Omni Bridgeway Limited (OBL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Omni Bridgeway Limited 1H '25 Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Raymond van Hulst, Chief Executive Officer and Managing Director. Please go ahead.

Hello, and good morning all. My name is Raymond van Hulst, Managing Director and Chief Executive Officer. Welcome to Omni Bridgeway's results presentation for the 6 months ended 31st of December 2024. Joining me today are Guillaume Leger; Global Chief Financial Officer; David Breeney, our Deputy CFO; Jeremy Sambrook, Global General Counsel and Company Secretary; and Nathan Kandapper, Global Head of Investor Relations. It has been less than 12 months since our Investor Day when we presented the strategic direction of the company and set ourselves ambitious strategic and financial targets. I'm happy with the significant progress made on these targets in such a relatively short period, and I will spend some time today discussing this. It is particularly pleasing to be able to do so against the backdrop of good half year results. Over the next 20 minutes or so, I will first cover the highlights from the half and the performance of our portfolio. Guillaume will then take you through the key elements of our financial results before I come back on our strategic priorities, the Fund 9 transaction we announced in December and a revisit of some topics addressed at the Investor Day in March last year. So let's move on to the highlights for the half. I would like to start off by identifying the key points where there has been good momentum during the past financial period. On the portfolio side, we continue to observe an acceleration in the number of completions and the associated income. Importantly, also at increased volume, the return metrics are class-leading and are trending higher. Whilst we are harvesting the portfolio, our team continues at the same time to originate new high-quality investments with approximately $320 million of new fair value added. This has resulted in continued growth of the total portfolio fair value to beyond $3 billion. On the operational side, we have worked hard to ensure that OpEx is under control and that we are on track to hit our target of $85 million for FY '25, down from a target of $95 million in FY '24. We have also recently executed further cost-saving initiatives, of which we will see the full benefit during FY '26. These cost savings will be in the magnitude of $10 million on an annualized basis. The establishment of Fund 9 as a continuation fund is probably the most significant milestone achieved for OBL over the last period. Whilst it took a lot of the team's bandwidth for a significant part of calendar year 2024, it has delivered on many of our strategic objectives at the same time. It completely deleveraged our balance sheet, significantly strengthened our liquidity profile and most importantly, validated our fair value framework and the fair value of our portfolio. During the half, we made a net profit after tax and before NCI of $18.7 million, an improvement of $7.6 million compared to the first half of 2024, excluding secondary market transactions. This was driven by a 21% increase of investment income and fee revenue, taking it to $150.5 million, combined with a 20% reduction in cash OpEx for the comparable period. We have an additional $64 million of new income yet to be recognized, which mainly relates to investments with conditional settlements or positive judgments on appeal, which will be recognized in future periods given when they complete. The total portfolio fair value increased to $3.2 billion, up 13% or $400 million during the past 6 months. As outlined previously, this represents the net present value of the expected loss adjusted and probability weighted investment cash flows of our full portfolio of investments. This is the total fair value and includes the share of both the third-party fund investors and OBL. The OBL only share of the portfolio has increased from $1 billion to over $1.2 billion. In terms of new investments, we are still on track to achieve our aspirational full-year goal of $700 million, with $319 million in fair value added for the half from new or add-on commitments. Our portfolio continues to realize strong fair value conversion, exceeding 100%. For the half, a conversion rate of 111% was achieved across all 40 full and partial completions. Over the last 12 months, since we've implemented the fair value methodology in December 2023, we have realized a cumulative fair value conversion rate significantly above 100%. This reflects a period of good completions, and we aim and expect it to track to 100% average over the long term. As mentioned in the key messages earlier, we are pleased that the return metrics generated from completions in our portfolio continue to be leading with a 2.8x multiple on invested capital, or MOIC, achieved on the 40 full and partial completions. At period end, our cash and receivables amounted to $126.5 million. This excludes any cash proceeds from income recognized post 31st of December and excludes in full the positive effects of the [ Sunline ] transaction. Similar to prior periods, I won't spend too long on Slide 6 as we have provided you many of the highlights earlier, and this has been part of our quarterly reporting. However, we felt that it was important to continue providing the breakdown. As mentioned, completion activity and momentum has increased with 40 full and partial completions for the half versus 22 full and partial completions for the first half of 2024. As mentioned earlier, this has been without any compression of the MOIC, yielding a multiple of 20 fully completed matters and 2.8x across all full, partial and income yet to be recognized completions. We anticipate completion activity and momentum to continue based on the investments, which are subject to anticipated or current settlement discussions or for which an award or judgment is expected. Looking at our portfolio on a fair value basis, our portfolio is well balanced between the regions and the different investment types. This level of diversification within the legal finance asset class is unique to Omni Bridgeway and reflects the geographic scope and expertise of our platform. The diversification mitigates the risks associated with adverse regulatory, legal and economic events in any particular region or area of law. I'm equally pleased with our limited exposure to single large investments with the largest 10 cases representing less than 15% of our commitments and just below 25% of the total fair value of the portfolio. It should be noted that this focus on diversification does not preclude us from investing in larger matters. Rather, we do so on a co-funded basis with nonfund external capital to mitigate any concentration risk, while we typically still receive management fees, transaction fees and/or performance fees on such external co-funding. Looking at the right-hand side of Page 8 first, total portfolio fair value has increased by 13% for the first half of financial year 2025 to $3.2 billion. This is net of new commitments, completions and material litigation events and represents the embedded value of the group's investment portfolio. Of the $3.2 billion, over $1.2 billion of fair value is attributable to OBL only, representing our co-invest and carried interest. This is up 17%. In line with the growth in fair value, we've seen the investment carrying value increase over the past 5 years to approximately $972 million after completions, impairments and the deconsolidation of parts of the portfolio following secondary sales. For the first half, the increased carrying value was driven by approximately $144 million in deployment in both new and existing investments. On to Slide 9. In breaking down the 13% gain in portfolio fair value for the 6-month period, the impact of new commitments and completions is relatively straightforward to follow. The value added from deployments and the discount unwind reflect the reduction in future deployment obligations and the value increase on the passage of time as investments move closer to an expected completion. Material Litigation Events or MLEs amounted to $53 million and reflect the net effect of all positive and negative litigation events over the period, which involved $139 million of our investments in this period. These can be interim judgments, but more often include timing changes following updated court schedules or externally driven adjustments to budgets or claim values. The relatively limited amount, less than 2% of total portfolio value after netting a significant number of positive and negative MLEs is another reflection of the diversification and uncorrelated nature of our portfolio. And finally, the other bar reflects mainly FX impacts on the portfolio. I will now hand over to Guillaume to take us through the financial results in more detail.

