ICG plc (ICG) Earnings Call Transcript & Summary

Good afternoon, and thank you for joining us today. In recent years, we have spoken about our approach being to scale up to scale out and to invest in our platform. Today, we'll focus on scaling out, why we do it, both from a financial and a strategic perspective and how we do it. We will leave time for Q&A at the end. You can submit questions through the webcast messaging function or by telephone and details are on the online portal. The slides are also available on our website and recording of this session will be available on the website in the coming days. I'm delighted to be joined by 4 colleagues today. David Bicarregui, our Chief Financial Officer; Andreas Mondovits, our Head of Marketing and Client Relations; Sarah Faulkner, our recently appointed Chief Operating Officer; and Krysto Nikolic, our Global Head of Real Estate. We will talk through our track record of scaling out and the significant growth this has generated. We will look at the benefits our clients get as a result of our breadth, and we will briefly touch on the challenges and opportunities from a platform perspective. And finally, we will finish by pulling this together in the context of real estate equity. But before that, a quick recap of ICG today for those less familiar with us. We are broadly diversified global alternative asset manager with $86 billion of assets under management across more than 16 strategies. We manage capital on behalf of a blue-chip client base that numbers over 660 globally, and we operate out of nearly 20 locations around the world. Financially, at the 30th of September 2023, we generated GBP 0.5 billion of fee income over the last 12 months and our balance sheet, which had a net asset value of 714p per share accounted for less than 4% of our total AUM. We are 35 years old this year. We have grown almost entirely organically by having a very strong investment culture and delivering great returns for our clients. And we have had the financial and human resources to develop more strategies to scale out. There are a couple of key messages we want to leave you with today. Strategically, our execution of scaling out has been one of ICG's defining successes over the last decade. Our clients value it, and we have created a powerful ecosystem as we become ever more relevant across a wider range of asset classes. The financial returns of scaling out are very attractive. And as we get broader, our shareholders benefit from growing more diverse, more resilient streams of recurring fee income. Of course, in the early stages, it is intangible. The embedded strategic and economic value in our scaling and seeding strategies today do not really appear in our financial metrics, but the drivers of ICG's future growth have never been so clear, so tangible and so diverse. And with that, I'll pass to David.

Thank you, Chris, and thank you all for joining today. The starting point for this discussion is why? Why do we believe that being broad at scale is the right thing for ICG. Why not just focus on being excellent at a handful of strategies. The answer lies in our view of how this sector will evolve strategically and what will it take to be successful in the long term. Clients are continuing to shift towards private markets. In doing so, they are looking for the right partners, those that can enable them to invest across multiple asset classes at scale. If you can do that, you're becoming increasingly relevant with crucial relationships. So we view breadth at scale as important to maximize our addressable fee earning AUM in the coming decades. From a financial perspective, a larger, more diversified base of fee earning AUM generates more resilient and recurring fee streams. And those fees, alongside our balance sheet generate capital that we can then reinvest in the business. Our financial model and capital base gives us significant flexibility as the industry continues to evolve in the years ahead. And finally, operationally, both to protect the firm and extract maximum value from the knowledge, data and IP that exists across ICG. It is that thinking that informs our business model of scaling up, scaling out and investing in our platform. Historically, the firm has executed this successfully. We have increased our fee earning AUM by almost 6x, our recurring fee income by 7x and FMC profitability by almost 9x. Over the last decade or so, we have launched roughly 12 new strategies. In analyzing what to start, we look at the total addressable market, we consider client demand and how we can scale our AUM, and we make sure that we have the right team to originate and manage investments. From our heritage in our European corporate strategy and CLOs in 2012, we have grown in all 4 of our asset classes, structured and private equity, private debt, real assets and credit. Two strategies during this period, Senior Debt Partners launched in 2012 and Strategic Equity launched in 2014 have become flagships and leaders in their field. Others are continuing to scale. And which really underpins our long-term success, all have excellent investment track records. I do not believe there are many, if any, [indiscernible] managers who have organically grown so broadly over the last decade. These strategies have been meaningful drivers of our growth in AUM. Roughly 70% of the growth of total AUM has been enjoyed since 2012 and has come from the strategies that did not exist before 2012. And over that time, our balance sheet investment portfolio in dollar terms has stayed flat. The financial returns of organic growth over the long term are very attractive. The basic model is clear. Our balance sheet enables us to seed strategies 1, 2 or 3 seed investments have been made, and then we raise a third-party fund. And as we raise subsequent vintages that are bigger and the compound over time, the equity value shifts from being balance sheet focused to be in earnings driven. From a downside protection perspective, if the fundraising is materially delayed or does not meet the targets, there is the cost of the team, but shareholders still receive the asset level returns and we haven't paid goodwill to buy a GP. So there's an attractive risk reward profile here. The chart in the middle of this page sets those economic flows. And when I spoke earlier about the benefits of generating capital to reinvest in the business, you can see here what I mean. The precise economic characteristics of each strategy, of course, vary. And it does take time. We estimate that at the group level, strategies are probably cash flow positive roughly 5 years after we hire the team. By using some middle-of-the-road assumptions, we estimate the unlevered IRR at a group level of a new strategy is roughly 25%, excluding performance fees. In our view, that's a very attractive risk-adjusted return for our shareholders. It is one of the reasons why we have not pursued M&A historically. Of course, there may be other reasons to do M&A, and we regularly assess opportunities. But from a pure cost of capital perspective, it's a high hurdle for us to do an acquisition. Krysto will talk about real estate equity later, but I also want to flag strategic equity as another great example of this practice. We founded it in 2014, hiring a small transatlantic team. Today, it's the world's largest strategy dedicated to GP-led secondaries and has led all of the largest deals within this space. We're now raising our fifth vintage with a commitment from the balance sheet of roughly $100 million, down from $200 million in the prior vintage. And at the 31st of December 2023, we had total fee earning AUM within strategic equity of nearly $9 billion. Without going into fund-specific economics, the scale, the speed and the return profile and fee rate of this example are all notably better than the model fund I referred to on the previous page that generated a 25% IRR. Over the last decade, it has been a very efficient use of our balance sheet to scale this team and to rapidly shift from generating shareholder value from recurring fee income. It's a great proof point, and there are many others such as direct lending, which we founded in 2012, and today manages $22 billion of AUM. From a franchise strategic perspective, the fact that we've done them is testament to having the resources needed to scale out successfully. We have the culture, knowledge and expertise. We're entrepreneurial investors at heart and having built strategies from the ground up, there's a lot of internal IP to help drive future success. And as well as the financial resources, you need the right operating platform and the client franchise, both of which we'll touch on later. So in summary, on scaling out, we think it's valuable, financially and strategically. We've executed it successfully over the last decade, and we've got the tangible and intangible resources needed to do this in the future. So at this point, I'll pass over to our Head of Marketing and Client Relations, Andreas, to talk about our client franchise.

