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

[Operator Instructions]

We'll take our first question from Tom Mills of Jefferies.

I just had a couple of questions, please. You touched on how budget clarity is supported a notable pickup in demand for your tax-efficient products, which sounds very helpful. I'm just interested to get your take on broader budget and Mansion House speech implications [indiscernible]. Many of the headline announcements sound pretty positive for your business [indiscernible]. But I'd be interested to hear what you have to say. Secondly, can you give us a sense of where you think the second vintage of your natural capital strategy could get to in fund size terms? And then finally, I've also seen that you've printed a strong performance fee number in the first half, which looks like it was driven by private equity assets. But can you talk a little bit about that? And do you have much view on the pipeline of assets there as well?

Tom, thanks for the question. I think the Mansion House speech and the budget together have endorsed the fact that if we're to achieve growth in this country, it will come from small companies in the main. And that's our target market. I think if you look at the idea of combining pension fund -- local authority pension funds, just out of interest, we deal with virtually all local authority pension funds and have money for most of them. And in some cases, we've gone back to them 2 or 3 or even 4 times for [ source ] of cash. So long established relationships, profitable on both sides. But we've seen under George Osborne the first kind of genesis, if you will, of this idea of merging pension funds -- local authority pension funds. That happened and has happened over the last 10 years. So I think it's just more of the same. When it happens, it tends to slow down the responses of those affected. But it doesn't happen to everybody all at the same time. So net effect, probably pretty close to 0 from our point of view. And we expect to continue attracting money from local authority pension funds. And indeed, you'll see more of that before the end of this calendar year, I hope.

And just taking the second point. In terms of the Foresight natural capital front, I think our target fundraise there up to final close would be between GBP 300 million and GBP 500 million. So it's going to be a material strategy going forward. We're receiving a lot of inbound interest into that strategy. And as you know, we've been involved in the forestry area, in the U.K. principally, for over 5 years now. So there's an area we've got a lot of experience. So we're looking to develop that further and more so on the institutional side. And we see that as being a key strategy on the infrastructure piece -- the wider infrastructure piece going forward.

I think the final question was on performance fees.

Performance fees. So I mean performance fees have been strong, as you say, principally from the private equity part of the business. I think sometimes -- these things don't come in a linear fashion. I'd expect to see more performance fees again principally from the private equity part of the business in the second half of the year. I also think we had a slight asymmetric deployment first half, second half. So I think we'll see a higher degree of arrangement fees from deployment in the second half as well. So you might see more of a balance of deployment and performance fees in the second half. But overall, I think we're making progress on both fronts. And so looking ahead, just to reiterate the point I made previously, I see us falling within consensus for the year.

Thomas, just in conclusion, as you know, we've got three parts of our business. It's rare that all are firing on all cylinders at the same time. And indeed, we know at Foresight Capital Management, like everybody else in the OEIC market, has had outflows in recent years. We know that the infrastructure business is starting to raise cash again, but it's had a year or two where it hasn't. But on the other hand, the private equity business and the tax-efficient business is, to put -- not to put too fine a point on it, booming in terms of inflows and returns. And you should expect to see more performance fees between now and the end of our financial year. That underlines the point that we're a business, not a platform, with lots of different bids.

Our next question comes from David McCann of Deutsche Numis.

Hopefully, you can hear me. Just one quick follow-up on the hydrogen thing. Just a question that's come in, just keen to hear your thoughts on from your side. Obviously, no longer going ahead with the funds. Obviously, you did see the write-down in that hydrogen asset you had in a couple of your existing funds. So to what extent was the decision not to go ahead with the hydrogen fund to do with that write-down? And how much of it was to do with the wider implications that's going on in the hydrogen market itself?

