Pollen Street Group Limited (POLN) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Pollen Street plc investor presentation. [Operator Instructions] Before we begin, I'd like to submit the following poll. I'd now like to hand over to the CEO, Lindsey McMurray. Good afternoon.

Good afternoon, and welcome to our results for , where we outline our 2023 annual results. It's great to have so many of you with this able to join today. I'm Lindsey McMurray, CEO, and today, I will cover the key highlights, provide an overview of our investment strategies and provide an overview of the financial section and our guidance. Having built strong foundations within the business, we have an exciting time ahead to present a very attractive investment proposition. The execution throughout the year by the team has been exceptional. We are delivering strong AUM growth, capitalizing on the structural expansion across private capital markets. Our specialist investing approach provide us with a competitive edge. Through our recurring fee structure, we generate high-quality earnings from our asset manager, coupled with financial strength of our balance sheet, enabling us to accelerate fund formation. Across the group, we benefit from attractive operational leverage, demonstrated by the strength of our team. Our seasoned team combines expertise with agility, ensuring efficiency and adaptability and a dynamic market landscape. We have proactively established a capital allocation framework and announced a share buyback program, which will allow us to deliver attractive returns for shareholders. Here, we present our financial results for 2023. These numbers reflect the momentum we've built and the opportunities that lie ahead. The financial performance for 2023 was ahead of target, and looking at the outlook, we're upgrading the guidance, which we'll come to later on in the presentation. I'm pleased to share that the Pollen Street had strong performance in 2023, both financially and strategically. The group recorded strong performance across the board, significant progress against fundraising targets and benefited from attractive deployment opportunities in both private equity and private credit. Our 2023 results were underpinned by accelerated growth in the asset manager and consistent performance in investment company returns. We've raised GBP 1.3 billion in private equity, including securing approximately half of the fundraising for Private Equity Fund V, in private credit, we closed at GBP 225 million separately managed account, where we anticipate the first close of Private Credit Fund IV imminently. Our fee-paying AUM grew by 36% in 2023, and this strong fundraising led to fund management EBITDA growing by 79% to GBP 15.2 million, demonstrating strong operational leverage in the business, driving fund management EBITDA margin improvement of 8%. The investment company returned GBP 30.2 million of income from investment assets, and we made progress rotating our balance sheet from predominantly holding direct investments to holding investments in Pollen Street funds. This shift enables the investment company to benefit from returns generated by diverse portfolio across private credit and equity, while helping these funds reach scale and providing a catalyst for raising additional third-party capital, driving higher management fee income for the group. Our solid fundraising growth is testament to the support of our clients. And in the last 3 years, fee-paying AUM has increased at a compound annual growth rate of 33%, followed by growth in deployment of funds and total assets under management growing by 28%. We delivered consistent growth in line with our guidance with especially strong growth in private equity AUM. As we look to the future, we look to exceed the GBP 4 billion of fee-paying AUM in 2024 and to grow overall AUM to around GBP 10 billion over 4 to 5 years. Our success in fundraising means that asset management represents an increasing contribution to revenue now over 60%. Overall, we delivered 23% AUM growth with total AUM rising to GBP 4.2 billion, up from GBP 3.4 billion in 2022. We closed 2023 with fee paying AUM of GBP 3.4 billion, which is a 36% increase and well on track to exceed GBP 4 billion in 2024. All of this translated into profit before tax of GBP 43.1 million, a 25% uplift over the previous year. And we expect to maintain this momentum in fundraising with the first close of Private Equity IV actually now closed. Over the past 18 years, we've been building deep capabilities across financial and business services sector. Our approach has been aligned with mega-trends that are shaping the future of the industry. Our sector focus is strategic and deliberate, aiming at delivering high returns with low volatility. This approach has not only served us well, but has contributed to a 0 loss track record across both strategies, an achievement we are immensely proud of. We've carefully created a deep ecosystem which consistently delivers a strong deal flow in execution. Approximately 80% of our investments are sourced internally and negotiated bilaterally across both strategies. And with this, we've delivered 29% gross IRR for private