Navigator Global Investments Limited (NGI) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Navigator Global Investments Limited 2020 Annual Results Briefing Conference Call. [Operator Instructions] I would now like to turn the conference over to Amber Stoney, Chief Financial Officer. Please go ahead.

Good morning, everyone, and thank you for joining our webcast today. This is the first time we've done a webcast. So please bear with us if there are a few teething issues, but hopefully, you find it an effective presentation. So with me today is Sean McGould, our Chief Executive Officer; and we also have Scott Perkins, Executive Managing Director with Lighthouse; and Ross Zachary, who's Navigator's Director of Strategic Investments. And so we will all be taking part in the presentation today. For those of you who have the chance to review our announcements already this morning, you've no doubt seen that this is a big day for the company. And not only are we presenting our FY '20 results to you, but we're also very pleased to be able to present a significant transaction involving the acquisition of strategic portfolio of alternative asset managers and minority interest stakes. So our format today will be for me to walk through the annual results. I'm going to turn it over to Scott Perkins. He'll provide an update on the business and particularly, in respect to assets under management. And then Sean McGould and Ross Zachary will talk about the transaction before we open it up to questions. So, right, just multitasking. So I think you should be able to see the next slide on the webinar. So in terms of our key results measures, the -- as we've previously announced, we closed our assets under management at 30 June at $11.8 billion in -- the reduction was due to a combination of outflows from the MAS assets that we acquired back on 1 July 2008 and also a significant reduction in AUM due to the performance in March 2020 when markets were particularly volatile at the beginning of the COVID-19 pandemic. So in -- the reduction in AUM over FY '20 resulted in a 17% reduction in management fees, which in turn saw a reduction in our EBITDA. So this year, due to the introduction of the new leasing standard, we've presented both an EBITDA and an adjusted EBITDA, and I'll just discuss the differences between those shortly. The other thing, I think, which will be of key interest to shareholders is the dividend. The Board has determined that a final dividend of $0.055 per share, meaning that we'll have total dividends of FY '20 of USD 0.14 per share. So in terms of final dividend and based on current FX rates, we expect that will be approximately $0.88 per share. So in terms of the summary of our results, I'll discuss our key revenue and expense items shortly. So in terms of the EBITDA result itself, EBITDA as determined under an IFRS basis came in at $30.5 million for the year, which was down 19% on the prior year. So that includes the benefit of the reduction in lease expense that's no longer recognized in operating expenses under the accounting standards. So in order to provide an EBITDA figure, which is more comparable to the FY '19 results, we've also presented an adjusted EBITDA. So that has been reduced by $2.2 million of the cash payments that were made during FY '20, which specifically related to those lease costs. So this $2.2 million, it represents the lease interest expense and the lease liability payment in the statement of cash flows so that users of this slide can easily tie that where those amounts come from. So as a result of that reduction, so the adjusted EBITDA comes in at 28 -- sorry, got them online, yes, $28.3 million for the year. Our EBITDA margin for FY '21 is 28%. So that's down 33 -- from 33% on the prior year. And this reduction is due to several factors. The key being the reduction in revenue, which occurred during the last quarter of the year due to the AUM reduction and the COVID impacts, where we did not have the opportunity to have a corresponding reduction in operating expenses over that quarter. And in addition to that, we've had some nonrecurring items, which I'll just outline on the next slide. So turning to that. We had a couple of significant items, which are nonrecurring and should be taken into account when considering the FY '20 results. In particular, we've incurred $1.8 million of expense transactions in relation to the transaction that we're announcing today. And in addition, we also included in that EBITDA number is just under $800,000 of an impairment expense. This is in relation to a full write-down of the MAS intangible that we booked back July '18. We're originally amortizing it over 7 years. But given the reduction in the AUM over that period, we've considered that it's prudent just to write that down to 0. We've also got an agreement with Mesirow that there is no further earn-out in relation to those assets. The final nonrecurring point I'll just note is that we incurred $1.1 million of termination costs. So relating to staff redundancies. The majority of this cost relates to those redundancies that we announced in November 2020, and there is also some additional provisions for -- maybe at the end of this financial year for some redundancies that are planned in the near future. So taking all of those items into account, we end up with an adjusted EBITDA, excluding these nonrecurring items, of $32 million for the year. In terms of the results by half -- I apologize. We've actually just broken it down so that shareholders can easily see the difference between the first half and the second half. So in relation to that, clearly, you can see that there has been a reduction of the $18.7 million that we had for the first half in terms of our core operating activity earnings, and that's down to $10.8 million. That $10.8 million does include the $1.8 million and the $800,000 nonrecurring items that I mentioned previously. So just moving on to revenue. So in terms of the key revenue items, obviously, management fees is our largest revenue line. As I noted earlier, it's down 17% on the prior year, and that's consistent in the fall in average AUM across the FY '20 year of 15%. We've also had a slight reduction in the average management fee rate, and this is a consequence of the change in AUM mix as a proportion of customized and platform AUM, which earns a lower fee rate than commingled, has increased as a proportion of the total AUM. Performance fees for the year came in at $5.6 million, and we earned an additional $1.9 million in the second half. I think -- and this is pleasing and indicative of the good performance of the equity strategies that occurred over this half year despite the volatile markets. In terms of the revenue from reimbursement of fund expenses, these are incurred where the company initially pays expenses on behalf of the funds, and then it's fully reimbursed. There's a corresponding expense that fully offset this amount, and hence, this is EBITDA neutral. We also had a small reduction in the income from the provision of office spaces and services. And this has mainly reflected some changes in arrangements and particularly, a change in our London office premises that occurred towards the end of this year. So in terms of expenses. As a human capital business, obviously, employee expenses is our largest expense category. Employee costs were down this year by $4.4 million. And that reflects a reduction in headcount that occurred during the year, particularly in November '19 and a reduction in the bonus expense compared to the prior year as well. In terms of professional fees, these fees were actually up $1.3 million for the year, but that is due to the additional $1.8 million of transaction costs that got expensed prior to 30 June. It also includes a $900,000 spend in relation to development of our proprietary trading platform, which is now complete. Occupancy expenses are lower than in the prior year, and this is due to changes from the new leasing standard. So if we took into account those additional $2.2 million of lease cash expense, we come in with occupancy expenses incurred as a whole, largely unchanged from the prior year. And the only other thing of note on that particular slide is the impairment loss, which I referred to earlier for the MAS intangible assets. In terms of the balance sheet, so probably the key thing there is that we're pretty comfortable that it still remains a solid balance sheet. And certainly, we're comfortable with the cash position of the company. The other thing to note is that, obviously, in the current environment, we have done a significant review of the carrying value of our cash-generating units and the goodwill in particular, and we're very pleased that we don't have any impairment in relation to those carrying values. So just lastly for me is just to reconfirm the dividend. I've obviously mentioned that earlier. The full $0.14 per share for the FY '20 year actually comes in at just a smidge over 80% of EBITDA but sits at the top end of our dividend policy and payout ratio. So with that -- actually, sorry, I do have one more thing to note, which would be we have put in a specific slide in relation to COVID-19 impacts. We're very fortunate, I think, from the point of view of we are quite aware that the key impact on our business has been the volatile markets back in March and the consequential impact on performance and AUM. In terms of where we sit relative to others, we are very fortunate we didn't have any issues in relation to supply chains or cash management. And we have been able to move our business to a work-from-home model with minimal disruption, which has been very valuable. So with that, I'm actually going to hand the presentation over to Scott Perkins to talk about AUM.

