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

Thank you for standing by, and welcome to the Pacific Current Group 2024 Full Year Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Michael Clarke, Executive Director and Acting CEO. Please go ahead.

Thank you very much. Welcome, everyone, to the Pacific Current Group's investor presentation call for the 2024 financial year. By way of introduction, my name is Michael Clarke, and I'm an Executive Director and Acting CEO of Pacific Group. I joined PAC in February of this year as a Non-Executive Director and transitioned to my current role on 1 July of this year. I'm joined on the call by Ashley Killick, the CFO of PAC. Ashley joined the PAC 5 years ago. In our update to shareholders last year, we noted that PAC is committed to taking actions that would result in greater recognition of the value of PAC's portfolio. We are gratified by the progress we've made on this front in FY '24, as well as the underlying financial results. Turning to Slide 3 in the presentation pack into operational highlights. This past year was a transformational year for the Pacific Current Group. After multiple parties sought to purchase PAC, a viable transaction ultimately emerged that PAC believed would be both feasible and beneficial to shareholders. The intent of this strategy was to unlock value by reducing corporate expenses while retaining access to key investment capabilities. It involves simultaneously selling 3 of PAC's assets to GQG, while externalizing investment management of PAC's portfolio by appointing an affiliate of GQG to provide investment management services back to us. The transaction results in an expected reduction in ongoing operating expenses of more than 40%, while simultaneously ensuring the continuity of portfolio management of our portfolio. The agreement with GQG will last a minimum of 2 years, but can be extended at our discretion. Now, turning to transactions throughout the year because there has been quite a lot of activity. To say it was an eventful year for the portfolio is an understatement. The activity involved mostly selling assets, although 1 new investment was made. Highlights of FY '24 include the following: in September, PAC September '23, PAC purchased a 24.9% stake in private credit manager, Avante Capital, for USD 28 million. Then in March of 2024, PAC sold its entire stake in GQG. This sale was the culmination of a very successful investment and yielded PAC total proceeds of AUD 257.3 million. Combined with the distributions received throughout the investment, PAC made more than 99x its initial investment. So, obviously, a very successful activity. In May of 2024, PAC announced the partial sale of its investment in Pennybacker Capital. The proceeds, which will be paid out over the next 2 years, are roughly 1.75x PAC's initial investment, yet, of course, PAC retains 45% of its original stake in Pennybacker. So, again, a very successful transaction. In May of 2024, PAC announced the sale of the 3 assets related to the GQG, effectively the outsourcing of investment management. Those assets, Proterra, Avante, and Cordillera, and we received consideration in total of USD 71.25 million and with the assumption of certain deferred payments and earnout obligations. So those were the major transactions through the financial year FY '24. I mean, clearly, as most on the call would know, we have announced 2 further activities this year, and I'd just like to summarize those as well. In early July 2024, PAC agreed to sell its entire stake in Carlisle Management Company to Abacus Life, a NASDAQ listed company. The transaction, which is contingent upon regulatory approval, will require -- will result in PAC holding a combination of stock and bonds in Abacus worth roughly 50% more than PAC's pre-transaction estimate of Carlisle's fair value. Owning bonds in Abacus will actually result in increased contributions to PAC in the current financial year and going forward compared to owning Carlisle equity only. So, again, I'm very happy with that successful transaction yet to be completed. In early August 2024, PAC announced the sale of 55% of its stake in Victory Park Capital to Janus Henderson Group. The initial proceeds from the sale will provide PAC with USD 33.9 million. This will be supplemented by an earnout that could provide PAC with an additional USD 28.7 million. PAC will also retain most of its entitlements to future performance fees. This transaction is expected to close later in 2024 after certain approvals have been received. With so many asset sales, it may appear there has been a strategic decision to sell assets. However, that is not the case. All of these sales have been driven by outside buyers expressing interest in PAC's assets. Fortunately, the prices received for these sales have been quite attractive, with all the transactions occurring in valuations at or above PAC's estimate of fair value. Turning quickly to financial highlights. PAC saw a solid growth in revenues and underlying profits in FY '24. This occurred despite the loss of earnings from selling all or part of our investments in GQG partners, Pennybacker Capital, Proterra, Cordillera and Avante. Statutory results were heavily skewed by the gains from the sale for PAC's stake in GQG. Underlying results were strong, with underlying EBITDA growing 18% and underlying NPAT growing 24%. Dividends of $0.38 per share were declared. With no remaining franking credits, all dividends will be unfranked. And finally on the slide, looking ahead, obviously, PAC's financial results will be notably different in FY '25. This stems from the fact that many assets have been sold and some of the dispositions, as I've discussed, are still in progress and also the timing of these transactions remain uncertain. Additionally, some of the proceeds PAC will be receiving will produce earnings for PAC through the assets being held. Lastly, PAC's cost structure will be notably lower going forward due to the various transactions that have been discussed. There is a potential too for future cost reduction initiatives. Helping shareholders understand how these different considerations impact financial results in FY '25, but also into the future is an important initiative for management this year. As a result of selling so many significant assets, it's fair to say that PAC is flush with cash. In April, we announced our intention to return capital to shareholders via an off-market stock buyback of up to $300 million. The buyback will be subject to PAC obtaining applicable Australian Tax Office rulings. And again, as with the settlement of the Carlisle and Victory Park transactions, timing is not certain, that is expected to be later this calendar year or early next calendar year. Quickly looking forward, PAC management look to carry forward the strong momentum that has been built in FY '24 into the current financial year. There are 5 key focus areas in FY '25. These include returning capital, as discussed; continuing to enhance capital flexibility; delivering new growth initiatives; optimizing organizational effectiveness; and reducing debt. I'll speak more about these various activities after Ashley has updated on the -- in more detail on the FY '24 financials. Ashley, I'd like to pass over to you.

