Bridgepoint Group plc (BPT) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to Bridgepoint's 2023 Full Year Results Presentation. I'm William Jackson, Bridgepoint's Founder and Chairman, and I'm joined this morning by Raoul Hughes, our CEO; and Adam Jones, our CFO. Now before I hand you over to Raoul, I'd just like to take a minute to talk about where the business stands at the start of 2024. Our key message today is that Bridgepoint is in great shape. Looking back in our investor update in 2021, we were probably the first to call publicly and I think very transparently, the start of some more difficult times in the alternatives market. And especially that's coming slowdown in the fundraise market. Today, we're making the call that, that period is coming to an end. We're seeing an improvement in market conditions right across all our activities. But importantly, right through that period since November 21, Bridgepoint's been able to continue to raise, deploy and release capital while also executing on our business development strategy. And I think that just shows the strength of our model and the depth of our platform. As a result, today, on many measures, we're now well ahead of where we expected to be when we IPO-ed in 2021. Two specific highlights I just like to mention from our year in 2023. In September as you'll recall, we announced a combination with ECP. Once that transaction is closed, Bridgepoint will offer exposure to the 3 largest and most important strategies in private market, private equity, infrastructure and private credit. And that's at a time where the breadth of offering is really of increasing important both to fund investors and to shareholders, but very importantly, our ability to have high-quality operations on our platform [indiscernible] of our group earnings. Secondly, BE VII. We've talked about BE VII for a long time. We've long been advocates of the robustness and opportunity that's presented by the European middle market. It's actually the premise on which our business is being built, and I'm pleased to say that BE VII is set to close at the end of this month, right on its target of GBP 7 billion. It's a great result. I'm now going to hand over to Raoul and Adam, who're going to talk you through the performance and progress in '23. And after that, I'll conclude with our outlook for '24 and beyond. So with that, over to you, Raoul.

