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

Thank you for standing by, and welcome to the Pacific Current Group 2023 Full Year Results. [Operator Instructions] I would now like to hand the conference over to Mr. Paul Greenwood, CEO and CIO. Please go ahead.

Thank you all for joining us for the Pacific Current Group Full Year 2023 conference call. We appreciate your interest in the company and look forward to walking through last year's results and where we see the business heading this year. As I'm sure many of you are aware, there's a lot going on at PAC. So I will jump right into it. On Page 3 of our presentation, we cover some of the highlights for the year. Among the operational highlights, I note the following: a strong 16% growth in assets under management, up to AUD 204 billion. We had 9% growth in ownership adjusted FUM from USD 12.9 billion to USD 14.1 billion. We made a $30 million investment in Cordillera Investment Partners. And we sold part of our investment in Proterra Investment Partners at a very attractive valuation, roughly 41, 42x earnings. And we made solid progress towards securing outside capital to manage. From a financial perspective, revenues ex mark-to-market adjustments were up modestly for the year in U.S. dollar terms. We saw a 13% growth in management fee revenues but a decline in performance fee revenues. Corporate revenues, which primarily consists of commission revenues [ or sales ], our sales force makes on behalf of our portfolio companies, declined from USD 2.9 million to USD 0.9 million. The reason for this decline relates to, one, our portfolio companies having fewer products in market, given the sort of where they are -- those products are in their fundraising cycles. And two, the reality that our sales team devoted considerable time raising external capital for PAT to manage directly. EBITDA was essentially flat on the year, but underlying NPAT was down 11%, primarily due to higher interest expense. The PAC Board declared a final dividend of $0.23 a share resulting in a full year dividend of $0.38 a share. Lastly, consistent with what we stated at our previous AGM. For the first time, we are releasing PAC's NAV adjusted for our internal fair value estimates. Our estimates add another $2.04 a share to our statutory NAV of $9.88 this year. I will elaborate more on this in a minute. As we look into FY '24, we expect some big developments. Obviously, there is the matter of a potential acquisition of PAC, which we will touch upon shortly. From an operational perspective, we believe this will be a watershed year in terms of revenue and profit growth fueled in part by solid inflows we expect throughout the year. And we fully expect to announce an exciting new investment in the very near term. Going to Page 4 of the presentation, we provide a summary of the underlying financial results for the year. As we noted, management fee growth was driven by GQG, Proterra and the annualization of the Banner Oak investment as well as the new investment in Cordillera. Performance fees declined primarily because in FY '22 Victory Park had very large incentive fees from the listed vehicle it manages. The carried interest payments received in FY '23, which are the performance fees from the nonlisted vehicles that at managed actually increased meaningfully last year and should increase even more this year. On Page 5, we displayed the component pieces of PAC's revenues over time. While revenues grew last year, there were several revenue developments we expected, but that did not arrive in time to be booked in FY '23. We believe that ultimately, this is just a timing matter for reasons I will touch upon. One specific example relates to raising private capital funds. If a manager is raising a fund and that fund has already secured funds under management, subsequent commitments to the fund need to pay what I referred to as catch-up fees, which are the management fees that would have been paid had they been in the fund from the start. This impacted us because some of our boutiques have significant pending commitments where the documentation is not yet complete. And as a result, the timing of those commitments slid from FY '23 into FY '24, most likely this half. This means that we will still receive the same amount of money ultimately but the timing is somewhat different. Another example of deferred revenue related to those situations where management fees are earned based on the deployment of capital. The macro environment generally slowed the pace of deployment, which had the effect of delaying when boutiques start earning management fees on