Eurazeo SE (RF) Earnings Call Transcript & Summary

Hello, and welcome to the Eurazeo Financial information H1 2023 results. My name is Caroline, and I will be your coordinator for today's event. [Operator Instructions] I will now hand over the call to your host, Mr. William Kadouch-Chassaing and Mr. Christophe Baviere begin today's conference. Thank you.

Thank you very much. Good morning, and thank you for joining our H1 results presentation. Thank you for the interest you take in our company. This presentation will have 3 parts. First, key highlights for the first half. Second, we talk about operational performance. Third, we talk about financial performance. We will then be available for a Q&A session. Let me start with the key highlights. As regards financial highlights, let me remind you that we changed the qualification of the company at the start of the year, and this is the first time we are reporting under the IFRS 10 exemption. Eurazeo net results for the first half stands at nearly EUR 1.8 billion with 3 factors behind it. First, we continue to grow our asset management business at a steady pace. Fee-paying AUM are up 16% year-on-year, and fee-related earnings are up 37% at EUR 69 million. The contribution of the asset management activity amounts to EUR 64 million for the first half, up 45% year-on-year. Second, the value of our portfolio is stable at around EUR 8 billion, with a slightly negative mark-to-market of EUR 27 million. We maintain a cautious approach to valuation in spite of good underlying operational performance of our portfolio companies and supportive valuation benchmark. As you can see, the per-share value of our portfolio increased by 3%, nevertheless, partly thanks to our share buyback program. Third and last, we have 2 exceptional items in H1, one positive at EUR 1.9 billion, stemming from the impact of the change in IFRS Coalification as I said, which was already announced in Q1 and one slightly negative with EUR 74 million loss resulting from the unwinding of the Rhone partnership. On nonfinancial, we continue to strive, as you know, for leadership in ESG. And as a case in point, we made further progress. The share of AUM that we qualify as impact is up 8% to reach EUR 4.7 billion at the end of the first half. As you know, we have a great believer that impact will become increasingly a driving force in our fundraising. Let me update you on key decisions taken in the past 5 months since Christophe and I took over as co-CEOs of Eurazeo. These decisions are milestones to achieve our objectives, which is to create the European-based leader in private markets on mid-market growth and impact. First, we took decisions on organization and people. We adjusted our organization to reflect our strategy to operate as a full-fledged and scalable asset manager. We renewed leadership in some key investment teams and functions. And as you know, together with our stakeholders, we adapted the remuneration structure of the Executive Board that is now more aligned with shareholders' interest. Second, on strategy. We announced that we would review our minority stakes. We announced today that we have just disposed of our 30% stake in Rhone. The decision on MCH will be taken by the end of the year. On top, we are also assessing the midterm potential of all key investment strategies and will communicate at the end of the year. Third, on efficiency. We have launched key initiatives such as merging management companies that will simplify greatly our organization, investing more strongly in our digital road map and harmonizing operations across the company. Finally, we took the decision to change materially and improve our financial reporting. We also published today on top of the new qualification of the company. We also published today new KPIs with the performance of a selection of our funds, which you will find in the appendix. I now hand over to Christophe, who will comment on the operational performance for H1.