Thank you, William, and good morning, everybody. I'm pleased to be reporting a compelling set of financial results. Investment performance continues to be strong across private equity and credit. Importantly, deployment and fund returns both remained in line with expectations. In fundraising, BE VII and ECP V are on track and we expect a good year of capital raising ahead. The balance sheet is strong and will be further strengthened following a U.S. private placement, which we will cover in more detail a bit later. The platform is well positioned as activity accelerates and the market recalibrates. Now as you will see on ECP, we are waiting on the final regulatory clearance from the U.S. energy regulator, and we expect the transaction to complete in Q2 this year. Had ECP been formally part of the group, closing AUM for the year would have been EUR 62 billion, split across private equity, infrastructure and credit, 2.3x the IPO, 32 months ago. Including ECP, our FRE margin grew from 31% to 36%, thanks to increased management fees and careful cost control, something which Adam will say more about later. The addition of ECP will result in a higher FRE margin than for Bridgepoint stand-alone, taking account of the normal margin cycle, which peaks when new phones come on stream. Looking at the performance of our existing PE and credit businesses. Management fees grew by 10% to GBP 265 million and underlying FRE grew by 28% to GBP 95 million. With encouraging signs that the exit market is now recovering, we are pleased to report PRE, which while 15% down year-on-year as we foreshadowed it would be in September, was nonetheless ahead of market expectations at GBP 55 million. As a result, underlying EBITDA increased by 7% to GBP 149 million. Now I thought it would be also worth quickly looking at our performance over the slightly longer term. Since 2020 and the IPO, we will have grown AUM by an annual rate of 32%, including ECP. And for the existing Bridgepoint perimeter alone, our fee income by a total of 79% and PRE by 31%. Amortizing our cost base over a larger AUM and fee income has resulted in the underlying FRE, almost quadrupling and our FRE margin, more than doubling. All this has been achieved while growing our investment team by just 9% and maintaining a consistent blended fee rate with a minor reduction due to the mix shift between private equity and credit. Importantly, we've been doing this for a long time. And over the last 20 years, our strategy of pursuing both organic and inorganic growth has resulted in AUM growth of 15% per annum. This has been achieved over the long-term cycle in, cycle out. Now having talked about the financial performance. On the next few slides, I wanted to touch on the drivers of that performance in the business. Fundraising, deployment and capital returns and valuation progression. Despite a challenging market backdrop, we made good progress with fundraising in 2023 with over EUR 4.5 billion of capital raised across the firm and ECP. Combined with fund performance, this gives us confidence that we can achieve our capital raising aspirations for 2024 and beyond. Credit had a particularly strong year with over EUR 1.5 billion raised for 2023 vintage funds between Bridgepoint Direct Lending, Bridgepoint Credit Opportunities and 2 more CLOs. This positions the Credit business well to continue to take advantage of the more favorable interest rate environment. As William mentioned, in the near term, BE VII is expected to close this quarter at the GBP 7 billion target. ECP V is expected to close at the back end of April. We guided in September to a target of $4 billion, and we expect it will end up a bit ahead of this number. Both of these are great results in the current market and set up these funds with plenty of capital through their next cycles. I'd particularly like to thank William, sitting next to me, from Bridgepoint's perspective, but also Doug Kimmelman, at ECP, for their continued tireless efforts in particular, traveling around the world meeting investors. In 2024, credit will see Bridgepoint [ Growth ] IV, Bridgepoint Credit Opportunities V to further CLOs and ECP ForeStar, which is the new ECP credit vehicle, all raising money. While in private equity, BDC V and Bridgepoint Growth II will both be in the market. The prospects for BDC V are particularly strong given the outstanding performance of BDC III which is among the top-performing European low and mid-market funds in its vintage. All of this activity is underpinned by continuing investment in our capital-raising capabilities. The Investor Services team has more than doubled since 2021. We now have a global presence with new IRR colleagues on the ground in China, Singapore, South Korea and Japan as well as to specifically cover the DACH region, along with the strengthened team in the U.S. as well as our first individual dedicated to the private wealth channel. One positive consequence of the congestion in the fundraising market over the past 2 years has been the addition of new LPs into BE VII, which has significantly diversified our geographic mix and brought in a number of new sovereign wealth funds to the platform. Where historically, Bridgepoint had over-indexed in the U.S., the most mature LP market and which represented some 56% of BE IV's capital, we now have a much broader exposure globally with a material increase in the proportion of capital raised for BE VII come from Asia and the Middle East at almost a quarter of the fund. This diversification and expansion of our investor