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

Good afternoon, and welcome to the Pollen Street Group Limited Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question it received in the meeting itself. However, the company can review all the questions received today and have to respond to its appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you to CEO, Lindsey McMurray. Good afternoon.

Good afternoon, everyone, and welcome to the 2024 Interim Results Presentation for Pollen Street Group Limited. Thank you all for attending, and apologies for the short delay. I'm Lindsey McMurray, CEO, and I'll be presenting today with Lucy Tilley, CFO. Today, I'll cover the key highlights of our performance, the overall strategic vision of Pollen Street and our AUM evolution. Lucy will present our financial results and then I will provide a quick recap of our investment strategies together with the outlook of the group, followed by the opportunity for Q&A. So taking a look at the key highlights for the first half of '24. We've increased our total AUM to GBP 4.5 billion as of the half year and to GBP 4.8 billion as of the 31st of July 2024, which is a 42% growth over H1 '23. This includes raising GBP 600 million in credit funds with the first close of Credit Fund IV together with a new SMA. Private equity strategy is progressing well with continued fundraising for private equity V, which is on track to reach its EUR 1 billion target by the end of the year. Fee paying AUM increased by 35% over the last 12 months with good visibility of further growth in H2 with a robust pipeline in credit loans. Our fund management profitability is up 54% year-on-year, reaching GBP 8 million in Fund Management EBITDA, underscoring the operational efficiency. The balance sheet remains strong, delivering 9.7% net investment return and GBP 15.8 million income and net investment assets. Fund management revenue continues to grow as a percentage of total standing at 63% today, and we expect this percentage to continue to grow over time. We're aiming to deliver strong AUM growth based upon our specialist investment focus and well aligned to investor allocations. We focus on sectors, where we have deep expertise. And as we grow our operational efficiency improves, leading to expanding margins and increased profitability. Our balance sheet gives us financial flexibility, and we have a clear capital allocation framework to optimize shareholder returns. We are pleased to see this vision translate into financial performance. Now to our strategy at the highest level, our strategy is clear. We aim to generate consistent, high-quality returns for our investors with a disciplined risk framework that supports sustainable long-term growth. We achieved this by leveraging our deep industry expertise, making targeted investments in high-quality businesses that enable us to maintain a strong track record and continue to build support for further funds. This approach drives AUM growth and builds high-quality income. It also boosts investment returns, enhances operational efficiency and deepens engagement with our investor base. Simply put, we're committed to delivering value while managing risk effectively to continue to support growth in our strategies. And our platform continues to scale with the growth trajectory is clear and robust. Looking at our fee paying AUM, we have steadily increased with a 29% compound annual growth rate since 2021, reaching GBP 3.4 billion. And our total AUM mirrors this trend was growing to GBP 4.5 billion at the half year and GBP 4.8 billion at the 31st of July. And with this strong AUM growth, has demonstrated a consistent trajectory aligned with our guidance. We set out our GBP 10 billion AUM target earlier this year. And with our total AUM now at GBP 4.8 billion, we have a clear path towards this target. This is also supported by investment company commitments in the asset manager to help accelerate growth in the asset manager. I will hand over to Lucy to cover the financial results.

