Eurazeo SE (RF) Earnings Call Transcript & Summary

Hello and welcome to Eurazeo's First 9 Months 2023 Results Call. My name is Alicia and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions]. I will now hand you over to William Kadouch-Chassaing, co-CEO, to begin today's conference. Thank you.

Thank you very much. Good morning. Thanks for joining this call. I am pleased to welcome you to our Q3 2023 trading update and first 9 months results. Let me walk you through the performance and development we recorded for the period. Overall, I'd say the mantra is that we continued to post solid growth, in context, which, as you know, is more uncertain than ever. Steady AUM growth is the first message we want to pass. We enjoyed a steady increase in our assets under management. Fee paying AUM, as you can see on the page, it has been provided to you in the press release, are up 19% for the period. Our total AUM are up 11%. Just a technical comment, as a remainder, we have sold our stake in Rhône. So now our AUM exclude the contribution from Rhône which has also been restated logically for -- in the 2022 figures. We have, for the period, a resilient fund raising. And this is, again, in spite of a more challenging environment. We've raised EUR 1.7 billion from third parties in the first 9 months of 2023. This is a tad lower than we had raised -- the amount we had raised for the first 9 months 2022, excluding Rhône, i.e., for our core asset management. Now if you would just focus on Q3, we are at above EUR 400 million to be compared with EUR 300 million for the same period of last year. Quarterly fundraising figures are a bit less relevant. And remember that last year, we had some concentration on Q4 with EUR 1.1 billion. So overall, EUR 1.7 billion, a tad lower than we had for the same period of last year. The main contributors as we explained in the past quarters are logically private debt, which continued to enjoy a very strong momentum with over EUR 900 million raised in the first 9 months, which is up 31% compared to last year. We enjoy a very good start for our impact strategies. This is clearly a promising sector with strong interest from clients. Infrastructure funds that we've talked about in the past quarters continue to collect well. This is a fund dedicated to energy transition. We have new commitments and we are now very close to the initial target of EUR 500 million. So we should cross that target and end up the year at the level above. Smart City II, which is a venture fund focused on mobility and technologies associated with green mobility in cities has closed and exceeding its initial target. Another contributor, which you would find across different strategies both in terms of clients, beyond institutional, as you know, we have a very strong contribution from wealth management. That continues to be the case for the first 9 months, fundraising for -- in wealth management, was about EUR 600 million for the first 9 months, actually EUR 566 million, which is very consistent with the number we had in '22, which was a record year. That represents 33% of the inflows. And now wealth management represents 17% of our AUM, third party AUM should we focus on inventories, which when you compare with competition is obviously a good number. A very important thing, which we announced yesterday, post closing, we completed a first closing of our mid-large buyout strategy at EUR 2.3 billion, of which EUR 600 million of third-party investors' money. This is a very important milestone for this strategy, which is historically supported by the balance sheet, has already proven that it could raise money through secondaries and dedicated site funds. But now we're talking about primary money in this new Capital V program of EUR 600 million. So if you adjust the EUR 1.7 billion, I talked about before, for this number of EUR 600 million, you end up on a pro forma EUR 2.3 billion, which is to be put in conjunction with our guidance for the year. We now expect that we should reach around EUR 3 billion of fundraising for the whole of 2023. And as you hear from me, we have already done the bulk of it as we speak. Logically and that's the next slide, good momentum in AUM growth translates in increasing recurring revenues. They are again up double-digit at 10%. The management fees, recurring management fees stand at EUR 305 million for the first 9 months of 2023, again, 10% up relative to the same period of last year. And adjusted for last year catch-up fees base effect, we don't have much catch-up fees in the first 9 months of '23 but we had catch-up fees in 2022. The management fee growth is up 12%. If you focus on me, as we put in the press release on third parties adjusted from the base effect I was alluding to, management fees are up 7% for the first 9 months. Let me turn now to the performance of portfolio companies. As you know, we are publishing now our numbers under IFRS 10 exemption rule, which means that we no longer consolidate the revenues of the portfolio companies. Yet as discussed with you in the previous quarters, we continue to think this is a very important indicator