Pacific Current Group Limited (PAC) Earnings Call Transcript & Summary

Good day, everyone, and welcome to the Pacific Current Group Full Year 2020 Results Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Pacific Current Group's CEO, Paul Greenwood. Please go ahead.

Thank you, Christine, and thank you, everyone, for joining us for the FY '20 results call. FY '20 was, obviously, an unprecedented year and what started as a fairly normal year radically changed with the onset of the COVID-19 virus. We are pleased to announce that despite the enormous disruption we experienced or the world experienced, FY '20 ended with PAC's funds under management at an all-time high, the highest ever underlying net profit before tax and after tax in dollar terms and a 40% increase in our dividends. And so I'm going to briefly touch on some of the highlights in the presentation. And then, of course, we'll have -- open it up for questions after that. Page 3 of the presentation provides a snapshot for the summary of the year. And you can see from an underlying earnings perspective, we made strong progress in the year with underlying NPAT growth of 21%. Dividends were increased substantially. We had some of the fastest-growing FUM, if not, the fastest. I'm not sure on that, but certainly some of the fastest-growing FUM of any public asset manager. Though much of that growth is -- as is clear in this presentation was driven by the exceptional growth of GQG Partners. Page 4 of the presentation highlights the status of our franking credits and net assets per share. I would note that while ROC is our only Australian asset, at current dividend payout levels, we should still be able to pay a fully franked dividend for at least 3 more years at the pace -- at our current rate of distribution. Page 5 touches on some of the year's highlights. And frankly, all of these have been disclosed or discussed on other calls, so I won't elaborate here. But I'm happy to chat about any of these items at the end of the presentation. Page 7 is a really important slide, I think, because it details the difference between statutory results and underlying results. And you can see here that from a statutory perspective, we posted a loss during the year. While from an underlying earnings perspective, we showed meaningful growth. We think it's easier to understand our business by looking at it from an underlying earnings perspective. The statutory results are complicated for the reasons noted on this page, and they're actually really important reasons. So for example, we had $54 million of impairments, but this ignores the substantial increases in value of Carlisle because they're fair value through the income statement or GQG, which is fair value through the balance sheet. It also completely ignores the increase in value at a firm like ROC, which is held at book value and cannot be written up for accounting reasons. So that's why we draw your attention to the underlying results. Moving on to Page 8, where we summarize the underlying profit drivers. There really are 4 important observations here. The first is that contributions from our boutiques grew nicely during the year. The second is that we made great progress on controlling our expenses. And the third is that the corporate revenues declined notably, and the corporate revenues are sort of retainers and commissions we paid. Primarily, it's related to sales revenues that we receive for our sales efforts. And then the fourth item is that we see a notable pickup in performance fees that we've received as well. I'll ask Ashley Killick, our CFO, to touch on the next page, which is our balance sheet.

Thanks, Paul. So our business model is very much about trying to be flexible in the structuring of our investments and our deals. So therefore, that means we end up with a variety of different accounting treatments, so in particular, the investment in boutiques break down into basically 4 different types of groups. So the way we even look at our balance sheet and our profit/loss internally is we try and look at PAC as a stand-alone entity that we treat separately. So here in this balance sheet, we've tried to provide that insight. So the investments in the boutiques are broken down into subsidiaries, which is Aether, Seizert; associates and joint ventures, which is VPC and Pennybacker; fair value through P&L, which is effectively Carlisle and Proterra; and then fair value through other comprehensive income, which is GQG and then [ EAM ]. So just looking at the balance sheet over that 3-year period, you can see the cash declines significantly over that period. At the start of FY '18, we had just realized investments in Aperio investor schedule. And then over the last 2 years, we've redeployed that pipeline, Pennybacker, VPC, Proterra. So redeployment of that cash into the investment in [ Victory ]. In the current year, subsidiaries has declined, and that's primarily the impairments in Aether and Seizert. Associates, there's been some impairments at VPC, but predominantly, it's the acquisition of Pennybacker that has driven the increase in fee. The increase in value of Carlisle that Paul referred to before has seen the fair value through profit and loss rise. And the great results in GQG has seen a fair value through other comprehensive income rise from $66 million to $102 million. So all in all, our net assets have risen from $383 million last year to a touch over of $400 million this year, reflecting the strong growth in underlying performance as well as the improvement in fair value. So I will hand back to Paul now.

