Regal Partners Limited (RPL) Earnings Call Transcript & Summary

Good afternoon everyone, and welcome to the first half '23 results briefing for Regal Partners Limited. Today's results will be presented by the Chief Executive Officer, Brendan O'Connor; and Chief Financial Officer, Ian Cameron. And the briefing is being conducted by webinar and phone. As shown on Slide 3, the agenda for today is that Brendan will start with the results highlights. Ian will cover the key financials and then hand back to Brendan for a business update and the outlook. We will then have a short question-and-answer session. We will provide more details at that point, but for those online, please feel free to submit your questions at any time during the briefing so that we can lead with those. Please also note that today's presentation is being recorded and there will be a replay made available on Regal's website. We also may have media in attendance today. I would now like to hand over to Brendan.

Thanks very much, Ingrid. Brendan O'Connor, CEO of Regal Partners. Wonderful to be with you in front of you again talking about Regal's first half '23 results. Just to remind you, Regal Partners was formed through the merger of VGI 12 months ago. It's now a $5.8 billion asset manager with over 50 investment professionals importantly structured across 4 key asset classes of long/short equities, private markets, real and natural assets and capital solutions. To focus quickly on the highlights from the half, the normalized net profit after tax for the 6 months to 30 June, 2023, was $13.1 million, up significantly from first half 2022. The Board is determined to pay an interim dividend of $0.05 per share that's a 100% franked and up on the prior period dividend of $0.04 per share. The statutory cash flows during the 6 months were almost $27 million notwithstanding the statutory loss of $3.9 million, which really reflects the accounting expense of $4 million related to the deferred contingent consideration of Attunga Capital, an item that otherwise would have been capitalized under accounting standard except the fact that it fell outside the 12-month window. The key drivers of our normalized profit for the half, as I mentioned before, was fund at $5.8 billion as we've already disclosed the market. The driver of that are our net flows for the 12 months to 30 June of being $1.1 billion, pleasingly ahead of our target of $1 billion revenues up 9% to $47.6 million and strong cost control $27.5 million, down almost 11% on the prior corresponding period. From an outlook perspective, I'm pleased to say that fund performance improves and together with product innovation that will drive further net inflows and growth over the 12 months ahead. We've previously announced a nonbinding indicative proposal for Pacific Current Group. We're midway through due diligence engagement with that business and happy to take questions on that if required. The balance sheet is robust. We've got over $230 million in cash and investments at 30 of June and as previously announced, we've also secured a $50 million unsecured revolving corporate credit facility as of July, none of which is drawn at the moment. Turning to Slide 7, it was really pleasing to see the business generate $1.1 billion of net flows over the 12 months to 30 of June. Importantly, had net flows in both second half '22 and first half '23. And whilst investment performance eroded some of our fund in the second half '22, investment performance has been a strong contributor in first half '23 and we've exited 30 June with a continuation of that positive investment performance. Perhaps the most pleasing part about the net flows for the 12 months were that 76% of all funds are delivering -- of all our funds are delivering flows over that 12 months and 57% of our net flows are going into new strategies developed within the prior periods, the prior 3 years. Further, it's wonderful to receive endorsement from new clients, particularly new institutional investors over the last 12 months. Importantly, 7 of those new institutional investors have come from offshore with extensive or following extensive investment, but also operational due diligence on the Regal business. I think looking forward the investment raising climate is going to be challenged obviously with higher rates. There's a natural competitor to the products that Regal is -- has, but also say that the nature of the segment that we operate within the family office and a high net worth domestically and of the institutional client base offshore leads to a lumpier profile of net flows. Having said that, we sit here with confidence today with a product set and strong client interest across a range of our products that indicates that we should have strong numbers to highlight over the next 12 months. Group fund $5.8 billion as at 30 of June here. The table on Page 9 provides a good profile of the net flows being largely based across each of those product sets, small outflows within private markets and given the sort of turmoil within some of the private markets at the last -- more generally over the last 2 years, I think that's been a strong outcome and we're increasingly looking forward to the IPO market reopening and a better vintage of investment deals coming forward. At that juncture, I might turn to Ian Cameron, our group CFO, who will take us through the financials.

