CapMan Oyj (CAPMAN) Earnings Call Transcript & Summary

Good morning, and welcome to this presentation of CapMan's Half year 2024 Financial Results. My name is Charlotte Wessman and I'm the Communications Director of CapMan. And presenting today, we have Pia Kåll, CEO of CapMan. [Operator Instructions] I hand over to you, Pia.

Thank you, Charlotte. And welcome also from my side to this CapMan First Half Year 2024 report. During 2024, we have continued strong growth and profitability improvement. Our assets under management are now at EUR 5.8 billion, a record high. It's a 16% growth compared to the year-end. And the growth is mainly driven by our acquisition of Dasos Capital and successful fundraisings in Infrastructure II fund and in the Growth Equity III fund. Assets under management is the key driver for our turnover fee income and also carried interest. Turnover in first half year also grew with 16% compared to last year. In profitability, we see an even stronger improvement. We have positive development in all main components of our EBIT. In other words, fee profit grew significantly, carried interest was on a higher level than previous year and also fair value changes positive contributing to a comparable EBIT of 14.4% or 3x last year's first half results. We are an active value creation -- we are an active business builder and it means that through the investments we make from our funds and the value creation we do during our holding period, we are building the society that we want to see in the future, in line with our vision to be the most responsible private asset company in the Nordics. To our fund investments, we are impacting the Nordic economies and societies on a significant scale. We are developing human-centric sustainable real estate. We are currently the owner of 222 properties with more than 10,000 tenants. Through infrastructure and private equity ownerships, we are part of the green transition, we're part of building growth and creating new jobs. At the moment, we have 44 portfolio companies in our funds with a total of more than 13,000 employees. We're also one of the largest private investors into timberland in the Europe and manage natural capital in a responsible way in a portfolio of more than 240,000 hectares of land. In our business model, we have 2 main business segments driving value. Our Management Company and Service business is where we manage institutional investors, funds and invest those. The key value drivers there, fee profit from the management and service fees and carried interest when we do successful exits from our funds. Our second -- segment, Investment business is where we invest CapMan's own balance sheet, primarily into our own funds to drive growth in our Management Company business and for shareholders, creating shareholder value through investment returns on these investments. If we look at the financials for these segments, the key numbers, we see strong development across the board. Fee profit for the first half of the year at EUR 7 million is a 50% growth compared to last year's same period. Carried interest, by nature more volatile as we record it only when transactions happen, exits happen and the carried interest actually is achieved. This first half year EUR 3.8 million, primarily from our credit fund and a EUR 1.1 million increase if we compare it to last year's first half. In our Investment business, the fair value of our investment into private assets at the end of June, stand at EUR 162 million. The fair value change for the first half year on these investments, a positive 2%. Here, the underlying dynamic being that our own funds developed very strongly in private equity and infrastructure and credit. On aggregate, our own funds contributing more than 5% fair value increase. Whereas our external funds, especially venture capital funds had a negative development on aggregate then a EUR 3.5 million positive or 2.2% positive development. If we look at each of these components in more detail, starting with the management company, service business, looking at the fee income, fee profit growth last 12-month averages for the last 3 years, we said that fee income has been growing at 10% per year on average during this period, it's primarily driven by the growth of assets under management. In fee profit, we have an even stronger development and relative profitability is improving and especially an uptick now in the first part of 2024. Here, average annual growth on fee profit, 17% over the last 3 years. Also carried interest and its impact growing over time as our assets under management grow. Moving then to our Investment business and our balance sheet investments. Our total balance sheet of EUR 211 million, out of that, EUR 162 million is the value of our investment into private asset funds. We have a good diversification both across asset classes but also across vintage years and it means that we, over the coming years, expect a positive cash flow from these investments, more distributions than capital called to new investments. We have a certain share of the balance sheet invested in external fund investments, primarily venture capital funds that are not managed by CapMan, the main focus of our balance sheet investments though are to support CapMan-owned management company business and CapMan-owned funds. So at the moment, we are not contemplating new investments into external funds. If we then look at how these investments have developed over time, it's a long-term business and inherently, there is volatility, especially between quarters, but also across years. If we look at the last 3 years, though, we've had, on average, an 11% positive fair value change in our investment, which is in line with our target between 10% and 15% depending on the allocation. More close term, if we look at the first half year, our fund investments had a fair value change of EUR 3.5 million. That corresponds to 2.2% fair value increase, where our own funds contributed EUR 5.5 million, where especially private equity infrastructure and credit funds contributed strongly. Real estate had a more flat development, which is more in line with the market that's still recovering, but competitive compared to the market development. External funds specifically or external venture capital funds had a negative development of EUR 1.9 million, thus taking down the total to EUR 3.5 million. This is though, a normalization and a clear improvement compared to