Thanks, Amber. On Slide 11, if we can move there. You can see we ended the fiscal year at $11.8 billion in assets under management. That's down roughly 17% from the beginning of the fiscal year. The overwhelming majority of that decline relates to outflows associated with some legacy Mesirow businesses, particularly their custom funds. Performance on the year in the aggregate was slightly negative as well, mainly driven by the results of the first quarter of 2020. Amber, if you can move to Slide 12. Yes, perfect. This slide breaks AUM into various categories. In the first chart, you can see that AUM is roughly half in custom funds and half in platform and commingled funds. The level of custom funds has increased over the past few years, and we've seen increased demand from institutional investors for Customised Solutions. On the strategy breakdown, about half the assets are now in equity-based strategies as we've seen stronger performance and more interest from clients in those strategies over the last year. And we've seen more opportunities from an investment perspective there as well. From an investor type and investor geography charts, there was very little change over the course of the year, although we did see a slight percentage increase out of the Middle East and Europe. And we do continue to see a lot of interesting opportunities outside of the U.S. Moving on to Slide 13. So Slide 13 just walks through the quarterly changes in assets under management and some of the drivers of those changes over the course of the fiscal year. Looking at the pie chart at the top right-hand side of the slide, there was no real change for the biggest bucket on the year. The Lighthouse custom funds and platform. There was a slight decrease in Lighthouse Commingled Funds, primarily from the multistrat. And the biggest drop, as noted earlier, would have been from the legacy Mesirow funds. While the Mesirow assets have clearly dropped more than we would have hoped for, we knew that was a risk going into the transaction. However, I would note that it was and is still profitable from a business perspective. We've retained some very good clients and strong employees as a result of the transaction. I think Slide 14 just shows performance on the year. Nothing really to add there. And I think with that, I will pass it on to Sean and Ross to discuss the transaction with Dyal.

