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

Good day, ladies and gentlemen, and welcome to Foresight Group Half Year Results to 30th of September 2023. [Operator Instructions] I would like to remind all participants that this call is being recorded. We will now hear a prerecorded presentation by the Executive Chairman and Co-Founder of Foresight Group, Bernard Fairman; and partner and CFO, Gary Fraser. Questions will follow after the presentation.

Good morning. I'm Bernard Fairman, Co-Founder and Executive Chairman of Foresight Group. I'm delighted to welcome you to Foresight's interim results for the 6 months ended 30 September 2023.

And I'm Gary Fraser, Chief Financial Officer of Foresight Group. Today, we'll take you through our company performance and financial results for the period as well as the outlook for the remainder of the year and beyond.

Foresight Group is a uniquely positioned organization with a diversified business model that has shown strong resilience through this recent period of economic volatility. Following the high growth rates delivered last year, the first half of our current financial year has delivered stable AUM and further profitable growth for the group and our shareholders. First, we'll talk you through some key highlights from the period. Showing one of the steepest increases in interest rates in living memory, our diversified business model has continued to deliver strong and resilient performance. Core EBITDA increased by a very healthy 28%, and AUM was slightly up at GBP 12.2 billion. Looking forward, the business is well positioned to benefit from interest rate stabilization and normalization. We benefit from high-quality revenue with good visibility on future earnings. Recurring revenues at 87%, which sits within our target range. Our high-quality specialized products continue to attract long-duration capital with over 90% of our assets from this source, and we are not experiencing any pressure on management fee margins. We also continue to see an increasing level of opportunity within our key markets. Today, we have a future deployment pipeline across international infrastructure projects of over GBP 5 billion, providing us with confidence in our ability to deploy the funds that we raise. And it's not just an infrastructure that we see opportunity. With the launch of 4 new regional funds in our private equity division last year, you might not have expected further developments in this area. However, I'm delighted to confirm that earlier this month, we expected our regional footprint further with a GBP 50 million first close for a new investment fund for Wales alongside a further GBP 10 million capital raised for our Northern Irish strategies. So turning to the next slide. I'd like to take a moment to remind you all of our extended track record of profitable growth, which has seen the delivery of GBP 27.6 million of core EBITDA in the first half, a 28% increase year-on-year. As we've increased our scale post-IPO, we've also improved our profit margin, generating 40.7% in the period. Now looking at AUM on Slide 6, you can clearly see how our scale has built up over the years. In the year-to-date, AUM has increased slightly to GBP 12.2 billion with infrastructure growing by GBP 0.3 billion despite the challenging markets. This resilience in our AUM is due to the high proportion of long-duration capital we manage, which enables us to continue to deliver profitable growth with a shift in the mix towards higher-margin vehicles in the period. And turning to Slide 7. I'd like to provide a bit more color on 4 key components of our diversification, which combined to deliver success through economic cycles. We have a proven ability to successfully raise both institutional and retail capital, which is reflected in our AUM with roughly 2/3 from institutional, a 1/3 from smaller but more regular retail sources. We have 3 investment divisions, which each contribute to the profitability of the group and provide resilience against changing market conditions whilst providing opportunities to leverage complementary employee skill sets. We benefit from over 90% of our AUM being long-duration capital within evergreen or LP vehicles. And we are increasing our geographic diversification with investment assets across 3 continents. I'll now pass over to Gary to take you through the financials.

