Eurazeo SE (RF) Earnings Call Transcript & Summary

Hello, and welcome to Eurazeo Q1, 2024 Trading Update. My name is Rusty, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand over to your host, Mr. William Kadouch-Chassaing, Co-CEO. Please go ahead.

Thank you very much. Good morning. Thanks for joining this call. I'm pleased to welcome you all to our Q1 2024 trading update. Let me walk you through the key highlights of the quarter, which pertains to, first, the asset management activity; second, the asset rotation; and third the underlying performance of the on-balance sheet portfolio. Let me start with asset under management. We recorded year-on-year steady increase in our assets under management, reflecting the good momentum we had in 2023. Fee paying AUM were up 8% year-on-year, with fee paying AUM from third-party, up again double digit at 11%. Total AUM stand at roughly EUR 35 billion, up 8% year-on-year. Management fees from third parties are up 10%, excluding catch-up fees and some base effects. The total management fees, including balance sheet were up 6%, excluding catch-up fees. In line with our strategic plan, management fees from the balance sheet are flat as we are progressively limiting our reinvestment in our own front. Fundraising activity was obviously soft in Q1 at EUR 210 million. We remind everyone that fundraising is not linear through the year. On the institutional side, we had no significant closings in Q1 after a strong Q4. Let me remember again that Q4, 2023, was more than 50% of the total fundraising from last year. I mean this is how we have been known through the quarters, as I said. On the wealth management side, we continue to enjoy good momentum with EUR 162 million raised in Q1, our flagship fund in wealth, EPD-III, which is a mix of private debt secondaries and development funds continues to perform very strongly in France. And we announced during this quarter, its launch in Germany through a partnership with the Moonfare platform. This should accelerate the pace of adoption in Europe. Let me also mention that we had our first inflows coming from outside of France pertaining to Belgium in the first quarter, collection in the tech dedicated funds was softer in line with the market. Now looking ahead, we are confident about our momentum of fundraising for 2024. We have constructive discussions with LPs and potential distribution partners in France and outside of France in wealth. And we have, as we highlighted already during our 2023 full year results, a rich and diversified pipeline across asset classes, size of funds and source of funding. Let's turn to realizations and deployment. Realizations were up 20% year-on-year at EUR 408 million. This is clearly better than the market overall. As already mentioned, we see a progressive improvement in market conditions. And as already indicated, we have a good pipeline of exits, which should result in higher exit volumes of the balance sheet, particularly in 2024 versus last year. Focusing on the balance sheet, which obviously is the key element in our story, given the commitment to shift gradually towards an asset lighter level. At the end of April, proceeds amounted to EUR 538 million, which is already 6.5% of the total portfolio value. Now in the number I quoted before, EUR 408 million pertaining to the first quarter, balance sheet realization were only EUR 131 million. But remember that end of April, we are at EUR 538 million. Deployments totaled EUR 414 million in Q1. We remain highly selective. But nevertheless, there again, we see increasingly progressive improvement with good opportunities to deploy. Case-in-point, we announced in April the acquisition by our -- [indiscernible] by our strategy of Eres, a leading French employee benefit manager. This acquisition will be realized in the coming quarter. Focusing on realizations. And it's clearly at the heart of the question in the industry today. As you know, it's both important for us from a balance sheet rotation standpoint. It's important for the competitiveness of our asset management is concerned because it translates into DPI across the Board. As we had announced at the end of the year, we have been able to close and announce exits during Q1. Let me stress 2 important things. First, exits span across a large area of sectors and asset classes for Eurazeo. On top of good quality, small and mid-market buyout assets, we have been able to trade in Biotech, Venture and soon in Growth equity. This is the shaded line that you have here. This reflects a gradually improving environment as well as the quality of the investments in those fields. Second point, value creation of the exit was strong, above 2.2x cash on cash for the Biotech assets and more than 4x for Venture, Biotech and Growth assets. I know that you are very focused on that. Let me stress as well that in aggregate for these exits realized or announced, we've been able to trade above the last mark in the book. Let me finish with the selected demand, which is the underlying performance of our on-balance sheet portfolio companies. Overall, Q1 continues to reflect the high quality of this portfolio. In buyout, which represents 60% of our portfolio, growth has been 9% at constant scope. In Growth, which represents 23% of the total portfolio value revenues were 19% with the bulk of the portfolio growing at 20% or more. Finally, in real assets, which account for 12% of Eurazeo portfolio value, revenues were up 7%, including with good contribution from our real estate exposure in hospitality. I will stop there this trading update and leave the floor to you for questions. Thank you very much.