Thank you, William. So let's start with asset management KPIs. Total AUM are up 3.5% over 12 months. But third-party AUM are up 7% with balance sheet AUM growing at a lower pace. A double-digit growth in fee-paying asset management, which are up 16%, thanks to our recent fundraising and deployment in some asset classes. Turning now to fundraising. As you are all aware, the current environment for fundraising has become more challenging in the short term. LPs are taking more time to allocate their funds given a slower pace in asset rotation and distributions. The impact of the denominator effect and caution on rate hikes. The latest data available points to a market decline in fundraising for the European market of 17% to 20% in the first half of this year. In this context, we raised EUR 1.3 billion over this period, down 15% for the same period last year. Private debt again recorded good inflows, both in direct lending and in corporate loans through a program called [indiscernible]. In private equity, we collected funds mainly in venture and in secondaries and ongoing funds. We just announced the final close of the Smart CT2 program above target at EUR 400 million. Wealth management inflows remain a strength for our group. We raised around EUR 350 million in H1, around 27% of the group's fundraising for the period. We expect this segment to remain dynamic, thanks to the new partnerships we recently signed like CNP and [ LaBonte Postale ], Boursorama, Allianz, [ Belgium and Aptiv ]. I just mentioned that private is currently doing well. Allow me to give you a few highlights on the strategy, which represents nearly 20% of our assets under management, we are one of the leaders in Europe on the mid-market segment. Our particular trend here is clearly direct lending with promising development in asset base and corporate financing. For direct lending franchise benefit from a strong positioning with our mid-cap focus. As you know, the ongoing disintermediation of banks and financing tools fully based on floating rates offers a very favorable risk-reward profile for investors. Take or less vintage, which is called Eurazeo Private Debt VI. We are on track to reach our EUR 2 billion target, let's say, during this autumn. Our target net IRR is between 9% and 10%. The default rate of the portfolio is very low at 0.3%, and the low loss ratio is basically 0%. This is due to the fact that we are financing strong cash-generative companies backed by blue-chip sponsors. We are also able to continue to deploy capital at a good pace. This enables us to be very selective and this bodes well for our future fundraising. A word now on asset rotation. As you know, the M&A market is currently slow due to macro uncertainties on rates and on the macro economy. According to Pitchbook, private equity deals in value are down 54% year-to-date in Europe, and this is even more on large deals. Private deals are down 35%. That being said, the need for private capital remains very high, especially in key segments like infrastructure, energy transition and in the digitalization of our economy. In this context, we continue to be extremely selective on investment with deployment of EUR 0.9 billion in H1 compared to EUR 1.7 billion for the same period last year. That's a decline of more than 40%. Realization proved more resilience and are down only 32% in H1. Conditions remain healthy for quality mid-caps, which is Eurazeo, core focus, and we have a good pipe of potential exits, especially in the small mid-cap component of Eurazeo investment strategy. The underlying performance and this is a key element, the underlying performance of our portfolio companies remain solid on average, revenues of our PE and real asset portfolio, excluding roads are up 14% in H1. EBITDA is up 13%. The revenues of our growth companies are up 15% in H1 with the bulk of our investments on posting revenue growth in the 20% to 30% range in the context of a stronger focus on improving profitability. Thank you. I now leave the floor to William for our financial results.

