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

Good afternoon, and welcome to the Pollen Street Group Limited Investor Presentation. [Operator Instructions] Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Lindsey McMurray, CEO. Good afternoon.

Good afternoon, everyone, and thank you for joining Pollen Street's Interim Results Presentation for 2025. Nice to see for many people joining us today. I'm Lindsey McMurray, CEO of Pollen Street, and I'm joined today by our CFO, Crispin Goldsmith. I will start with the key highlights of the first half of the year, together with a summary of our progress. I will then hand over to Crispin to cover the financial performance in detail before I return to outline our strategic priorities and provide time for Q&A. So looking at the first half, I'm proud of the progress the team has delivered. We set out clear priorities for 2025, and we are making strong progress against these. We completed fundraising for Private Equity Fund V, well ahead of target, and we are on track to outperform our target for Private Credit Fund IV, as it continues to expand our AUM, and we're scaling deployment in both strategies. Earnings are growing strongly, underpinned by higher management fees. And overall, the group is firmly on track to deliver its strategic objectives for 2025 and beyond. So as we've communicated, Private Equity Fund V closed at EUR 1.5 billion, ahead of its original EUR 1 billion target, supported by strong demand, particularly in North America. And we are pleased to be able to deliver GBP 500 million of co-invest to our LP2. We have raised GBP 600 million for Private Credit Fund IV by June of 2025 with a strong pipeline of investors giving visibility on exceeding the GBP 1 billion target during the second half of the year. This drove significant growth in total AUM, up 35% to GBP 6.1 billion, with fee-paying AUM up 37% to GBP 4.7 billion of AUM. We achieved good deployment across both strategies and private equity. We invested in two new platforms and completed 7 bolt-ons. And in credit, we closed 14 new deals, bringing total deployment in the first half of the year to GBP 600 million. Earnings stepped up correspondingly, and the Board declared a dividend of 27p per share and carried out GBP 6.3 million of buybacks in the period. So since January 2024, we have returned GBP 70 million of capital to shareholders through the combination of dividends and buybacks. So with the strong fundraising, we are seeing a structural shift in our revenue profile of the business with Asset Manager delivering the majority of growth. The asset management revenues accounted for 58% of group revenues in the first half of 2023, and that's now grown to 76% in the first half of 2025. Recurring management fees now make up the largest share of our earnings, and these are the highest quality revenue streams given their contractual and recurring nature, providing strong visibility and resilience. This shift underpins the quality of our revenue mix and positions us to deliver sustainable earnings growth in the years ahead. Our AUM continues to grow, which underpins our confidence in reaching our medium-term target of GBP 10 billion AUM with total AUM has grown 29% CAGR since 2021, increasing to GBP 6.1 billion as at June '25. Fee-paying AUM has grown at 32% compound growth over the same period, reaching GBP 4.7 billion at the half year. Both private equity and private credit have contributed to this, and it's particularly notable to see momentum building in private credit fundraising, which will be the key driver of AUM growth in the near term. So looking at our strategies and turning to private equity. With the completion of the fundraising in Private Equity V, this fund is already well invested with 8 exciting investments already made. Our core investment themes across payments, wealth, insurance, tech-enabled services and lending continue to witness deep structural change and our team identify those businesses positioned to benefit from these changes. We've completed two new platform investments, OrderYOYO, it's a payments-enabled e-commerce provider serving the European restaurant sector. Leonard Curtis is a U.K. provider of corporate restructuring services and is well positioned to be a lead consolidator in that space. Alongside these, we executed 7 bolt-on acquisitions across the portfolio, further strengthening our existing businesses and supporting their buy-build strategies. The outlook for deal activity is -- in our sector is attractive. And as a leading specialist in our mid-market, we have an exciting pipeline to create a very attractive portfolio for Fund V. On the credit side, we -- in credit, we do not invest in corporate direct lending, but are focused on asset-backed lending. This type of finance underpins much of the real economy from people buying homes and cars to SMEs financing equipment to real estate developers funding projects and even intellectual property owners monetizing their rights as such, is less correlated to M&A activity. It's a very large and growing market expected to reach $7 trillion by 2027, and we have developed a leading platform in Europe and are excited to build this out as the market grows. We have been very active in H1, capitalizing on strong demand for our product with investors and the good momentum in deploying capital, too. Total credit AUM increased 17% in the first half to GBP 2.3 billion, with fee-paying AUM up 41% to GBP 1.8 billion. 14 new transactions were completed in the period. Together, the growth in credit AUM and the pace of deployment are driving an expanding base of fee-paying assets, which will continue to support management fee growth in H2 and beyond. So why are we able to deliver fundraising outperformance in a competitive and challenging fundraising environment? It's because we're focused on delivering alpha in our asset classes. A combination of sector specialism, mid-market positioning, disciplined structuring and pricing enables us to deliver top-tier returns within a controlled risk framework. In private equity, we invest in businesses that are well positioned to take advantage of structural change. We are disciplined to pricing and then apply an operational framework focused on revenue-led growth, margin expansion and buy and build to create long-term value. In private credit, our origination networks and structuring expertise give us access to opportunities with attractive pricing dynamics. The combination of specialist focus, disciplined structuring and pricing and a proven framework underpins our ability to deliver sustainable, high-quality alpha for investors. And with this focus on delivering high-quality returns for our limited partners, we're able to build an increasingly large and diversified investor base across geography and investor type. Over the last 18 months, we have broadened our reach with notable growth from North America as well as increasing commitments from the Middle East and Asia. To support this momentum, we recently opened an office in Abu Dhabi, strengthening our commitment to the region. I'll now hand over to Crispin to take you through the financial performance.