[Operator Instructions] We'll take our first question from Nicolas Vaysselier from BNP Paribas.

I have 3 questions, please. The first one, starting on fundraising. So you seem to imply that the soft number in Q1 is more a timing issue. So I guess you are still seeing some demand for your different strategies. But I'm interested in knowing a bit more about the progress you're making on the different flagships in buyout growth and also in secondaries. And also, you have mentioned in the slide impact buyout strategy. I think this is more a newer strategy. What could be the size of such first-time funds? Then on your exit pipeline, you keep mentioning a positive outlook. I'd like to know if among the exit processes you have in the pipeline that includes some of the big tickets in your MLBO funds? And if this is more skewed towards the back end of the year or if it could happen in coming months? And then lastly, on the performance of portfolio companies. So I think the numbers you gave on revenue growth. However, it's a little -- the disclosure is a bit different just last time, but I'm interested in knowing what's the derivative here? Are you seeing sequentially some slowdown in growth across portfolio companies or some reacceleration versus the H2 last year?

Well, thank you, I mean, this obviously very relevant and important questions. Let's start with fundraising. Yes, this is largely a timing issue. I mean we did register strong tickets in Q4 2024. We've launched first early this year. So we expect that we'll have closing through the year. It's not a demand issue. As I said, we have constructive discussions with LPs. We continue to register good inflows on the wealth side and are able to strike group partnerships. When I mentioned we've been able to raise already some money now in Belgium. You know this is very progressive, wealth management. But it's a good sign that we are able to strike. We've also done some agreements with family offices and high sales in countries such as Switzerland and Germany, that would be very progressive. On the main fund LP related, and if you go back to the page where we have the program. Let me start with direct lending. I mean we are on the same pattern, same type of momentum that we enjoyed for our Fund VI, so still pretty strong. Mineral buyout, we continue to have constructive discussions. So we should be able to have further tickets through the year. Secondary fund growth, I mean there different, secondary just started its fundraising this year. You know that our secondary fund is half dependent on wealth, half dependent on institutional. I think the wealth collection has been stronger in Q1 for secondaries than the LP money, but we have a constructive discussions here. Secondaries is generally are pretty attractive. Growth, we said it's more towards the end of the year. We want to see some improvement in the market and also with the strong team we put in place. It was important for us that we are able to announce some exits and some investments, which will materialize in the next weeks. So we are quite positive about the prospects here, but it is more squeaked towards the end of the year, maybe early 2025. This is for the main sort of large one. Selective funds, I mean, sustainable infrastructure, we had said we would final close ahead of the initial target of EUR 500 million. This will be the case and this would materialize in the next months. We have good momentum on Biotech particularly, it is based on Article 9. So this has some positive tailwinds. And these are reasonably small funds. Impact buyout, which is the point you mentioned. Also split towards the end of the year. It's a fund that is complementing our offering impact, you know that we are predicting impacted Ventures with smart cities in debt through asset-based debt. Biotech, it's also an Article 9 fund. Now we are willing to launch an infrastructure, of course, obviously, we are willing to launch a buyout front around the concept of planetary boundaries. We have very good traction in the dialogue with LPs. It's too early to say what we can target, but it's going to be above the EUR 500 million mark. And then wealth, I have already commented. Exit pipeline. What we said is that we see an improvement relative to last year. Last year, we did perform a tad better than the market in terms of exits. And clearly, in Q1, we did much better than the market with a plus 20%. And the EUR 538 million pertaining to the balance sheet is encouraging. Now we're not operating in a totally normalized environment and we are operating in a new improving environment, where we can show that we deliver. So you're right. There will be some, the bigger tickets, which are essentially for us associated with Mineral buyout, as you pointed out, even the configuration of our portfolio that's pretty normal. But this is a pretty well-balanced pipeline of exits that we have. You've seen what we had announced in Q1, and we have also smaller things in small buyouts. We announced things in Venture, Growth and Biotech. We may have a bit of real estate. So this is a pretty diverse portfolio of assets that we have now. I won't comment more because there is an intrinsic execution risk in everything we do, but let me just reiterate that we confirm that we should do better in 2024 relative to 2023. Then on the performance for the portfolio, it varies fundamentally. So it's not easy to answer to your question. So generally speaking, I'd say that for some sectors and for some companies, it's clearly basically a rebound. With although there is still a bit of historic effect of some slowing down towards the end of 2023. So overall, the 9% for buyout, for example, that you have to take is really a large chunk of the companies continue to grow at double digit and so again, see some acceleration, and you have some cases for which is clearly more difficult and maybe the minority of the portfolio. But overall, I don't think we can give a very consistent picture across the Board. If anything, things are mainly improving. Something which we don't comment in the first quarter trading update because we only comment on other news is that the drop-through in terms of EBITDA is gradually improving relative to 2023. 2023 was a year where we had really some impact on the cost side of inflationary pressure and value chain disruptions. I mean that's loosening a bit.