Thanks, Bernard. So turning to the key financial metrics on Slide 9. In summary, our diversified business model has delivered a resilient AUM performance, up 1% in H1 FY '24 despite macroeconomic headwinds. Furthermore, the combination of a 34% year-on-year increase in revenue and robust cost discipline delivered a 28% year-on-year increase in core EBITDA pre-SBP. These financial metrics translate into the delivery of further shareholder value with our interim dividend of 6.7p per share, representing a 46% increase from the prior year, whilst maintaining our dividend payout ratio of 60%. Now providing a bit more color on the movements of these key financial metrics. AUM was up marginally at GBP 12.2 billion during the 6 months to 30 September 2023. This was a function of strong inflows of GBP 247 million into higher-margin retail products delivered by our near 50 strong in-house sales team and continued successful private equity institutional fundraising via a GBP 30 million third close of the Foresight Northeast fund. In combination, these inflows offset GBP 207 million of net outflows and lower margin OEIC products, the latter principally being driven by the challenging wider market conditions. The net impact of these movements resulted in an improved AUM mix when compared with that of 31 March 2023. Moving on to Slide 11 and revenue. 87% of total revenues were high-quality recurring annual revenues, which was right in the middle of our target range of 85% to 90%. At the same time, we continue to deliver strong growth, up GBP 17.1 million or 34% year-on-year to GBP 67.8 million in total. Breaking that down, GBP 7.7 million of the GBP 17.1 million increase was organic, showing the impact of growth in AUM in FY '23 flowing through to the H1 FY '24 profit and loss account, with GBP 9.4 million flowing from M&A activity. Looking ahead, H2 FY '24 revenue will benefit from a full 6 months of management fees derived from higher-margin retail and private equity fundraising delivered in H1 FY '24. Further retail and institutional fundraising and on the institutional private equity side, 2 of those new funds completed in November; and last but not least, incremental performance fees with GBP 1.85 million having already been crystallized post period end. Moving on to Slide 12 and costs. During the period, we also maintained firm cost discipline in a tough inflationary environment, where H1 FY '24 costs were 8% up on our re-based H1 FY '23 costs of GBP 38.4 million. This increase comprises an average 7% staff salary increase, reflecting the higher inflationary environment, GBP 0.6 million, reflecting a review and benchmarking of senior staff remuneration by Korn Ferry and GBP 0.4 million cost relating to the staff share of performance fees. Looking ahead, we expect our full year cost increase to be approximately 10% higher than the FY '23 re-based cost number of GBP 76.7 million that we set out at the FY '23 results. As we continue to closely manage costs, we have also begun to execute targeted cost-saving initiatives in H2 that we estimate will save approximately GBP 1.9 million in FY '25 on an annualized basis. And finally, we are guiding to an effective tax rate of circa 20%, which is unchanged from our previous guidance. Turning to Slide 13. Strong 28% year-on-year core EBITDA pre-SBP growth was driven by successful prior year and year-to-date fundraising into higher margin and longer tenure vehicles, the annualization of FY '23 M&A activity, and as previously noted, the maintenance of firm cost discipline in a high inflationary environment. With the challenging 2023 market for institutional fundraising, particularly relating to infrastructure, having slowed the pace but not the size or scope of our institutional fundraising ambitions, we achieved a core EBITDA margin of 40.7%. Looking ahead, we expect the full year margin to be higher than that achieved in the first half. I would now like to pass you back to Bernard Fairman, who will take you through the outlook section.