base positions us well for future fundraising in 2024 and beyond. Deployment pace. Deployment pace is always lumpy. There was a certain seasonality to our business in the way processes start and finish. And after a strong half 2 in fund deployment, particularly in BE VII, we finished 2023 with all funds broadly on track against their deployment targets. Perhaps even a deal ahead in BDC IV at 79% invested. Importantly, our guidance for the timing of subsequent funds remains unchanged. This is a strong endorsement of our team's approach to origination. For example, the European private equity team typically tracks opportunities for, on average, 3 years preinvestment, getting to no founders -- families and management teams very well. This means that in our middle market, often transactions are happening outside typical full auction processes and therefore, potentially less subject to wider trends in M&A activity. While M&A markets were subdued in 2023, we nonetheless returned GBP 1.8 billion of capital to investors, having exited 6 private equity investments at an average multiple of 6.8x money invested. I'm particularly pleased that we have a healthy pipeline of potential [ actions ] for 2024 as these things are binary and the timing. But I'm confident sitting here in mid-March that we can continue to deliver in the year ahead. And finally, fund performance. This continued to be strong across private equity and credit and progress in fund valuations underpin the PRE we have reported today. Bridgepoint Europe VI remained ahead of plan or at 1.8x, while BDC III showed strong momentum to grow from 3x to 3.8x during the year. In Credit, Bridgepoint Direct Lending III and Bridgepoint Credit Opportunities IV, both remained on plan with net IRRs of 10.4% and 13.8%, respectively. In infrastructure, ECP III made good progress with its [indiscernible] increasing from 1.9 to 2. Importantly, we continue to record exits at a premium to fund valuations with the average valuation uplift on exit across our private equity funds of 34% over the last 5 years and actually 48% of those exits in 2023, maintaining our strong track record of top quartile DPI. The strength in fund performance, which means that we are continuing to record valuation progression is no accident and is at the core of what the business does and what we do very well at Bridgepoint. This slide is something that Xavier Robert, our Chief Investment Officer, covered in detail at the interims last year, but it's worth repeating. We are very structured and disciplined in our investment approach. Defined asset selection, and our value creation toolkit are at the heart of what we do, helping us deliver premium performance and valuation progression without multiple expansion. This is illustrated by the fund metrics you can see on the right of this chart. High growth, high EBITDA margin, strong cash conversion and relatively low leverage. So strong performing sensibly run growth businesses. Indeed, a lot of these are replicated in our credit business, too, where sector selection away from more volatile sectors and significant equity value cover, set that business up to do well despite changing markets. Next, a couple of thoughts on ECP and the wider strategy before I hand over to Adam to through the numbers in more detail. As I mentioned, we anticipate the ECP transaction will close in quarter 2. In the meantime, the businesses are spending a lot of time together. Planning for global LP coverage is advanced. As a reminder, ECP brings over 170 new LPs of the platform with an attractively low overlap of about 20%. We have established mechanisms for sharing transaction opportunities post closing, and we are expecting critical functions to be integrated quickly and product and strategy extensions will come into focus after closing. In terms of ECP's performance, Fund V fundraising is going well and should close a bit ahead of target, as I have said. Importantly, deployment is on target at 40% and with a number of interesting opportunities in the pipeline, provides comfort that their fund cycle too is on track. As we spend more time working together, I'm increasingly excited about the future of the combined group. There is a real cultural fit between the 2 teams as we get to know each other more. Now we plan to host a Capital Markets Day later in the year, including the opportunity to meet the wider ECP team, and I hope that many of you will be able to join us for that. ECP will be an important step forward for the Bridgepoint Group, but I'm conscious that we need to be prepared for further opportunities as the pace of our industry consolidation continues to increase. To this end, we recently took the decision to partially refinance the existing ECP bond, following closing of the ECP transaction, and raise incremental capital to the U.S. private placement market. These facilities are conditional closing and we'll replenish the balance sheet capacity to fund the next series of opportunities and investments in funds, following capital use for the cash component of the ECP deal. We are well positioned to continue as a global leader in middle market added value investing and build on our strong position and continue to look at both organic and inorganic growth across investment strategies and geographies through scaling existing strategies, product strategy extension and expanding into new alternative asset classes and diversifying our sources of capital. And with that, I'll now hand you over to Adam to take you through the numbers in more detail. Adam?

