Omni Bridgeway Limited (OBL) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Omni Bridgeway Limited Fiscal Year 2023 Results Call. [Operator Instructions]. Andrew Saker, Managing Director and CEO, you may begin your conference.

Thank you, Josh. Good morning. My name is Andrew Saker. I'm the Managing Director and CEO of Omni Bridgeway. Welcome to our results call for the year ended 30 June 2023. Joining me today is Raymond van Hulst, Executive Director and current Co-CIO for EMEA and the incoming CEO; Guillaume Leger, our Global CFO; Jeremy Sambrook, our Global GC and Company Secretary; and Mel Buffier, our Global Head of Investor Relations. Over the next 15 to 20 minutes, we will look to cover off the highlights from FY '23. Key elements of our financial results, the performance of our portfolio as well as our strategy for FY '24. This year, much like last year, is a tale of 2 halves. With the few material completions in the first half, we made a loss after tax of over $30 million. However, the second half, we saw a 95% increase in completions and secondary market sales based towards the fourth quarter, resulting in a 400% increase in total income on a group consolidated basis and a 200% turnaround in profit after tax between the 2 halves. This reflects the nature of the underlying asset class, a topic we have discussed repeatedly. The life cycle of our investments means that evaluating performance over short-termed 6 monthly interval does not truly represent the nature of our assets. Furthermore, this highlights the fluctuations of returns in investments with binary outcomes. We have seen strong growth in most of our key metrics. Of note, we have delivered total gross income and revenue to a record level of over $330 million, up 51% on last year. This was derived from diversified sources comprising both completions of investments in secondary market sales. We have materially grown annual commitments to a new record of close to approximately $550 million for the financial year, meeting the target commitments that we set in May 2022, a growth of 17% for the year. Following on the growth in commitments and notwithstanding the record number of completions and secondary market sales in the year and after impairments, our estimated portfolio value, or EPV, increased to a new record of over $30 billion, up 12% in the year. The growth in EPV has translated into a rise in implied embedded value, or IEV, in our funds, marking a 9% growth over the year to $3.9 billion. IEV is based on the realization of the currently unconditional funded portfolio using a normalized 15% estimated portfolio value as a conversion rate. We currently estimate that the value from these future completions provisionally attributable to OBL is $1 billion. This excludes estimated management fees and potential performance fees, which I will cover later. Whilst attaining these milestones, we continue to have industry-leading performance metrics with a ROIC of 1.1x and an IRR of 77%. We end the year with a strong financial -- capital position with over $360 million in combined cash and receivables on a consolidated basis. Of that, the OBL balance sheet currently holds about $130 million in cash and receivables with access to additional $60 million in debt, which can be allocated for operational needs to fund investments and potential expansion opportunities. Whilst not recognized on a consolidated basis, OBL has provided its proportion of capital to its funds so our cash and receivable position also includes a portion of those liquid assets within our funds. With this liquidity, the upcoming launch of our new Fund 8 and promising indications of upsizing in Funds 4 and 5, we're in a unique position in both our sector and the alternative asset management industry. I note that some shareholders have different views on the level of liquidity we should retain. Some shareholders believe our current level of liquidity is too little, and some shareholders believe it is too much. We're committed to continuously assessing our cash retention policy, considering the following factors: our requirement to fund projected investment growth, ensure suitable liquidity and support corporate initiatives while also factoring in our capacity to generate cash from completions and secondary market asset sales. This approach aligns with our strategy for sound capital management. Furthermore, we are equipped with a leading platform to generate future growth and revenues for our stakeholders in our funds and through our public equity. This effectively diminishes any valid concerns about the need for raising funds from public equity in the immediate future. As you will see in the following 2 slides, there was a significant turnaround from the first half and a 31% growth on a year-on-year basis in total income on a consolidated basis that financed the continuing growth of our platform, such that profit after tax was relatively flat between the periods. Breaking this down further, I'd like to emphasize the following. We achieved a 30% rise in litigation income proceeds year-on-year derived for completions and cash proceeds from the sale of our participation in Fund 1 assets, which generated a net gain of over $27 million upon its deconsolidation. We saw a 31% increase in management fee income compared to FY '22, which I'll discuss in more detail later. It's also worth highlighting that we have over $55 million in income pending recognition due to matters that have not yet satisfied our income recognition criteria per IFRS accounting regulations. Amongst these, over 40% has already been recognized as income during the initial quarter of FY '24. Had this income been realized prior to 30 June, our pretax profit would have been approximately $12 million. Whilst employee expenses have increased by 20% over FY '22, this was part of our planned growth in FY '23. However, we have driven a 10% reduction in these expenses between the 2 halves, representing the initiation of our ongoing cost optimization process. Turning now to our operating efficiencies. As we have previously identified, our focus has been on enhancing the utilization of our platform to generate more income per unit of cost. Notably, in FY '23, we've once again achieved material growth in both the value managed by each investment manager and the value created by each investment manager, expanding by 22% and 16%, respectively. These advances build upon the efficiency gains we achieved in FY '22, which grew year-on-year by 38% and 28%, respectively. In aggregate, this translates to a 50% improvement in efficiency over a 2-year period. This underscores the capabilities of our team, systems and processes as well as the evolution of our platform. It's important to recognize these types of efficiency improvements within the context of cost discipline. I note that our management fee cost coverage ratio decreased from 20% to 16% during the year. This was a function of the reducing management and servicing contribution from Fund 6, coupled with the investment made in headcount increasing from 199 to 224, and the expansion of our global footprint with locations opened in the U.S., Italy and France combined with previously subdued expenses during the COVID period. As the investments that are newly committed to continue to deploy, management fees will increase. Having said this, we've taken note of our shareholders' concerns regarding the expanded cost base. Since March 2023, we've been implementing the strategy for optimizing costs, with the full impact of these efforts expected to materialize in FY '24. This strategy encompasses several aspects, such as the deliberate withdrawal from less productive locations, a reduction in head count and specific functions and the planned pass-through of certain costs to be borne by our clients were allocated to our funds. As we put our cost optimization strategies in place and coupled with our anticipated growth in management fee income, we expect our cost coverage ratio to improve in FY '24 to around 23%. As noted in the annual report by our Chairman, there is an evolving use of fair value accounting and reporting by our industry peers, and we intend to explore the use of fair value reporting to assist with appropriate peer comparison and to enhance the assessment of the embedded value of our assets. As will be apparent from this slide, we've seen the investment carrying value increase at a compounded annual growth rate, or CAGR, of 16% over the past 4 years to over $740 million after completions, the deconsolidation of Fund 1 in May 2023, secondary market sales and impairments. These investments are predominantly carried at cost and could see a material change if reported on a fair value basis. The increase in the carrying value of investments was driven by approximately $270 million in deployments made by the group towards both new and existing investments in FY '23 to secure a strong future for our shareholders. Our commitments for new investments, including conditionally funded and investment committee approved investments, reached an all-time high of almost $550 million during FY '23 and have grown at a CAGR of 25% over the past 4 years. This, in turn, has fueled expansion of our EPV to an unprecedented $31 billion, growing at a CAGR of 34% over the past 4 years. This progress stands in comparison