Foresight Group Holdings Limited (9LR.F) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the Foresight Group Holdings Limited Investor Presentation. [Operator Instructions] Before we begin, we'd like to submit the following poll. And if you could give that your kind attention, I'm sure the company be most grateful. I'd now like to hand over to CFO, Gary Fraser. Good morning, sir.

Good morning, Mark, and good morning, everyone. I'm delighted to welcome you to Foresight's full year results for the year ended 31 March 2023. As Mark said, I'm Gary Fraser, the Chief Financial Officer for Foresight Group and today, we'll update you on our strategy, exceptional performance and impressive financial results for the year as well as the first quarter trading in FY '24 and the outlook for the rest of the year and beyond. I'm pleased to report it's been another year of highly profitable growth for Foresight, and we've delivered an excellent performance ahead of both our own and market expectations. We've extended our track record of achieving against our ambitious growth targets, and that's enabled us to materially increase our shareholder returns with a very significant increase to the dividend. I'm popping my camera off now to make these slides bigger for you as we turn to Slide 4, but I'll pop back up again at the Q&A at the end of the presentation. So moving on to Slide 4. I'd like to start with a reminder of our excellent track record of profitable growth. Over the last 5 years, AUM has grown annually by 37% compound. And over the last 3 years, core EBITDA, pre share-based payments, our core profitability metric has grown annually by 28% compound. This has accelerated over the last year, during which we have delivered AUM growth of 38% and core EBITDA pre SBP growth of 58%, leading to a record year of profitability for the group. As you can see from the chart, our track record of profitable growth is both consistent and impressive. Moving on to Slide 5, where we look in more detail of the acceleration of growth we achieved in FY '23 and tying that back to delivery against our 4 strategic growth targets. Firstly, growth, we grew AUM by 38% in the year to GBP 12.2 billion. This was well ahead of our 20% to 25% target and FUM, which represents our fee earning assets under management increased by 35% to GBP 9 billion. The notable increase in annual growth can be primarily attributed to the successful execution of our acquisition strategy, with infrastructure capital and the Technology Ventures division of Downing, both being financially and strategically accretive to the group. And as you may recall, we have made a commitment that all acquisitions we make will be earnings accretive. We're not interested in anything that isn't. Additionally, our franchise benefited from organic growth within our higher-margin strategies. Our retail fundraising team was successful in creating strong demand for tax-efficient products. And we launched 4 new regional private equity funds, materially expanding our footprint in this market. Secondly, high-quality earnings. Our highly predictable model provides us with excellent visibility on earnings and 87% is comfortably within our target 85% to 90% range. This visibility enables us to match our cost base to revenues and ensures that we continue to grow profitability. As we enter FY '24, our revenue will benefit from a full year of fees from the significant growth in AUM delivered in FY '23. Thirdly, operating leverage. Our core profit margin increased by 5.1 percentage points to 42.1% in the year, as we grew revenue significantly faster than costs, and this positions us well to meet a 43% medium-term target, which ends in FY '24. Our continued progression in this area provides evidence of our scalable platform facilitating margin expansion whilst allowing investment for future growth. And finally, to shareholder alignment, in line with our dividend policy to pay a total dividend of 60% of profit after tax, we're announcing a final dividend of 1.5p, an increase of 46% on a full year basis. This reflects both our successful performance in the period and the confidence of the Board and the positive outlook for the group. Moving on to Slide 6. This outstanding performance in the year once again reflects the strength of our diversified and resilient business model. To recap, our AUM is well spread across both retail and institutional investors, providing us with a consistent stream of gross retail inflows from around 40,000 retail investors. This is driven by our in-house sales team, and it complements more sizable long-term institutional fundraises that we have as well. Our business model consisting of infrastructure, private equity and Foresight Capital Management provides resilience against prevailing macro conditions as well as providing synergies by leveraging complementary skill sets within the different divisions. We're well diversified by fund type as well. Over 60% of our funds are in evergreen or listed vehicles, giving us long-duration capital and a further 25% in LP structures with an average remaining life of 12 years. This provides us with a very high degree of certainty of future based revenues and allows us to plan accordingly. And we're also diversified by geography. Our expanding geographic footprint across Europe and Australia is demonstrated through our acquisition of infrastructure capital. The U.S. also remains a core target market for us, and we've already made inroads there via our partnership with Cromwell in the sub-advisory market for our OEICs. At the end of the financial year, 43% of our AUM was outside the U.K. compared with just 23% in IPO. This is a direction of travel that we expect to continue and intensify over time. So we have diversification through our investor base, our investment divisions by vehicle type and by geography. This allows us to respond to opportunities as they are identified, leveraging our broad skill set to deliver consistent and profitable growth. On to Slide 8 in terms of key financial metrics. You can immediately see that these metrics reinforce the message that you've already heard in that it's been an expanding year for the group. AUM and fee earning assets under management were up 38% and 35%, respectively, driving a 38% increase in revenue to GBP 119 million. This is a significant milestone for the group, being the first year we have generated over GBP 100 million of revenues, demonstrating that our business is growing and fast. It is also worth making the point that this growth does not come