Thank you, Raymond, and good morning. We're delighted to be delivering a strong half year financial result for FY '25, improving in all of our key performance indicators. Starting with the consolidated group financial results on Slide 12. We are $18.7 million before NCI, an improvement of 68% when excluding secondary market transactions. The company's gross proceeds and revenue stood at $150.5 million, a $26.5 million increase versus the first half '24 on the account of solid completions. Expenses reduced to $23.3 million during the period, assisted by positive exchange rate movements. Moving on to Slide 11. We show our performance on an OBL-only basis, representing the performance of the group, excluding the external fund investors' interest and reflecting of the amount attributable to equity shareholders. For the half, we achieved a positive overall net cash flow, delivering $32 million of positive net cash flows. After deployments, OBL-only cash flows amounted to $7 million. We generated $19.6 million of positive net cash flows from investment activities derived from completions less interest for the period, while management fees increased to $22.8 million for the half, representing 65% increase in management fees half-on-half. OBL-only platform expenses for the half was $39.6 million, firmly on track to deliver the $85 million cash OpEx target. Non-IFRS OBL-only cash P&L excludes the effect of the Fund 9 transaction, which achieved financial close after the end of 1H '25. The Fund 9 transaction is expected to deliver between $310 million and $320 million in OBL-only cash. Slide 12 shows how management views the economic performance of the company during the period. Realized and unrealized movements in fair value generated for shareholders in 1H '25 net of cost stood at $170 million gain, which is not fully recognized in our IFRS financial statements. With the validation from the fair value conversion of 111% for the half, this non-IFRS methodology demonstrates OBL's ability to deliver consistent value to shareholders. Turning to Slide 13. As mentioned by Raymond at the start, our team has been very disciplined on cost management. As a result, our cash OpEx is tracking towards our set target of $85 million for the year with initiatives to optimize expenses already bearing fruit in 1H '25. Additional cost-saving measures have been executed in recent months, which are expected to further reduce OpEx on an annualized basis by approximately $10 million. The full impact of these efforts will continue to materialize in the 2026 financial year and beyond. We are on track to meet our target of $30 million in management fees for fiscal '25, accelerated by additional Fund 9 management fees as these assets were not previously generated fee income. The combination of falling cash OpEx and increasing management fee income aligns to our medium-term target of 70% cost coverage by FY '28. Moving to Page 14. This chart provides a bridge of cash movements during the half and our liquidity balance at the end of the half. On an OBL-only basis, we have $126.5 million in cash and receivables at December 31. This excludes cash proceeds from completion post December 31, '24, and the cash that we received from the financial close of the Fund 9 transaction reported to the market on Tuesday. It also emits projected cash proceeds from matters classified as income yet to be recognized. As we will discuss later in this presentation, the Fund 9 transaction removes ongoing interest payments and reduces deployments by OBL into the future, which will further improve our liquidity. Before I hand back to Raymond, I would like to jump forward a couple of slides to Page 22 to talk through upcoming management changes. As we have discussed previously, an essential part of our fund management business model and growth is to have continuous access to fund capital. Therefore, I am pleased to announce that from March 1, I'll be taking on a new role as Global Chief, Capital Markets, focusing on fundraising activities and strategic business development alongside Raymond. I'm very excited about this development, having already been working in this capacity for a number of months. Dedicating more of my time to this strategically important activity is something that I look forward to given the opportunity set and the progress that has already been made in this space. While this is a bittersweet moment stepping away from the core numbers, I know that the team and shareholders are in good hands with my Deputy CFO David Breeney, stepping into the CFO role. I look forward to introducing David to our key shareholders in the coming days and weeks. With that, I would like to hand it back to Raymond.