Thank you, Gary. Now before we look at the outlook for the business in more detail, I would like to take a minute to remind you of who Foresight is and the building blocks of our success. We are a sustainability-led alternative asset manager. We operate across 3 core divisions: infrastructure, private equity and Foresight capital management. We have 4 Article 9 funds, 11 dedicated to driving the energy transition and 14 supporting regional SME investment. We are diversified with over 200 institutional investors and around 40,000 retail clients across 3 business divisions and 3 continents. We are predictable with 87% recurring revenues and over 90% in evergreen or LP vehicles with long-duration capital. We operate in rapidly growing markets with a leadership position in our key growth markets. We are ideally placed to capture the benefit from these long-term structural trends. We've already delivered material growth in AUM and margin expansion since IPO, but have significant scope to scale our existing investment platform further with the benefit of a very strong deployment pipeline across multiple international markets, including the U.K., Europe and Australia. These factors combined to deliver profitable growth and are underpinned by our unique culture and the wealth of knowledge and experience provided by our people. So how does this all work in practice? I'm now going to take you through a few slides to explain the size of the energy transition opportunity and why Foresight is ideally close to benefit. I believe the energy transition is the largest investment opportunity of all our lifetimes. The energy system, indeed, the entire global economy is in the early stages of being rebuilt with low or 0 carbon infrastructure and over 90% of the global economy now has stated net zero targets. This is creating an increased demand for electrification, significant technological advances as levels of research and development spend rise, this will result in an increasing cost competitiveness for renewables with solar and wind power now the cheapest fall of electricity generation globally. And this is all being supercharged by multiple significant global regulatory tailwinds with a further acceleration as a result of a strengthening focus on energy security. But what does all this focus and these targets actually mean in practice? It means that there is a clear and growing need for very significant levels of incremental investment into low-carbon energy generation, storage and grid infrastructure. And we've included a few examples on the slide for you to highlight the scale of this requirement, and this requirement presents a very clear opportunity for Foresight. For over 15 years, we've been investing in the wider energy transition across 3 main layers: the initial power transition, for example, wind and solar generation, the systemic power transition where the investable assets create flexibility and connectivity in the energy system, for example, reserve power, interconnector cables and battery storage facilities. And finally, the wider net zero transition, which focuses on addressing emissions from sectors other than energy. So natural capital, such as forestry would be an example here. As you can see from this slide, we already have multiple strategies across each of these 3 layers. Strategies that were specifically designed decades ago to align with these long-term trend. And we have a clear plan to build on this experience to launch new strategies, which leverage the knowledge of our people, our understanding of the markets and our investment track record to expand our platform. And turning to Slide 18, you can see evidence of our track record, where we've deployed over GBP 4 billion. As of today, we're invested in 435 infrastructure assets across 9 countries and multiple sectors with a currently installed green energy technology capacity of 4.7 gigawatts of power. This level of investment has helped us to build a strong reputation as effective managers of sustainability-led infrastructure investments that contribute towards the energy transition. As our track record has deepened and as the division has scaled, the profile of our investments has increased whose [indiscernible], which involved the construction of 35 6.6 megawatt turbines, the largest onshore wind turbines in the world. Silvermines, which is a landmarked pumped hydro development in Ireland that will drive system stability due to the rapidity in which it can be switched on or off. And there's attractive government funding on potential EU subsidies. And MaresConnect, a development-stage asset that is constructing to high voltage direct current interconnector cables under the Irish sea and are shortlisted for Ofgem support. These metrics and examples clearly highlight the depth of our expertise in this market. And as the market continues to grow, we see the size of our investment opportunities expanding in step, creating a very material tailwind in the business. So I've just given you some color on the opportunity in our largest market, but we benefit from long-term structural growth trends across all of our key markets. These growth trends give me confidence in our ability to continue delivering profitable growth across the business. Through the combination of a focused approach to fundraising and supplemental M&A activities, we have multiple levers available to us to deliver success. We have a healthy pipeline across both retail and institutional fundraising. Our institutional infrastructure fund raising efforts are currently focused on existing strategies, expanding [indiscernible] and launching [ Fleet 2 ] to build on the successful track records and access opportunities across the renewable rollout and systemic energy transition, while we prepare for the launch of a new hydrogen fund. Our regional quoted equity strategy continues with a high degree of success I referenced earlier, with further regions targeted, the U.K. expansion and the prospect of rolling out the model overseas. Our differentiated investment products remain very attractive to retail investors, and we are seeing successful ongoing fundraising. This has been further enhanced during the period through the creation of a dedicated OEIC sales team. So to sum up, on the back of our resilient performance in the period and our strong pipeline of opportunities, we remain confident to deliver our strategic targets. On a rolling 3-year average, we've delivered 22% AUM growth within our stated target range of 20% to 25%. Recurring revenue was also well within our target range at 87%. Alongside strong growth in profits, our margin is above 40%, and we remain confident to achieve our 43% target as the business builds operational leverage through institutional fundraising activity. We remain committed to ensuring a high degree of shareholder alignment. And accordingly, I'm pleased to announce an interim dividend of 6.7p per share, reflecting the group's successful performance. Foresight has continued to perform during this period of financial volatility, and we're well positioned strategically to benefit from interest-rate stabilization and normalization as economic conditions improve, I'm therefore confident in the group's ability to continue to deliver profitable growth and shareholder value today and in the years to come. Thank you very much for listening, and we'll take your questions.