to the $1.8 billion in EPV we had at 31 December 2014, when I joined what was then known as IMF Bentham. The key insight from our portfolio is that we remain focused on diversity across geographical regions, case types and capital forces. The outcomes for FY '23 reflect the sale and subsequent deconsolidation of Fund 1 during the last quarter. We are actively mitigating concentration risk with the top 10 cases now representing 22% of the portfolio, down from 28% of 30 June 2022, and 35% 4 years ago, which helps with the consistency of our returns. In contrast, some of our peers face substantial concentration risk from a few significant key investments. The sale of the participation in Fund 1 assets, which was a U.S. focused investment vehicle, has resulted in a rebalancing of our portfolio, making regional distribution more pronounced. Anticipating team expansion in the U.K., we expect a further moderation of our U.S. proportionate exposure in the future. Furthermore, the Fund 1 transaction impacts our diversification by investment type, particularly in relation to the reduction in single-party matters and the expansion in class action and the law firm investments. We continue to seek investments that optimize risk-adjusted value and will be agnostic to the type of investment where that may be achieved. Our appetite for large, single-party investments has moderated given the other investment opportunities that are now available to us. In this slide, we present a detailed breakdown of our investments by fund along with remaining balance sheet investments. The left-hand portion of the slide displays a breakdown of each fund, including its size and the capital contributed by third-party investors and by Omni Bridgeway. The middle portion provides data on our existing and ongoing investments. Moving to the right, it includes data on matters that are completed up to 30 June 2023. It's important to note that whilst historical performance is available, it may not necessarily be an indicator of future performance, particularly in the context of the unique uncorrelated investments in which we invest. The outcomes of the individual cases are independent of one another. Whilst historical performance offers some reassurance, it's crucial for the number of investments to be substantial enough to hold statistical significance. Consequently, the historical performance fund with insufficient number of completions lack statistical relevance. This tends to be true for most of our funds when evaluated individually. However, when we assess our collective fund and balance sheet performance over time, the picture changes, which as noted on Slide 3, provides a historic return on invested capital of 1.1x and an internal rate of return of 77%. For example, although the Fund 4 metrics at 30 June 2023, falls short of our long-term historical performance and show a negative ROIC and IRR arising from a few but large completions, we hold the belief that these figures will experience significant enhancement considering the inherent value remaining within the portfolio. With the few additional completions and partial completions that have occurred this August, the metrics have changed to 1.05 ROIC and an IRR of 7%. Our assurance in achieving improved results is, to some extent, supported by the interest shown by our investors in Fund 4 to commit additional funds to the second series of these funds. To this end, we note that we have indications from several investors of their appetite to provide between USD 400 million and USD 600 million in a first close for the upsizing of Funds 4 and 5. We will continue to work on this first close to occur in the first half of FY '24. Given the rate at which our annual commitments are growing, we plan to pursue a second round of fundraising. This additional close will supplement the initial round and provide access to additional capital for investment purposes. Our intention is to seek fund term adjustments to improve our cost coverage ratios on more favorable terms for the second close. In the first quarter of this year, I'm confident that we will complete the initial capital raising for Fund 8, a global enforcement fund totaling over EUR 300 million. We are in advanced stages to close a limited recourse debt facility of up to EUR 135 million, along with standby equity of up to EUR 15 million to be provided by OBL. This debt is backed by an existing principal protection insurance policy and the investments made in Fund 8. We will disclose full details to the market once this is finalized. In the next 3 slides, we provide a comprehensive breakdown of the value we anticipate will be created from our investments in encompassing both our role as a fund manager, comprising our capital and returns as well as management fees and performance fees. In Slide 15, we provide the EPV and IEV breakdown by fund and the estimated completion date for our investments, applying our normalized EPV conversion rate of 15%. The EPV used, relates solely to investments that have received unconditional approval. On this slide, for unconditional investments to 30 June 2023, we estimate that an aggregate of around $1 billion of attributable IEV will flow to Omni Bridgeway, excluding estimated management fees and potential performance fees. Furthermore, there is $4 billion of EPV relating to additional investments conditionally approved or approved by our investment committees, which aren't reflected here. Should these investments proceed and yield successful outcomes, they are estimated to generate an additional $600 million in attributable income, a material portion of which would flow to Omni Bridgeway. I'll expand on this in more detail, but you will note that the potential performance fees are approximately $240 million, assuming the group's historic ROIC of 1.1x in achieving a 20% management fees of around $20 million per annum. Both performance and management fees are payable from the Omni Bridgeway. Slide 11 provides a detailed breakdown of management fees, acknowledging that some of the granularity is not transparent in our accounting practices. Putting to one side these nuances, you'll observe that we have actually generated notably higher management fees than have what has been previously disclosed in our presentations. We expect to collect approximately $22 million of management fees in FY '24 in accordance with the arrangements with each of our funds, implying a cost coverage ratio of more than 20%. This forecast includes a nominal fee for the ongoing management of Fund 1 post deconsolidation. For Fund 4 and 5, we earn management fees on external deployed capital. As you will note, management fees for these funds will continue to grow with the estimated increase in net deployment in these funds. We also earned administration fees on these funds. As previously noted, we intend to seek a revised management fee for Series 2 of Funds 4 and 5, which we will look to attach management fees at an earlier part of the investment life cycle but of course, will be determined in the context of the market conditions at the time we seek to raise this capital. And finally, the forecast includes receipts from cost coverage arrangements as part of the expected Fund 8 debt facility, offsetting reduced Fund 6 management fees. Turning now to performance fees. Performance fees are payable only in relation to Fund 4 and Fund 5. In Funds 2 and 3, Fund 6 and Fund 8, we have a predefined profit share, which is captured in our allocation of IEV in Slide 10. Performance fees in Funds 4 and 5 depend on the overall achieved profit or ROIC and IRR for that fund, and as such, it's difficult to estimate with any precision. However, I note that even now, we received cash from performance fees as matters complete or soon thereafter, subject to an annual true-up based on the actual performance of the fund. Our performance fee structures are typical for a fund management business other than the super normal performance fee of 30% above the 20% IRR. If performance of the fund achieved less than an 8% IRR, which is the hurdle for these funds, then the performance fee is 0. If the performance of the fund is more than 8% but less than 20% IRR, the performance fee is up to 20% of the profit attributable to external capital with a catch-up of the first 8%. If the performance of the fund is more than a 20% IRR, then we paid a performance fee of 30% of the profits above the 20% hurdle. Whilst we have yet to meet the income recognition thresholds for performance fees associated with Fund 4 and Fund 5, the terms of these funds entitle us to approximately $240 million based on the group's historic ROIC of 1.1x and achieving at least a 20% IRR hurdle for the fund. If the ultimate IRR achieved exceeds 20%, our performance fees will also increase. Our historic IRR is 77%. So if we maintain that, we could expect that the fund terms would entitle us to a higher performance fee. I also note that our estimate here relates to existing unconditionally funded investments and will also increase for future unconditionally approved investments as they convert into unconditionally funded investments. I would now like to hand over to Raymond van Hulst, our incoming CEO when I retire in October at this year's Annual General Meeting, to elaborate on his immediate focus for the company's future.