Thank you, Christophe. Let me start with the contribution of the asset management business. As I said, we continue to enjoy steady growth. Management fees are up 13% in H1. Third-party management fees are up 3% in the first half. Adjusted for base effects, notably catch-up fees of about EUR 10 million in H1 '22. Gross of third-party fees would stand at 9% and total management fee growth would stand at 19%. This is more in line with the growth you see in third-party fee-paying AUM. Fee-related earnings for the first half of 2023 are strongly up at 37%. They stand at EUR 69 million. This results from the combination of management fee growth, as said, and a very strong discipline on cost, enabling a positive dose effect. During our Q4 results, we guided you towards strong growth in FRE for the year. As you can see, we are on track to meet this target. Let me stretch and you can see that on the chart, right-hand side of the page, that we further increase our margin, our FRE margins in H1 stands at 33.5%. It is up 200 basis points relative to end of the year 2022. And this is trending towards our midterm target of 35%, 40%. As you can see on the chart, we have steepened the increase in the margin over the past 2 years. Our Asset Management business in a nutshell posted a contribution of EUR 64 million. This is up 45% year-on-year, again, thanks to strong positive jaws effect. The level of performance fees remains low due to limited realization on the portfolio currently. This is a market-wide issue, as you know. In addition, we expect performance fees to pick up in the next years due to the maturity of our fundraising. In the medium term, as our funds are maturing, we indeed should enjoy a level of PRE as a percentage of our total revenues, more comparable with peers. Let me now run you through the results of our investment activity, starting with the change in fair value of our portfolio, which has become, as we said, the main driver of the P&L for our investment activity with a new IFRS accounting norm. Before I comment on the evolution pertaining to Eurazeo, let me comment on the context of the first half. As a matter of fact, we benefited from a rather favorable dynamics for the valuation of our portfolio in the first half. First, as Christophe already highlighted, we have a solid underlying operational performance of our portfolio with double-digit revenue and EBITDA growth. Second, we have indeed supportive valuation benchmarks, public market multiples have trended upwards since the beginning of the year, both on the broader market and even more so in the tech space. Finally, as we highlighted a few quarters ago, we continued to enjoy a limited sensitivity to interest rates for the valuation of our portfolio as we have implemented a conservative hedging policy. Nevertheless, this is the next page. As highlighted before, in spite of this rather favorable context for valuation, we maintain a cautious approach to valuation in H1, leading to a slight decrease in fair value of $27 million or minus 0.3%. In a nutshell, portfolio valuation is flat in absolute terms and post a small increase on a per share basis, thanks largely to the share buyback program. The main reason why we decided to remain cautious on valuation is a slow M&A and capital market environment, as Christophe highlighted. There are too few exits we consider in the market to take a more positive stance on valuations we see. Now should you only take the underlying portfolio performance, you will easily get a plus 5% increase. This equates to EUR 384 million due to the underlying performance I mentioned. This is offset totally by valuation metrics we use for minus EUR 392 million. We have EUR 132 million of change in scope. And in total, the value of our portfolio in absolute terms is up 1%, EUR 8 billion, and the value per share is up 3% at EUR 103 per share. In a nutshell, the contribution of the investment company, the next page, stands at minus EUR 74 million, of which, as I said, EUR 27 million of change in fair value of the portfolio, EUR 61 million charge from management fees, which offsets the same amount recognized as a plus in our asset management business revenues. Other items include some transaction costs and the cost of financing of the holding company are rather insignificant. Now to summarize, you can see the group IFRS profit and loss. We posted EUR 1.8 billion net results for the first half, with again, first, a positive contribution from the asset management activity at EUR 64 million, a negative contribution from the investment company at EUR 74 million and EUR 1.8 billion of nonrecurring items, as I said, a positive gain of EUR 1.9 billion due to the first time application of the IFRS 10 exemption and a negative impact of EUR 74 million stemming from the sale of our 30% stake in road. On the balance sheet, let me say that again, we end up a period with a significant financial headroom. Our net debt remains very muted at 5% financial gearing, EUR 426 million, and we have $7.4 billion of dry powder, of which EUR 5 billion from our limited partners. To wrap up, we operate, as Christophe highlighted in a more difficult environment, for fundraising and asset rotation. In this result, we consider our results are satisfactory. We continue to grow our asset management, improve the margin of our business and our portfolio valuation is stable at EUR 8 billion. We remain very confident about the strength of the underlying fundamentals of private markets and more specifically on the potential of Eurazeo. As I mentioned, we have launched some key initiatives and we will present to you our midterm road map and financial trajectory during the Capital Markets Day on November 30, 2023. Thanks for your attention. We'll now be available for questions.

[Operator Instructions] We will take the first question from Alexandre Gerard from CIC.

4 quick questions on my side. The first one is related to the rise in management fees, which is mainly driven by your sales investment activity with management fees from third-party clients being up 2%. Can you come back at that point? Or is this so low? And what can we expect for the second half? Second question is related to sterling costs and other costs, we are also significantly on the rise. Why can you come back on that point? The third question, it's obviously related to the fundraising. We do understand the slowdown due to the complex environment. But what can you expect for the full year? And with the major funds that you have on the road, can you come back to that? And the last question is related to what you state on the first slide of the presentation when you talk about ongoing assessment of key strategies besides on and MCS, are there other assets that could be disposed?