David, I think the answer to that is it was all to do with the latter. I think we will launch the hydrogen fund but just not yet. I mean, as everybody knows, timing is probably the most important thing in life. And the time is not yet right as it turns out. So I would expect to see that relaunched in a year or so. Because if anybody can tell me what the -- how you power hard to decarbonize forms of energy use other than through hydrogen, I've yet to learn it. So I'm sure hydrogen will be a really important part of the energy transition, but you've got to get the timing right. And the same point in pushing into a market that isn't quite ready yet, and it wasn't, which is why we took the decision. But on the other hand, we do -- this is in kind of premarketing, we do premarketing for a reason.

I think you made the point yourself, David. So by implication, BP, Shell, Repsol, Fortescue in Australia and yesterday, Norsk Hydro, they all pulled back from immediately pushing ahead with green hydrogen projects. So I think it is a wider market point as demonstrated by some of those big names as well.

So just to follow up, what is it that is causing these issues in the market that's leading to the pullback of projects elsewhere, as you mentioned?

I think it's probably -- there are huge opportunities in decarbonization, bigger than the amount of money available to finance them. Hydrogen projects typically are pretty expensive. You need government incentive in most parts of the world for them to work. If you recall, back in the early days of solar, we needed feed-in tariffs, which were enormously attractive and, indeed, right at the beginning were 90% of the return, 90% from feed-in tariffs. And that gradually went down as governments around the world achieved what they were planning to. And by the way, I think that was the most successful effort I've ever seen of government's pump priming. I mean, normally it's disastrous. But in this case, it was a great success and certainly brought solar on much faster than they otherwise would have done. Well, the same is required here. I think governments recognize that. But governments, generally speaking, are pretty strapped for cash. And there are other reasons as well. Like, for example, in Germany, the government subsidies that were expected hasn't happened because of a number of reasons, not least of which there is effectively no government in Germany. So until they have their election and they establish what their policy is, that's kind of on hold. So that's probably the principal reason, slowness of subsidies coming forward, without which, it will take much longer.

Okay. And I guess, one broader but related question to that. With the Trump government we have in the U.S. and what feels like possibly some rolling back on some of the move towards renewable and sustainable energy, who knows exactly what will happen, but that seems to be the early rhetoric. I appreciate you don't have that much, if anything, in the U.S. But how do you see that potentially changing the demand and landscape for renewables and the energy transition that you've talked about more broadly?

Firstly, I think it will make -- certainly for us, it will make not the slightest difference because we've never invested in things that weren't profitable. I mean, hydrogen is an outlier because it's an early technology. But there is no subsidy across a whole range of renewables that we invest in. Solar, it is profitable in most parts of the world. Certainly, there has been a subsidy in the U.K. in solar for a long time. So I think you're not going to burn coal if it costs 3x as much to produce energy as solar does. Texas is full of wind. California is full of solar. That won't stop. But the more kind of egregious handouts that we've seen over the last year or so under the terms of the IRA, rather amusingly named Inflation Reduction Act, will go away. And it will be highly economics that will drive investment. And I think that's a good thing.

[Operator Instructions] There are no further questions on the webinar. I will now hand over to Elizabeth Scorer to read out the questions. Please go ahead.

Thank you. So the first question we have online is from James Allen at Panmure Liberum. He has a number of questions, the first being around the level of indicated redemptions on the Australian funds. Can you give any more color on the background as to what the situation is there? With a follow-up question around, if there's any further indications on redemptions for EIT and ARIF and what the implications of that may be.

Yes. I mean, in terms of the redemptions, clearly when we made these acquisitions, we'd assumed a level of redemptions. So the level we've actually seen on DIT is higher than we'd anticipated. These are private funds, so we don't disclose the exact amount. But I mean, it's disappointing that the amount of redemptions is higher than we thought. But I think, generally speaking, the strength within Foresight is the diversification of the business, the resilience of the business model. And without question, we're still on an upward trajectory in terms of the momentum behind the business. As Bernard alluded to earlier, we're driving forward in private equity and retail sales as well as institutional fundraising and other areas. So I think overall, we're still in a really positive upward trend. In terms of EIT, the redemption window is next year, and ARIF, there's no indication of redemptions whatsoever. So I think overall, we've got plenty of time. The redemption window is 3-plus years. So we've got plenty of time to, a, look at replacing those redemptions with new investment. But also, we've now -- we acquired that business 2 years ago. We're facilitating additional sales resource in that part of the world. And so we'd expect to start raising primary capital over there over the next couple of years that will hopefully supply any of the redemptions that we see going out the door.

