CapMan Oyj (CAPMAN) Earnings Call Transcript & Summary

A very good morning to you all, and welcome to CapMan's 2019 result presentation. My name is Joakim Frimodig, I'm the CEO of the company. Let me start with some highlights of the year. Overall, 2019 was a good year for CapMan, and we saw a strong finish to the year in Q4. We had a solid execution of our growth strategy overall. Our turnover in 2019 grew by 46%, and our comparable EBIT grew by 110%. We saw an improvement in our earnings profile. Our EPS was up to EUR 0.12, and our return on equity increased to 16% on a comparable basis. One of our key strategic theme has been to increase the fee-based profitability, and that has been increasing now for 13 consecutive quarters and now standing at EUR 12 million. In our own funds and fund investments, we saw a solid value creation. Fair value change was 10% on an annualized basis in 2019. And what was also positive was that we were able to realize a lot of this value, which is exemplified by our carried interest income, which rose from EUR 1 million in 2018 to EUR 7 million in 2019. Our balance sheet is strong. Equity ratio stands at 60%. And what is very positive is that we have been able to create strong shareholder value in the last year. In 2019, total shareholder return was 64% and the Board is proposing a dividend and equity repayment of EUR 0.13 this spring, which would mean that our distribution to shareholders would be growing for the seventh consecutive years. Before we look at our separate segments and their development, just a quick reminder of our earnings model. As you might recall, CapMan is reporting 3 segments. We have our Management Company business, where we have investments into private equity and credit, real estate and infrastructure. Here, we are managing EUR 3.2 billion of assets, and this is through our funds invested in about 110 separate investment objects, companies, real estate assets and infrastructure assets, and we are managing the capital of about 250 institutional clients. From this part of the business, CapMan earns fees, management fees and carried interest income. Our separate and second line of business is our Service business where we have 3 different units: CaPS Procurement Services, Scala fundraising services and JAM reporting and wealth advisory services. And from this part of our business, we receive service fees. And the third leg that we stand on is our Investment business, our own balance sheet, where we have about EUR 200 million of investment capital, which is now mainly invested into our own funds. And from this part, we have reserved -- we get return on our own investments to realize income and fair value changes. So combining these management fees, carried interest income, service fees and returns on investment, that combines to our reported EBIT. Now if we then look at our last year's results through these different segments, we can see a solid development across all the different business lines. Our Management Company business, that grew by 35% in 2019. And we saw a positive development in the management fee-based profitability increasing from EUR 1.8 million to EUR 3.3 million. Increasing this number is a key theme for 2020. Also we have been, for a long time, talking about increasing our carried interest income and now we can report a substantial increase from last year. As already mentioned, that number is up from EUR 1 million to EUR 7 million. And we received carried interest income from our Hotel fund, Mezzanine V fund and our Access funds last year. We have a large number of ongoing fundraising projects that we have initiated and that will continue this year. And through this, we see a continued strong growth in our assets under management and also in our fee-based profitability on the Management Company side. Service business, we saw a very strong development in 2019. Top line was up by over 80%, and actually, all 3 business lines were contributing strongly to this development. And here, profitability was up from EUR 4.4 million to EUR 9.1 million. So if you combine the fee-based business, you can see that the growth in turnover of the Management Company and Service business combined, plus 46%; and then our fee-based profitability, up by 10%. Our own investments, there, our total return was 9%. As you might recall, we have part of our own balance sheet invested into a market portfolio, liquid assets, cash, but our own fund investments returned about 10%. That is a fair number. We have said that our target is to have 10% to 15% return here. And we saw some variations between funds, and there's still room for improvement in these figures. But overall, solid development in all of the business segments last year. Next, I'd like to highlight a couple of key events from the fourth quarter of last year. In December, we established our second Hotel fund. That's a successor to our first Hotel fund, which was established in 2008. The new fund has a different structure. This is a semi-open-ended structure where we're looking to raise new capital going forward and looking to increase the size of the fund and also expand the investments into other Nordic countries. The current portfolio is focused on the Finnish market. The fund acquired, as a seed portfolio, all the assets of the first fund, and therefore, it has about EUR 370 million of equity at establishment. But as said, we are looking to grow this number and grow this product. Through this transaction, where the second fund acquired the assets of the first fund, that also realized carried interest income to CapMan, which you saw in the figures I presented previously. The new fund has a slightly different structure. It is a long-term vehicle and an open-ended vehicle, which means that the fee