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

Thank you for standing by, and welcome to the Navigator Global Investments Limited Interim Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Stephen Darke, CEO. Please go ahead.

Thank you, Melanie, and welcome to everyone who has joined the call this morning to discuss the 2024 first half results for Navigator Global Investments. I appreciate the focus on NGI rather than the Nvidia earnings call that's also happening now and may be receiving some more attention globally. I'm Stephen Darke, Navigator CEO. I'm joined today by my colleagues, Ross Zachary, CIO of Navigator and Head of NGI Strategic Investments; Sean McGould, CEO and CIO of Lighthouse; and Amber Stoney, NGI's Group CFO. Slide 3 is today's agenda for the call. But before we begin, I'd like to just provide a brief reflection on my first 5 months at Navigator. From day 1 in this role, I've been excited by both the company's focus on alternative asset management as well as the compelling opportunity for me personally to lead this development of a navigator platform along with the team. There continues to be strong long-term macro tailwinds for both the alternatives asset class but also the independent asset management model as well as a growing acceptance of the investment proposition of providing strategic capital to support asset managers' growth. More specifically, though, after meeting many of the principles of our partners' firms over the last few months, I recognize the quality and diversity of the strategies and the opportunities for material growth across the Navigator portfolio. Many of the managers, as you know, are leaders in their respective sectors, generating top-tier performance for their investors and raising capital in somewhat challenging markets. With Ross, I've spent a lot of time with the Blue Owl team discussing potential new opportunities, their impressive business services platform that supports NGI managers and overall their perspectives on the GP staking market, of which they are the clear market leader globally. I would like to thank Sean McGould for his support and guidance during the CEO transition period. He has a long history with Navigator and also as the founder of Lighthouse, the business with which we can now turn his full focus too. So turning to Slide 5, the company overview. The Navigator is importantly the only ASX-listed company that derives 100% of its revenues from a portfolio of alternative asset managers. As of the end of the calendar year across our partner firms, including Lighthouse, Navigator manages AUD 108 billion across 37 strategies, which are invested by the implementation of now 179 investment products. Such strategies have typically low correlation to global and equity and fixed income markets and importantly, to one another. Turning to the business model. And before we cover Navigator's first half business and financial highlights, I wanted to take a brief look at the business and the platform for those who may not be completely aware. In essence, Navigator is a relatively simple company. We provide growth capital and strategic engagement to a diverse group of well-established, high-quality alternative managers we refer to as our partner firms. Currently, that portfolio comprises 11 asset managers. Our model is twofold. We acquire minority interest in asset managers providing financial capital to drive the growth of those firms by our permanent capital structure being our listing that provides then the opportunity for us to take minority stakes and have strong alignment to preserve and increase values -- increase value for the underlying firms. Navigator also provides strategic support to its partner firms, either directly from the NGI management team who have a combined 70 years-plus experience in alternatives and also indirectly from the utilization of the 50-person business development team of the GP strategic capital part of Blue Owl, who economically now owns over 50% of our stock and is our strategic partner. In terms of our portfolio, given the breadth of many of their platforms, it's often challenging to bucket our partner firm strategies. But the diagram shows our portfolio across liquid alternatives and private market alternatives with those managers who have elements of both included in the center. It's important to note that liquid alternatives refers to the underlying nature of the hedge fund type strategies, including multi-strat equity hedge, discretionary macro commodities. In terms of private markets for Navigator that includes private credit, real estate capital solutions, asset-backed lending and specialized private equity. In terms of the future, I wanted to upfront just indicate for sort of NGI and its shareholders the growth of the business derived from 4 sources: increased net inflows across our partner firms; secondly, positive investment performance generated by our partner firms that provide fund returns for investors, but also performance fees and carry; and also improving margins and operating leverage at the partner firms, which increases their profitability and distributions to Navigator. Finally, accretive investments in new partner firms bringing exposure to additional fee-paying assets, further diversifying the portfolio and increasing the resilience of our revenues. Turning to Slide 7, addressing the business highlights for Navigator. 2023 was a pivotal year with a focus on simplifying the structural complexity of the Navigator business and positioning the company for continued growth. In the last 6 months, the company progressed a significant transaction, which saw it acquired the remaining interest in a 6 strategic portfolio managers originally acquired in 2021. This was done by the early settlement of its 2026 obligation with our major shareholder. This transaction delivered the full earnings of the NGI Strategic Portfolio 2 years earlier than under the prior deal terms and removed a significant liability from NGI's balance sheet, strengthening our financial position significantly. Related, the company launched an entitlements offer on the 5th of December 2023 to raise cash to partially settle that transaction shares were allotted just after reporting period finished on 3 January '24 and Navigator settled the transaction, including payment of $48 million to Owl. Pleasingly, there was a 93% take-up level for that entitlement offer. We are announcing today that Navigator has executed an amendment with existing bank vendors that closed on 15th February, increases the size of our revolver to USD 100 million from the prior USD 70 million existing facility and extended the original 3-year term, which was maturing in June of next year now to a 5-year term maturing in February of 2029. This credit extension provides additional flexibility and liquidity to efficiently manage the Navigator business and was possible because of the result of the strengthened financial position of the firm post the restructure in equity. It's important to note that Navigator will continue to be conservative in that use of leverage. Finally, Navigator deepened its leadership team with the appointment of an Australian-based CEO, improving the ability to actively engage with the Australian market and execute growth initiatives working alongside Ross, Sean and Amber. I'd like to call out that in October of 2023, Ross was appointed as NGI's Chief Investment Officer and Head of NGI Strategic Investments. Ross has been with Navigator since 2016 has been instrumental in the company identifying and executing what have been transformative transactions for the company. Now turning to Slide 8 for financial highlights. It