equity and 13% gross IRR in our latest private credit fund. We continue to enjoy strong support from existing investors and build new ones. Our clients now span a range of geographies and investor type. Our focus is on fostering deep relationships that cater to the needs and objectives of our partners with an -- on a recurring basis. As is well documented, we operate in markets with strong structural tailwinds in private markets. This growth is greatest in our strategies of private equity and credit. In private equity, we're able to take -- if you go to the next slide, please. In private equity, we aim to take a long-term perspective and commit capital to deliver strong performance over the longer term. Investors are increasingly allocated to specialist strategies, and we're positioned to [indiscernible] on this. In private credit, we see a wider opportunity set emerging as traditional banking institutions continue to retrench from markets. With rising interest rates, we are presented with an opportunity to achieve higher yields with lower risk. Private credit stands as a consistent and reliable income-producing asset class, and asset-backed lending is positioned to benefit from larger allocations to private credit. Turning to our strategies more specifically. Our private equity strategy delivers high-quality earnings for the group. Our approach is focused on building tech-enabled, customer-centric and data-driven organizations to create fast-growing market leaders. We made primarily controlled investments in mid-market financial business services businesses with conservative leverage levels and revenue-led growth across the portfolio. We maintain a target 3x gross return, and we're currently raising our flagship Fund V, targeting EUR 1 billion of commitments. This chart aims to outline our target market and why it is deep and powerful. In the horizontal axis, we assess a business' ability to benefit from strong digital adoption capability. Of course, to win today and tomorrow, we look for businesses on the right side of the chart, progressive and well placed to take share. The vertical axis is customer relationship and retention. We aim to be at the top with businesses that have strong customer relationships and retention and positioned to take share to deliver strong operating performance. This enables us to grow businesses through different economic cycles. Our credit strategy is dedicated to asset-backed lending. We're one of the largest and best established lenders in the sector in Europe, having invested more than GBP 3.5 billion across over 100 transactions since 2015. Our strategy is focused on providing senior loans to companies, secured directly on diversified portfolios of assets that have real tangible value and where it's those assets that generate the cash flow and revenue for the borrower. This asset security, combined with borrower guarantees mean our lending has significant downside protection. Yet we're able to earn premium returns, because the market is significantly underpenetrated in Europe, with barriers to entry from its fragmented nature and being not well intermediated by advisers. This means you need a team to be able to originate, underwrite and structure deals in-house. We have developed this over the last 10 years with one of the largest teams in Europe and a top-tier track record. These dynamics, combined with the vast size of the market and the shift in market share from banks to private capital means we're confident we have significant long-term growth prospects for the strategy. Our next slide shift fund has actually gone through its first close already ahead of target before Easter with a full target of GBP 1 billion across the fund raise of that. The assets we take security over can be either financial assets, loans and leases or hard assets, cars and residential property. And while we address a wide range of asset types, the consistent themes of direct asset security, diversification, conservative leverage levels, comprehensive covenants and corporate security are fundamental pillars of the strategy, meaning it can be resilient through market cycles. This -- all of this means that we've delivered a very strong financial results for 2023. Another successful year with fundraising activity and deployment that we outlined, described earlier in the presentation, leading to fund management income growing to GBP 49.2 million for 2023, which is up 32% from GBP 37.4 million in 2022. High operating leverage for the business, combined with disciplined cost management has led to modest growth in fund, management, EBITDA, administration costs and considerable growth in fund management EBITDA, which closed the year at GBP 15.2 million, a 79% increase on the GBP 8.5 million for 2022. This is equivalent to an EBITDA margin of 31% for 2023, up from 23% the prior year. And the margin is on track to exceed 50% in the longer term, consistent with the guidance previously issued. The investment company has performed well, generating GBP 30.2 million of income. This is a 7% increase on prior year. Overall, profit after tax was up 23% at GBP 40.4 million in 2023, which is equivalent to earnings per share of 63p per