structure is slightly different, the level of ongoing management fees is slightly higher than in the older structure, whereas the level of performance-related fees is slightly lower than in the other structure. This is in line with the form of the new product. But this is a very, very positive development, this transaction in itself, but the opportunity is that it opens up for further development on this front. So here, we are looking to taking more capital going forward and as said, expand our investment operations and acquire new assets in all of the Nordic countries. The second development of the fourth quarter I'd like to highlight is that CapMan decided to step back from the Russian market. The fundraising and overall operating environment in Russia has been challenging for some time. In the quarter 3 report, we mentioned that we had initiated a strategic review regarding this business area. And following that review, we have agreed to sell the business to the investment team. CapMan wrote down the entire goodwill related to this operation at year-end, that was EUR 4.2 million. This impairment is a noncash item, and we treat it as an item affecting comparability, so nonrecurring item. The Russian business has been a smaller part of our operation, less than 3% of turnover last year, and operations were slightly loss-making. So this means that CapMan, in its investment activities, is focusing now more on the Nordics, which is clearly our core area. What remains as exposure after this for CapMan is our own fund investments into our 2 -- into the 2 Russian funds amounting to EUR 4.3 million at year-end. But the underlying portfolio there is performing well. Otherwise, CapMan, as said, is now taking a step back from the Russian market. Then returning to the figures and some more details. On this particular slide, you can see the development quarter-by-quarter this year compared to last year. So you can see that we were going stronger than before for every quarter, but especially strong was the fourth quarter, the finish to the year and boosting the top line was this carried interest incomes in particular. If you look at the EBIT figures, you can see a big improvement, especially in the fourth quarter. There are 2 reasons for that. It's a strong performance this year. But also, if you might -- as you might recall last year, in the fourth quarter, we still had a fairly sizable market portfolio, and there was a negative general market development, so the fair values were negative there. So 2 reasons for this big delta if you look at the fourth quarter. When it comes to the earnings model, as mentioned, a strategic theme has been to increase the level of fee profitability while remaining strong balance sheet returns, but also getting more carry on board. Historically, CapMan was very much a carried interest-driven business. In the last 3 years, we have been increasing the share of fee profitability, but still having very small carried interest incomes. Now a new profile is emerging where we have a substantial fee-based profitability. The balance sheet continues to make good returns. And now we are also seeing substantial carried interest. So the earnings profile has clearly changed during the last 3, 4 years. Here is another example of the changing earnings model. This is how our EBIT split has changed. 2017, still investment income making up the bulk of the EBIT. And this year, a fairly good balance between fee-based profitability, carried interest and investment income. Here, you can see, when we look at the fee-based profitability, how that has developed. So the fee base has been growing by 30% in the last 12 months. And at the same time, we have been able to uphold good cost control, which means that the fee-based profitability has continued its steady increase. And as said, for 13 consecutive quarters and now at an all-time high of EUR 12.4 million, the fee-based profitability. When it comes to the balance sheet, the key theme there has been to decrease our market portfolio, while at the same time, increase investments into private assets and mainly our own funds. Last -- at the end of last year -- actually at the end of 2018, we still had a sizable market portfolio and a lot of liquid assets and only half of our own investments were invested into the private asset space. Now if you look at the end of 2019, about 70% of our own investments are into private assets, the private market, our own funds, and we have communicated that the target is around 80-20 between fund investments and liquid assets. So we are getting close to our target levels there. We have sizable outstanding commitments of about EUR 100 million into new funds, which will further shift this allocation towards more private assets. The balance sheet is strong. We have repaid some debt during 2019. And at the same time, to uphold good flexibility, we have increased our revolving credit facility, which is undrawn at the moment. The balance sheet is virtually net debt free and the equity ratio stands at 60%. So there is flexibility and room for additional leverage, if that would be needed in the balance sheet. The objective, although, is to uphold a very strong level of solidity, as we've stated in our financial targets. A further breakdown into our assets under management and also our own balance sheet investments. Here, you can see the split of the assets under management of EUR 3.2 billion, and the majority is in real estate, EUR 1.9 million -- billion and about EUR 1 billion into private equity and infrastructure growing. And if you look at the fair value of our own balance sheet investments, you can see that about half is in real estate and infrastructure and the other half in private equity. And there, of course, if you look at the