B.P. Marsh & Partners PLC (BPM) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the B.P. Marsh & Partners PLC Interim Results Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and publish responses where it's appropriate to do so. And these will be available via your Investor Meet company dashboard. Before we begin, I would like to submit the following poll. And I would now like to hand you over to the executive management team from B.P. Marsh & Partners PLC. Dan, Jon, good morning.

Good morning, all. I'm pleased to welcome you to the B.P. Marsh Interim results to the 31st July 2023 presentation. As usual, presenting on these interim results is myself, Dan Topping, Chief Investment Officer; and Jon Newman, our CFO. We're very pleased with these results, and I'd like to thank all the members of the B.P. Marsh team and the wider portfolio for their efforts in allowing us to achieve them. The key highlights, being set out on Slide 3. Net asset value increasing in the period, GBP 203.5 million, an increase of GBP 14 million or 7.3% over 6 months or GBP 23.7 million or 13.2% over a year. An 8.6% increase in equity portfolio in the period or 12.3% excluding Kentro, which remained flat due to the exchange and completion on that investment. And consolidated profit before tax in the period of GBP 15.6 million, delivering a total shareholder return for the period of 7.9%, which has left us with available capital of GBP 51.5 million currently or GBP 4.3 million as at 31 July 2023. We declared a special dividend of GBP 1 million and a further dividend of GBP 6 million proposed, being paid in GBP 2 million annual installments from 2024. We're delighted with the overall performance of the group in the period, which is a continuation of our previous results as at 31 January 2023. Slide 4 shows our consistent long-term net asset value growth, which I believe speaks for itself. And Slide 5 outlines our dividend strategy, which I shall discuss in further detail later in this presentation. A significant event for the group in the period was the sale of Kentro, as outlined in Slides 6 and 7. The group sees its investment and disposal of Kentro as a prime example of our unique investment approach and our ability to produce bespoke investment situations, which should provide the opportunity for significant returns. As you will note, we initially acquired a 5% stake for GBP 1.5 million in what was Nexus Underwriting Management, a profitable independent underwriting agency specializing in financial lines and trade credit insurance. Since then, what was Kentro and is now -- what was Nexus and is now Kentro has leveraged B.P. Marsh's experience and skill set and has completed circa 20 acquisitions and grown its revenue and profitability by approximately 10x, with adjusted EBITDA growing from circa GBP 2 million at the time of our investment to north of GBP 20 million at the time of our disposal. We will end our partnership with Kentro as the largest single shareholder, having provided an aggregate of GBP 15 million in equity funding, which has returned the group of GBP 51.5 million. Completion took place post period end on 9th October 2023, which delivered an IRR of 23.6% and a money multiple on the equity invested of 3.41x over a 9-year investment period. Before moving on to how we intend to utilize these proceeds, I thought it made sense to provide an overview of how Kentro's grown since the group invested in 2014, and I believe Slide 7 shows this in respect to the key milestones and valuation increases. Turning to Slide 8 in terms of what we intend to do with Kentro proceeds. The group confirmed it intends to return GBP 7 million of the proceeds to shareholders via dividends, special dividend of GBP 1 million has already been declared and will be paid in November, and the further GBP 6 million over 3 years from 2024. It's our ongoing aim to strike a balance between returning funds to shareholders and retaining funds to grow NAV. And I believe the Kentro disposal adequately displays how we intend to do that. Regarding dividends, by 2028, GBP 18.6 million would have been distributed since 2010, equating to 53.56p per share or 38% of our flotation price of GBP 1.40 per share. We believe this demonstrates long-term rewards for our shareholders for their patient support of the company, whilst also providing significant firepower for new investments and to support the existing portfolio, which has delivered exceptional NAV growth. In terms of new business, turning to Slide 9. The group has an exciting pipeline of new investment opportunities, which we will have the opportunity to execute on, subject to us being able to obtain satisfactory terms of investment. Whilst we expect an increase in new business proposals on the back of the disposal of Kentro, it's our intention to maintain our measured approach to new business without the need to feel obligated to deploy cash too quickly or change our modus operandi. In the period, the group undertook 2 new investments, Pantheon Specialty Limited and Verve Risk Services. Pantheon, on Slide 10, was an opportunity to once again partner with Rob Dowman, an individual with over 30 years of experience in the sector, having previously been joint CEO of Besso Group and Besso Limited since 2015, B.P. Marsh previously being a shareholder in Besso Limited, exiting in 2017. Rob and his team are recognized as leading London market casualty brokers specializing in complex liability placements throughout the world. And given our long association with Rob Dowman, this provided B.P. Marsh with an excellent opportunity to partner with them once again, totally deliver exceptional long-term shareholder returns. Verve Risk Services, on Slide 11, is an underwriting agency specializing in professional and management liability business for the insurance industries in the U.S.A., Canada, Bermuda, the Cayman Islands and Barbados. The experienced management team, Scott Simmons and Alan Lambert had operated as a unit within another business, but B.P. Marsh offered them the support to undertake