Impax Asset Management Group Plc (IPX) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Impax Asset Management Group plc Investor Presentation. [Operator instructions]. The company may not be in a position to answer every question received during the meeting itself but the company can review the questions and publish responses where it's appropriate to do so. Beford we begin, I'd like to submit the following poll. I'd now like to hand you over to Ian Simm, Founder and Chief Executive Officer. Good afternoon to you, sir.

Good afternoon, and thank you, everyone, for joining. So I'm going to dive straight in and assume that not everyone's heard from Impax before. So just go straight to the beginning. And just in summary, so Impax is a business I founded in 1998. We are an investment management business serving institutional and wholesale clients around the world, managing just over £37 billion investing in equities, fixed income and private markets with investment team in Europe, North America and Asia. And what distinguishes us is our investment philosophy, which is our view that what we call the transition to a more sustainable economy, which essentially is an industrial revolution based on materials and energy efficiency on the one hand, the switch to clean energy and in general, smarter, more efficient products and services. This industrial revolution, which has been building now since the 1990s is accelerating and is full of investment opportunity, both superior growth and also mispricing. And so that's what our investment teams are doing is exploiting those to ideas and generating medium- to long-term investment outperformance relative to generic indices. So this industrial revolution really is powered by technology change, regulatory change, changing consumer sentiment. There's a wide diverse set of market opportunities and a large number of companies, both listed companies and private companies, which are leading the way. This is a history of the firm for 26 years. And so each bar is the assets under management at the end of our financial year in September of the year in question. So you can see from a very small base of GBP 15 million, we've grown to over $37 billion -- sorry, $37 billion, which has been a fairly flat amount for the last 4 years as we've navigated the strong push in interest rates and inflation after the Russian invasion of Ukraine and then the mega cap tech boom over the last 18 months or so. So more of that to come. So what you're seeing today is the results from our 12 months of annual reports, which we published very recently. So that's the year ending 30th of September. So as you can see here, we've reported revenue of GBP 170 million, a 31% adjusted operating margin and slightly rising cash reserves and proposing to maintain our dividend at the same level as last year, subject to shareholder approval. At the same time, as I'll go on to explain in a moment, then there's been a significant investment in the expansion of the business through 2 acquisitions in fixed income and some new product development in equities. The investment conditions we're facing are, of course, the same that everyone else is facing. So it's been quite an interesting challenging 2-year period post the, if you like, the inflation spike of 2022, 2023 and 2024 have seen huge market concentration around the so-called Magnificent 7 mega cap tech stocks and generally rising markets but strongly skewed towards U.S. large cap. And what that's meant for equity market sentiment is that broadly speaking, it's been positive, but anyone who's not been market weighting or better in U.S. mega cap tech has struggled to maintain relative performance against generic indices. So that's the situation we found ourselves in. We've, therefore, lagged the generic indices in many of our equity funds. And yet we're not alone. So I'm sure you've experienced this in other parts of your portfolios. What we've actually experienced is not a weakness of the underlying companies that we've been investing in, but rather a derating of the stocks of those businesses as multiples have come down on a relative and generally absolute basis. Meanwhile, our fixed income business has been enjoying some -- a period of relatively high interest rates compared to recent historical norms. And we've seen some great opportunities around corporate debt mispricing. In the context of Impax's investment philosophy, then we've seen in the last couple of years quite a strong push towards clean energy, for example, the U.K. government's Clean Power 2030 target, which is 5 years more ambitious than pre the U.K. election. And also, generally speaking, a timing of cost increases for renewable energy as interest rates have plateaued and started to show signs of falling. So that's broadly been encouraging. And there's some interesting challenges in electric vehicles around battery supply and consumer demand. But meanwhile, lots of investment going into insurance products and resilience around weather-related risk and plenty of other opportunities around use of smart materials for materials efficiency. Our investment performance, broadly speaking, in absolute terms has been excellent. So you can see some very strong numbers here. But as I mentioned before, the relative performance has been weak, and that's been a period of sustained relative underperformance for the last couple of years, which has been much longer than we had anticipated. We had noticed or experienced going into the U.S. election in November that, that relative underperformance has started to moderate and there were signs being shown of quite significant improvement. But unfortunately, over the last month since the election of Donald Trump, then the uncertainty around policy trajectory and even the likelihood of a soft landing in the U.S. has increased dramatically. And so there's been a flight to large cap, even mega cap stocks and with some policy indications and the prominence of Elon Musk in particular, then, of course, tech stocks have been back in favor once again. So in that sense, we are still in quite a choppy period with investment performance. But if you take a through-the-cycle view and look at historical patterns over 2, 2.5 decades, then the mean reversion back to historical norms is now long overdue, frankly. And we, in a central scenario, are optimistic of a positive outturn over the next couple of years. So a few charts now showing the the development of our business, read the chart left to right, starting at the end of the last financial year, GBP 37.4 billion moving through the first half to the solid green bar in the middle, the end of March and then the second half over on the right-hand side. So it should be self-explanatory. You can see outflows