By Michael Kim
READ THE FULL BENF RESEARCH REPORT
After the market closed on 11/14/24, Beneficient (NASDAQ:BENF) reported F2Q25 (Sep) earnings results. On a GAAP basis, BENF reported net income of $0.03 per Class A diluted share for F2Q25 – the company’s second consecutive profitable quarter as a public company – versus a loss of $115.95 per share for F2Q24. The year-over-year inflection primarily relates to more favorable revenue trends, and a $307 million non-cash goodwill impairment charge in F2Q24.
On an adjusted business segment attributable to BENF equity holders basis, the company reported an operating loss of $2.3 million for F2Q25 compared to a loss of $4.6 million in F1Q25. The Q/Q improvement was largely a function of lower credit loss adjustments combined with lower operating expenses. The net loss equated to $0.52 per Class A share versus our $0.29 loss per share estimate. Relative to our model, the miss was primarily a function of fewer Class A shares outstanding combined with a $0.8 million loss on financial instruments and higher corporate expenses.
After updating our model for F2Q25 actuals, we are refreshing our F2025 and F2026 EPS estimates. On an adjusted business segment attributable to BENF equity holders basis, we forecast a net loss per Class A share of $2.02 in F2025 (Mar) followed by net income per Class A share of $0.08 for F2026. Notably, our model builds in further increases in Class A shares outstanding reflecting ongoing ExchangeTrust transactions.
Turning to valuation, despite our slightly lower earnings outlook, we are leaving our price target unchanged at $5.00, representing meaningful upside potential from the stock’s current price. Our primary valuation construct revolves around the Board’s recently adopted ExchangeTrust Product Plan to complete up to $5 billion of loans backed by alternative assets. More specifically, our model incorporates seemingly conservative assumptions around interest rates, credit losses, fees, and margins, calculates pro forma EPS based on incremental share issuance to fund $1 billion of liquidity transactions, and applies a peer group average P/E multiple to our estimates. In our minds, the stock’s underperformance provides investors with an attractive entry point for BENF as awareness and appreciation of the company’s business model, growth prospects, unique positioning, and valuation disconnect increasingly take hold.
Following our review of F2Q25 results, we highlight the following key takeaways:
1. Reaccelerating growth: We expect origination volumes (and business activity more broadly) to start to reaccelerate reflecting a number of powerful industry and company-specific factors including:
a. Ongoing growth in alternative assets under management fueled by rising allocations and strong investment returns generates rising demand for liquidity, particularly as distribution activity remains muted more broadly reflecting lackluster exit markets and extended holding periods. Indeed, the median distribution rate across the industry for broadly diversified portfolios currently sits at around 8%, or well below the long-term average of 16%. More troubling, distribution rates remain essentially nil for below-median funds. While GPs can access the secondary markets for larger, more complex liquidity transactions, Beneficient focuses on underserved MHNW investors and STMIs that value certainty of price, cost, and time when seeking early liquidity options.
From a regulatory perspective, it seems likely the incoming administration will promote a more friendly capital formation economy. In turn, we expect to see improving IPO markets driving reaccelerating distributions, and rising deal flow. That said, regulatory changes take time to flow through to the markets. As such, we forecast a near-term step up in demand for liquidity to fund expanding investment opportunities – seemingly boding well for BENF’s LP early liquidity and GP fundraising solutions.
b. Beneficient maintains a comprehensive go-to-market strategy spanning multiple clients, distribution channels, and approaches. Focusing on GP Solutions, the company targets funds facing identifiable liquidity needs including absolute/relative performance issues, limited carry potential, first-time managers, and those nearing winddown. In addition, Beneficient remains focused on developing enterprise-level solutions to advisory platforms via the company’s Preferred Liquidity Provider (PLP) offering. The program leverages Beneficient’s AltAccess platform to deliver turnkey liquidity, primary capital, custody, and reporting services to platform customers. Currently, the PLP business includes agreements with 20 alternative asset funds representing $1.5 billion of committed capital across various asset classes and vintages. To date, Beneficient has financed ~$10 million of liquidity transactions for LPs under the PLP program, with line of sight into further activity given a growing pipeline. Shifting to MHNW individuals and STMI investors, Beneficient continues to make inroads with the advisor community, family offices, and consultants.
c. The company’s Primary Capital Program (PCP) remains well positioned to support GP fundraising initiatives. Recent data suggests funds coming to market and those recently launched that are currently raising capital are targeting approximately $330 billion of new capital. The pipeline for new commitments continues to build, and we would expect Beneficient to close initial transactions in relatively short order.
d. Beneficient’s recently introduced Machine-Automated Pricing System (MAPS) streamlines pricing of alternative asset portfolios by leveraging the company’s valuation algorithms and standardized documentation, thereby driving quicker processing/closing times for liquidity transactions. Following the integration of MAPS into Beneficient’s AltAccess platform, transaction closing times can be further compressed to as few as 15 days compared to up to 15 months for more traditional processes (often catering to large GPs). Management plans to add additional functionality to MAPS in 2025, thereby further enhancing a key competitive advantage for BENF.
e. Management remains focused on further extending the company’s services by launching adjacent/related new businesses. More specifically, plans remain on track to launch a platform to facilitate alternative securities lending leveraging BENF’s LP relationships, operational infrastructure, technology, and compliance/regulatory expertise. According to senior officials, the total addressable market for alternative securities lending could meet/exceed $60 billion per year, particularly given the likelihood for a step up in demand for liquidity in the near-term.
2. Strengthening the balance sheet: Beneficient recently announced a transaction that removed the cash redemption feature from a portion of the company’s preferred securities, which triggered a redesignation of approximately $126 million of preferred equity as non-redeemable. In turn, $126 million of temporary equity was reclassified to permanent equity on Beneficient’s balance sheet as of September 30, 2024. As a result, quarter-end shareholders’ deficit stood at $13.2 million, down from $148.3 million as of June 30, 2024, with line of sight to a positive inflection in shareholders’ equity, a key threshold for maintaining compliance with Nasdaq listing requirements.
Furthermore, the company’s registration statement was just declared effective by the SEC paving the way for the potential sale of up to 203 million shares of Class A common stock to finance alternative asset exchanges.
3. Fading technical selling overhang: As part of Beneficient’s former parent company’s Chapter 11 Plan, GWG assets – including equity interests in Beneficient – were transferred to the GWG Wind Down Trust (WDT). The Trust was formed for the purpose of selling BENF equity to satisfy debtors related to GWG’s bankruptcy. As of 10/4/24, the GWG Wind Down Trust held 348,183 shares of BENF representing 7.6% of total Class A common stock outstanding – down from 28% in late August and ~90% at the time of BENF’s IPO in 2023, thereby enhancing supply/demand trading dynamics for BENF, removing a considerable technical overhang on the stock, and broadening the shareholder base.
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