Pinnacle Investment Management Group Limited (PNI) Earnings Call Transcript & Summary

Thank you for standing by. Welcome to P&I's Full Year FY 2024 Financial Results Teleconference. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand over to Managing Director, Mr. Ian Macoun.

Thanks, Rachel, and welcome, and thanks to everyone who's joined us on the call this morning. As you've heard, this call is to discuss our results for the 2024 financial year. We posted with the ASX last night our formal results announcement, our annual report, including the audited financial statements for the year, our corporate governance statement and importantly, our corporate sustainability report and also, importantly, our investor presentation. We'll be speaking to various parts of the presentation this morning. The colleagues with me on the call are Alan Watson, our Chair; Andrew Chambers, Executive Director with particular responsibility for institutional distribution and international, Kyle Mcintyre, who leads our wholesale and retail distribution function and Dan Longan, our CFO. I'll call out the main themes and highlights of our results and also briefly provide some further context and elaborate a few aspects that we feel are particularly important for analysts and shareholders to understand. We'll leave plenty of time for questions, which are welcome to direct to any of the Pinnacle representatives on the call. As you can see on the agenda, Slide 3, there are sections where the relevant executive will be Andrew or Kyle or Dan rather than me. Slide 2 is a disclaimer that is important, and we would ask you to read this at your convenience. Slide 3 is an agenda. Slide 5 is a summary of our themes for the 2024 financial year. For quite some time now, we've been emphasizing our strategy of further increasing the diversity of our business. Our momentum in both private markets, asset classes and internationally has underpinned a year in which we achieved robust growth in funds under management, in revenue and in earnings. We've delivered record opening funds under management of $110.1 billion as we moved into the new 2025 financial year. That is up 20% on a year earlier and up 10% over the 6 months from 31st December. We delivered net profit after tax for the 2024 financial year of $90.4 million, up 18% on last year. Earnings per share of $0.455, up 17% and dividends of $0.42 per share, also up 17% on FY '23. To elaborate these themes, looking at Slides 5, 6 and 7. We've achieved continuing growth in private markets, assets under management and in other alternative strategies. The momentum has continued to build in international distribution. We have achieved robust overall retail net inflows despite weakness in the appetite of retail investors for public equities over the first 3 quarters. Our net horizon 2 spend reduced, as expected, as revenues grew, demonstrating operating leverage across the platform in the second half of the financial year. Many affiliates have continued to deliver strong investment performance. resulting in performance fee contribution from a diverse set of strategies. To elaborate, these themes looking at Slide 6 and 7, continuing growth in private markets assets under management and in alternative strategies, fundraising conditions remain challenging for public equities managers during the year despite rises in line indices. Net inflows into private markets assets represented 57% of our total net inflows for the year. Private markets funds under management represented $22.8 billion or 21% of total FUM at 30th of June 2024 and up from $1.5 billion or 6% of total fund at 30th of June 2016 and up from $16.5 billion or 18% at 30th of June 2023. Affiliate revenues from public equity strategies were 54% in FY '24 on 70% of total FUM compared with 81% on 89% of total FUM 5 years ago. International distribution momentum has continued to build. International investors now account for more than $18 billion of FUM from more than 40 countries outside of Australia. The challenges in the domestic institutional markets are well known. We will discuss these later. We've been deliberately investing in our international distribution capability and in internationally relevant product development over the past 10 years. This is now delivering meaningful flow success, $7 billion or 70% of our total net inflows in FY '24 was from international investors. We have a very strong platform for future growth. We have achieved robust overall retail net inflows despite weakness in the appetite of retail investors for public equities over the first 3 quarters. Our diverse product set has driven a solid overall outcome, $23 billion of retail net inflows into private markets asset classes, plus $1.3 billion of retail net flows into listed credit, and we delivered strong distribution performance in REITs and in equity income in retail. Our product innovation has broadened the access to private markets asset classes for wholesale and retail investors. Noting that conditions for raising assets into traditional equity strategies were challenging for much of the financial year, but there were early signs of improvement in the fourth quarter and in July. Our net horizon 2 spend has reduced as expected as revenues grew demonstrating operating leverage across the platform in the second half of FY '24. Clinical affiliates have continued to invest into initiatives driving strategic growth over the medium term. Spending on current Horizon 2 initiatives peaked in the second half of FY '23 and the first half of FY '24. Revenues from these initiatives have continued to build during the second half of FY '24. The net cost to Pinnacle after tax in the second half of FY '24 was $4.5 million, down from $7 million in the first half, which represented a significant reduction in both the absolute cost and the relative cost to Pinnacle. We actively seek and prosecute additional initiatives of compelling quality. These initiatives create additional capacity, providing medium-term growth opportunities and have historically delivered high returns on investment. Co-investment from affiliates reinforces the focus from our affiliate partners on growing their businesses and delivering superior growth through the cycles. Many affiliates have continued to deliver strong investment performance, resulting in performance fee contribution from a diverse set of strategies. 85% of affiliates strategies with a track record of 5 years of longer have outperformed over the 5-year period to the end of June. More than 25 strategies now have the ability to deliver performance fees, and these represent 35% of affiliates total FUM. In the 2024 financial year, 13 affiliates contributed performance fees. The strategy set is diverse and largely uncorrelated with the ability to deliver meaningful fees in each financial year across market cycles. Turning to Slide 8, the financial highlights. As I've mentioned, we've reported NPAT of $90.4 million for the year, 18% up on the FY '23 NPAT of $76.5 million. Our diluted EPS was $0.55 per share, up 17% on FY '23 EPS of $0.39 per share, and we declared a final dividend of $0.264 per share, taking total dividends for the year to $0.42 per share, also up 17% on FY '23. To the top left-hand side of the table, our aggregate affiliate sum at 100% at 30th of June 2024 was $110.1 billion. This was up $18.2 billion or 20% on $91.9 billion at 30th of June 2023 and up $10 billion or 10% on the 31st of December 2023. The Aggregate retail FUM was $28.8 billion at 30th of June 2024, up $6.1 billion or 27% on a year earlier. The ASX 300 index was up 7.7% over the year, and the MSCI World Index up 17.5%. The NASDAQ was up 28.6% and the global REIT index relevant to res cap was up just 2.9%. Total affiliate revenue at 100% was up 30% at $663.4 million of which $553.6 million was base fees, up 22% and $109.8 million was performance fees, up 89%. Pinnacle's share of performance fees after tax was $31.2 million, up 112%. So a little over double on $14.7 million in FY '23. Total net inflows for the year were $9.9 billion, of which $3.9 billion was retail, $7 billion was from international investors, and we had $900 million of net outflows from Australian institutions. During the second half of the 2024 financial year, total net inflows for the half were $5.4 billion, of which $2.1 billion was retail, $3.9 billion was from international investors, and we had $600 million of net outflows from Australian institutions. Slide 9 shows our record of earnings growth over the 8 years that we have been listed Pinnacle. Slide 10 shows the alpha performance of our 40 affiliate funds or strategies in bar chart format over the past 5 years. Slide 11 shows the detail of the affiliate platform and some of the highlights within affiliates of the 2024 financial year. Slides 13 and 52 to 56 provides further performance detail. Slide 12 elaborates our track record of strong earnings growth through periods which incorporates some less favorable stages of the market cycle. Slide 13 shows some detail on our performance fee record and opportunities. As mentioned, we are growing the size and diversity of our performance fee potential and look forward to our strategies with larger performance fee FUM delivering in future years. Slide 14 shows our 18-year FUM and net flow history. FUM has grown at a compound annual growth rate of 23.2% per annum over the past 10 years. Our thumb source from international clients has grown very strongly over the past few years, and particularly in FY '24. Aggregate retail and international FUM, which tend to have higher fees than domestic institutional now represent 43% of total FUM Slide 15 provides detail on the growth of our private markets businesses and of our international asset classes. And again, Slide 16 provides some detail on the increasing diversification of our business. Slide 17 updates on our more recent major industry awards, a huge one was Hyperion winning the overall Fund Manager of the Year award from Morningstar. Slide 19 has detail on our revenue and margin performance and Slide 20 has further detail on our financial results. The main additional item I would point out there is the change in NPAT excluding the return on our principal investments and offsetting interest cost and the open Invest revaluation. As I have stated every year, I think of that as an important measure of our core earnings. At $83.3 million, that was up 23% on last year. Slide 21 shows balance sheet items. I will skip over Sections 3 and 4, leaving that detail to questions and one-on-ones. I think I have referred to key conclusion points from those sections. So if we had more time, I would love for you to hear directly from Andrew Chambers and Kyle Mcintyre on these topics. If I move to Section 5, titled Growth Agenda. Slides 26 to 41. In Slide 27, we remind shareholders that we think in terms of 3 horizons of growth. Horizon 1 is the main game. It is continuing to pursue net inflows into existing strategies of existing affiliates. We remain very confident of our ability to continue to do that. We conservatively estimate