commitments they have already received. The good news is that over the last couple of months, we are seeing an acceleration in the rate of deployment. Collectively, we feel that at least USD 5 million to USD 7 million or essentially AUD 7 million to AUD 10 million -- such deferred -- this sort of revenue slipped from FY '23 into this fiscal year. Most, if not all of this, we should capture in the next 6 to 12 months. I should say, in the next -- it should be front-end loaded. So it will be first half bias. Moving on to Page 7. At the AGM last year, we talked about providing greater transparency into what we believe is the value of our underlying portfolio. As a reminder, the reason we wanted to do this relates to IFRS accounting standards. These standards results in PAC's being unable to reflect the appreciation of some of our portfolio companies in our statutory accounts. So for the first time, we're releasing our estimates of fair value for the broader group. You can see that when we adjust NAV for our fair value estimates, we add another $2.04 per share, bringing the estimate of the fair value adjusted NAV to $11.92 a share. This compares to the statutory NAV of $9.88 a share. It is also worth noting that the $9.88 reflects GQG as at 30 June. And if you brought the price forward to yesterday, that would add another $0.12 to $0.15 per share. In the table on the right on this page, you can see that essentially all of this value, this extra uplift resides at Victory Park, Pennybacker and Roc. . Lastly, I would note that we have a history of selling successful assets at prices well in excess of our own estimates of fair value. While no such transactions are inevitable, we believe that there remains an elevated chance of some liquidity in our portfolio. Moving to Page 9. As I suspect everyone on the call is aware, PAC has become the subject of acquisition discussions. In late July, Regal Partners made an unsolicited bid to acquire PAC via proposal that contemplated 75% cash and 25% GQG stock. A couple of days later, GQG said it would also make an offer to acquire PAC. In response, we hired UBS to advise PAC and help us ensure that we are considering an appropriately broad group of potential partners. While 2 companies have made their intentions known publicly. It is fair to say that this process is not limited to these 2 parties, and more than 2 firms are already engaged in diligence. At this time, we expect to receive indicative offers from interested parties during the first half of September. Of course, given the nature and complexity of such processes, it is difficult to say how long it will take to narrow this list down to 1 or 2 [ suites ]. And given the existence of potential conflicts of interest, the PAC has established a committee of non-conflicted Board members to make recommendations on which offers [ at least ] shareholders should consider if any. Moving on to Page 11. We show some summary of funds under management in the 3-year cumulative growth of our portfolio companies. And on Pages 12 and 13, we update the ownership adjusted FUM and ownership adjusted yield exhibits that we debuted in our midyear results. Next year, it's worth saying that next year, we expect not only to -- for the ownership adjusted FUM to grow, but also the ownership adjusted yield, both the management company yield and the performance fee yield. Moving on to Page 17. We offer some thoughts on the operational outlook for the company. The first is that we expect clarity on the strategic direction of the company in the near term. Second, our portfolio is poised for a strong year of growth in FUM revenues and profits. Third, we believe we will have an exciting announcement about a new investment in the near future. And fourth, we believe there is a nontrivial chance of additional liquidity in the portfolio at very attractive prices. And in terms of the financial outlook for the business on Page 18, we believe FY '24 should be a great year for PAC. The reason we have such confidence relates to the following: we expect notable increases in contributions from Victory Park, Pennybacker, Banner Oak, Roc, GQG and IFP. We will also benefit from the annualization of the Cordillera investment. We expect to make at least one new investment, as I have noted, and there's a decent chance we will secure external funds to manage though it is -- I really need to caveat that, that I think we will have to wait for the dust to settle around any potential transition before that capital can be secured. So with that, I will conclude my remarks, and Ashley and I are available for any questions that you may have.