Thank you, Guillaume. I would like to use this opportunity to thank Guillaume and acknowledge his significant achievements over the past 3 years as our Global CFO, with the transition to fair value and the introduction of OBL-only metrics as only a few notable examples. But most importantly, I look forward to continue working closely together with Guillaume on capital formation and strategic business development. [Technical Difficulty] he joined us in 2023 as the Head of Financial Control before taking on the Deputy CFO role last year. He has a strong and relevant background in fund management and has already proven himself a capable finance leader throughout the Fund 9 due diligence process. Like Guillaume, I look forward to introducing David to you in the coming period. Moving on now to a status update on our strategic priorities. In mid-December last year, we announced a transformational transaction for OBL with the launch of Fund 9 as a new continuation fund. Fund 9 has acquired 100% of OBL's co-investment in over 150 assets across our balance sheet, Funds 2 and 3 and Funds 4 and 5 Series 1. As part of the same transaction, Ares Management has acquired a 70% stake in Fund 9. This transaction with Ares is set to deliver between $310 million and $320 million in upfront cash proceeds to OBL only, realizing a 3.2x multiple on invested capital and an estimated 80% fair value conversion. Earlier this week, on Tuesday, the 25th of February, we achieved financial close with an initial payment of $275 million received from Ares, which was used to repay our outstanding debt of $250 million in full, together with some accrued interest. An additional payment of between $35 million and $45 million will be received at completion, anticipated by the end of March. The establishment of Fund 9 has allowed us [Technical Difficulty] of our stated core strategic objectives in one transaction. It has resulted in a full repayment of outstanding debt and will provide circa $60 million in additional liquidity, therefore, derisking and strengthening our balance sheet. It has acted as an independent third-party validation of our fair value methodology and total portfolio fair value via the extensive due diligence undertaken by Ares and its advisers on this. It will improve our cost coverage ratio by generating cash management fees on assets not yielding any management fee income before. And it has accelerated our transition to a capital-light fund management model by reducing our co-investment obligations in Funds 2 and 3 and Funds 4 and 5 Series 1 from 20% to circa 6%. It will also allow post completion for further simplification of our statutory accounts through deconsolidation of the funds. And last but not least, the addition of Ares as a capital provider in a structure like this is not only a validation of OBL as an institutional grade fund manager, but also of legal finance as an asset class growing in prominence, both of which have already proven to be supportive of fund capital raising. Moving on to Slide 18 now. We've made good progress as well outside the Fund 9 launch with our portfolio delivering excellent performance metrics from an increased number of completions. Those completions have further validated our fair value methodology and the implicit value of the portfolio with overall fair value conversion exceeding 100%. As Guillaume mentioned earlier, a disciplined cost management approach has been executed, putting us on track to achieve our cash OpEx target of $85 million for the full year, down in FY '24. We've also managed to take additional cost-saving measures as indicated that will materialize in FY '26, which are expected to deliver an additional $10 million of savings on an annualized basis. With the reduced OpEx and additional sources of management fees, we are tracking well towards the medium-term strategic cost coverage target of 70%. The team has also been active and continues to be busy on raising fund capital. We've been able to extend the life cycle of Funds 4 and 5 Series 1 and added close to USD 90 million in additional capital prior to the investment period closing. New investments will now go into Funds 4 and 5 Series 2 as well as Fund 8. We have raised over $1 million in new external capital over the last 18 months across Funds 4 and 5 Series 2, Fund 8 and Fund 9. We continue to make good progress on the capital raised for the Funds 4 and 5 Series 2, which is still open for the next 12 months and are on track to make further clauses from multiple parties who have given us soft commitments. Slide 19 demonstrates the significant cash flow and liquidity benefits that Fund 9 will deliver for OBL. It shows, especially when compared with Slide 14, the material benefits that follow from the full removal of cash interest expense and a significant reduction of expected deployments for OBL only. Combined with additional management fees and reduction in cash OpEx, it puts the company on track for structural overall positive free cash flow. I would like to revisit the slide that we first showed at the Investor Day in March 2024, which provided a valuation framework for OBL based on independently evaluating the value of the portfolio and the value of the platform. We discussed in our FY '24 results, the implied valuation gap between the market value and the assessed intrinsic value of OBL using that framework. And whilst the announcement of Fund 9 has made that gap slightly smaller, we believe there is still a significant disconnect. [Technical Difficulty] to explain the valuation gap, which we believe have all been substantially addressed through the achievements on the strategic priority. Uncertainty on the fair value framework has been addressed via a full year of supportive completion metrics and through Fund 9 as a material secondary market transaction, providing an independent validation and the portfolio fair value. The Fund 9 transaction has also removed any perceived balance sheet or liquidity risks by fully deleveraging the company and increasing our liquidity position. Within the same period, OpEx has been reduced and cost coverage is increasing. We anticipate revisiting this slide again at future presentations to track our progress in closing the gap. Our strategic focus areas follow largely from the prior slides and discussion. As we just discussed, closing the valuation gap between market and intrinsic value will be a key focus area. The second main focus, as discussed, will be on continued growth of available fund capital by expanding and diversifying our fund investor base. We have already demonstrated our commitment on this topic today with the announced management changes. In terms of strategic projects and targets for FY '25, we are generally well progressed and are on track for the majority of these. And with that, I would like to now open the call for questions.