Okay. And Amber, if you could put up Page 18, that would be great. And now -- excuse me, Page 19. Perfect. So now, we'd like to take some time just to talk about the partnership with Dyal Capital Partners. And the acquisition of the strategic portfolio of alternative asset managers and minority interest that we announced this morning. We're very excited by the acquisition and the growth opportunities it provides Navigator. Ross Zachary is going to go into much more detail than I will on the summary on the overview of the transaction, the strategic rationale, including the expected benefits and the key terms and funding arrangements. Amber is then going to provide an overview of the expected financial outcomes and next steps regarding the transaction. So first, just let me discuss Dyal briefly and who they are. Dyal's senior team has spent over a decade making minority investments in alternative asset managers. They were formed in 2011 and currently manage over $20 billion. They've invested in 45 of the industry's leading alternative asset management firms. The firm operates across a variety of asset classes and sectors, including equities, credit, fixed income, commodities, real estate, energy, manufacturing, telecom, technology and media. The groups, the advancement firms that partner with Dyal, they get more than just a financial transaction. Dyal has a 34-person business services platform. And the business services platform can help the underlying managers raise capital, understand regulatory changes, assess competitive positioning, et cetera. So Dyal has been doing this for a long time. They're probably the largest firm in the world that acquires minority stakes in these businesses and obviously, has done a number of transactions in the space. Dyal is headed by Michael Rees, who is also a member of the firm's Partnership Committee. Dyal is a unit of Neuberger Berman. And currently, they manage 4 funds and are raising an additional fund as well. Prior to founding Dyal, Michael Rees was one of the founding employees and shareholders of Neuberger Berman group, which actually transitioned out of Lehman Brothers back in 2009. Michael has been involved in the alternative asset management business since 2001. So just a little bit of history on Dyal and who we're partnering with in this process. If we -- I think we're already on Page 19, Amber. Briefly, I'm going to hit these points before turning it over to Ross. We believe that the acquisition is transformative for the Navigator business. We think it will unlock material benefits to shareholders. I need to be clear that this is a partnership at the Navigator level and will not impact the operations of Lighthouse in any manner. So we are not trying to integrate these firms into the Lighthouse business. These are separate standalone businesses, they have existing management in place. And they are not being incorporated into Lighthouse. Each of the alternative asset management firms is well-known to Navigator. So obviously, Dyal has partnered with them for a long period of time. But we also know them from being involved in the industry. Each of the firms is well-established, at least 15 years, with attractive characteristics and a track record of delivering returns for investors and shareholders. We expect the transaction to deliver increased earnings diversification for Navigator from acquiring an earnings stream with low correlation between each of the managers as well as the rest of Navigator's businesses, while we retain upside exposure through a more material performance fee component. Ends will be covered here in more detail later in the presentation. Another attractive element is the ongoing partnership with Dyal, which can be leveraged for our future growth. Aligning this partnership is supported by the issue of equity to fund the transaction. So we expect Dyal to be a material shareholder in Navigator for a number of years to come. And we expect Dyal's deal flow, which, again, they would have been probably the largest purchaser of minority interest in this space last year. Their deal flow is significant, and we expect to be able to partner with them on individual transactions for Navigator and things that they may do in their funds as well. So with that, I'm going to pass it over to Ross to go through in greater detail the transaction and why we are so excited about it. So Ross, over to you.