has been a strong start to the financial year. We have grown both AUM and profitability across the business. Partner firm AUM increased 16% during calendar year 2023 to just under USD 74 billion, an increase of almost USD 10 billion. At the ownership adjusted AUM level for Navigator increased 10% during the course of the year to USD 26.1 billion. The group's adjusted EBITDA for the half year was USD 35.3 million and a 67% increase from the prior comparative period. The key driver for this improved performance was the earlier receipt of distributions from the NGI Strategic Portfolio investments, and importantly, more than doubling of the contributions from the group specialist private market investments, Marble and Invictus. The NGI strategic business continues to be a key driver of the growth -- a key driver of the growth with the company receiving strong cash flows for the half. At an aggregate level, our partner firms have continued to deliver AUM growth through both net flows as well as strong risk-adjusted performance as we will show, which should continue to grow a diversified and resilient income stream. Lighthouse delivered 5% annual growth in AUM, importantly driven by a 26% increase in hedge fund AUM as well as growth in management fees, which was a 13% increase on the prior comparative period. It's worth noting that 2021 and 2022 were exceptionally strong years in terms of the levels of distributions paid by our partner firms, driven by higher-than-average performance fees. These years provide an indication of the earnings power of this portfolio. For full year '23, the result was underpinned by steady management fee revenues at an ownership adjusted level with performance fees returning to more normalized levels. Based on how the businesses are performing currently, we expect that the second half of 2024 will be stronger than the first half, but the timing of revenue receipts can be variable and at the discretion of the individual managers. So while first half distributions were higher this year versus prior corresponding period, we expect, based on projections of NGI Strategic Investments profitability that those distributions may be lower overall for the full financial year versus the 2 previous years, which were exceptionally strong. Also, a portion of NGIs revenues is generated from continued positive performance of its partner firms. Although it's very early in the year, 2024 has started strongly in terms of the performance across NGI strategies. Turning to Slide 9. There has been continued steady growth of NGIs ownership adjusted AUM with the business adding $2.4 billion at the NGI level over the year. The growth was particularly strong from the NGI strategic business with 17% growth during the year, approximately double the market average. Turning to Slide 10. That $2.4 billion of additional growth in ownership adjusted AUM has been generated from both net increase -- sorry, increase in net inflows across the portfolio and positive investment performance with the growth attributed almost equally from each. Ross will provide further details on attribution between net inflows and investment performance within the strategic portfolio. Turning to Slide 11. As you know, alternative asset managers have strong alignment of interest to the economic performance of their strategies and the returns they generate from their investors. We have reviewed NGI's current historical revenue proposition looking through the NGI share of the underlying revenues of our partner firms. Consistent with the principal, Navigator has a portion of its underlying strategies that are subject to performance fees with the majority of those strategies having performance fees that crystallize annually, assuming, of course, returns are positive and exceed the strategy's respective high watermarks. Accordingly, performance fees should have and do have an impact on the ultimate revenues of our partner firms in Navigator. This graph shows the indicative historical split of revenues received by Navigator from both management fees and performance fees and then the fees by business segment on the right. The average level of performance fee revenue to Navigator in the past years indicatively has been $65 million, representing 29% of total NGI revenues on a look-through basis. In calendar year '23, 30% of those revenues were attributable to performance fees in line with the long-term average. It's important to note that given the uncorrelated nature of the underlying strategies, the diversification of the portfolio and the proven successful long-term performance of our partner firms, there is an expectation that a portion of this overall performance fee revenue should be received every year, providing a resilient source of income for Navigator. For example, of the top 3 partner firms contributing to NGI distributions in each of '22 and '23, only one manager was in the top 3 in both those years with 4 other managers buying for the other key positions. This illustrates the diversification of NGI's partner firms impact on group distributions. There will always be variability in the total level of performance fees with the risk of lower than average, overall performance fees as well as the upside you saw in '21 and '22, and frankly, even further potential upside of all managers achieve their targeted returns. Turning to Slide 12. Having now been at Navigator evaluating the platform and the opportunity set, I thought I'd just briefly finish the opening remarks to highlight what I believe the key differentiators are of the business and some further color on Blue Owl and the relationship with Navigator. In my view, the key strengths of an investment in Navigator and our business models are the fact that we are global and also that we only focus on alternatives. We only also invest in established leading managers globally with track records. Also, we have a strategic relationship with Blue Owl that provides NGI, not just with the supplemental origination channel for new transactions, but also value creation for the NGI partner firms. In terms of capital structure, the listed permanent long-term partner in minority stakes and alternatives firms in my perspective is the optimal way to support and grow and be invested in the alternative asset management industry. And finally, we have exposure predominantly to equity hedge credit in private assets, which means the portfolio should generate gradual continued AUM growth with sustained portfolio performance at a portfolio level. Last slide for me, 13. Just a quick snapshot on Blue Owl. It's the global industry leader in partnering with alternative managers, having done 60 deals and having over $54 billion within the vertical that actually provides GP stakes. Importantly, the business services platform on the right there, the underlying access that Navigator and its partners have to a 50-person Business Services Platform team that includes just under half in capital introduction that's available to Navigator at no cost to either us or our partner firms. Leveraging this resource in my mind, is a competitive advantage to Navigator, not requiring the often expensive build-out of a services platform. Typically, given the maturity and leading position of our partner firms, I want to point out that they have their focused business development functions internalized within their business, which in my mind is the optimal approach to maximizing enterprise value for asset managers. But we do complement that with the business services platform and NGI's direct value-add opportunistically. Now I'd like to hand over to Ross to review the NGI Strategic Investments portfolio. Ross?