a management buyout and delivering management a majority shareholding in their business, which they previously didn't have. Both of these investments are examples of B.P. Marsh's solid investment approach, offering unique structures, attracting motivated and entrepreneurial management teams. Turning to our aggregate insurance position, Slide 12. I suppose this demonstrates the aggregate size of the premium within the portfolio. And as previously mentioned by me, the market often says that B.P. Marsh walks softly but carries a big stick, and I suspect this is what they mean to in terms of the GBP 1.75 billion amongst the B.P. Marsh portfolio companies. The full insurance portfolio is set out on Slides 13 and 14, and I thought I'd highlight some notable performers within that. XPT, Slide 15, is now the group's largest investment, which is no mean feat given we invested in 2017 as a startup, and this business now produces over circa $700 million of GWP, has made 14 acquisitions today at 19 office locations throughout the U.S. with over 250 employees, which, when we invested, it was 4 individuals with no office and a business plan. Over the course of the period, the group lent XPT a further GBP 4.9 million, GBP 800,000 of which has already been repaid. The majority of this funding is used to allow XPT to continue its M&A strategy. Slide 16, CBC continues to deliver excellent growth and was the biggest riser within the portfolio for the period. This has allowed it to grow. This growth has been delivered by organic and new hires. In the period, the group lent CBC an additional GBP 1.5 million, which together with their own funds allowed CBC to repay its loan facilities with its bank at Coutts & Co. Additionally, post period end, the group lent an additional GBP 800,000, which allowed CBC to exercise a Call Option with the group over 5.9% shareholding in CBC, which was owned by the group. These shares were canceled. As a recap, the group originally invested in CBC in 2017. And since then, that time, our valuation has increased significantly, with the group's current equity stake now being worth over GBP 30 million. And over the period in question, CBC's value has increased by GBP 11.3 million or 59%. Other notable performers across the portfolio are ATC, Slide 17; Lilley Plummer Risks, Slide 18; and Stewart Specialty Risk Underwriting, Slide 19. ATC has grown to one of the largest Lloyd's underwriting agencies in Australia, having more than doubled its GWP since we invested in July 2018. Lilley Plummer Risks, Slide 18, continues to grow and expand its product offering. Whilst established to be a marine broker, the business has now developed into a number of other niche areas, including Political Violence, Terrorism and North American Property. The performance of Lilley Plummer Risks has allowed it to repay just over GBP 1 million to the group during the period by a redemption of preference shares and repayment of loans. The group's equity investment of GBP 308,000 is currently valued at GBP 8.86 million. Stewart Specialty Risk Underwriting, Slide 19, also showing impressive growth, producing circa CAD 75 million in 2022. This will grow to about CAD 83 million in 2023, and we expect it to surpass CAD 100 million of GWP in 2024. From humble beginnings, an equity investment of GBP 17 by B.P. Marsh alongside GBP 400,000 or so loan, SSRU has become one of the largest owner-operated underwriting agencies in Canada, which we now value in excess of GBP 11 million, just under GBP 12 million. On the subject of the wider market, we've included on Slide 20 our high-level overview of where pricing sits on a premium basis. Property premium growth is showing no sign of abatement, whilst casualty market rates continue to rise, although at a slower pace. The noninsurance investment currently is LEBC, which we detail on Slide 21. I think we've discussed this previously and the rationale for supporting this investment. That rationale has not changed, and the management team led by Derek Miles continues to take the group forward. And we fully support Derek Miles and his team in continuing to deliver the turnaround at LEBC. In drawing my presentation to a close, as I said at the beginning, we're delighted with the results achieved, thanks to our partnership with our portfolio companies. As our partnership with Kentro has drawn to a close, the results do demonstrate that we have an ongoing portfolio with the ability to produce further significant growth, noting that the growth in the underlying portfolio without Kentro was 12.3% in the period and 23.8% over the last 12 months. The sale of Kentro, whilst transformational for the future, does not lead to the need or desire to change our modus operandi, being that we continue to identify businesses with strong management teams and good growth potentials, which we can help fund, support and develop so they can deliver on these growth opportunities, which, in due course, we believe produces returns on our investments to our shareholders by a blend of ongoing equity and NAV growth within the portfolio and regular returns of capital to shareholders. Given the strong cash position, our current portfolio and the strong pipeline of new business opportunities, we believe that the group is in a very positive position moving forward. We all as a team at B.P. Marsh are excited by the future. I, as Chief Investment Officer, share the sense of environment -- excitement given the opportunities available to us. Such opportunities should have a positive outcome on the company and ultimately, the share price and shareholder returns, which in the long run is the scorecard for a listed business. Before handing over to Jon and hopefully repeating myself in a final time, all of this could not be achieved without the team at B.P. Marsh and our partners within the portfolio, to whom we are particularly grateful. I can now handover to Jon to talk through in more detail his thoughts on the key financial performance indicators within our results, after which we will deal with any questions.