greater than inflows in both the first half and the second half, market performance being positive in the first half and pretty flat in the second half with the net result of all that being that we pretty much went sideways over that 12-month period. A breakdown of funds under management. So the top left chart shows the equity funds that we run, listed equities in green and orange, thematic equities in green, non-thematic equities or core equities in orange. And then in fixed income and private markets at a much smaller scale. So you can see the business is really very significantly in listed equities. In terms of the source of our clients in the bottom left, you can see the Asia Pacific region, relatively small. Europe and the U.K., definitely the significant majority of the firm, but I think Impax Asset Management is particularly unusual in having -- being a U.K. domiciled or headquartered midscale investment manager with a very well-established and successful U.S. and Canadian distribution engine. So that's over 1/4 of our assets under management and about 1/3 of our team. A bit more detail on the funds breakdown on the top right. And then bottom right, you can see the type of fund change between last year and this year. But thing to draw out of this is BNP Paribas, BNPP AM Asset Management. So the funds that we manage for BNP Paribas Asset Management, just over around 1/4 of our revenue and BNP Paribas Asset Management is our largest shareholder with nearly 14% of the ordinary shares. So it has been our strategic objective to be reducing that on a relative basis to improve the diversification of the business, which we've done successfully, but at a relatively modest clip. So I think over the last 5 years, that's dropped down from somewhere in the mid-ish 30s to 25%. And -- but the relationship with BNP Paribas Asset Management remains rock solid, and they are certainly the client that gets the most attention, as you could imagine. Again, more detail on what's happened in the time period. So this is the breakdown over the full financial year in dark blue versus the previous 12-month period in green. This is the flows -- net flows for different channels, starting with the U.K., Ireland on the far left. And then in the middle, the standout, of course, is what happened with BNP Paribas asset management flows, which were more negative over the 12-month period that's just ended than in the previous 12-month period. That situation had been moderating quite nicely in the fourth quarter and is not showing signs of improvement as the Trump administration settles down. We think that's just a relatively short-term hiatus. So we're confident that will continue to improve. So a few slides now on our strategic priorities. So listed equities, of course, the significant majority of 90% or so of our assets under management. So we've continued to invest in the quality and breadth of the team and also been launching some new products. So thematic equities, we've got a very strong track record in. So some new launches there with our so-called social leader strategy, which is a blend of health care and financials, U.S. version of our very successful environmental leaders product and then an expansion of our Asian investment work and Latin America to launch an emerging market strategy as well as a non-U.S. or EFA strategy. So plenty of work going into new strategy and product creation. If you've listened to our reports over the last couple of years, you'll have definitely heard quite a bit about fixed income. So we've had fixed income investment management capability since 2018 when we bought a business in the U.S. We've added to that in 2023 with more hires and in particular, creating a new post as somebody who's heading up the division. And then the last 12 months or so, we've completed 2 -- or we've advanced 2 acquisitions, one which is completed, which is the one in Denmark, bringing in global high-yield investment capability. And then the second, which is signed and announced, but not yet completed, subject to some regulatory approvals, which are a formality. That's a larger deal, which is a U.S.-based team, but European clients. So a very significant expansion over that time period of our fixed income capabilities, plenty of exciting opportunities to go for. And we are now going to be consolidating these acquisitions, but certainly wouldn't rule out making some more acquisitions if we can find the right ones. We've also been considering expansion into private equity. So this is a business area that we've run since 2005. We are in the value-add area and focused on renewable energy. So -- we are currently investing in our fourth fund, have ambitions to raise and manage our fifth fund, which will probably kick off in 12 month's time or so. But meanwhile, we're also looking at other possibilities around acquiring teams in the real asset space, not necessarily just in renewable energy, but possibly in areas like real estate and infrastructure. Distribution is also a key element of the firm. So here, we have historically had many third-party distributors, of which BNP Paribas is the largest, but we have another dozen or so in which we are the sub-manager or provider of product on someone else's platform. And those partnerships are everywhere from Canada and the U.S. through to Australia and New Zealand with many countries in Europe in between. So that platform, third-party distribution work is just over half our business, but we've also selectively been adding to our direct sales teams in recent years. So we have, I think, half a dozen salespeople in Europe right now and slightly more than that in the U.S. So looking to build relationships directly with asset owners and their consultants, but also to ensure that our brand is widely known in the wider marketplace as well. So this twin track of institutional marketing direct and intermediary marketing using other people's sales and client service teams is a deliberate strategy of the firm and I think is serving us well and producing a nicely diversified global client base. And then, of course, at the same time, we are looking at the efficiency of our cost base and trying to ensure that our infrastructure is scalable as it can be. That's in part a question of the corporate services work that we do in back and middle office and IT systems but it's also around legal, risk and compliance. And with a headcount just over 300, and we are working very hard to ensure that we're not increasing that materially unless there is an acquisition, like, for example, the imminent SKY Harbor acquisition. We've also made some further investments in the last 18 months or so in management structure, leadership training and general career development for what's