for you to gauge the quality of the portfolio we have on balance sheet as well as the quality of the investments. As you know, what we invest from the balance sheet is usually through the funds. And what the numbers we give you here relates to assets which represent 95% of the total net value of Eurazeo balance sheet. So we consider it's a very relevant indicator. Overall, as you can see, very decent and even solid growth across the board. Revenues in mid-large buyout, mid-large buyout represent 43%, as you know, of our balance sheet value -- on balance sheet value. Mid-large buyout companies posted revenue growth of 15% year-on-year for the first 9 months, well distributed, broad-based and that reflects the quality of choices, particularly in terms of sectors, companies, geographies. Small buyout posted somewhat slower growth, a bit more heterogenous for this first 9 months with 3%. Business services and health care-related companies continue to have very strong growth. Companies more exposed to the consumer sector are experiencing some slowdown. The growth strategy shows again that the underlying growth of the company continues to be strong and consistent with expectations. Overall, the weighted average growth is 17%. There are some companies, particularly related to consumer marketplaces or fintech, which experienced a slower growth. But overall, the bulk of the portfolio companies posted growth in between 20% and 45%. The brands strategy, i.e., consumer growth unit recorded again a pretty broad-based robust growth of 11% year-on-year. And real assets, which, in this case, relates particularly to real estate in terms of exposure of the balance sheet posted also very strong growth at the portfolio level of about 10%. That reflects the type of exposure we have. Type of exposure is very concentrated on hospitality that represents more than 40% of the portfolio and that's obviously very good in the context. Offices less -- represent less than 30% of the portfolio. But one has to say that even in this area, we benefit from high occupancy rates. Let me turn to the deployments and realizations. In terms of deployment, we continue to be selective, with EUR 3 billion of deployment in the first 9 months compared to EUR 3.8 billion for the same period of last year. Now we are selective but we benefit from the fact that we have diversified sources of funding with institutional money, third-party; retail money, third party and some balance sheet, which allows us to be somewhat active in this context. We are starting to see some interesting opportunities, thanks to some repricing, particularly in secondaries and somewhat in buyouts, which [ debts ] continue to enjoy a good momentum. Realizations, which I know is a key area of focus for everyone in the industry, we're more, we're logically more limited in the period and the overall market is down 50% according to PitchBook in terms of realization. There is a bit of proactivity in this number. So let me explain. We decided in the market context where rates had not stabilized yet and there were some uncertainties, the so-called bid-ask spread, not stabilized to delay some of our exits, which explains the lower number for 2023 year-to-date. Now having said that, we are confident about the outlook. We launched a number of processes, which are ongoing. And that would result in a pickup in realizations in the first half of 2024. Let me finish now with the balance sheet and dry powder, still very comfortable, headroom we have a 12% gearing for the company, which is a bit higher than what we had in the past quarters. But as you know, we run the company with a conservative credit policy, yet it can vary from one quarter to another depending upon the pace at which we deploy versus the pace at which we realize. That remains a very reasonable gearing, it compares to own funds of EUR 1.4 billion and we have ample liquidity with a credit facility. In terms of dry powder, we stand at EUR 6.2 billion. So the number for third party has been adjusted for Rhône. Rhône was accounting for EUR 600 million. So the number is EUR 4 billion ex Rhône plus EUR 2.2 billion commitment from the balance sheet, which gives things flexibility for future deployments. To wrap up, Yes, we continue to operate in a difficult environment on asset rotation and fundraising, although we concur with some comments that have been made by peers that there are some green shoots. In this context, we have been able to grow our asset management activity and the underlying portfolio companies growth remains dynamic. During the full year result of 2022, we guided you towards strong growth in FREs for the year. We are on track to meet this target. On the fundraising side, we anticipate reaching EUR 3 billion of inflows for the year, which would be somewhat above the level of fundraising we achieved in 2022 for the whole year. As you know, we have an important milestone in terms of financial communication with you as we will be presenting our midterm road map during the Capital Market Day on November 30, 2023. I now thank you for your attention and we are available for questions.

