this would likely affect the amount of money raised. Also, many of the unitholders already have a large exposure to the Magellan Global Fund and may not wish to add to that.
Another factor is the recent volatile performance of the Global Fund. In the year to November 30, the fund underperformed its benchmark by 5 per cent.
But the fund has achieved an annual return of 15.7 per cent over the past 10 years.
Disclosure: The author’s self-managed super fund has units in the Magellan Global Fund.