[Operator Instructions] The first question is from Peter Meichelboeck from Select Equities.

Just a couple of questions. Obviously, given the recent large-scale asset sale, the Fund 9 deal with the $310 million, $320 million of cash coming into OBL. When I just sort of think about it, big picture, it's a huge deal. It's equivalent to about 3/4 of the current market cap. So I'm just wondering, once that deal closes in this sort of second half, will there be a dividend or a special dividend or some sort of capital return to shareholders? I guess, going forward, what is the dividend policy, but I'm particularly referring to that transaction given its size.

Thanks, Peter. I appreciate the question. So we are currently focused on completing the transaction and getting the maximum of that amount in, assessing the liquidity position and our ability to do buybacks or dividend distribution is something that we'll be assessing once that's done, and I'll be addressing that at the full year results presentation in August, but I can completely understand the question. I also note that historically, the focus was on -- what the perception was that the company had a liquidity risk and that was often addressed. So I'd like us to avoid getting back into that situation as well. But certainly, looking at what the total cash is defining the new policy on how many months of runway we [Technical Difficulty] before we can look at dividend distributions or buybacks is something that's on the cards after completion of the transaction.

Can I also just check, I'm not sure if you've mentioned this before, but the transaction costs associated with that deal, if you put out -- is there a number on that out there yet or.