Yes, thanks, Michael. As Michael said, I'll quickly run through some of the numbers. FY '24, as Michael said, saw some significant transactions occur, especially in the fourth quarter. These transactions impacted our statutory results. Net profit after tax attributable to members rose from a loss of $15.8 million in FY '23 to a gain of $110-ish million. Unfortunately, our accounting policies drive us to present our results in a sometimes confusing manner. As an example of the gain on disposal of the GQG shares was recorded as an increase in the fair value of that investment, while the gain on disposal of Pennybacker was disclosed as a gain on the sale of investment. So to try and simplify our results, it sounds normal practice to try and present an underlying profit and loss, and we've put that on Page 4 of the presentation. There is a reconciliation of the underlying profit to the statutory results also shown on Page 20 of the deck. But the underlying results for FY '24 were quite satisfying, with an underlying net profit after tax of $32 million delivered up 24% on the prior year. This was primarily driven by increased boutique management fees, which were up 23% on the previous year. Corporate costs increased in Australian dollars, but they were relatively flat in U.S. dollars. Most of our costs are actually driven -- operating costs are driven through the U.S. operations. With the small rise in shares on issues, the growth in net profit after tax translated into a slightly lower growth in EPS. But EPS was $0.624 per share compared to $0.508. The final dividend has been maintained at $0.38 a share. And as Michael said, albeit this year, it will be total [indiscernible] franked, while in the previous year it was franked to about 64%. As we've discussed in previous investor updates, our accounting policies caused some boutiques to be reported at current value, while others retain to be historical cost. But each reporting period we perform, for accounting purposes, an exercise to determine their current value, which we call fair value. While PAC's statutory net asset value per share increased by over 16% to $11.48, PAC's fair value estimate of net assets per share increased to $13.47, a premium of almost $2 per share of the statutory NAV. I might move on to a full breakdown of the calculated fair value versus the book value is shown on Slide 8 that I'll come back to. But if we can go to Slide 5, we run through the revenue composition. And as you can see, management fee revenues in FY '24 have continued that steady growth that we've had over the past few years. The current year's or FY 2024's result was driven primarily by strong fundraising in Pennybacker's flagship fund and its new infrastructure strategy. There was also a fee crystallization at Banner Oak, which monetized future management fees on a subset of its assets. In FY '24, we had Avante included and we had the annualization of Cordillera. And then, finally, there were some boutiques that turned around their results and went from losses to profits such as IFP. As the graph shows, performance fees were slightly down year-on-year. Both Victory Park and Roc increased their contribution this year. But Strategic Capital Investors, which ceased operation during the year, had generated large performance fees in the prior year. So that exclusion caused performance fees to decrease year-on-year. The mark-to-market securities at VPC, again, produced a loss, and negligible commission earnings resulted in lower corporate revenues. I might go to Slide 6 now, where I presented the alternate balance sheet. This is designed to provide a walk-through of PAC's corporate financial position, and we do this by deconsolidating Aether out of the statutory accounts and historically, Strategic Capital Investors. Just