CapMan Oyj (CAPMAN) Earnings Call Transcript & Summary

Good morning, and welcome to CapMan's results presentation for the first half of 2023. I'm Pia Kall, CEO of CapMan. We'll start with the financial development. During the first half, we continued to grow fee income and had a stable performance in a slower market. The market uncertainty has continued. It's driven by continued fears of further increasing interest rates, inflation rates and also increasing geopolitical tensions in Europe. Simplified, the effect it has is higher return requirements, decreased valuations, and in some cases, less availability of financing. We see this especially in the real estate market. It's also impacting private equity and infrastructure. But in the lower mid-market where we are active, we see less of an impact. Overall transaction market is slower. It takes longer for buyers and sellers to find consensus and the fundraising market has slowed from its peak years in '21 and '22, and we see processes taking longer, decision-making taking longer. We take proactive measures to drive our performance, and we have good development on several key metrics. Our fee income and fee profitability continued to grow. We had a 5% growth in turnover, excluding carry, and we had a 14% growth in fee profit, so in EBIT excluding fair value and carried interest. And the strong growth in fee profit is a combination of, of course, turnover growth, but that combined with a moderate cost increase and cost control. Another important area for us is delivering attractive fund returns, and here, we have continued to execute on our investment strategies. We have done 5 investments and 3 exits during the period. And we have for CapMan recorded EUR 2.8 million in carried interest. That's from exits in the growth fund. And we expect more carried interest over the next 12 months from ongoing exit processes. Our funds also continue to perform well. We had a 3% positive fair value change in our own investments in our funds. That's driven by private equity and infrastructure strategies with a neutral contribution from real estate. In a more challenging fundraising market, we still see continued investor demand for our products, and we have, during the first half, raised EUR 200 million of new commitments to our strategies that goes across private equity, infrastructure and real estate strategies. Our key figures for the first half year, we have a turnover of EUR 32 million. It's flat compared to last year, but turnover, excluding carried interest growing with 5% to EUR 29 million. EBIT, excluding carried interest and fair value changes, so fee profit at EUR 5 million and a 14% growth compared to last year. Our assets under management are at EUR 5 billion. That's at the same level as beginning of the year. We have EUR 200 million of new commitments coming in, but at the same time, we have a negative impact from completed exits and negative fair value or asset value changes in especially residential funds, and these 2 net each other out, and our balance sheet and cash position continue to be strong. A short recap of our business and earnings model before we go into the more detailed financials. So CapMan is the home for specialized mid-market investment teams supported by a joint platform with experts. The majority of our business is management company business where our teams manage funds across real estate, infrastructure, private equity and credit and also wealth management services. We have a service business in caps, procurement services. From these businesses, we get management fee and service fee income, and we also get carried interest from the managed funds when we do successful exits. In addition, we have a EUR 200 million balance sheet that we invest primarily in our own funds, but also selectively in other private market products. And the impact you see from these investments on our profit and loss is the fair value changes of these investments. If we start then with the predictable stable core of the business, the fee income, as you can see, over the past 3 years, fee income has grown with an average annual growth of 14%. And we have increasingly steady contribution from carried interest. If we look at EBIT, excluding fair value changes, an even stronger development. So EBIT without carry at fair value and average annual growth of almost 30% over the past 3 years. And also here visible, the contribution from carry becoming more and more steady. With a continued top line growth and also improving profitability, our cash flow is also on a positive trend and improving. It's by nature lumpy. For example, related to when transactions giving carry when they are closed and when in time they happen. But the trend is clearly a rising one and our position now at the end of this period, is, for example, almost double to the cash position we had a year earlier. If we then look at our turnover and profitability for this period, turnover of EUR 31.6 million, flat from last year. But you also see an almost continuous growth curve over the last 4 years. When we look at EBIT, this period, EUR 4.7 million, here, you also see clearly larger swings between the periods. For example, 2020, when the COVID pandemic hit, we had a negative EBIT for the first half compared to last year's record level of EUR 33 million and now at EUR 4.7 million. What's driving these swings is the fair value changes of our investments. They have no cash impact, but a relatively large