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

Good day, and welcome to Pacific Current Group 2023 Half Year Results Conference Call. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Paul Greenwood, Managing Director, Chief Executive Officer and Chief Investment Officer, to begin the conference. Paul, over to you.

Thank you very much, and thank you all for joining us for the Pacific Current Group First Half ’23 Results Call. We appreciate your time and interest in our company and look forward to providing an overview of the first half of fiscal '23 and then some thoughts about the future. As we go through the presentation, I think it will become clear that the strength of our business continues to grow and our strategy of building a resilient, diversified private capital-centric model continues to be validated. Indeed, one only has to look at some of the large traditional equity-oriented businesses that have announced results around the world and to understand the risk of having so much of one's revenue attached to equity markets. So we think this period has been a wonderful period of validation for our overarching business strategy. Our portfolio performed well during the market -- during a market environment that continues to be challenging. While it was not without some frustrations, the revenue growth we have called out ahead of this half has indeed become evident, and we believe this growth will continue beyond this fiscal year. On Page 3 of the presentation, you'll note some highlights for the period, including continued growth in FUM. FUM was up 3.5% during the period. PAC’s portfolio has now experienced 24 consecutive quarters of positive net inflows. This growth was widespread with the non-GQG managers actually growing faster than GQG. We had long last secured a credit facility, albeit the timing of that was less than ideal given the trajectory of interest rates since then. The financial highlights for the period included a 52% increase in management fee revenues driven by our Banner Oak investment and recognition of 6 months of earnings instead of 4 months of earnings per GQG Partners. When combining management fees and performance fees, you actually get a 29% increase in boutique contributions, excluding mark-to-market adjustments, and those that you’ll remember are noncash adjustments or noncash item, I should say. Underlying EBITDA grew 24% if you strip out those unrealized mark-to-market adjustments. We are also announcing a fully franked dividend of $0.15 per share for the period. On Page 4, we show results in both USD and AUD. And I'd like to highlight a few items here. First, performance fees were actually quite strong for the period, though lower than last year. As last year's were enhanced by Victory Park's realized incentive fees that stemmed from its SPAC exposure. Corporate revenues, which are basically sales commissions declined notably because our sales team had less product to work with during the period. Interest expense was up as a result of PAC drawing $30 million on its credit line. This contributed to a decrease in underlying NPAT of 12% in USD. This interest drag was unintended and arose from the fact that we terminated a deal at the 11th hour after the capital to fund the deal had been drawn. While regrettable, ur experience has taught us the necessity of walking away if something isn't right even if you've incurred costs or drawn on the credit line. Such broken deal costs are an inevitable sort of occupational hazard of what we do. Our NAV -- the reported NAV declined modestly due to the slight fall in GQG stock price during the period. However, our internal estimates of fair value for the aggregate portfolio actually increased during the period. Page 5 provides a simple look at the components of revenue. This highlights the growing strength of the business. Notice that the pink bars are the mark-to-market adjustments, which sort of ebb and flow over time. And the yellow bars are commission revenues, which are also episodic. In fact, it's worth noting that the commission revenues are expected to be more volatile in the future due to the fact that we are now primarily raising private capital strategies. And when we do that, those revenues tend to be recognized all at once as compared to long-only manager where those revenues are recognized over time. This half -- this current half should see an uptick in commission revenues as compared to last time. On Page 7, it highlights the size and the growth of our managers. And this chart is important because at the end of the day, when you're investing in PAC, what you're really investing in is you're really betting that these boutiques will grow. And if you look at this chart, it's clear that the trend for our portfolio has been strong consistent growth in recent years. If the majority of our boutiques grow over time, we should be in good shape as a business. Pages 8 to 12 just highlight -- provides brief overviews of our portfolio companies. I won't elaborate on those here because I want to move on to Page 14 through 16, which provide an overview of PAC's business model, Page 14 does, and a new way to better understand the relationship between funds under management for our boutiques and the revenue we receive. We appreciate that PAC at times can be complex to analyze and the link between aggregate funds under management and revenue can be difficult to discern. And we think these pages hopefully go a decent way to clarify some of that. So Page 15 introduces a new concept at least for -- that PAC is articulating, other firms have done this before. But it’s intended to highlight the relationship between the funds under management of our boutiques and the revenues we receive. I'll go over it briefly, but if I don't do it justice or if it's confusing, I'm happy to chat with anyone offline about it to make it clear. So first, we start by multiplying each boutique’s funds under management by PAC’s equity percentage. This gives us what we are calling our ownership-adjusted FUM. You can think of this as PAC’s share of their FUM. For example, if a manager manages $4 billion, and we have a 25% ownership stake, then our ownership-adjusted FUM is $1 billion. Page 16 takes the revenues we receive from the boutiques and divides them by the ownership adjusted FUM. This provides a measure of the ownership adjusted yield. One way to think about this is assume PAC is an investment manager that manages the $13.3 billion of asset shown on Page 15. The ownership adjusted yield is akin to the management fee that PAC is charging on that $13.3 billion. The 2 tables on Page 16 break out this ownership-adjusted yield separately for our public-focused boutiques versus our private capital-focused ones. And one thing the graph highlights is the greater consistency of management fee yields with the private capital managers. In the appendix of this presentation, you will find an ownership adjusted FUM reconciliation that explains which managers are private, which are public and what their ownership adjusted FUM is. Page 19 provides some thoughts on the operational outlook for the business. And PAC continues -- expects continued flows into our boutiques at roughly the pace we have experienced over the last 2 years. We expect to make a significant investment in this half, though as we've recently demonstrated in the last half, these deals are never done until it's over, but we certainly -- it is our expectation that we will finalize a significant investment. We continue to believe that we could experience some liquidity in our portfolio this year, though once again, that is not yet certain either. Expenses have edged up with resumption of travel, although not dramatically. The biggest third change on the expense front is the interest expense that we are now incurring as a result of drawing on our credit line. We hope to deploy that capital soon so that -- to help mitigate that, that interest expense drag. On Page 20 of the presentation, we get into our financial outlook, and we continue to expect FY '23 to be a solid year of revenue growth. In fact, we expect record revenues in both FY '23 and FY '24. We expect this to be driven by growth in key boutiques like Pennybacker and Roc, and looking into FY '24, Victory Park. Performance fees should grow and stay higher for multiple years, really beginning in FY '24. This will primarily be driven by Victory Park particularly in the second half of FY '24. We also expect enhanced earnings from the new investment we anticipate making. The second half of this fiscal year, so the one we're in currently is expected to be modestly higher than the first half. Though ultimately, this will come down to timing on performance fees in 1 or 2 binary developments that are difficult to predict, but that generally fall into the fundraising count. We also expect a modest uptick in commission revenues in this half. Lastly, at year-end, we intend to release our fair value estimates for all of our portfolio companies. Right now, we don't disclose the fair value of managers like Victory Park, Roc and Pennybacker, where we report as -- them as a share of associates. But we will release those fair value estimates at when we announce our year-end results. Currently, our assessment of the aggregate fair value of our portfolio exceeds the book value by a significant margin, and we anticipate that will become apparent when we release that at year-end. So that is it for the overview of the half. We’d be happy to take any questions that you will have.