All right. Thank you, Ashley. Page 11 just touches on 2 investments that we made last year, both of which have previously been discussed at length, so I'm not going to elaborate on them here. Page 12 refers to our revenue diversification, and I actually need to call out that there was a data mistake here that, actually, which I apologize for and take responsibility for not catching. But on the last bar where it says 61% of our revenue is not related to managers that are -- have equity or that are related to -- that are equity market-related, that number actually should be 41%. So in other words, 59% of our revenue is -- comes from investment managers whose revenues are not directly linked to public equity markets on a day-to-day basis. We will -- we are issuing a revised presentation that just corrects those -- that bar there. But that -- between that and the other bar, which underscores that a lot of our revenues are in what we call closed end, which just means that there's sort of longer lockup type vehicles, you can see that, that [ does mean ] a lot of our revenues are secured for at least some finite period of time as opposed to revenues that could walk out the door tomorrow. And for those who've heard us talk about our objectives around diversification, these are both sort of consistent with what we've been attempting to do, which is to reduce the systematic risk in our portfolio by limiting market exposure and have more resiliency through more longer-term type revenues. I think the diversification is why the large sell-off in equity markets in March had a very muted impact on our financials. In fact, our stock price held up better during the correction than essentially all of the peers that we follow. And I think that reflects that sort of resiliency that comes both from the diversification but also some of the underlying deal structures. Page 13 highlights the growth in the portfolio. And obviously, GQG had unprecedented growth. I've never seen anything like it. But in general, we are quite pleased with the growth, particularly if someone told us we could -- could you produce that in the middle of a global pandemic, and we're happy to -- happy with these sort of results. But you can see the growth in the portfolio is fairly broad, though there's been a couple of weak spots, most notably Seizert and Blackcrane who lost a significant account later in the fiscal year. Page 14 really just touches on the impact of COVID on our business, and really, it's actually a fairly important slide because the nature of our portfolio and the underlying -- because of the nature of our portfolio and the underlying structures of our investments, we didn't see a lot of impact from COVID. We haven't thus far. Moreover, we're thrilled to say that our boutiques investment performance has held in there very well. In fact, at least with the long-only equity managers, I've never seen it as strong as it has been. So far and away, the biggest issue we face related to COVID is challenges around fundraising for boutiques. As most people are aware, most of our investment managers are institutionally focused firms. And so many of them have had to alter their fundraising plans. Simply, they can't go out and see prospects. And then as I know is certainly the case in Australia, perhaps even more so in the U.S., a lot of large allocators are focused on their existing portfolios right now and less receptive to any new investment. So that has certainly had impacted our firms, our portfolio companies. But I believe when all is said and done, I think we will have lost sort of a year of fundraising momentum that we have. Now that said, we're already 6 or 7 months into it. So I think that's the bad news for COVID for us, is that it's -- the primary bad news is the disruption in our ability to go out and sell products or our portfolio companies' ability to go raise capital. The good news is that, one, our managers have had very good performance all things considered and so we remain very sellable. Two, we're actually seeing early signs of renewed sales activity now, which is obviously encouraging, and we can see that by the number of sales calls that we're able to set up with prospects and the number of inward bound inquiries we're receiving. And then the third is, we actually have some visibility into some specific opportunities that our boutiques have in front of them. And as we look at those opportunities, they look like they're sort of ramping -- we expect those to sort of ramp as the year progresses. So we -- it's one of those rare times where we actually feel like we have more visibility, probably 6 to 18 months out than we do 0 to 6 months. But a lot of that's just because of the clouded environment right now with regard to the ability to get out and sell. So then moving on to Page 16. Really, sort of that page touches on our strategy going forward, and basically, it's sort of status quo in the sense that we're focused -- we're going to continue to focus on finding unique diversifying investment opportunities. And that's -- we're very excited about some of those opportunities we're looking at. Second is we want to make this year a real emphasis on the distribution side of things, and so what that -- practically, what that means is that Pacific Current will attempt to expand a number of portfolio companies [ inwards ] with using our distribution resources. And then secondly, it means we're going to work more actively with our firms or our boutiques to help them identify other partners or other avenues to access capital. And we've already had some success on that front more recently. And then the third point to note is that we're actually considering pursuing new revenue sources. And the most likely way that this would arise is a result of PAC actually raising the fund that sits alongside PAC. And the reason for this is that our investment engine are -- sort of the [ ensuring ] -- the resident's investment capability we have can deploy far more capital than PAC can access. We think we could easily deploy USD 100 million a year, and that's very difficult for PAC to access. Accordingly, we're exploring whether there's ways we can monetize that sort of excess investment capability through the management of outside capital. And the way that would work is that we would -- if we were able to raise that capital to fund the management fee for that fund would become incremental revenue to PAC. And we believe PAC could do this with a minimum of new resources if any. And then we would also expect PAC to maintain the right to invest alongside those investments should it choose to in order to sort of avoid potential conflicts. We have not pulled the trigger on this initiative yet, but we have been doing some exploratory work trying to understand the viability of the strategy. And the feedback thus far has been encouraging, and so we will make a call in the near future about whether to go forward with this initiative. Page 17, I'll just highlight real quickly. Despite COVID, we've actually seen a fairly sharp pick up in opportunities. While we've sourced 145 over the last 12 months, year-to-date, we've actually -- the opportunities are running at a pace well ahead of 200 a year. So we're actually encouraged -- or somewhat surprised but encouraged by the opportunities that we're seeing. And then lastly, on Page 18, we've really touched on some of the points in the outlook section, but as I noted earlier, COVID clouded our very near-term visibility in some new business opportunities, but we expect this cloud to dissipate, and we expect the majority of our businesses to secure additional capital in FY '21. And so we are -- with that sort of caveat around the very immediate term, we're very -- we feel very good about our portfolio and sort of the intermediate-term growth prospects we have. And then lastly, I'd sort of -- if you take this whole sort of presentation and sort of distill it down into what we think makes PAC unique. I think we've built a well-diversified portfolio that has been severely stress tested in FY '20. We are not a leveraged data play, and we are focused on growing segments of the asset management industry, not segments of it that are in secular decline. Investment performance is generally strong, which is a necessary condition to grow. It's not sufficient, but it's certainly necessary. We've continued to post solid growth in our underlying earnings, and we have no debt, a high dividend yield and a nice thing for franking credits. So with that, I will turn it over back to Christine and happy to address any questions that you may have.