last year, where we had a total negative fair value change for the first half year. If we add up these earnings components, we see improvement across the board and our comparable EBIT at EUR 14.4 million, actually being almost 3x the EBIT we reported for last year's first half year. Fee profit at EUR 7 million is a 50% improvement to last year, carried interest at EUR 3.8 million, also almost 40% improvement compared to previous year. But obviously, here we have inherit the volatility between years. It still takes us to an EBIT excluding fair value changes and EBIT from our management company and service business of EUR 10.8 million compared to last year's EUR 7.4 million. Add to that, the positive fair value changes and we are at the EUR 14.4 million to be compared to last year's EUR 4.7 million. So a strong development during this first half. Our balance sheet remains solid and goodwill liquidity. Equity ratio is above 50%, so on target level. And if we look at liquidity, cash at bank and undrawn credit limit of almost EUR 70 million, we have the liquidity needed to support our business and our investment to grow also going forward. Looking then at our strategy implementation. The market has continued subdued also into 2024 after the slowdown we saw in '23, we continue to our growth strategy with the objective to reach EUR 10 billion in assets under management during the strategy period. We delivered -- we're building it on our competitive advantages, delivering top investment returns in our funds through active value creation. And here, as mentioned, during the first half year, very positive development across our funds, competitive development in all investment areas. We integrate sustainability as a core theme in all our activity. And as it is a people business, we developed CapMan as the home for top performers so that we can attract, develop and keep the best people in the industry. Growth is coming through 3 drivers, making sure we are the preferred Nordic partner for institutional fund investors, scaling existing products and launching new products and also selectively looking at acquisitions like Dasos Capital that was completed earlier this year. Some highlights from these focus areas. If we start from the transaction side. So the transaction market in general into '24 has continued roughly on the same level as at the end of 2023, so on lower levels than what we've seen in the previous years. We have been able to maintain a good activity, both in new investments and exits and this is driven by good value creation in our funds and active development in our funds. On new investments, we completed 7 new platform investments during the first half year. That can be compared to an annual average of 13 new investments across the last 10 years over the cycles. It's our real estate team that's been active both Nordic Real Estate III, Social Real Estate and Residential, and it's also our Growth III fund, making a first investment into Tana and special situations investing into terabytes. When we look at the exits, 6 exits completed during this first half year, again, comparing it to the average annual that we've had over the past 10 years of 7 exits, it is on a very high activity level. Here, the Danish real estate team making 2 exits, our credit net capital fund, 2 exits and also buyout exiting 2 assets during this first half. When it comes to growth, we have executed on all 3 growth drivers. We have been scaling our existing products with CapMan Nordic Infrastructure II having a final close in April at EUR 375 million, that's a doubling of the size of the first fund and also demonstrating the attractiveness of the strategy for international investors with 70% of the capital coming from outside of the Nordics. CapMan Growth III had their final close also in April, keeping the hard cap of the -- sorry, the maximum size of the fund at EUR 130 million after a very fast fundraising process. We've launched new products with CapMan Social Real Estate being launched around year-end, targeting EUR 500 million of equity over the coming years and already 2 investments made within Helsinki and in Copenhagen. We've also executed on the inorganic growth, establishing CapMan natural capital as a new investment area after the acquisition of Dasos Capital that was completed in March. The investment area already has some EUR 700 million of assets under management. Looking at this growth from our investor base perspective, our investor base continues to grow and internationalize half of the EUR 5.8 billion that we are managing is coming from outside of the Nordics. When we look at the type of investors, it's really institutional investors, pension funds, asset managers, private investment companies that form our investor base. And also, when we look at new capital raised during this first half year, roughly 1/3 of it from Finland, the rest of it from outside of Finland, similar type of -- type of investors. With this growth, assets under management are on a record level of EUR 5.8 billion, driven by both these fundraisings and also the acquisition. Comparing that to our target of EUR 10 billion assets under management, we are on the growth path to reach that. And then when we also look at the funds we have opened in the market, naming fewer; Residential fund, the Social Real Estate fund targeting EUR 500 million, the Nordic Real Estate IV fund, flagship funds, starting fundraising, targeting a final close of EUR 750 million. We have the Dasos sustainable timber wood -- fund open targeting new investors all the time. We see that it is realistic to meet our growth target. CapMan's long-term financial objectives remain unchanged. For the first half of the year, our management company and service business grew 14%, in line with our target of 15%, return on equity at 16%, close to our target or 20%, equity ratio above the target of 50%. And the distribution policy remains to pay sustainable distributions that grow over time. So in practice, paying out the fee income and the fee profit and the carried interest that we generate from our Management Company and Service business and excess from the Investment business. The outlook estimate for the year, unchanged. We estimated that assets under management grow in 2024 and also that the fee profit will grow compared to last year. After a strong development in both of these during the first year, we're in a good position to reach these targets. Thank you.