share. We've declared a dividend of GBP 32 million of dividends in relation to the year, which is in line with target. The strong growth in asset management this year continues the longer-term track record. Average fee-paying AUM has grown 27% per annum from '21 -- 2021 to 2023, driven by fundraising across the strategies and deployment in private credit. And we've maintained our fee rates across the products with fund management income growing at 20% per annum over the same period with further contractual step up due in 2024 as management fee revenue is recognized on an AUM already raised in 2023. Fund management EBITDA has grown 47% per annum over this period, reflecting the high operational leverage of the business as a well-invested cost base. The investment company has a stable and growing income stream with income increasing to GBP 30.2 million, up from GBP 28.3 million in 2022. The key drivers of this are the higher interest rate environment, strong credit performance in the credit assets, offset by lower balance sheet deployment to create capacity to invest in our funds. We have more than doubled the investment company's commitment to our funds since the start of 2023, so that over GBP 120 million of investment company balance sheet is committed to support fundraising efforts of the asset manager. This has more than doubled the commitments as of 31 December '22, and we have created capacity for our commitment into the first close of Private Credit IV also. This reflects our plans to steadily grow the investment company's commitments in the asset manager to help accelerate growth of the asset manager. We expect the allocation to higher-yielding equity assets to increase to approximately 30% over time. This capital should deliver higher returns than the investment company as it's deployed. The tangible NAV per share grew to 530p per share as at the 31st of December 23, up from 540p as at the same period last year. We announced a capital allocation framework and share buyback program. Under this framework, we'll allocate capital as follows. Firstly, as I outlined, to invest in our funds to allocate -- to accelerate the growth in asset manager while also taking advantage of attractive investment opportunities, aligning the interest with our investors to grow AUM. Secondly, to support the dividend policy, which is declared dividends no lower than GBP 33 million in respect to 2024 and dividends growing progressively thereafter. Thirdly, to maintain strategic flexibility for inorganic options should opportunities arise. And finally, at the current share price, the share buyback will create significant value for shareholders. And we're currently planning on buying back 2% to 5% per annum of the outstanding share capital of the group. We'll continue to maintain a prudent balance sheet. The group's net debt to tangible equity ratio was 54% as at the 31st of December '23. This is lower than it's been historically to create capacity to make commitments for our funds leaving significant flexibility to create shareholder value. Our financial results have met or exceeded each of our targets. For the asset manager, average fee-paying AUM was 29 -- GBP 2.9 billion for 2023, in line with target. Fund management income was GBP 49.2 million, fractionally ahead of target. Fund management EBITDA was GBP 15.2 million, exceeding target. And for the investment company, income of net invested assets was GBP 30.2 million, again exceeding target. Having delivered on these targets, we're upgrading the financial guidance for the business. We previously issued financial guidance that fee-paying AUM would be GBP 4 billion to GBP 5 billion between the 30th of September '24 and '25. Fee paying AUM was GBP 3.4 billion as at the end of 2023, and we expect to exceed the GBP 4 billion threshold in 2024. We are, therefore, raising guidance to grow total AUM to around GBP 10 billion within 4 to 5 years. We've previously issued guidance for the return on net investment assets to be around 8% in the longer term. Given the performance over 2023 and the outlook for the portfolio, we're now revising our guidance from return on net investment assets to rise to low double digits within 2 to 3 years. Our other guidance is maintained with management fee rates at around 1.25% to 1.5% of average fee-paying AUM over the longer term. Performance fees of around 15% to 25% of total fund management income on average over the longer term and fund management adjusted EBITDA margin in excess of 50% in the longer term. So with these strong foundations that we have built and by excellent execution by the team, it gives us an exciting opportunity ahead. AUM growth is strong. Our specialist investment approach is serving us well, allowing us to generate high-quality earnings through our asset manager, bolstered by a strong balance sheet that supports further fund formation. We have outlined our capital allocation framework and initiated a share buyback program. With 2023 surpassing expectations, we now look to deliver GBP 4 billion of fee-paying AUM for 2024 and more than double total AUM to GBP 10 billion within the next 4 to 5 years. And with that, I'd now like to open to Q&A.