Thanks, Sean. And maybe we'll start on Slide 20 for this section. As Sean mentioned, the transaction involves the acquisition of 6 minority investments in high-quality and well-established alternative asset management firms. As consideration, Navigator will provide Dyal with a 40% economic interest on a fully diluted basis through a combination of the issuance of ordinary shares, representing 19.9% ownership and convertible notes at closing. Under the terms of the agreement, Navigator is entitled to a preferred income stream through a minimum annual cash flow distribution of $17 million from the portfolio. For the first 5 years, this minimum annual distribution will be indexed at 3% per annum, and we will share the cash flow generated above this level through a 20-80 sharing arrangement between Navigator and Dyal, respectively. After 5 years, Navigator will acquire the remainder of Dyal's interest in these cash flow distributions above the minimum for a onetime payment which will be linked to the portfolio's actual financial performance-based on a fixed formula. This structure reflects Dyal's confidence in the outlook for the portfolio and their belief in the growth potential of Navigator. On Slide 21, we'll continue some of the key points of the transaction. Dyal's long-term equity interest provides effective alignment for the ongoing partnership. Dyal will be retaining a majority of its equity interest as characterized in both shares and notes for at least 5 years. This equity ownership is subject to various rights and obligations under a shareholders' agreement, including their ability to appoint a Director to Navigator's Board so long as they continue to hold over 10% ownership on a fully diluted basis. There is compelling financial rationale behind this transaction. The consideration provided to Dyal represents an attractive multiple based on the expected preferred minimal annual distributions leading to immediate cash EPS accretion for Navigator shareholders. The cash flow generated by this portfolio is expected to support the long-term dividend policy of Navigator. The transaction is subject to a long stop date of 12 months and will require Navigator shareholder approvals and regulatory approvals. We expect the transaction to complete between December 2020 and January 2021, depending on the timing of these various regulatory approvals. This time line, of course, can be delayed because of the COVID pandemic. On Slide #22, we set out exactly how we see the consideration and earnings are acquired at closing and then after year 5. On the top left, you will see that the equity consideration issued at closing in the form of shares and convertible notes. As you move down and across the slide, you will see this in return for the minimum annual distribution and 20% of the additional cash flow generated above that. Based on last close of around USD 0.98, this represents upfront consideration of $106.5 million. Over that 5-year period, Dyal will remain entitled to 80% of any excess distributions above the indexed minimum annual level. Following the 5-year period, Navigator will acquire Dyal's interest in the excess distributions for a onetime payment. The quantum of this consideration provided will entirely depend on the performance of the portfolio throughout this 5-year period. Following this payment, all cash flows generated by the portfolio will accrue to Navigator. Slide 23 summarizes the transaction rationale. The transaction has a strong commercial logic, and we expect will unlock significant benefits for Navigator shareholders. First and foremost, the portfolio is comprised of high-quality and very well-established managers with long track records of generating impressive results for their clients. Each firm has strong leadership in place with the deep resources required to meet their global client base's needs. This transaction and the portfolio acquired provides both scale, and as Sean mentioned, meaningful diversification to Navigator. In terms of diversification, we want to highlight that these unique and uncorrelated earnings streams are both uncorrelated amongst the portfolio as well as the Lighthouse business. As Sean also mentioned, this business offers attractive upside exposure through meaningful performance fee component throughout the products these businesses manage. It's important to remember that Navigator will receive the first $17 million of earnings and cash flow from these firms regardless of if it is generated by management fees or performance fees. In particular, the portfolio and the partnership with Dyal will also help Navigator establish a new platform for future accretive growth opportunities in the alternative asset management sector and more broadly. Importantly, the terms of the transaction allow for Dyal to provide liquidity to its clients over the long term. And therefore, we expect that this transaction will promote long-term liquidity in Navigator shares. The partnership with Dyal is also designed to ensure that Navigator can benefit from Dyal's expertise and long history with the managers through their ongoing involvement with the company. We welcome Dyal's representation on the Board and the various services they will provide in the years to come. Finally, the financial metrics of the transaction are attractive to shareholders, and we expect they will be even more compelling at the end of year 5 when the remaining distributions are acquired. The following slides will further address some of these key points. Slide 24 provides a snapshot of the 6 managers we're acquiring interest in. This portfolio was formed with an emphasis on quality and growth prospects. Today, these firms all remain profitable, have strong track records of delivering impressive investment results for their clients, and they continue to meet an ever-evolving set of client needs. Each firm represents a highly specialized business in their respective strategies. At the portfolio level, this results in a diversified array of 26 strategies across 111 products. It's important to note that this transaction will have no impact nor any interruption to these 6 managers' businesses. Unlike when Lighthouse acquired the assets and client relationships from Mesirow, this transaction, at the Navigator level, will not impact the managers' businesses at all. Importantly, there are also no required changes to the terms of Dyal's original investment in the managers as a result of our acquisition. These terms effectively align us with the active owners of each manager and provide certain minority protections to ensure our interests remain aligned. Slide 25 illustrates the historical earnings of this portfolio. In aggregate, the portfolio has provided a stable level of management fee revenues over the last 3 years supporting a consistent level of pretax profits. Portfolio financial performance year-to-date 2020 appears to be consistent with recent years' outcomes despite ongoing market volatility. Each manager has various performance fee arrangements, which have historically provided material earnings upside post employee incentive arrangements. And although we do expect 2020 to be a more challenging year, the managers have proven their ability in other difficult environments to generate strong returns. You will see here that the historical level of pretax profits provides strong coverage for the preferred income stream or minimal annual distribution that Navigator is initially acquiring. Slide 26 sets out various metrics that provide some more insight into the additional scale and the earnings profile of this portfolio. The portfolio represents a material increase in AUM for Navigator, adding $35 billion on a gross basis. On a proportional ownership basis, the acquired portfolio will represent roughly 40% of the combined AUM of Navigator and result in an increase to $19 billion total. This increase in scale materially increases Navigator's profile and future growth prospects in the alternative asset management industry. There is a diversified mix of products throughout this portfolio. A majority of the assets are in products, which are eligible to charge performance fees. As noted, this upside exposure from performance fees, which are expected to represent a more material of Navigator's pro forma revenues than the current business. At this point, I'll hand it back to Sean to address our post-acquisition business structure on the following slides.