[Operator Instructions] Your first question comes from the line of Nicholas McGarrigle of Barrenjoey.

It's Nick McGarrigle. Just a question on the -- I guess predominantly Victory Park. Just how do we get comfort around the outlook for performance fees there? I assume management fees will be ticking up over the coming year just on the back of new commitments. But how do we get some comfort around the outlook for performance fees that -- is a lot of that accrued or does it require public markets to cooperate, like what are the sign, points to look at as external people?

Yes. Well, good question. What I'd say is most of the performance fees you'll be seeing are not related to any public vehicle they have and they're predominantly pure private credit. What I can tell you is the performance of their -- private credit strategies continues to be consistent with the strong results they've produced in the past. And because it's private credit as opposed to private equity, it's -- there's a -- it's much more predictable. Obviously, private equity is subject to the vagaries of valuations and exits, whereas private credit, you're just expecting -- you'll sort of have good idea of the return if they just don't have any credit issues. What I'd say is -- and we've said this in the last call, I think the performance fees alone will, from Victory Park, will -- should put us -- put them into the -- as big a contributor as GQG. And then sort of FY '24 and going forward, we expect those to actually grow significantly from that level. So we can't share much other than largely these are funds -- those performance fees are -- they're not fully baked, but they're largely baked because you're getting towards the end of some funds life. So it means that these forecasts, well, a lot of that has essentially been earned. So all they have to do is continue at the same level and we would achieve those same results.

Can you just refresh us on how those funds work? Because obviously, the capital is deployed into loans that -- they’re not sort of perpetual agreements that keep that loan book funded? Or does this one fund wrap up and then they typically tend to refund that same borrower in a new fund in and up close -- how does that typically work?

Yes, Nick, it's more the latter. So their funds will wrap up, and yet they can continue to fund those platforms through subsequent vehicles. So they don't have to be utilization of it.