No, I haven't given a number. I did give an indication at the Fund 9 announcement itself. It's about -- between 3% and 4%, I believe. And it's not completely clear yet where it will end because there's legal fees and other due diligence fees involved, but it's in that magnitude.

Look, my second question was just around costs and the cost coverage. I guess, when I sort of look at the company now, particularly post the Fund 9 transaction, the company is obviously increasingly focused on relying on management fees, which are effectively independent of sort of litigation success, if I could call it that, and then hopefully some performance fees and coming through, which is obviously dependent on sort of litigation outcomes and sort of with a decreasing sort of focus with the co-investment by OBL in the cases themselves. So I'm just wondering from an OBL shareholder perspective, just wondering if do you look at the business now where the corporate cost base must be covered by the management fee and the sort of the performance fee upside and the returns from the cases from the co-investment that those parts of the cash flow is what should flow to shareholders. And if that's the case, I'm just wondering why we shouldn't be sort of thinking of the corporate cost base now after sort of 8 years of the funds management sort of operation. Shouldn't the, sort of, the corporate cost base, I appreciate that it's sort of heading towards $75 million by the looks of things. But shouldn't that, after 8 years, be basically covered by the management fee? I think you've talked of a target there of cost coverage of, I think it's 70% or 80% by FY '28. Just want to sort of get your thoughts on where you think -- how you view the management fee covering all of the cost base.

Thanks, Peter. I think I've been pretty transparent on that at the Investor Day, outlining where -- that we want to grow this to 70%. I'd like to highlight that we're significantly below that, but we're market leading and no other litigation funder listed has a better cost coverage. It will take some time to further grow the management fees through -- and the transaction fees, but we are tracking well. And I think the growth towards that 70% is faster than most parties would have expected at the Investor Day. And certainly, that's the feedback I got over the last 12 months on this. But yes, if you transition to a fund management model, ultimately, you want to have a significant cost coverage percentage. This particular asset class, which has -- is difficult to scale up on a per IM basis, but has very high returns. We will likely always have less than 100% and part of the cost [Technical Difficulty] invest and performance fees, which will be disproportional compared to most other asset classes. So that's inherent to the model.

I'd like to point out also, Peter, that over the past few years, we've improved both components of the -- of that coverage, reducing expenses and increasing these fees. If you look at Page 13, you could see these 2 components quite handsomely going in the right direction. And Raymond and I have been very focused on continuing this into the future to reach our target. I would also mention that as Raymond said in our industry, we're leading in the greater alternative asset manager industry. Not everybody is at the high coverage amount. I think there's a recognition that performance fees and co-invest also contribute in the profitability of managers. So I think we need to recognize that as well.

Your next question comes from David Fraser from MST Financial.

Raymond, Fund 9 announcement of the settlement and the sell-down was announced at end of December, clearly, a relatively quiet time in the market. But have you seen since then, I guess, any additional interest? And do you think there'll be any sort of collateral benefits from actually doing that transaction?

In what context, David -- a fund capital raising, sorry, do you mean?

No, just the fact that, are you seeing any inbound or are people interested in what you've done with the Fund 9 transaction? And are there any collateral benefits that will accrue from that?

Yes, absolutely. It's -- even though it was indeed announced shortly before Christmas, there's been a lot of attention -- it's triggered a lot of attention. I think the collateral benefits have been some more requests coming in for funding. So it's helped with name recognition. But most importantly, it's helped us with our fund capital raising discussions. And we've seen that also in the [Technical Difficulty] a lot of validation is coming from this transaction and the due diligence that has been done and what it says about our book and underwriting results. On a completely different side, it's -- next week, I'm going to be in Singapore and presenting Omni Bridgeway and our funds to 60 of [Technical Difficulty] Ares. It's just one indication of how a deal like this helps us in getting the attention and airtime that we're looking for.

That sounds good. I mean, is there an opportunity to work closely with Ares going forward? Will they contemplate actually putting money into the funds, capital into the funds?

Yes, it's a very good relationship, and there's continuous contact and they're truly aligned with us. So we are discussing all different ways of working together and innovative ways of contributing to our funds is certainly one of the topics that we're discussing. So yes, I don't see them as a straight LP. That's not necessarily what their business model is, but there are certainly ways where they can contribute to our fund capital base.

