Omni Bridgeway Limited (OBL) Earnings Call Transcript & Summary

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Omni Bridgeway Webcast. [Operator Instructions] I would now like to turn the conference over to Raymond van Hulst. Please go ahead.

Good morning. My name is Raymond van Hulst, Managing Director and Chief Executive Officer. Welcome to Omni Bridgeway's first half results for the 6 months ended 31st December 2023. Joining me today are Guillaume Leger, Global Chief Financial Officer; Jeremy Sambrook, Global General Counsel and Company Secretary; and Mel Buffier, Global Head of Investor Relations. This is my first results presentation since taking over as Chief Executive Officer 4 months ago at the Annual General Meeting. And I've had many meetings with investors pre and post at AGM. I've noted a strong desire and expectation for changes to be made towards increasing and reporting shareholder value and specifically through increased cost coverage, simplification of our reporting and transitioning to fair value. I'm pleased with the progress made during the recent months in these areas. And while some changes made will take some time to become visible, I'm confident shareholders will have noted some of the first changes and results in our reporting and disclosures since the AGM. This includes the increased cost coverage from our new series II Funds, the simplified quarterly reporting and the first steps towards non-IFRS fair value reporting in this results presentation. In addition to this progress, I'm particularly satisfied this period with our investment performance metrics, as I will also present today. I will cover the highlights from the half, the performance of our portfolio, introduce our new fair value measure as well as our strategic focus areas for the 2024 financial year and beyond. Guillaume will take you through the key elements of our financial results. Now on to the highlights. During the half, we made a net profit after tax and before NCI of $33 million, which compared to the first half 2023 financial year loss of $30 million represents a 211% turnaround. Investment income and fee revenue derived from diversified sources, comprising both completions of investments and secondary market sales grew by 53% to $155 million. This was biased towards the second quarter and included the sale of a 25% participation in Fund 4 IP assets, for an initial amount of $31.5 million, which occurred in December. We had an additional $89 million of income yet to be recognized at 31st December, which comprises $29 million income recognized post 31st December and $60 million relating to substantially completed investments with conditional settlements or judgments on appeal, which will be recognized in future periods if and when they complete. As announced at the AGM and in our quarterly, we are in the process of transitioning from estimated portfolio value, or EPV, to fair value as a non-IFRS measure of investment and portfolio values. In this results presentation and as a next step in the transition, we have reported a total portfolio fair value of $2.5 billion. This represents the net present value of the expected loss adjusted and probability weighted investment cash flows of our full portfolio of over 300 investments. This is the total fair value and includes the share of both third-party fund investors and OBL. Fair value better captures the duration, pricing and other value and risk drivers of legal finance investments. It aligns better with general financial market metrics as well as with disclosures of our peers. I will explain the fair value framework and methodology in the latter part of this presentation. As indicated and similar to EPV, we report fair value as [ non-IFRS information ]. We do not currently intend changing the basis of presentation for our statutory accounts. The commitments towards new investments amounted to $260 million. This represents 42% of our 2024 financial year target and 58% of our full year value goal. Average pricing on these new commitments was 38% higher based on the fair value per dollar of new commitments and compared to commitments that were made in the 2023 financial year. An additional 29 exclusive term sheets have been agreed, representing over $180 million in investment opportunities, which, if converted into funded investments is a further 29% of this financial year's target. Funds under management increased to $3.2 billion, driven by the first close of the Fund 4 and Fund 5 series 2 capital raising. At period-end, our cash and receivables were over $290 million. On an OBL-only basis, including OBL's proportion of cash in its funds, we have around $120 million in cash and receivables, together with an undrawn debt facility of $60 million to support our operations and fund investments. This excludes any cash proceeds from income recognized post 31st December and any cash proceeds from income yet to be recognized. Investment highlights. The 22 full and partial completions for the financial year-to-date demonstrate industry-leading performance metrics with an overall multiple on invested capital of 2.3x and a provisional internal rate of return of 58%. We achieved income of $175 million, provisional share or OBL. Completion activity and momentum is expected to continue in the next 12 months based on investments, which are subject to anticipated our current settlement discussions or for which an award or judgment is expected. We will provide an update on our strategic initiatives during an Investor Day scheduled for the 27th of March in Sydney. We will then discuss the milestones we have already achieved as well as initiatives planned for the short and medium term. During the Investor Day, we will also provide background on our fair value methodology. We have already made good progress on our strategic objectives. In relation to our capital raising objectives, the first EUR 135 million of debt was raised in September as part of our EUR 300 million Fund 8, which is focused on global enforcement investments. And in December, we completed the USD 485 million first close of the Fund 4 and 5 series II capital raise on improved cost coverage terms. The continued and additional investments by existing investors alongside OBL's co-funding, provides a strong base to market the remaining capacity. We significantly expanded our capabilities in the U.K., the world's second largest legal finance market. The associated cost is included in the $95 million of cash operational expenses indicated for the 2024 financial year. With the build-out of our global platform now complete, our efforts have shifted towards optimizing operational efficiency, refining fund terms and increasing funds under management. Additionally, we are simplifying our reporting to facilitate better benchmarking against our industry peers. The transition from EPV to fair value is an important element of that. Our medium-term target remains to achieve approximately $1 billion in annual commitments or equivalent value. Key business performance drivers include optimizing the volume versus pricing trade-off, improving operational efficiencies and cost coverage and diversifying our investor base. I will now hand over to Guillaume to take us through the financial results in more detail.