[Operator Instructions] We'll take our first question today from Jens Ehrenberg at Investec.

Can you hear me all right?

Yes.

Yes.

Great. Two questions from my side, if that's all right. Firstly, just on the infrastructure side of the business and sort of looking at that, that we would expect you to go into the fundraising in the first half of 2024. What are sort of the underlying valuations of the infrastructure assets done? Is that still all holding up all right? And then secondly, I think we had 2 days ago, the confirmation from the FDA that they are looking to introduce their sustainability disclosure and labeling regime. Do you have any thoughts on that? To what extent would you expect to be impacted by that, particularly on sort of your retail products?

Thanks, Jens. It's Gary here. So firstly, on the valuation side. Certainly, the valuations are holding up in terms of infrastructure valuations. So I think in terms of the assets we already manage, clearly, discount rates have increased as interest rates have increased, but that's been partially offset by inflation length increases in revenues. And so we've seen over -- certainly, over the last few months, last 6 months, fairly static levels of valuations despite the increase in discount rates. I think as we start to see short-term interest rates having hit a peak, maybe even coming down, I think we're seeing bond yields coming down. Eventually, during the first half of next year, I think we'll start to see short-term interest rates coming down, and that should have a positive impact on valuations going forward. So I think looking ahead a little bit in terms of valuations, I think there's a relatively positive outlook in that respect. In terms of the second question, at the FCA's recent announcement, in terms of sustainability disclosure and labeling regime. I mean I think generally speaking, we welcome that. I think for us, we see it as supporting the U.K.'s position as a world-leading competitive center for asset management. It's sustainable investment. I think it also adds credibility to the sustainable investment market and ultimately should protect consumers. I think from a disclosure perspective that we make today relating to EU SFDR and the UN SDG for example, our disclosures in that respect are more comprehensive than those proposed by the FCA. And so firstly, I don't foresee many problems within new proposals. It shouldn't have a material impact on our reporting requirements. I think the final point I would make is that, generally speaking, the U.K. market has become congested with asset managers and investment funds making sustainability claims. And I think more broadly, any actions that add clarity to that area are very much welcome in my opinion.

Understood. And sorry, Gary, just on the first question. Am I correct in understanding that if sort of valuations have held up well and if the -- say, the outlook is cautiously positive, that should presumably hold positively for any fundraising conversations you may have. Is that fair? Or...

Yes, absolutely right. I think that is absolutely correct in terms of a fundraising conversations that we're right in the middle of.

Our next question is from Andrew Watson, Singer Capital Markets.

Really helpful. Two questions for me, both on fundraising. I think first one is not in your focus on RF and FEIP in terms of near-term opportunities. Can you just give me a sense of where the discussions are with potential LP partners in terms of the milestones and the process their side, please? That's the first one. And then the second one is just a little bit of color around the composition of your GBP 5 billion plus pipeline, please?

So in terms of the first question. So conversations are obviously ongoing with LPs. I'd like to think that we have -- as I said, I think in the RNS, we have first closes on both of those in H1 calendar '24. With a strong market win behind us, it could even be a bit earlier than that. Certainly, conversations with LPs, I think, are the most positive they've been right now than they have been at any point during calendar FY '23. So that's what's giving me confidence in the momentum behind those fundraisings. I also think in addition to those 2 that you mentioned, Andrew, our hydrogen fund, I'd like to think that we have a first close of that in H1 calendar '24 as well. So I think ongoing conversations, a number of soft commitments across the first 2 funds that you mentioned, and we're just pushing ahead in terms of securing more commitments that will bring us to a first close during that period. I just mentioned. So that -- that's principally what I would say on that. Clearly, I can't determine what exactly it will be, but we're pushing hard on both fronts. And I'd like to think, as I say, H1 '24 is certainly doable. And with the right market dynamics, I think we can even bring that forward. In terms of the second question, in the GBP 5 billion, it's really across the entire infrastructure spectrum. I think we've got -- if I look at it, we've got renewable generation is probably about GBP 2.5 billion of it. Storage Technologies probably just over GBP 1 billion and then hydrogen a short billion. And then the remaining difference is a variety of different technologies. So I think the 3 core areas are principally those that I've mentioned. And a lot of that, even the GBP 5 billion is related to the rollout projects that we're already invested in. So effectively, the GBP 5 billion is locked in for us to invest if we so wish. So I think we've got a high degree of security there in terms of maintaining that, if not building upon it as we roll out some of these projects even further.