[Operator Instructions] But just while the company takes a few moments to read those questions that have been submitted today, I'd like to remind you the recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via your Investor dashboard. Lindsey, as you can see, we have received a number of questions throughout today's presentation. And if I could just hand back to you to read out the questions, I'll pick up from you at the end.

So we have a question around the dividend, which perhaps I addressed -- pre-submitted, perhaps I addressed during the presentation. But as given that we're moving the frequency as we move from an investment trust to a commercial company, the frequency of the dividend will move from quarterly to semiannually, which is correct. But with that, does the guidance for dividend change? The guidance will continue that we have announced a dividend for the year of 2023 of GBP 32 million. And then that with guidance, to be no less than GBP 33 million for 2024 and progress it thereafter. So the guidance remains the same on an annual basis. It will change, however, from annual to semiannual. Another question asking about, given the strong performance and growth in both private equity and credit. Are there plans to go into new sectors and geographies in the near future? And the answer to that is that the guidance that we have provided on the AUM growth is very much simply applying simply well-executed and focused on the strategies that we have already. So completing Fund V for private equity and firmly in the mid-market of Private Equity IV financial business services. And then steadily, we're deploying -- we're raising and deploying that fund well already, so that we'll then look to, in time, being very selective as to how we compose the rest of the portfolio from here and in time, in line with normal planning cycles. We'll move on to Fund VI doing precisely the same, perhaps kind of increasing the size of the fund to allow us to, say, quarter strategy, but perhaps adding 1 or 2 more deals progressively into each fund. Similarly, with private credit, we will be -- we're making good progress already with Fund IV. As I outlined at the time of the results, we were looking to amend that close. We have already successfully completed the first close of Private Credit IV. And again, the cycle of raising funds for credit is shorter. They tend to kind of be running a more 18-month cycle than 3-year cycle. So the fundraising for private credit will be Fund IV during the course of this year. And then with a bit of a pause, we'll then move into Fund V. So we'll then -- probably then start to align the cycles of Fund VI for both private equity and credit, but it is doing what we're doing to deliver the guidance that we have. And executing and doubling down on very strong execution, which we believe is what will be rewarded by LPs. A question on, has the acquisition of Pollen Street been positive for the Honeycomb shareholders? We believe that this strategy is very strong and one that we believe on, is very strong. And as I say, a strategy that we believe will prove out. We have clearly had a bit of dislocation in the share price, and that is quite separate from what we believe in terms of the strategy and delivery of that. It has been -- as we've moved into a commercial company, again, that change has been very well received by shareholders. And there has been a very strong kind of diversification of the shareholding base, which we -- the reason that we have made the commitment and the changes that we've made and we're starting to see early sight of that. We think there's more to go. But we think that this is early site, and longer term, we fundamentally believe in the overall strategy for that. Question on the transitioning of the balance sheet from direct investments to what is referred to as seed capital skin in the game? Is it a differentiator? It's a differentiator, but it's not seed capital, is what I would say. The capital that we are allocating from the balance sheet is pari-passu with LP investors. So it is entirely where we are selling and presenting product for investors, which predominantly on the credit side, is offering 11% to 13% from a proven strategy, which is indeed what was the Honeycomb strategy and moved into the private credit. So it's not seed for new strategies. It's very proven over the last 10 or more years that we have been delivering, it is more alignment and the alignment of the balance sheet enables us to increase the amount of investment we are making, aligned with our investors, which in turn, they see that alignment positively and can help us accelerate the size of the fundraising that we're making there. So just to be clear, it definitely helps alignment, but it isn't seed capital for unproven strategies. It is proven strategies. Do we -- I'm trying to just read these. Like another question on the dividend, which I think is -- I've already covered. So I think it's been there. There's a question about dividend coverage. And the way we are looking at dividend coverage is that the return from the balance sheet broadly covers the dividend. And as we build fund management