Thank you. So I'll take question 1, 2 and 4 and Christophe will comment on fundraising. Rise in management fees. As I said, if you focus on the third-party management fees, adjusted for the base effect I mentioned, they are up 9%. And as you can see, the fee being AUM and third parties are up 11%. So in the context, it remains a quite satisfactory metric. Now the reason why we have a 45% increase in balance sheet-related management fees for the first half is largely due to the fact that the decision on the commitment from the balance sheet to our flagship mid-large buyout fund, which is significant. It's EUR 1.8 billion commitment overall was made during the period. So this creates, I wouldn't say one-off, but the specifically important move. So you should not expect such movements in the next quarters. Now with regard to steering costs, let me remind you first that we are amongst those people who have an investment company amongst the most conservative in terms of allocation of transversal cost to the holding versus the asset management. In other words, most of our cost base is allocated to the asset management. This is close to 92% of the cost base. So if you make comparison, you'll find that people allocate only 75% or sometimes 80% to the asset management. So it means that the margin you see on the asset management to begin with, and hence, talking about the increase in the margin is really reflecting the truth of our cost base and the profitability of the business. Now more specifically on steering costs, we're not talking about big numbers here, but there is an increase. This is totally associated to a few things I've mentioned before, when you say, "I want to digitalize more strongly my operations and automate some of my key processes." It comes with some investments that some of them when they are deemed transversal would be booked there. Same when you decide to simplify your management structures, it comes with some cost, obviously, to implement that. And so there is no other explanation than that. Maybe I'll take the last one, and so Christophe will comment on fundraising. When we say we review our investment strategies. This is with a view that we will communicate to you at the end of the year during our Capital Market Day, what is the potential we see midterm for each and every business we have in the portfolio. So it doesn't necessarily mean -- let me be clear, it doesn't mean that we will stop a specific business as we've decided to unwind the [indiscernible] at the minority stake we had in Rome. It means that we will be able to tell you how far a business can go within our portfolio. Now having said that, we had already given to you 4 criteria to assess an appealing business that fits to our strategy. The full criteria, it has to be relevant to a client in terms of risk profile and returns. It has to be relevant in size compared to its peers. It has to be accretive to the profitability of the asset manager, and it has to be consistent with our ambitious ESG strategy. So these are the criteria according to which we assess the businesses, fundraising.

Thank you, William. Well, thank you for raising the point. It's an important topic in the current environment. Well, first, what we would like to say is that despite the less favorable environment with a decrease of circa 20% in fundraising activity in Europe, our view William and I share the same view that you often raising for the funds we had on the road is satisfactory. Regarding H2, well, as you know, we don't give guidance at this stage of the year. And considering the challenging environment, what we can say is that we are cautiously optimistic for the full year. We have significant interest in our funds from blue-chip LPs from repeat LPs, which we expect to materialize before the end of the year. As you know, we continue to have a positive momentum in wealth management, and this confirms the fact that Eurazeo has a specific trend by diversifying its fundraising with a component, the bulk is obviously done with institutional money, but the wealth management market is reacting differently. And as you know, so far, it is resisting better than the institutional market.

We will take the next question from Arnaud Palliez from CIC.

Arnaud Palliez from CIC. I have 2 questions. The first one is regarding the adjustment you made on your portfolio valuation. I would like to have more details about what type of assets, what type of sector have been mostly affected by the lower multiple. It's the first question. And the second one is on the MCH. Can you please remind us the story about MCH and what's going to happen next?