Thank you, Stephen. I will start on Slide 15, and spend a few minutes describing the NGI Strategic Investments business and why we are so excited about the quality, scale and outlook of the segment before then kicking it over to Sean to provide an update on Lighthouse. Slide 15 provides an overview on who our partner firms are and what alternative investment strategies they specialize in. These are scaled institutional businesses, time tested and proven through prior market cycles, illustrating their ability to generate strong investment and operating results through their best-in-class systems and by attracting and retaining top talent. We are fortunate to partner with the businesses who are known as leaders in their respective alternative asset classes. And you can see by the firm level AUM on this page that these firms not only have the staying power, but the resource is to continue to attract talent, new clients and generate strong profits as they extend their leadership positions in the years to come. As Stephen highlighted, Navigator and our partner firms benefit from the value-add services and perspectives of our strategic shareholder, Blue Owl. That support is provided at no cost to NGI or our partner firms and provides us with a true edge in what is a highly competitive and ever-evolving industry. We have the differentiating opportunity to leverage the almost real-time insights, guidance and relationships of Blue Owl's broad ecosystem across their 60-plus market-leading managers with well over $1 trillion of alternatives AUM globally as well as the 50-person team of industry veterans with expertise across their decades of experience. If you turn to Slide 16, we can start to dig into the AUM of this segment. Slide 16 provides an overview of our current partner firms AUM. This segment represents a uniquely diverse set of uncorrelated independent alternative asset managers with USD 58 billion of collective alternative asset management, over $10 billion on an ownership adjusted basis. Through this portfolio, Navigator gains unique and attractive exposure to high-quality earnings streams with significant operating leverage across liquid alternatives, public and private credit, commodities-based strategies as well as private real estate capital solutions. No single partner firm represents the majority of our AUM in this segment or the profits we've experienced. As expected, since acquiring these assets, we have seen different firms contribute to our profits more than others in any given time period. In recent years, we have been focused on adding long-term duration AUM to the portfolio. That focus first resulted in the addition of Marble and Invictus who both deploy their strategies almost exclusively through private equity-style closed-end drawdown fund mandates with locked-up capital and highly visible revenues. We've also been pleased to see several of our existing managers in the NGI Strategic Portfolio, successfully raising closed-end funds over the past 2 to 3 years to further diversify their product offerings and extend the duration of their capital as well. Currently, over 25% of this segment's AUM is long duration in nature, and we expect this to grow over time. As we look across this portfolio, we see a variety of growth drivers across the segment. If you turn to Slide 17, you'll see a bit more detail on the key drivers of AUM over the past 2 years. Across the NGI Strategic segment, we have seen AUM growth both through net flows as well as strong performance, resulting in 9% growth in ownership AUM in 2022 and 17% in 2023. Through that time period, we saw our private market partner firms generate strong growth through a capital raising cycle. This was expected and discussed at the time of our investments. In fact, our capital was in large part provided to support this growth. Given the strong market opportunity and compelling risk-adjusted returns they offer, we are looking ahead to another strong capital raising cycle for these managers in the fiscal '25 to '27 time frame. In 2023, we saw a very strong year for the NGI Strategic Portfolio in terms of net flows. This was driven by impressive flows into their flagship products, newly launched products as well as custom outcome-oriented mandates. I cannot emphasize enough that this organic growth was achieved in a highly competitive and challenging market environment and validates that is the well-established firms like NGI partners with that are best positioned to attract net flows in today's industry. Please also note when looking at the past 2 years that although there are always several products in the market across this portfolio, these are long sales cycles where they're offering private funds to primarily institutional investors. And therefore, it is normal that it will result in lumpy wins. As an example, some of the NGI Strategic Portfolio flows we saw in 2023 were in the works for some period of time. Although not immune to major market dislocations, the last 2 years clearly illustrate that with so many growth drivers across this business, NGI is very well positioned to deliver continued growth, which results in higher profits over time. If you please turn to Slide 18, we'll provide a bit of detail around those recent profit distributions. Looking at Slide 18, you will see the 6 partner firms in the NGI Strategic Portfolio on the left side are operating at multiyear peak AUM and are well positioned to continue to increase enterprise value over time and continue to generate strong profit distributions to NGI. With that said, the mix of earnings by manager, each who have unique expense structures and profit drivers does have an impact on the level of profit distributions we receive, and we expect fiscal '24 will be in line with the longer-term average we've seen from this portfolio. If you look at the right-hand side of the slide, you'll see that $22.4 million of profit distributions contributed to our first half adjusted EBITDA. This strong increase of over 100% as compared to the first half last year was driven by both an earlier-than-usual profit distributions from the NGI Strategic Portfolio as well as strong performance from our private market firms as they are now generating fees off of a higher base AUM, and we did receive distributions related to carried interest from those managers. It's important to note that this $22.4 million does not yet reflect any additional cash flows from the NGI Strategic Portfolio that we will now receive following the January 3rd completion of the redemption payment transaction with Blue Owl. If you please turn to Slide 19, we'll provide a bit more detail regarding the investment performance of these partner firms. The strong performance you see on this page and the deep experience in their respective strategies position these firms for further growth. We are very proud of our partner firms investment results and especially -- we find them especially compelling when looking at them in aggregate. Please note that the NGI strategic composite shown here covers roughly 45% of the overall portfolio's AUM and is comprised of many of the flagship products, which we see as indicative of the core offerings. You'll see here that in calendar '22 and calendar '23, these strategies can generate attractive risk-adjusted returns in both up and down markets. Although this performance has benefited in recent years by improved investment environment for hedge fund strategies, these are not beta-oriented or market-driven results. They are comprised of alpha generated from investment processes that have been developed over decades in their respective strategies. We do expect this opportunity-rich environment to continue in the years to come and believe the focus on interest rate policy globally, geopolitical and U.S. election outcomes as well as the increase we see coming in corporate event activity and the evolving credit market dynamics as presenting attractive opportunities across our portfolio. As you look at the returns from our flagship funds of the private market partner firms on the bottom half of the slide, you will see that their strategies of investing capital into broad, inefficient and under-banked asset classes produce compelling risk-adjusted returns. They deploy highly specialized, credit-oriented strategies designed to generate consistent returns to their investors over the life of their closed-end fund vehicles. Even in an environment like 2022 and 2023, where we saw the fastest interest rate increase in history, several material bank failures and depressed volumes across both the multifamily housing and U.S. mortgage markets that they invest. Our partner firms were able to apply their specific targeted approaches and their decades of experience, and we saw them efficiently deploy capital and realize capital hitting their return targets. Their investment, financing and portfolio allocation expertise has been tested, and they are now operating in an attractive environment where their capital is even in higher demand. And we see the strong opportunity set going forward as they deploy their recently raised funds. If you please slide -- excuse me, if you flip to Slide 20, we're providing some analysis on the NGI strategic portfolio and illustrating just how uncorrelated our partner firm's core strategies are to the market as well as to one another. This diversification benefit was examined at the time of acquiring these assets and continues to contribute to the stability of our composite returns as well as the AUM trends of this portfolio. Please note that the strategy shown here also have a low correlation to the private credit-oriented returns of our private market firms and show similar low correlation numbers when run against the investment returns of Lighthouse's main strategies. Please turn to Slide 21, and I'll touch on how we are now approaching new growth opportunities. We remain focused on growing our number of unique earnings streams and capitalizing on what remains a growing need by hundreds of alternative asset managers globally for access to growth capital or a way to facilitate the evolution of their partnerships, which NGI is well positioned to assist with. We have the proven ability to identify, structure and execute lasting partnerships with leading alternative asset management firms and have a true sourcing edge through our partners at Blue Owl. We approach every partnership knowing that their needs are unique, but with a clear objective to position them for long-term growth while generating attractive returns for NGI shareholders and increasing the scale and diversification of our business. We remain focused on the same characteristics that have resulted in the strong profits and sustainable alignment with our existing portfolio. As part of the scale and diversification effort we continue along, we intend to increase exposure to areas of the alternative asset management industry experiencing secular growth. Our pipeline today ranges across specialized private equity, private credit as well as hedge fund strategies, which we think may further diversify and are global in nature. We also see a very attractive opportunity set within the broad real assets and infrastructure asset classes. Some of these pipeline opportunities came through us directly from our partners at Blue Owl, while others were sourced directly. This is an exciting time for the company as we will have access to more cash flow and increased debt capacity this year, allowing us to capitalize on new opportunities in our pipeline. Sean, over to you.

