Eurazeo SE (RF) Earnings Call Transcript & Summary

Hello, and welcome to the Eurazeo 9-Month 2024 Trading Update. Please note, this conference is being recorded. [Operator Instructions] I will now hand you over to your host, William Kadouch-Chassaing, Co-CEO, to begin today's conference. Please go ahead, sir.

Thank you very much. Good morning. Thank you, all, for joining this call. We are aware it's a very busy day from a news standpoint. So pleased to see that you're all here to listen to our 9 months' 2024 trading update. Overall, we published today a strong set of results across the key metrics. So I will walk you through the key highlights for the quarter pertaining to: first, the asset management activity; second, the asset rotation; and third, the underlying performance of the on-balance sheet portfolio assets. So let me start with the key data relating to the asset management, and of course, with fundraising. So fundraising activity continues to be strong with EUR 3 billion raised over the 9 months year-to-date, which is up 76% compared to the same period of last year. More in detail, private debt continues to enjoy a strong momentum following the launch earlier this year of our seventh vintage in direct lending. Private debt now represents 25% of our AUM. Private equity is also significantly up. It's up -- fundraising pertaining to private equity is up 60% relative to the same period of last year with additional closings on the fifth vintage of MLBO, i.e., our mid large buyout franchise and flows in secondaries as well as in venture, biotech and digital. And as you know, we've commented that in the previous call, we have already announced the final close of our sustainable infrastructure fund, our impact-related sustainable infrastructure fund at over EUR 700 million, which was 40% above the initial target. Second, and this is key to our strategy, we continue to grow our international LP base. Flows from international LPs represented 70% of the total amount of institutional fundraising in the first 9 months of 2024 with some key wins in Asia, in the rest of Europe as well as North America. Third, wealth management continues to grow with EUR 629 million raised over 9 months, which is 11% growth year-on-year. Now as customary, we give you a guidance for the rest of the year. Looking forward, we now expect fundraising for the full year of 2024 to be around EUR 4 billion. Remember, we were at EUR 2.9 billion in 2022. We reached EUR 3.5 billion in 2023. So that EUR 4 billion would be another year of growth in spite of context that is only gradually improving. Turning to AUM. Let's start with the fee paying AUM. Over the first 9 months, we continue to enjoy a steady increase in our assets under management. Fee paying AUM were up 9% year-on-year with fee paying AUM from third parties up, again, double digit at plus 12%. Total AUM stand at the end of September at EUR 35.5 billion, up 7% year-on-year with AUM from third party also posting a 12% growth. As you can see, both for total AUM and fee paying AUM, the balance sheet-related AUM are stable to negative, which reflects our own strategy in terms of capital allocation, as we highlighted it back in November of last year during our Capital Market Day. Turning to management fees. Total management fees, including balance sheet, were up 9% for the first 9 months. Here again, management fees from third-party are up double digit, plus 15% with similar growth on IMG as in private markets, in line with our strategic plan. As I said, management fees from the balance sheet are down 3%, as we are progressively limiting our reinvestments in our funds with the intention to generate excess cap through asset rotation, as we already mentioned. Additionally, because here, we're talking about management fees, we generated EUR 12 million of performance fees year-to-date, of which EUR 3.4 million pertained to third party. A word on realizations. Asset protection is accelerating against the backdrop of yet gradually, only gradually improving M&A market. Realizations were up 3x compared to the same period of last year at EUR 2.4 billion at group level. This figure reflects our ability to monetize assets and generate distributions for our clients. As you know, Eurazeo fares pretty well relative to peers in terms of DPI as a case in point. Exits have been done in good terms, reflecting the quality of our investment strategies and translated in strong returns for our clients. Deployments also increased, although at a more modest pace on the period, and totaled EUR 3.2 billion, up 5% versus last year. We remain highly selective, but nevertheless, see increasingly good opportunities to deploy in our preferred sectors and geographies. Focusing on asset rotation pertaining to the balance sheet. There again, you see that balance sheet rotation year-to-date is strongly up versus the same period of last year. Over the last 9 months, we've been able to increase significantly our volumes of exits with realized amount for the balance sheet at 5x higher than the same period of last year. Including announced deals, asset rotation already represents 11% of our previous year's portfolio, around twice the level we had last year at the same period. The last example of exit, which is an announced deal, is I-TRACING, a cybersecurity company from our lower mid-market fund, PME IV through a continuation fund. The sale will generate EUR 64 million cash upstream for the balance sheet, consistent with the 3x cash-on-cash multiple and a gross IRR of 33%. As previously announced, we've launched several exit processes, which are expected to materialize in the coming quarters. Last, let me comment on the underlying performance of the portfolio companies. You're all aware that under IFRS 10, we don't consolidate the revenues of portfolio companies held by the balance sheet any longer, yet we give you indications of the health of the portfolio on a quarterly basis. This performance reflects still the good quality of this portfolio. In buyout, which represents 60% of our portfolio at constant scope, weighted average revenues were up 7%. In gross, that's 22% of our total portfolio value. Revenues were up 14% with strong dynamic still in the SaaS companies and platform dedicated to circular economy. In real assets, which accounts for 12% of revenue portfolio value, revenues were up 21% in real estate with a particularly strong dynamic in our hospitality segment and a rebound of the real estate development segment. This is an important segment for us. We have a very dedicated positioning as an operational real estate investor. That's why for us, revenue and EBITDA metrics in that sector matter. We are now available to answer your questions. Thank you very much for your attention.