impact here on the result. And what they hide under them is that continuous growth of fee income that is more or less following the turnover development. And that's also clear when we open up the EBIT in more detail for this period. So if you look at the components, starting from the left-hand side, management fee profit, service profit and related costs from investment business and platform, we land at a fee profit or EBIT, excluding fair value and carry of EUR 4.7 million, a healthy growth to last year's EUR 4 million. For this period, EUR 2.8 million of carried interest from exits in the growth fund. These are inherently uncertain in timing when carry happens, and we expect more carried interest over the next 12 months from ongoing processes. But for this period, fee profit and carry taking us to an EBIT excluding fair value of EUR 7.4 million. Then for this period, a negative fair value change of EUR 2.7 million taking us then to an EBIT of EUR 4.7 million. And a large difference to last year really coming from the fair value changes, where we then had a positive 24 compared to the now just below EUR 3 million negative impact? If we break down that fair value change even further, what we can see is that our own funds continue to perform well. We have a positive EUR 3.7 million impact from our own fund investments. That's driven by private equity and infrastructure, and from real estate, a neutral impact from value-add on hotel real estate developing positively, and income-related real estate strategy is slightly negative. What's really pulling the fair values down is our investments into external funds, and here especially our external venture capital fund investments. They had a negative development in Q1, and unfortunately, that continued into Q2. So in total, for the half year, a EUR 6.4 million negative. Adding these 2 up, we then end up at a negative EUR 2.7 million, which can be put in perspective in that this is roughly 1.6% decline in our investments. So in that perspective, still a fairly stable or small change, but obviously here, significant numbers. Our balance sheet continues to be strong. We have an equity ratio of 46%, and we have available liquidity of EUR 63 million in cash and undrawn credit limits. The strong liquidity means that we can commit -- kind of fulfill our commitments to our investments, and we can also continue to support growth of our business. And in general, a strong balance sheet in these market conditions gives us financial stability to continue with our operations. Our balance sheet investments are diversified across private markets. Majority is into our own funds, but you can also see external venture capital funds and fund of funds. Total value of these investments at the end of period, EUR 167 million, and we had undrawn commitments of EUR 82 million. This EUR 82 million will be called down over several years, and they can be compared to the EUR 63 million of liquidity that we have available, showing that we have ample headroom to meet our commitments and also for future commitments. Moving then to strategy implementation. We have set our vision to become the most responsible Nordic private asset company. What it means for us in this economic environment and also a regulatory environment that's rapidly changing is really that through active ownership, we can drive transformation. In private equity, in small and mid-cap companies, it means accelerating growth with sustainable business models. In infrastructure, it's around supporting green transition and sustainable operating models. Within real estate, an opportunistic and value-add real estate, it's really around transforming assets, extending life spans and introducing energy efficiency and green building practices. In the more core real estate, it's around improving asset utilization and efficiency. When we do these things across our investments, we drive financial returns for our investors, but at the same time, we create sustainable impact. So we can combine, create sustainable value for our fund investors, for our shareholders, but also for the broader society. Our strategic focus areas remain the same. It's building on developing our competitive advantages, delivering top investment returns through active value creation. It's integrating ESG sustainability as a core theme in everything we do, and it's developing CapMan as a home for top performers, making sure that we attract and retain the best people in the industry. When we succeed in this, we can drive growth, both through scaling up existing strategies and products, and also exploring new products and potential acquisitions to accelerate the agenda. The overall objective naturally, to drive shareholder value, and with this strategy through a combination of growth and improved earnings quality and an ambition to double assets under management to EUR 10 billion. A couple of highlights from these areas from the period. Starting with the fund performance. On the transaction side, we have continued to execute on our strategies, both with the investments and exits. We have 5 new investments for the period. The latest ones being Serverius and IT infrastructure company, the Nordic Infrastructure II made an investment and Silmäasema, our Growth II fund, invested. On the exit side, 3 completed exits, the latest 1, Coronaria, an exit from the first growth fund and also contributing carried interest for this period. At the moment, we have 2 funds in carry at