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

Thank you for standing by, and welcome to the Pacific Current Group 2025 Half Year Results. [Operator Instructions] I would now like to hand the conference over to Mr. Michael Clarke. Please go ahead.

Thank you very much, and welcome, everyone, to the Pacific Current Group, or PAC, as we say, investor presentation call for the first half of the 2025 financial year. By way of introduction, I'm Michael Clarke, and I'm an Executive Director and Acting Chief Executive of PAC. I joined the Board of Pacific Current Group in February 2024 as a Non-Executive Director and transitioned to my current role in July of 2024. I'm joined on the call by Ashley Killick, the Chief Financial Officer of PAC. Ashley joined PAC over 5 years ago. In our full year update to shareholders in August last year, we've highlighted that PAC was committed to taking actions that would unlock shareholder value and reported the progress made to achieving this goal. We are gratified to report that the momentum developed in the previous financial year has continued into the first half of FY '25. Turning to Slide 3 in the pack. We are pleased to report the company's interim results for the 6 months ended 31 December 2024. Just working through the key highlights. Clearly, there's been a big focus on the implementation of an equal access off-market share buyback of up to $300 million at a price of $12 per share. The buyback was approved by an Extraordinary General Meeting of PAC shareholders in January, receiving the support of well over 90% of shareholders entitled to vote at that meeting. The buyback timetable is well progressed with the offer closing on 7 March and settlement expected subject to any necessary scale back by 18th of March. We will obviously update the market on the 7th of March as to the progress of the buyback. Pacific Current is also declaring an unfranked dividend of $0.15 per share with a record date of 5 March. The dividend is equal to the dividend declared in the first half of the previous financial year. Importantly, as the dividend record date is pre the close of the buyback, all shareholders, including those shareholders who have subscribed into the buyback are entitled to receive the dividend. During the period, Pacific Current declared a statutory net profit of just over AUD 100 million, driven by uplift in the fair value of assets in the portfolio and the gain on disposal of selected assets. This compares with the statutory net profit of AUD 11.7 million in the first half of the previous financial year. Pacific Current recorded a decline in underlying net profit to AUD 15.3 million from AUD 16.7 million in the first half of the previous financial year. This decline was driven by the disposal of assets, which resulted in a higher level of cash in the portfolio. Importantly, cost-saving initiatives implemented in the previous financial year positively supported the result with a 37% reduction in corporate operating costs during the period. Turning to transaction activity. It was another busy period following the work done in the previous financial year. In July of 2024, PAC announced the sale of 100% of its interest in Carlisle to Abacus Life. PAC received 1.97 million newly issued Abacus bonds with a coupon of 9.875% at an aggregate par value of USD 49.2 million. In addition, PAC received 1.36 million shares of Abacus common stock. As at completion of the sale on 3 December 2024, the aggregate net proceeds for PAC were estimated to be USD 60.3 million. In August 2024, PAC announced the sale of 55% of its equity stake in Victory Park Capital's Management Company and 22% of PAC's future carried interest entitlements in Victory Park's funds yet to be launched. Pacific Current received an upfront consideration of USD 33.9 million and that's before transaction costs, of which 75% was in cash and 25% in Janus Henderson stock. Pacific Current could also receive up to an additional USD 28.7 million earnout payment based on certain Victory Park gross revenue milestones to be measured in calendar years 2025 and 2026. Finally, the agreement also includes provisions for the potential sale of the remaining 45% of PAC's interest in Victory Park Management Company and an incremental portion of carried interest into the future. In December 2024, PAC announced the redemption of its interest in Banner Oak Capital Partners. PAC originally invested USD 35 million in Banner Oak in January 2022. The redemption of USD 19.1 million coupled with USD 15.9 million of historical distributions from Banner Oak resulted in a full return of PAC's invested capital on a pretax basis. And the final transaction for the 6 months. In December 2024, PAC disposed of all of its interest in NCI or Nereus. Post the calendar year-end in February, PAC agreed in principle to restructure its 100% equity ownership in Aether Investment into a revenue share agreement. This is designed to provide even stronger incentive and alignment with Aether management as they work to execute new growth initiatives. As a consequence of fair value uplifts recognized on partial and completed sales of assets during the period and related considerations, PAC's fair value estimate of NAV increased to AUD 14.32 per share at 31 December. This estimate exceeds the statutory NAV by $0.48 per share and compares with the estimated fair value NAV of $13.47 per share on the 30th of June 2024. I'd now like to hand over to Ashley to cover financials for the first half of the financial year.