Thank you, Raymond, and good morning. We have incorporated new elements into our results presentation at the request of multiple stakeholders. Now included is financial information on an OBL-only basis, representing the performance of the group, excluding the external investors' interest and reflective of the amount attributable to equity shareholders. During the first half of 2024, we generated $23 million of positive net cash flows from investment activities derived from investment completions and the cash proceeds from the sale of our participation in Fund 4 IP assets. This was offset by making $32.5 million of deployments and $11 million in interest payments. Given higher deployments and other fee-generating activities, management fees collected increased to $7.6 million. A further $3.2 million was accrued during the period. With the introduction of Fund 8 and other fee initiatives, our target for the year is approximately $24 million. We have received performance fees of $6.2 million from Funds 4 and 5 completed investments. Cost management initiatives have reduced platform expenses to $49.2 million, with actual cash outflows of $47.8 million with the difference due to positive changes in working capital. Cash flows from the prior slide, this chart provides a bridge of cash usage for the half. On an OBL-only basis, we have around $120 million in cash and receivables and an undrawn debt facility of $60 million. This is sufficient to support our operations and fund investments without relying upon cash inflows from future investment completions, secondary market sales, management and performance fees. This chart excludes cash proceeds from completions post December 31 and projected cash proceeds from matters classified as income yet to be recognized. Slide 8 provides a detailed breakdown of management fees, acknowledging that some of the granularity is not transparent in our financial statements. Putting to one side these nuances, you'll observe that we have actually generated notably higher management fees and other fee income than previous periods. Our cost coverage ratio increased to 22% during the half and is anticipated to further improve to around 25% for the 2024 financial year, above the 23% previously indicated. This comprises Funds 4 and 5 management fees on externally deployed capital, cost recoveries from funds, receipts from Fund 8 cost coverage agreement, offset by reduced Fund 6 management fees, given this fund is now in harvest mode. This table does not include Funds 2 and 3 management fees that have accrued to $6.6 million and will be payable to OBL after preferred entitlements. We achieved an important milestone with the first close of the series II capital raise for Funds 4 and 5 at improved cost coverage terms through the inclusion of transaction fees on new investments. Transaction fees comparable to facility fees and traditional lending will typically be payable to OBL in the first years of an investment life cycle. We expect to earn these transaction fees starting in the 2025 financial year. This represents a significant improvement versus the series I fee terms and is in line with our stated objective to increase cost coverage, contribution from future funds. As we prioritize the enhancement of our cost coverage, our efforts have also centered on maximizing income per dollar of platform costs. This involves leveraging the capabilities of our team as well as refining systems and processes. Furthermore, we've taken note of our shareholders' concerns regarding the expanded cost base. Since March 2023, we have been implementing a strategy for optimizing expenses and increasing cost recovery. These efforts will continue to materialize in the 2025 financial year. OBL's current cash OpEx run rate is improving, which indicates [Technical Difficulty] target of approximately $95 million for the 2024 financial year. I'll now hand it back to Raymond.