Thanks, Brendan. So on Page 11, we've got the normalized P&L. We normalize it for one-off costs as well as noncash accounting adjustments such as amortization. We've got spot fund at 30 June of $5.8 billion, which remains unchanged at the end of July, average fund of $5.4 billion which just reflects the movement from our fund of $5.2 billion at 1 January and $5.8 billion at 30 June. Average management fee percentage is 1.1%. That is on our total fund inclusive of any staff and not to any fund managed on partner charities. As announced previously, effective 1 January, 2024, will be turning on fees at the 50% rate on staff fund. As at the end of July, that would equate to additional management fees of $5 million per annum with the optionality of any performance fees on that fund as well. Management fees is $29.5 million and performance fees of $8 million. Performance fees largely relate to our resources long/short fund Regal, the resources' royalties fund as well as the Attunga Power strategies. Whilst not on this slide, I'd like to refer to the year end of December '21 where we earned performance fees of $163 million, which demonstrates the earnings leverage and power of the business when our funds are at higher watermark and any performance fees. Other income of $10.2 million. Most of that relates to the return in our fee investments, which performed very, very strongly in the first 6 months of the year with an annualized return of 9.6%. Strong contributions from our listed funds VG1 and RG8, our tax opportunities fund, private credit, but it was a diverse mix, so total net income of $47.6 million. The employee benefits expense of $14.3 million largely relates to fixed staff costs as well as add-on costs such as superannuation and payroll tax as well as any discretionary bonus expenses. Deferred compensation grant amortization of $5.5 million, that's a noncash item that relates to prior year bonuses, which we defer and invest over 2 years for alignment purposes. Other expenses of $7.7 million down materially 26.2% from the PCP, we're very focused and disciplined around maintaining our costs. So total expenses of $27.5 million up before tax of $20.1 million and normalized impact of $13.1 million. So earnings per share of $0.052. Going to Page 12, we've got a graph that shows the distance to high watermark of our funds. We've listened to feedback and we're pleased to provide additional color on this information. The key point to draw out from this slide is between December '22 and June '23, the percentage of fund at or above high watermark or within 5% of high watermark, has grown and increased from 19% to 29% on a larger fund base, which is a great result. Turning to Page 13, we've got a robust and liquid balance sheet. Nearly $230 million in cash and seed investments. Cash of $37.2 million at the end of 30 June down slightly from 31 December, but that's after the payment of the final '23 to dividend of $0.04 per share or circa $10.2 million. Trade and other receivables of $23.1 million largely related to management fees, performance fees and distributions receivable that we received in the month of July. Investments in financial assets of $196 million, that's our seed investments in both our listed and unlisted funds. Intangible assets of $219 million. That largely relates to the goodwill that was recognized in June last year when VGI and Regal merged as well as any management rights and contract assets. So total assets of $496 million and net assets of $440.9 million. We've got excess franking credits of $27.2 million, which equates to 4x the dividend that the directors has approved yesterday of $0.05 per share fully franked payable on the 14 of September. We've also got a debt facility of $50 million, which remains undrawn. I'll turn back to Brendan.