Thank you, David, and thank you, everyone, for joining us today. This seminar is not specifically about today's fundraising environment, but recently saw quotation & McKinsey Research report that resonated with me. The music didn't stop, but someone turned it way down. In other words, fundraising is running at a much slower pace. To take that analogy a bit further, unless you're very good or very lucky, if as a manager, you only have 1 instrument, and the music gets turned down, who knows if that is the instrument, the audience, our clients want to listen to. But with a broader orchestra, you got a better chance of having what people want to hear. And secondly, when everything comes together, what you're playing is much more impactful to our clients and to our shareholders. And that is the topic today. What is scaling out, having more instruments in the orchestra bring to our clients. One thing is clear to me, our clients really value it. The next few slides will give you some color on how we got to this point, while scaling out has been a key ingredient in delivering these results and how we'll make them sustainable in the future. Over the last decade, our client base has gone from 69 clients in 2012 to 662 today, almost 10x larger. We reduced our dependency on U.K. and Europe today at 52%, down from 65% in 2012, while expanding in the Americas and in APAC. We diversified across investor type, in particular seeing notable growth in asset management family office. So we have a proven success in penetrating new markets and new client types and have built a client franchise that gives us a strong foundation for future growth. As I mentioned in our seminar last year, we have historically focused on broadening our client base. With our scale today, both from a client and product perspective, our focus in the coming years will be more balanced. Between attracting new clients and increasing our share of wallet of our existing clients. More on that later. So why do clients value this. It's multifaceted, but I think it comes down to 3 reasons. First, trust; second, our ability to provide solutions; and third, the insights our clients can gain from us. To start with trust. We are a people business. And over time, LPs come to understand and value our investment philosophy and the culture that is shared with an ICG globally. This is also the starting point that has enabled us to deliver great results. With most of our strategies being first quartile relative to our peer group. And as Chris said, this is our 35th anniversary this year. We have proven our longevity, which is crucial if you're entering into a 10-year marriage for closed-ended fund. Next, solutions, which become increasingly relevant as we get broad at scale. We're able to work with clients in the spirit of partnership to meet their needs. Many of our LPs are resource constrained and seeking to reduce the number of GP relationships, while simultaneously increasing the absolute commitment to alternatives. Our combination of being a trusted manager and our broad waterfront of products enables us to meet our clients' needs by giving them access to multiple high-performing strategies for single point of contact, which we can also package into bespoke solutions. And finally, insights, possibly the most intangible. We have hundreds of portfolio companies, hundreds of investment professionals, investment strategies that across geographies, sectors and asset classes and have visibility on thousands of data points, as Sarah will touch on later. We refer reports, formal meetings or informal events with us. Our portfolio companies and fellow clients, they value the insights that they get from being part of the ICG network. Turning the focus on how this helps us scale out. Crucially, our client franchise helps us anchor fundraises. This chart show for relatively recent first-time funds and split the number of LPs by existing clients in light blue versus new clients to ICG in dark blue. You can see that existing investors from the bulk of investors in our first-time funds, a testimony to the franchise value and trust our clients have in our brand and our ability to deliver returns. So by both leveraging existing client relationships to support the launch of new fundraises, and attracting new clients as our product offering broadens, our client franchise is powerful, a powerful ecosystem that supports our growth. And as this ecosystem builds and scales, it opens increasingly large opportunities for us to capture AUM. How do we do this? In addition to increasing ticket sizes as subsequent funds get raised, there are simplistically 2 routes to leverage this franchise value. First, cross-selling; and second, multi-strategy mandates. Starting with cross-selling on the left-hand side. We discussed this last year the potential percentage of clients who have been with us since 2017, and we were invested in more than one strategy stands at 34%. The example we used last year, Client X, has continued to grow. Since we spoke last, they have committed another $600 million in aggregate across 3 strategies, including to Metro 1, a first-time fund. And on the right-hand side, multi-strategy mandates. These are real solutions built in partnership with some of the world's largest asset owners and enabling them to access a bespoke set of ICG strategies to meet their own risk, return and liquidity requirements. Today, we have over $3 billion in fee-paying AUM in a handful of these accounts. Each mandate typically starts with $500 million invested across 3 to 5 strategies and then grows over time. Delivering these requires a broad offering of scaled products in the top class operating platform to provide clients the reporting and liquidity management that these mandates require. It is only in the last couple of years that we have really have the product and platform to deliver these. They take a long time to originate and a sophisticated approach to client engagement. Looking ahead, I expect these will be an increasing area of focus. So lots going on. Looking ahead, where are we focusing? There are a number of areas, let me pick out a few. Deepening client existing relationships. Cross-selling, multi-strategy mandates and simply getting bigger tickets as our strategy scale up or present substantial opportunities for us. North America, we made a good progress in recent years and expect over 30% of our fundraising in financial year '24 to come from the Americas. The opportunity set remains huge. With the U.S. and Canada combined, representing over 50% of the addressable capital for us globally. Wealth, we have discussed this before. We continue to take a measured approach, but are seeing notable success here. I estimate that in financial year '24, roughly 10% of our capital raised will come from the wealth channel, including from flagship funds like Strategic Equity V, and first-time strategies such as LP secondaries. And finally, client experience. As we get broader and more complex and as clients become ever more sophisticated, we need to keep focusing on this. It's a cross-firm effort, including my team, the legal team, the portfolio managers and our broader platform, which is a neat segue into Sarah, who has recently joined as our Chief Operating Officer, with responsibility for, amongst other things, our platform. So a lot achieved, a lot going on and a look lot to look forward to. With our clients and shareholders benefiting as we continue to scale up and to scale out. And at this point, I will pass over to Sarah.