Thank you. [Operator Instructions] Your first question comes from Nic Burgess from Ord Minnett.

Just a couple of quick questions from me. So just on the -- your amended version of valuation net asset value. I take your point on the difference in GQG. Are you able to give us just an indication as to the difference elsewhere in your new methodology?

In the method -- there's no difference in the methodology in terms of valuation. So we have -- we did not do -- we did not do any new valuation where we have always valued all our companies. So the ones we're revealing the fair value for are valued identically to how the rest of the portfolio is. And we -- it's just that we just have historically -- or you're not allowed to show that in the statutory NAV. So all we're doing is showing what sort of behind the scenes what -- how we value those businesses, and because we're -- okay, go ahead.

So what's the main different aside from GQG, which is straightforward. What's the main difference in your approach versus statutory?

Well, there's no difference in methodology. The difference in value is on that page, we have a table on the right, which literally calls it out by portfolio. On Page 7, you'll see where it called Victory Park, Pennybacker and Roc, you'll see the book value that that's -- that book value is what's reflected in our NAV. And on the left column is the fair value, which is our internal fair value estimates, and then you see the fair value uplift on the right side.

Yes. I guess the question I'm asking, though, is why is there a difference? What is driving that difference?

It's because the book value, we're not allowed to show for these equity-accounted boutiques, we're not allowed to show the appreciation in the assets. So they're essentially recorded as cost. And they can be written -- it can be written down, but they can't be written up, and that's the challenge.

Yes. Okay. That makes sense. Just on the flow outlook, are there boutiques that you can mention that are going to do the majority of the heavy lifting in terms of generating that flow of between $2 billion and $5 billion?

Yes. I'll highlight a couple at least, we always -- hope is broad, but there we're probably very -- most bullish around Pennybacker and Victory Park. Pennybacker is in market right now, having good success raising a couple of funds that I think that success will continue and then Victory Park will be coming back to market. They've announced this publicly to raise ABOC 2, which is the ABOC 1 ultimately, I believe, was about $2.4 billion. they'll be back in market for a fund in that $2 billion to $3 billion range. And they will be back in market imminently. And then the other -- but those will be the -- those will do the lion's share of it and hopefully broadly beyond that.

Yes. Okay. And take your point about potential liquidity event. Excluding any liquidity event, what is the capital at hand that you have to deploy readily available to deploy for acquisitions at the moment?

It's pretty modest right now just where we are in the sort of the cash cycle and paying our dividend and having just invested in Cordillera. So we will -- I'd say it's -- we probably have a little over $10 million in cash or something like that.

Yes. So the liquidity has been...

Undrawn debt facility.

Yes, yes. We have a lot of undrawn debt.

What would that be roughly?

USD 20 million.

USD 20 million.

Your next question comes from Nicholas McGarrigle from Barrenjoey.

Just a question. You mentioned a significant investment in a private capital manager is a significant fit within the envelope of the USD 20 million undrawn facility? Or is it potentially something you'd need to obtain further funds for?

I would say we -- it would be a typical sort of growth equity investment from us, which falls into probably the $20 million to $30 million range. What I would note is if this deal comes off as expected, not all that consideration would be paid upfront...

Understood. And -- yes. And then just in terms of the style of the manager sort of akin in terms of the management fee kind of deal and private capital class that you're not in? Or is it an extension of other things that you already operate, that you already have stakes in now?

This would be private capital-oriented 10-year funds, so very long, very long funds with very attractive fees.

And I think you made some outlook comments around making progress on gathering some external capital to manage. Can you give us an update on that process?

Yes. And that, I believe, absent -- absent the acquisition discussion that's now going on. If it wasn't for that, I'm pretty confident we'd be able to close on secure some -- some capital this calendar year. So those -- we're starting to reach a stage where those conversations are well advanced. I think for obvious reasons, some of these prospects are -- want to wait to see what plays out.

Yes. That's fair enough. And just in terms of the net overheads, obviously, commission revenue down just on flows. But I mean, there has been significant flow in the last couple of years. Is it just that your -- the internal PAC team hasn't necessarily had a hand in that $10 billion over the last 2 years?

Yes. I mean, yes, is the answer because PAC it's worth noting that we don't perform capital raising services for all of our investment managers. We typically are working with just 2 to 3 at a time. And so one of the reasons, for example, FY '22 was a little elevated is because we had good success with Victory Park in FY '22. But after the successful closing of that fund, they haven't been in market and now they're coming back to market. But -- so that's when I alluded or referenced fundraising cycle, that's sort of what we're referring to it sometimes would be sort of funds that are either in market or out of market. And so that's why the nature of this sort of fundraising will be and the revenues associated will be quite episodic. And by focusing some of their energies on raising capital for us, it's actually a much -- we believe, a much greater return on our investment because instead of a onetime -- if they're successful, that instead of us securing a onetime fee, we're actually benefiting fully from the management fee revenues if we were to secure funds under management.

Okay. Cool. And maybe just a comment on [ ABOC ]. I think that obviously, the return on that investment have not necessarily hit the targets, but values going up, the funds increasing and obviously, I get the sense there your expectations around their commitments are improving. Can you just give us an update on the sort of profit profile of that business given what they have been hand?