Thank you very much, Pia. And now I welcome also Atte Rissanen, CFO at CapMan for the Q&A session. [Operator Instructions] First, maybe we have some questions from the audience.

It's Jukka-Pekka Pesonen from Nordea. So one question about your personnel expenses. We saw that they increased year-over-year in Q2. Of course, some of them could be attributable to Dasos, but could you explain, is there anything else driving the personnel expenses growth, for example, the new -- the closures of the funds? Or is it -- is this like the new run rate for the Management Company business?

I think the more relevant figure, to look at, is really the H1 costs, so the costs incurred during the first half of the year. When you look at that on a comparable basis, you can see that our entire cost base is up 7% year-over-year. And some 50% of that is attributable to Dasos. So that means that our sort of CapMan excluding Dasos costs, up 3.5%. But of course, there's some variance between quarters as we saw, it was a very good fee profitability quarter in Q2. So that's, of course, linked, to some extent, to variable remuneration also.

Okay. Perfect. One question about overall the transaction market situation. Could you give us an overview if there's any signs of improving activity in the transaction market or...

So I would say that it's continued. We could say, roughly on the same level where we ended '23, so that means that it's somewhat better than where we had in the beginning of 2023. So during last year, it picked up towards the end of the year. And we basically, I would say, stayed on that level. Now -- but we haven't really seen a major change in the transaction activity in the market in general yet. That said, of course, there's investment opportunities and depending on the strategies, so, both in private equity and in infrastructure, there are things moving. Real estate is still more subdued than what it has been. So I would say no major change yet. But it's may be looking to slowly start to brighten up.

This is Kasper from Inderes. How much of the growth in management fee is explained by the catch-up from final closings? Would you give us a somewhat rough estimate at least.

So management fees during the first 6 months, up EUR 3.5 million. And of that amount, we could say that retroactive fees amounted to some 1/3.

Thanks. Just checking that the average fee margin should slightly improve after the closing in Infra II fund.

Yes. Of course, it depends on the product but infra being a higher fee sort of product compared to the average. So of course, when Infra has a successful closing, that impacts the overall.

And just to check the carry-in in second quarter came completely from Nest.

In the second quarter, we received carry from our old legacy access funds. So those that were divested more than 10 years ago, but still some carry tails that come to CapMan.

Then we take some questions from the webcast. M&A is an agenda and how does that look for second half of 2024?

M&A remains on the agenda as it has been but it also remains something that is very, very selective but we need to find the right teams, the right product and the right timing. So timing there is very, very difficult to say but there are discussions ongoing as there's been all the time.

Are there any group-wide ESG initiatives for second half of 2024?

There are group-wide ESG initiatives or sustainability initiatives continuously and they are usually longer than just a half year. So when it comes to our emission reduction targets, reaching a science-based target, initiative targets both in real estate and private equity infrastructure. That continues. That's also the link -- sustainability link that we have in the latest bond that we issued. Work with diversity equity inclusion continuous. Human rights across the portfolio continues. So the whole scale continues. And I think a lot of the work is really implementation work, really making it happen in the portfolio. So it's slow going till we really get the impact there. And primarily now we focus on what we have launched and continuing that.