[Operator Instructions]. We'll take now our first question from Alexandre Tissieres from Bank of America.

Relating to private equity. Could you please talk a bit more about what you currently see in the market? I mean it's a strategy where you have the most exposure and also the one which is a bit slower this year due to wider bid-ask spreads and slower fundraising overall, do you see -- are you starting to see signs of improvement? And is it fair to say that 2024 will be a bit better than this year but still relatively slow compared to a very strong year and exceptional year like 2021?

That's a very broad question. But that's a very broad question because as you know, for us, private equity encompasses buyout strategies. It is buyout, mid-large and small buyout. It is growth and venture and it is secondary. So in that sense, the dynamics behind the strategies can differ a little. So I guess your question is more focusing on buyout. But correct me if I'm wrong, happy to talk about the rest. As you know, secondary is pretty dynamic as a segment these days. Now it's also a right question because talking about fundraising, talking about underlying value of the portfolios and the underlying growth of what's in the portfolios and you're referring to realizations. On fundraising and focusing on buyout. Yes, this is slower to raise buyout funds in the market than it is to raise private debt funds, secondary funds or focused infrastructure funds, I mentioned impact being a segment that clearly enjoys some tailwinds. Having said that, we managed in 2022 to raise and close above its initial targets, our small buyout funds. Remember, this was [ EUR 1.1 billion ] compared to an initial target of EUR 1 billion. And for mid-large buyout, now we enjoy -- we are happy to see that we have been able to raise that EUR 600 million. And we obviously work to make more than the EUR 600 million in the next quarter. So I would concur that it's more difficult. It takes more time. We are a bit of a newcomer in terms of raising primary money for mid-large buyout, which is also a function of us being also in transformation to our third-party asset management. But when you have good quality teams, a focused value proposition and good track record that you can show to potential clients, I mean you can get it, which is obviously where we are now. In terms of the underlying performance, I've mentioned it, it reflects what I've just said in terms of the value of investments, it's pretty good, if not strong. In terms of realizations, as I said, slower in '23 but we expect a pickup including for buyout in 2024.

We'll take now our next question from Nicolas Vaysselier from BNP Paribas.

I have 3 questions, please. The first one, coming back on your comments on deal pipeline for H1. So I understand that we should expect Q3 to be -- Q4, sorry, to be pretty quiet. But for going into next year, could you give us a bit more color on what kind of investments are in the pipeline? And how large could it be here thinking about the potential cash flow going to the balance sheet? In terms of the fund raising as well, I wanted to come back on your announcement yesterday. Have you set some sort of a target size for the buyout fund? I wanted as well to know if -- what's the likelihood for a first close to happen in the growth fund as well in Q4. And if you could provide as well more color on the fundraising for your private equity secondary fund, how is the traction? What's been raised so far? And finally, just a quick one on the net debt. So I've seen that it's risen due to, as you say, the timing issue between deployments and realizations. But I wonder what are the terms exactly of this RCF, the maturity and the cost mainly. And how do you see -- do you see it in your overall balance sheet structure? Could you think, for instance, that paying it down could be a priority over using cash for buybacks or M&A?

Okay. So I think your first question was about divestments, not investments.

Yes.