[Operator Instructions] And it looks like our first question is coming from Stuart Dodd with Renaissance Asset Management.

First of all, well done on the results and I guess very well done on the dividend. A couple of questions. Just, I guess given your run-through about the potential for private fund on Slide 16, I think it was, I presume that means that you made no progress, no further progress on sourcing debt during the period given what was happening.

Stuart, are you talking about sourcing debt?

Yes.

Yes, yes. So I'll talk about debt and [ that ]. So we were in discussion with a couple of lenders to secure some debt in -- at the time of COVID, those banks disappeared in the blink of an eye. After the pandemic hit, we're actually -- one of them has now reached out and we're reengaged with that. But I think the sort of debt we're talking about with them is very modest levels, less than a -- we're trying to basically get a debt facility to bridge particular transactions. And so I don't really link that to the desire to have or potentially manage a pool of funds. I think a fund -- we don't know what size we secure, but we would probably, ultimately, target at least USD 250 million to USD 300 million fund, so it would be a sizable fund, far beyond what we could ever raise in debt or would want at least.

Okay. And without going into mind-numbing detail, are you able to just give me a high-level view on the impairments that were taken?

Sure. Most of those -- I believe most of those were in the -- each of the first half of the fiscal year, but the biggest, I believe, was Seizert Capital for all the reasons that have been discussed beforehand. I think that was followed by Victory Park. I think we took -- noted that at the end of the first half as well. And then, frankly, we took a bunch of smaller impairments this year, and frankly, all -- it reflects that when you value these companies and you push back fundraising a year, that sort of has this ripple effect through a lot of our boutiques. So there's a number of smaller impairments that are frankly just that. They are from deferred fundraising, and it's unfortunate. Some of those, based on the accounting standards, we can write back up, but some we can't. But that is another -- which I was remiss not to underscore, but that's another sort of impact of COVID is that the delayed fundraising has had impact valuations and thus resulted in some impairments.

Okay. And just remind me, the carrying value of Seizert, what's that at now?

It's less than $10 million. It's probably -- actually what is -- you've got any...

Yes. That's USD 6 million, USD 6 million.

[Operator Instructions] And we have no further questions in the queue.

All right. Well, Christine, if there's no -- if you don't see any other questions there, we will -- thank you, everyone, for their time. And we will -- I know I have some follow-ups with anyone who wants one-on-one sort of dialogue. So thank you for the time. Thank you for your support of PAC, and stay safe.

Thanks.

And that does conclude our call for today. Thank you for your participation. You may now disconnect.