quickly running through it. The major points are the sale of the boutiques has led to a large increase in our cash balance. The deferred settlements associated with Pennybacker have also resulted in other current assets increasing. Other noncurrent assets includes a cash deposit that is used as security for the WHSP debt, which is shown in noncurrent liabilities. The gain on sale of the boutiques has obviously led to increased tax liabilities. And then we'll look at the boutiques, the impairment in Aether has resulted in subsidiaries decreasing from $44 million to $26 million. The impairment in Banner Oak and the sale of Pennybacker has resulted in lower values in the associates and joint venture line. The reduction in face value through profit and loss is due to the sale of GQG, Cordillera and Proterra, but it's been offset by the reclassification of the residual portion of Pennybacker, which is now included in fair value through P&L. EAM is the only investment we have fair value through other comprehensive income and its value has risen slightly. But all of those has seen our net assets -- book value net assets rise from $509 million to $599 million. So maybe if we can skip to Page 8. Here, we show a breakdown of the fair value compared to book value of our significant boutiques and their changed basis over the financial year. Now, I need to draw your attention to Page 30 of the deck, where we describe how we assess fair value. This aesthetic details, this is not the value that a specific investment would be realized at, but the result of a hypothetical exercise for accounting purposes. But Slide 8 shows an uplift in fair value of over 13% as we've risen from $11.92 per share to $13.47 per share. The uplift in fair value was obviously primarily driven by the proceeds from the boutique sales. The increase in book value has been 16% over the period, which shows that on average we have been able to realize values in excess of our historically recorded fair values. I might quickly go to Slide 10, and this slide really summarizes all of the transactions that have been completed in FY '24, as well as the 2 transactions that have been announced post balance sheet -- post balance date and are in the process of being completed. So I think we've covered all of those. If we go to Slide 11, as Michael alluded to, there has been some changes in leadership and this slide goes through and describes some of those. We saw the externalization of the investment management to an affiliate of GQG Partners under the investment management agreement, which will be in place for the next 2 years. We've had the formation of an investment committee, which consisted of both Board Directors and an external member, and we've had significant changes at the Board level with the resignation of 3 directors and the appointment of 2 new directors. A key focus of FY '25 obviously will be for us to bed down these changes and to ensure organizational decision-making and effectiveness is improved. If we now just go to Slide 12. This tries to recap FY '24's results, assuming that all of the boutiques that had been sold during the period had been undertaken on the 1st of July 2023, and so therefore, we have the full year loss of the earnings from those transactions, also the earnings associated between Carlisle and Victory Park transactions that were announced after year-end, and the go-forward cost base adjusted for the externalization of the investment management and potentially other cost synergies. Important to note that it does not represent profitable earnings guidance for FY '25, but just intended to provide shareholders with an example of how PAC would have performed if all of the transactions had been completed in 1st of July 2023. And on that note, I'll hand to Michael.