now quite a complex corporate structure. So just moving on to financial performance. I think this version of the slides is not the full financial breakdown, although I'm now looking at the slides in front of me, I think actually, maybe it is the full financial breakdown. So there's the summary here of the results. So I'm not going to go through all this, but you can see that things were fairly flat compared to the previous year, maybe slightly down in terms of adjusted operating profit on the back of slightly lower revenues. But we are comfortably covering a full year dividend, which should allow us to maintain the dividend at the same level as last year with a coverage of less than -- sorry, with a payout ratio rather of less than 90%. So the revenue performance here broken down on the left-hand side with the different components from flows and investment performance and then critically, the fee margin on the right-hand side, which we've been able to maintain in roughly the mid-40 basis points for quite a few years now. This is reflective of quite a wide range of the high 20s basis points up to 90-plus basis points for listed products. So over 90 clients that come together to pay us fees, which the blended average of which is shown here. So in terms of cost base, then we have been working quite assiduously to manage costs to ensure that we are as efficient as possible. We've been looking for efficiency in terms of individual performance. but also team structure efficiency. So we have had a small number of people made redundant or post being made redundant in the last 9 months just as we've identified efficiencies. And we're also selectively experimenting with AI to try and further improve efficiency which services are provided. But we can't get away from the fact that people is our largest cost and obviously most critical asset. So our people management skills are and processes are right at the heart of our success. So operating performance, I think pretty self-explanatory. We've seen a moderate reduction in operating profit over the last few years as the operating margin has come down. We did have an extraordinary period of growth in 2019 through 2021 when revenue was coming in so quickly that we couldn't actually employ the people in the right way to manage at full capacity. So we had an extraordinary peak margins up at the sort of 38%, 39% operating margin for those years, but that's been normalizing more to the early 30s over the last couple of years as is shown here. And then also, as you can imagine, a strong prioritization around cash management. We do have a fairly tight turnaround in terms of flow from our clients. So we're not in need of a huge amount of working capital. But we do have a deployment of capital program, which I'll explain on the next page, but we're very keen on managing our cash flow so that we can give ourselves as much flexibility as possible. And you can see our dividend history there on the right-hand side. So capital position on the right-hand side of this chart, 2024. So our capital surplus and seed is at the top. We do have seed capital in half a dozen funds, private and public equity and are very disciplined about managing that to make sure it's not excessive. We have a capital requirement of just over GBP 20 million, but clearly, we need to or want to keep a nice healthy buffer on top of that. So the balance sheet is efficient, does have some surplus, for example, for selective additional acquisitions if the right thing were to come along. And in the meantime, we have been selectively buying back shares. We do think that that's warranted, particularly given that every year, we're issuing somewhere north of GBP 1 million new shares as part of management compensation, the expense of which is capped within a cap for the total non-salary compensation. So just moving to the outlook, then I'm sure everybody is sharing the uncertainty about what happens in 2020 to 2025 with the U.S. administration being unclear as to what its policy package is going to look like and what that means for the trajectory for the economy in the U.S. and for interest rates and therefore, investor sentiment. So our central scenario is that Trump is not going to act in a way that stokes inflation because that will be politically unacceptable or certainly unpopular, but rather to negotiate hard to improve trade terms for U.S. companies and that, therefore, should benefit. -- U.S. company earnings and not depress multiples. So our central scenario is one of broad optimism. And actually, the mid-cap biased industrial type portfolios that we tend to invest in with flexibility to go into the U.S. for most of them or to stand us in good stead, and we're long overdue a mean reversion. So central scenario is one of quite a successful couple of years ahead with the derating that we've experienced in the last couple of years finally shaking out. There's no guarantee, of course, that's going to happen. So we are thinking about how we would manage portfolios if we end up in a more inflationary environment. And also, we also need to be mindful that the mega cap tech stock boom may continue. It's probably unlikely certainly over that 2-year time period relative to everything else because the valuation differential is really quite extraordinary at the moment, but it's not out of the question. So I'm just going to pause and turn to questions in a moment. But I think just in summary, then the investment management world is, to some degree, in a barbell in which, on the one hand, there's $1 trillion-plus asset managers with low fees. And on the other hand, there's alternatives and private equity managers. But in Impax's space, which is GBP 40 billion, $50 billion or so, then there's certainly -- I think we've demonstrated that there's a global demand for managers with specialist ideas around strong alpha and beta opportunities, which is certainly what we are advocating and have been doing for a long period of time. So we believe we're the world's largest, longest established manager with this particular investment idea. It's not ethical investing. It's not ESG. It's not impact investing. It's simply investing in an industrial revolution, which has some compelling drivers where our specialist team can really add value. So we're looking forward to building on our client base in this area over the next few years. We do think we've got a nice array of products. We would like to be a little bit more diversified with more in fixed income, but we're on the road to achieving that and with a very well-established client base and management team owning just over 20% of the business, then we think we've got a nice alignment of interest. So I'm going to pause there and happy to address any questions.