Thanks very much, Ian. I might just spend a little moment now giving a bit of a business update just to tie that together, finish with an outlook and then pause for questions. Pleasingly, as I said, the $1.1 billion of net flows earned or achieved over the last 12 months further diversify the business, diversify by thumb by asset class with an increasing proportion of capital being managed in capital solutions and real and natural assets. The fund by liquidity has a bias towards term and closed in capital. Not only does that provide in our experience the basis for a portfolio or superior portfolio construction, but also provides a resilient earnings profile for IPO shareholders. It also is continuing to diversify by client channel pleasingly has increased exposure to offshore institutional investors. On Slide 16, the nature of the strategies that we run, given the fee mix with a combination of management fees and performance fees together with strong alignment with a lot of both staff founder and balance sheet capital invest along outside our products, a really a strong focus in performance and our long-term performance track record remains highly attractive. The chart in Slide 16 shows a selection of our strategies right across the business with returns that have at least a 3-year track record and they're performing very strongly through what has been generally a challenging environment, particularly given the movement in rates both the last 18 months to 2 years. Taking that comment further, I note with interest that further product innovation and performance is the key to driving our thumb growth and our net flows ahead of the strategies that we've grasped here all set up within the last 8 years. These strategies represent over 40% of group fund today and provide over $8 billion of fund capacity. The ability within the management team here at Regal to be able to have great client relationships and then pivot to then develop products that are meeting that client demand really has been a hallmark of our success in driving net flows and will continue to be the hallmark of our ability to drive net flows over the years ahead. Just turning now to each of the 4 business segments and starting with long/short equities. The term mainstreaming alternatives, I think is a good one to sort of highlight the trend that's occurring here. The Regal Australian Long/short Equity Fund, a long/short active extension product providing outperformance of the ASX 300 index started live back in August 2009 and it's a great example of Regal's fundamental long/short equity strategies increasingly being used by investors seeking to have broader equities exposure. So rather than actually investing with a long only manager, increasingly seeking out the skill set available with the long/short manager like Regal to gain their equity exposure. The line there from the Eureka Hedge Fund index clearly shows that in the bear market, going back to sort of September 2021 as rates started to increase has really been a challenging time for the market notwithstanding that the broader set of Regal long/short equity funds have continued to power ahead. Further, we're capitalizing on our capabilities, in particular with good idiosyncratic vesting around the resources, long/short strategy in the Asian health care strategy and responding to investor demand, particularly offshore for an increase in low net long/short strategies. Finally, I'd highlight that the Regal Australian Small Companies Fund, which started life back in 2015 continues to generate strong returns and is in the top 3 versus the Mercer peer group across 1, 3, 5 and 7 years. Our private markets strategies now wrapped up within the ongoing fund being the Regal Emerging Companies Opportunities Fund has had a pause in performance whilst the IPO markets closed. And we look forward to that IPO market opening again. I'd say that these times within the last 2 years of the IPO market being closed typically correlate to better vintages of investment going forward as the terms on which we invest in are typically improved in the investors' favor. And pleasing to see that our suite of products there from the emerging companies Fund I, which is now closed and capital returned to investors and then Fund II, III in the emerging capital opportunity fund, continuing to see good opportunities ahead should the IPO market open again, when it opens again. The real and natural assets segment really captures our 61% interest in Kilter Rural. Kilter Rural being the innovators within the Australian water market and farmland market. The Kilter Water fund, their flagship fund has generated 13.6% return since inception from the tailwinds sitting behind that from both a permanent cropping perspective, creating high demand, but also climatic changes together with the supply reductions as announced by the government more recently are all going to provide tailwinds in our view behind the water price going forward. Importantly, during the half, Kilter launched the Kilter Agricultural Fund in June 2023 as a first entree to a broader $0.5 billion perpetual agricultural water and carbon sequestration fund that will target returns of between 10% to 12% over the medium to long term. Attunga Capital, pleasingly, brought on board 2 new institutional investors within its award-winning Power and Enviro strategy. In addition to that, the development of the carbon and enviro fund has now been running for 19 months and notwithstanding the more recent stock performance in carbon prices continues to attract good institutional interest noticing the big discrepancy between Australian, New Zealand carbon prices and where carbon prices are needed by 2030 to limit further global warming. I'd also add that first in the early part of second half 2023, this month, Regal increased stake in Attunga from 51% to 61%. And then finally, Capital Solutions, a segment that didn't exist 12 months ago has got off to a flying start. The Regal Private Credit Opportunities Fund, that fund launched in October 2022, has quickly scaled to circa $300 million with generating a gross running yield of about 11% per annum. I think the investment climate has moved in our favor. It's a private credit fund that really takes advantage of the deal flow that Regal gets access to given our broad relationships. It has no direct property exposure. And as previously announced, we've been delighted to be joined by Chris Champion, previously Managing Director and Head of Financing Group at Goldman Sachs to be a member of our investment committee. Further, the Regal Resources Royalty Fund has been a great partnership. So as we brought the team on board, they've gelled well with the capability we already have within the resources sector. That fund continues to go from strength to strength and we're actively seeking other resource royalty within both Australia and offshore to add to that portfolio. Importantly, we continue to see strong demand for the exposure to resource royalties, which as an investment strategies are not held back by the high inflation environment that sits here in Australia and labor shortages. Finally, from a business update. We're very proud that we have $1.7 billion in listed investment vehicles list on the ASX that provide investors, retail investors with exposure to a number of our better-performing strategies. RF1 now has 9 of our best-performing strategies within one vehicle after we added private credit in March 2003. That fund has generated since inception returns of just under 20% since listing in June 2019. RG8 now managed by the Regal team, which was the former VG8 Asian strategy renamed and with a new leader, RG8, continues to generate improved returns, but with further work to do there to call back to our high watermark. And finally, VGI has generated strong returns. The team, whilst Rob Luciano is on his sabbatical led by Phil King but taken forward by Marco Anselmi and Simon Birrell are doing a great job in generating strong risk-adjusted returns within that vehicle. I'll finish by talking about our strategy and outlook. You won't be surprised to hear that the same messages that we put out 6 months ago haven't changed. And that is the growth-focused strategy that we have remains unchanged built upon, I think, 3 key pillars: a diversified and scalable growing platform; attractive market tailwinds as investors are increasingly going to be seeking alternative ways to generate returns, and hence the growing demand for alternative investment strategies of the life that Regal provides and managers and the strong business economics to have those alternative investment strategies, we need unique investment strategies, we need the best staff to be able to do that. And those combinations command higher fees relative to long-only managers of equities or fixed income. So we believe we've got multiple opportunities for growth, most importantly, organically in front of us. And if we were to do anything inorganically, we'll be very disciplined to make sure it's highly accretive to the IPO shareholder and provide synergies beyond what we have in the business today. I might pause there and see if there are any questions.

