Unpicking David Di Pilla’s HMC Capital is no easy feat

Some of the underlying metrics used by HMC and the company’s fee structure – including management charges for its stable of funds and levying fees for acquiring and disposing of assets – certainly push the envelope.

The fee structures of HMC’s real estate investment trusts engender real questions about whether the parent can be aligned with investors. For example, HMC draws management fees in these trusts from their gross asset value, which doesn’t consider leverage and therefore may perversely encourage growth over long-term stability.

A bigger pool of assets generates more fees that way. And acquisition fees charged by HMC relate to the funds buying assets and one would assume these are in lieu of using investment banking advisers.

Whichever way you look at it, the stakes are high. On one investment firm’s estimates, the fees HMC has banked from its listed real estate trusts since inception top $350 million, buoyed by fees associated with the listing of data centre play DigiCo Infrastructure REIT.

But these sorts of fees can create a disconnect between the manager’s incentives and investor interests. As a former investment banker, Di Pilla understands fee structures better than most. What he has ensured, though, is that HMC has meaningful stakes in its listed vehicles, which provides alignment in the purest sense.

Another interesting quirk is that HMC presents its $18.5 billion of assets under management as “committed” which includes undrawn equity commitments and a real estate development pipeline. This is unusual in the world of asset management groups, although others, including real estate manager Qualitas, opt for this model.

Understanding HMC’s modus operandi is even more important, given the situation surrounding debt-laden hospital operator Healthscope, where Di Pilla’s company has a seat at the table as parcels of debt change hands. A potential ownership change at the company, the country’s second-biggest operator of private hospitals, is also on the cards as owner Brookfield weighs its options.

More broadly, the HMC model has some striking similarities to that pursued by Macquarie more than 20 years ago, when the latter was building a stable of listed satellite funds. That lucrative structure came under immense investor attack over the fees Macquarie levied for managing those funds and its ability to clip the ticket at every turn.

At the time, that raised key questions about whether retail investors were suited to the sort of assets Macquarie was ploughing into these listed funds, and whether retail investors were getting a raw deal.

Asked about the shift away from the listed fund model in the book The Millionaires’ Factory, co-authored by this columnist, Macquarie chief executive Shemara Wikramanayake said retail investors – without specialist financial advice – were not the right owners of long-duration, illiquid infrastructure assets.

“What was going on with things like Sydney Airport is we were using listed vehicles toinvest in illiquid assets, and we thought that was a good way to have these things owned to give investors greater liquidity at smaller investment sizes,” she said.

“With hindsight, it’s just not such a good match if investors haven’t had specialist advice on tolerating illiquidity. Because the biggest thing the investor needs to understand is the longer duration and illiquid nature of the assets.”

While HMC is a different proposition to Macquarie, in that it is not a bank and doesn’t house fixed income and commodities trading, Wikramanayake’s point on listed versus unlisted funds is valid. Let’s not forget on the initial public offering of HMC’s DigiCo managing the transaction alongside four bulge-bracket investment banks, were eight mid-tier and retail brokers including Morgans and CommSec.

Di Pilla stands firm on the HMC model and highlights that Macquarie built its pedigree as an alternative asset manager by creating three or four listed vehicles initially.

“That’s what gave them some momentum, gave them some scale and gave them credibility to become a diversified alternative asset manager across both public and private markets over time,” he says.

Di Pilla also shrugs off criticism of HMC’s fees, saying its listed investment entities have conservative capital structures and long-term growth drivers, with the parent entity being “completely and utterly” aligned with its funds, and is the largest shareholder.

“We benchmark our vehicles to internally versus externally managed (funds) because we are acutely aware of the cost of capital,” he says. “We do look at the cost of capital carefully to say if we were to go and hire these people and run it as an internally managed vehicle what would it cost?”

HMC draws on a combination of listed and unlisted entities and capital sources, with analysts at Morgan Stanley last month noting the company was taking an “active step” to evolve its asset management mix from listed sources to sourcing more unlisted money.