the unutilized capacity of the affiliates existing strategies in excess of $300 million. So there is plenty of Horizon 1 runway left with the attendance strong gains in operating leverage that will be accompanied by such growth. Slide 28 explains that we have an excellent platform in place to move ahead with sustained growth. Horizon 2 is the subject of a lot of activity, both within Pinnacle itself and within all of the affiliates. We have stated that we estimate this cost was in the order of $11.5 million to Pinnacle's bottom line NPAT in FY '24 compared with $14 million in FY '23. This is a slow patient process where we invest now for medium-term gain. But we have been doing this for a long time and have a very strong record of very high returns on the past Horizon 2 investments not even including unrealized capital gains on the value of the businesses and strategies that we have built, and we are confident that will continue to be the case in the future. We've mentioned specific Horizon 2 initiatives in Slides 29 and 30. Slide 31 explains that Horizon 2 has been a highly valuable accelerator for new affiliates and strategies. The aggregate net cost to Pinnacle of these initiatives within Pinnacle and affiliates has reduced significantly from an estimated $7 million in the first half to $4.5 million in the second half of FY 2024. Slide 32 has some detail on a new Pinnacle Horizon 2 affiliate, life cycle investment partners, which has only just begun. These early days and this high-quality global equities affiliate based in London, we will build carefully and deliberately over the coming year. We will update on progress in this regard in due course. Slides 35 to 39 provides some detail on metrics, which has been undertaking extensive Horizon 2 initiatives. Now to Slide 33, Horizon 3, which, of course, is where we use capital to buy into existing businesses. Our most recent Horizon 3 transaction was the acquisition of 25% of private equity and venture capital manager Five V in December 2021. As planned, 5G has expanded substantially since then, and we are delighted with this partnership. In terms of potential new Horizon 3 opportunities, Slide 33 explains in summary that we have done a lot of work on a large range of attractive opportunities, though in the final analysis, we haven't so far progressed with any to completion since Five V. We have remained disciplined and patient but have made substantial progress on several fronts and look forward to reporting new initiatives to you when they eventuate. Slide 34 shows some milestones in the growth of Five V since we acquired our 25% interest. Again, Slides 35 to 39 provides some detail on metrics, which is another successful Horizon 3 acquisition made in 2018. Slide 40 shows some milestones in the growth of Horizon 3 investment Coolabah, since we acquired our initial 25% interest in December 2019. Slide 41 provides some further detail on Coolabah, which has performed very well. I really want to spend some time on Section 6 corporate responsibility. We are proud of the progress we have made on so many fronts. I refer shareholders to Slides 43 to 46 of the presentation and to the corporate sustainability report that we table last night and is on our website. In summary, we are committed to building a sustainable, inclusive and resilient firm. You can see some of the actions we have taken under the headings Purpose, People and Planet on Slide 43. Slides 44 to 46 summarize the work of the P&I foundation of which we are very proud. Total donations made by the foundation during FY '24, primarily to the 17 long-term charity partners were $677,000 with affiliates providing a further $445,000 to 12 of these charity partners. Total support provided to charities across the group, including also workplace giving by employees totaled $1.387 million. Now in conclusion, referring to Slides 48 and 49 I would like to remind shareholders once again of the basis on which we remain so confident of our company's ability to grow and prosper, which is our distinctive business model that was designed specifically to ensure sustained investment excellence. This is embodied in our DNA, call it our core ideology or fundamental beliefs, which are the basis on which our business was built and which will endure and guide us for many years, hopefully, decades into the future. This is the source of our competitive advantage. The most talented and experienced investment professionals love it. Importantly, their clients love it. It delivers stability and sustainability of it, which traditional investment institutions are less able to facilitate. We are experts at the multi-affiliate model, which we have been successfully executing on for 2 decades. We execute on it better than others. We understand talented investment people and their needs. The subtle forces that sustain enduring excellence and those that are inimical to it. We ensure succession when others don't seem willing or able to. Importantly, these basic principles are applicable to a very broad range of asset classes, geographies and markets. They will sustain our growth as we evolve and adapt and as the world changes. The need for investment excellence is massive, greater than ever and more so as investing becomes more and more difficult and as market circumstances change. And we please now invite questions. Please note the appendix has additional information people are often interested in. I would particularly call out Slide 57, which shows historical FUM by affiliate every 6 months over the past 12 years.