Thanks, Guillaume. We have seen the investment carrying value increase at a compounded annual growth rate or CAGR of 16% over the past 4.5 years to approximately $823 million after completions, secondary market sales, impairments and deconsolidation of both the Fund 1 portfolio and the Fund 4 IP portfolio. During the half, the increased carrying value was driven by approximately $177 million allocated by the group towards deployment in both new and existing investments to generate future income. New commitments of $260 million were made in the first half of financial year 2024. As indicated earlier, this accounts for 42% of the full year commitment goal and compares to an average 47% of commitment target reached at 31st December over the last 3 years. On an equivalent value basis, this accounts for 58% of the full year value goal of $625 million, reflecting our focus on value over volume, improved pricing and capital efficiency. In this slide, we represent a detailed breakdown of each fund, including its size and the capital contributed by third-party investors and by Omni Bridgeway. This highlights the successful capital raising for Fund 8 and for the second series of Funds 4 and 5. The continued reinvestment by the existing investors of our first- and second-generation funds underscores the confidence of leading institutional and legal finance investors in our track record, investment origination and underwriting process. For the second series of Fund 4 and 5, we continue raising capital from both existing and new investors. Our objective is to grow each fund to its cap size of USD 500 million and to expand our private capital investor base. Series II will commence investment activities following the expiry of the first series commitment period. Collectively, the series I funds have approximately USD 176 million, still available for commitment with the ability to recycle capital from completed investments until the end of their commitment period. Fund 8 secured EUR 135 million as a first tranche in debt capital and has begun making new investments. It has also successfully completed a first investment. For the first time, we are reporting our portfolio on the basis of a fair value measure. Our portfolio, for which the fair value is calculated at $2.5 billion remains well balanced between the regions and the different investment types. This diversification is unique to Omni Bridgeway and mitigates the risks associated with adverse regulatory, legal and economic events. We are also satisfied with our limited exposure to single large investments with the largest 10 cases representing less than 15% of the commitments and less than 25% of the fair value of the portfolio. The transition to fair value is a key part of our stated objective to improve our communications and disclosures. Unlike EPV, fair value is widely used for valuing financial assets in general, and there is an evolving use of fair value accounting by our industry peers. We have now adopted the use of a fair value measure on a non-IFRS reporting basis to assist with peer comparison and to enhance the assessment of the embedded value of our portfolio. At a high level, I will step through the methodology. The basis for our methodology is what is called a probabilistic scenario analysis and involves the following steps. At inception, for each new investment, the likely outcome scenarios are identified, which will typically include multiple loss scenarios as well. The probability of each outcome scenario is then assessed as well as the cash outflows and cash inflows associated with the scenario. The combination of these allows us to calculate a total loss adjusted and probability-weighted cash flow for the investment. And this cash flow is subsequently discounted at currently 12% to arrive at the fair value of the investment. In order to assess the cash flows for each of the scenarios, we need to make assumptions, including in relation to probability of success, duration, budget, expected judgment or settlement demand, also called quantum, as well as recoverability. To the extent possible, we will rely on observable data inputs for this, such as external legal opinions, expert reports and legal statistics, but there remains a significant amount of subjective judgment involved from our experienced investment management team and pricing and structuring team. In subsequent periods, the fair value will typically increase as a result of deployments made and the unwinding of the discount due to the passage of time. Only when there has been a material litigation event, will the probabilistic scenario model be adjusted, leading to a further fair value change, positively or negatively. This probabilistic scenario analysis is the same process as used for pricing and structuring our investments and for supporting investment management decisions. This framework and the discount rate used has been developed and benchmarked in consultation with our auditors. Using this methodology, we have calculated [Technical Difficulty] at 31st of December 2023 to be $2.5 billion. This is the total fair value and includes the share of both the third-party fund investors and OBL. Fair value will be a key topic at our upcoming Investor Day provide further background and example. We look forward to discussing this and our strategic priorities more extensively in March. I would now like to open the call for questions.