AUM, historically, clearly, we were investment trust and paying out the bulk of the -- or all -- to all intents and purposes, all of the income. So as the fund management EBITDA grows, thereby, dividend coverage grows. So we then end up with an overall very healthy coverage dividend. Do we use NAV loans for our funds? Predominantly, no, they're occasional. We use -- we have leverage on the balance sheet that is well documented. And so we use that. And as I mentioned, that was sitting at 54% to -- debt to tangible equity -- debt to equity in -- for the end of the year. We have a very stable approach to dividend for the balance sheet. On credit, we will offer investors unlevered and levered classes, but that's more as a client demand as opposed to a NAV basis for the funds. How much of the share buyback has been completed? We provide -- we actually provide a discretionary mandate -- we don't have control over the mandate, so I don't have the precise answer. We have said that we will do it steadily. So we announced it on the 21st of March, and then we would do it steadily over the coming months. So it's broadly somewhere around GBP 5 million a month. But once we allocate that, we allocate it to a broker, so we don't have control of that. And what we'll say is that, yes, so that is in process and I can get an update offline. There's questions in the FT about leverage and PE. The FT cover private markets in a very generic way, I would say. And they cover it almost as if it's new. The private capital markets, especially private equity, are very mature markets. And when you go to see pension plans in the U.S., they've got programs that are decades, probably, in many cases, 4 decades long. It's a very refined -- it's a very multidimensional market. And so there are headlines of trends in the FT, which are read. I don't think they do justice to the refinement and the multidimensional nature have a very mature and very sophisticated market. So are there -- are there potential dangers to leverage? If used badly, we don't use a lot of leverage in our strategies. It's not been the reason and the driver of growth and return on our strategy. So we are aware of the headlines, but we don't believe that it's -- it's something that we're mindful of, but not a danger for our returns. FCA investigation into private market valuations. The time will tell. There's a lot of debate as to which will be right. And there's a question as to the drivers. You can take both sites. Yes, the private markets have been -- have had very well-structured pricing and more valuation principles that have been audited and very, very thoroughly over the years. There's also a question as to the motivations as to why public markets are so volatile, in some ways, if they believe in the long-term fundamentals. So which is right? One is being marked to fundamentals and long-term growth; and one has been marked to short term. I think what I would say is the alignment of returns and awards of private managers where they're only paid, once investors and their funds are returned, their cost basis and a preferred return and only then after the return of cash and -- private managers do not make returns based on the mark of their funds, and that makes a fundamental difference. So I think the FCA will have a look at it. I think there've been a lot of detail that has gone into that over the years. And so we'll see what comes out of it. It's something that we are alert to participate in the wide group. But yes, we'll take in due course. Types of assets included in the portfolio. So it's a question that says, can you provide examples of the types of assets included in the portfolio and how they contribute? So to be clear, we are -- the corporate is -- on the private end -- so I'm not sure whether the question is in relation to the funds and whether they're related to the private equity or private credit. As it relates to private equity we are investing in, as I say, businesses in the mid-market, where we are taking typically a controlling stake and we are looking to grow those businesses based on them having a good solid customer proposition and franchise that we believe we can use modern practices to grow in a strong way to take share. And it's simply by looking to build businesses in and around 30% that we think that we can drive good risk-adjusted returns. The corporate is broadly not exposed to those assets, except for ultimately the performance fees that come out and the small contribution from the balance sheet. On the credit side, similarly, we're investing in these borrowers that I outlined earlier, where we're getting very strong risk-adjusted returns. Some of that is on the balance sheet. We're getting -- the corporate is receiving fees from those funds, and the balance sheet is investing alongside those. I'm trying to read -- there is a question about what is the difference between fee-paying AUM and non-fee-paying AUM. So the contributors to AUM which don't attract fees are two large components. One is as we're investing our private equity funds, on occasion, we will do a transaction that is larger than the fund will take for risk capacity. So if we