[Operator Instructions] Your first question comes from Nicholas McGarrigle with Baron Jelly.

I had a question around operating leverage in the underlying affiliates. Obviously, the horizon 2 costs have come down materially on a run rate. But can you give us a sense of any other things to think about with the operating leverage? I think it was the current percentage point or 2 that the margins picked up, but should we think that, that continues to expand with fund growth into FY '21?

But sort of big picture. Nick, you know, we said we don't target to fill our margins, et cetera. We address every piece of potential business. And if it's a good business, we take it and there's a big range of fee rates and so on. But broadly speaking, increasing retail, increasing international investors, that is very helpful for our revenue for our fee rates. As you know, Horizon 1, as we continue to grow the FUM of existing affiliates that is very helpful. Nick, you and others keep putting out to me that our margins are not as high as many fund managers. And I'd say to you, there's no reason why they won't be when our affiliates are not investing so much in Horizon 2 and as they become more mature. I'd love to talk about Hyperion Global, which is a $3 billion and has capacity of $30 billion and won't need any more cost to get there. But yes, there is a lot of operating margin expansion inherent in our business in terms of what you're really looking for the shorter term, it is expanding somewhat our existing horizon to affiliates are maturing, and that brings us more revenue and lower net cost. Open question, how much more horizon to we do in the future, but we had a big peak, which has come off somewhat. But Dan, do you want to talk about an next question more short term?

I mean you get the main points in terms of the actual data points, Nick. So the margin improvement was about 5 percentage points second half on first and 3 after performance fees. And the FUM at the end of the year at $110 mills about 10% higher than the average. So we feel that we're in a reasonable shape into 25 for that item.

No, I was just going to say, performance fees, of course, will vary year-by-year. But I've been banging on for a very long time that I believe there is a certain minimum level that you ought to be baking in year after year because it is such a diverse range. So we ought to get a certain minimum level. We have numbers in mind here. You can all make up your own mind. But of course, some years, it will be higher again. That's a variable, but I think people understand that. The underlying margin should grow over time.

And then the -- I guess, one of the investment areas in horizon 2 has been metrics, but it seems like profit obviously grew there 40%, as you disclosed in the annual report. So that was good to see. It looked like second half, obviously, there was an even more material growth rate. Do you want to make some comments on metrics, and I guess add some color on recent fund growth? And have we seen the origination revenues come out of a pretty significant fund growth over the second half year.