Yes, yes. I would say -- and we've sort of mentioned this, but when we invested in the business we excluded participation in the performance fees of some of the funds and vehicles that they had that were already relatively mature. And we -- but we did buy into the ability to participate in funds that were sort of earlier in their life cycle. So now especially beginning in FY '24, we are -- we will enter a multiyear period where the performance fees produced by Victory Park step up significantly in terms of their yield to PAC. And so it's one of the reasons why where we can be as confident as we are around our contributions is because these are funds that are already 5 or 6 years old, performing great, and we're coming close to the point where we start to really reap the benefits of that. And in addition to that, we are, I'd say, very bullish on their fundraising prospects for a few things, but certainly ABOC 2. And I don't think we'll have to wait to covering to get some proof points along those lines. So this is a business that is, I think the -- I'd say the rate of appreciation of the asset is sort of accelerating. And I think if they have a very successful fundraise, it will really sort of take the value of this business to a whole another level.

I guess the other 2 where there's a gap between yours estimates of ours fair value and the statutory fair value of Pennybacker around Roc, maybe if you wanted to make some comments on the traction that those 2 have had versus what you're carrying those at on balance sheet?

Sure. And I'd say -- keep in mind that essentially what you're looking at more or less on the book value for those is something that's basically cost. And so Pennybacker is in market raising Fund VI right now. Fund V was $1 billion, Fund VI is already at $1 billion, and we'll, I think, continue to grow from here. And we -- they also have some additional funds that they've had some recent success with. So I think we will see a -- this year, the distributions we receive from Pennybacker should be multiples of what we received last year based on fundraising that we have, I'd say, a fairly high degree of visibility into. So it's just that these businesses have so much operating leverage that once you get to a certain point and you can step up the size of your individual funds, the acceleration in terms of what we can receive is, is pretty significant. And Roc continues to execute very well. I think one of the things that might be a little misleading is if people track our FUM announcements, they will see that Roc lost some FUM over the last couple of quarters. It's worth noting that, that FUM was very low fee FUM and their business, as I've mentioned in the past, is really becoming a direct private equity investment. So this year was another strong year for them or I should say, FY '23 was, FY '24, we expect the same, and we expect the same in FY '25. So there's a lot of sort of momentum in the business. So I don't think -- I think the fair value on all of those companies, certainly in aggregate, but I would arguing that the individual company level is, is not aggressive.

[Operator Instructions] Your next question comes from Nic Burgess from Ord Minnett.

Yes. I was just going to follow up on the boutiques. Just one question on Carlisle. Paul, I know that, that was very structured, I think, or [indiscernible] a little bit maybe a couple of years ago and it's sort of grinding a little bit lower in terms of [ FUM ] not materially, how is the life settlement market in Carlisle's place in that at the moment?

Well, I mean, in the life settlement market was notably disrupted by COVID ironically. Because it sort of put some of the liquidity challenges rear their head. What I'd say about Carlisle is, Carlisle did a good job of restructuring their open-end fund and converted some of the open-end fund investors to closed-end fund investors. But until the restructuring of their open-end fund was complete. They have been unable to do engage in the level of trading that they, that they desire, they prefer, and that is a source of value add. And so it is only in the last few months that they've been able to essentially resume that. And in fact, last month of performance that I've seen is you're starting to see the performance of the open-end fund improve again. Closed-end funds have continued to perform very well. So I think [ cautious ] optimistic we've seen the bottom in terms of the difficult performance there. But the revenue stream still, still a solid revenue stream and we're optimistic they will be able to raise some additional closed-end fund money this year.

Yes. So that was my second question. So you think fundraising can bounce back reasonably quickly at some stage this year or still a bit further away?

So I think they'll secure. They will secure more funds under management this year. What's -- with some of our companies, we know literally who the clients will be. And I don't have that level of visibility here. I know they just closed on a few -- some money actually from Australia recently. But -- and we know that they have some large parties that are interested. But -- timing for them is a little lesser on the current fundraise.

There are no further questions at this time. I will now hand back to Mr. Greenwood for closing remarks.

Well, thank you, and thanks, everyone, for your time and questions and interest. We -- there's obviously going to be a lot happening in the next month or so here. So do you have any questions, please feel free to reach out. Otherwise, stay tuned, and you should be hearing, hearing from us probably sometime in the month of September, some sort of update. So thanks, and that's it. Have a good day.

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