Again, when we talk about adjustment in the portfolio valuation this is on the basis of a strong increase in the underlying performance. So any area where the performance is less strong, will be already embedded in the aggregate. But to be more specific, there are areas where clearly there is pressure on the margin or on the revenue increase. This is particularly true in the B2C, particularly true in the B2C market platform, possible. These businesses have benefited strongly from the so-called Netflix effect. Some of them obviously enjoy a less favorable environment. We have 1 or 2 businesses in the financial sector for which situation can be conjecturally point in time a bit more difficult because of the ALM. But I'd say, generally speaking, our portfolio enjoys performance on a very broad-based basis. This is a reflection of the sectors we are in. We are in sectors which are more B2B SaaS with predictable cash flow profile. Health care is the same. Energy infrastructure as it relates to energy transition is the same. So high gross margin, predictable cash flows. So that explains and still structural growth. So a lot of the adjustment is frankly being that conservative because we also know that there is a bit of pushback by you guys, by the way, in the context where there is a few realization about private market valuation versus market valuation as we complete most of our valuation based on average multiples. We are mindful of the fact that we may not have adjusted downwards as much in the second half of '22. And so we don't want to go too fast in adjusted was. But as we said, pressure is rather on the upside. MCH, we completed this acquisition of 25% stake in MCH, which is a Spanish Madrid-based small lead market buyout platform in 2019. The view at the time and it is interesting to mention that the one who led this acquisition of a stake is ahead of our small mid-market buyout business. [indiscernible] was precisely that it could contribute to the internationalization, the Europeanization of a small med buyout business. As you know, we strive to be a leader with pan-European approach, sometimes more global, but usually a pan-European approach. The one area where we still rather French is our successful small buyout fund of EUR 1 billion. We completed the fundraising last year. Now we are in the process with Oliver and Christophe to assess whether taking over the full control of MCH is interesting from a return standpoint. And from a strategic standpoint, this is a good business. They have a good historical performance, a strong team. But obviously, it's too early to say. We're just beginning to dig into it. And as we said, we will tell you by the end of the year, if this is rather buying the full or exiting.

We will take the next question from Geoffroy Michalet from ODDO.

I have one, and it has to do with your third-party asset management business. I was wondering if you could maybe in the coming communication or release, maybe give more granularity on the split of the carried interest that will come in the following year between the listed company, Eurazeo, and the teams that have also arrived in this current interest knowing that there are great variations among the lipid players from the U.K. players or onto being more geared towards the teams and to a partner group being more geared towards the leading company. Thank you very much.

I think we are quite transparent on the card. First of all, we differentiate when we publish PREs, third-party versus balance sheet. So that's quite explicit. As regard to the split between the asset management and the teams, knowing that we apply carried rules, which are totally market practice, usual 80-20, years of vesting, very consistent with the market, et cetera. The split between the asset management and the teams within the 80-20 can vary. It's usually more favorable to the teams in venture funds, for example, this is a legacy of the past, and it's closer to our target of 60-40 in buyout funds as a case in point. So we monitor what the market is doing, which means we monitor what our clients are saying. And I'd say, in aggregate, we are around 70-30, 80-20 is a split between client and GPs teams. And within the 20, I'd say, in aggregate, we have 70 for the teams, 30 for the GP. So our numbers, that results from that, they are very transparent because when we have PRE, we tell you then what is the carried for on the balance sheet and the carries for third party. The thing we will not do is be very specific on giving amounts to the teams because that's obviously not what the competition is doing. And we know for sure, having talked to our market authority that our level of disclosure is very satisfactory.

We will take the next question from line Christoph Greulich from Berenberg.

Chris, it's just one from my side. On the balance sheet portfolio, could you provide a bit more color on the exit pipeline in H2? And is it fair to assume that the realizations in 2023 as a percentage of any, we will be roughly in line with the [ Saligari ]?

As we said during our full-year results presentation, we target 15%, 20% asset rotation over every year on a normalized basis. Last year, we were at 18%. It can be like '21, there was a bit of catch-up. We were closer to 30%. So it is a bit true through the noise that we get to this 15%, 20%. What we had said also is that being mindful of the context, we expect that we would be rather at the lower end of the range, maybe a tad lower than the 15%, but this is where we are as it stands for 2023. No, let me add, it's not your question, but let me add that for the years to come in a normalized environment, obviously, given the maturity of our portfolio, we have a strong backlog of exits for the years to come.

We will take the next question from Oliver Carruthers from Goldman Sachs.