do a deal, for example, that is a GBP 200 million deal, we may allocate GBP 100 million to the fund. And then we will allocate GBP 100 million to our LP investors that we work with, but they will do that side-by-side, the fund directly. Generally, where you're an investor in the fund and you invest on that -- what we call co-invest, that typically is without fees. So that's one component of a non-fee-paying AUM. And in some ways, that's the support that we give or the reciprocity we give back to our investors for their support in our funds. The other component to non-fee-paying AUM is on the credit side. So on private equity, we get paid on a committed basis. So commit -- so where we invest on private -- where we raise a private equity fund of EUR 1 billion, for example, when we raise that capital, we will charge fees on the total amount even before it's invested. So the day when it's closed, we will start charging on EUR 1 billion basis. On the credit side, the fund charging structure is different. We will charge not when the funds are closing, but when they're deployed and therefore, the other component of known fee paying AUM is where we have raised the fund on credit, but not yet invested it. So we've got the capital there, but we're not charging fees until it's actually deployed. So the 2 big buckets, and it will be the GBP 100 million, broadly half-half, and that's where it comes from. What are the fees -- what fees are charged in the investment company? The investment company is charged exactly the same as the third-party funds are charged. There's a question about another corporate asking investors to purchase shares in a multiple of their shares in incentive package. Well, there are two executives on the Board. One of them is me. I clearly own a much, much larger percentage than a multiple of income in the stock. So I'm very much aligned. For other executives who don't own that, we have exactly that same policy already in place. So it's -- without looking to others, we established that policy as we were setting up the remuneration structure. At what stage would fund management income be used for dividends? That is something that we need to consider as we build out the combination of the combination of dividend cover and paying dividends. At the moment, we are maintaining the guidance of 33% -- or GBP 33 million and then progressive really from there. But over time, as we build out the operational leverage, that is something that we will revisit. There's a question on the dividend per share, I don't have it to hand. But clearly, the number of shares has increased that are eligible for dividends. So that's something that we can share. There's a question of will we join the FTSE. That will depend -- the FTSE 250, that will depend on the share price. And the number of exits are unlikely to impact that. The exits don't have a meaningful impact. As we continue to raise new funds, then we steadily exit. They don't have a big impact on well, on the corporate. The corporate is looking to the fees coming from the funds as opposed to any of the underlying assets, particularly. And so if you're -- if it's a question which we get asked on what happens on speculation of something like [indiscernible] IPO, immaterial to the corporate. There's a question about the share -- the management team selling shares. In fact, they've broadly been internal transfers between different members of the management team, where some have different situations. So you'll see that I've been acquiring those. So it's not necessarily in net sales, it is predominantly transfers. So I think those are the questions that I've received.

Perfect. Yes, Lindsey, thank you very much for answering those questions. And of course, the company can review all the questions submitted today, and we'll publish those on the Investor Meet Company platform. But perhaps just before redirecting investors to provide you with their feedback which is particularly important to yourself and the company, could I just ask you for a few closing comments?

Yes. Look, I think I hopefully have outlined, we've set very strong foundations for the business. The strategy that we outlined in the combination is being realized. The execution and the implementation of the strategy by the team has been exceptional. We're witnessing that strong AUM growth, and we now -- we have outlined the capital allocation framework with the share buyback, we've surpassed our '23 expectations. Look to deliver, again, to those expectations and beyond for the GBP 4 billion of fee-paying AUM for 2024 and then look to double the AUM beyond. So very excited about the prospects. Thank you all for your support. And please get in touch with the team if you have any further questions.

Perfect, Lindsey. Thank you once again for updating investors today. Could I please ask investors not to close the session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. It's going to take a few moments to complete, but will be greatly valued by the company. On behalf of the management team of Pollen Street, we'd like to thank you for attending today's presentation, and good afternoon to you all.

Thank you.