to the cost of profitability, with core EBITDA pre SBP, up 58% to over GBP 50 million, demonstrating the significant operating leverage in the business. Additionally, we improved core EBITDA margin by 5.1 percentage points in the year to 42.1%, as I said earlier, putting us right on track to deliver our medium-term target of 43%. This target is not a ceiling though. We believe that we can continue to grow profitability, adding further operating leverage as our strategies at scale over the longer term. This outstanding performance has enabled us to materially increase our shareholder returns. And therefore, by maintaining our dividend payout at 60%, we've significantly increased the total dividend of the year to 20.1p, 46% increase. Moving on to Slide 9 and AUM progression. So looking at these key financial metrics in a bit more detail and starting with AUM. This slide focuses on the significant progression of our AUM growth since FY 2018. As you can clearly see from the chart, we've consistently added to the group's AUM year after year. With each of our 3 business divisions contributing to deliver an impressive overall increase in AUM of 4.7x, taking AUM from GBP 2.6 billion to GBP 12.2 billion over 5 years. Drilling down into the divisional contribution, Infrastructure remains the largest division by AUM and increased by 4.4x over the last 5 years. Growth delivered through organic and organic sources, both -- so for example, acquisitions of Infrastructure Capital in 2023 and the investment mandates of JLEN in 2019 and PiP in 2020. Around GBP 1 billion through the successful launches of our FEIP strategy, the IPO of Foresight Forestry, tap issuances from the other listed vehicles such as FSFL and JLEN as well. The PE division has doubled the AUM since IPO and delivered an increase of 3.4x over 5 years with exceptional growth in FY '23. Some highlights from FY '23 include significant expansion of regional growth strategy with 3 new funds in the U.K. and the first fund in Ireland. The acquisition, as I said earlier, of Downing Ventures, very much complements existing ventures offering that we have and accelerate growth and presence in this area. Foresight Capital Markets, or FCM, has grown by 10.6x despite net outflows in the current year. With our in-house specialist retail sales team, we're still seeing demand for these sustainable strategies across the U.K., IFA and wealth manager networks and gross inflows remain robust. This division still has high growth potential, benefiting from scalable operations, and we're actively pursuing further distribution strategies, following our recent expansion into the U.S. and our U.S. sub-advisory mandate with Cromwell. Moving on to Slide 10, where we look at the AUM bridge. Post-IPO, AUM has grown by 69% being a mix of both organic growth at 31% and strategic acquisitions at 69%. We expect organic inflows through institutional fundraising market to drive growth over the coming year. Drilling down further into our exceptional growth in FY '23, acquisition activity drove a step change in AUM to GBP 12.2 billion, an increase of 38% in the year. The retail fundraising sides the most activity and net outflows in lower-margin oil products, which were driven by challenging market conditions as markets experienced a reset in valuations against the backdrop of persistent inflation and central banks increasing the pace of interest rate rises. However, this was largely offset by continued strong gross flows into high-margin retail products, driven by our in-house sales team and also our institutional regional private equity vehicles. Additionally, we saw a negative GBP 0.2 billion movement in the year, primarily due to a strengthening of sterling against the Australian dollar in H2 post the acquisition of Infrastructure Capital. Moving on to Slide 11 now on revenues. 87% of revenues were driven by high-quality recurring annual revenues, right in the middle of our target range of 85% to 90%, whilst at the same time, continuing to deliver strong growth, up 38% year-on-year to GBP 119.2 million, GBP 20 million of the GBP 33.1 million increase was organic, showing the impact of growth in AUM in FY '22 flowing through to the FY '23 P&L. And looking ahead to FY '24, we have a very high level of confidence that we're going to materially grow our revenues year-on-year by simply annualizing the recurring revenues we generated in H2 to allow for the acquisitions and rolling forward all other revenues at the same level as FY '23. Our revenue in FY '24 would already be 11% higher than FY '23. This provides us with an extremely strong base level growth before delivering on any of our incremental fundraising plans for FY '24. That certainty of revenue generation facilities business decision-making and is a core strength of our recurring revenue model. It's also worth noting that we added diversification to our revenue streams in the year through a geographic expansion, more than doubling our non-sterling denominated revenue contribution from GBP 7.5 million in the prior year to GBP 19 million or 16% of total revenue in the current year. Moving on to Slide 12 and costs. Costs grew marginally ahead of our guidance at 12.9%, excluding acquisitions, significantly lower than the revenue increase I've just taken you through, and we expect FY '24 cost to grow at a similar rate. We were able to largely deliver on our cost guidance through continued strong cost discipline and continuous steady investment. Clearly, Foresight benefits from recurring and predictable revenue streams, allowing us to plan ahead for multiple years. Finally, on costs, we are now estimating an effective tax rate of 20%, reflecting higher U.K. corporate tax and an increased presence in Australia. Moving on to Slide 13, an investment in people. We will continue to invest in our most important asset, our people, to deliver enhanced returns for investors. At the year-end, our FTE has increased to 361 from 261 in the prior year. This growth was largely driven by the 56 people acquired through acquisitions, including around 25 additional asset management employees in the ICG business. Outside of the acquisitions, we invested in a number of key areas, including but not limited to, new regional teams to support PE fund expansion, and increasing our ratio of investment professionals to 48% from 44% previously. At Foresight, we believe that continued investment in our wider workforce creates a differentiated capability that sets us apart from our peers and enables us to deliver enhanced returns to our