Probably one for Guillaume here. In management fees, you've obviously got transaction fees, which effectively is a new part of your fee structure in the Series 2 funds. How are transaction fees going for Funds 4 and 5 Series 2?

Going very well. And actually, we started to include transaction fees in our investments in our term sheet with claimants. As we extended Series 1, though, these transaction fees ended up not going directly into OBL only. They're part of the returns of the fund. In Series 2, as we explained a year ago in the Investor Day, then those will accrue to OBL only directly and immediately at the beginning of an investment. So yes, it's going very well. There's a good response from the market. And I think people understand all the value that we contribute to an investment at the beginning with the due diligence and the clearing of all the items and our role as an adviser. And we've been able to charge these fees. So perhaps at the full year, we'll give an update more quantified of how this is going.

I think just to add to Guillaume, we're seeing that on average, the transaction fees that we manage higher than we had anticipated and have kind of presented at the Investor Day. So that's a good sign.

And last one, that's, I guess, a big picture one, maybe it's for [indiscernible]. But on Slide 20, on the valuation framework, could you sort of just run through a bit more detail on the right-hand side, the value fund management platform and the $150 million per annum, just explain that a wee bit more?

Sure. This is -- there are a couple of slides in the Investor Day deck that go into this. But essentially, this is closely aligned with the OBL-only fair value P&L that's in this deck as well. We're looking at OBL, we have our portfolio, our existing portfolio. But on top of that, we -- the platform generates additional new fair value on an annual basis, which the market will have to find a value for. And I think ultimately, if fair value conversion remains at that 100% the OBL-only fair value profit as presented in this presentation as well would over time convert into cash conversion. And that would -- I'll leave it up to you to indicate what a recurring cash flow of that magnitude would be worth. But that would be the way…

Your next question comes from Mark Southwell-Keely from Select Equities.

I have a couple of questions. The first one is just around the $88 million of restricted cash. Can you just break down for us how much of that applies to OBL-only cash?

So we have effectively some restricted cash. Some of it relates to individual investments where we have received proceeds, but part of these proceeds belong to the claimant. And over time, during the investment, there's some collections there that the end -- the claimant under certain milestones.

But how much of the $88 million applies to OBL only?

So I don't have the exact number here, Mark, but there's a part of it, like I said, it's going to be paid to the claimant, part of it will be retained by Omni over the life of the investment. And as usual in our business, it all depends on the success or the milestones of the investment.

Mark, I'll have to take your specific split between what's OVL only and consolidate it on notice and come back to you on that. We don't have that readily available.

And secondly, just in terms of the OBL-only attributable fair value, which at 31 December was $1.2 billion. Would you mind just simplifying it for us post the Fund 9 transaction, what's the pro forma number for that?

The way to think about that is we get $310 million to $320 million in cash proceeds. If we achieve an 80% fair value conversion, you would gross up to the $310 million to $320 million by that 80%, and that's a deduction of the OBL only part of the book, which will then be replaced by $310 million to $320 million in OBL cash.

There's a slide, Mark, in the deck that we published in December when we announced the creation of Fund 9 that also helps see total fair value, OBL part of that and then the part that's getting sold. We can separately send you the page reference.

Your next question comes from Peter Meichelboeck from Select Equities.

Look, just one follow-up. Just on Fund 4, 5 Series 2, the capital raising. Can you just let us know -- can I just clarify exactly how much you've raised so far? How much of that is external and how much is that from OBL itself?

So the -- I referred to what we've said earlier on that. We've raised slightly over $500 million. That includes the OBL share of it. So we've had to first close with the existing investors. We've had 2 closes, 2 further closes thereafter. And I'm not sure exactly what I can add to that. It's between $500 million and $600 million at the moment.

And out of that $500 million to $600 million is the OBL at EUR 200 million. Is that right?

That's OBL at $200 million indeed.

There are no further questions at this time. I'll now hand back to Mr. Van Hulst for closing remarks.

Okay. Thank you all. Hopefully, we've answered all the questions. We've taken one question on note on which we will come back later. If you have any follow-up questions, please don't hesitate to reach out. And thank you for joining us today, and look forward to speaking again later.

That concludes our conference for today. Thank you for participating. You may now disconnect.