Thank you, Ross. If we could turn to the next page, just Lighthouse overview and strategy. I want to hit on a few things. So AUM right now, up to $15.6 billion in AUM across the firm. As many of you know, that have listened to these calls for a long period of time, Lighthouse has really gone under quite a transformation over the past decade. When we started the decade, we were more of a fund to funds and allocation business, and we've really transformed the business to be more hedge fund oriented now. So that transformation continues to be very important to us and shows up in the flows that we're seeing in the various products that we offer, particularly in the equity and macro space on a global basis. So I'm very happy with the progress that we've seen there. The second thing that's most important for Lighthouse is just to continue to deliver on results that our clients expect from us, so from a return perspective. Calendar year 2022, I think we delivered those results very strongly. It's a difficult year for all sorts of capital markets, whether it's bonds or equities within that -- within the range of asset classes and perform well. I think when we look at the first half of fiscal year 2024, definitely, the conditions have been a little bit tougher, particularly for very hedge strategies like we run, we run very low beta equity strategies. When the markets go straight up, presents a little bit more difficult environment for us. I would say that's changed since November despite the market's doing very, very well. The strategy has continued to deliver good results here in the first couple of months of the year and are very optimistic about what we can do going forward. And kind of the third pillar of the business is our clients. And in that respect, we continue to diversify our client base globally. We continue to receive very high marks on our client service, the information we provide to our clients and the partnering attitude that we have with them. So those are kind of the 3 pillars of Lighthouse and what we're trying to work on. And I'm going to flip to the next page to talk more specifically just about some of the operating results for 2024 here. When we look at the first half of 2024, we've seen an increase in total fee revenue of $48.1 million. That's a 12% increase above the same period last year. So that's driven really by -- mainly by management fee income that's come through there. Performance fees have remained very similar to that, and that is reflective of the environment that we've operated in for the first half of this year. So very happy to see growth in total fee revenue of about 12%. I'm happy with the way that we're seeing trends in AUM and the client diversification. Again, the biggest drivers of that growth continue to be from the hedge fund business. The performance fee revenue, as I mentioned, was flat. And the performance fee revenue, I would also point out is going to continue to vary as we've pointed out in other parts of the portfolio. But I think we're very comfortable that across the NGI portfolio and across the NGI company, performance fees are a part of our revenue mix, but they're much more stable because of the number of businesses that we own. Lighthouse has the same effects. We're going to see some variability in those performance fees, but you can see they are very consistent over time. So very happy with how we're positioned there. If we go to the slide, just with the AUM trends on that, just looking at where the growth came from since 2022, you can see it's up about 26% in terms of the hedge fund growth. And that is what we have been focused on. That's where the transformation has really taken place. We embed those hedge fund portfolios within our hedge fund solutions business. So when I look at these businesses combined, again, happy with the growth rate that we're seeing, the commingled funds customized solutions business, as we've said, those will be a little bit slower growth businesses as we emphasize the hedge fund business, but still seeing growth there. And then the Managed Account services business, which we continue to work on and structure, really to focus on larger clients and partnership-related elements to those clients, meaning we can help them with just more than kind of the pipes and plumbing of some of the managed account and other securities work that we do for them. The growth rate there has been about 4%. But again, there, I'm happy with the clients that we're working with. I'm happy with how we prioritize that business. And as we've described in the past, it's really more kind of elephant hunting there and developing those relationships over time. So we definitely, as we've talked about, the fund raising environment definitely changes. It ebbs and flows for our business with really kind of the state of the markets and the euphoria that we see in the markets, if things are going well, things are reaching new highs in stock markets and bonds have come back. That can create a little bit of a headwind for us. I think that these types of conditions pass, been doing this now for over 27 years. I have seen all different types of environments. The pipeline that we have is very, very strong. The relationships we have with our clients are very strong and we see time periods more like 2022 when there is enhanced interest in hedge strategies. And that can certainly wane a little bit when you see markets just kind of take off like we've seen. But as I said, we have a very, very strong pipeline. We have a global footprint, global client base and we continue to deepen our relationships with our clients. So I think we're in good shape from that perspective as well. On Page 26, just a little bit on the performance, looking at that. You can see 2022 better year certainly relative to markets. 2023, a little bit more challenged, particularly in the macro strategies. But again, I think we're comfortably positioned to deliver on the promises that we have for our client. And when we evaluated over a 3-year period, I would say we have met the expectations of our clients. I would also point out, as Stephen mentioned, we're seeing some better results here in the first 2 months of the year. So through the first 6 weeks of this year and the alpha production globally has really returned nicely. Good results in January, good results here in February and we're trying to build on that going forward. The last thing I'd point out is just on the focus on our client relationship. So we continue to expand our geographic footprint. I would say that our business and the growth rates within our business. Despite being based here headquartered in the U.S., I think of Lighthouse as a global company I always have. We have operations, not only in the U.S., but in Europe, in Asia and we've had these operations for well over 10 years. It's very, very important that we continue to have a global footprint. It's very important that NGIs partner firms have a global footprint because this business and the alternatives business is going to continue to grow globally. And the assets that we see and the growth that we see and the types of clients that we serve are both within the U.S. and external. So I'm glad that we've made the investments that we have in the people and the offices to continue to show strong growth. Managed Account Services, we did reposition that business and again, we want to work with our clients in a much deeper way in terms of what we're doing there, in terms of the investments, in terms of the operation, in terms of the risks, all of those things. We have a very strong partnership relationships with our clients. That's what we want to target going forward and that's what we continue to target our marketing efforts towards. And I would say even since we've done the repositioning, we've had success within those elements. I think that's the right strategy to do going forward and happy with what we've done there from a realignment perspective with the greater Lighthouse business and I think the team is very energized, the client certainly that we service within that segment of business when we described what we wanted to do and how we wanted to do it, they were extremely receptive. And I think it's helped to deepen those relationships even further. And then the last thing I would point out is just some of the fund raising across distinct client channel. So we have a number of different client verticals that we serve, everything from sovereign wealth funds to pension funds, to hospitals here in the U.S., the foundations to individuals to retirement plans really across the board. We have tried to segment our business and make sure that we're serving those verticals and we are meeting kind of the needs of what our clients need within the Hedge Fund universe for each of those. So I think when our client speak to us, they know that we are listening to what they're trying to solve for. If we can help them with that, we're going to go ahead and do that if we can. We've also been very helpful in pointing out others that can. Hopefully, in the future, as we continue to expand the Navigator ecosystem, it will be within our own ecosystem because they are looking for us for trusted advice and trusted advisers and all of these clients more than any time in my career of doing this. They want to work with trusted firms that have a lot of experience that have been through different market conditions. They have experienced executives. This is a tougher time for, I would say, start-up elements of the business, particularly within the Hedge Fund space. And our clients -- we have become trusted for them and that's a great feeling for all of us here. I truly think we're helping -- our clients are helping them in all different sorts of needs. And when you have that trust element and you have an idea for them and they listen to that, that's really how we're going to increase our growth and deepen our relationships with our clients. So we're here to service them, the success of our business is going to be a derivative of how well we do for our clients and that's the mentality here. As Stephen mentioned, now that I don't have some of the obligations that I had previously with the holding company. My full focus is on delivering for our clients here, continuing to grow the business, provide opportunities for the employees that work here. And -- but overall, I'm very excited about the NGI platform in total. Lighthouse is one piece of that. When I think of NGI, I think of it as a portfolio of companies that are similar to Lighthouse in terms of what we're doing. But the strength now that we have across these multiple firms is much stronger than when NGI quite frankly just on one business, which was Lighthouse. And this as may have been where I spent my whole career, but there's power in this portfolio that's greater than any one element. So I'm super happy with how our position. I'm super happy that Stephen has joined us for the work that Ross and Amber have put in to make this possible to get this transaction settled with Dyal and to the partnership that we've developed with Blue Owl and Dyal. So couldn't be happy with how things are positioned and I'm super excited to see what the next 6 months brings. So with that, Stephen, I'll pass it over to you -- okay, to Amber.