So metrics have been -- still are on a mission on a mission to grow their business greatly. The growing origination capabilities, big time. That's been quite expensive. They are marketing like crazy to get fuming because they know they can cope with much larger FUM than currently. So that's the mission they've been on. We've been very happy about that. although it has not been helpful for our short-term profits and margins and so on. But look, Andrew Chambers has been responsible for selling metrics. He's very close to it. He's on the board of it, but you'll notice their FUM inflows have been strong in both retail and institutional and offshore.

So I mean, overall, the net inflows into metrics exceeded $4 billion for the year. I think on the institutional and international side of international, about $0.5 billion locally, we're in excess of sort of $7-odd billion and then the balance in retail. The retail on in very substantial in the context of the wholesale retail markets participating in private markets are open ended structures and permanent capital vehicles. I think we have about $7.8 billion today in the wholesale retail markets in the private market strategies through that particular channel, which makes us leaps ahead of any nearest competitor in the market in that space. That's private markets overall as opposed to metrics in terms of the total [indiscernible] . But metric continues to invest very heavily in our origination, where they're really trying to bring the investor close to that point of origination with a full benefit of those risk-adjusted returns flow through to the investors, and they have better control of setting the terms and conditions with borrowers in terms of credit terms and conditions, so that have better risk management as a result of that origination, but also a much higher cadence of deployment relative to most of the peers in the market, which might raise a closed-end fund but take them maybe 3 to 5 years to fully deploy it. So that reduces any J curve and any cash drag for investors being deployed so quickly. So origination is particularly strong with over 70 people in origination in the business today and is a real competitive advantage for the business in terms of both, risk management as well as deployment and total returns relative to peers.

I mean, have we seen -- had obviously significant flows in the second half. Have we seen the origination revenues that come from deploying those proceeds into writing loans?

So that's certainly happening. But obviously, they need to step up and step back pace at which they originate new loans. With deals, sometimes they have sort of finalized terms and conditions with borrowers, but they don't draw capital for maybe 6 months later to 12 months later. So obviously, there's a real [indiscernible] to closing out deals actually getting that money deployed. But the reality is they speed up and slow down the rate of origination in response to, obviously, the inflows coming into the business.

And then it be remiss of me not to ask a final question maybe on last cycle. Obviously, it's a new manager starting up. I think the main principles there have come off their guarding period on a couple of weeks ago. How should we think about the ramp-up profile of that business over its first year.

So it's very early days, Nick. Those investment professionals, there are 7 of them initially have post-employment restraints, which they need to honor and which they will honor. I would say you won't see much activity this calendar year probably. It takes time to build a new boutique. We build carefully and deliberately, this should be a very big and very successful business over time. We will do it at the pace that makes most sense for building quality. So as I said, we'll update in due course, but we tend to go slowly and carefully at the beginning. Yes, you didn't see much activity for a couple of years or -- and then it was like, "Oh my goodness, where that $8 billion come from? Well, it was from the work you do early.

Your next question comes from Tim Lawson with Macquarie.

I appreciate there's going to be a few questions around the Horizon 2 investment. And obviously, you don't want to be stuck in sort of a specific number, but is there a natural level of sort of base revenue to base expense fee that you think sort of makes sense for the group over the cycle?

And then are you talking about profit margins or fee rates, Tim?

Profit margin.

It's different affiliate by film. But as Ian said before, all of the fit, well, nearly all of 5 had a significant Horizon 2 program ongoing for some time. And as that unwinds, as we've begun to see in the second half, you should see those profit margins improve quite markedly. Now there's a difference between an equity affiliate, which can run large amounts of FUM with relatively small human capital investment and then a private markets business like metrics or [ Parisa ], where there's a greater need for human capital and will naturally therefore, but at a lower margin. But I think it's fair to say there's room for material growing pretty much across the board.