Thank you, Andreas. By way of quick background, I joined recently in a newly created role to bring together key functions that support our fund activities within ICG, an area which, as I will touch on shortly, gets increasingly complex as you scale out. When we say platform, what do we mean? Within an operations context, I viewed as having broadly 2 sides. Firstly, having the infrastructure in place across strategies that enables us to maximize the value of the firm as a whole. For example, leveraging unified technology platforms to deliver data to our clients through quality reporting and analysis across different strategies and vintages. Secondly, ensuring consistency and scalability across fund structures, client onboarding, deal execution whilst remaining flexible to our clients' needs. These are crucial to ensuring future success, and they get more complex as we grow our client franchise, launch new strategies and expand into asset classes such as real estate. And we want to do all of that in an efficient way so that as we scale up and scale out, we see the benefits of operating leverage. David spoke earlier about this being a long-term business model. That operating leverage has clearly come through over the last decade. Ten years ago, we were running at an FMC PBT margin of 35% to 40%, and it's now roughly 55%. Of course, scaling out is dilutive to margin until we get into second or third vintage. We estimate our flagship strategies are running at 60% operating margin or higher. We have seen good operating margin expansion coming through and given the number of scaling and seeding strategies we have on our platform in the years ahead, we see further opportunity to get more operating leverage. As well as the inherent operating leverage of managing larger funds, we are focused on ensuring our platform as a whole is invested, scalable and positioned to facilitate the growth of ICG in the next decade and beyond. Today, we have nearly 20 offices globally. And from an operating platform perspective, our main locations are London, Warsaw and Pune. By having our people located together here, we create hubs of excellence around. For example, Fund Accounting and Finance in Pune and Ddata Analysis and Engineering in Warsaw. As we grow, we intend to continue to scale Warsaw and Pune in particular as we have now reached critical mass there. This location approach over the long term will make us incrementally profitable and scalable. I have mentioned data a number of times. It's something I didn't quite grasp the potential of until I joined and saw how much we, as a firm, actually have access to. Data relating to the economy, ESG, transactions, client requests, business reporting. When you take a step back and look at the platform as a whole, we see a huge amount. There are some really exciting use cases here. In developing investment thesis and in being ever more relevant and thoughtful to clients around our reporting and our thought pieces. Today, we're at the foothills of this journey. My immediate focus is on client reporting and investment analysis. We've got a large number of clients globally, and we have over 170 funds and mandates, all of which have a wide range of reporting needs. And as Andreas mentioned, we're doing an increasing amount of cross-selling and multi-strategy mandates. As client demands become more sophisticated and our product offering more complex, we need to ensure that we report to clients in a transparent, holistic way. When we do this well, it is really additive to our client franchise. That's just one example, and more broadly using this data in an actionable way is a multiyear journey, but one that I'm personally very excited about. So looking ahead, our platform will be a key pillar for supporting our growth in the decades to come. There's a lot we're doing, but fundamentally, my focus is on ensuring we get the benefits of our scale, both financially and intangibly through knowledge transfer. In short, building a connected platform. Over the coming reporting cycles, I'm sure there will be more on this topic and I look forward to speaking with many of you again in the future. And now an area where we have spent real time not only on client reporting, but on the operating model more generally, real estate equity, Krysto.