Thanks, Ashley. Just to now complete the last 3 or 4 slides, which really turn to the outlook looking forward. As we've discussed, or as I mentioned, I think at the start, we have an important initiative to try and as much as possible help shareholders to understand in more detail of our financial results and the way they're likely to move this year and into the future. Turning to Slide 14. As I mentioned in my summary at the start, these 5 key areas are the near term focus. So the focus in this financial year. Obviously, the first one, returning capital, we've mentioned a couple of times. And it is obvious, and as we mentioned, it's subject to an Australian Tax Office ruling. I think we are the first company to ask for a ruling on the basis of an equal amount, equal access, off-market buyback. So that's why the timing is hard to be clear on. We expected, as I said earlier, late a decision or sorry, a ruling from Tax Office later this year or early next. Important to stress that, while we've indicated the size of the buyback is up to $300 million, the final sizing is not being set, and obviously, also the price that the buyback will be conducted at has not been set yet and that is a matter for the Board going forward. We continue to enhance capital flexibility. I won't discuss that more because we talked about both the Carlisle and Victory Park transactions in some detail. Again, just to highlight, both of those will settle, again, in the next 3 to 6 months. So there's a little bit of uncertainty in that timing as well. Obviously, subject to regulatory approval. Important to note, there are no further transactions currently on the horizon. But that's not to say that if we are approached and see attractive opportunities that we would pursue them. To reemphasize there are no further transactions currently on the horizon. Delivering growth initiatives, the focus here, I'll talk a little bit more about that in the next 3 slides, but the focus is to work very closely with existing boutique partners, where we see potential to accelerate growth, but also to pursue new growth initiatives. And again, I'll speak more about those in the next couple of slides. Ashley and I both mentioned organizational effectiveness, clearly, significant change in the Board, investment decision-making, particularly, and aspects of our operations. All of these changes need to be bedded down. They are working well at the moment, but there's certainly more we can get out of all of those areas of operation. And as Ashley and I both mentioned, reducing debt, which relies on negotiating to potentially be able to pay back. We have -- as Ashley mentioned, we are holding cash against the outstanding debt anyway. Turning now to Slide 15. And this is sort of a new slide that's designed to basically give another way to look at the PAC portfolio. And it really has been built based on the significant activity, transactional activity in the portfolio over the past 12 months. I mean, first, the largest part of the portfolio now is cash, around AUD 318 million. And as we've spoken about, we will use that for or a large portion of that for the buyback. Second category, financial assets, currently, about 34% of the portfolio, which includes Pennybacker and Carlisle receivables, Abacus bonds, Janus Henderson shares when these transactions settle and the Victory Park earnout. All of these are likely to be crystallized to cash as and when possible over the medium term. But clearly, when the terms are attractive, there's no imperative in the short or medium term to change. It's when the opportunity arises. Management fee related investments continue, currently, 10% of the portfolio. Again, as discussed, include Aether, Banner Oak, EAM, Northern Lights, IFP, plus residual stakes in Pennybacker and Victory Park. So there's still a chunk of a fee-based revenue that will continue to be earned. And then finally, carry related investments, currently, 13% of the portfolio. Again, potentially significant contributions through time from Victory Park Holdco, Astarte and Roc being the main contributors. But again, these cash flows are lumpy. Carry related payments are uncertain, but we expect them to be significant into the medium term. And obviously, these are less likely assets to be sold. Turning to Slide 16. And this is really thinking about assets, the PAC go-forward strategy. And it's pretty much the obvious, but the strategy will look to allocate capital to its most accretive uses, including both reinvestment and distribution to shareholders. In addition to the large cash balance and the ongoing distribution from boutiques, PAC has several assets that you can call in harvest mode. These are financial assets or receivables where PAC is looking for the right opportunity, as I mentioned, to realize the assets to cash. And on the slide there lists the various assets. PAC also has mature boutiques. We may experience liquidity events in the short to medium term with consideration that potentially may be received in the form of more assets as we receive with Carlisle. Carlisle transaction, while it's a complete sale, we effectively exchange for Abacus assets -- Carlisle assets for Abacus assets, obviously, of premium. So there may be more transactions of that nature. But these assets may also be harvested or if the proceeds received in cash can be immediately reallocated. And again, key areas for go-forward capital allocation, include the growth opportunities I've discussed, share buybacks, capital return and dividends. Turning to the final slide. It's really a summary of the sources of capital. I've spoken about that in the last 3 slides. The sources, the application there and some more detail on existing boutiques, working capital, obviously, to fund growth, balance sheet investment potentially or the purchase of secondary sell-downs from boutique shareholders. PAC can stand and provide liquidity for those events. Potentially also our investment in GP stakes fund managed by GQG. We have negotiated the ability to do that, and that's a consideration that may be taken over time. And then also potentially investment in other listed GP stake managers. As we believe the model is powerful and, obviously, these investments are subject to quality, price and the potential growth opportunity. In conclusion of the presentation, PAC part of the update, I'd like to thank our employees and the PAC Board, both past and present, for their work to enhance shareholder value. Though great progress was made in this past year FY '24, there is still much to do, and we remain relentlessly focused on achieving the best possible outcome for our shareholders in FY '25 and beyond. We'd now like to open for any questions you may have.