Thank you, Michael. If we look at Slide 4 in the presentation pack, I'll just quickly go through the financial highlights. As Michael said, over the past 12 months, we have fully realized our investments in Avante, Banner Oak, Carlisle, Cordillera, GQG, Nereus and Proterra, while partially realizing our investments in Pennybacker and Victory Park Capital. These realizations have obviously impacted our revenue from boutiques in this period. As a result of these disposals, management fee revenue is down 61.6% over the prior comparative period in U.S. dollars. In first half '24, performance fees were AUD 4.5 million, while in the current period, it was AUD 0.5 million. The majority of these fees were generated by our investment in ROC Group. Over the past few periods, the listed investments held by Victory Park Capital have had negative mark-to-market losses. But in the current period, they've turned around and have recorded a net gain of USD 1 million or AUD 1.5 million. So, in May 2024, we've outsourced our investment management function to GQG. This has resulted in us significantly reducing our corporate cost structure, but incurring an investment management fee. The cash realized from the boutique realizations have led to higher interest income being generated. And therefore, our underlying net profit after tax and earnings per share have declined between the 2 periods, but the Board has decided to maintain our dividend at $0.15 per share. This dividend will, however, be unfranked. If we turn to Page 5 of the presentation pack, this is effectively a graphical depiction of the revenue trends that we've discussed. If we turn to Page 6, we can work through the ultimate balance sheet. The intention of the ultimate balance sheet is to deconsolidate the results of Aether. To present a walk-through of Pacific Current Group, we've done this analysis over the last couple of years. If we look at cash, the boutique realizations that I've mentioned before have significantly increased our cash balance. We hold AUD 300 million on short-term deposit in preparation for the previously announced share buyback. In addition to the remainder $80 million, we also have the deferred consideration arising from the partial disposal of Pennybacker, of which half will be settled over the next 6 months. We've previously borrowed USD 41 million, which is shown in the other noncurrent liabilities line. That's translated into about AUD 64 million. It is secured by a corresponding U.S. dollar bank deposit, which is including other noncurrent assets. During the period, we impaired our investment in Aether. As such, the investment in subsidiaries line has reduced significantly. The disposal of Banner Oak and Victory Park partially has resulted in a significant reduction in the associates and joint venture line. The remaining interest in Victory Park Capital and the Janus Henderson shares we received as consideration is now classified as a financial asset reported at fair value through profit or loss plus the significant increase in the value of that asset class. The fair value through other comprehensive income is the investment in BAM, which has recently changed its name, but its value has maintained at around AUD 10 million to AUD 12 million. If we turn to Page 8, we have an analysis of the net asset value broken down. Movement in net assets has seen the book value of our net asset value per share increase from AUD 11.48 to AUD 13.84. In preparing our statutory accounts, we undertake a value action exercise to consider whether any asset is impaired and to determine the value for fair assets -- financial assets recorded at fair value. This process is governed by the accounting standards and is not intended to provide a precise value of which an investment would be realized at. Further details of this process are detailed on Page 26 of the presentation, which I encourage everyone to read. The center columns of the table on Page 8 summarize the values resulting from this process. This suggests that fair value, net asset value per share has increased from AUD 13.47 to AUD 14.32. Part of the consideration for the disposal of Carlisle was bonds in Abacus Life. These bonds are similar in nature to those listed on NASDAQ, ticker code ABLLL. We received these bonds at their face value of USD 25 per unit. Historically, they trade at a slight premium to that value. However, at 31st of December, the closed price was USD 33.66. Subsequently, they have returned to their historical volume. The accounting standards require us to record this investment at the price they traded on 31st of December. Had they been valued at a price more in line with the historical volume, then a lower value would obviously have been reported. The blue column on Page 8 restates the value of these Abacus bonds to a 3-month volume weighted average price, excluding the abnormal period. This restates the fair value net asset value at 31 December to $13.96 per share. I'll now hand back to Michael.

Thanks, Ashley. If you can turn to Slide 12, which now we'll go through the near-term focus. So we turn to the outlook for the remainder of this financial year. Pacific Current Group management expects to maintain strong momentum that has been built in the first half by continuing to focus on executing a clear and disciplined plan. Focus of this plan will be to execute 5 key initiatives. The first we've spoken about at length, which is to return capital. And as discussed, the buyback, the off-market equal access buyback is progressing and will close Friday week. And obviously, we will update as we know more. The second key focus area is to deliver growth initiatives. We continue to look for opportunities to both increase investment in current boutique partners where potential exists to accelerate growth and to also look for other new growth investment opportunities, which is something that we've been working on over the last 6, 7 months or more. We also look closely at optimizing organizational effectiveness and we continue to bed down the significant changes to the organization structure and decision-making processes that were implemented in the previous financial year. These changes impact on all of PAC's operations. But to date, our relationship with GQG and the team there is strong and the other aspects of that are progressing well. We will continue to focus on lowering corporate costs. Our corporate cost savings, as we've discussed, of 37% were achieved in the first half of FY '25, obviously, compared to the previous financial year, we will continue to explore opportunities to further reduce costs. And finally, reducing debt, which we discussed at the full year result. We will continue to pursue negotiations to pay down all outstanding debt, but we'll only do that when it, obviously, economically makes sense. In conclusion, we would like to thank our employees and the PAC Board, both past and present, for their work to enhance shareholder value. Strong progress was made in FY '24, but there is still much to do and we remain relentlessly focused on achieving the best possible outcome for our shareholders in this financial year and beyond. We'd now like to answer any questions that you may have. Thank you.