Thank you, Sarah, and good afternoon to everyone on the call. ICG Real Estate is now one of the largest investors in European real estate, investing across both real estate equity and real estate debt and across practically all of the U.K. and Continental Europe. In 2022, we also started a business in Asia and now have teams on the ground in Singapore and Sydney, prosecuting a high-return real estate investment strategy focused on developed Asian markets. We have a team of 60 professionals now across 4 ICG offices, and a client base that is large and diversified, ranging from European insurers and pensions to global sovereigns and U.S. state plans. Our real estate business continues to grow nicely overall. And today, we manage a little under $7 billion in AUM. However, our business has changed considerably in the last 5 years. In 2018, we had a monoline focus exclusively on real estate credit and exclusively on the U.K. Since then, we've expanded our lending strategy to Continental Europe, added 2 new strategies in real estate equity and most recently launched an equity strategy in Asia. There has been substantial scaling up and scaling out. Our 2 new equity strategies, which is the focus of today's discussion, invest in 2 primary areas. The first is strategic real estate, which is focused on acquiring operationally critical assets leased to high-quality credits, often secured through primary sale and leaseback transactions. The second new strategy is Metropolitan, which is our opportunistic strategy focused primarily on corporate and special situations investing in logistics real estate. And even with these additions, we feel like we are scratching the surface of what is really an enormous global asset class and where there is significant high space for us to grow our global product range. This growth comes at a time of significant dislocation in global real estate markets, of which I'm sure you'll all be aware, making this an opportune time to leverage the ICG platform to accelerate our market share in these key markets. The growth in our real estate business, both current and in the future is significantly enhanced by being part of the ICG ecosystem. First, building new investment franchises requires a culture that embraces entrepreneurial growth. Generally, we have to be fast moving to take advantage of market conditions. Our real estate opportunistic franchise build is a good example of this. It had been contemplated for a while but we really accelerated the program in late 2022 in response to the dislocation that we were observing in global real estate markets. Leveraging our existing client franchise in the early stages of business growth is essential. Many of our existing clients already had substantial real estate equity programs and we were able to have high-quality discussions immediately with existing LPs who already view ICG as a trusted fiduciary. The financial resources of the firm are pivotal in this process. We used our balance sheet to prove concept early and to create a seed portfolio of investments particularly at a time when other market entrants need to raise third-party capital before investing. This is a meaningful competitive advantage. And as Sarah touched on earlier, our operating platform provides a backbone for operational excellence, which allows us to scale quickly by providing leverage to the investment teams and the business growth. And finally, as real estate becomes more operationally complex and industry-specific, accessing pockets of expertise around the firm is a critical advantage for us and it's a clearly understood differentiator in the eyes of our investor base. As mentioned, the growth is accelerated by utilizing our balance sheet to create seed investment pills and to align with our underlying investors. I'm pleased to say that we've managed to use the balance sheet and real estate extremely efficiently. Since 2018, we've used $420 million of balance sheet capital, nearly all of which has been returned to the firm through either fee-paying syndications to LPs or transfers into fee-paying funds. And the end result of that is an established and sustainable real estate equity platform with $2 billion of fee-paying AUM. We've also attracted 11 new clients to the firm. Some of them are now looking at other ICG products and we put their capital to work successfully through 43 new investments. As we look forward, we believe that the outlook for our real estate business is very positive amidst the backdrop of dislocation. We're broadly in the global real estate markets. Very importantly, we have very limited legacy issues. Partly, this is because most of our investing has been recent after the downturn in global real estate markets. But even more importantly, we've been incredibly disciplined in sector and thematic exposure. We have zero exposure to office or retail and our real estate equity book and we will be one of only a few real estate investors globally with no exposure there. Over 75% of our exposure is in logistics and supply chain infrastructure. And this sector continues to benefit from the underlying drivers of e-commerce growth, on-shoring and a general undersupply of logistics space. In addition, we have increasingly become important liquidity providers to European corporates and institutions seeking to recapitalize through the sale of balance sheet assets, which typically involves the sale of their underlying real estate. All these elements combined for a very positive outlook for our real estate business. Thank you for your time.