investors. For example, through high-quality in-house asset and portfolio management, we are able to extend asset lines negotiate strong performance guarantees, source and evaluate high-quality deals in even the toughest markets, leverage expertise across the portfolio, create innovative and motivational deal structures and refinancing packages and differentiate our offering to LPs and build market-leading management teams. These capabilities were integral to -- integral to the group's outstanding increase in profitability in FY '23, with, for example, GBP 3.6 million generated in performance fees from the sale of 2 solar portfolios. Moving on to Slide 14 and profitability. You can see evidence of how these profitable realizations have combined with wider business performance to deliver a 58% jump in core EBITDA to GBP 50.2 million, as revenue growth continues to outpace cost increases with no pressure to fee margins. As a result, we have also made significant progress towards a medium-term target set out at IPO of 43% core EBITDA profit margin in FY '24, by delivering a 5.1 percentage point increase in margin to 42.1% in the current year. This outperformance meant that we saw multiple upgrades to analyst consensus over the course of the year, reflecting the generation of performance fees and success in fundraising and acquisitions. We are confident that we will continue to grow our core profitability and profit margins as the business scales and specifically about delivering on our profit expectations for FY '24. On to Slide 15 and shareholder returns. Underlying earnings per share increased during the year to 34.6p in FY '23, and this translated into a full year dividend of 20.1p per share for FY '23, an increase of 46% over the 13.8p per share paid in FY '22. So moving on to Slide 17, significant market opportunity. I now want to remind you of the size of the market opportunity that we benefit from in terms of the energy transition in particular, before taking you through our broader fundraising plans and an update on our outlook in trading in Q1 '24. Foresight is 40 years old next year, and one of Europe and Australia's most established real estate investors. We've been investing in the renewable energy transition for over 15 years. These markets are growing rapidly as the demand for cleaner, greener energy continues to increase, driven by a growing demand for energy transition strategies and a recognition of the importance of energy security. In 2022, global investments in energy transition technologies reached a record high of $1.3 trillion. And this level needs to quadruple for us to remain on the pathway to a 1.5-degree increase in temperatures worldwide. This would represent a cumulative investment of $44 trillion between now and 2030, of which 80% would need to be in energy transition technologies. Add to this, our renewed focus on energy security and helpful government policies such as the U.S.'s IRA, Reduction Act, and the scale of the market opportunity, where over 50% of our existing AUMs invested becomes very, very material. Our infrastructure investment strategies cover the whole spectrum of renewable energy generation and transition as well as wider economic decarbonization, resulting in us being very well positioned to support the broader energy transition by investing capital in the real assets that are driving this change. Moving on to Slide 18 and the multiple levers to deliver further profitable growth. This gives -- this slide gives you an overview of our ambition in this area. As those of you who follow us are probably aware, our focus for FY '24 is organic growth. We have a strong pipeline of fundraising across asset classes scheduled for this year and beyond. This includes established strategies such as ARIF in Australia and FEIP in Europe alongside new opportunities such as Foresight Core European Renewables and our expansion into adjacent asset classes, such as hydrogen, which we believe will play an increasingly important role in the transition to more sustainable and secure energy provision. We benefit from having multiple levers for growth. And in addition to organic fundraising outlined above, we continue to assess the market for accretive M&A opportunities. We have been pleased with the performance of our FY '23 acquisitions to date with ARIF raising almost AUD 200 million since the acquisition. And with a growing track record building on the previous success of PiP and JLEN, we believe there are attractive partners and continue to see a pipeline of acquisition opportunities. Moving on to current trading on Slide 19. We estimate that our AUM at the end of June was marginally lower at GBP 12 billion. We raised new retail money, but this was offset by the lower margin OEIC money that we lost as a result of net outflows and redemptions and a negative FX adjustment as the pound strengthened against the Aussie dollar. We're pleased to see our diversified approach continues to deliver resilience in today's market and look forward to the OEIC's returning to growth when these conditions become more favorable. As we look ahead to FY '24, we can see a high degree of revenue visibility from locked-up capital, delivering recurring revenues. This visibility facilitates long-term decision-making and effective cost management. And we're confident in our ability to continue to deliver on our growth targets, and we anticipate continued fundraising into high-margin retail vehicles with additional institutional fundraising and M&A. And timings are on course -- timings are, of course, unpredictable, and we would see institutional fundraising weighted towards H2 as we move beyond the summer period. Finally, to close our presentation today, I wanted to remind you of who we are. We are a specialist sustainability-led international infrastructure and regional private equity investor. We have a diversified and resilient business model with recurring and predictable long-term revenue, and we remain ideally positioned to capture the long-term structural growth trends in our key markets. Our model is highly scalable so that we can continue to deliver future growth, and we have a demonstrable track record of profitable growth and delivery against our key strategic targets. This is underpinned by a strong entrepreneurial culture and the talents of our people, which, when combined, enables us to consistently deliver profitable growth and shareholder value, as you can see from the stats on this slide. Thank you all for listening this morning, and we'll now take questions.