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

I guess my main question is just around the buyback. I'm not sure if you've had any early indications on applications or commitments to participate in the buyback or if you've got a strong view that the whole AUD 300 million do you think will be substantial?

Nick, I think we can clearly respond, the buyback is progressing. We're not releasing any numbers today. It's -- I think today is a cardinal moment, the release of the half year results. And there's another, what is it, 8 business days left for the buyback period. We fully expected that many of the shareholders may wait until later next week. But again, we intend to update the market on Friday, the 7th, of what's happened. And we have no indication or more indication than we've had since the beginning of which way particularly the major shareholders will vote. All are supportive. We know that. We updated the market on that. But we don't expect to receive an indication and that's the way it should be. So, I guess we've all got to wait until the 7th to get an update on the buyback. And no comment on whether it's $300 million or less, we just don't know at this stage.

Okay. Maybe just on Aether, they've obviously struggled to raise additional funds and they're being impacted by the structure and management fee margins reducing over time on prior vehicles. What does their contribution look like under the revenue share versus the equity share that is -- was previously in place?

Sure. Look, I'll make some comments, and then I'm sure Ashley will make a comment. I mean, basically, the way we look at Aether is it's really got an existing business, a legacy business, if you like, and also an intention to launch an interval fund at the moment. It is very popular in the United States. It is effectively a product designed for the private wealth market, which provides access to private market assets for high-net-worth investors with some level of liquidity. They're in the process of raising that fund. The early indications are sound. We won't know until -- we'll know by the end of the financial year the progress of that fundraising. Basically, the design of the revenue sharing agreement is really to return the cash we've invested in the business over the next 3 years. There's a different revenue share arrangement for the existing legacy business and the interval fund, with the whole thing being designed up to provide the best net present value result we could achieve. But much depends on the progress of the interval fund and its launch, again, which we'll know more about that by the end of the financial year. Ashley, do you want to add anything to that?

I think you covered it quite well. If you go back a couple of years, it was a Tier 1 boutique. But the lack of new fundraisings seen it not being able to bring in new revenue sources. And so therefore, we've got the existing ARA funds now in effectively run-off market. It's at a point where the revenue contribution is not that strong. And going forward, unless they get some new funds up, it will be difficult to see it producing a positive economic return. So, moving to the revenue share has enabled us to shore up our position.

Yes. Great. Maybe a question around the debt. Is there -- what's the kind of date at which you can pay it back without penalty just to give us a book-end on when that debt could be paid back?

So, Ashley, do you want to...

October '25.

Sorry, October '25?

Yes. There will be some minor penalty at that point in time. But that's a markedly change at the optimal point.

Yes. Okay. And you're holding cash against that debt. Is that the requirement of the facility? So that cash is encumbered until when you get that finally paid up?

Yes. We've pretty much drawn USD 41 million, we've got a USD 41 million deposit.

Okay. And then you touched on reducing costs further. Obviously, the costs reduced significantly to USD 3.4 million in the half. I assume given the trimmed down portfolio of stakes, obviously, the management fee is pretty formulaic. But where do you think that annual run rate of cost can get to in U.S. dollar terms over time?

Look, in terms of forecasting, I would hope -- the cost -- the de-complication of the asset portfolio that we've undertaken, clearly, as you said, reduced costs not only across the investment management agreement, but also all other aspects of the operation of the business, lots of costs around effectively being a listed company. So, we expect to continue making those gains through time. I mean, hard to forecast a number. If we couldn't get that down to -- Ashley, you better correct me if I'm wrong here, but something like 30% goes -- 70% goes to around 50% over time, I think that will be -- that's sort of like a target for us. Ashley, do you agree with that? Or do you have a different view?

Debt, obviously is a large component of the cost structure at the moment. So, stripping that out will help significantly. And as you alluded to, as the value of the portfolio diminishes, then obviously, the investment management fee will reduce as well.