Thanks, Jon. I'll start with Slide 29. So as Stephen said earlier, the first half of the 2024 financial year started strongly. The $35.3 million of adjusted EBITDA is up 67% on the prior period and it's driven by increases in revenue across the business. As Ross outlined, the NGI strategic portfolio made distributions of $15.4 million for the first half, which is double the amount received for the equivalent period last year. This is due to several of the partner firms paying a portion of their profits out ahead of the end of the calendar year, which is a shift in trend that we experienced in the prior 2 years. Marble & Invictus also contributed to the earnings uplift, distributing $7 million this half as compared to $3 million in the prior period. The increase in part reflects the monetization and distribution of carried interest in certain products, which was anticipated this period. Sean has outlined the impact of the higher management fees for Lighthouse, which came in at $41.8 million or 13% up on the prior half. The increase in management fees has been an important contributor to the higher result. With revenue being the key driver of improvement in this result, we also saw a 25% increase in the adjusted EBITDA margin for this period. On Slide 30, we set out the key numbers for both statutory EBITDA and adjusted EBITDA. Both statutory revenue and expenses include approximately $53 million of fund reimbursement costs. These represent the cost of Lighthouse funds, which Lighthouse incurs and then fully recovers from the funds. The size of the reimbursements has grown as Lighthouse continues to build out its Hedge Fund business. Since they generally net out, we exclude both revenue and expense side of these reimbursements in adjusted EBITDA. As such, the $72.1 million of the non-IFRS revenue shown in adjusted EBITDA is primarily management fees, performance fees and distribution income. To get to adjusted EBITDA from statutory EBITDA, we adjust for a number of items. The largest is the change in fair value of assets and liabilities recognized in the P&L. This adjustment excludes from EBITDA gains or losses that are created on the revaluation of the NGI strategic partner firms, investments as well as the revaluation at each period end of the redemption liability as it progressed close to its original payment in 2026. The other adjustments include an add back of cash paid in relation to office leases, which under IFRS is considered a financing cash flow rather than operating expense. And we also adjust our transaction costs recognized in the P&L in the period, which were incurred in relation to any completed transactions. And finally, the last adjustment is the non-cash share-based expenses. So when you take out those items, you end up with a cash and adjusted EBITDA, which is more reflective of the true earnings of the business without the extra noise of those items. The largest adjustment this half and the key driver between the difference between statutory EBITDA and adjusted EBITDA is the $40 million impact of writing up the redemption liability from its 30 June 2023 carrying value of $160 million to the $200 million agreed consideration value, which was settled on the 3rd of January 2024. Moving to the next Slide 31. Here, we set out information about the key drivers of adjusted EBITDA for the half. On the revenue side, the 33% revenue increase is driven by AUM increases on both Lighthouse and NGI strategic businesses and an improvement in average management fee rates from Lighthouse, which were 51 basis points in the prior period and are up to 54 basis points this half. There's also strong potential for performance fees with 25% of AUM on the Lighthouse side subject to performance fee arrangements and 76% of AUM on the NGI strategic side. Operating expenses for the period after excluding fund reimbursement expenses and offsetting some sundry income, which relates to certain cost recoveries, they came in at $34.6 million or up 6% half-on-half. The group's largest expense relates to employee costs and there is -- which were $1.6 million higher for the half. This was generally due to increases in compensation across the group, largely in response to inflationary pressures. There was also $2.1 million of non-operating expenses, which were incurred during the half and they mainly related to the repositioning of the Managed Account services business that Sean previously mentioned. Other expenses remain relatively flat after netting out sundry income. There was a $0.2 million increase overall and that includes a $0.5 million increase in the third-party distribution costs and these costs have gone up consistent with the growth in the related assets under management. On Slide 32, we set out how we've positioned Navigator with a flexible balance sheet and enhanced cash flows to support our strategic objectives. The early settlement of the redemption liability leaves us in a position where our current funding obligations around deferred consideration of $88 million are met with existing operating cash flows of the enhanced cash flows and our access to debt. As Stephen mentioned earlier, we've recently closed on an amendment with our existing bankers to increase our secured credit facility from its current $70 million capacity to $100 million, with an increased term of 5 years now maturing in February 2029. This facility is flexible with no minimum draw and flexible repayments and is a competitive interest rates. The renegotiation of this facility was possible after completing the early settlement of the redemption payment. This was a significant transaction and Slide 33 sets out both the capital structure and the net asset position of Navigator, both pre and post the transaction. We are extremely pleased with the results of the rights issue, which formed a part of the funding for the transaction and the 95% shareholder approval at the AGM and the 93% participation in the entitlement offer demonstrate that it was strongly supported by our shareholders. The transaction closed on the 3rd of January 2024 and so other than the write-up of the redemption liability to $200 million and its reclassification to a current liability, it's not reflected in the 31 December 2023 balance sheet. Slide 34 shows the pro forma 31% balance sheet as if the transaction had closed on that date. The particular adjustments are set out on the Slide, so I won't go into them in detail other than to note the pleasing reduction in total liabilities of the group from $370 million to $168 million post transaction. I'd also like to point out that as part of the terms of the transaction, Navigator drew $15 million on our loan at the launch of the entitlement offer on the 5th of December. The cash from that draw is included in the $65 million of cash held at balance date. Given the success to capital raise, Navigator only used $3.2 million of this cash to fund the consideration for the transaction and once we'd settle transaction costs, we've paid an additional $18 million against our outstanding loan balance, so that the principal owing as of today is $13.5 million. So that ends my section and I'd like to hand it back to Stephen.