[Operator Instructions] We have another question from Andrew Shepherd-Barron at Peel Hunt.

Yes. Great. I think I've unmuted myself. Yes. Okay, the symbol says I'm still muted. Yes. Okay. A couple of questions, if I may, but both linked to the same thing really. One, which is sort of management remuneration, share-based payments of that. One, which is -- basically, you've had a [indiscernible] and you put management payout, but also we see a big increase. Well, the continuation of last year should increase in share-based payments. Can you talk us through whether that's going to increase or exactly how much of it's related to acquisitions, et cetera? And then the other question is a sort of broader question. When you -- about FRE margins, can you talk about how you see FRE margin trends and drop through? And when times get better and funds raised exactly how quickly do you think that margin can continue to run into 50% or whatever number you have in mind?

Okay. So in terms of the costs, with respect to effectively the options, if you like. The vast majority of those, Andrew, related to acquisition activity. So I think in the period to 30th September, it was about GBP 8.8 million of costs related to share-based payments. and just under GBP 8 million of that relates to the acquisition activity. I mean a good rule of thumb would be that on an annual basis, the remuneration element of share-based payments is capped at 1% maximum. And anything else related to share-based payments would be as a result of acquisition activity. So we would never go above 1% on average in terms of share-based payments for remuneration stuff. Does that answer that question?

Yes. Sorry, 1% of what?

1% of equity in issue effectively.

Okay. Okay. Great. Yes, that's fine.

In terms of FRE margins, I mean, I think -- I mean, clearly, that's linked to -- first of all, what I would say is in terms of investment management fees, and those associated with the different divisions. We're not seeing any pressure in terms of investment management fees. So the 2 new funds that we've just closed on the private equity side, there in the normal [ GBP 190 million ] to [ GBP 225 million ] in terms of basis points management fees. So we haven't seen any pressure on investment management fees. So -- and we haven't seen that across the board. So on the others that we're negotiating on in terms of the new funds on the infrastructure side. Again, those are within the range that I've previously discussed. In terms of how that flows through to core EBITDA margin and where we think the direction of [indiscernible]. So first of all, as I said, I think I expect the margin in the second half to be higher than the first half. I think if 1 or 2 things had happened earlier in the process, i.e., the performance fees have landed by the 30th September or we've seen an annualization of the cost savings, the actual margin at 30th of September would have been 43.6%. It's not, it's at 40.7%. But I think just extending that forward, the key driver for us in terms of accretion in the margin going forward is the institutional infrastructure fundraising. And so I see it hitting 43% in the very near term. I also see us getting -- my ambition is for us to get to 50%, but that will be a function of institutional fundraising principally in the infrastructure side over the next few years.

We have a further question from David McCann at Numis.

Can you hear me?

Yes, David.

Yes. Perfect. Yes. So just actually to follow up on one of the earlier questions. So this sort of GBP 5 billion pipeline that you talked about, origination capability I think you've identified, how much of that do you think you can realistically utilize from funds that you have organically [indiscernible] and how much of that is [indiscernible] rely on doing that partnership you touched in the past [indiscernible] as big brother as I think was the term used. So just be interested -- yes, how much do you think you can do with what you've got in the reasonable future versus how much will rely on [indiscernible] in someone else's capped whether [indiscernible].