Yes. Okay. And then maybe just an update on the -- some of the residual or the remaining affiliates. Do you think that -- you've obviously restructured Aether. Are any of the others kind of, do you think, in a position where you could progress to some sort of event to either realize value or restructure? Or is that not the intention of the remaining portfolio?

We constantly are in touch with them, obviously. They're all quite separate business activities. There's no real linkage between them. So, they're all separate conversations. We're in good conversations with all of them. I guess, particularly ROC, Astarte. We are also looking to work with IMC, as it's now called, the old EAM as well. Northern Lights is traveling well. But again, we speak to them. All of them are in growth that appropriately may require or may need capital support to accelerate that growth. Quite hard with them all. Obviously, Pennybacker and Victory Park, we are not in that sort of phase with them. But in the other 6, we're constantly looking for opportunity and looking for opportunity to deploy capital in an attractive way.

Yes. I guess that's -- my final question potentially is around what is the intention with the remaining balance sheet even if you get $300 million out the door, you're still left with a very substantial balance sheet. Is investment in new affiliates on the cards? Is the capability to undertake that diligence existing internally? Or is there a consideration of participating in the private capital solutions fund that GQG has raised?

We'll look at all of those possibilities, to be frank. Very importantly, we need to see the results of the buyback and understand what our landscape looks like. And it's -- that's something we've obviously been working to very sort of closely for the last sort of 9, 12 months. But we'll get to that point. And then certainly, I mean, to us, the obvious place to look to deploy capital is existing boutiques that we're close to or either on board. We know them well. We can work with their businesses and they're in various stages, as I said. So, the opportunity is there for the deployment potentially of a reasonable amount of capital. But we will also look at -- and again, particularly driven by the way the buyback goes and how the balance sheet looks, look potentially new growth opportunities. And we mentioned at the Extraordinary General Meeting that we could maybe co-invest with groups like the GQG or others around investments, maybe not put money in a fund, but that's something we'll consider. But maybe as a first, we may have opportunities to co-invest selectively. We'll pursue all of those potential paths to grow.

The next question comes from Nic Burgess with Ord Minnett.

Just a follow-up question. Just so I'm clear, with the 2 growth options you've mentioned, either investing further sums in existing boutiques or investing in new boutiques, who's responsible for that? What is Paul Greenwood of GQG responsible for, if any, of those 2 outcomes? And which are you responsible within Pacific Current?

Sure. Paul and his team are -- clearly, there is -- for them to originate an investment for us, it will be a conflict with what they're trying to do with their funds. So they aren't out there looking for new investment opportunities for us, that's our responsibility. We may ask them to provide advice or analysis, but in terms of originating, that is -- that will be -- that's our responsibility through the investment committee at PAC. And then with the existing boutiques, we work actively with Paul and team under the IMA. I mean that's the point of the IMA to give us the closest possible relationship with those boutiques and advice through Paul and team. I mean the thing that's happened over the last 6 months this investment committee that we formed back in sort of June -- May, June is operating effectively. Strong contributors are on that committee. That's becoming a very, very important decision-making body in the company and likely will increase that importance going forward.

Okay. That's clear. Just a clarification around costs. So, excluding debt reduction and excluding the variable costs that you pay away to GQG, it sounds like there's still an expectation of further cost reductions in the costs that remain within the business on an underlying basis. I just wanted to be clear, are those further cost gains dependent on further reductions in the overall asset footprint or those reductions will happen regardless?

Those reductions are not reliant necessarily on the reduction in the asset footprint. They are a consequence of the -- as I mentioned earlier, the sort of the complex -- making the business far less complex. And that we will see ongoing savings as a result of that process around every aspect of tax operations. We've gone from whatever it was, 17 or so boutiques, I don't know, 15 months ago to now 8. So, there is a logical and natural, if you like, reduction in complexity and then potential cost savings.

The next question comes from Charlie Kingston with K Capital.

Just, I suppose, following up around the buyback. I know we don't know how much you will be able to execute. But if it doesn't, if you get, I don't know, half of the $300 million or thereabouts, can you just -- or much less than the full amount, can you talk to intentions returning that? I think you've been pretty explicit that you don't think there are any other means, no other sort of on-market buybacks. I think you said that they would be inefficient. But in the event that you don't get the full $300 million, can you just talk to what your intentions are, either further buybacks or returning that capital? Would you do an on-market buyback up to the same price of $12? Or what happens in that event, please?