Thanks, Raoul. Good morning, everyone. I'm now going to take you through some more details on our financial performance in 2023 and update you on guidance for 2024. Overall, financial performance was very strong in 2023,, underpinned by the strength and resilience of Bridgepoint's business, as you've just heard from Raoul. Careful cost control and strong investment terms, both played their part in today's results, and I'll say a little bit more about those each shortly. As you have heard, we've recently taken steps to further strengthen the balance sheet to support our strategic growth plans with an incremental USD 430 million private placement of debt. We are today announcing a final dividend of 4.4p per share, subject to approval at our next AGM. This means that our total capital distribution to shareholders in 2023, between dividends and share buyback, will be 16.4p per share. That's more than twice the 8p per share from 2022. We are today setting out our guidance for FY 2024. And in summary, we are well placed to meet current market expectations. Let's start with assets under management. We raised a total EUR 2.7 billion in Bridgepoint in 2023 across BE VII, Direct Lending III and Credit Opportunities IV, and also delivered EUR 1.9 billion of realizations. Valuation gains linked to the strength and resilience of our aggregate fund performance added a further EUR 1.7 billion. These valuation uplifts were trading-driven with weighted average EBITDA growth of 19% across private equity funds versus minus 5% for the MSCI European Index. Importantly, 81% of our unrealized valuation multiples were flat or reduced in the year, which really does underscore the strength of earnings performance within our portfolio. Consequently, AUM finished 7% ahead of the prior year at EUR 40.5 billion. If we were to adjust those figures for the addition of ECP, assuming the transaction had closed in 2023, total group AUM would have grown by 62% to EUR 61.6 billion. Now turning to fee paying AUM. We raised a further EUR 1.4 billion of capital commitments and deployed EUR 2 billion of new fee-paying capital, set against this fee-paying asset realizations from both the sale of equity investments and the return of a loan credit strategies totaled EUR 0.8 billion. So in total, our fee-paying AUM grew by 11% and year-on-year. Again, with the addition of ECP, fee-paying AUM would have grown by 57% to EUR 36.7 billion. This growth in fee-paying AUM, obviously, delivered strong growth in management fees and other income, which grew by 10% to just over GBP 266 million in the year, including catch-up fees of GBP 6.7 million for BE VII. In aggregate, revenues grew 5% year-on-year to just under GBP 322 million. Fee margins across all of our strategies were stable in 2023 with a slight year-on-year decrease, driven by the increased proportion of private credit in our fee-paying AUM. As we'd previously guided at the interim results in 2023, PRE was materially skewed to the second half of the year and represented 17% of total revenues with the assets that we chose to sell, delivering an average 6.8x money multiple. This result was slightly ahead of our previous guidance of 15% due to the strength of trading performance in our funds over the last 6 months. As you know, PRE is not linear across the year, and it is dependent upon both the progression in fund performance and the timing of exits. We do expect PRE for 2024 to be similarly weighted to the second half of this year. Before we move on, I would like to just highlight the significant potential future value of our fund co-investments in carried interest, which will collectively drive PRE over the coming years. Since 2018, we've recognized nearly GBP 300 million of PRE, but the embedded potential value of future PRE remains very material with over GBP 1 billion expected from current funds, including those materially raised to date. Let's just break that down to its constituent parts to illustrate that point in more detail. In the second bar of the graph, the right-hand side of the page, you can see that GBP 67 million of carry is still to be recognized from current funds, if they are to be fully realized at their Q4 2023 valuations. Next is a roughly GBP 400 million of PRE to be earned from fully invested funds, if they deliver on their target returns. And finally, there is illustratively a further nearly GBP 700 million of PRE from funds that are not yet fully invested if those 2 ultimately deliver their targeted returns. If you compare the split between the carry and co-invest on the graph, you can see that as you move from the left to the right of the graph, there is a material growth in carry within PRE, which obviously reflects the fact there is a higher corporate share have carried interest in newer funds. Now let's move on to operating expenses. Those totaled GBP 171 million for the year, an increase of just 1.6% from 2022. Careful cost control was an important contributor to overall performance in the year with prudent management of cost growth and headcount investment during what was an uncertain macro environment. Total personnel expenses were essentially flat year-on-year, with headcount investments largely phased over the last 6 months, offset by a lower bonus expense, which reflects the lower number of exits that we realized in the year. FTE growth of 3.7% in '23 was principally driven by continued investment in portfolio support teams, Investor Relations and our credit team. Other expenses grew by 7% to just over GBP 45 million, mostly relating to increased travel and higher legal and regulatory spend with the completion of our AFM registration in Luxembourg. Having looked to revenue and expenses separately, let's now review the impact on group profitability. Fee-related earnings grew by 28% to GBP 95 million in '23, reflecting the first full year of fees on BE VII combined with our cost control efforts that I mentioned. Our FRE margin continue to expand, reaching 36%, which has now more than doubled since the IPO. The combination of FRE and resilient PRE saw underlying EBITDA reached almost GBP 149 million, a 7% improvement on 2022. If we turn to the reconciliation between underlying and reported before tax, this is driven by other exceptional expenses, which consist principally this year of expenses incurred in the combination with ECP. Looking briefly at our tax charge. This increased from GBP 6.8 million in '22 to just over GBP 15 million in 2023. The increase in underlying effective tax rate to 11.4% is caused by the lower level of completed fund exits relative to the prior year. Now here's a high-level summary of the underlying Bridgepoint balance sheet, which excludes the presentational impact of consolidating our CLOs since that accounting requirement does somewhat confuse the underlying position, as I previously mentioned. The recently executed private placement totals USD 430 million, with a mix of 3-, 5-, 7- and 10-year tenors, but at a blended coupon of just over 6.17%. There was no funds raised will be put on deposit at an interest rate of approximately 5%, and therefore, they will only have a marginal impact on our interest expense line until they are deployed, obviously, at which point they will start generating incremental profits and cash for the group. This now gives us substantial new capacity to support our business development strategy, and it actually fully replenishes the liquidity we had following the IPO. If you combine the GBP 239 million of cash and the undrawn GBP 250 million revolver, that means we have liquid resources at the year-end of nearly GBP 0.5 billion, ahead of a cash funding obligation of just over GBP 230 million on the completion of ECP. Co-investments on the balance sheet continues to represent just 1.3% of total AUM, which again underscores our capital-light profile. As you know, we completed our first GBP 50 million share buyback program in October and then launched a second GBP 50 million share buyback, which at the year-end still had GBP 40 million remaining to deploy. The combination of that proposed dividend and the share buyback means that our total capital distribution shareholders this year will be 16.4p per share. Now I'd like to finish my section presentation by turning to guidance for 2024. In summary, as I said, we believe that we are well placed to deliver the market's current expectations for this year. For the sake of simplicity, now and going forward, we are going to present and guide the underlying performance of the group assuming a full year of the combined group of both Bridgepoint and ECP. Other than the fact that ECP V is now aiming to close a little ahead of its $4 billion target, we are today reiterating the guidance we gave in September relating to ECP. On fundraising, we expect the group to raise at least EUR 20 billion over the next fundraising cycle. We expect direct lending IV to start generating fees in the second half of this year, Bridgepoint Development Capital V and Credit Opportunities V in the first half of 2025, and ECP Fund VI in the second half of 2025. As Raoul and William said, BE VII is expected to close this quarter at the EUR 7 billion target. And with approximately 10% of fund commitments actually completing in 2024, catch-up fees are expected to be around GBP 12 million this year. In credit, we expect to deploy approximately EUR 1 billion of net fee paying AUM in each of the next 3 years. As it was in 2023, we expect PRE to be materially rated to the second half of this year, let's say, roughly 2/3 of the 4 years total. And we expect PRE this year to be at the upper end of our normal range of between 20% and 25% of total income. Excluding the impact of ECP, total costs in 2024 are likely to represent high single-digit compound growth from 2022 because inflation does still remain. Exit activity will pick up with a corresponding increase in the bonus pool and the phasing of 2023 hires, combined with the delayed recruitment, does impact the cost base in 2024. So as a consequence, our short-term guidance for FRE margin remains unchanged in the low to mid-30% range until BE VIII starts to generate fees in 2026. That represents a slight reduction from the 36% margin that we realized in 2023, but that is to be entirely expected and just reflects the usual margin profile of the private equity cycle, where the fee-paying AUM will now naturally shrink in 2024 as we start to successfully realize investments ahead of the next material fundraise. But importantly, our long-term FRE margin guidance at 45% and above remains unchanged. Finally, we expect the effective tax rate for the enlarged group to now be around 15%. The Bridgepoint element is unchanged. The increase simply reflects the impact of ECP's profits at U.S. federal tax rates. With that, I'll hand back to William for closing comments.

