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

Good afternoon, ladies and gentlemen, and welcome to the Foresight Group Holdings Limited Half-Year Results Investor Presentation. [Operator Instructions] Before we begin, as usual, we would just like to submit the following poll. And if you'd give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to CFO, Gary Fraser. Gary, good afternoon, sir.

Good afternoon, and thank you for that introduction, Jake. Good afternoon, everybody. As Jake said, my name is Gary Fraser. I'm the CFO of Foresight Group, and I will take you through the interim results of Foresight for the period ended 30th September right now. So without further ado, let's crack on. So first of all, a summary of Foresight, what we do, and the areas that we're involved in. So just a bit of a recap. The investor base is approximately 70% institutional and 30% retail. We continue to see both strands of that investor base being important. We'll continue to raise both retail and institutional money going forward. They're very good offset against each other and both are important sources of further fundraising for our strategies. In terms of those growth strategies, we have regional private equity. We have tax-efficient products. Within infrastructure, we have energy transition and decarbonization beyond power. And then on Foresight Capital Markets side, we have listed equities. Those products and strategies are addressing huge market opportunities. So within the private equity side, there's a GBP 15-plus billion equity capital gap in the U.K. alone. And so our regional strategy is really trying to address that large market. And at the moment, we're only about GBP 1 billion in terms of how much we've invested in the regions. And in terms of the energy transition and infrastructure more generally, the requirement is to invest $4.8 trillion a year over the next few years and then even more thereafter. So the opportunity, the sheer scale of that around the world is enormous. So positive momentum across our diversified strategy. So if I just drill down a little bit there. So within the private equity and tax efficient side, we've got highly profitable growth strategies there. Within regional private equity, we've been raising a number of funds that have both generated nice performance fees, but also recurring annual revenues as well. Our tax-efficient products, whether that's VCTs, whether it's CIS, or whether it's a business property relief have had a record first half of the year, raising GBP 241 million, and we expect to do even better in the second half. In terms of infrastructure and Foresight Capital Management, these are highly scalable strategies. So in terms of energy transition, we had a first close, a 1A close almost EUR 300 million of the second vintage of our flagship pan-European energy infrastructure fund, FEIP II. And a FEIP I investment into a EUR 300 million -- 267-megawatt solar power portfolio in Greece effectively closed out the investment phase of that fund. So moving segueing from one fund to the next very quickly indeed. We also have a dedicated natural capital fund that's commenced premarketing. And that will effectively target principally forestry, at forestation, land regeneration, and various variations on a theme in that regard. And then within listed equities, we have Foresight Capital Management, which had a positive performance of GBP 56 million in the first half of the year. That is a tougher fundraising environment. There's no question. The interest rate-sensitive strategies have suffered from the high interest rates that we've seen recently, but also from recent commentary around higher for longer interest rates. But I do think we'll see an easing of interest rates over the next months and years. And therefore, I'd like to think that the scale of that part of the business, which is only GBP 700 million out of GBP 12.5 billion will start to increase over time. So in terms of our recent track record, over the last 5 or 6 years, we've seen AUM increase by 27% and core EBITDA since we first launched our IPO in 2021 of 29% compound annual growth rate. So we're seeing real growth in both AUM but underlying profitability as well. So in terms of the financial results, AUM, just a shade under GBP 12.5 billion at GBP 12.4 billion, and that was up GBP 0.3 billion or GBP 300 million during the first 6 months of the year. Funds under management, slightly different metric, not including the debt within several of these investments or funds, was up to GBP 8.7 billion, also up GBP 0.3 billion during the period from GBP 8.4 billion at the end of the financial year in March. Revenue was up GBP 5.4 million to GBP 73.2 million, a healthy increase over the first 6 months of the year, and we expect to see that maintained or even increase during the second half. Recurring annual revenue, effectively management fees, the real high-quality revenue within Foresight's business remained stable at 87%, and we're very pleased with that. Going forward for the second half of the year, the outlook remains the same for 87% plus in recurring annual revenue. And then our profitability metric, core EBITDA pre-share-based payments was GBP 29 million, up GBP 1.4 million from GBP 27.6 million a year ago. So very healthy progress indeed. And in terms of dividend per share, 7.4p, so up about 10% during the same period last year. So very healthy dividend yield. And I think at the current share price, it's probably 5.5% or thereabouts. So in terms of the AUM bridge, how did we get from point A to point B over the last 6 months? Well, we started at GBP 12.1 billion with gross inflows in terms of AUM during the period of GBP 600 million, but also outflows of GBP 300 million during that period of time and taking us to GBP 12.4 billion