[Operator Instructions] We have received a number of questions throughout today's presentation, and I'll start the Q&A session off with the first one here, which reads as follows. What specific actions are you taking to improve your assets under management inflows, please? How does the sales in Asian and U.S. markets in the last few years compare to your expectations?

So, new sales is a function of having the right products with the right packaging in the right markets. So we are expanding our product range, first and foremost. So we're offering more types of broader range of products. So for example, we've now got fixed income products in Europe, which we haven't had before, and we have got some new thematic products around infrastructure and the social leader strategy. So taking steps to broaden the number of investment strategies. We're launching new fund wrappers -- so that means new UCITS funds. We've moved the funds from our Danish acquisition from Luxembourg to Ireland to allow them to -- for more straightforward sale throughout Europe. And then specifically in Asia and the U.S., we are encouraging Asian clients either to come to us directly with segregated accounts in larger strategies or we are sub-managing accounts on the Asian group's platforms, for example, Australian mutual funds, which we're sub-managing. In some cases, those Australian or more likely actually Asian investors are able and willing to invest in the Irish UCITS range. And then in the U.S., this has been a process that's been underway for a long period of time. We have a dozen so-called 1948 mutual funds on the the mutual fund platform impacts LABEL, that we've also been launching with larger wholesale private wealth managers, segregated accounts or so-called collective investment trusts on their own platforms. So being really quite client responsive and nimble to the vehicles that we are able and willing to run. And we are actively looking at setting up an so-called active ETF, which is the way that the U.S. market appears to be heading at the moment. So that's probably an initiative for 2025.