It's a good question, Charlie. Obviously, we won't know until Friday week what that will look like. But there's nothing to stop us doing on-market buybacks. We really -- subject to the success of the off-market -- equal access off-market buyback, that's really something that you can do in a way once. Obviously, the on-market buyback, we can continue with them annually. And no doubt, depending on how the off-market buyback goes, that's certainly an option for us. But then whatever happens, then the balance sheet result will guide us in terms of strategy going forward and the potential for us to, as we said, invest in existing affiliates or look for new opportunities. A combination of all of those we'll look to pursue, but it will always be done with creating shareholder value in mind. We feel no pressure if the buyback is not subscribed as much as we would like. We feel no pressure to certainly spend that money quickly. We'll never do that. But we will look for opportunities to deploy capital to get the best return that we can for shareholders through all of the things that we've discussed.

Okay. Good to know that there is that possibility because clearly, there's going to be some accretion with fair value NAV at circa 14%. So, I would think an on-market buyback makes sense if the current price prevails. But then jumping to growth. I think you mentioned you've been looking for 6 to 7 months at potential deployment into new opportunities, but I don't think we've had anything thus far. But could you just give us a sense of ticket size that you are looking to do? Because, again, even if you do deploy or get the full $300 million bought back, you've still got an extra $80 million, notwithstanding your debt, but another, what, circa $200 million of assets in harvest mode, so cash-like. So regardless of the outcome, you're still going to have a huge amount of cash. So, I'm just hoping to get some color around ticket size, where you're looking or a potential deployment, please?

No, sure. Your numbers are pretty close to the funding. So, whatever the outcome as you say, we'll have an investment -- investing focus will be a clear priority going forward. Ticket sizes depend on the opportunity. It's something that the Board and this committee will need to review very closely. My own view, what it's worth, it would be very unlikely to go and -- it will be more inclined to make a number of investments than 1 or 2 large ones is my thinking about risk and diversity. I mean beyond that, it is totally driven by the opportunity and then managing it. Whether we co-invest, whether we directly take stakes in other entities is all subject to the opportunity and the potential of the opportunity, Charles.

And then just the business going forward, I think -- am I right in saying that the overhead is around $8 million or $9 million. But in terms of income, I know it's going to be lumpy with earnouts and potential performance-type fees, but you're probably going to have -- I don't know, is your largest revenue line going to be interest income, I suppose, or the Abacus bonds, I think they're generating 10%, but just trying to get a sense of what the earnings on the current portfolio look like for this business, please?

Ashley, do you want to have a shot at that one?

Yes, it will be interest income, and it will be a function of how much cash is left after the buyback, I guess.

Exclude the interest income, but just the existing portfolio.

Nothing else. Sorry, from the boutiques?

Yes.

There will be obviously, just from the management fee income will be now down to pretty much Pennybacker and Victory Park being the main drivers of management fees. ROC and VPC Holdco obviously are the ones that will drive out the performance fees and difficult to estimate the performance fees given how lumpy they are.

Okay. But any sort of quantum you can provide, really just the base management fees you expect? I presume they're going to more than cover your overhead. Is that fair?

I don't think we have any problems covering that cost base. We tend not to quantify our forecast.

Okay. And then just on the tax -- the deferred tax, can you just remind me that the GQG, I think you were conservative in that tax potential liability, but is there any upside to that? And I think it's around about $70 million deferred tax or a bit higher that you've accounted for. Is any of -- could any of that result in franking credits? Or is that all offshore U.S.-related?

It's all offshore. So, ROC is the only boutique that we have onshore. And as I said, ROC's revenue to us is very much driven by performance fees at the moment. So, they're a little bit lumpy. Therefore, our ability to generate franking credits is one of a kind.

And the GQG liability, was that -- just remind me, is that a conservative estimate? Is there potential for that to reduce? Or what have you accounted for there?

We assumed that will be accessible in the U.S. The election of Donald Trump has seen some speculation around a reduction in corporate tax rates in the U.S. So potentially, there's some opportunities for us to reduce our tax burden in the U.S., depending on how the negotiations take place.

Okay. And just lastly, when do you intend on crystallizing those Abacus bonds? And I think some of the other stock has escrowed for a while, but when can we expect those to be harvested, to use the term you used, or converted to cash?

Investment committee assess timing of investment. So, we're looking at the best time to realize those. At the moment, they've come back down to USD 26.5. So, just above par value and face value. And they're reasonably attractive bonds given coupon yield of the bond at the current setup.

Just remind me what's par on those bonds, please?

USD 25.

There are no further questions at this time. I would now like to hand the call back to Mr. Clarke for closing remarks.

Well, thank you very much. Well, I'd just like to thank everybody who joined the call. It's great to update. We appreciate your support for PAC and look forward to keeping close into the future. Cheers. Thanks.

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