Thank you, Ross. So if we turn to Page 27, which it should be on now. So we expect -- through the slide, you can see that we expect to adopt a multi-boutique operating structure following completion with the existing Lighthouse business operating alongside the new portfolio. So again, just to confirm, there are no changes at Lighthouse. We are not integrating any of these businesses into Lighthouse, and they will become part of the holding company. Overall, we believe this structure will create greater focus on each business, which will be able to pursue their own growth opportunities and include further investments and acquisitions of specialized asset management firms by Navigator, by the holding company. So these businesses will continue to operate as they are. Again, there's no integration with Lighthouse. And as Ross mentioned, they continue to operate in the manner that they have prior to this. So we think the overall structure is very clean and very easy to incorporate new firms into and certainly, to incorporate the existing firms as well. Turning now to Page 28. And just an overview of Dyal, which I touched on, again, this goes into more detail. So we discussed their total capital -- or committed capital is about $22 billion. They have proven experience, definitely a stable capital base, definitely aligned and focused with their managers and have created a number of very strong strategic partnerships. In addition, we expect Navigator to benefit from their ongoing business service capabilities and investment platform as I discussed earlier. Dyal is a leading provider of capital in the alternative investment management space. As I mentioned, $21 billion in committed capital. And while it is difficult for us to fully quantify, we certainly believe that Dyal has the best deal flow in the world for these types of opportunities. So we're very excited to partner with them. We think this structure makes sense for both Lighthouse and for the business interest that we're acquiring. And we think that we have a long-term strategic advantage in terms of sourcing new opportunities for Navigator with this partnership with Dyal. And with that, I'd like to turn it over to Amber just to talk about the expected financial outcomes.

Thanks, Sean. So obviously, the financial impact of this transaction will be of key interest to our shareholders. In entering into this agreement, given that the consideration is a combination of shares and convertible notes, based on our current share price, we consider that this is an attractive acquisition multiple. And we expect that the portfolio will generate immediate cash EPS accretion for Navigator shareholders. We've looked at this. And based on our expectations and consideration of the recent performance of the combined managers, we expect the portfolio to contribute approximately $20 million to $22 million in cash distributions from its initial year. And that would be comprising about the $17 million of the minimum annual distribution and an additional $3 million to $5 million based on our 20% interest and sharing of the distributions earned by the portfolio above that level. So historically, when considering this, we've looked at the level of management fee revenue that's being generated by the portfolio. And we've made sure that when considering that, we've looked at whether or not that $17 million minimum distribution will be well underpinned by the management fees, and that would appear to be the case. So given we've had a focus on these cash distributions and the minimal annual distribution offers a protection to Navigator because of the volatility of the performance fees and the operations -- operating performance of the managers, so we've thought through this structure quite carefully in terms of how this initial component works. So we anticipate that the incremental Navigator operating expenses will be between $1 million to $2 million just in terms of this new business line. And based on the structure and the jurisdictions of the portfolio we're acquiring, we're expecting an effective tax rate of approximately 10% on the cash distributions received up from the portfolio. We're expecting long-term growth in cash distributions, and it will support our earnings and dividend profile over time. And particularly following the acquisition of Dyal's 80% interest in those excess distributions after year 5, we do then expect that the portfolio will contribute to a higher level of earnings at that time. So the redemption payment, we expect to be funded out of earnings, all things being equal over the 5-year period. And with that, there is some additional information on there about some of the accounting issues. But I will just note that we are taking this to shareholders, so there will be a significant amount of additional detail that is presented to shareholders regarding the financial statement impacts. So in terms of next steps, we will be obviously taking this to shareholders. So we're in the process of putting together an explanatory memorandum. We expect that will be out in early October so that shareholders have sufficient time to consider the transaction. And that we would have this approved at our Annual General Meeting in November. We're expecting close to be either late December or early January, just pending some of the regulatory approvals, including FIRB, which has a longer time period for approval given the COVID pandemic. So with that, I believe it's time to open up for questions.