Thanks, Amber. Turning to Slide 36, I just want to spend a few minutes on sort of Navigator's growth profile and strategic objectives and then summarize and hopefully leave a few minutes for questions. On Slide 36, which is a fairly simple Slide because it's fairly clear what are the compounding opportunities to grow the business, but there are multiple growth levers in the NGI business model. There's the growth in the alternatives industry, which Navigator specializes in the tailwinds behind that business and the interest in strategies that are uncorrelated to the broader markets. There is also continued partner firm growth and that can either be exhibited by inflows, performance or increasing operating margin at the underlying businesses. And then Blue Owl and Navigator can opportunistically and in a considered way, think about how it can add value to its underlying partner firms to accelerate both firm's growth trajectory. And then finally, as Ross spent some time talking about, it's the addition of new partner firms, accretive investments in additional managers that help really compound the investment opportunity, importantly increase the diversification and resilience of the AUM and earnings. And just stepping back, I mean, our portfolio is just a high-quality portfolio. There remains a concentration on liquid alternatives and private and public credit, wherein lies the opportunity to add number of different strategies across the alternative spectrum and we're looking at those very closely. Our portfolio of minority stakes in alternative asset managers such as is provided by an investment in NGI provides a combination of downside protection, upside optionality and attractive cash flow yield. Turning to Slide 37, I don't want to spend much time on this. This is not the forum to discuss the benefits of alternatives, but you can see that out of the asset management industry at which there are some sectors under some pressure, the alternatives category is growing and expected to grow at double the overall market. The interesting element here is the graph on the right, showing that by 2027, certainly, some people think that alternatives will capture over 55% of global revenues in the industry. With this sort of very favorable macro backdrop, owning equity stakes in a portfolio of leading alternative managers and thereby sharing in those material [indiscernible] and performance fees by virtue of the equity stakes should have a material upside for NGI and its stakeholders if those managers continue to successfully invest and grow their business. Next slide, Melanie, the strategic objectives are clear. We need to support and provide value add to our partner firms opportunistically. We need to identify and execute on accretive partner firm investments in growth markets. We won't be doing transactions for deal site. We'll be doing transactions that make sense in the overall mix of the Navigator portfolio and business and the backdrop in which we find ourselves. And then finally, to drive capital efficiency and increase operating leverage even further at the NGI level. Meanwhile, an overall key objective for management is to broaden the market, understanding and growth prospects of the NGI business to a larger investor base, also to potential strategic partners to potential partner firms and to other market participants as the business has been largely invisible to many. But as a result of the recent transaction, we have an opportunity to change that dynamic. So in summary, last slide for today, Navigator's vision is to be the leading alternatives firm on the ASX and a preferred partner to mid-market alternative firms globally. Navigator benefits materially from owning alternatives and the increasing demand for alternatives. From my perspective, I believe it has the right capital structure, either by virtue of its listing or by virtue how it approaches minority stakes for alternative managers. We have shown increased and continued and expected continued growth in AUM and earnings. Our relationship with Blue Owl and through the experience of the NGI team provide strategic value and we'll be continuing to focus on that. And finally, we really look to -- in a prudent and measured way, look to scale the business with additional asset managers and partner firms now that our balance sheet has been strengthened considerably. So NGI enters 2024 with significant momentum across our business, increasing opportunities to invest for growth and an enhanced capital position. Thanks for listening to the speakers today. Thank you for your time, everyone. I'd now like to open the call to questions. Melanie?