at the period end. If you reflect a constant currency basis within those numbers, it's slightly higher at GBP 12.5 billion, and that principally takes into account the variations of FX in our Australian business. So revenues, which I touched a little bit earlier, up 5.4% to GBP 73.2 million during the period. So a healthy increase during that period. And it's probably worth noting that we see an increase in revenue usually during the second half of the year because a lot of our retail fundraising tax-efficient flows tend to be weighted towards the second half of the year in the run-up to the end of March, start of April with the tax year-end. In terms of those revenues, 21% was non-GBP denominated, which is a small increase on the prior year. And that just shows the sort of increased geographical diversification of the business. Over a period of time, more of our revenues have come from either Europe or Australia. And we expect that to continue both in the short and medium term. Cost is always one a focus from a lot of people. So if I just touch upon that. In terms of what I consider a normalized cost base of GBP 45.4 million, that was up GBP 4 million during the period. Principally, that cost increase of GBP 4 million was an annualization of prior year salary inflation, which was during a very high inflationary environment in 2023 and further investment in employees during the fundraising cycle. In terms of current-year salary increases, that returned to the historical average of about 5% per annum. And just looking ahead, I expect moderation both in terms of headcount and future salary increases. The latter partly because there'll be a balancing of the increase in national insurance contributions that we saw from being implemented in the recent budget. In terms of the far left-hand side and the impairment, so just touching upon that. So the impairment that's going through the P&L is effectively a write-down due to redemptions within our Australian business. Now I think we've been prudent in terms of that write-down. The net write-down is not GBP 9.3 million, it's GBP 2.9 million after we take into account an earn-out adjustment, but also a deferred tax charge. And the reason behind that, we've got a redemption window within one of the funds out there and the redemptions were higher than we budgeted for. And because we acquired that asset, the impairment charge needs to be taken through the P&L. But that is a noncash item in terms of profit in the current year. Profitability up 5 and a bit percent from 27.6% up to 29%. Last year, sort of first half, second half looked at roughly about 45%, 55% in terms of the split. So went from 27.6% up to 59.3%. I think this year at 29%. consensus has us for the year ranging between 20 -- sorry, 63.7% and 66% in terms of core EBITDA pre-SBP for the year. And as I look ahead over the next few months, I have a high degree of confidence that we'll fall within the analyst consensus range for profitability for the period. So in terms of outlook, if I just tackle each of those in turn. So within the various growth strategies in the business, I'll take those one by one. In terms of regional private equity, we've had a very successful fundraising period over the last number of years actually and very recently as well. So just taking that a little bit further, we recently announced fundraising with a new fund in the Southwest region of England, where we'll open offices in Bristol and Exeter. That initial fundraising is GBP 50 million, and we expect or hope within the next few months to close to double that fundraising from GBP 50 million up to GBP 90 million or GBP 100 million, assuming that we can attract further investments in that fund. We now cover about 14 offices across the regions in the U.K. So we very much got the regional private equity strategy around the whole of the U.K., and that really enables us to see most of the opportunities in terms of new deal flow within our target sector, which is typically check sizes up to about GBP 5 million, although we can do a bit more. And on an annual basis, we probably see 3,000 new deals, and we filter that down into about 50 actual transactions in terms of new deals and perhaps 50 follow-on deals as well. But it's been a very successful strategy, and I expect that to go from strength to strength over the next 5 years. In terms of tax efficiency, again, successfully fundraising. Our business property relief assets have been raising money successfully, as I said earlier, record first half of the year. Nothing in the budget that should impact those strategies at all. So if anything, I would expect to see an acceleration of that in the second half. In terms of venture capital trust, which we also manage, Foresight Enterprise VCT launched about a month ago, I expect that fund will close today fully -- having fully raised its investment in target fundraising. And then during the rest of the year, I'd expect us to see more fundraising. Foresight VCT, I think, will be very close to launching its product in the next week or 2 has been previously announced. And I would expect that one to go very quickly as well. Performance in both of those VCTs has been very strong over the last 5 years, and I expect that to continue given the pipeline that we have access to, given the regional capability of Foresight. In terms of the highly scalable strategies in terms of infrastructure, Energy transition, again, I mentioned FEIP II earlier, had a first close, EUR 300 million in June, July time. I expect we'll see another successful fundraising, another close before the end of March 2025. And that fund overall has a target fundraising of about EUR 1.25 billion. And so we'll be well on our way after those first 2 fundraises to raising that target. In terms of decarbonization beyond