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

I will have 3 questions, please. The first one on fundraising. I'd like to know what is the pipeline looking like for Q4 in 2025. And if you could provide updates on what's the status for the MLBO fund? You said you had additional fundraising there this quarter, but is the fund closed? And how much AUM have you raised there? And also in terms of private equity secondaries and growth, what's the status of fundraising for those 2 funds? The second question, more on the balance sheet monetization and capital structure. Correct me if I'm wrong, but you haven't announced any new exits since the beginning of the summer. You're still talking about pickup in realizations, but I wonder if you think this year you can reach the 20%, 25% realization pace that you typically have during 1 year. Obviously, it's more something for 2025. And as a result of lower exit pace in December, I noticed the net debt increased a bit again on the balance sheet, so I wonder if it's constraining your capacity potentially to the strategic M&A. And last question more on the NAV dynamics. I know you don't update quarterly, but how do you see value creation going into H2? Would you expect that the contraction in multiples you've seen over the recent years is done? And if that's the case, then should we expect NAV to grow in line with earnings? And also I have noticed that you don't release the EBITDA growth in your presentation, but if you could comment on how it's evolving, that would be super helpful.

Thank you, Nicolas. I mean, very comprehensive questions. So let's start with fundraising. So we gave you a guidance for the year, which is EUR 4 billion. That means we expect to generate a good billion -- around a good billion of fundraising for the last quarter. As usual, you will have the contribution from the Wealth segment though it's pretty foreseeable. Remember that we have still on the road at full steam our Private Debt VII fund. We have on the road our secondary fund V, a fund amongst the flagship. And that fund is both funded through LP, but also has -- attracts a significant money from the Wealth segment. We are on the road with our newly launched impact fund around the planet boundaries in layout. We have our biotech fund, as a case in point. So I mean this is key contributors for the quarter going forward. And in 2025, some of it will continue to be deployed. We also intend to launch new vintages at some point during 2025. We will comment on that during the annual results together with Christophe, but we are thinking about real assets. Also, in buyout, remember, we have well deployed our Fund IV. So we should -- pertaining to the lower end mid-market segment, so we should come back to the market. So we'll highlight precisely at the end of the year what we have in the pipe of 2025 as usual. But I think for 2024, you have a good view. MLBO, i.e., the mid market, so we will announce the final flows in the next week. For MLBO, I mean, you know that this fundraising is associated with successive closing, so we had a number of closings ever since the first close. We should be -- as a whole, for the program, we should be around EUR 3 billion, of which -- including balance sheet. So that means you're going to have well north of EUR 1 billion of third-party money. The growth fund, as we said, we don't expect to have fundraising in 2024. Yet, as I think, Christophe had commented during our first half call, where we are seeing good traction with LPs. And so this is something that should generate yield fundraising in 2025, we think as early as H1. Balance sheet monetization. You can say it's slow paced relative to the expectation that we come back to a normalized 24%, 25% asset rotation per annum or you can say, which is what we say, it is a strong pickup. In fact, 5x in realization and twofold realization plus announcement relative to last year, that's pretty strong in the context. I mean, let's take stock of the environment. The environment is improving, probably more gradually than we would have expected, we and the rest of the industry throughout the end of last year. And in fact, the M&A market is not buoyant so far. So it's -- you have to be really good at selling good assets that you have on your portfolio to generate this type of asset rotation that we are generating, so just to put this in perspective. But I understand perfectly your question, of course, to generate the EUR 4 billion excess cap that we've committed to generate over the 4-year period of execution of the plan, we would need to come back to a more dynamic asset rotation. In fact, if we stick to the distribution we want to -- we have committed to our shareholders, i.e., share buyback and dividend, we are more at 16% needed. So no, we don't expect 25% in 2024. But so far, as I can tell, based on the processes we have in the pipe, we are confident that we should go beyond the 11% that we have at the end of September. That's how I would phrase it. So it's going in the right direction. And obviously, any improvement in the macro and rates environment is helpful. Your comment on net debt, no, we don't feel constrained. We are obviously pretty conservative in terms of net debt level at Eurazeo level. And again, to come back to the earlier comment, we -- our aim is to generate excess cash, not to hold net debt. But 17% gearing at a given point in time is still very comfortably implicitly qualifying Eurazeo as a good credit. I mean it would be qualified as investment grade in -- based on the key metrics by potential ratings agency should we have a rating. So that net debt has its own life. So if we complete further transactions in the next quarters, it will go down. So this is more a factor of the sequencing of the sales and per se problem of exit space. Does it constrain Eurazeo to do potential M&A? Number one, it would mean -- your question implies that we will announce M&A at some point. We may, but this is not an imminent move. I mean, we're observing what happens -- what's happening in the market, obviously, with great attention. And it is not a constraint per se because we have ample financial leverage should we need to finance something. But as you heard from me, this is not an imminent announcement that we are preparing here. NAV dynamics, again, a looking forward question. Listen, we don't comment on value creation on a quarterly basis. But as we have said or we've been saying in the first half, what we see now is that we think we've reached a plateau in terms of adjustments and the value creations. As you know, value creation in dynamics are made of pluses and minuses overall, but -- so we don't give guidance here, but we can give you an indication that in our view, gradually, we will resume some value creation, certainly in the next quarters. 2024, as we had highlighted, was still a year where we had some adjustments. Looking at some multiples that was -- we thought necessary. But gradually, we should see some more positive outlook going forward. And again, I won't comment on anything here. We don't give a guidance on that metric. And last question on EBITDA. The reason why we don't give EBITDA metrics on a quarterly basis is because we are focused on revenues, both at the asset management level as well as the portfolio level. What I can tell you is that there is some improvement in the drop-through. So in fact, without giving you a number, of course, we will share that for the full year when we publish our final results, we see a more dynamic EBITDA growth than revenue growth on the buyout side, as well as in gross for a growth equity company, most of them are not yet at breakeven. Some are close to breakeven, though we see tendency to decrease the cash burn, which can be quite material depending upon the company. So overall, pretty encouraging.