Great. Thanks, Adam. We've covered a lot of material this morning. But just to conclude, if we look back at 2023, we've continued to make really significant progress against that strategy we set out at the IPO, as I noted earlier. Investment performance continues to be good across both private equity and credit. Importantly, fund deployment and fund writtens both remain strong and on plan. In fundraising, we and ECP are on track to close our flagship fund raisings on or slightly ahead of target. The balance sheet is strong. It's been replenished and recapitalized. These all contribute to strong financial performance in 2023 and that outlook that Adam has just talked about for '24. Looking ahead, I think our industry outlook is increasingly positive after the hiatus of recent years. We've started 2024 with a really healthy investment and exit pipeline. We continue to invest in our people and platform, that's really important. We continue to explore growth opportunities, both organic and inorganic. And I think we're really well positioned to benefit and lead further industry consolidation. In summary, the platform is well positioned as activity accelerates and recalibrates in the alternatives market. So I'd now like to hand back to Poly, our operator, who's going to manage the Q&A process. Poly, back over to you.

[Operator Instructions] Your first question comes from the line of Arnaud Giblat from BNP Paribas Exane.

I've got 3 questions, please. Can I first ask on fundraising of BDC V? What are the parameters are you looking at to think about sizing that fund? I mean with BDC IV now at 3.8x on any multiple, I'd assume that there'd be quite some good demand there. So I'm just wondering how you're thinking about sizing it? Any constraints? My second question is actually related to that. With BDC IV at 79%, how many more deals do you require there for BDC V to be activated? My third question is on the headroom you've built for -- on your balance sheet. So $430 million placing, A lot of the M&A you've done transactions that was a significant proportion in equities. I'm just wondering, clearly, you've built -- you've rebuilt your capacity to do M&A. Is that something you could envisage? Could you be opportunistic if anything, that's presented itself? Or are you first going to focus on integrating ECB?

Okay. Thank you, Arnaud. I'm going to pass those over to Raoul.

Arnaud, BDC V. So it's BDC III that's 3.8x. It's the sort of -- which is the fund before last, which is the one that really drives the performance of the fund, one before the current fund is only redrive -- sort of performance and your fundraise the next time we're at. BDC V, we have a sort of a target fund size of EUR 2 billion. And we're in the market at the moment. That is the best thing to say on that. We want to be cautious about individual fundraising amounts as we move forward to the next phase of our growth. So the target fund size for BDC V is EUR 2 billion. We are -- as I think I said in my part of the thought, we're pretty confident in that fundraising, given the performance of the business. I think it's also one of the things that we are very disciplined about, is making sure that we raise the right amount of capital for any one of our strategies so that we can continue to invest it well through a sensible sort of time frame through the next fundraising cycle. So we're not -- we clearly want to grow the business and want to raise more capital. We want to do so in a rate-disciplined way and raise the right amount of capital for each strategy.

And I think the other thing, Arnaud, one of the nice things about having probably the top-performing fund in its kind of peer group is that it's going to give us a good chance to shape the investor base of that fund next decade with the demand that we've got for that program. So EUR 2 billion on the cover, we'll be disciplined about it. In terms of BDC IV's position, I guess, ultimately, they invest in a reasonably wide range of equity -- equity sized deals. I anticipate it's probably 3 or 4 deals to get them on the line. It depends on very much what they're actually going to individual deals, but 3 or 4, that sort of number. And then talking about M&A. I think the USPP has put us in -- back in the same liquidity position that we're in the point of the IPO. So we've effectively replaced the cash element of the ECP transaction, which is a broadly similar number to the amount private capital raised at IPO, to put us back in the same position to continue to develop the firm through various forms of M&A. I think you're absolutely right that -- when the transactions that we do are likely to contain reasonably significant elements of shareholder shares in the transaction. That's mainly because I'd expect deals that we do with independent firms where founders are looking to come and join the platform and part and parcel of that, we want them tied in with equity. And indeed, they want to be tied in with equity. And it's one of the beauties of our position as a listed business, we can offer this. So I said I think you could think in terms of the capacity of that quantum of cash being a minority of any wider transaction that we do. But we -- so we feel we're well placed to continue to develop the firm and to grow through M&A. But clearly, it's all about finding the right opportunities at the right time with the right people, and the cultural fit as we touched on with ECP. The cultural fit for this business is really, really important. We are very much a people business. We're focused on any deal that we do. We need to partner in we like-minded people who we feel can be additive to the wider platform and the culture of the firm.

So it's actually just you could -- we have the capacity to do an ECP II. But I don't think you should expect to see that come down the line anytime soon. We would be very cautious and sensible about finding the right thing as ECP has shown. Does that answer your questions, Arnaud?

Your next question comes from the line of Nicholas Herman from Citi.

Three questions from my side. Just a follow-up on the growth question. So beyond inorganic growth, I think you also referred to using the incremental capital raised through the private placement to accelerate organic growth as well. So can I just ask you to provide more detail on of what you're referring to? Are you talking about that? A build-out -- that sort of strategies at Bridgepoint and ECP, regional expansion and so on and so forth. So detail there would be much appreciated. Secondly on exits. Could I just ask you to provide a bit more detail, please, behind the guidance? I guess how many exits do you have in process or are expected to commence? And how many exits underpin your guidance? And I guess as part of that, do you typically see the buyers of your assets being more biased to being sponsors or strategic buyers? And then the final question, please. In terms of -- you sort of -- I guess you talked about healthy pipeline and help -- I think you point these update on deployment. So I guess could you just be a bit more specific on which funds -- well, I guess -- sorry, I guess, given how you see the current fund cycles across the various strategies. So that's my question.

Okay, Raoul, do you want to take the first one?