I mean it is clear that 2023 will, most logically we'll end up the year with a percentage of realization relative to the previous year NAV, which would be lower than our average. The average -- in fact, if you look at the past 10 years, pace of realization is about 24%, 25% per annum. Now we like to be that conservative. So we usually say we are able to realize between 15% and 20%. Now this is not linear. If you look at 2021, for example, where there was a bit of catch up after a very slow 2020, it was 51%. You look at 2020, it was closer to 10%. So overall, through the noise, you can retain that 20%, 25% is what we can achieve, i.e., we recycle the portfolio on a 4- to 5-years basis. But it is not linear. So 2023, we decided that it was not worth launching some of the processes that we had in mind to launch too soon before we would see the famous green shoots that you've been -- talked about by others, i.e., some stabilization in the interest rate environment and some relaxing of the financing conditions for potential buyers, be they LBO funds or corporate. And this is where we are. So we expect that 2023 will probably be below -- most likely be below this average and '24 will be logically above in a normalized environment. And I expressed some confidence earlier. Fundraising, your question is quite wide. So let's start with the first part of your question, which relates to mid-large buyout. Previous program was [ 2.5 ]. So we expect to be at least at this level and we'll see. I mean we are, again, reasonably cautious in the environment but we are also reassured by the capacity of the new management team, to market the fund, the choice they've made in terms of investment approach, value proposition, quality of the dialogue, they are able to initiate with clients. And so I think we should be in a good position to reach at least this number. Growth, we said, it's a difficult market for tech fundraising overall. And we have some management change. Now we are going into the phase where clearly, the team is stabilized. In fact, we are onboarding very senior international profile at senior advisers. We will announce some recruitments of senior people to the team. And so that -- and the dialogue is very productive with clients. But if I'm plain, promise more 2024 event. Secondaries, good dynamic in the dialogue, both on the deployment side, which we see now that we're able to access some good opportunities in terms of value creation. And clearly, there's good dynamics on the institutional side for the fundraising of Fund V. Some logically we done in '23. And then we have the whole year of '24 to complete. Let me remember you that fundraising, particularly for debt and for secondaries but also in growth in venture, we benefit strongly from having wealth collection. Remember that secondaries and debt have a significant portion of the program deployed associated with wealth. In fact, let's look at debt, for example, we have close to EUR 2 billion, which is on the institutional side, if you add up what we've done so far, which was the target. We may be able to go above that. We'll leave that for future disclosures. But on top of it, we have a EUR 600 million, EUR 700 million of debt for the program that can be deployed. So in fact, these strategies strongly benefit from the fact that we don't have only one source of funding. And we believe -- we will come back to that when we do our Capital Market Day. This is a real strength in the context for Eurazeo to be able to have 2 sources of third-party money and one source of own funds. More and more, you see that having the 3-pronged approach to resources is a competitive advantage. Net debt, let's be clear, our intention is not to have permanent net debt on the balance sheet. We consider that the policies have been set forth in this company for years is a valid one. So net debt should be low. I would say that 12% gearing is pretty low, in fact. But overall, it should be logically even lower than this number through the [indiscernible]. In aggregate, you rather -- you are a tad higher than 0, tad lower. So this is what we will continue to do. And if you bear in mind that we will have some realizations that is not too difficult to imagine that we should come back to a much lower number. Remember, in 2022, we ended up the year with very low indebtedness, close to 0. In fact, at some point, we were at EUR 800 million net debt midyear. That was also due to the sequencing of deployments versus realization. Does this debt cost much? No, in fact, this is a low margin over EURIBOR. So it's reasonably a cheap debt in the context. Maturity of a credit line is 2026. So there is no refinancing issue with that regard. And I will not comment on the last part of your question, which is the balance between reimbursing net debt and returning capital to shareholders via share buyback. We have a Capital Market Day on the 30th of November. And we will be clarifying what is the policy in terms of capital allocation. Just have in mind, that is not because you have some debt at a point in time that you're not able to increase your distribution going forward.

We'll take now our next question from Patrick Jousseaume from Societe Generale.

So regarding the company and the portfolio, the figures to the end of September, some of them reflect a deceleration in growth in Q3 for a portfolio company in the mid-large buyout segment and probably a decrease in the small mid segment. So they both represent around 51% of the portfolio. So can you give us some granularity on these trends and tell us maybe what is the impact of the portfolio's value might have been if you have carried out September 30 valuation.