That's great. The next question here, where do you see the company in 5 to 10 years' time?

Gosh. Well, look, I think -- the most important thing to point to is the fact that we are in an increasingly AI and tech-driven world with increasing focus on costs, and that's impacting financial markets as much as anything. And so I think the Impax business is going to thrive because it focuses on areas that are being disrupted, high growth and material change driven by technology and regulation and let's face it, frankly, changing consumer sentiment. So that's where technology is going to struggle to anticipate trends, and that's where we're going to focus our active management. I think having said that, though, we will remain interested and willing to do more in private markets and also more potentially in systematic model-driven portfolios. The transition to a more sustainable economy, we think, is a set of trends and an industrial revolution that will play out over 5 to 10 years and more. So that investment thesis is good for that time period, if not much longer. And we do think that clients are going to remain brand aware in asset management and want to believe that they're investing with a group that they understand and obviously, that they can trust. So I think over that time period, there's every reason that Impax can remain an independent global player with a deeper client and product base.

And turning to the next question. With expectations of a soft landing for the U.S. economy, what specific macroeconomic trends do you foresee as most supportive for your investment strategies over the next 12 months?

Well, I think broadly speaking, with 90% or so of our assets under management in equities and a bias towards what you might call quality growth or growth at a reasonable price, then we do have a correlation to cost of capital and then hence, to base rates. And so gently declining base rates are generally pretty good for what we do as cost of capital drops and therefore, valuations can improve. And then I think the very significant outperformance of mega cap tech over the last 2 years has meant that there's a huge valuation anomaly according to fundamentals. So we are looking for that valuation anomaly to be reduced or potentially removed. If we end up with a situation in which inflation remains persistent and interest rates don't come down quite so quickly, we're going to have to be more nimble in stock picking and stock. The stock selection is going to have to be less quality growth oriented. So we're up for that. We can't guarantee to be outperforming in that scenario.

Thank you very much. The next question here. With your fourth renewable energy fund closing successfully, what's your expectations for private market investments in the next year?

Well, we are doing 2 things right now with the money we've got. So firstly, exiting our third fund, which we are quite well advanced, but still need to do quite a bit more. And secondly, investing our fourth fund. So that's keeping the team very busy and it's likely to be the absolute focus of our work in private markets area for the next 12 months. We do have an eye on setting up a fifth fund, which if things work to plan, ought to be ready for the market in roughly 12 months' time. And then we have not closed our [ES to] ideas around other real assets investment work that I -- as I mentioned before. So that would almost certainly involve bringing in a team or maybe even buying a boutique in a related area of real asset investing.

Some strategies underperformed due to market concentration in mega cap tech stocks. What changes are being implemented to mitigate this in similar future scenarios?

Well, I think as we found in 2001 and 2007 and to some degree in the 2011 Eurozone crisis period, you can't outperform in every market. And certainly, with a thematically driven investment idea, clients -- sophisticated clients don't expect us to outperform in every market. So the answer is that we're not changing our investment process, but I think we are looking at the impact of AI, in particular, for core sectors to see whether there's valuation anomalies that we haven't researched in enough depth. So we're definitely not falling into the trap of doing a pivot on our investment process just at the wrong time in the market because you really don't get forgiven by your clients for doing that. What that does mean is that we've had in 2024, a longer period of relative underperformance compared to expectations. But as I showed in the earlier chart, absolute performance has been very strong. So clients have seen their wealth expand considerably. It's just that they would have made more money if they had invested even more in mega cap tech stocks.