Yes. Accelerating our organic growth. So I think that comes with building out the existing strategies with -- in the markets that they're in and expanding into wider geographic market. So we will continue to grow and expand the private equity business across the mid-market verticals that we're in, and we'll expand a bit more geographically, I suspect. With ECP, we do think there is a real opportunity to develop ECP's business into Europe. One of their real attractions of the transaction was the network and the contact base that we have in Continental Europe providing them -- with them with an opportunity to deploy capital there, which they haven't done before. And if you think about the whole energy transition market, which is sort of a really hot space at the moment, and you look at the Inflation Reduction Act in the states, there's a lot of talk of a similar-type of thing happening in Europe and sort of certainly the new labor government in the U.K. is making some of the sort of noise or the potential new labor government rather. So I think there's a real opportunity for energy transition in Europe. And I think the platform that we have now have in the U.S. with ECP is going to be additive to our wider equity business in the states. I think we really feel there's a real opportunity. There's a need and a real opportunity to scale our platform, both in Europe and outside Europe. And so I think credit is one of -- is a product class, which we should be able to scale organically very quickly. So that's probably first...

Do you want me to do exits?

Yes.

I mean let's not exits. It's all about portfolio management across the different funds. So we set ourselves up to have vintage year of discipline, both on new investment on exit. So we're trying not to particularly time the macro. The nature of the assets we have helps us to do that. So we probably have 20%, 25% of the portfolio at any one time as potential exits. And we start the year looking at how much capital do we want to return back to drive fund performance. We're focused on net IRR, total value and the amount of capital we've returned, the DPI metric to investors. And we want to make sure we've got optionality. So ultimately, these are individual events. And as Raoul said many times, they kind of either have...

They happen [indiscernible].

Or they don't. But we normally have doubled the number of exits in our sites for the target we're trying to deliver. So we're reasonably confident about that.

And that's across the equity businesses. Yes, yes, sort of one of the things in the '23 exits. It happened that more of those were in the growth in the BDC side of the business rather than the BE side of the business. But we -- so we look at -- sorry, coincide different fund side. We're looking at exiting across all of our private equity business.

Yes. And I think on deployment, that's a healthy pipeline. Deployment doesn't kind of work on a linear basis. It's sort of like buses. You get 2 or 3 come. We had a very, very active Q4 in BE. We're going to nicely rebuilt pipeline there. BDCs were the same, isn't it Raoul?

It gives us -- there's real seasonality to the private equity business. And you tend to find that the transactions get initiated at the start of the half years and then the people aim to try and have targets of completions and signings, before major holidays and breaks. So you tend to find that you could be working on transactions for quite a while. But they tend to consummate either just before sort of Easter or summer or just for Christmas or Thanksgiving in the state. So sort of there is -- this is -- a -- it's a bit of a seasonal process.

And when you look at on the equity funds, which I guess is where there's a lot of focus. You're sometimes ahead of the game, sometimes a little bit behind the game. If you look at BDC, it's ahead of the game, which is nice. BE VII is actually bang on the same spot as BE VI was at the same time the same amount as the it was invested in 3.5, 4 years, and we'd expect it to be the same.

Yes. And the same applies with ECP. There, if anything, even slightly more lumpier than we are. And if you -- a classic Bridgepoint private equity fund will have 16 to 20 deals in it. And so the ECP is a more concentrated strategy. And so they may have 10 to 12 and by definition, there is -- their deployment is also lumpier.

Can I just follow up to that, please? Yes, sorry, just -- yes, I want to request -- I just want to follow up again on the potential buyers of your assets between -- the mix [ is strategic ] and I ask because one of your listed peers had previously noted that it sees potential buyers of its assets now becoming less willing to go through with the transactions as those potential buyers don't want to deploy in the current tough environment and have to go back to their MLPs for more capital. So I wanted to see if that's -- ask you personally if you're seeing as well and kind of a bit you're exposed to that.

Not an issue at all. I mean actually, the -- at the moment, we've just gone through quite a number of things with strategics, which is always pleasing to see strategics back. I think as we've said before, people are more comfortable making EUR 1 billion, EUR 1.5 billion acquisition at the moment and making a EUR 10 billion. And that plays right to us. When we look at the large buyout market, one of the things that makes Raoul and I smile is when you see the huge amount of capital sitting there waiting to deploy, and we've got the store, all the assets in. So come on down.

And your next question comes from the line of David McCann from Numis.

So firstly, on the consolidation of [indiscernible] governance plans there. You previously spoke about real estate being an obvious private assets that you, obviously, don't [ currently ] have. Maybe a [ gap ] portfolio dislocation in that market in recent years, should we say. So with that sort of be -- would be the obvious gap for -- when you're thinking about your own -- set your future M&A plans, expansion in other areas, perhaps building up some of the existing capabilities in adjacent areas. How do you think of that? That's the first question. Secondly, on sort of timing of BE VIII and the next ECP funds. I appreciate it might be slightly [indiscernible] but I mean any color on timing around that '26, '27? Something else to get us some color on what your expectation given the current set market and so would be helpful. And then finally, sort of more technical one. On carrier receivable rules are -- you've actually increased in the second half as I think was touched on the presentation as well. Maybe just talk through some of the characters, what's driven that increase? Is it based on [indiscernible] period? So much based on market to market and how much based on the expected pipeline? I guess getting a bit closer to fruition and any other major drivers, what's driven those numbers up notably in the second half?

Okay. We'll pass the first two to Raoul and the third one to Adam. Raoul?