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

I'm going back again on the same questions regarding fundraising. What do you mean by positive outlook for the year more precisely, please? I mean do you expect to be above what you recorded last year in terms of gross fundraising? And also, in terms of redemptions, what do you expect? Is it going to be a normal year, i.e., more or less 12% of the produced AUMs? So that's my first question. Second question, I mean, do you reiterate in terms of operating performance, the fee-related earnings margin in 2024, which is going to be slightly up compared to last year. So that's my second question, the trend on your FRE margin. And the third and fourth questions are related to your corporate development strategy. Can you update us on your GP acquisition pipeline? If there are any acquisitions in the pipe? And MCH also, last question, of course, I mean, you had in mind to maybe dispose of that stake. Can you update us on that situation also?

Thank you for your questions. You smartly tempted me to provide guidance that is your question number one. We don't provide guidance pertaining to fundraising solely in the year because -- if you could take the side, given that quarters are not even -- things can be back-ended. So I will not do that. But when we say positive outlook is because we consider we are on track to fundraise across the diversified and rich portfolio of funds that I mentioned, and we see positive vibes, as I mentioned, in our capacity to being distributed outside of France, gradually. Again, I mean it's not translating big flows for 2024 but it's very encouraging to see that we are able to strike partnerships and get some early flows. It's very encouraging to see that our direct lending franchise continues to perform very well, not every direct lending franchise contrary to what is being said very often is necessarily able to fundraise easily these days. I mean the positioning of this strategy is apparently quite astute impact, we see good dialogue. What we mean by positive outlook? Positive outlook is we have good commercial dynamics in a context that is progressively getting better but is now back to the buyout years 2021-'22. We'll see for the industry as a whole, how it develops and may be some positives when, and if the ECB has announced its first cut because they would certainly help relaxing the so-called denominator effect for some of our bigger piece. But obviously, we're not counting on clearly on market, we're counting on our performance as an asset management first and foremost. That's what we mean by positive outlook. Operating performance, yes, we expect some growth in FRE for 2024. Corporate Development, let me remember what we said during our Capital Market Day. We present an organic road map of 4 years and everything comes here, organic and 4 years. You don't transform the company that has an average duration of its portfolio of 4.5 years. And obviously, as the ambitious purpose of winning market share is a very competitive landscape. We don't do that in a quarter. And it's organic, again, broadly speaking. Now we also, as said, you're right on that, that we see key reasons for the industry to consolidate. We observed consolidation moves, and this is our duty as management to look at potential opportunities that may help us accelerating the pace at which we meet our end target, which is to become this reference leader in mid-market growth and impact through Europe. So we never comment on specific situations, unless we have something to announce. But yes, we do the job of identifying what makes sense, if it makes sense. MCH, you heard it well. We will dispose of our stake in MCH, and we will announce it in due course, most probably in H1, or the latest in Q2.

We have a few questions on the web, so I'm going to just take them. First, is -- we answered quite a few of those questions already. But there's a question from [ Salma Hussain ]. On the deployment, we talked about realizations, but she wanted to have a few words on deployments. Are you finding more opportunities? How do you see the environment for deal flow into the deployments?