[Operator Instructions] Our first question is from Tim Lawson of Macquarie.

I'll just quickly start on the Navigator business before asking a few questions on the transaction. So just with the split of fund you provided, you've got obviously multistrat and the equity strategies. Just trying to clarify, are any of those sort of related? So if you had outflows in multistrategies, does those effectively drag any of those equity strategy fund with it?

Not necessarily. No, Tim. It's -- the products are fairly separate as far as shareholder base and things like that. So we haven't seen the impact of that to this point.

Okay. And just on the transaction. You mentioned the potential for new firms. Is that going to be done with this new structure, effectively, the old Navigator and the investments part? Is that done in joint venture or partnership with Dyal? Or is that something you're expecting to continue with directly independent from Dyal?

We expect both. There are certain things that we can source. But Dyal, as we mentioned, is probably the largest in the world at what they're doing. Their deal flow is very, very significant. Their structuring capabilities are very significant. They've done 45 transactions in the space. So we want to work together with them to identify potential transactions as well, and they will continue, obviously, to do things on their own and given their scale is much greater than ours. But absolutely, we intend to work collaboratively and again, source our own deals as well.

Yes. And just on the tax on the $17 million, is your sort of the tax base applicable against that 10% tax rate? Or is it not going to apply?

No. We've actually structured this, Tim, so that we'll have 2 U.S. groups. So the existing tax losses relate to their Lighthouse business, and that effective tax rate relates solely to the structure that we're putting in place.

Yes. And can you talk a little bit more about that after year 5, you talked about a payment of 4.5x the average in excess of the minimum annual distribution. I assume that's of the 100%, not of the 20% minimum annual distribution. I'm just trying to break out...

Yes, that is correct. So anything above that $17 million indexed amount, we take the average of that over 5 years and apply the multiple to come up with the redemption price.

[Operator Instructions] Well, I think we do have a few more questions on the list. Our next question comes from Phil Chippindale of Ord Minnett.

I just wanted to ask about the transaction. Can you just give us some rationale as to why Dyal are selling? And then secondly, what are you looking to bring to the table in terms of this partnership? You've really emphasized that in your commentary, Sean. So I just want to be clear about what you guys are going to bring to the table here.

And so just to clarify the question, what we are bringing to the table or what Dyal is bringing to the table or both?

I suppose, both. But really, I'm trying to see what you guys are bringing to the table. Obviously, other than the price that you're paying, what are you looking to really add to this? And what's Dyal expecting from you guys from a strategic point of view?

Yes. I think, Phil, a couple of things. One, we've known Dyal for a long period of time. I think they realized that we've been in this space, in the alternative asset management space, for over 20 years. They have a fund, as Ross mentioned, these were some of their original investment. And they want to continue to find a liquidity path over a long period of time for their original investors while increasing value and growth opportunities for them. So it gives Navigator a chance to diversify its business holdings within the alternative asset management space, which I think is important. They know us as partners. I think that's important as well. They know that we know the space as well. And on the flip side of that, Dyal has grown very rapidly since their inception and has become a global leader in this space. So Navigator is picking up their intelligence in the space, their deal flow in the space. And we have a common objective of maximizing Navigator over time for the benefit of their early investors and our ongoing shareholders. So as we've discussed over a period of time, Phil, we have wanted to diversify Navigator and to create a true holding company structure. The intention was never just to hold 1 asset forever, that being Lighthouse. And I think this makes a lot of sense in order to do that and really set the holding company on a growth path. And certainly, Lighthouse is a part of that, but having 6 other firms contributing to that. As Ross pointed out, the first $17 million out of these 6 firms comes to Navigator. So I think we have a very strong chance of earning that and more. So I think it makes financial sense, and it meets Dyal's objectives as well. So those are really the reasons, Phil. But I think we both know the space well, they know parts of the space much better than we do in terms of private equity or real estate or other types of firms like that. But certainly, we've been around the more liquid alternative space, and I think we can bring that expertise to them. So that's -- those are really the rationale, Phil.