Thank you. So as Lindsey has talked about, the key highlight of the first half has been the increase in fee-paying AUM. And that has come from a combination of new fundraising and deployment within Credit IV. As a result, we've seen a step-up in management fee income. We've talked before about the impact of operational gearing. We're able to be selective about the OpEx investments we make as revenues increase. So the step-up in management fee income feeds through into scaled-up profitability and increasing fund management EBITDA margins. We've done this at the same time as having returned significant amounts of capital to shareholders through both dividends and share buybacks. And I'll go through these points in more detail in the next few slides. So during H1, we delivered increasing profitability and strengthening quality of earnings. Fund management income grew by 55% to GBP 41.4 million. We've held administration cost growth at 29% as we've chosen to make further OpEx investments in the business development team to support future fundraising and in the investment team. So that operational gearing grew the fund management EBITDA margin to 43%, up from 31% this time last year. And as a result, the 55% increase in fund management income translated into 112% increase, more than doubling of fund management EBITDA to GBP 17.7 million. Income on net investment assets was GBP 13.3 million for the half year. That reflected equalization effects where gains are reallocated between investors as if they'd all come in at first close from a strong fundraising period, the phasing of equity gains within the year, which are expected to be concentrated towards the second half and also the GBP 70.6 million of capital returned to shareholders through a mixture of dividends and share buybacks since January 2024. You can see the benefit of those share buybacks in EPS growth of 25% from an underlying 18% increase in profit after tax. So our growth is being driven by management fees, which are the highest quality revenue streams given their contractual and recurring nature. And that allows us to see a continuing trend as we discussed in the full year results and as Lindsey has already highlighted, of an increasing share of revenues coming from the Asset Manager. Asset Manager revenues of GBP 41.4 million for the half represents a compound annual growth rate of 38% versus H1 2023. Within that GBP 3.4 million came from performance fees, reflecting the expected weighting of equity returns towards the second half, in line with the phasing of the underlying investee company budget. So we can see that as we grow fee-paying AUM, we're unlocking operating leverage in the Asset Manager and for the group as a whole, which is complemented by consistent, resilient and cash-generative investment company returns. As a group, we continue to benefit from a very strong balance sheet. Drawn leverage has increased to GBP 206 million following the refinancing and upsizing of our debt facilities during H2 2024. And we maintained GBP 34 million of undrawn leverage with a net debt to tangible equity ratio of 55.6% at the half year-end. I'm pleased to say we're trading in line with expectations, both for H2 and beyond. We'll see a continuing growth in fee-paying AUM in H2 through rising credit forward deployment, but management fees will be lower than H1 without the benefit of catch-up fees. We expect performance fees to normalize towards the lower end of the long-term guidance and full year investment company returns are expected to be in line with FY '24 with both performance fees and investment company returns benefiting from the weighting towards the second half of gains on equity positions. Our longer-term financial guidance remains unchanged as does our capital allocation framework. Share buybacks continue to be a key component of this and authority for further share buybacks was reviewed at the June -- was renewed at the June 2025 AGM. We remain committed to a progressive dividend policy. Dividends per share in relation to the full year 2025 will be no less than 55p, and we were pleased to announce an interim dividend of 27p as the first tranche of this.

So turning now to our strategic priorities for the second half of the year. Our focus remains firmly on execution, continuing fundraising in Private Credit IV, maintaining active deployment across both strategies, progressing the private equity realization pipeline and evaluating share buybacks within our broader capital allocation framework to ensure that they are used strategically and where most value can be created. And to bring this all together, I'd like to close by recapping on our investment case. We are delivering strong and consistent AUM growth, supported by our specialist focus and strong returns with growing operational leverage, further enhancing profitability. There's been a step change in the quality of earnings with recurring management fees now a primary driver of growth. This builds a predictable, high-quality income stream supported by continued AUM expansion. Our balance sheet remains a key differentiator, providing stability and enabling third-party AUM growth. Alongside this, our disciplined allocation framework balances investment in growth with returns to shareholders. Together, these pillars create a resilient and scalable platform, positioning us to deliver long-term value for investors and shareholders. I'd like to thank the team for their hard work, our investors and shareholders for their continued confidence. And with that, I'd like to open up to questions.

Thank you very much for your presentation this afternoon. [Operator Instructions] I'd like to remind you that a recording of this presentation along with a copy of the slides and the published Q&A can be accessed via investor dashboard. [Operator Instructions] I please ask you to read out the questions and give responses where appropriate to do so, and I'll pick up from you at the end.