Thanks, Brendan. [Operator Instructions] So I'll just start firstly with online questions. So I have a question here saying you're starting to [indiscernible] institutional clients a bit more. Can you talk about some of the sources and strategies that they're particularly interested in or that you're targeting for them and perhaps related to that you've launched recently the Cayman Resources long/short fund, where is that being sold?

Yes. Yes, great. So as I'd highlighted of the $1.1 billion in net flows, one of the most pleasing parts about that is that it included 9 new institutional investors sprinkled across a range of those asset classes. But given the question talked about the resources' long/short strategy, I guess that's a great case study of the offshore institutional demand that we're increasingly seeing. Institutional investors are increasingly interested in our low net exposure strategies that can clearly demonstrate through the cycle good alpha by generating, I guess idiosyncratic returns or alpha as opposed to just beta. That's certainly the case with our long/short resources strategy and is very much the case with our Asian health care strategy. So it's very much offshore institutional investors that are typically seeking that low net exposure targeting Regal's fundamental research knowledge and the ability to be able to generate alpha regardless of market movements. Pleasingly, they come with -- those clients come with a heavy amount of independent investment due diligence and operational due diligence. I've said it before, but it's pleasing to see not only about our investment strategies, but obviously the compliance, the systems, the operational aspects across both our systems and our back office being given flying colors or ticks by those operational due diligence exercises.

Thanks, Brendan. The next question is, off the back of your interest -- increased interest in Attunga, is there a preference going forward for any specific type of growth for Regal, whether that's through further M&A, seeding new funds or controlling minority stakes in unlisted funds?

Yes. Good question. I think the organic growth that we've got in front of this is highly accretive to the IPO shareholder and I think is absolutely the center or the main focus for the business here. We recognize that there are other strategies that would take time to replicate or other markets that we could equally play within. However, our main focus is generating the earnings growth by growing each of these strategies to capacity. But we will from time to time have a look at inorganic opportunities, should they be accretive to the IPO shareholder.

Next question is, while it is early days, can you talk about what's attractive within PAC and some of the boutiques?

Yes. I think the PAC story is pretty simple. I've followed the PAC journey for a while now when it was back as TRG Treasury Group and now PAC following the merger with Northern Lights. I think Paul Greenwood and the team have assembled a wonderful collection of alternate asset managers in a number of geographies, but principally in North America. There's a broader set of alternative investment strategies there that exist within the Australian marketplace. The exciting prospect from our perspective, I guess, is threefold. One is there's the obvious ability to be able to run the business with the leader cost base on the basis that you only need 1 listed business and Board and management team around that, that the more important point strategically is the exciting prospect of being able to import some of that investment capability that the PAC boutiques have within North America and Europe into the Australian marketplace by leveraging the capability we have here in Australia through our distribution marketing team. And then further add to that by the prospect of being able to ex-support some of our institution grade products such as resources, health care, water, agriculture into the North American market, leveraging the distribution and management capability that PAC has.

Great. In terms of private credit, that's a strategy that was launched relatively recently. Where do you see the main opportunities? What sort of assets they are investing in and how big could it get potentially?

Yes, I think private credit's been a very exciting product development from Regal's perspective. We've had great success in raising money for it which has coincided with a movement in the opportunity within the marketplace for further private credit being put to work. So we're very much in a period where we're taking advantage of the broad relationships that Regal has to deploy that capital. We're deploying that capital on better economic terms than we thought we would when we started the business. And pleasingly, the product development or the growth of the product has accelerated beyond our first business plan. So circa $300 million a day, we've got a pipeline of around about $150 million that are very executable over the next 6 months. It's likely that that fund could be as much as $0.5 billion by 31 December this year, well on its way to being $1 billion beyond that. So just to remind everyone, that product started on the 1 of October last year. It has no direct property exposure and is, I think, investing at a wonderful vintage for private credit.

Next question is, you did talk about briefly before, but can you expand a bit further on how you see the fundraising environments at the moment?