[Operator Instructions] Your first question comes from Phil Chippindale with Ord Minnett.

First question, just on Marble & Invictus. The $7 million contribution in the first half is a nice jump versus PCP. Can you perhaps guide us to which of the 2 was the main driver here or were perhaps sort of share between the 2 businesses?

Ross, do you want to take that?

So, Phil, I guess the first point I'd make is when we executed both in 2022, we saw them as quite complementary. So as you probably remember, Marble does have more carried interest that they generate and that we bought into that Invictus. So as you can imagine, in this period, they contributed more as we highlighted, carried interest coming through. But when you think about the flows disclosed and the momentum of these businesses, they're both tracking really nicely in terms of growth and overall profits going forward.

This might be a question for Sean. Just on the Lighthouse management fees and apologies I joined the call about halfway through, just had another result. The Lighthouse management fees were very strong. So I might have missed this, but can you just walk us through the drivers of that stream, please?

Yes, it's -- again, I mean there were some growth in the solutions business, but most of that, Phil, came from the growth in the Hedge Fund business. So if you look at the Slide, just pulling this up, if you look at the Slide from 25, you would see where the AUM came from and that would roughly correlate with the bump in management fees that we saw.

Last question for me, probably one for you, Stephen. Just from a high level, obviously, now that the transaction is completed, your relationship with Dyal/Blue Owl is very strong. Just thinking about the longer-term potential here and your businesses are the type for further acquisitions?

Yes. It's a great question, Phil, that's why I spent quite a bit of time in New York with the Blue Owl team. I think the one thing I would say and you may have seen the establishment of a new fund vehicle that they've done called the Advantage Fund. But between their mainline funds to target the top 200 alternative managers in the world and the Advantage Fund and Navigator, there's effective vertical integration of the GP staking space at which Navigator is a part. I think there's opportunities to do transactions at each of those 3 layers. Obviously, my focus and dedication is at the Navigator layer. Given the relationship and we welcome Marc Pillemer who'll join the Board very shortly and their shareholding, there's obviously a great strategic sort of supplemental pipeline. I'm not sure if you've heard Ross, but he had pointed out quite rightly that we have our own proprietary origination by himself and me and Sean, but there's also transactions that Marc and his team refer to us partially better than we do our work, of course, like we always do. I would expect that will continue. In fact, with the new Advantage Fund, I would expect that deal flow could actually accelerate. That doesn't mean we do any transaction or that we get over our skis in terms of how we structure the transaction. We're going to be prudent in how we look at it. Ross indicated just how big the pipeline of opportunities are. If I could just highlight one thing. It's been a difficult environment for some managers. So there is a real attraction in taking minority growth capital that doesn't broadly impact the governance and autonomy of your firm from a partner who's able to provide a services platform and help you grow the business with either money or strategic advice. And we're seeing that happen, I think, more when time to a little bit more challenging for smaller firms. So I'm actually quite optimistic. I think we have to be careful on the sizing of transactions and we'll be focused on that clearly, like we have been doing in the past.

Your next question comes from Nicholas McGarrigle with Barrenjoey.

Phil obviously asked all the really astute question, I might just ask one around the strategic portfolio. Normally, around this time, you can indicate what distributions have been for the kind of financial year-to-date? And then can you give us any indication on that or I mean kind of just read into that, that you're expecting somewhere between that 3 and 5-year average return on the strategic portfolio for this financial year.

I might start and then Ross can certainly or Sean can follow-up. As we pointed out in the AGM next year -- last year, we were sort of indicate towards the broader long-term averages. When we thought about it this year, we've had a difference of timing receipts of the NGI distributions into the first half. Given that there's variability on when the managers pay distributions and some of the concerns about whether that's going to be in June, July, August, we took the view that rather than try and guide to a rather narrow range and then find ourselves potentially have to reset, not because there's any difference in the performance or attractiveness of the business, but because of the timing of receipts that, that wouldn't be a prudent proposition. So I feel very strong about the underlying cash flows and profitability of the firms, but do you feel as if you know exactly when you're going to get paid the money, I think it's challenging. So we are guiding -- we expect the second half result to be in excess of the first half, but potentially not as strong as the second half of last year. So we're guiding, therefore, above $70 million, at least, if not more and we'll just have to see how the 6-month sort of continues to play out. But Ross, Sean or even Amber, do you want to sort of provide a supplement to that?