Okay. So I'll address these broadly in the order that they have been submitted. Can we give an update on the net returns for investors in our strategies? In private equity, we target gross numbers, but the net follows. So broadly, we target 3x growth for private equity returns and the high 20s to 30% IRR, which we are delivering, that translates to a net of about 2.4 return. And in credit, depending on the currency and depending on the -- whether the investor elects for a leveraged sleeve or unleveraged sleeve, we deliver somewhere between 12% to 15% gross, and that translates to about 10% to 13% net and that it continues to be what we are delivering. And of course, what we also highlight is we do that within a controlled risk framework. So we look to deliver a 0 loss return -- 0 loss with those returns. There are a number of questions about Shawbrook and its impact. The impact of Shawbrook on our financials are entirely included within our guidance. And therefore, any prospect of an IPO has been taken account as we look forward into the guidance, and that's well reported in the guidance that's in the market. So it's been something that's well anticipated given the length of time that it's been within our portfolio. In terms of buybacks relative to share price, recent performance, we continue -- it's an act -- we renewed our -- the Board renewed the authority for buybacks at the AGM. It's something that we continue to see as being a valid part of the allocation framework. We're trying -- we're aiming to use it to support liquidity, then remove liquidity. So to the extent it's assessed on a daily basis as to where it can be used as a value accretion and positively to the stock, we still think it's part of the overall tool and framework that we should be using. Other strategies, we've said over time, other strategies that we would look to consider. We've got private equity buyout in the mid-market. We have senior credit. There is a capital credit opportunity space in the middle, and that's something that we'll assess over time. There could be other adjacencies that we can look at that we outlined in our very first Capital Markets Day. So there are a range of them, but the most obvious near term. But what we have been focused on is solidifying both of the core strategies, which is now very much in train -- done or in train. And so that's been the focus. And so now we can look to some of those other emerging strategies. You will see -- asked a question about -- and if I use the deck, someone asked a question about where the investors are coming from on credit. And you'll see that the credit fundraise has been very well balanced across geography, developing even more in the Middle East and Asia, but there's still a very healthy market in credit in the U.K. and we've had some very good successes with some of the U.K. pension plans. So in credit, you'll see that it's well balanced. It's much more weighted to the U.S. in private equity, but it's very well balanced. And I think it's reflective of the positioning of the asset class. How are we positioning to take advantage of the U.K. pension reform? Well, in some ways, that looks to us being able to serve some of those pension plans, and we have an active dialogue with a number of them. We have some SMAs from some of those programs. SMA is a separately managed account where we manage larger amounts of capital, tailored to the preferences of individual investors. So we have been building our relationships there. I'm sorry, I'm trying to read the question. I'm not avoiding the question, I've answered everything. So what confidence do we have in fund returns? Look, we have been maintaining, -- as I mentioned earlier, maintaining pricing discipline. In our mid-market, it is still possible to buy businesses that are positioned to take advantage of the structural growth dynamics that I mentioned. So we're looking to kind of find businesses that may not have been growing at 30% but have the potential to be growing at 30%. And together, we work with the management team to create plans that get us a business plan that is seeking to grow, aiming to grow with a good view to grow at 30% top line growth. So that's what we are -- that's what we're looking to find and it's maintaining -- Leonard Curtis that's up here, was acquired at a very good price at sub-10x multiple. So it's about being specialists in our markets, having our origination strategy right across the team and doing the outreach to find, making the relationships so that people want to work with us and continuing to maintain discipline and then build momentum and growth as early in the investment cycle as we possibly can. And we believe that we can. If you look at the returns across vintage of funds, they are improving each fund. And so that's the sort of evidence that we're getting. The seeding of funds is a positive differentiator, which we agree. So we have a balance of how much AUM can we support doing this. So we have been clear and outlined precisely the investments we've made in our individual funds. And so in total, we have just short of GBP 200 million of commitments to our own managed funds, and that's predominantly invested in credit funds, and that kind of enables us to continue the income generation from the balance sheet and some of it is into private equity funds to reflect the strategy of the overall business. But it's GBP 200 million in total, and it's predominantly Fund IV for credit, some for Fund III for credit and then also Private Equity V and some into what we call an accelerator vehicle. So it's broadly matched, I think, about GBP 130 million to credit, GBP 70 million to private equity and the balance sheet in total is GBP 500 million. Direction of travel, I think we've said we'll get up to about 40%. Is that right, Crispin?

Yes.

So we've still got a way to go, but it will come with the next vintage of funds that won't happen in the near term.

Lindsey, Crispin, thank you for answering all those questions you can from investors. And of course, the company can review all questions submitted today, and will publish those responses on the Investor Meet Company platform. Just before redirecting investors to provide you with their feedback, which is particularly important to the company, Lindsey, could I please just ask you for a few closing comments?

Yes. Just thank everyone for their support where you're already an investor, interest where you're not yet an investor and hopefully -- and as always, if anyone has very -- any individual questions, Crispin and I are available and Shweta to address any of those offline. So please feel free to send those through.

Lindsey, Crispin, thank you for updating investors today. Can 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? This only take a few moments to complete, and I'm sure 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.