That's great, Gary. Thank you very much indeed for updating investors this morning. Gary, I will return your camera as suggested earlier. [Operator Instructions] I'd like to remind you the recording of this presentation along with the copy of the slides and the published Q&A can be accessed via your investor meet company dashboard. Liz, if I may, I'll invite you to open the Q&A tab. As you can see, you've had a number of questions from investors throughout today's presentation. So thank you to everybody for your engagement this morning. And if I may, Liz, just hand back to you to read out those questions and give -- and Gary, if you could give response as appropriate to do so, and I'll pick up from you at the end.

Wonderful. Thanks, Mark. So yes, you guys had a number of questions. And if I kick off with the question where the question starts off by I think it's a great performance. But then the question is, what is the greatest risk to this momentum continuing in the future?

I mean, as I talked a little bit at the end there, I think at the moment, we're seeing across -- worldwide, I think the institutional fundraising market in Q1 was down 94%. So that gives you a flavor about how tough the institutional fundraising market is at the moment. I think where we're different from a lot of the monoline institutional fundraisers that we've got a diversity of products that we can offer LPs. And I think that sets us apart and gives us an ability to offer something unique that other people can't. So as I said, I expect institutional fundraising to be more weighted towards H2. But I definitely see a willingness from LPs to commit to our strategies and noted earlier about one of our Australian funds already having that commitment to one of its fund raises of almost AUD 200 billion. So there's certainly a willingness in LPs to commit to our strategies. And I think given our head start that we have wider decarbonization agenda, I'm confident that despite the headwinds in institutional fundraising more generally, where we can still achieve those targets. I think it's important to say as well that in addition to the institutional side of things, we're still performing exceptionally well on the retail side fundraising. And although we've seen net redemptions on the OEIC side, that's more than been offset by high-margin products to retail investors. And so net-net, our revenues and profitability on the retail side is up despite the fact that we see net redemptions on the OEIC side.

Thank you, Gary. And there's a logical follow-on from that in a follow-up question which talks about what are the key drivers behind that strong retail inflow?

