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

Good afternoon, ladies and gentlemen. Welcome to the Pollen Street Group Final Results Investor Presentation. [Operator Instructions]. The company may not be in a position to answer every question received during today's meeting. However, the company can review questions submitted today and we'll publish those responses where it's appropriate to do so. Before we begin, we'd like to submit the following poll. And if you give that your kind attention, I'm sure the company will be most grateful. I'd now like to hand over to CEO, Lindsey McMurray. Good afternoon. The floor is yours.

Thank you, Mark. Good afternoon, everyone, and welcome to the Pollen Street Annual Results for 2024. I'm Lindsey McMurray, and I'm delighted to present with Crispin Goldsmith, our CFO. So for 2024, it's been a phenomenal and pivotal year for the group, outstanding financial performance and critically that the Fund Management business now represents 2/3 of revenue and the key driver of performance and growth. We've seen 29% growth in AUM to GBP 5.4 billion with Private Equity V exceeding its EUR 1 billion target. Credit AUM rose by 25% with GBP 500 million of available capital ready to deploy with strong fundraising momentum continuing into 2025. Fund Management revenue now represents 68% of total revenue and then with strong EBITDA margin expansion at 39%, up from 30% last year. The Investment Company continues to deliver strong and reliable returns with our net investment return at 9.6% and GBP 31.8 million of net investment income. And together with this growth, we've been able to deliver strong cash generation to shareholders, returning approximately GBP 48 million through dividends and buybacks. So we're delivering growth and capital. Throughout 2024, total AUM grew by 29%, reaching GBP 5.4 billion at the year-end and forecasted to be GBP 5.8 billion by the end of Q1. Fee-paying AUM, which represents 75% to 80% of total AUM, has grown at a similar pace, reaching GBP 4 billion by the end of '24 and already forecasted to be GBP 4.3 billion by the end of Q1 2025. And we're increasingly confident of meeting our medium-term guidance of GBP 10 billion of total AUM. So across the strategies, with strong performance. With Private Equity, Fund V surpassed its EUR 1 billion target with fundraising continuing into 2025. We raised GBP 400 million in co-invest vehicles, strengthening strategic investor relationships. We deployed GBP 1.1 billion of capital into 3 new platforms in '22 bolt-on acquisitions. And we're maintaining a robust pipeline for '25 and signed 2 successful exits during the year. In Private Credit, we raised over GBP 500 million for Credit IV and separately managed accounts. The strategy and the team are increasingly recognized as a leader in our field on a global basis. Fund IV remains on track to reach its GBP 1 billion target in 2025 with a strong transaction pipeline for deployment. Fund III is fully deployed with 21 investments. So there's been significant momentum in revenue in '24 with Fund Management business firmly dominating our performance. Total revenue was up 24% to GBP 98.6 million, driven by a 62% increase in management fees. The Asset Manager now accounts for 68% of total revenue. The fee rate was at the top end of the range of 1.5% due to catch-up fees with FRE scaling well to GBP 21.7 million and PRE adding a further GBP 4 million. And the Investment Company continues to deliver a strong foundation of reliable income. And with this revenue growth, it translated into a step change in profitability with Fund Management EBITDA growing by 72% to GBP 25.7 million and margins expanding from 30% to 39%. The Investment Company increased our allocation to our funds, committing GBP 196 million with GBP 130 million drawn by the year-end. Now turning to our products and our markets. As a reminder, we invest to take advantage of the structural changes taking place across the financial services industry. We currently have 2 strategies, mid-market private equity with controlled buyouts, aiming to deliver 3x money multiple. In credit, we provide senior asset-backed capital to high-quality operators in the select field. The private equity market continues to develop. And despite challenges in some of the broader fundraising environment, mid-market funds have demonstrated resilience and stability. And this chart illustrates funds between $1 billion and $5 billion stand out as the only segment to show growth over the last year as returns have proven more attractive and the exit market more reliable. Sorry, and the financial services sector is a key sector in transactions being recognized as a critical and dynamic sector by many of the global strategic investors. Global private credit has a lot of headlines is forecast to grow 50% from $2 trillion to $3 trillion between 2024 and 2028. Specialist areas like asset-backed lending are playing an important role in this growth, offering strong returns, while addressing investing needs for diversification from direct lending. Our asset-backed strategy is a clear complement to a private credit program that is now well recognized as Pollen Street internationally in its space. So we're positioned in the right parts of the market. Our client base remains a cornerstone of our success, enabling us to grow across region and deepen strategic relationships globally. Our LP base is well balanced with 30% in Europe, 30% in North America and the balance split between the U.K. and Middle East and Asia. I'll now hand over to Crispin to cover the financial performance.