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

A couple of questions, if I can. The pro forma P&L is helpful. Can I ask for a brief discussion around what the pro forma fair value NAVs might look like, if at all possible?

Ashley, do you want to have a go at that?

So I haven't done that one, Nic. What would it look like if I put it all back to 1st of July? I would have thought it would be pretty similar to the 30 June number.

Isn't there the uplift from -- I mean, the essence of the question is, what's the expected uplift on fair value for Carlisle and Victory Park transactions?

So we had at 30 June '24, effectively the fair value estimate for both Carlisle and Victory Park, assuming those transactions had occurred.

Hang on a minute. Aren't the comments in the slide contrary to that? I think in the Carlisle one, it says, we expect a fair value uplift once the transaction finishes. Sale of partial equity stake announced post 30 expect fair value uplift.

Yes. So there has been a slight discount applied to the Carlisle value to reflect the need to get regulatory approval.

Right. So we can think about those 2 transactions as being in the fair value pack, but discounted to account for risk.

Yes. Correct.

Is that right? Okay.

Correct.

All right. Maybe we can take that off-line.

Take that off-line.

Slightly further conversation. Just a couple of other questions. Just in terms of the debt, what's the timing on the debt? And do you expect to pay a penalty there?

You can have a go. Ashley, if you want to have a go.

Yes. I think it's got about 16 months to run before we can repay without penalty. Effectively, the quantum of the penalty is to make up for the interest that would be foregone.

Right. But since it's in the presentation pack, I'm assuming that the intention is to pay it back early and pay a penalty.

Look, that's a consideration for the Board. It's not something we've settled on at the moment. It's being actively discussed. But it's a trade off on, obviously, the cost versus time. It's something we look at regularly, but we haven't made a final decision on that yet. Clearly, the decision we are making is to pay down that debt. We will -- as soon as it's financially sensible and the funds are being held to do that in cash in the U.S., we will pay that back completely.

Yes, okay, that makes sense. And just lastly on the cost base. So you mentioned the $6 million saving which you'd previously announced, and obviously, there have been further divestments since then. And then in the pro forma numbers, the saving on the cost base was a bit higher than the $6 million. So, I guess, just in general, as divestments continue, how -- what sort of opportunities for that cost base to scale down? Is there a minimum that we should be thinking about or have in the back of our mind as the minimum cost that's required to run the listed business in its vaguely current form?