Thank you, Krysto. Before opening to Q&A, a couple of closing remarks. Stepping back for a moment. In some ways, our levers of value created for shareholders are very clear. Growing fee-earning AUM generating management fees, investing it well and generating performance fees and investment returns. That's the top line. Scaling out is a key route to growing fee earning AUM, and that's why we wanted to spend time with you today exploring it. As those strategies then scale up, there's substantial operating leverage, all of which drives earnings, generating capital, which we then return to shareholders or reinvest in the business in new strategies and in our operating platform. The visibility of our growth is now clearer than it's ever been. We have the strategies on the platform today that can deliver a decade and more of future growth. There are many permutations of how our growth could develop in the coming decade, but there are large and addressable markets behind everything on this page. And a number of these strategies are in the middle and on the left, could be very large over multiple vintages, real estate equity being one. Another obvious example would be LP secondaries. So there is substantial runway ahead of us and successfully execute what we have on the platform today, bringing with it strategic and economic benefits that will continue to become increasingly clear in our reported financials in the years to come. And with that, I'd like to thank you all again for your time and open the floor to questions.

[Operator Instructions] Firstly, David, picking up on your comment that have been 12 strategies launched since 2012. Looking ahead, should we expect a significant slowdown in the pace of these launches? Or what other gaps do you see? What new strategies might be on the plate?

Yes. Good question. Thank you for the question. I think the 12 strategies we mentioned all came together at different times, different teams, some of which were purchased transactions, some of which were teams coming together. So the exact sort of composition will always vary dependent on market opportunities. I would say at the moment, as you saw in one of the final slides, we have a lot on our plate at the moment. We have a lot that are scaling. And we've also got 4 strategies that are still on the balance sheet and seeded. So from where I sit, we've got our plate full for the foreseeable future. But we keep everything under review. There are gaps. There are always gaps in terms of what else you could do and we keep those under review as well, both organic and inorganic growth from here.

Thank you. We have a question from Luke Mason from BNP.

Firstly, on real estate, appreciate there now could be a good opportunity for new investments, given the kind of sell-off we've seen. Are you seeing a lot of demand from clients for real estate equity strategies? It feels like a bit more of a difficult strategy in the market in a minute. And how big could that fund or the metropolitan fund be over time? And then just secondly, on the private wealth channel, you mentioned it briefly, it is kind of 3% of AUM in terms of fundraising. What are the main distribution channels or partners you work with? And how should we think about the potential to scale kind of new semi-liquid strategies from here? And then thirdly, you mentioned a few times kind of inorganic growth potential. Just what could make you consider inorganic growth? Is there any specific gaps that you would look at that could really accelerate in the launch of new strategies, for example?

Thanks, Luke. I'd like to take them in reverse order. So David, if you want to take the M&A question and Andreas on wealth and then we can finish with Krysto on the real estate if that works.

Yes. Thanks for the questions. So I think in terms of M&A. I mentioned we keep it under review all the time. It seems to me, obviously, a sector where we are seeing more, particularly around infrastructure, particularly around private credit. So I think the correlation there is maybe obvious to those who know the sector is about where the sort of hotter growth potentials are. For us, we've got a pretty full plate, as I mentioned. I think the bar to us is more about whether it accelerates meaningfully something that we could deliver organically. We talked about it in the slides. But if you think about teams being cash flow positive around year 5, the returns probably being commensurate with year 8. Clearly, a lot of what we're doing pays back over 5, 10, 15 years. And so M&A for us is really about whether it accelerates something we could otherwise do. And then you're into the more intangible components about team, structure and organization. So relatively high bar from where we sit at the moment.