Also, redemptions are not new in these funds. Long before we came along, there were redemptions and they simply get closed in the market. That's what -- in the secondary market. That's what we expect will happen here. And clearly, it will take away from primary capital while you're kind of chewing through the secondary sales. But that, I think, is normal in all business.

Thank you, Bernard. And a final question from James on the hydrogen fund. So we've already touched on some of this in some of your previous answers. But is there any more color you can give in terms of with hydrogen having moved right in terms of being delayed, is -- the natural capital fund that's being launched, is that expected to offset that as well as Australia? Or how do we think about fundraising and the different levers that are in place there?

Yes. I mean, I think we've covered some of it. But just to be clear, I think the natural capital fund will be [ GBP 300 million to GBP 500 million ] at final close. We'd originally anticipated the hydrogen fund being as much as EUR 750 million at final close. I think -- so natural capital will cover some of it. It's likely to be at a higher fee rate than hydrogen fund. So we'll cover some of it. Where else do I see the -- I see the additional money coming from the FEIP II subsequent closes. But we're also raising both retail and private equity money more quickly than we'd anticipated. So I think overall, as I mentioned just previously, the resilience of the business model means that we're still confident in terms of achieving our targets which, just to reemphasize the point, is to double core EBITDA pre-SBP over the next 5 years. That's not going to be linear by any means. But once we raise those funds and we see the deployment taking shape, that will really increase the amount of money that's been driven through to the bottom line. So I'm very confident indeed in that regard.

I mean it's worth saying, for example, we're raising money in the VCT market faster than anybody else. The first offer, Foresight Enterprise is likely to close in the next -- within the next week, having only opened a few weeks ago. The next offer, Foresight VCT will open next week, and it's likely to close by the end of the calendar year or shortly afterwards in January. As a straw in the wind, yesterday, we raised GBP 7 million retail money on the day. So we're not a siloed business where it's all down to one fund happening exactly when you expect it to. We're a business with multiple bids. And as I said earlier, at any given time, as long as one is firing on all cylinders, which is currently happening, we can -- we'll do our numbers. I mean we always do our numbers, but that's possibly why, because we've got lots of bids in the business. At any given time, 1 or 2 or 3 of them are firing on all cylinders. That remains the case.

Thank you, Bernard. We have one final question over the webcast, which is from Joshua McCathie at Downing. And his question relates to FCM and whether the recent changes in cost disclosures on the look-through fees have started to have any impact on the fundraising outlook for that business. So perhaps a short update generally on FCM.

I mean, the reality is, I think it's too early to say on that specific question. I think the update on FCM was during the 6 months with an outlook for reduced interest rates. We started to see both performance improve and the rates of redemptions reduce. I think now that people see interest rates being higher for longer potentially, then that does have the potential to impact the level of redemptions. And so I think we didn't forecast the level of redemptions continuing to decelerate in the second half, as I might have done 2 or 3 months ago. We might see those level of redemptions maintain at the current rate on average for the next 6 months, which would be disappointing given where we were a few months back. But that said, it's factored into our thinking. But we're not sitting on our hands here. We've beefed up that retail sales team with -- specifically focused on the FCM part of the business. And we're also looking at other inorganic opportunities as well in that space. So I think there's a lot to go at, and we're really trying to push ahead with that part of the business. So watch the space.

Thank you, Gary. No more questions online. Bernard, do you have any closing remarks? There are no more questions.

Yes. Well, thank you very much, everybody, for attending. I hope you've seen evidence in our numbers and our likely performance going forward with the breadth of the business and the strength of the model. We thank you for your support, and look forward to speaking to you again next time. Thank you very much.