Yes. And those ones that need extra resourcing as they grow, they tend to have higher fees, including performance fees and so on, which reflect the economics of those businesses. You talk about metrics private markets business that have strong origination and they don't all. Those are the ones that will be, that will have the major competitive advantage and be much stronger over time. You Tim So, I think what you're getting at, I mean, quality funds management businesses have high margins. That's the nature of them once they mature. But it's something we've always done. We've always encouraged our affiliates. In fact, we talked about this even before we start them. Will they have a long trajectory, we'll be able to do new strategies as their earlier strategies run out of capacity, and we always encourage them to not exceed capacity. So it's not surprising that most of our affiliates are spending some money on new strategies. Of course, the point will come where they don't need to do that anywhere near so much. So the new strategies they are investing in. The cost is smaller relative to their base. So that will happen over time. It all came in a bit of a rush over the last couple of years, and that really heightened the sort of Horizon to drag. And I think that has probably sort of worried some people. Will that be permanently the situation. It shouldn't be -- but we love affiliates doing new strategies when it makes sense. And they only do them if they are very compelling. Remember, affiliates are spending their own money in the sense that they could otherwise be getting dividends. And we will do Horizon 2, where it makes sense. You'll see we've been, we haven't done too many. We've done fairly big ones. We're very, very careful. We talk a lot about sadly how many we say no to because they just aren't big enough, they aren't good enough. But we will keep doing more Horizon 2, but they'll tend to be big.

Tim, it's Kyle here. I think one of the pleasing things is when you look at some of the Horizon 2 strategies and what's going to drive growth over the medium term, have a look at what we've done in wholesale and retail with groups like Plato with Plato Global Alpha with that fund now over $100 million in retail fund, Fie V Horizons, over $100 million in retail FUM, Landon, Firetrail small caps, long wave, all over $100 million in retail funds. So you're definitely seeing the momentum coming through. And then we've got a really solid pipeline of things that have good ratings that should come through and deliver similar momentum in the coming years.

And just one quick question on base fee. Obviously, it moved up over the year-end, particularly in the second half. Could you just talk through any sort of specific call outs there, please? -- it against our sort of simple average calculations, obviously, versus an average FUM work over the year.

Again, as a generalization, private markets asset classes tend to be higher fee than traditional, especially traditional asset classes in domestic institutional. So that should be a tailwind for average fees as we do more and more private markets.

I think there are 2 main drivers. That's certainly one and then the other is the growth of international, where the similar types of business, you'll generally get a higher fee rate. So that's really been the main driver. In terms of specifics. We called out at the half year release that Five V closed this Fund V of $770 million. That's in the flows in the second half. And I say real assets over in the U.K. and fund that GBP 100 million mandate that also funded in the second half. So that were both helpful.

Probably worth also adding to Dan's comment on international, it's not just institutional in these days. So of the $7 billion, $575 million came from wholesale retail channels internationally. So Canada, Continental Europe, U.K. wholesale and also New Zealand. And so those are more analogous to what we earn in the domestic wholesale retail market as well. So it's not just offshore institutional early high rates, but it's obviously the wholesale retail channels offshore too.

The U.K., we think will have good potential for us. We plan to expand our capability there in the wholesale retail market be.

Your next question comes from Nick Burgess with Ord Minett.

Just on profitability of affiliates. So [ Intipityes ] is acquiring [ MakBan ], any impact on, or the impact of that on [ antibodies ] themselves and then impact on the overall profitability of affiliates, please?

So certainly, Maple-Brown Abbott is accretive to [ antibodies ]. They have put capital into that. And Pinnacle put just its pro rata share of the capital required for that. That will be very nicely accretive. Other than that, Dan, do you want to...

I mean we think it is a deal that makes a lot of sense for antibodies. We absolutely understand the rationale. It gives them further avenues for future growth in asset classes that are pretty nicely complementary, but it will take them a little bit of time to do the things that they need to, to bring those 2 businesses together before we see real significant earnings growth on top of that modest accretion that Hans mentioned.