Yes. And I mean, effectively, given how much of the return is accrued over time and how much equity they created, if there's a NIM, they're obviously earning a spread as they go. I would have thought that the security of those performance, they should be fairly high, like there's not a crystallization value on exit.

That's correct. It's just based on the cash return and exceeding the preferred return of the fund. And so we have -- internally, we received forecast -- it goes out multiple years of what we can expect from them if performance is consistent with expectations and performance has been consistently consistent with expectations.

And can you just look to -- I mean, a lot of the underlying borrowers potentially have found it a bit harder to fund the equity in their businesses, just given where bench capital and other funding sources, the type of businesses, our funding has gone. But can you talk to the health of their underlying clients, I guess, and also the health of the loan book?

Yes. Well, yes, to the extent I'm aware there that, well, I know what their performance is. It's been very strong. The -- I think the results are there. The health of their investments have been very strong. I really can't speak to the health of the underlying companies. But what I'd say is when times get more challenging, it allows Victory Park to engage at more attractive attachment points when they create these facilities. So it creates opportunities for them to either get a better return outcome or a more attractive risk profile on their investments. And they're seeing some of that for sure.

And is it fair to say that the contribution from Victory Park is going to be highly second-half skewed in light of those performance fees?

It is definitely going to be second half skewed. And of course, when you're talking about these crystallization events, things can always slip a month or 2 or things like modestly. But I would say -- yes, I would say at least 2/3 to the second half maybe.

Yes. Okay. And then just in terms of progress on commitments, you're obviously tracking well from the initial guidance that you gave, which I think was over an 18-month period. Can you just talk to the particular trends that you've seen amongst allocators at the moment? I presume that there's a pivot away from public equities and more towards alternatives, which has probably helped?

Well, I wish that were the case. It's not quite the case because one of the things that has happened with the decline in equities is you have, they call the denominator effect, where the ag public equities have gone down. So there's some plans are feeling the need to rebalance toward equities. That said, I often say that when you invest in PAC, really one of the primary risk you're taking is, call it, idiosyncratic fundraising risk for these companies. And we continue to -- the fundraising environment has become more difficult than last year, but sort of on an asset-by-asset level, we really feel good about the progress we expect to be made. And that's why we think that at the sort of portfolio level, we will continue to see aggregate flows in the ballpark of where we've seen them in the last 18 months. It will be -- these are big institutional flow, so it can be a little chunky, but we expect firms like Roc and Proterra and Pennybacker and Victory Park to all make -- continue to make significant progress over the next 18 months.

And then can you just talk to -- I mean, there's obviously a couple of managers there that are on the cusp of being Tier 1. Can you just talk through the process of the ones that are more on that [ precipice ].

Yes. There's really 2, and those are Roc and Pennybacker. And I think there's a -- if both of them sort of execute as we would expect, I think we probably at June 30, we would -- we'll likely reclassify both of those as Tier 1.

And just on the current progress, not assuming any additional flows and sort of rolling forward a couple of years they’re sort of at that point now?

I would -- well, I would say, I would expect them to be at that point by June 30 is the way Pennybacker -- yes, on a run rate basis. That’s right.

Yes, okay. Cool. And then in terms of the balance sheet, can you talk to the funding, the cost of funding and what that means in terms of the cost you prepared to pay to invest that new facility accretively?

Yes, great question, Nick, and unfortunately, our market timing on our debt facility was suboptimal. As a reminder, our debt facility, it's a SOFR plus 480. And I believe 30-day SOFR right now is about 4.45. So I give you a sense. I'd say most of the deals we're looking at are sort of at that would be, give or take a point or 2 are going to be close to that breakeven might be modestly accretive could -- it might not be if it has a real strong growth profile. But it's -- I think it is -- we'll probably deploy that capital -- by the way, I think we'll probably deploy it at a rate that covers the interest expense.

[indiscernible] the growth profile?

Yes, that's right. Something we would expect to have double-digit growth.

Right. So it might be neutral in the first instance, but then you're buying a manager that's growing and that you can generate a bit of return.

Exactly. Yes. We’re not going to pay 10x for no growth.

[Operator Instructions] And currently, there are no further questions on the phone. So I'd like to hand back to Paul.

Well, great. If -- we appreciate everyone's time. I appreciate there may be additional questions as you go through the material. And have -- please feel free to reach out to me or Ashley with those questions. And we -- in the week of, I think, March 13, we’ll be doing a roadshow in Sydney and Melbourne. And if you're not on the agenda and you'd like to be in, we have time, please reach out. I think that's all for us. Thanks again for your time and interest.

That does conclude our conference for today. Thank you for participating. You may now all disconnect.