Yes, only other thing I'd add Stephen and Nick, thanks for the question is, as you said, so 15.4% for the first half through 12/31, you're quite right. I think the last 2 years, given it got us through our press in those 2 years, we were putting out as of February 22, what we've received, we found it to be kind of less important this year because we're receiving everything all the way through the end of our fiscal year for '24 earnings, but we have received about $6 million since 12/31 through current date, just wasn't kind of as paramount, we felt to the full year earnings because as Stephen said, this is going to be a year where as with other years, that the second half is quite determinant of what the full year and we just got to wait to see when those profit distributions come out. But Amber I think that's the practice that we're going to move towards probably because there's no more pref just thinking about the 2 periods separately.

Yes. Agree, Ross.

And then I think you gave a number that's about $90 million of capital committed into those new investments, 7% return and you kind of -- you're tracking -- you want to track towards 10%, I mean you'll put that money up during the next couple of years with that 10% hurdle do you think that, that comes on a staged timing with the capital deployed? Or it might be after you fully deployed the whole 185 couple of years after that?

Ross, do you want to take that?

Sure. It's really tough to say, Nick, in any given year. Everything is in place given the capital raising, so that adds the tranches of those 2 commitments go in during our fiscal '25 and then first half of fiscal '26 or excuse me, yes, fiscal '26. We -- the earnings will also ratchet evenly above. As you can see from the 7% with committed capital to date, we're tracking for this year to get above the 10% target. It's just some of the distributions can be lumpy. So I think it's safe to assume on a fully funded basis, we can absolutely guide to that and we hope that it's kind of a glide path in nature. Again, directionally, we feel really good that they're tracking glide path. We just -- similar to the other managers, the timing of the profit distributions can always vary.

Your next question comes from Lafitani Sotiriou with MST Financial.

Congratulations on the improved disclosure of big improvement with and it's appreciated. Can I just clarify with the extension or reforming of the credit facility? Is it a similar interest rate? Or can you add a little bit of color. I'm not sure if it's just I haven't had a chance to find that, but...

And thanks for your commentary disclosure. We're doing our best over here. In relation to the facility, I think the answer is yes, it's broadly the same. And no, we can't disclose specifics. But Amber, Ross...

Yes, I would just say there's a slightly higher margin, but that reflects the longer 5-year term, which is pretty usual. So -- but they're definitely attractive rates when we compare some of the other financing options available in the market for loans of that size.

And just can I circle back on the environment at the moment, there's a few slides around what your targets are for M&A within the MGI strategic portfolio. Could you just add a little color to what the existing pipeline is, how that's compared historically? And if you could just also elaborate what the hurdle rate is in comparison to your own? Like is there much consideration if you're looking at these transactions versus where your own stock is trading?

Given I can't really compare to historically how Navigators look to transactions and given really Ross is leading the way fantastically. Maybe, Ross, you take this and I'll add anything.

Yes, no, sounds good. And Laf, please correct me if I miss part of the question. With regards to the current pipeline, I would say it's as active as ever for 2 reasons. Number 1, as we highlighted in the remarks, the demand for growth capital of established yet growing firms is actually higher than it's ever been from our perspective because the fund raising cycles have extended and people realize having the stability to support long-term growth is really important. And also both the LP base, so the global investor base as well as management teams have become much more educated, as Stephen highlighted on the benefits of having a credible long-term oriented partner that can have kind of legitimate, but a targeted advice and not be too intrusive for their business. So that's good. I would say, of the active portfolio, it really varies right now across specialized private equity, private credit. We are, as I mentioned, looking at some liquid alternatives firms if there's a good use for capital and we view them as diversifying to the business because as you saw from the NGI Strategic Portfolio, the cash yields to us can be really compelling off of those type of investments if it's the right opportunity. And then we are seeing groups within more kind of growth equity where it may take a little bit more work to figure out if they will come out of this recent few years as a leader or not, but those are firms that are continuing to see secular growth because innovation needs capital and there are really experienced groups out there that will continue to put their specialized resources to work. With regards to how we evaluate the deals, it really hasn't changed. We definitely look at how the overall valuation compares to us, but excuse me, to our stock. But if we're not really using entirely equity funding and it's part of the pros or not, we're looking at a holistic basis and several different metrics around shareholder returns in the early, mid and late cycle of those investments. And then as Stephen highlighted, making sure that they're diversifying the business. I mean one of the things you can see from the last 3 years of results here is that diversification plays a really big role and we think it will play an even bigger role going forward. So that becomes a focus. But Stephen, I don't know if you want to add anything else to that?

I think, the only thing I would add and it's probably something for a separate conversation, but you're obviously seeing large transactions in the private markets being done, some control deals that are in the spot like BlackRock's acquisition of GIP. Some of the prices that are being paid, not necessarily that transaction, but are quite significant. So very sensitive to price. I mean, those sorts of businesses on a smaller scale and more navigators focus. They're hard sometimes to grow our private markets businesses, step changes in AUM, different compensation. So you really need to be very careful you don't overpay for those sorts of businesses. So we're very wary of that, that doesn't mean we won't look at them, but it's something that we're very focused as to whether this is the right time in the cycle on some of these private credit strategies. But the great news is that there are a lot of other opportunities across the spectrum.

Thank you. That's all the time we have for our question-and-answer session. And that does conclude our conference for today. Thank you for participating. You may now disconnect.