Thank you, Andrew, and good morning, everyone. I'd like to start by saying a few words about Andrew. Under Andrew's leadership, we successfully established a global funds management platform expanding the Americas, APAC and EMEA regions, scaling rapidly and launching diverse fund structures and an emerging asset class. He has created a world-class dispute finance team with enterprise-wide capability in developing unique products and fund structures to expand market reach, scale and improve returns. He leaves the group in a strong position after recently strengthening core parts of our business whilst maintaining the highest industry standards. It was through his vision and drive that the merger with the European business was successfully completed, and it has been a pleasure and privilege working closely together during the last 4 years. I'm honored and humbled to lead the transition to the next phase of our strategy. I will outline this in more detail after I commence formally as a CEO. Our immediate focus are our financial year '24 results roles, which include achieving $625 million in new commitments or equivalent value through improved pricing and attribution terms; exploring the transition to or adding fair value reporting; finalizing the establishment of Fund 8, our new Global Enforcement Fund; increasing funds under management via our first closing of Series 2 of Funds 4 and 5; and a potential launch of new funds; continued focus on cost coverage improvement initiatives; accelerating realizations and mitigating risk through secondary market transactions; moderately expanding our U.K. team to increase our presence in the second-largest litigation finance market; and aiming at approximately $95 million of cash operational expenses. Our medium-term target is to achieve approximately $1 billion in new commitments or equivalent value annually. Key business performance drivers include optimizing the volume versus pricing trade-off, philosophy and investment completions, secondary market sales, portfolio optimization and sustained improvement in operational efficiencies and cost coverage. I will now hand back to Andrew for his closing remarks.