Thank you, Lindsey. I'm pleased to present Pollen Street's financial results for the first half of 2024. We have continued to build on our success in 2023 as Lindsey set out earlier. This has driven strong growth in our financial performance with fund management income increasing by 23% to GBP 26.8 million. The inherent operating leverage of the asset manager, combined with disciplined cost management has led to modest growth in fund management administration costs and therefore, considerable growth in fund management EBITDA, which increased by 54% to GBP 8 million. This is equivalent to an EBITDA margin of 30% for H1 2024, up from 24% in the prior period. The margin is on track to exceed 50% in the long term, consistent with the guidance previously issued. Investment Company delivered strong returns in the period with return on net investment assets increasing to 9.7% and income on net investment assets of GBP 15.8 million. This was driven by robust performance in the underlying portfolio with strong levels of risk-adjusted income. With the benefit of our new tax losses arising from previously incurred management expenses in the investment company, profit after tax was up 35% to GBP 23.6 million for the half year. We expect the balance of available tax losses to be utilized in H2. And with the impact of the share buybacks in H1, earnings per share increased by 36% to 36.9p. We have declared an interim dividend of 26.5p per share, representing a cash outlay of GBP 16.5 million, which is in line with our guidance of a minimum of GBP 33 million for the full year. This slide breaks down the revenue from our 2 operating segments, the Asset Manager and the Investment Company as set out in late [ 6 ] of our interim results. The Asset Manager earns core management fees based on fee-paying AUM, which provide a steady and predictable income. These are typically 1% to 2% of fee-paying AUM annually. These fees are an increasing proportion of our overall revenue. In addition to management fees, the asset manager earns performance fees and carried interest, which are linked to investment performance and are typically 10% to 20% of profits above a hurdle rate. Combined, the core management fees and performance fees are an increasing proportion of our revenue streams. Our net investment return in the investment company is generated from the balance sheet investments in direct holdings of investment assets as well as from holdings in our credit and private equity funds. In summary, these are recurring and high-quality revenue streams as demonstrated through our track record. Turning to the investment company performance. The investment asset portfolio delivered another period of strong and stable performance in the first half with an increased return of 9.7% on average net investment assets for the period of GBP 329 million. At the 30th of June 2024, the investment portfolio was GBP 430 million and was well diversified across deals and borrowers. It was 91% invested in credit assets and 9% investment in private equity assets. So that is either in direct deals or through Pollen Street managed funds. With high realizations in the period, the portfolio generated cash of GBP 170 million, an increase of 26% on the prior period, demonstrating the quality of the portfolio. This cash generation combined with the phase II of a drawdown of our balance sheet fund commitments, reduced our net debt to tangible equity ratio to 28% from 54% at the year-end and enables us to support commitments to Pollen Street Managed Funds. As funds are deployed and as our fund commitments are drawn down, leverage will normalize and this will drive returns to shareholders. This next slide sets out the balance sheet transition in more detail. Reflecting our plans to steadily grow the investment company's commitments to the asset manager, which act as a catalyst for the growth of the asset manager. Our low leverage position facilitates the rotation of the portfolio to focus on investing in Pollen Street managed funds as these funds drawdown on net commitments. At the 30th of June, the balance sheet had a 15% exposure to Pollen Street managed funds. With our balance sheet commitments to Pollen Street managed funds at 30th of June of GBP 163 million, GBP 67 million of which is drawn down. The fund exposure of the balance sheet will increase to 35% of these funds continue their phased drawdown over the next few years. Within the allocation to Pollen Street managed funds, we expect the balance to shift slightly towards private equity funds with private equity funds representing circa 1/3 of the amount committed to our funds over this time horizon. In the medium term, we will continue to transition to further fund commitments. In June, we refinanced our previous facility with a new 4-year, GBP 200 million senior debt facility at a lower margin. We will see the benefits of this lower cost of leverage coming through in the second half of 2024 and beyond. And this new facility also gives us flexibility that supports the rotation of the investment company to Pollen Street managed funds. As of 30th of June '24, we had drawn GBP 85 million on this facility and alongside the asset-specific facilities, [indiscernible] the total leverage for the group was GBP 130 million, leaving significant headroom of GBP 115 million on our overall facilities. In addition, the group had GBP 30 million of cash, resulting in a strong liquidity position to both deploy funds into a large pipeline of attractive new deals, many of which were expected to complete in the second half of the year and fund drawdowns on our commitments to Pollen Street managed funds. I'll now hand back to Lindsey to cover our core investment strategies.

So by way of recap, we are -- and many of you will have heard this, but I'll recap how we position ourselves with our underlying strategies. We are focused holistically on aligning ourselves for deep structural changes that are reshaping the financial services industry. This has been our consistent long-term focus. Within that, then, as we look at private equity, can we take a deep, thematic approach to identify the structural trends driving growth across the relevant subsectors outlined here. Some of the key themes are middle and back office transformation, how do we modernize the way we deliver our financial services products. The highest standards of regulatory compliance and cybersecurity consistently embedded across the industry and of course, the consolidation of distribution channels are 3 core themes that we've been aligned behind for going on 20 years. We take some of it within these thematics, we have been active, especially in the wealth and insurance sectors, 2 platform acquisitions and 19 bolt-ons, enhancing our portfolio companies, capabilities and enabling them to scale efficiently. Firstly, Neil, a consolidator in the fragmented WealthTech market in the DACH region. It aims to capitalize on the demand for digital WealthTech solutions by leveraging cloud-based technology to gain share and scale. Second, [ Matthew Olé ] and a number of you may be familiar, but a wealth management business with the potential to become a leading vertically integrated advice business in the U.K. powered by modern technology and processes. In insurance, market study stands out as a prime example of how we are creating leaders in our industry, from #9 to #2 in personal lines insurance in the U.K. in less than 3 years. Wide group in Italy is one of the leading consolidators in insurance in a very highly fragmented market. Turning now to private credit. In private credit, our strategy is designed to deliver strong risk-adjusted returns with a robust downside protection. We focus on secured lending to nonbank lenders, leasing businesses and technology companies with large diversified asset portfolios. Our portfolio is diversified across sectors, including SME lending, real estate, energy transition and asset finance. Then turning to some examples on the credit side, Nave is a business in France that is why we provided a EUR 75 million senior financing to a business in France, providing leasing vehicles through the dealership networks with very strong protections against the valuation of those vehicles. So by, we have delivered in excess of GBP 100 million senior facility on residential real estate to one of the U.K.'s most dynamic property developers and Capify, we provide a GBP 40 million senior financing secured in U.K. and Australian SME loans aligned with the thematic trend of supporting the SME financing space and the gap that's provided and that being created by the banks. These case studies demonstrate our ability to structure and secure loans across the various sectors, each contributing to a strong risk-adjusted returns. So with that recap and turning to the outlook. As we're looking forward to the remainder of '24, our focus remains on driving growth through fundraising and deployment. We continue to fund raise in Private Equity V and Credit Fund IV. The deployment of private credit funds already raised during the first half of the year will increase our fee paying AUM and our goal is clear to achieve GBP 4 billion of fee-paying AUM by the end of 2024. We reiterate our wider financial guidance. We continue to review the capital allocation strategies, where it enhances shareholder value, and we aim to declare dividends of no less than GBP 33 for 2024 with a progressive outlook moving forward. Our delivery has been strong, and we look forward to a very attractive medium-term outlook. Now with that, I will now open up to QA.