Thank you, Lindsey, and I'm delighted to be presenting my first set of results for Pollen Street. Before getting into the numbers, for those less familiar with the business model, I'd like briefly to recap on how the group generates revenues and earnings. The group consists of the Investment Company and the Asset Manager. The Investment Company generates net income from the group's own balance sheet, which is deployed both in direct investments and increasingly through our funds. We have a strong through-the-cycle track record of delivering consistent and attractive returns from this capital. The Asset Manager manages third-party capital on behalf of our limited partner investors through a range of private equity and private credit funds. We charge quarterly management fees either on committed or invested capital depending on the fund strategy and maturity, which gives a stable long-term contracted revenue stream. We also charge performance fees, typically a share of investment gains over a predefined hurdle. We have a long and consistent track record of generating performance fees through investment performance, the timing, in particular, in the early years of a fund can be uncertain. Fund Management costs, predominantly people and property are deducted from fees to give Fund Management EBITDA, which together with net investment income comes together to give the group EBITDA. Fund Management EBITDA can be subdivided into PRE, performance-related earnings, being performance fees less certain performance-related costs. and FRE, fee-related earnings, being management fees less the balance of the fund management costs. So 2024 marked a significant shift in our revenue mix. Fund Management income, which consists of both management fees and performance fees derived from our managed funds grew 36% in the year to GBP 66.8 million. Through cost management and the inherent benefits of our scalable operating model, administrative cost growth was held at 20%, allowing Fund Management EBITDA to grow by 72% to GBP 25.7 million. The Investment Company sustained its track record of delivering consistent returns with the return on net investment assets increasing from 8.8% in 2023 to 9.6% in 2024. This allowed income on net investment assets to increase 5% to GBP 31.8 million despite a reduction in average net investment assets during the year as a result of share buybacks and dividend payments. The EBITDA of GBP 57.5 million was up 27% from GBP 45.1 million in 2023, with the ongoing transition towards Fund Management EBITDA evident. The top chart on this slide shows in more detail how that income mix has evolved in recent years. High-growth Fund Management income, now 68% of the total, is having an increasing impact on driving overall group performance with income on net investment assets being a stable foundation to support cash generation. This has been led by growth in recurring management fees, which have driven rapid growth in fee-related earnings to GBP 21.7 million in 2024, an annualized growth rate of 89%. The group's performance fee portfolio is still relatively early stage. Income from performance fees is, therefore, towards the lower end of our medium-term expectations. And consequently, performance-related earnings accounted for a modest 15% share of Fund Management EBITDA for 2024. Given that profile, there is significant embedded value in performance fees, which haven't yet been recognized in earnings. Based on target lifetime returns of 2.5x to 3x money on invested capital for our existing Private Equity assets under management, we'd expect to earn between GBP 162 million to GBP 227 million of performance fees over the coming cycle, which have not yet been recognized. Turning to the Asset Manager in more detail, which is scaling well. 2024 was a year of significant growth, driven by successful fundraising efforts in both Private Equity and Private Credit. This delivered 29% AUM growth to GBP 5.4 billion at December 2024 with a corresponding 17% increase in fee-paying AUM to GBP 4 billion. This is a continuation of steady AUM growth over a number of years and feeds straight into growing Fund Management income. The blended management fee rate for the year of 1.5% was at the top end of the range, noting that this was boosted by GBP 5.9 million of catch-up management fees in the year. As already outlined, the Asset Manager benefits from an inherently scalable business model with additional funds raised being largely managed by the existing team. Growth in revenues, therefore, fed through into an expanded EBITDA margin of 39%, on track to meet our medium-term target of 50%. We see this come together on this slide as a summary of the Asset Manager progression over recent years. Successful fundraising has generated consistent growth in AUM, delivering 25% compound annual growth in revenues. This has in turn delivered a 54% annualized growth in fund management EBITDA to GBP 25.7 million in 2024. The Investment Company's balance sheet fulfills a dual function. It's both a strategic resource, for example, to give alignment of interest with our limited partner investors through investments in our managed funds and a generator of stable and attractive investment returns. During 2024, it has excelled in both these roles, delivering growing returns in both percentage and absolute terms, while executing a transition from direct investments to our funds, which accounted for 26% of invested assets at the end of the year, up from 11% at the end of 2023. A further GBP 66 million of commitments to our funds will be drawn down as investments are made by the funds. The investment performance delivered was particularly impressive alongside the GBP 48 million of cash returned to shareholders during the year through dividends and share buybacks. This had the effect of reducing average net investment assets by 4% to GBP 330 million. So the increase in net investment return from GBP 30.2 million in 2023 to GBP 31.8 million in 2024 equated to an 80 basis point increase in the yield to 9.6%. Our portfolio is well diversified with 93% allocated to credit assets and 7% to private equity assets, delivering robust cash flow and stability. During the year, we put in place a new GBP 240 million senior debt facility, refinancing the previous facility at a lower margin. GBP 191 million of this was drawn at the year-end. Our net debt to tangible equity ratio improved to 50%, down from 54% in 2023, giving a strong financial position to support future growth. We continue to optimize the use of excess capital to support growth and deliver value to shareholders. We invest in our Private Equity and Private Credit funds to support organic growth and accelerate the expansion of our asset management platform. This ensures alignment with our strategic priorities while driving future scalability. We declared GBP 33 million of dividends for 2024, in line with guidance. Dividends actually paid in cash during 2024 were GBP 25 million, reflecting a one-off reduction due to rephased payment timing. In addition to that, GBP 23 million of capital was returned to shareholders during 2024 through share buybacks. We are committed to maintaining our progressive dividend policy. Going forward, dividend growth will be below the rate of earnings growth to allow us to reinvest earnings in value creation opportunities in line with the capital allocation framework. Our balanced approach ensures we remain agile in deploying capital effectively while delivering sustainable returns for shareholders.