Thank you, Raymond. As you'll be aware, this is my last full year results and investor road show with Omni Bridgeway. I'd like to take the opportunity to thank our shareholders for their support through the past 8 years. I acknowledge our journey has been complex. Raymond and I remain convinced and excited that the investment made in developing our platform and refining our business model will continue to yield the anticipated outcomes as evident from our recent performance in this last half. I would also like to take this opportunity to thank our other key stakeholders, including our private investors, the dedicated team members, executives and Board of Omni Bridgeway. I'd now like to open the call for questions. Thanks, Josh.

[Operator Instructions] Your first question comes from the line of David Fraser with MST Financial.

Can you hear me?

Yes, David. Thank you.

Andrew. Good luck for the next couple of months and enjoy your retirement. I'm sure you won't retire but anyway, a couple of minutes for me, basically talking about your outlook for '24 and going forward. Historically, we've had, I guess, a target of $1 billion worth of commitments, new commitments in '25. I just wonder what the sort of timing on the new commitment of $1 billion. And then for $625 million in '24, you talk about equivalent value through improved pricing and attribution terms. Could you explain a bit more what you mean there?

Sure. I'll actually get Raymond to address both of those questions, David. Thanks.

Thanks, David. Yes. Well, actually, value to OBL is the combination of volume, pricing and the part of value attributable to OBL. And it's a matter of price elasticity on the commitments if we -- if I can achieve or if we can achieve slightly less commitment but at a much higher pricing level than actual value created for OBL would be higher. And similarly, if we can increase the attribution to OBL through our fund structures. And for example, Fund 8 is expected to have a higher attribution to OBL, $1 of commitment at a higher implied pricing in Fund 8 adds more value to OBL than $1 at a lower pricing in another fund. So we want to set the target at value to OBL rather than in a pure commitment level of volume level.

Okay. So simplistically, if you assume that, including the performance fees, you're getting $1 billion worth of returns plus $240 million of investment fees. What we should be looking at for going forward is what your forecast returns are from IEV plus performance fees? Because if you're getting, as you say, more attractive terms in pricing, the $625 million that we would have done in, say, '23, you might be able to achieve with $550 million in '24? Is that a simplistic way of looking at it?