[Operator Instructions]. Lindsey, Lucy, as you can see, we've had a number of questions from investors throughout your presentation. So firstly, thank you to everybody for engagement. If I may just hand back to you, Lindsey and Lucy, just to take us through the Q&A then I'll pick up from you at the end. Thank you.

Okay. So there are a couple of questions on strategy, which I will address and then some of the questions on buybacks, which I'll hand over to Lucy in a second. So the priorities for deploying huge funds consistently, so we are deploying private equity V and Credit Fund IV at this moment in time. private equity V, all of our strategies are consistently doing what we've been doing for the last going on 2 decades. We're firmly in the mid-market, investing in businesses that we believe have a strong integrity of product and for position for their customer, and we are there to help those businesses often founder-led to scale up especially deploying modern processes and ways of engagement. So delivering the product in a modern way. Maybe I can still maybe [indiscernible]. And then -- so it is -- we have in private equity V, we now have completed 5 deals, and therefore, it is well on track, arranging some of the deals that I mentioned earlier and they're all in our website, if you'd like to learn a little bit more. And of course, we're happy to discuss them in details, but we all fit within those thematics that I outlined key deep thematic drivers across and we aim to get a good spread across the subsector. And then we aim to get a geographic spread, and that's often determined by the pace of change across the different markets. So thematics that we've been operating and investing behind in the last 15 years in the U.K. where often it's been the lead adopter of some of the technological change, we are now working our way in kind of applying in other European markets. At a good land, it tends -- the portfolio tends to be about 50-50 U.K. Rest of Europe. It tends to be well spared across the subsector. So we've got an off to good start. We're about 50% deployed and the business has a great portfolio, and we're very excited about that. So we're now being very selective in our pacing from here. On the credit side, similarly, we're deploying in credit IV, that is GBP 1 billion, and we're aiming to get something like 20 deals across there. So the team are moving out the pacing is a little bit different. And so it's keeping to the heritage of great deals in line with that strategy and kind of being very selective through the pipeline. So it's pacing, selectivity and making sure we're getting that right balance of [ alpha ] in the strategy, but I always like to see it by cutting off the kind of left tail of the distribution of outcomes is what we're aiming to do by digging deep in our sectors. There's been a question about allocation increasing to the balance sheet in private equity. So historically, of course, our allocation to the balance sheet was almost entirely to our credit strategy because that's the heritage of Honeycomb where it was, in fact, the vehicle that deployed the credit strategy as we move to deploy the balance sheet strategically to support the overall asset management business. We have increased the allocation towards private equity to enable us to support all parts of the business on the asset management side, but still keeping the weighting towards credit funds. So a bit of a move. It also enables us to then align to deliver or we're guiding to a low double digits net return for that balance sheet. So it serves a number of purposes. The balance sheet, one of the key reasons for the combination was to enable us to deploy the balance sheet to support asset management so it makes sense to employ some of that towards private equity, but still maintaining the integrity of having a dividend yielding balance sheet and enabling us to get a bit of a pickup in yield. So it's a kind of 3-pronged thinking there. Lucy, would you like to pick up the dividend question?