Yes. Well, if you look at the classic verticals in alternatives, really, you are right. Exposure to the real estate vertical is something that is missing in the portfolio. Whether it's the right thing for us to do will really depend upon our views on the development of that market and our ability to find the right way in, at the right time, with the right partner. And so we wouldn't rule it out, but nor would I say it's the most advance of our thinking. There's plenty to go at in expanding the existing verticals. I mean, another area is the secondary world and how we think about the right way to play in the secondary world as that develops and bifurcates a bit between LP secondaries and GP-led secondaries, and how we get into that part of the market. So wouldn't rule it out, but it really comes down to can you find the right partner firm, both in terms of scale, location and cultural fit.

And as you were saying earlier, the organic -- combination of organic and M&A with ECP is really interesting in Europe.

Yes, it is. There's plenty -- yes. I see where you're looking. There's plenty of ways of delivering the growth aspirations that we have, without having to deliver a real estate transaction. That's the way to look at it rather than ruling it out.

Timing of the new -- of the next generation of funds?

As for all for you, isn't that [indiscernible] ?

We're just finishing the last [indiscernible].

We look at it. He's always an awful lot to ask. I mean look at it [indiscernible] gone around [indiscernible] existing fund.

Thank you very much. A bit of an [indiscernible].

I mean I guess the answer is [indiscernible] one.

There's no change to the timing, David, of those funds. I don't think we're expecting fundraise markets conditions to massively improve in the next few years. There's the pigs going through the python of the size of portfolios and getting cash back to investors, that will improve things a lot. But we've got a very diversified LP now. And as Raoul was saying earlier, the addition of the new LPs from ECP, it's great to have that breadth. And we're pretty confident that we're well placed for next time, and it will be at the timetable that Adam's described. Carry Adam?

Sure. David, if you look at PRE for '23, its progression was really driven by BE VI BDC III, in particular, and our growth from BG I. BDC III and BG I, in particular, were sort of the areas where we concentrated exits and significant fund progression. But importantly, they both made material progress on the fund performance through repaying entirely their preferred return to investors. And therefore, freezing the carry hurdle. And therefore, the fund has substantially de-risked, which then allows us to, obviously, recognize more of that carry component. But as I said, going forward, when you look at the quantum of inherent PRE that's locked up, there is substantial more value to come over the next sort of 4 to 5 years.

And that progress in BDC III has driven things significantly.

Absolutely.

Yes, really. BDC III, there is a reasonably high corporate carry relative to other of our historic funds. And the fund is performing so well, when you get to sort of 3.8x your money current value, we expect it to be [ accompanying ] and all that, as the end, the carry opportunity is tremendous. And it's sort of really coming through in the valuations. And I think it's interesting that PRE is an interesting part of the business in that the -- we've talked a lot this morning about the lumpiness of exits and it's not -- it really isn't linear. The way we really look at it internally, I guess it's twofold. From a fund management perspective, as William says, we're constantly looking at which of our assets, which of the 25% on average of our assets we want to try and exit. What's the constantly working proactively to think about how do we exit businesses and what's the right timing on money back. And then from a sort of a managing company impact and fund perspective, we really look at the total embedded value of that investment. And the chart that Adam showed, there's a significant embedded value on the balance sheet of the current value of our funds. But there's an awful lot of value that will flow through over the course of the next 5 years as our existing funds maturate and get better and deliver the returns. And then you add on to that over time. There is a greater proportion of corporate carry sitting in the management company for the newer funds and the older funds. So that will really turbocharge this as we go forward. So although you guys tend not to value PRA when as well as FRE, in this business -- although we are sort of an asset-light model, the assets that we do have and invested in our funds are set to drive significant profit and cash over the course of the next couple of fund cycles, as the sort of the carry comes through, the funds perform and the higher proportion of corporate carries realized.

[Operator Instructions] And your next question comes from the line of Angeliki Bairaktari from JPMorgan.

Just a couple of follow-ups, please. So just to come back just to the question of carry that was asked right now. Out of the GBP 55 million PRE that you had in 2023. Can you tell us how much of that is actually reflecting exits? And how much is just fair value, just to have an idea? And second question, I can see on Slide 8 that Bridgepoint Credit Opportunities for -- is exactly now 85% deployed. So does that mean that we could expect the next vintage of that strategy to get activated in 2024. And lastly, if you can also talk about the target size that you have on BDL IV, please, sorry, BDL V.

Okay. Adam, do you want to do the PRE point?

Yes. Angeliki. If you break down the PRE for 2023, that total of GBP 55 million, it breaks down to GBP 30 million of carry and GBP 25 million of co-invest. Now remember that co-invest's simply the proportion of to increase for the GP co-investments on our balance sheet. That is straightforward mark-to-market based on the fund elements. The carry is, obviously, then driven by the exits and the discount unwind, which as I said, was concentrated in BDC III and BG I.

Okay. Raoul, the credit funds.