Yes. Okay. So I think in terms of that GBP 5 billion plus, I think it would be reasonable to expect Foresight to be able to do up to half of that from the funds that we're raising at the moment. And I think the remainder of that would be done through either securing co-investors, each of those projects alongside our funds or through some sort of partnership, as has been referenced previously by Bernard some sort of big brother partnership where we would be able to utilize their resources or distribution capabilities that would then enable us to raise the additional capital for that type of pipeline.

[Operator Instructions] We have another question from Andrew Shepherd-Barron at Peel at Hunt.

Got you. Just very quickly following up on that question. Where is the big brother? How -- how is it proceeding? What are your thoughts? Can you say anything about size, type, anything would be interesting.

I mean, we're in active discussions with a handful of very large players, Andrew. Clearly, these discussions do take a long, long time. So as soon as we've got anything more to say on that, we absolutely will announce it to the market or as appropriate. But all I can say at the moment is that we're in active discussions with a handful of very well-known players.

We have no further questions on the web now. I will now hand over to Elizabeth Scorer to read out the written questions.

Thank you. So we have a number of questions from Tom Mills, and I will just ask them one by one, if that's okay, Gary. So the first one, if you could just give a bit of color in terms of the latest flows within the OEIC side of the business?

Yes. I think very recently, we started to see a reduction in net outflows on the OEIC side of the business. I think in the very near term, we've started to see inflows. I think overall, depending on today being the 30th November, I think AUM on the OEIC part of the business will be higher than it was at the end of October. Now it's very early in this whole place -- this whole piece in terms of calling a change, and I would never do that at this early stage. But I think it's hardening to see a change of momentum even if that's just reduced outflows. But I think we're also starting to see performance in the underlying holdings improve. And I think that's on the back of the changes in terms of views on interest rates going forward. So I think it's very early days, but I think we're starting to see a little bit of a change both in terms of demand and performance of those underlying assets.

Great. And then just touching on -- following the acquisition of ICT Australia last year, there was a discussion around cross-sell opportunities between the funds that we have there, the investors in Australia and the investors in Europe and whether there is a potential for cross-sell with the investor base. How have those discussions been progressing?

I mean the answer to that is that the discussions are progressing well, both for Australian investors to invest in Europe and vice versa. So that's something that we're pursuing at the moment. I think discussions are going well to date. And I think that optionality given Foresight's international status is something that LPs are particularly keen on. And I think we'll see more of that during H1 FY '24, FY '25.

And then finally, are you able to just give a little bit more color on the M&A backdrop for [indiscernible] deals because there's been some recent buyers into the space. So just would like to hear your perspective on that one.

Yes. I mean I think we're always actively looking at M&A opportunities. I think our current rating necessarily precludes us from doing too much in terms of share usage. So where we would do deals, we would utilize cash where appropriate. I think we're still seeing some private market assets with unrealistic expectations in terms of multiples. And as the listeners will know we've made a commitment not to make dilutive acquisitions. So when we do make acquisitions, they'll be accretive to the business. And so anything that we're doing or looking at the moment will be accretive to the existing business. There are 1 or 2 opportunities that we're considering. But they're at the smaller end of the scale. And it's nothing that's going to happen during FY '24, the period to 31 March. It would be beyond that, in my opinion.

No more questions online.

And there's no further questions on the webinar. So I will now hand over to Gary Fraser for closing remarks.

Thank you. All I would like to say is I think the demonstration that we've -- in H1 FY '24 resilient set of results. I think the outlook for the rest of the year to 31 March '24 to achieve consensus is well on track. And I've highlighted in my notes earlier about the 2 new funds in private equity as well as the performance fees starting to flow through. So I think we're very well placed for the rest of the year. I think I've probably never been as clear in terms of the ability to raise institutional funds during the first half of the calendar year '24. So I think all in all, we're in a very good position. We've resourced appropriately to take advantage of the opportunities as they are coming. And so I think the outlook for Foresight is very good. I think the one final thing I'd like to say is just to thank everyone for tuning in today. I look forward to speaking to you all in due course. Thank you.