Thank you, Crispin. So in terms of outlook, we have clear priorities for 2025 to complete the fundraising for Private Equity V and Credit IV and with that, expanding our AUM towards the medium-term target of GBP 10 billion. We expect returns on net investment assets to rise to low double digits within 2 to 3 years. Management fees are projected to remain in the 1.25 to 1.5 percentage points of fee-paying AUM with performance fees expected to contribute 15% to 25% of total fund management income over the longer term. We're targeting long-term Fund Management EBITDA margin of 50%, and we continue our disciplined approach to capital allocation using share buybacks on occasion to align the strategy and enhance shareholder value. We will declare a dividend of no less than 55p in respect of 2025, reflecting our commitment to progressive dividend policy. So with that, I will now open to questions, and we have a good range of questions.

So thank you for those that have come in to any of you who would like to still submit. I'll start to work my way through, and we can address any questions that you have. So one question is on co-invest. We've committed or we've raised GBP 400 million in co-invest and how do we see that as part of our strategy. Overall, we don't commit to co-invest to any of our investors, and that is something that is consistent across the investor pool relationships. However, where we have deals where the allocation to the deal is we're satisfied with the position that we've got exposed to in the funds, co-invest is a great way for us to expand the relationships, the strategic partnership with our investors. So there's no commitment to do it. Where we have it, it is definitely a positive for relationship and how we work with our investors. And -- but it doesn't impact the financials of the business because we don't ever forecast that we'll be having co-invest. We simply forecast that we will be having the fees coming from the flagship funds. So it doesn't impact the financials. We'll do it where it suits the risk appetite of the funds and the relationship building with our LPs. How resilient are our credit assets in a potential downturn or rate environment. The vast majority of our investments are actually floating rates. So -- and at this current point in time, often subject to a floor in their underlying reference rate. So at this particular point in time, they have been set within the higher interest rate environment. The facility and the approach we take to setting the amount that we will lend to our borrowers is by applying pretty severe macroeconomic shocks to the variables that could impact. So we will run analysis that will take account of GDP, recessionary environment, reductions in property prices, spikes in unemployment. That together means that the facilities that we have are designed to withstand a much worse macro than is currently forecast. And that kind of is evidenced by the fact that as we move from the changing macro in '21 to '22, the facilities that we had continue to perform very robustly. So we believe they will perform well because that's the way we set them up to do so. Question on, do we have timing on the GBP 10 billion AUM. We've said that to the medium to long term, so 4 to 5 years is our time line. Matching -- I'll try to address this question. There's a question about matching duration risk and liquidity given the allocation to longer-term strategy. So there's the allocation to funds from our balance sheet. And those are managed to -- so we have a GBP 196 million commitment of a total balance sheet of GBP 500 million, so well within the manageability of the liquidity of the cash generation of the balance sheet. So from the allocation to the funds from the balance sheet, we manage it very carefully and there's a significant amount of cash generation from the balance of the balance sheet to enable us to manage that -- those commitments as they're drawn. As it relates to the funds themselves, we don't have any redemption capability. So we don't run any specific liquidity risk within the funds themselves. So we believe that, that is well managed. And where we would have -- the only place where we have any leverage facilities in the funds is where it is in the credit side. And as I mentioned, there's a lot of cash generation in those to make that eminently manageable. Our competitive edge vis-a-vis the large players like Blackstone or