Andreas, do you want to pick up the question?

Yes. On wealth, and semi liquids. So first, as I said earlier, we are taking a measured approach to wealth. So from where we sit, we don't think we need to flow massive teams into this, given the opportunity I outlined earlier on the institutional side. We have massive growth potential there, but it doesn't mean we want to miss out on the opportunity. So what we're doing at the moment, we are raising ICG equity with a large global wealth manager -- global wealth bank, let's say. But we're also working with the RA channel in the U.S., which has been actually quite good for us. And then on LP secondaries, as I mentioned earlier, that one is a first-time fund, but we had actually pretty good success with a couple of smaller wealth shops in Europe, but also in the RA channel in the United States. So that's that one. And then as I said, Metro -- or I didn't say it. So Metro is one we're negotiating or discussing currently with a large wealth shop. And that's interesting because they haven't raised for real estate in 2 years. But I find the offer and Krysto will again talk about this in a second. So compelling that they are considering haven't launched yet, but they're considering to launch this, which is fantastic given it is technically speaking still a first-time fund, and that's very unusual that wealth would even touch these. So we had pretty good success there. In terms of semi liquids, again, we are looking at this. We're considering it. But at the moment, we have pretty good success with our closed-ended funds. And that's obviously also a bit easier for us to manage and we're scaling them up. So I think that's kind of -- yes, as I said, it's a measured approach, but quite successful.

Luke, on real estate, you're absolutely right to observe that the bankrupt is a tougher one right now, particularly as global LPs digest. Their exposure is primarily in the global office markets, which really are a big driver of some of the dislocation that's happening in the market. I think that points us towards a few things. One is to continue to construct a real estate suite of products that are highly specific in terms of how they invest and where they invest. And you will have heard me mention earlier, our global focus on logistics and supply chain infrastructure. That has served us well, both in terms of performance and also in terms of LP demand. As an example, in the last 12 months, we've raised about $450 million for the metropolitan strategy. And that is amidst the real estate fund raising backdrop, which is the worst we've seen in a very long time. And that is, I think, largely driven by the intra specifically in the strategy rather than a general interest in real estate. And so as we look forward, we're targeting EUR 1 billion capital raise for Metropolitan 2, which is the second fund in that series. It is exclusively focused on logistics real estate, which is where capital is flowing. And so as we think about the real estate market, we are much more focused on individual sectors rather than real estate as a broad-based category.

Thank you very much. And it segues nicely into a question specifically on real estate. You mentioned no office or retail. With the market downturn in office assets in particular, do you imagine that might become interesting at some point? Or are you exclusively focused on logistics as a structural growth story.

So the short answer is we're not focused on the global office markets. We are on balance negative on the outlook both from an occupational perspective and from an investment market perspective. And we think it's difficult to see the catalyst that will cause capital to flow back into that sector in a way that would cause there to be a meaningful rebound in pricing. There will be people who make money in the sector for sure, but we don't think that what's on offer today is good enough risk-adjusted return. And so it won't be part of our strategy going forward. And we will be focused on sectors that have a longer-term tailwinds driven by a series of global megatrends that are driving not just real estate markets, but also general corporate markets. The biggest one of that being our focus on the logistics sector.

There are a couple more questions on the phone. Angeliki from JPMorgan.

First of all, you mentioned that you already have quite a few strategies at the moment in the scale in phase and also 4 strategies being seeded. So I was wondering if you're not launching any meaningful new strategies over the next few years as you're trying to scale this existing strategies, what does that mean for cost growth in the FMC and sort of the -- any potential investments that you make into investment professionals and bringing on new teams. Shall we expect that cost growth perhaps to moderate from sort of mid-teens, high teens that we have seen in recent years? Second question, with regards to the multi-asset mandates. I was wondering, are those sort of mandates simply a factor of offering allocations to your -- to one specific LP to a number of firms? And how do you manage the distributions that you get from previous vintages within these mandates? Do you reinvest the proceeds of those distributions? Or do you distribute them, give them back to the LP? Effectively, what I'm trying to get at is the mandate sort of capital -- committed capital stable? Or does it increase as you invest and then come down as you disinvest similar to closed-end funds? And then third question, out of the 4 strategies that are currently being seeded, which ones are closer to raising third-party capital in the next 12 months?

Perfect. David, do you want to take the cost growth in the FMC?