Just a question for Amber. I just missed numbers you were talking about earlier. The $17 million of distributions plus the 20% in excess of that. I think you actually gave a little range of what you're expecting to maybe receive in the first 12 months or so. Was that -- can you just do a quick recap on that?

Yes. So I think we've put together a slide that just gives a snapshot of the existing business that -- just trying to fix through so I can tell you which one it relates to. So Slide 26 kind of sets out the current metrics and has a look at their current pretax profit just based on recent history. And so using that as, I guess, as an indicator, and obviously not a forecast, but just an indicator. If you look at that, we would expect that we get that first $17 million of minimum payment. And then above that, we would be getting a 20% participation of between $3 million to $5 million.

Okay. And just finally, again, this might be buried in the detail somewhere, but I haven't seen any details around the terms of the convertible note that you talked about.

There is an Appendix -- sorry. So there's an Appendix that I haven't talked through. We kind of wanted to make sure we had plenty of time to Q&A. So just Slide 32 of the full pack, and I will put it up on the screen, excuse me while I try and multitask. So we're looking at a convertible note that is a 10-year term. There is not a provision to redeem the note early, other than just as a fallback at the end of the 10 years, if for some reason, they're not able to convert due to our takeover law provisions. And the key on that one as well is that we're not paying any fixed interest component in terms of any regular interest payment. Those shares or pursuant to the notes will contribute in ordinary dividends on an as-converted basis. So as much as possible, they look and feel like equity.

[Operator Instructions] Our next question is from Tim Lawson of Macquarie.

I just got a follow-up. I think Phil has already asked the question on the motivation behind Dyal, but I would just then ask on that convertible note comment. So will you effectively be reporting a diluted EPS -- diluted base convertible notes. Is that the way you say they're effectively looking like equity?

Yes. So we will need to include these shares that can be issued under the notes in our diluted equity calculation. So you'll be able to see that clearly in our EPS. So we'll be reporting a basic and a diluted, but the diluted EPS will take these notes into account.

There are no further questions at this time. I'd like to hand the call over to Mr. McGould for closing comments. Apologies, we do have a question that just snuck in from Mark Hancock of Precept.

Hello. Can you hear me?

Yes, Mark, go ahead.

Just a question on the actual outlook for the Navigator funds themselves, the diversified fund had an 18% decline in the March quarter. Can you just clarify what -- are you aware of a lot more outflows that are currently expected in the existing business, particularly in the diversified fund?

Yes, Mark. We know that there certainly will be some outflows. I think the performance in the second quarter was very strong. Performance continues to be good going forward here. So I think we're back on track. We certainly changed some things based on the losses that we incurred in March, but I think that the portfolio is very much back on track.

Okay. And can you just indicate on the staff redundancies, what sort of cost outs are you looking at doing in FY '21 on the existing business?

It certainly, Mark, won't be as material as what we did this year. So I think it depends on some of the growth prospects and other initiatives we have. One thing that we didn't touch on as much in this call was just some of the success we've had on the platform business. So what we don't want to do, Mark, as we've discussed in the past, is rationalize people or costs or things like that just to bring them back as we're expanding a business line. And we've had several new clients on the platform side. So the real plan is, again, to continue to grow these business lines within Lighthouse and move forward from there. So I'm not expecting any significant redundancies right now.

Just on the acquisition. With the historical AUM, it doesn't seem to be a convincing growth path that you've painted on Slide 26. What -- where do you see the drivers for growth in the Dyal AUM?

Mark, as you would see -- yes, go ahead, Ross, and then I'll jump in. Go ahead.

No, no problem. So Mark, one of the things I would note on the historical AUM is that the decline or kind of overall flat path you see at a portfolio level is really driven by a series of unique events, whether it be closing of a strategy due to a lower opportunity set or just generally more outflows due to other reasons kind of spread out across the managers. What we see now is that these strategies have performed well for the most part, remain leaders in their space and have continued to both launch new products and open up historically closed products, and we do see demand for them. So I think you are right to point out that when you look at the last 5 years at the portfolio level, the AUM is not -- would not project a growth path. But with regards to the underlying capabilities, we do see demand going forward.