power, that's more focused around our natural capital strategy. And again, we're in premarketing there, but we've had very good feedback from our target market, and I expect us to fully start fundraising that in FY '26 with potential closes in both FY '26 and FY '27. Finally, on the listed equity side, in the first 6 months of the year, we saw decelerating net outflows. Those strategies within listed equities are very much interest rate-sensitive strategies. So it's no surprise when people are looking at a 5-plus percent return in equities and a 5% return in the bank that they're looking at the bank as rather than taking equity risk in these types of strategies. But that said, performance was strong in the first 6 months of the year, and that's probably partially why we saw a deceleration of net outflows. And as we start to see interest rates moderate over the next year plus, I expect we'll start to see real inflows in that strategy as well. In terms of our longer-term goals for the business, we boiled down most of the targets at IPO into one core target, which was to organically double core EBITDA pre-SBP in the next 5 years which given the sort of levers, the growth levers we have in the business, some of which I've just touched upon, we think is eminently achievable. Also, where it's opportunistic to do so, we look at M&A as a strategic lever to accelerate growth even further. At any point in time, I probably see 3, 4, 5 opportunities come across my desk. And so it is something that we're actively pursuing and reviewing. But by no means will we do any deal. We see a number of deals, most of which we don't do. In terms of the retail tax efficiency products, we've had extremely strong performance across both inherent tax and flagship VCT products. For instance, I think if you look at Trustnet, Foresight VCT's performance is second over 1 year, first over 3 years and second over 5 years. So not only you've seen really strong short-term performance, but you're seeing that performance over a prolonged period of time as well. The fundraising for those 2 strategies is from our large and established in-house distribution team. We've got 50 to 55 people across those teams. And so we've got very deep high fame wealth management relationships, and they're constantly enabling us to push forward and raise money for those strategies. But we will only ever raise as much money as we need to fund the acquisition -- to fund the investment acquisitions that we're looking to make. We've also seen some regulatory support following the U.K. autumn budget. VCTs, the government committed to VCT legislation for another 10 years to 2035. And I think there was also a greater deal of clarity across business property relief as well. GBP 1 million exemption for individuals, so potentially GBP 2 million per couple, and also clarity around the assets that will be included with that and those that won't. In terms of regional private equity, that's been an extremely successful strategy for both us and our investors over the last 10, 12 years. We've issued a fourth new fund in the last 2 years, GBP 50 million first close post the period end. It's an evergreen fund, providing a permanent pool of capital for Foresight. And as I said earlier, Bristol and Exeter offices to open shortly. Again, second close expected in the current financial year. I think you can see the coverage there. I mean we have one office in Scotland, but we've got a couple of funds in Scotland. We also have 2 offices in the island of Ireland as well and a greater degree of coverage than a lot of private equity firms who just deal in the sort of mid-market and are pretty much London focused. So we try and get access to a greater number of deals, which then really drives pricing and also the ability to get a greater multiple on exit. Foresight Energy Infrastructure Partners, FEIP II was about EUR 851 million. But once you add co-invest was over EUR 1 billion in terms of total secured commitment. 29 investors, 14 investments, and it's pretty much closed in terms of its investment, maybe 1 or 2 little follow-ons, but 97% has been allocated to investments already. And although it's only just completed its investment phase in about January this year, the signs are very good in terms of performance of that fund. And I think it's that confidence in the performance that led to a very quick first close of FEIP II. So not only closing FEIP I in January, but first close of FEIP II was in June this year. So I think that's borne out of the confidence in terms of, a, what we're trying to do in terms of sustainability, but also the performance of the underlying assets within FEIP I. And as I said earlier, just to reiterate, GBP 300 million first close, GBP 1.25 billion fund size in total, 12 to 15 investments and IRR in the 12% to 15% range. So in summary, a very profitable record of both AUM growth at 27% CAGR over the last 6 or 7 years and core EBITDA of slightly above that at 29% CAGR since we launched the IPO in February 2021. I mean you can see that the upward trend is continuing within the business. I think you see that AUM has flattened a little over the last couple of years. But that's explicable in that the -- the lower-margin capital management products has seen outflows, as I mentioned earlier, due to the interest rate sensitivity of that asset. But that money has been replaced by both institutional capital and also the tax-efficient retail product money. So overall, although assets look relatively flat, the profitability of the remaining assets has actually increased during that period, as you can see from the graph on the right. So I've talked for a while now, and hopefully, all of the detail in the slides is clear, but I'd be more than happy to take the Q&A now if there are any on the call.