Apollo. So as I outlined, we are investing in the mid-market space and also 2 points of differential and also kind of focused in the financial business services sector. In each of our sectors, we've got a specialism. By devoting ourselves to those areas, we are aiming to deliver top-tier returns, which are 3x growth in private equity and 12% plus for senior credit without -- within a very narrow distribution of risk outcomes. So in practice, we are aiming by our focus to couple off the left tail of distribution without compromising on returns. And that is how we would differentiate ourselves. As I showed on the chart earlier, not to say that there aren't big amounts of capital going to those brand names, household names that you -- that were mentioned. But the private equity, the fundraising market in mid-market of private equity has proven to be highly resilient because it tends to have greater liquidity because at the mid-market, there's a wider range of buyer. So we've seen the resilience. And within that, we present ourselves as delivering strong returns within a narrow risk profile. So that's what I would say on a simplest basis. And then the final question I have here is does the structure of the Asset Manager and the Investment Company present conflicts of interest and are they managed. There are -- so the balance sheet itself, and this has existed for as long as Honeycomb has existed since 2015, '16. The balance sheet itself is a pool of capital, the investment company is a pool of capital that is eligible to benefit from the assets being generated in the credit strategies. As the team are originating any single deal, they do not know where the deal will go. They just originate the deal. At the time the deal is being completed, we will go through a very rigorous audit process that says which pools of capital Funds and Investment Company is this particular asset eligible for. And for example, we have an SMA with a U.K. pension that only wants U.K. assets. So anything that's euros will not be eligible for that pool. But based on eligibility criteria that is documented within each of the partnership agreements, we will assess the available capital for the deal and the deal will be allocated pro rata to available capital. It's a process that we've been running going on for 10 years now. It's been audited on many, many occasions. And so technically, there are some -- I would say, yes, there are some conflicts, but very well versed in managing those.

That's great, Lindsey. Crispin, thank you very much indeed. You've taken all the questions from investors. So thank you to everybody for your engagement this afternoon. Lindsey, I know that feedback will be particularly important to both you and Crispin, and I'll shortly redirect those on the call to give you their thoughts and their expectations. But perhaps before doing so, I could just come back to you for a couple of closing comments.

Yes. So as I said at the top of the call, I think this year has been -- we were confident we could deliver a pivotal year where the Fund Management business is now representing 2/3 of the revenue and is then set up to drive further performance and growth. We've been very pleased with the fundraising in what is kind of a market that has a lot of negative headlines. We've been thrilled with the fundraising momentum in '24 and continuing into 2025. So we sit here with our task ahead of us of the 10 million -- the GBP 10 billion rather, but with a good tailwind as we come through Q1 and hopefully also for the rest of the year. So thank you to everyone, investors, shareholders, potential shareholders who are looking at the company. We appreciate it, and we'll address as many questions as we can. And we'd love your feedback and any other individual questions, we're always here to address them. So thank you all for taking the time today.

Lindsey, Crispin, thank you once again for updating investors. Ladies and gentlemen, could I please ask you not to close this session as we'll now automatically redirect you for the opportunity to provide your feedback in order that the company can better understand your views and expectations. This only take a couple of moments to complete, and I'm sure it will be greatly valued by the company. On behalf of the management team of Pollen Street Group Limited, we'd like to thank you for attending today's presentation, and good afternoon to you all.

Thank you.