development during the last few years, our balance sheet allocation has been shifting more towards the real estate and infrastructure side. The return target for our own investments, 10% to 15% with this mix. And as I mentioned, in 2019, we achieved 10% return. We received EUR 7 million of carried interest in 2019 coming from 3 sources of Mezzanine V fund, Access funds and then the Hotel fund. But we also have a number of funds approaching -- carry a number of funds in which the main value creation work has been done. So we foresee more carry coming on board in the future. A key theme for this year is growth in our assets under management and driving that is a number of fundraising projects. Actually, we have 6 fundraising projects ongoing at the moment, which is a record number for CapMan. Basically, we are raising capital in all of our investment strategies. The demand remains strong, and these projects are proceeding as planned. What we have not mentioned before is that we have initiated the fundraising for our Nest Capital III fund and also that we've initiated fundraising for our next Nordic Real Estate III fund. But as you can see, there's buyout infrastructure and real estate as well as private credit strategies in fundraising at the moment. And this is a key growth driver for this year. If you look at the share price development of last year, I said I'm happy that we can show good return to our shareholders. Total shareholder return last year, 64%. And if you look at the period, last 3 years, 130%. We have a broad and diversified ownership base with about 20,000 shareholders. During the fourth quarter, there was a change in the largest shareholder of CapMan. Silvertärnan became the largest shareholder in November 2019. That's a company controlled by Föreningen Konstsamfundet with minority owners, Ilmarinen Company, our family office and my own holding company. If you look at CapMan's vision going forward, and this is the same we've shown before, we want to be a Nordic private assets powerhouse. Focus in our investment activities on the Nordic market but being international when it comes to the capital sourcing. Focus on private assets, that means private equity, private real estate, private infrastructure and credit and powerhouse really creating value and bringing innovative solutions in this space. And just a quick reminder that a lot of actions have taken place in our strategy in the last few years. And also in 2019, we have introduced completely new investment areas such as infrastructure and also new products under existing strategies such as the open-ended Hotels fund II as an example, and why not -- the latest buyout fund also in 2019, Buyout XI. We are diversifying our investor base, diversifying it internationally in some strategies. And in some strategies and products, we are going more local towards slightly smaller investors. And there have been actions on all of these fronts. So overall, I would say that the strategy is moving forward well on all these different fronts. And I think the results of last year also show that this strategy is starting to bear fruit. The benchmarking of our long-term financial objectives in relation to recent performance, we target an over 10% growth in our Management and Service business, there we have clearly exceeded our target, both in 2018 and 2019 with 22% and 30%. When it comes to the return on equity, we have an ambitious target of over 20% there and we are approaching that. But still, we have some work to do to reach that target. Last year, we were at 16% on a comparable basis. In terms of equity ratio, we are very much aligned with our target of over 60% solidity. And when it comes to distribution, our objective is to pay an annually increasing dividend to shareholders and the proposed distribution for this spring, as said, would indicate a growth of distribution for the seventh year in a row. And maybe a recap of the key themes for this year. When it comes to the Management Company business, as I've already mentioned a couple of times, we are looking to significantly grow our capital under management and driving that is some of the fundraisings and new products established in 2019, but also the fundraising projects that we are working on at the moment. We believe that the growth can be achieved with largely the existing resources and cost base, so we foresee a continued growth in the management fee-based profitability. We have some funds already in carry, and we have other funds approaching carried interest income. On the Service business side, we saw already a very good profitability there. We are looking to uphold the good profitability and grow all of the 3 business lines under the Service business. And when it comes to our own investments, we are looking for returns that are in line with our targets, as mentioned with the current split of portfolio, 10% to 15% has been our target there. So combining all of these, we are looking for growing earnings and growing dividends in 2020. And finally, you can see our annual distribution per share 2012 to 2019, and you can see the growth trend that I was alluding to in my earlier comments. When it comes to the financial objectives, I would highlight from here that, first of all, we do not give a numerical estimate for 2020, but we expect that management fees and fees from services continue to grow in aggregate 2020, and our objective is to improve the aggregate profitability of the Management Company and Service business before carried interest and any possible items affecting comparability. More news from CapMan. We are publishing our annual report on week 8. Our Annual General Meeting is on March 11. And our next interim report is on the 23rd of April. Hope we see you all there, if not before. Thank you.