What would be the #1 reason for investing in CapMan right now?

I think we have a very attractive growth outlook and it's supported by both the growth in the Management Company business, fee profitability, relative both growth and then relative profitability improving there. Also when assets under management grow, the carried interest potential grows. And then in addition, the benefit from the investment returns when we invest in our own funds. So I think those 3 components all have a positive trajectory, which makes it a really good shareholder value creation.

Can you briefly explain how would rapidly decreasing market interest rates impact CapMan's result and the key business areas?

Sorry, the rapidly...

Decrease in market interest rates.

So if Interest rates would rapidly increase, I think in most investment strategies, the increase that we saw and equally a decrease is actually on the returns we've been able to manage it quite well. But it probably would lead to, is that transaction markets would pick up faster. And I think that, as an add-on would then mean that also the fundraising market would pick up faster than what we see happening right now. Trade would be positive but also with a stable level where we are now, I think that the market will start to recover over time.

And without Dasos acquisition, the IM is roughly 2%. Are you happier with that? And do you see faster growth at second half year?

When we look at the assets under management growth, what I'm happy with is the fundraisings that we've been able to achieve over the past 12 months. There, we've taken in some EUR 400 million or more in new capital. What's impacting the assets under management is then also where you have, especially on the real estate side, net asset values that have gone down when the total market valuations have gone down. And that's, of course, decreasing our assets under management. And the net impact there is then that 2%. But what I'm happy with is that fundraising is continuing. We're attracting new investors and our current investors are loyal and that's the key driver for future growth.

And I think you need to keep in mind that it's never a linear growth when we talk about assets under management. It's dependent on the timing of fund closings. There weren't any fund closings taking place in Q2 with the exception of the Infra and Growth, which were already communicated in connection with Q1. So I would be quite surprised if there would be significant inflows of capital without fund closings being held, but fundraising is progressing.

Cash flow is important for investors, but are there other values that CapMan emphasizes when investing in portfolio companies.

While investing in portfolio companies specifically in our private equity strategies, they have very different focuses. So growth going with minority stakes in growth -- fast-growing companies, [indiscernible] small, but kind of [indiscernible] stage companies as well. When it comes to special situations, they go in, as their name says, in special situations where we might have tricky situations also where cash flow is not good and the company really is in help or need of a restructure, et cetera. So cash flow is not always what's determining it. It's really -- what we look at is from the point where we get in as an owner, can we, together with management, create value so that we exceed the returns that our investors are expecting and the situations can look very different.

How do you view the current level of operating expenses relative to revenue? And do you have any plan of cutting costs going forward?

I think that's also linked to the first question regarding the costs during H1. As mentioned, 7% up year-over-year. And of that 50% attributable to Dasos. So 3.5% increase in operating costs during the first 6 months compared to revenue growth of -- well, fee income growth of EUR 4.1 million. So the operating margin is notably improving as we speak. So in a sense, of course, we are looking at cost control every day. And I think we're making progress in that -- is visible also from the even the step change in the profit level.

And regarding forest, do you view forest investing as a lucrative market? Could we see new investments in this front in the next 12 months?

So when it comes to timberland investments, I mean, the natural capital team is continuously looking at new investments and doing add-on investments into their portfolio and raising new capital to make new investments. So there's a continuous activity going on there. And we need to remember they have a European portfolio. So yes, there are attractive opportunities in the markets all the time. And I would be surprised if they would not make acquisitions during the second half of the year, continued normal business.

And regarding infrastructure, on a general level, what kind of new opportunities do you see in CapMan infrastructure and then a new potential growth segments.

The Infra has had a very -- very good deal flow throughout. And I mean they have 3 main focus themes that they invest along; digitalization, energy transitions and data centers or digitalization. And I think in all 3 of those, what I hear from the team, there is a good inflow of new cases continuously.

And last questions from the web audience. Second part of the dividend is unpaid. When can shareholders expect to be paid?

I think it's communicated that the decision is expected to be made by the Board in connection with the September meeting. So mid-September.

Any additional questions from the audience? And there are no more questions and thank you for today.

Thank you all.

Thank you.