Yes. Lindsey, yes. So on dividends, firstly, as Lindsey said, yes, we do intend to have a progressive dividend policy. Moving forward. And on the buybacks, this is something that we monitor very carefully. It's been well received to date. We're approximately halfway through our GBP 30 million, so just over GBP 15 million to date. Obviously, we monitor the equivalent rate of return very carefully. And we do this on a monthly basis. So we're absolutely mindful of what the impact it's having.

I'm just trying to -- there's a simple answer to -- as the question, do we have any [indiscernible]? No, absolutely no and never have that was a very conscious question. There's a question about custodian REIT. That's -- It is part of our portfolio company and does it cross the corporate? So it doesn't fit into the allocation at all. Our portfolio companies are kept very discretely and have to, as a regulatory matter, we kept separately from the corporate. Do the regulatory pressures on charges challenge the model? No, the private markets have -- has I'm not saying there are -- it's not a regulatory pressure. And we are so on private equity the flagship funds are very resilient [ 2 and 20 ] fee structures, that's across the industry. And where there is and the way we work with our investors is an occasion, we'll allocate some co-invest, which they get without fees. But the core funds have very clear fee structures of [ 2 and 20 ]. On the credit side, similarly, it's 1 in 10. But occasionally, if you've got a large -- the tickets the investor allocations on the credit side can sometimes be larger and sometimes that can come with a fee discussion. We're able holistically to maintain over 1% across the funds. And typically, where we brought those larger tickets, they are increasing AUM and beyond our planning. So the net-net is a positive one. And so the private markets have -- as I said, there's no pressure, but the pressure tends to come more on the credit side, but more with those larger tickets, which we have not planned. So we're able to kind of manage and reaffirm our guidance on the overall financial profile of the business. Is there an AUM target that enables full allocation of the balance sheet? That will be progressive. So the question is, I think the question is, at some point, could the full [ GBP 350 million ] be allocated to fund? It could be, but it will take another set of vintages at least. So we have made our allocation to these vintages private equity V, credit IV. I don't expect those will increase materially. And therefore, the next allocation to funds will either be when we start thinking about alternative strategies or the next vintage. So that will happen in the medium term, but it won't happen in the near term. There's a question on buybacks as the GBP 30 million of buybacks Lindsey referred to -- so, Lindsey, why don't you pick that up.

Yes, yes. Yes, it's GBP 30 million, it's the answer to that one.

There's a question on [ Matthew Olé ], again. It's been interesting. We completed in that deal just a couple of weeks ago. We've been working with the team, we'll differentiate ourselves on service, on process, on great client service a very strong product proposition but [ sleek ] ways of operating and engaging with clients to bring -- to give the greatest standard to what is a great talent for. So it's about bringing modern efficiencies and ways of operating into a business that's got deep heritage is how I would try to say. There is another question on charging structures and credit funds, as I said, typically 1% management fee on the credit side of the business, it is 1% on net invested assets and 10% performance fee. How much [ co-invest ] in AUM? Sorry, I don't quite understand that question. But if you mean how much is invested in funds we have committed as at the balance sheet, as at the half year, GBP 160 million, as at now GBP 185 million, of which about GBP 66 million to GBP 70 million has been drawn. And so there's another GBP 100 million of commitments broadly to be drawn down over time. The dividend policy, a few questions on that. I think we have -- Lucy has broadly covered that. And then there's a question on the carried interest and the budget we align ourselves. We have always been very compliant in relation to tax. If it increases tax, it increases the tax from the team as it does for everyone that will be impacted by that, not something that we can control. And it's something that we believe will be manageable.

That's great. Lindsey, Lucy, you've been very generous. You've taken every question that people have submitted. So thank you to everybody for engagement. Lindsey, Lucy, I know investor feedback is important to you. I'll shortly redirect those on the call to give you their thoughts and expectations, but before doing so if I could ask you for a couple of closing comments.

Well, I'd like to thank everyone for their attendance today. Thank you for your support to the extent that you are a holder of the shares. Thank you for your interest to the extent that you are an interested potential holder of the shares. We're always available if he didn't get your question addressed. As fully as you would like on the call, trying to kind of make sure, we get the chance to cover all of the questions, but please reach out to us if you would like to discuss any of the matters more fully. Thank you for your time.

Lindsey, Lucy thank you once again for updating investors. If I could please ask investors not to close the session, as we're now automatically redirect you for the opportunity to provide your feedback in order the company can better understand your views and expectations. And it would take a couple of moments to complete, but I'm sure will be greatly valued by the company. On behalf of Pollen Street Group Limited, I'd like to thank you for attending today's presentation, and wish you all a very good afternoon.