AlTi Global (NASDAQ: ALTI) is an independent registered investment advisor (RIA) that manages or advises on $72 billion in assets worldwide. Since going public via a special purpose acquisition company (SPAC), the company’s shares have fallen by 58%.

However, one analyst sees a +100% upside in the small-cap name. Let’s break down the financial company’s operations to understand its place in the market and how it is growing. We'll also review important metrics from the company’s Q2 earnings report, released on Aug. 9, detail some tailwinds and risks, and examine an outlook on the stock.

AlTi Global: Focusing on Wealth Management and Alternative Investments

AlTi operates in two business segments: Wealth Management and Strategic Alternatives. The wealth management segment offers complete money management to ultra-high-net-worth (UHNW) clients. This includes individuals, families, family offices, foundations, and endowments. The average account is worth $40 million.

The Strategic Alternatives segment has $16 billion in assets and focuses on the company’s alternative investment platform. The platform provides private investments to clients, such as hedge fund strategies, private debt, and real estate.

The company has two internally managed investment funds and three externally managed funds, which it provides access to through its platform.

AlTi Beats EPS Estimates in Q2

AlTi beat analyst estimates on adjusted earnings per share (EPS), which came in at a loss of $0.04. A loss of $0.10 was expected. However, in terms of revenue, the company missed expectations by $3 million, coming in at $49 million, a decrease of 4% from the previous year.

Revenues are expected to grow by 17% over the next two years. The company grew wealth management revenues by 20%. This was due to strong markets and some acquisitions of other wealth managers.

Markets going up increase the company’s assets under management (AUM) as many of the client assets are invested in the stock market. The company’s revenues then rise as it can charge management fees on a higher level of assets.

Strategic alternatives revenue declined by 51%, driven by lower management fees due to an AUM decrease of 21%. This decrease was caused by the divestment of certain funds. Although not positive, this is likely a one-off event as AlTi shifts its offerings in the space.

Tailwinds and Risks for AlTi

AlTi should be able to grow through several trends in the wealth management industry. First, the industry overall is poised to continue growing AUM at a solid 7.9% pace through 2028.

Even more, when it comes to clients with over $10 million in assets, RIAs are increasing their number of clients faster than giant wirehouses. Examples of wirehouses include firms like JPMorgan Chase (NYSE: JPM) and UBS Group (NYSE: UBS). RIAs grew client relationships in this bracket by 13% from 2016 to 2022, as opposed to 8% for wirehouses.

This is crucial. It costs more to manage five $3 million clients than one $15 million client, but they generate similar revenue. The focus on higher AUM clients increases margins.

Also, more wealth advisors are moving to independent firms, not traditional ones. Clients prefer the independent model for its personal touch. Advisors like it for the control it gives them. This gives AlTi an advantage in acquiring the best talent.

Next is the growing appetite for private alternative investments. Private investments often outperform public ones with similar risk levels. This is largely due to their illiquidity premium.

Private alternative investments typically lock investors in for 10 or more years and don’t allow the money to be withdrawn. After the end of the "lock-up," capital is returned to investors. Investors often receive excess returns over similar public market investments. This compensates them for being unable to access their money for a long time.

A study of private debt funds found they outperformed the investment-grade public bond benchmark by nearly 1% per year after fees. Private debt AUM is expected to increase by 11% annually through 2027.

One risk of investing in wealth management firms is that their revenues are largely tied to market performance, which doubles down on the risk that investors already face through investing in the market.

Analyst Price Target and Outlook

Raymond James is currently the only analyst with a price target on the stock. However, with a target of $9 per share, this implies an upside of 121% from the current level.

These tailwinds provide a positive outlook for the firm. The company intends to continue growing through acquisitions.

This strategy makes sense, as the majority of RIAs are open to acquisitions.