the moment, growth equity and Nordic real estate. There are several assets remaining in both of these funds, and it means that every exit we do from these funds will contribute carried interest. We also have several funds in value creation and exit phase, which means that they are transitioning towards carry. And we expect more carried interest over the next 12 months from ongoing exit processes. But as usual, timing for these is always uncertain. Moving then to the theme of sustainability. And we released our sustainability report for last year just before summer done in accordance with the GRI standards. We see good progress on several targets. Within environment, we strive for climate resilience and resource efficient operations. We have set emission reduction targets that have been validated by the science-based target initiative. For last year, we saw a 17% growth in our Scope 1 and 2 emissions. That's towards a baseline of 21 when we still had a large COVID impact. Regardless, our target is to reduce emissions by 51% by 2032. Our share of renewable electricity also grew. Within social, we strive for meaningful work in a diverse and inclusive workplace, and we have a stable, relatively good share of women in management group and share of women as all employees at 36% and 40%, respectively. Within governance, accountability, transparency and executive level diversity, a stable share of 33% of women on the Board of Directors, and we have done work to link ESG targets into our performance share plans and variable remuneration. These same sustainability targets are also extending into our portfolio and into our investments. Also there, we see good progress during last year. On climate, within private equity and infrastructure, 11% of our portfolio companies have now set and validated the science-based targets, emission reduction targets and the target that more than half will do so by 2027. Within real estate, the target is to reduce emission intensity both in residential and commercial real estate. As a whole, we reduced intensity during last year, driven by commercial real estate, taking down emissions, almost 30%. With a meaningful work in a diverse and inclusive workplace, we have a good average employee engagement in our portfolio of companies, 76 out of 100 as an average score. And during last year, we created more than 2,500 net new jobs in our portfolio companies. On the real estate side, a good tenant satisfaction with an average of 3.7 out of 5. On accountability, transparency and executive level diversity, we have a stable share of women on portfolio company boards, and we have an increasing share of companies that have linked remuneration to ESG targets. In addition, in this area, there's a lot of basic work in making sure all portfolio companies have the required policies and practices in place for running a good -- in accordance with good governance. Sustainability is an ongoing work. And in the portfolio, it's really a work that goes hand-in-hand with our financial value creation plans and continuously evolving and improving. Moving over to our growth and assets under management. At the end of the period, assets under management of EUR 5 billion, that's flat from the beginning of the year. Despite the challenging fundraising environment, we have raised EUR 200 million of new commitments that goes across private equity, infrastructure and real estate strategies. And that obviously increases our assets under management, but at the same time, we had a decrease following completed exits and a negative net asset value change primarily in our residential strategy, ending then at a EUR 5.0 billion at the end of the period. Going forward, we see good possibilities to continue to grow our assets under management. We have several fundraisings ongoing, and we also have several funds coming to the market within the next 12 months. The foundation for successful fundraisings is really like we continue to deliver attractive returns to our investors in the funds. We have a good foundation to do so with the setup we have with specialized investment teams and an active value creation approach. In addition, we have a very solid LP base in majority being international institutional investors who take a very long-term view on their investment strategy. They are less impacted by short-term market changes, this for example, we've seen that our investors have committed more into the residential fund during this period. And then as a third thing, the fact that we have a very diversified strategy with several investment strategies and products gives us stability in these market situations, both on fee income and in assets under management growth, whereas some strategies have more challenges in the current market environment, the same market environment offers opportunities and favorable situations for others. And that way creating a stability overall in our portfolio. A short recap of our long-term financial objectives, objectives to strongly grow our management company and service business, having a return on equity above 20% and equity ratio above 50% and distributing annually growing dividend to our shareholders. Our outlook estimate for 2023, we keep unchanged. We expect assets under management to grow, and we expect to grow operating profit, excluding carried interest income and fair value changing compared to last year. And with this, it's time to round up the presentation. Thank you for your attention.