Thank you, Dan. So I'm pleased to present the key financial highlights for the 6-month period to 31st of July 2023. So overall, our NAV increased by GBP 14 million or 7.3% for the period to GBP 203.5 million, which is equivalent to 567.3p per share or 556.3p on a diluted basis. So that equates to a total shareholder return of 7.9% for the period, including the dividend of GBP 1 million paid in aggregate in February and July of this year. Overall, the group has delivered a consolidated profit before tax of GBP 15.6 million for the period. Whilst this is 8% lower than the prior year period, this was due to foreign exchange movement. The prior period benefited from GBP 5.8 million in foreign exchange gains in the valuations, whereas the current period saw a GBP 3.8 million reversal of those gains. Adjusting for this, the comparison would be GBP 19.2 million versus GBP 11.2 million in the prior period, an increase of 73%, excluding FX movement. The majority of the profit relates to the increase in valuations of the investments, with the equity portfolio rising by 8.6% after adjusting from realizations and additions, and that now stands at GBP 185.8 million. One of our core strategies is to seek to ensure that the yield from our portfolio covers our operating expenses so that investment cash isn't depleted by working capital. On an underlying basis, the profit before tax was GBP 0.8 million for the period compared with GBP 0.7 million in the prior year period. A final dividend of 1.39p per share or GBP 0.5 million was paid in July, bringing the total distribution to 2.78p per share or GBP 1 million, in line with the previous year. Turning to Slide 24. Since flotation, the group has achieved compound growth of 8.9% per annum and 11.8% since inception. That is after all expenses, tax, dividend distributions and excluding any capital raised. So this slide sets out the key investments, realizations and loan portfolio movements during the period. We invested GBP 0.4 million in equity in this period, which was the new investments in the MBO of Verve Risk Services and a nominal investment in equity in Pantheon Specialty. We also received GBP 0.8 million in proceeds from realizations during the year. Lilley Plummer bought back GBP 0.7 million of redeemable preference shares, and we received an additional GBP 0.1 million from the previous sale of Summa. Turning to the loan book. This stood at GBP 17.8 million at 31st of July compared with GBP 11.5 million at January '23. We granted GBP 8.2 million in new loans during the period to our portfolio, GBP 4.9 million to XPT in the U.S. to fund deferred consideration payments on acquisitions; GBP 2 million to CBC, which was used to fund the new MGA investment and repay bank debt; GBP 0.7 million to Denison and Partners/Pantheon; and GBP 0.6 million to Verve for working capital. GBP 1.6 million of loans were repaid during the period, GBP 0.8 million from XPT from the loans we provided earlier in the year, GBP 0.5 million from Fiducia, and GBP 0.3 million from Lilley Plummer. And given that we don't set exit clauses, we are a medium to long-term investor with an average holding period of over 7 years, we often structure our investments as a mixture of debt and equity, although never just debt. This enables the yield to be received on the investment to cover our operating costs and debt repayments help to replenish our capital funds, rather than having our capital tied up into an eventual exit. We do have a slide on Slide 30 in the appendices. This sets out all of the loans in details. All our loans are valued at par. The average interest rate charge for the period was 9.9%, which was up from an average of 8.6% charge in the year to 31st of January '23. At the period end, we have GBP 4.3 million in cash, down from GBP 12.1 million at January 2023, due to the investments in loans are set out and following the GBP 1 million dividend paid and GBP 0.7 million in share buybacks. Turning to Slide 25. There have been a number of significant developments since the period end. Regarding investments, we've provided GBP 4.6 million in new loans. GBP 3 million lent to Pantheon for working capital as they continue to hire new staff and producers. GBP 0.8 million, as Dan said earlier, was lent to CBC to fund the exercise of a share option, whereby we sold shares back to CBC, which were then canceled. GBP 0.5 million was lent to Brown & Brown as part of the Kentro sale for specific legal matters outstanding to enable completion. And GBP 0.3 million was lent to LEBC Holdings to part finance the acquisition by Aspira of LEBC Group's assets. The loan portfolio balance is now at GBP 22.4 million, approximately 11% of our NAV. In October, we received the cash proceeds from the sale of Kentro and now have GBP 51 million of liquidity prior to distributions. Based on the current share price, there's a significant discount to NAV. So Slide 26, to summarize why invest in B.P. Marsh, we are a leading specialist investor with an excellent track record with a team with a wealth of experience. Although we're specialized in financial service businesses with a specific interest in insurance intermediaries, our portfolio is diversified in terms of product lines and geographically mitigating risks. We have achieved 8.9% compound growth since flotation and 11.8% since inception after all costs and distributions through identifying excellent growth opportunities and delivering added value and return to shareholders, as demonstrated by growing the NAV to now over GBP 200 million. We've now got GBP 51 million in cash pre-distributions. We've demonstrated that we can successfully realize investments at or above prior valuations with strong exit performance over the last 18 months with the sales of Walsingham and Summa and now the exceptional performance in the sale of Kentro. We have a strong pipeline of investment opportunities, both within our existing portfolio for continued growth and expansion and in new opportunities. And we consider the current discount to diluted NAV to be unwarranted. So this concludes our formal presentation. I would now like to invite any questions that you may have.