Absolutely. A lot in that, but there's a connection, obviously, in your question. So I think we do have a lot of plate at the moment. We have 4 strategies on the balance sheet, as we said. If you just look forward to sort of this year and certainly into next year, I think the 2 that are most likely to become funds would be the life sciences investments and real estate in Asia, which overlaps a little bit with some of the comments Krysto was making about a focused strategy. And so we're working through those in terms of the next 18 months, let's say, 2 years. We're looking at this over a long time horizon, not over sort of 1 or 2 quarters. And so that's where our focus is. As to what that means for cost, I think Sarah put it well. If you look at the operating margin over time, this business grows without needing to put commensurate amount of people in place to scale the platform. And you can see that visually sort of over time in a given quarter or a given year, we're sizing the business more to what we want to achieve over that period. But I think the structural trend and the direction of travel is pretty clear from here.

Perfect. And then on to the multi-strategy question, Andreas, and there's a similar question, so I may add to that as well in terms of the duration of these mandates. So maybe you expand the question, just talk a little bit about for the multi-strategy mandates to take, how long they last and operationally, how we make some work?

So in terms of duration, they're pretty much all set up as Evergreens. The first 3 we did, and it's interesting to look at them because they started a couple of years ago, as I said, with about $500 million each. All of these have always used up their capital and they all have been topped up. So from $500 million, pretty much all of them gone $2 billion and more. We are onboarding 2 more at the moment and we're in advanced stage on another 2. So this is quite interesting. Now in terms of, again, Evergreen long term, in terms of recycling the capital or giving it back, it depends a little bit what investors want that so far. So again, all of them have been set up in a way, solving for an investor's risk return and liquidity profile, and they're all a bit different. And when you look through these, all of them invest into different strategies. Some have liquid stuff in there and was the only private markets, and so they are all a bit different. None of them looks alike, which makes it a little challenging for Sarah and her team. But we're solving really for clients' needs. And most of them so far and we'll see, but just want to recycle the capital and keep growing them, which is great for the investors. Now why are they doing this? And I said this earlier, the reason why they're doing this is because they want to reduce the number of GP relationships, which is a common trend. So they want to work with less GPs. And also, when you think about large U.S. public pensions is a good example. They usually have quite small teams, and they have to deal with low GPs, low funds and so what they're trying to find is a way to work with, yes, a smaller number of GPs, but have broader relationship with them. And that kind of was the starting point when we engaged in the discussions to set these up. But as I also said, there is a couple of years ago, we couldn't have done it because we didn't have the right -- the product seed wasn't broad enough and deep enough to do it. And that's really interesting for us to see now how the broader platform plays to our strength. And of course, the performance, as I said, first quarter, first the center for many of our strategies. So you need a number of ingredients have to come together to be able to do this, but we believe it will become one of our areas of strength going forward.

A couple more questions on the phone before that, there is question online around the credit and CLO asset class and how we see that in the context of scaling out. We see more opportunity. There either growing existing strategies or from launching new credit strategies.

Yes. I think with credit, I really want to segment it a little bit between sort of private credit, private debt and liquids, taking the liquids first. That's a CLO business with other funds around it, the CLO business has tended to generate 3 or 4 CLOs a year. We like the AUM. We like the management fees and we've got a track record of risk manage in the asset class. And so that will continue at around the same pace. I expect over time. Private debt obviously continues to be a big growth engine for us. It's our DNA. I referred to earlier about some of our history and heritage from 2012 and we see plenty more opportunities in the coming period. We're obviously on the Vintage 5 of SDP, which will be larger than 4 and so on and so forth. So scaling out and scaling up, as we said, across all strategies, including the ones that are already flagship strategies.

And there's a question from Oliver at Goldman.

So it's been touched on a few times, but you've obviously improved your operating profitability significantly in recent years. And -- but as you say, your scaling strategies are still a drag on this operating profitability level. So really, how should we think about this potential for improvement in the FMC operating margin that you've been talking to from the mid-50s today. As you scale up further over the medium term. Is it feasible that you could exceed 60% as we move through the next fund raising cycle? Or will you be running the business more in a way that, that will be much more moderate in terms of the potential uplift that we could see? And then the second question is, when we look at your scaling strategies across North American credit, European mid-market, Asia Pacific corporate infrastructure, our real estate, et cetera. Are there any that you would call out as having the greatest potential to scale up towards the $5 billion-plus range of your flagship as the next stage. I think you called out real estate equity and LP secondaries, but it sounds like that was more of a comment from a TAM perspective rather than on ICG's pipeline specifically?