Ashley, if you want to start on that one?

So there would be further cost reductions that we would hope to achieve over and above what's shown in the pro forma P&L. Obviously, there's costs that we've incurred through '24 that have been removed from the operation, but haven't fully been factored into that calculation. So, you'd hope to get a little bit more out of that. The investment management fee, obviously, is a function of the fair value of the portfolio. So, as the portfolio decreases in size, then obviously that fee will decrease.

If you turn to Slide 12, you've got the investment management fee line there. It's $300,000 versus $2 million. If these transactions had occurred at the start of the financial year, that's the estimated cost for that. And then, obviously, the corporate overheads line, I mean, the addition of both of those gives a sense of the total cost reduction likely. And then, as Ashley mentioned, there's potential going forward for a little bit more.

[Operator Instructions] Your next question comes from Nick McGarrigle from Barrenjoey.

I just wanted to get a sense of where you see the business in 5 years. Do you look at it as where you don't hold any actual stakes directly and you're more invested in multiple different GP staking firms? Or do you think that the business ends up being wound up and the fair value being realized?

Interesting question. Look, the current activity, which I -- as I emphasized, has been driven by basically groups approaching us. All of these transactions have been conducted at our fair value or above, some materially above the fair value. So I think there's an important element in that, that the valuation approach that has been taken in the past. Of course, I've only been involved this year, but the valuation process in the past. I mean, it's not been a bad proof point for it, the activity over last year. So that's one positive. As I mentioned, we will look -- there will be potentially future disposals going forward. We may invest into some of the existing boutiques, possibly materially. So there will be regular portfolio activity and review of our current boutiques in terms of their situation and needs, without counting over 5 years, some will progress, some may have run into challenges. I mean, that's to be expected. There's no a sense of winding up the business, and there's no sense of being only at GP stakes investor business. That's not in the current mindset of the Board. We want to continue with our current activity, which is investing in specific opportunities. And obviously, the opportunities we know best are the existing boutiques where some of them are performing very, very well. And there's the opportunity there potentially to upgrade our investment. So I think it's not right to say that the business is on a wind up path, and it's not right to say that there's going to be purely a multiple GP stakes business. It's continuing to have direct investment, but it may diversify all of those as well over time. Five years is quite a long period of time. But the most important thing is that, we always look at -- clearly, at quality, valuation, normal metrics before undertaking any new investment or any divestments. I don't if that -- does that answer your question?

Yes, that's helpful. And then, can you just give us a bit of a rundown on what the earnout provisions are around the Victory Park stake? Are they more maintenance of existing revenues to crystallize that remaining cash payment? And, I guess, likewise, is the kind of -- is it predominantly cash? Or is it Janus Henderson scrip that's being received in that consideration?

Ashley, I might just quickly start and then hand over to you. The important point about the Victory Park transaction is that, a number of these payments are based on basically the performance or aspects of the underlying business that Janus is acquiring, specifically sales results. They feed through these payments. So, there is effectively a minimum payment schedule. But then there's upside in a number of them. There's also the potential. Those are performance payments. There's also the potential for capital return. There's a capital return payment schedule that goes out a number of years for, in 3 elements, 15%, 15%, 15% potential, subject to a put and call pricing structure. So the transaction we assessed as being very attractive. There are, though, uncertain elements in terms of, particularly the upside to the transaction, some of which could be material. Ashley, do you want to add to that?

Yes. And consideration will be predominantly cash, but there will be some scrip element, similar sort of proportion to the initial closing scrip.

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

Thank you, all. Thanks for all of you who dialed in today. We appreciate your support and interest in PAC. I hope you've got a sense of -- a deep sense of the performance of the company in FY '24, but also the way we think about the company going forward, which was an important part of this update and continuing updates into the future. And that's -- we understand that's particularly important given the degree of portfolio activity in the past year. So thank you again for your attendance, and we look forward to being in touch in the future.

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