Yes. I mean the direct lending fund is the focus for the first half of the year. When we look at the sort of the quantum and the size of direct lending, you need to look at it in a totality for the vintage in the -- what we're finding in that market is that there is a -- discussions performance, people investing into the fund itself and people investing in dedicated SMAs that sits alongside it. So you need to look at that in totality because the mix between the 2 may well shift. The total target is in the order of GBP 4 billion across all of those. Well, I don't -- I think that will be raised during the course of '24 and '25. And don't forget in credit, the fee base of this is different from equity where the fee base is based upon deployed capital as you deploy it. So the important metric in credit is to make sure that your fundraising is running ahead of your deployment speed. And there if you have it, you've always got a bit more capital to deploy than you are deploying and that, make sure that you can keep in the market. And so although the total is that sort of number. We expect to raise that during the course of the next sort of over the course of '24 and '25, and that doesn't -- you don't need it [indiscernible] to raise the GBP 4 billion to start doing it. You raise it over time, and you deploy it as you go along.

Date of transition between IV and V, when do you expect that?

Well, I think it's less than of a data transitioning credit than it's in sort of because it's effect, once you've closed the capital, you just start deploying the capital on different bits. It's not the same sort of...

So you can invest the 2 together, yes?

Yes, you could do if you wanted to. You just allocate it differently to different ports. Angeliki, does that answer those questions for you?

Yes. Just on the BCL IV. Sorry, in the BCL V then, that is the same interplay, I guess, we because the firm is currently 85% deployed, so it doesn't leave much more fire power for you to deploy out of that front. I presume you have already even raised some capital for BCO V, which you can start potentially investing?

Yes, but yes. But the other thing about the credit opportunities fund is it tends to have a slightly higher velocity in quite a bit of the capital they deploy comes back quite quickly, the nature of what they're doing. So it's currently deployed at that sort of level.

You can reinvest?

You do. Yes. Yes, you do. Again, it's not quite the same sort of structure you have in a private equity fund. You actually sort of -- you can deploy it -- deploy flow within the investment period. And it's all about -- it's the balance between deployment and the rate of repayment. And there is an element in the direct lending strategy. At least, there is an element of sort of come together in times when you're deploying more, you tend to have more repayment coming back because the exit markets are stronger. And in times when you're deploying a bit less, the assets that you've got a bit stickier. Credit opportunities is a bit more of a bespoke going in and seeing opportunities and buying positions and then trading it a bit more. But so the way you -- the way I would look at it is what is maintaining the deployment and that deployment quantum in total, gently ticking up over time. It's net deployment, isn't that? And when you look at the guidance, Adam, was giving, it's -- we're guiding sort of GBP 1 billion a year-plus of net increase in the credit deployed capital.

Okay. That's fair. But just -- sorry, just one more thing. On BCO. Then is it fair for modeling purposes to expect the next bit to start deploying in 2025 or not in 2024?

Yes, yes. But yes.

There are no further questions on the conference line, and we will now address questions submitted by the webcast page. And I'll hand over to Adam Key to read out the written questions.

We have 2 sets, written questions. First from Tom Mills at Jefferies. First question, "There are 2 high-profile IPO processes ongoing from 2 of your European sponsored peers at present. If those go well, do you envisage of having a galvanizing effect on the European IPO markets as well as sponsor-to-sponsor exit deal flow? And secondly, those 2 deals currently in the market are having to deleverage materially. Is that something you would also envisage having to do with potential exits, whether sponsor-to-sponsor or via IPO to the extent relevant?"

Yes. I mean I think, Tom, you have to recognize that the IPO market is the arena for the large buyout world. When you look at the size typically of companies that are floating. It's typically in the several billion. So I think we've done a huge 250 exits over the last 15 years, and we've had 1 IPO. So it's not that significant in a Bridgepoint context. But yes, I mean, I think these are important tests of whether that market will be open this year. It will have implications for the whole market because obviously, it's driving return of capital. And yes, deleverage is an issue because the quoted markets are intolerant about lots of things, one of which is leverage. Next question?

And then secondly, from Nicholas Herman at Citi. "A technical follow-up for Adam. Please remind us of the tax rate differential between fee-related and performance-related earnings at Bridgepoint and ECP? And is tax on net carry negligible while tax incurred is based on FRE and invested income streams?"

Well, Nicholas, in short, there is no -- there is no quick answer to that we could get ourselves completely lost in the science of the relative components of how the tax liabilities that arise. But which is why we've always simply tried to guide you to an effective tax rate of 5% to 10% on the Bridgepoint-only elements. And the exits really determine whether you're at the high or lower end of that range. So in '22, we have a large number of exits. The effective tax rate had come down. This is all about the release of deferred tax. And then with the -- in the slower exit environment to '23, the effective tax rate goes up. And we've previously guided to 10%. We came marginally higher than 11%. The relative increase in into '24, as I said, is all driven by the ECP effective tax rate. That is, obviously, an onshore payer, although we look to whether we try and find efficiencies in that going forward. Perhaps from a modeling perspective, we can go into it. But I think we could get ourselves wrapped up. It's -- we should probably continue to guide at that 5% to 10% for Bridgepoint is the right way to think about it.

Okay. I think that ends the questions and ends this set of presentations. I hope it's been useful. Please feel free to talk to Adam Key, if you have any questions. But with that, thank you very much for joining us this morning. And Poly, thank you for managing the question process.