The Morgan Stanley analysts – which have an equal weight rating on HMC – highlighted examples including the $1 billion-plus unlisted HMC greenfield fund, which aims at doing developments by first buying land, and the up to $1.5 billion urban retail fund slated for the second half of the fiscal year.

While HMC’s $2 billion-plus energy transition fund will be an unlisted vehicle, in private credit the company has flagged it is continuing to explore the potential to set up an ASX-listed vehicle.

At least for now, it seems listed and unlisted funds will continue to feature in HMC’s repertoire.

What investors in the parent entity will need to assess is how tied HMC’s earnings trajectory and growth is to its ability to buy assets, bundle them into funds and rake in fees by drawing in retail shareholders.

Can it build sustainable and recurring revenue to underpin its growth over the longer term? The next few years will be crucial to understanding how HMC fares.

Di Pilla is certainly optimistic and his role in the marriage of Chemist Warehouse and Sigma Healthcare suggests he can’t be underestimated. HMC is targeting some $50 billion in assets under management over the next three to five years and Goldman Sachs estimates the company will get close to that at $49 billion in the 2027 financial year.

It’s a big task and Di Pilla can’t rest on his laurels.

The ‘final straw’

While HMC has its vehement supporters, there are also staunch detractors that are critical of the model’s fees and its structure, particularly given the recent trading performance of many of its listed entities.

“DigiCo was the final straw,” one fund manager, who asks for anonymity, says. “You are not supposed to get paid for having alignment with investors … they are ripping out lots of fees along the way.”

Others highlight the boost that valuation adjustments can provide to HMC’s revenue and underlying earnings as being of concern.

HMC’s valuation versus how much it manages also deserves some attention.

Using HMC’s $18.5 billion under management, at its peak market capitalisation the company was trading at a ratio of about 28 per cent. That now sits at circa 16 per cent given the pullback in the HMC’s shares. Just for comparison, asset manager MA Financial hovers at around 13 per cent.

On DigiCo’s ASX trading performance, Di Pilla points to the pullback in financial markets since it listed in December, particularly this year, as weighing on the share price.

“Almost every REIT in the world, particularly in Australia, is trading below NTA (net tangible assets). DigiCo has sold off in line with data centre comparables both domestically and offshore,” he says.

A quarterly rebalance of the S&P/ASX indices, which becomes effective on Monday, will provide some support to DigiCo in the near term, given it is joining the S&P/ASX200. Inclusion in key indices is more important than ever before, given the inexorable rise in passive investing over the past decade.

Still, DigiCo hasn’t traded above its $5 issue price since listing with a lot of fanfare in the final weeks of 2024. The stock is 21 per cent lower in 2025, compared to a 13.4 per cent drop in data centre developer NextDC.

HMC’s HealthCo Healthcare and Wellness REIT has shed 12.7 per cent this year while the retail-focused HomeCo Daily Needs REIT is 3.5 per cent higher.

HMC – the parent entity – has slumped 26.4 per cent this year, while larger global asset manager Blackstone has shed 13.7 per cent and Apollo Global Management 12.4 per cent.

Di Pilla says HMC likes dislocated markets because they throw up “great opportunities”.

“Alternative asset managers are a play on markets and they are a play on the economic outlook,” he adds. “No one expected the geopolitical impact of trade wars post the US election and the consequent impacts on markets over the last three months.

“We have to consolidate for a period of time and we don’t feel stressed by that.”

Most successful business models tend to evolve, and it will be interesting to see where Di Pilla takes HMC. Macquarie has had to reinvent itself time and time again as it sought to better shield itself from swings in financial markets.

HMC’s real estate trusts are set to benefit from a rate easing cycle if the Reserve Bank of Australia continues to cut rates this year, so there are external factors that will work in Di Pilla’s favour if that occurs.

The next test, though, comes in the renewable energy sector. Investors will closely watch HMC’s renewable energy raising, where it has already acquired seed assets and is engaging with investors. The raising comes against the backdrop of a retreat in markets such as the United States from ramping up cleaner forms of energy.

With a federal election looming, both sides of politics in Australia have committed to achieving net zero by 2050.