Yes, it's -- I won't use simplistic, but it's a way of putting it. I intend to give more explanation on that in the next presentation. But indeed, focus more on growing volume, growing pricing and growing attribution to OBL, and all 3 lead to value increase for OBL.

Okay. So going back to full year '23, just achieved, I mean, $544 million of commitments was a pretty d*** good outcome compared to the previous year. But at the bottom of your target range, can we assume that some of what you've just been talking about is reflected in that $544 million?

It's Andrew. And yes, the short answer is we started changing the pricing and structuring arrangements approximately 6 months ago. And the impact of that is now starting to flow through. And as a consequence, we can achieve more per dollar invested based on the revised pricing restructuring.

Okay. I've got lots of questions, but I'll just ask one more and then leave it for others. Could you give us an update on what's happening in the U.K. and the impact on the DBA regulation impacting and whether that's had an impact on your, I guess, forecast EPVs and IEVs? Or whether, as you said, in the first ASX release that it's not material?

Thanks, David. So the decision impact, I think, caught the industry a little bit by surprise. For us, we had built into our litigation funding agreements structures that address that as a potential risk. So the impact on us is relatively immaterial. Our appetite to the market is clearly strong and continuing to grow; a, because it's the second largest litigation market in the world; and b, one that we feel is underserviced, at least by us. And so we are, during the course of FY '24, adding moderately to our team capacity in that market.

Your next question comes from the line of Jason Palmer with Taylor Collison.

Just in respect of the cash cost guidance of $95 million, how does that compare to the '23 actuals, please? I know that you've got noncash costs included in the '23 actuals. So I'm just trying to understand how much you've actually removed.

Sure. It's -- I'll hand over to Guillaume and ask him to respond to that, Jason.

Jason, so our cash cost in '23 was $99.6 million.

And then my second question, and I'll take the rest of them offline [ in both account 2 and 3. ] So with Fund 1, as you got close to the waterfall head or you did a secretary transaction of the fund. And I'm cognizant that you are sort of $100 million-ish away from that hurdle in Funds 2, 3. Has the business looked at a similar type of arrangement? Would it contemplate a similar type of arrangement if a couple of transactions or a couple of cases fell in the first half of '24 to bring forward those cash flows?

Jason, we -- the short answer is yes. We certainly are looking at all opportunities in relation to potential secondary market transactions driven by risk management as it relates to either changes in duration or budget. And if there were appropriate opportunities to look at potential secondary market sales to Fund 2, 3, either in part or in whole, we'd certainly look at those. And if that -- within the best interest of the company, then we'd certainly look to bring those cash flows forward.

Yes. Okay. So just to follow up on that. Obviously, you brought forward the cash flows in Fund 1 forward last year or FY '23, which leaves a little bit of a gap in 2024 where those cash flows would have come through. How do you think about the cash flows attributable to OBL over this period, over this next 12 months? Can it maintain -- what its face? Or does it -- do you need to sort of transaction something to arise at a net neutral benefit as you're reinvesting back into the platform?

Sure. So we'd start with a very strong cash position with $360 million, of which is cash and receivables on a consolidated basis. We then have about $190 million of that, which is attributable purely to OBL on our balance sheet plus access to our additional debt facility. We have -- sorry, $130 million with additional access to the debt facility. We have obviously preceded some of our funds with our contribution to those investments. So overall, our cash position as a starting point is very strong. In addition, we've had a good start to the year with over 40% of debtors on a consolidated basis already convert into cash. And equally on an income yet to be recognized basis, we've seen, just in the period over the last couple of months, almost 40% of that convert into actual revenue. So it's been a very strong start to the year. In addition, we're expecting reasonable completions over the course of the year and consistent with our expected completion date. If durations extend on any of those, or as I mentioned, if there's a budget change, then we've got various levers we can pull, including looking at managing risk, duration risk, particularly through secondary market sales. So -- and I think we've demonstrated our capacity to do that with the secondary market sales that we achieved in FY '23. So for all of those reasons, we feel in a very confident and strong position in relation to cash flow during the course of the next 12 months and going forward, obviously.

[Operator Instructions] There are currently no further questions at this time. I'll turn the call back to Andrew Saker for closing remarks.

Thanks, Josh. Thanks, everyone, for your attention and questions. If you do have any follow-up questions, please don't hesitate to reach out. Otherwise, thank you and look forward to discussions over the next couple of weeks.

This concludes today's conference call. Thank you for joining. You may now disconnect.