So I'll start with the first part. Second part, as you know, we don't adjust valuations on a quarterly basis, only every -- at least to the market accounting-wise. We do that only half year and full year. Listen, yes, there is a case that the second derivative in terms of growth is a bit less favorable. But this isn't new. I mean, we had for mid-large buyout, top of my head, 17% growth for the weighted average of our portfolio companies, in the first half, we had 15%. I'd say that in the context that we all see clearly decelerating growth across Europe and globally. Some disruptions which have not totally been solved, particularly in trade between Asia, Europe and still some high inflation. I would say 15% is a very good number, 11% for the nongrowth portfolio is still a very good number. Now specifically, as we said, the more company is exposed to consumer and so the consumption growth pattern, the less growth it has these days because there is a limit to the number of times you can pass price increase to consumers. I mean, clearly, there is some impact on the macro there. But this is a small part of the portfolio. And as you can see, looking at brands, when you invest in consumer, in very focused, innovative growth companies, you can find very high growth profile. For example, Waterloo in the U.S., which operates -- which does flavored water and has increased its distribution capacity through partnership; or a UPD, which does upper end-market pet food. They all have growth pattern, which are in excess of 30%, 3-0. And then on growth, as I said before, we have a bit of the same pattern for some of the companies which are operating in marketplaces, consumer-focused marketplaces, growth will be slowing strongly. At some point, there will be a rebound, we think. But clearly, there is slowing down for the reasons we've mentioned on top of the fact that the post-COVID adjustment is still ongoing. But for the rest of the portfolio, the more B2B services you are, the more health care you are, obviously, you continue to have a very strong growth. And now on valuations, we've been very cautious in the first half. Some people wondered why we had been so cautious. What I can say is, we continue to have this double-digit growth pattern of the underlying figures. Multiples hold reasonably well. So that's the context of our valuation framework.

[Operator Instructions]. We'll take now our next question from Alexandre Gerard from CIC.

My first question relates to fundraising. What can we go for in 2024? I mean if we add up all the funds that will be marketed in 2024, what's your target? Can we have it by at least EUR 3 billion like in 2023? More or less correlated to that -- related to that question, in terms of your target to internationalize your LP base, is this the case in 2023? What part of that EUR 1.7 billion that you've raised are coming from international investors? And this morning, in the press release, you don't reiterate your medium-term target to double your AUM basis in 5 to 6 years' time. Is this still the case? So that's my first question, overall, I mean, related to the fund raising. Second question, regarding your OpEx base, this morning in the press release, you mentioned a certain number of new hires. And at the same time, you mentioned that you want to control your OpEx base. What can we go for in terms of FRE margin in 2023? And my last question is related to corporate development. Can you comment a bit on the M&A opportunities, the environment is consolidating very fast. And also regarding MCH have you made up your mind on what to do with your 25% stake in that Spanish private equity firm?