[Operator Instructions] Our first question will come from the line of David Fraser with MST Financial.

Can you guys hear me?

Yes.

Look, just -- I've got about 5 questions. I'll jump back in the queue. But first one, medium-term commitments of $1 billion per annum, Raymond, could you define me what medium means?

Yes, well, first of all, it's not commitments. It's commitments or equivalent value. I'm very strong on that difference and medium term is in the next 3 years.

And second one, probably for Guillaume, but everyone. Cash costs first half last year were around about $67 million, $68 million, come down to $49 million. That's included in the capitalized costs. And as you said, on target to get to less than $95 million cash costs for the year. Is that the new base? Or can we expect some continued cost management and costs to continue to come down?

So, what you see in the first half, David, you said it's $49.2 million of operating costs and because of working capital benefit, it's actual cash outflow is $47.8 million. And with the annual target of $95 million, so the second half will be slightly less than the first half. And we continue to believe that $95 million is the right level for us. Of course, in the future, we'll have -- we'll give better guidance on the target, but we think $95 million is the right amount.

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

Just in terms of the cost coverage, you're guiding to 25% for the year, which implies second half maybe run rating 28%. What is the transaction fees and some of the other structures you've got going due to that cost coverage?

Transaction fees have the potential to significantly increase the cost coverage. The attractive element of it is that it's typically very front-ended. One of the issues that we've been facing is that our management fees are a percentage of deployed and that increases only slowly. The next step up would have been management fees on committed. That would have increased it a little bit. But transaction fees, given that they are typically charged as a percentage of commitment at day 1, have the potential to add significantly to next years and the year after in commitment fees or in management fees.

And Jason, as I mentioned earlier, right, transaction fees are starting 2025. So, the 25% you see there does not include transaction fees.

Sure. I still think this is question one. So, I don't want to be put back in the queue, please, operator. The transaction fees, you've said a significant step-up in cost coverage. What does that really mean? Because you haven't really given any disclosure around what the nature of those transaction fees might look like, and you've obviously modeled it. So, I think given that the markets had some uncertainty around the cost coverage of the model and the platform more recently, I think you probably need to give me a bit more detail around what that cost coverage looks like in your modeling, please?

Sure. I'm quite happy to talk to that at the Investor Day. That will -- we'll prepare something on that. I don't have a number in front of me right now and I'd like to give that now. But I think generally, we expect and based on some experience numbers, we expect transaction fees to be in the 2% to 3% range of commitments. And so once the series II starts, it could be 2% to 3% of new commitments that come in. Not all commitments will have transaction fees and not all transaction fees will always be in full upfront. They may be spread out over time. But this should give you a little bit of guidance.

And my second question is around completions, please. You put out a really good slide around like basically cash flow neutral for the period, albeit you started the period with a lot of receivables. So, it kind of has gone a bit backwards in terms of cash and receivables in the period, but that's the sort of semantics. The completions for the second half, please. Can you maybe talk to some of the major milestones or completions that are on your books, in particular, some of the more public cases?

Yes. I -- given the sensitivities, let's follow or I follow the policy of not making any individual investments. So, I'd like to avoid doing that. There is a substantial number or a significant number of investments that are scheduled to complete this year, including a few substantial ones in Australia and some of them are public. There is no material news on those, but they are scheduled to complete.