Dan, Jon, that's great. If I may just jump back in there. Thank you very much indeed for your presentation this morning. [Operator Instructions] But just while the team take a few moments to review those questions that were submitted already, I would like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed via your Investor dashboard. Jon, Dan, as you can see, we have received a number of questions throughout your presentation this morning. Thank you to all of those on the call for taking the time to submit their questions. But Tim, if I may now hand back to you, sir, just to share the Q&A session with the team, and then I'll pick up from you at the end.

Thanks, Jake. So we've had a few questions, both on and off the platform, regarding share buybacks. Jon, do you want to group those together and take those?

So obviously, the Board is -- continues to consider the most appropriate and, I suppose, cost-effective mechanism for shareholder distributions of this size. As Dan said earlier, the aim is to strike a balance between investing for the long-term capital growth and providing shareholders with a meaningful return in the short and medium term. I suppose the key point is those discussions are ongoing, and the Board will provide further information on that in due course.

Thanks, Jon. Next question from James, are changes in the regulatory environment affecting B.P. Marsh and decisions you make?

Well, I think the regulatory environment is constantly changing. It realistically affected B.P. Marsh since what was the FSA and now with the FCA alongside the PRA and its regulation of the financial services sector and the insurance sector, and that we focus on. But generally speaking, no, we actually welcome regulation. We think it's good for the industry. It provides a framework to operate in, agreed systems and controls. It's neutral to us. We assume all our investee companies will operate within the regulatory framework.

Another question, how much competition do you see for new deals? Has this competition increased over the years?

To be fair, we would say we were unique in our investment area in that sort of [indiscernible] to GBP 5 million investment gap but we sit in the mid-market private equity investors don't fish in that pond because it's too small than their cost base is probably a bit too large to order. An angel investors -- the angel investors don't like going into, generally speaking, there's some technical nature of insurance broking distribution. So from our standpoint, we don't see any competition for investment because of the way we operate with our venture capital-style investments, using a private equity-style model. That being said, in discussing it with Jon, he pointed out that actually, there's more competition when our deals come to market where management ultimately want to exit. That next tier, we're seeing a lot of more interest from other buyers.

Thanks, Dan. And what are the key things you look for when investing in new businesses and how many opportunities do you turn down?

First, Slide 9, for the period, we saw 41 opportunities, and we did 2. So 39 for the 6-month period, and that's probably by and large, consistent with what we generally see. In terms of what we look for, an entrepreneurial, credible management team and a credible business plan because of our focus on the insurance distribution sector. We like to think that we've got a pretty good handle on what business plans look like in specific areas of business and what management teams are capable of. And therefore, it ultimately begins and ends with the people that come to us, as they'll be our long-term partners.

Another question, what is the average term of your investment holdings?

It's just over 7 years.