Thank you very much, Ian. The next question asks if there's any guidance on what the sector allocations might be for the newly funded fourth fund. And then will the fifth fund be substantially different from that?

I think this is a reference to the private equity funds. So yes, we're not really publishing where the investment pipeline is sitting at the moment. What I can say, though, is that we've seen continued strength in the European pipeline. So all over Europe, there are some interesting opportunities. We're continuing to focus on solar PV and on onshore wind and to some degree on hydro. So continuing to avoid material technology risk, significant technology risk. We have been investing successfully in the U.S. in Fund IV, but there is a limit to the exposure that we can take in the U.S. So we're like to max out on that. And then we have been also looking at areas such as electric vehicle charging and battery storage to some degree, to a minor extent.

We've got one final question here and asks, does the change in AIM tax rules as announced in the U.K. budget have any impact on your thinking?

Well, we've been on AIM since 2001. Effectively, we reversed the private impacts business into an AIM Shell company in 2001. And so we've been on the AIM since then. Be very happy actually being listed with relatively moderate reporting requirements. And so it was -- we certainly were not welcoming of the idea that AIM market would be challenged in terms of the inheritance tax benefits. So frankly, the policy result, which was non-zero, but also not as worse, not as bad as have been feared was not something we'd anticipated. And probably like many, if not most observers, we are keeping a watching eye now on what market reaction will be. So the initial signs are that liquidity hasn't really changed and is okay, but our stock has been quite significantly derated. So we are -- I think our central cases will carry on with being on AIM, but we are not averse to looking in more depth at the pros and cons of going on to the main market. And we've also not ruled out going private if there's a strong logic around doing that. So I'm afraid it's a wait-and-see answer.

Ian, thank you very much for answering the questions. I think you actually managed to answer all of them. What we will do is we will publish the responses on the Investor Meet Company platform. But just before redirecting investors to provide you with their feedback, which is particularly important to you and the company. Ian, could I just ask you for a few closing comments?

Sure. Thank you. Well, look, I really appreciate everybody listening and for the questions. Do give a feedback as to what else you'd like to see next time because this is a very useful platform for us, and we will certainly be back. So if you'd like to see us again and you'd like something different, then here's a chance to say. Look, I think putting aside the short-term turbulence around what's going on in geopolitics and to some degree, the U.S. economy, then I think we are in a period in which inflation largely has been brought under control and interest rates are heading south, hopefully quickly. But no guarantees, but definitely in that direction. So in that context, the market's sentiment for growth equities, quality growth companies, growth at a reasonable price, which is where Impax is focused, is very strong, and we are expecting a very significant mean reversion. The industrial revolution around clean energy is a secular trend for our lifetimes and this pricing that's coming out of that is continuing to provide great alpha opportunities. And meanwhile, many of the companies that we've been investing in for a long period of time are now in a position where they're strong enough to borrow money to fund their growth. And so there's a new fixed income opportunity arising. So as I was told about 6 weeks ago in Canada, Impax is the largest manager in this area globally now, probably the longest track record. And so in that context, when we pitch up from the 4 corners of the earth and offer our services in this space and people who are interested in this area generally know who we are, and that's a good foundation for further expansion. So with management, as I said, owning just over 20% of the business, there's a very nice alignment of interest with external shareholders. And we are very optimistic about the medium- to long-term growth potential. So I really appreciate your interest, for those of you who invested with us your support and look forward to answering your questions and being in touch over the coming months.

Ian, thank you once again for updating investors today. Could I please ask investors not to close this session as you now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This is going to take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of Impax Asset Management Group plc, we'd like to thank you for attending today's presentation, and good afternoon to you all.