So I think we're -- in terms of the key drivers behind it, I think we're offering something to investors that a lot of people do not have the ability to offer. So we have between 150 or so infrastructure investors, asset managers, portfolio managers, and our ability to give retail investors access to a stable return asset class in real assets. A lot of people aren't able to give retail investors access to that. Normally, it's reserved for only the largest of institutions. And so that proves to be really attractive with both IFAs and wealth managers to be able to offer that to their end clients, if you like. And because of that, our inflows have remained robust during the period. And performance is a second point that I would add. Our performance in these areas has been exceptionally well, both in terms of infrastructure and on the private equity side over the last 5 years or so. And so we're really delivering in terms of returns for investors as well. And I think that's why it's -- why Foresight in terms of both its key strategies has been attractive to investors.

And then in terms of the retail institutional split in terms of looking at the AUM, is there an ideal split that you envisage between retail and institutional to overall business?

So first thing I would say is that I love having the diversification of both at Foresight. I think the current split is roughly 70-30 and anywhere in that 2/3, 1/3 between institutional and retail, I would certainly like to maintain that for as long as we can because I -- you never have -- the retail comes in on a daily basis. So it's certainly very attractive revenues to have. Whereas on the institutional side, it tends to be much lumpier when you raise core funds maybe every 2, 2.5 to 3 years. So I'm having that split, I think, provides an element of resilience in the business that people who focus on one or the other don't necessarily have. And I think you can look forward to us delivering in terms of growth targets as a result of having both strategies going forward and continuing to happen.

Thank you, Gary. So then just drilling down into private equity a little bit more. Are you able to provide a little bit more color on what's gone well and what hasn't within that division, specifically? How have valuations changed over the past year and particularly with a focus on venture capital investments? If there's any additional color you can share there?

Yes. I mean, I think most of our regional strategy is certainly, the predominant regional strategies are very small-scale MBOs of both capital investments and they've gone particularly well. So I think as an example, and please take this as it's meant, which is just a strong win, but one of our Northwest -- first Northwest fund is currently in realization mode. I think it sold 6 of its 17 investments and the net multiple and this first 6 investments is about 6.7x money. So I think the regional strategy in terms of investing locally for pension funds and local investors has worked really well. It's generated not only value for pension funds, but it's also created many, many jobs in the regions as well. So I think that's gone particularly well. I think in terms of challenges and on the venture side, I think challenges retail side, I'm thinking during the squeeze, if you like, cost of living crisis, I think you saw restaurants that -- using as an example, restaurants that were in the middle, so not at the very low end and not at the upper end, I think they got squeezed in terms of footfall. And I think you saw some attrition in terms of value of that type of middle market retail investments. I think there's no question that was the case. In terms of the venture side, I think you'll start to see -- these interest rates to start to see banks [ drop stocks ] in terms of funding some of these things. So I think you're going to see more equity funding being required on a more regular basis until I think we see a more normalized bank environment. And who knows how long that could be, that could be 12 months or 18 months away.

And then staying on the topic of valuations, but moving up to the corporate level. Are we seeing any change in terms of acquisition targets in terms of the valuation profile there? And can you provide some color on that?

Yes. I mean, as I said earlier in the presentation, we only look at accretive acquisitions. What makes that quite difficult is our own underlying value, if you like. So when we listed, we were listed at [ 420 ], and profits were GBP 23.9 million. And here we are at over [ GBP 50 million ], and we're not much more than [indiscernible]. So I think our multiples actually have from about 20 to 10x. So that makes it quite tricky because I think what you're seeing in the private markets, despite the fact that you've seen small-cap listed stocks, a bit of a retrenchment in terms of the multiples. You haven't necessarily seen that in private asset vendor expectations. And so because of that, you're likely to see less larger deals, in my opinion, at least for the foreseeable future. That doesn't mean you can't still do acquisitions, and I'll give you an example. In June, we did a very small acquisition of a PFI contracts business. We paid GBP 4.8 million for it, which is just over 5x, and that will add GBP 1.2 million to revenues and about GBP 0.9 million to profits on an annualized basis. So there are still smaller deals to be done out there. But I think I'd like to see Foresight's rating increase so that we can do larger acquisitions like ICG, et cetera, going forward. But I think as investors also though, of course, it's very cash generative. So for a lot of the smaller deals, we'll be able to create [indiscernible] in cash and leverage up our ability not to take home debt or necessarily, as I said earlier, we definitely don't want to be issuing here where we see -- where the deal is not treated to underlying investments.

And then just looking at sort of the average fund life that the company benefits from and -- or equally to total asset life. Can you just give a little bit of color in terms of the duration of some of the assets that we own and also the average length of duration of our funds?