We will take our next question from Isobel Hettrick from Autonomous Research.

Isobel Hettrick. Can you hear me?

Very well. And thank you to join the crew of analysts covering Eurazeo.

Great. So I just had 2 questions, please. So the first, understanding M&A is not imminent, but if you could talk around potential areas or capabilities that you would maybe look at acquiring, please? And then the second question is, looks like Donald Trump is going to be elected President? And so have you done any analysis? Or do you have any thoughts about how potentially heightened geopolitical tensions, the returns of tariffs potentially extended to European countries as well could impact your portfolio companies in any way?

Thank you, Isobel, for these questions. Obviously, a wide question. M&A, as we have commented with Christophe last year during our Capital Market Day and again more recently during the first half results presentation, we consider that M&A could be useful to accelerate the pace at which we are executing our strategy, yet we don't consider that M&A is absolutely necessary to execute the plan that we've presented to the market. So that's a bit of a -- as in principle comment I'd like to make. So if you say -- if you take that in principle comment in consideration, then you will end up with -- you will do M&A in areas where you are confident that it will accelerate the pace at which you execute your strategy, i.e., scale your funds faster than on an organic basis by way of acquiring good franchises that have a more diversified or differently diversified client base than the one we have. So clearly, we would look more at sort of European-centric platforms in terms of investments, although happy to have some of these platforms also invested partly in Asia or in the U.S., as this is the case for our own platform. Yet with an investor base, they would be probably more geared towards U.S., Asian investors and our investor base case in point because we're pretty strong in Europe and in core Europe. And also, in terms of typology of investors, as you know, we are, for example, quite strong with insurers. So ideally, we would look for platforms, which are stronger in other areas. For example, there are -- we know that we could make progress with endowments case in point. So that's the type of thing. So now you look at the strategies we have. It is clear that we've launched, for example, new strategies in real assets. Could we go faster by doing some acquisitions there? Possibly, but you could go at other area where we are not yet at a scale that would be comparable to some of the peers with longer vintage and that could be a case in point. I'll stop there because, obviously, it's always delicate to comment more on that, but you just be confident that we are very focused on the execution of our organic strategy. But also being mindful of the environment. We also spend some time gauging if opportunities that would be value creating for our shareholders may arise. Donald Trump, so as it seems, he will win, but I'm not sure I will -- I convey any news to you. Listen, we are mostly a European investor, and it is true, a lot of our companies export or deliver services beyond Europe, namely Asia and the U.S. For example, if you take some companies we have in our growth equity funds, a company like Fever, which is a Spanish-based company working for the entertainment industry in our Gross Equity Fund IV, these guys obviously are very geared towards the U.S. given where the entertainment industry is. 2 comments I would make. Number one, where we invest in terms of sectors, we're not very exposed to the risk of further tariffs imposed by potential U.S. government because we are very much geared about the sectors that are at the core of the war on tariffs. But obviously, we'll have to monitor that. Number two, they could be even -- and I'll be saying that very cautiously, there could be even some positive. And by that, I mean -- I don't mean to make any political comment. We are an important investor for the European competitiveness. We are an important investor in biotech, in venture, in growth equity. We back in buyout very specific sectors, including healthcare, for example, or specialty finance, for which Europe that would be more conscious to -- of the need to put more money at work to fasten the closing of the technology gap to finance research and also to be a bit less naive in terms of tariffs and non-tariff barriers. Thinking about impact, for example, in the energy transition-related technologies and services, for Eurazeo, given where we invest, probably not perhaps in principle, but listen, this is very pessimist as a remark, I mean, it's too early to call.