Will they be -- so you're saying this year FY '24, will they be enough if they do complete to pay down the pref on Funds 2, 3 to the extent that shareholders and analysts can get some comfort around your ability to be sustainable from a cash flow perspective as you build your business?

So, we have -- first of all, when I speak about the year in line with what we've done in the quarterly, it's always on a rolling 12-month basis. I'm not referring to the financial year. It's nearly impossible to predict timing on specific months. What we've indicated is that we have about $1.5 billion in EPV that may complete within the next 12 months for Funds 2 and 3. If that would complete and if it completes as anticipated, then that would be more than enough to repay the pref on Funds 2, 3.

That's the next 12 months, but...

That's a rolling 12 months.

Your next question will come from the line of Peter Meichelboeck with Select Equities.

Just firstly, on Funds 4 and 5, given that you've now secured the $485 million of capital for series II, can I ask firstly what the investment deployment period on that series II capital raise? I think it was 4 years for series I. And furthermore, given the go-ahead for series II, we'll probably or possibly see a reacceleration in capital calls from those 2 funds. When do you expect Funds 4 and 5 to effectively become self-funding for OBL on a net cash basis? What I mean by that is that the cash coming out of the funds to OBL is enough to fund the company's cash calls into each of those funds?

On the first question, it's again 4 years or -- so the commitment period is 4 years or the earlier of the full commitment of the fund before it would go into possibly a third series. We haven't run an analysis on a fund-by-fund basis for kind of the evergreen, but indeed with the maturing of the investments in the first series and excluding the performance fees, the return of capital on completed investments should typically in full or largely offset the capital calls for the series II. I don't have an immediate date in front of me where we need to even out.

And my second question is in relation to Fund 1. At the time of the sale of the Fund 1 interest litigation last May, there was the residual interest of USD 36 million. And I think you ended up recognizing a profit and pretax profit in the last year of AUD 27 million. Given the update you did the other day in this result, there was some -- I think there was $15 million of write-downs in the residual interest. I think most of that was in Fund 1. So, I'm just wondering -- with the booking last year of the $27 million, this write-down of $15 million, I guess, I'm just wondering how confident you are in the remaining value in Fund 1 and essentially just trying to work out how much cash you think you'll ultimately get out of Fund 1 over and above that original USD 30 million that you received at the time of the sale?

So, Peter, the reduction that you're referring to that we announced last week relates to a case that we actually had a positive judgment, but the quantum came in less than expected. And as you point out, the value that we established back in May of 2023 for Fund 1 included the value of this case and that ended up coming back with a judgment much lower. The value that we use to establish Fund I and the same for the sale of the IP portfolio in December, those are based on the fair value framework that we have and reviewed by our auditors. So, we're confident with the values that we put out. Unfortunately, in cases like the one that the judgment different than what we expected, this happens in our business, right? It could be positive, it could be negative.

Are you able to -- just on that last point that I had around the further cash you ultimately think out of Fund 1, are you able to provide any color around that?

Yes, it could vary. It depends on the cases and the outcomes that we see in the cases. The case that I was talking about earlier is not over, right? We were looking at different types of appeals. So, it always depends on the outcomes of the cases.

Our next question will come from the line of David Fraser with MST Financial.

The last 2 questions. In your fair value calculation of $2.5 billion, just a simple one. Does that include conditionally funded and investment committee investments?

It's about $200 million in conditionally-funded NIC approved.

Sorry, so I missed the bit, Raymond. Of the $2.5 billion, about $200 million is for the conditionally-funded NIC?

Yes. That is correct.

Okay. And then again, a minor question. Slide 8, management fees that was broken down by Guillaume. Did they include the performance fees of $6.2 million?

No, no. This slide is just management fee and some other fee income. Yes. We -- our cost coverage, we want to show the recurring fees like management fees. Performance fees depend on completions and a bit more bumpy. So cost coverage, we wanted to -- maybe at the industry, call it, more recurring, so that's what we include in cost coverage.

Our next question will come from the line of Peter Meichelboeck with Select Equities. [Operator Instructions] Our next question will come from the line of Jason Palmer with Taylor Collison.