Is it -- I don't know if you have the number, but a useful statistic is what's your unused capacity in the existing strategies that you're acquiring. So you've got $36 billion -- $35 billion in -- on Slide 26 there. But would you know the latent potential before you reach capacity in the current strategies?

Not a specific number. I would say there are some capacity constrained funds and strategies with these managers. But each of these businesses over its 15- to 30-year history have launched either new strategies, new structures or new initiatives to capitalize on different client areas or different opportunity sets. So there's a track record in each 6 of these businesses of doing that. I would say that overall, all the current strategies remain with -- not capacity constrained by their nature. There are a few things just like things that Lighthouse sees in the industry where they will be capacity constrained. But at their current level, that's not an issue.

Just one last question in terms of the multiple that you're paying for the business. I'm a little bit -- it's a little bit hard to tell because of the script-based nature of it. But at the current share price, the market -- the value of the shares would be something in the order of $150 million, assuming the convertible notes are a great one. And you'll be acquiring, say, $22 million initially, which would put it at a multiple of about 6.8x distribution income. Is that the right number I'm looking at?

Is that Aussie dollar or U.S. dollar in terms of the consideration? Because the U.S. dollar price is closer to $1 at the moment.

Okay. I've got my currencies wrong.

Yes. Yes. And Mark -- it's a good question, though, Mark, and happy to answer it directly. So with the current share price, to your point, that's about a -- it's about a 6.2x multiple on $17 million. Assuming we only got the minimum annual, it's about a 5x multiple or high 4s, low 5s on the range that Amber indicated. And on kind of, call it, high 20s to low 30s range of the total portfolio earnings, even if they were to perform lower than the numbers you see as the historical and kind of the key metrics slide, that's somewhere in the 3.5x to 4x range. So that's why we do feel that this structure aligns our interest with Dyal and also aligns interest with shareholders in the sense that the upfront purchase price is an attractive multiple for, as we've highlighted, a minimum earnings stream, which we think is covered.

Okay. That's really helpful, those last few numbers you quoted. And very compelling numbers.

We have a follow-up question from Tim Lawson of Macquarie.

Sorry for the third question. But just following up on Mark's query on the cost number for the Navigator business. You talked about the outlook not changing that deal, but you have changed the cost base in the last 6 months that probably are not reflected in that sort of half year number. So can you just talk about what the sort of exit cost run rate is in the Navigator business?

In terms of the second half or -- sorry?

Well, no. So as we head into FY '21, you've made some redundancies in the second half, but that -- some of that -- some of those people remained redundant will have a staff cost in that line that we see in the second half. So what -- effectively as you exit June 30, 2020, what's the annualized sort of cost rate?

Oh, the reduction. It actually relates to just a small number of people. And so if you kind of look to more than average salary, we would be looking below $400,000 cost outs and just as base cost savings.

Yes. But what I'm trying to understand is, what's the base of cost saving from? So what's the sort of range of operating expenses for next year on the current sort of structure of the business, in the Navigator business?

So I'm not sure I've actually got the numbers in front of me to answer your question as fully as I would like to. I think we're looking at an improvement in margin, I guess, from that second half. So there will be some improvement given that we've got reduced costs, not just on the employee costs as well as some of the reductions to professional fees and IT costs that we see coming through. So we would look at having that margin sort of go back up above the 30% mark for the first half.

Yes. Okay. So operating expenses in that second half in U.S. dollars millions was about $32 million. So maybe that helps you think about what the number might be going forward.

Yes. I mean we're expecting a bit of like a reduction from that to an extent. And certainly, we have a bonus expense that flexes in relation to reduction in profitability as well.

Thank you. Mr. McGould, we have come to the end of the questions. I'd like to hand back to you for closing comments. Thank you.

Okay. Thank you. Thank you for everyone taking time here. And again, very sorry, I can't be down in Australia with all that's going on in the world. We feel very good about the holding company, Navigator, going forward. We think it's going to own interest in 7 businesses that are good businesses and can produce cash flow and have growth prospects, as well as the ability to add more businesses on as we identify them. And with Dyal's help, we feel very confident that we're going to be able to do that. So with that, I will conclude the call, but look forward to getting down to Australia when the pandemic is over and things are a little bit more calm. And again, very much appreciate your time this morning to listen to the presentation. And as always, please feel free to reach out to Amber or myself or Trevor with any questions or comments. But thank you very much.

Thank you. That concludes today's call. Thank you for joining us. You may now disconnect your lines.