[Operator Instructions] While the team take a few moments to review those questions that were submitted already. I'd just like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed via your invested dashboard. Guys, as you can see there, we have received a number of questions throughout your presentation this afternoon. And thank you to all of those on the call for taking the time to submit their questions. But Ben, at this point, sir, if I may hand over to you just to chair the Q&A with Gary. And if I look to pick up from you at the end, that would be great.

Great. Thank you, Jake, and thank you to everyone for submitting your questions. So now just taking the first, Gary. We've got a question around our guidance that we published as part of our full year '24 results. So the question being the guidance of doubling core EBITDA pre-SBP over 5 years implies a large increase in growth. What are the key elements that will drive the achievement of this guidance?

I mean in terms of the implication within that, so let me go back to that. So if we look at the growth in profitability over the last few years since IPO, I mentioned it was 29% compound annual growth rate. To deliver a doubling of core EBITDA between 2024 and 2029 requires organic growth of about 15%. Now the 29% is organic and inorganic together. But I think if you look at it over that period of time, we've definitely delivered around 15% or even greater than that during that period. So I think it's not a real increase. It's a really an absolute increase in terms of patents of profitability. But in terms of the growth rate of the business, it's in line with what we've seen in recent years. And if you add M&A on top, as you see, it's gone up to 29%. So I think based on what we've seen to date and also the visibility that we have in terms of the successful fundraising, both in terms of institutional and retail that we're seeing at the moment and have visibility on going forward, gives me confidence in terms of that guidance.

Great. Thank you, Gary. The next question is on our private equity division and the GBP 4.3 million of performance fees generated during the period. The question being, how sustainable is this level of performance in the near term?

So I mean we've got at the moment, there's probably 4 or 5 funds out of probably 14-plus funds generating performance fees because a number of the funds are relatively new and therefore, during their investment phase. So I would say that it's eminently possible and probable that we'll start to see -- we'll see those maintained in terms of a percentage of the overall total of revenue and go up in terms of absolute pounds in terms over the medium to long term. I think we've made a number of very successful investments within the regions over the last few years, and we're seeing the benefit of that coming through. What I wouldn't say though is you're going to get peaks and troughs over a 12-month period. So we've had a very strong first half of the year in terms of performance fees. We'll see more performance fees in the second half, but perhaps not as strong because it really is timed on when you make realizations. But that said, as I mentioned earlier in the presentation, the overall percentage of recurring annual revenue to one-off fees, if you like, will remain the same. And the reason for that is in addition to performance fees in the second half, I think we'll see an increase in arrangement fees from new investments made, so new deployment, but also in terms of upfront fees on retail fundraising as well.

Great. Thanks, Gary. The next question relates to the 10% increase to the interim dividend that you mentioned earlier, up to 7.4p per share. How confident is the Board in maintaining or increasing this level?

So the dividend is a function of our core EBITDA. So the payout ratio is 60% of core EBITDA basically in terms of profitability. So in terms of confidence around that, so we'll always maintain that unless things change. But clearly, that would be the case. But in terms of the 60% payout ratio we will maintain the growth in the underlying business will continue over the next 5 years, which I've described and beyond. So in terms of the absolute dividend continuing to go up as the business goes up, I'm very confident indeed. And I'm one of the biggest shareholders within the Foresight Group. So I was very pleased about the dividend yield as anyone else, and I think it will continue.

Great. And just linked to that in terms of the future growth of the business, are there any plans to introduce any new investment products to our portfolio to help drive that growth?