Sure, let me take those. So the -- on operating margin, as you saw Sarah presented, we've clearly got a track record of improving this as we've grown. We're doing 2 things, of course, fundamentally, we'll still invest in the platform. It's an ongoing piece of work. And as the business becomes broader and more global, clearly, we need to make more investments, not less. And so it's always going to be a balance in a given period of time. But I think the structural trend, as I said, is clear. The speed of fundraising itself is going to be a big determinant of how quickly we grow and where the fundraising cycles return to be in 4 years or 3 or 5, obviously, to some extent, is outside of control, but we're putting all the resources we can around our marketing and client relations teams in order to accelerate fundraising as it becomes available. So I think that's the thing to really watch in terms of what lifts the top line versus focusing too much on the cost line in isolation. I think your second question was more about sort of the potential of some of these strategies. And the reason I called out real estate and LP secondary sort of implied in your question is there are players out there with $5 billion, $10 billion, $15 billion, $20 billion funds. And so clearly, there's an addressable market. It's not like we are breaking new ground. And so our goal and our ambition is to capture more of the very large addressable markets, and that's why we're very excited about participating there. Again, the speed of execution will depend on the market environment as well as what we can deliver.

Andreas, we had a couple of questions on cross-selling. And particularly in this tougher fundraising environment, are you seeing cross-selling improvement at the moment? Or are you seeing it as a competitive advantage as you're talking to clients? So many of them are capital constraints today?

It's a good question. Yes. I mean many clients are capital constrained, full stop. So what it means, the first capital usually goes to the RE Apps and even some of our largest investors, some of our big sovereign clients hit their caps, the allocations. I'm thinking a couple of them I spoke to recently. And so even for them who would historically have done pretty much all the RE Apps even they have to be more selective now. So I think that is the theme. So that means if you can't do all the RE Apps you want to do then, for sure, you're less likely to look at new strategies, even if they are from a GP who you like and who you trust. So that's, I think, is the market context and the market backdrop. So compared to 2 years ago, cross-selling is much harder now. I mean there's no doubt. But at the same time, as you've seen throughout the presentation, take LP secondary, take Metro, most of this has gone to existing investors. That means we are cross-selling. There's no doubt about that, right? It's just the conversion ratios, how much -- it takes you way more meetings, and it's just much harder and takes away more effort to do it, but you can still do it. And yes, so we're doing it. But it's clearly -- it's tough. It's not easy.

David, we have a few questions on the thought process around which strategies to seed. And it might be helpful to answer a couple of those, maybe you give some color around how we determine, which strategies we want to see, how long we then spend seeding them from the balance sheet? And you mentioned downside protection here. How -- what happens if a strategy doesn't work conceptually, if it doesn't raise third-party capital. It would be interesting to hear.

Just building a little bit on some of the comments in the presentation. Firstly, we are looking for things that can become significant large and are in large addressable markets. We're not trying to develop niche strategies that don't scale, that is the theme here. And so if you look at what we have on the plate, as I said earlier, these are large addressable markets. These can be $10 billion funds of the future. And so that's the first starting point for this. Secondly, we're looking for in many cases, an adjacency to what we already do. If you think about the adjacency of infrastructure to real estate under a real assets umbrella, you think about some of the debt strategies and adjacent activity there. You think about strategic equity and our relationship with GP sponsors. So there's an adjacency benefit as we grow organically. In terms of how we use the balance sheet, therefore, to seed all of that, we've tended to put 1, 2 or 3 assets on the balance sheet to develop a very specific track record in managing those assets. That's very credible when you go to LPs and fund raise because we've got a track record. We can actually show them assets that we've invested in, how they performed, and therefore, the embedded upside of those assets looks like. They sit on the balance sheet for varying amounts of time, market dependent, but typically speaking, we've moved assets off the balance sheet within 1 to 2 years and then into a fund structure. And so many of the things you see on the page were formally on the balance sheet. In fact, last year, LP secondaries, elements of real estate we talked about and others were actually on the balance sheet have now become real funds for the first time. And that generates the long-term fee income back to shareholders. So that's the virtuous circle of using the balance sheet.

And then if it doesn't launch, we just have the balance sheet at the asset level return.

That's right. Yes. We talked a little bit about the asymmetry, if you like, on return, which is favorable, which is we are not putting down huge amounts of the balance sheet into sealing strategies. In fact, 90% of the balance sheet is co-invested alongside our clients in funds. At any given point, about 10% of the balance sheet is [indiscernible] and warehousing. As I said, 1 or 2 assets or 3 assets, not more than that. So actually, it's a disciplined use of the balance sheet. We've also got downside protection if one of these strategies doesn't become a fund in the future.

Perfect. There are a couple of more detailed specific questions on line, which we'll follow up with separately. But with that, I think we will wrap up. So thank you very much for attending today and we look forward to speaking soon. Thank you.