Well, I hope I won't be too frustrating. But I have to say that a lot of your questions are looking forward questions, sometimes even midterm or strategic questions, which we intend to address more in the context of the Capital Market Day than in the third quarter results. So also pardon me, if sometimes, I would say that we will communicate. Let's start with your question on fundraising '24. We usually give an indication on fundraising in the third quarter. Obviously, we will tell you what is the strategy in terms of fundraising, the type of funds that will be on the road for 2024, I mean, have in mind that the core of the strategy is to accelerate on the asset management and our ability to increase our inflows. So we are a bit cautious because of the context but we are quite confident that with this combination of institutional money, more internationalized, I will give you the number for the first 9 months, don't worry, wealth money and this positioning of private debt impact, mid-market buyout, secondaries and we have some appeal in the context of -- some element of differentiation. So that ties a bit to your question on AUM, EUR 60 billion. I will put it on the side and we'll come back to you, to tell you what is the sort of midterm perspective we see in terms of our ability to grow our AUM, revenues going forward, we will be as specific as we can be to help you build your models. Internationalization is going on quite nicely. For the first 9 months of the year, sort of the non-French resources pertaining to institutional money is 64%. Now on the retail side, it's still vastly French. But we're starting now to have some inflows through partnerships that will get slow first and then increase over time. So we have, as you know, a partnership with Allianz to distribute in Belgium. And we have partnership with -- concluded partnership with 2 platforms, one focused on Germany, Moonfare and one iCapital for distribution in Italy, Germany, Belgium as well as Switzerland [indiscernible] on top of my head. But on the institutional side -- and we'll talk about that more in detail during the Capital Market Day. We'll show you some examples, strategies for which the combination of scaling and internationalization of the client base is clearly functioning well. OpEx, this is revenues and AUM. So let me tell you that -- remind you that for the first half, the margin was 33.5%. At the end of 2021, it was 29%. So the journey of increasing the margin has started. We ended up 2022 with 31.6%. The intention that was stated by the company, 35% to 40% midterm. We'll come back to that in -- during the Capital Market Day. Obviously, our intention remains to continue the journey of increasing the margin over time, which means that we'll be very focused on growing our OpEx at a pace slower than our revenues. So what the clear intention is to continue to steer the company so that we generate positive jobs. Having positive jobs doesn't mean that you don't invest. I remember a call with you guys, where legitimately so, you had some questions pertaining to some departures. And I remember having told you -- in fact, overall, our headcounts are pretty stable. Some people go. Some people are recruited. So this is what we do. We continue to have a very focused approach to adding expertise where it is relevant, where we have growth potential. And if you look at the press release, we effectively mentioned that we've added some expertise in private debt. We recruited someone to, senior to deploy in the Scandies and Nordics because that's an area of development for us. We do that in fundraising. So we recruited someone who come early 2024 that will focus on Middle East sovereign funds, very high profile. We onboard some good senior -- profile of senior advisers. Senior advisers, not necessarily a huge cost because they are ways to incentivize them that don't weigh too much on your OpEx. But they are very important to help companies and strategies, either on fundraising or operations. So we did some very good hire for impact funds, very good hires for growth funds. And that's -- and when I say we will do some focused recruitment either for senior salesperson in dedicated geographies or to replace 1 or 2 senior person in the growth strategy, that is in light of being capable to increase our fundraising and ultimately our management fees. But overall, we expect that we will be very, very, very disciplined and the headcount will not grow significantly in the next quarter. It may not grow at all. M&A. I think we will have plenty of time, I think, to discuss where we see the industry is going on, whether M&A should be part of a growth strategy of companies such as Eurazeo. Base consolidation, it's pretty clear. I think we had already the opportunity in the past quarters to say and we consider that there is no reason why the alternative asset management would not go the [ path ] that banking, insurance, more traditional asset management have gone. But clearly, this industry will consolidate. There are many reasons for that. And Eurazeo has the capacity to be a consolidator rather than the reverse. That's what I would say at this stage. Now we have a strategy that is focused on ability to grow organically. The capital allocation, we'll come back to that, that prioritize return to shareholders. It happens that we also consider that we have some strategic flexibility for organic -- inorganic moves, external growth, should there be a valid partnership to make. MCH, yes, you're right to remind me that the fact that we've said that by the end of the year, we will clarify what we do with minority stakes. So I'd say the 30th of November is probably a good date to clarify that. So we confirm that by the end of the year, we'll have taken a decision.

We got -- really have no more questions coming through on the phone. So I will hand you back to William to take the webcast questions.

Thank you. I have a question from the webcast from Geoffroy Michalet from Oddo. A few of his questions have been answered already but one was about the share buyback program of the EUR 100 million and how much is for the long-term incentives and how much will be canceled. I think I can take this question. The EUR 100 million of share buyback is fully for this cancellation plan. So it's going to be relative. The LTIPs is on top of this EUR 100 million. And that's, I guess, is the only question that has not been answered.

Thank you, Pierre. So we would like to thank you very much again for joining this call. And we're looking forward to having you joining the next call on the 30th of November and wish you a very good day.

Thank you all. Have a good day.

Thank you joining today's call. You may now disconnect. Thank you.