Can you hear me okay?

Yes, we can hear you.

The fair value of $2.5 billion sort of implies relative to EPV about a 30% discount. So, I'm not sort of saying that EPV conversion should be 10.5% rather than 15%. But are you sort of saying with fair value that sort of exactly the type of cash inflows you would expect to realize on the portfolio now if you were to liquidate?

Well, I'm not sure how you arrive at the 30% discount. Based on our own review and inclusive of all fees, I think it aligns relatively closely. This is certainly something we will be talking about and presenting at the Investor Day. But I think on a high level, there's a difference between EPV and IEV and fair value. EPV-IEV is the undiscounted measure of income, whereas fair value is the discounted measure of gross investment profit. But the difference that you referred to may be the result of discounting.

I think, Jason, conversion rate of 15% you referred to is upon completion of the investment, right? So, there's no discounting at that point.

No, I get that. I guess, what I'm saying is that it's -- I mean with the weighted average cost of capital at 12% and let's say, an average duration of 3 years, it kind of says that maybe the true conversion is 10.5%, not 15%. That's sort of -- what I'm sort of pointing to. I'm just trying to work out sort of when you're managing the business, what you're thinking about from a cash flow perspective? That's the heart of what I was sort of getting at with the...

The question is offline, if you can go into the details maybe off-line, Jason, I make sure we understand your...

I'd certainly like to address that alignment of EPV, IEV and fair value later on. I generally don't want to steer away from the EPV and EPV conversion, It's all about MOIC and IRR and fair value. But I fully understand that we'll -- while we transition, we'll make that. We'll show how the 2 are connected.

And just my last question is just around managing our cash flows going forward. And your view, Raymond, around whether you should try and accelerate returns now or whether you're about building this book for the next 4 to 5 years to provide greater returns for shareholders because they trade [Technical Difficulty] pay down debt or you can reinvest back into the business with a higher platform cost and try and defray that over time, but it might mean that shareholders don't see a sense for 4 years or 5 years.

I have picked up strong feedback from shareholders that cash conversion is high on the wish list. And so I don't think I'll be further expanding the platform or growing the book in that sense and want to show that this -- that the book that we've built is able to [Technical Difficulty] before developing any other new strategic initiatives to further grow the book or the platform. Does that answer your question?

Our next question comes from the line of Peter Meichelboeck with Select Equities.

Can you hear me this time?

Yes.

Yes. Sorry about before. Just a couple of quick points -- questions. I might have missed this in the presentation or in the results. The head count, can you tell us where head count is now currently sitting?

Sure. It's -- we are at 213.

213, great. And the other question I just had was, once again, I might have missed this in the detail. Is there any update on the Westgem situation in terms of the adverse cost payment? I think it was [ $7 million or $8 million ], but any update in terms of timing or anything like that?

This goes into individual cases. So, I don't like to comment on individual matters that are still subject to litigation. But on a more higher level, there is no material development on our -- on any of our adverse cost exposures.

Our next question will come from the line of Mark Southwell-Keely with Select Equities.

Just a quick question, and I'm sure there's lots of different ways of interpreting this. But in terms of the fair value of $2.5 billion on Slide 3, the OBL kind of proportion of that, how much is it?

So, the OBL attribution of that, we haven't presented yet and that is on the agenda as well for the Investor Day. Each fund has a different attribution ratio. And it's the combination of the co-invest and performance fees that apply and whether it's an American waterfall fund or a European waterfall fund has an impact on what the discounted attribution rate is. But that is exactly a topic we're going to be addressing at the Investor Day.

And with that, I will hand the call back to Raymond van Hulst for any closing remarks.

Hopefully, we have answered all of your questions. But if you have any follow-up questions, please do not hesitate to reach out. We will be sending out further information on our Investor Day and hope to address any other questions that you may have at that moment. Thank you, everyone.

Thank you.

This concludes today's call. Thank you all for joining, and you may now disconnect.