I mean, we're always looking at opportunities. So I think the answer to that is almost certainly yes. But there will be adjacent strategies to what we already do. So adjacent strategies within the private equity, within infrastructure, within Foresight Capital markets. So we wouldn't make a leap into asset classes where we have no experience. So certainly new products, 1 or 2 already in the pipeline, but nothing that would mean that we'd be leaping too far from our core skill set, if you like.

Okay. Great. And then one final question we've got here is just on how do you assess your positioning against peers in the [indiscernible].

So I mean we compare ourselves to financial sector peers on a regular basis. I mean I think the one thing I would say that sets us out from a lot of our financial sector peers is that because we're predominantly alternatives with a much lower exposure to listed equities that we've been able to maintain both growth and profitability on an upward trend over the several years since we IPO-ed and I believe that will continue going forward. I also -- if you look at the way the business generates a lot of our revenue is very high quality. That flows through very quickly into cash flow, which then is demonstrated through our confidence in the underlying dividend. So we do look at other businesses, many of them have a lot more volatility than we do because they might be pure equity exposure or there might be monoline infrastructure. I think what gives Foresight its resilience is the fact that we've got 3 different parts to the business, private equity infrastructure as well as the listed space, the first 2 being in unquoted. And I think that resilience will maintain as we go forward and continue to have that 3 different divisions within the business. And as I say, even during really tough markets when it might be difficult to raise money for traditional equities, we've still been able to push up both AUM and profitability. I don't see any change in that in the future.

Thanks, Gary. We've actually had another question come in on the listed alternative investment trust sector, which has been under pressure now for a couple of years. Do you regard it as now in structural decline?

It's a big question to answer that. I mean I do think the market in that space grew very quickly. And it traded at a premium for -- since maybe 2012, '13, it probably traded at a premium for 8 or 9 years until the last 2 or 3 years. So I mean, I think how I would view the investment trust sector, and I started out in the '90s, is that there are certain periods of time where you can raise money and raise new investment trusts. I don't see that being the case in the near term or even maybe the medium term for the foreseeable future. So I think the ability to create liquidity for existing investors within the funds will be a key thing. We may also see some M&A activity within it. I think people on the call may or may not know, but we did a public-to-private of our forestry investment trust during the course of the summer. So whether it's in structural decline or it's just going through one of these medium-term cyclical volatility issues, I can't honestly answer. But what I would say is that investment trusts have been around for 150 years. And therefore, they will have seen a lot of these cyclical troughs during that period. And so I don't think -- I wouldn't -- I think I'd be foolish to call the end of investment trust. In terms of the alternative space, I think we'll see a contraction and perhaps some M&A in that space. But I do think in terms of what they're raising and where they're investing is still critical for infrastructure, not only within the U.K. but internationally. And so I do think they have a place to play in terms of investment going forward.

Thank you, Gary, and thank you, everyone, for your questions. Jake, I'll now hand back to you. No more questions online. No more questions online.

Perfect. Ben, Gary, that's great. And thank you very much indeed for being so gentle of your time there and addressing all of those questions that came in from investors this afternoon. And of course, we'll publish those responses on the platform. But Gary, perhaps before really just looking to redirect those on the call to provide you with their feedback, which I know is particularly important to yourself and the company. If I could please just ask you for a few closing comments to wrap up with, that would be great.

Sure. So firstly, I'd like to thank everyone for taking the time out of, I'm sure, their busy days to listen to me today. Thank you. Secondly, I'd just like to say, in terms of Foresight and looking ahead, as I said, the 3 parts of the business even when one part may be not working as well as the others, the resilience that gives us and the quality of the underlying revenues and profitability means that I have a high degree of confidence in terms of driving the business forward. And that's why there's a high degree of confidence in terms of the medium-term targets for the business. So all told, I think we're on an exciting journey at Foresight. I think if we see a turnaround in lower interest rates, that will accelerate. And who knows, we may even see a little bit of M&A that will help accelerate the business even faster. So I think we've got a lot to go up. We've got big markets that we're targeting, and we've got a very good team within the Foresight Group that are helping us deliver on those targets and promises. So I'd say watch this space. And thank you once again.

Perfect. Gary, that's great. And thank you once again for updating investors this afternoon. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order that the management team can really better understand your views and expectations? This will only take a few moments to complete, but I'm sure it will be greatly valued by the company. On behalf of the management team of Foresight Group Holdings Limited, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all.