[Operator Instructions] We will take our next question from Alexandre Gerard from CIC.

3 questions on my side. The first one is regarding your FRE margin in 2024 and generally thinking also on the evolution of the OpEx base, can you comment on that? Can we see a rising FRE margin in 2024? So that's my first question. The second question, are you still committed in delivering a 15% growth rate for your third-party management fees until 2027? And my third question would be a general question regarding iM Global Partner. Can we have a comment on the performance of that -- of your 50% stake in that company? And are you committed in keeping it at that level going forward, I mean 50%?

Alex, thank you for your question. But as the line was not so good, could you repeat the second question? The first on the FRE margin and the third on iM Global I got, but...

Okay. So the second question was related to the 15% average growth rate for the third-party management fees until 2027. Are you still committed in delivering that performance? Is it a base case scenario for you? So how confident are you in delivering that target?

Okay. Well, listen, this is -- so I'll start with this one then. We are reiterating every target that we've delivered to you a year ago. Our Capital Market Day dates back 30th of November 2023. If anything, our first year of execution is comforting us as relates to this perspective that we had shared with you. Now it is true that particularly when you talk about management fees, this will not be necessarily linear in the 4 years because, as you know, it depends upon not only the fundraising you do, but it's also -- it can also depend upon some step-down in certain firms, and they would be higher or smaller given the year. But overall, we are 15% year-to-date. And we are -- when we look at the schedule of the fund and our ambitions in terms of fundraising for the years to come, there is no reason for us to change that guidance. For FRE margin, similar to what I said earlier on the EBITDA, we don't provide profitability numbers on a quarterly basis. This is a trading update, not a full slate of results. As you could see, in the first half, we have been very disciplined so far in terms of cost management, yet making key investments. Remember, we've hired key senior people on the sales side. We've strengthened our growth teams around our leader, Hala Fadel, with hires of high-profile MDs, particularly in London. So -- but overall, we have been quite disciplined. So what I would say is that for the 2024, from where we sit, we should see some operating leverage in 2024, being mindful of that balance that we're trying to monitor being -- between being disciplined on the one hand, but also funding growth. I mean, this is a growth company that needs to fund its development. iM Global Partners, so we are very pleased with their positioning. We're very pleased with that growth. Obviously, the growth pattern is more dependent upon market effect than the pure private markets part of our business given the definition of management fees in which they operate. They are able both to grow the AUM at a good pace, and they are able to grow to acquire new partners, which is key to their platform. They also grow by having more partners that they can put on their platform. So, so far, it's a good performance. By definition, over the 4 years, it will be a tad more volatile than the performance that we have in other components of asset management given the potential market effects. An important thing about iM Global Partners, they are more geared to the U.S. than the rest of Eurazeo, which provides us with some diversification because a number of their partners -- underlying partners are very good equity/credit platforms with the U.S. underlying focused approach.

It appears we have no further questions on the phone. I will now hand over back to William. Please go ahead, sir.

If there are no more questions, then we should end this call here. We would like to thank you again for joining us today. And we remain at your disposal for further questions together with Pierre, Agathe and the team.

Thank you very much. Have a good day.

This concludes today's call. Thank you for joining today's conference.