Yes. The nature of the segments that Regal sells within in and that is wholesale family office and domestically and then offshore being institutional means that the flow of net flows across our products will inevitably be lumpy compared to other listed retail managers where through the likes of model portfolios and approved product lists, they've probably got a better line of sight to a steady stream of inflows coming through month to month. The other dynamic I'd highlight is obviously as the risk-free rate has moved up dramatically and you've seen some of this in the popularity of that's hybrid, for example, the other day. The risk-free rate has taken a number of I guess, marginal investors' money as opposed to investing on a more illiquid basis or in other asset classes. Notwithstanding that the range of products that Regal has continue to be of interest and we've got growing interest across a range of our strategies, including and not only our Regal resources strategy, but products such as resource royalties and multi-strat opportunities.

Turning back to PAC, I think your last update mentioned that any offer would be subject to due diligence. Can you comment on whether you are starting due diligence, whether it's still being negotiated?

No, I'm happy to say that we're in doing due diligence as we speak, we've engaged with the management team twice now. Early feedback on what we've found through due diligence is really to confirm our original thesis around the value that we thought within the business. We're looking to forward to engaging with management and ultimately the independent Board that they've established further and basically advance that -- our thesis and our offer.

The next question is just in terms of the dividend, $0.05, it's up $0.01 on the last dividend. What was the rationale in terms of setting that level?

Yes, I think we started the business 12 months ago and we merged VGI to have a dividend policy of at least 50% of normalized net profit after tax. If you have a look at both our balance sheet, so from the capital perspective, but also the high cash generated during the 6-month period, the Board saw fit to pay out a dividend, which was approximately or nearly a 100% of our normalized net profit after tax. When you look back over the last 12 months, it's a payout ratio of about 73%. So just to sort of finish, high-cash generative business, high capital sitting on balance sheet, surplus franking credits, it was all pointing to the fact that a $0.05 dividend was more than capable of being paid up.

Okay. [Operator Instructions] I will go back to online questions at the moment since there's nothing on the phone from what I can see. Can Regal comment on claims that it's taken a small stake in Magellan within the last 48 hours or so?

I'm not going to provide any comment there in terms of the investment decisions that the broader Regal team may make as part of the investment decisions. No, I can't provide any further insight there.

Thank you. Next question is, can you please outline what has been put in place to close the gap between NTA and share price of VG1 and RG8?

Yes, certainly. This is a question that we get asked from time to time and happy to engage with investors on that. When we merged with VGI, we were very clear that in our experience, Regal's experience built principally upon the RF1 Regal investment fund closing that gap between share price and the net asset value was really built upon 3 key pillars. Most importantly continued performance within the vehicle itself. And as I highlighted earlier, we've been pleased with the performance that the team has generated over the last 12 months there, but performance alone unfortunately is not enough. It needs to be supplemented with a proactive communication program back out to investors to highlight how the portfolio's performing, how the investment management team are actually seeing the environment and how they're responding to that. But thirdly, it needs a proactive capital management program, which really is code for a very transparent and clearly announced dividend policy, which we've now put in place for VG1 and RG8, noting that VG1 increased its dividend from $0.045, now $0.05 per half to match RG8. And the second thing is a proactive capital management program around buyback. So the buyback obviously is very accretive for ongoing investors while shares can be bought back below NAV, but also provides liquidity for exiting investors. We would love to have sort of made further progress of that over the last 12 months, but pleased to see that we are making progress and those, the 3 pillars that I've just highlighted, our strategy to close that gap continue to be prosecuted.

Great. The next question is with East Point, I think that was discussed briefly at the last results. You've now said the deal's completed. Can you provide a bit more color on how you're engaging with the team?

Yes, certainly you're right. So just in the last fortnight, we have received regulatory approval to complete the acquisition of the East Point Asset Management business. It's a small business with just under a USD $100 million based out of Hong Kong. Our team there led by Simon Walsh, I think have great insights into a China-centric Asian long/short strategy. We're at the early stages of seeing how we can collaborate across fundamental investment ideas across both East Point, RG8 and the broader Asian exposures within the Regal team, but it's early doors, but it's going well.

Thanks, Brendan. The next question, which may be for both of you, is we had some good cost control in the results. Could you expand a bit further on what was managed and yes, from here if possible?

I can take that. So probably 2 points. We're very focused on and disciplined around cost control. There's some additional synergies that we're seeing coming out from the merger between VGI and Regal. And then we're also -- have been investing in our capital solutions business which you'll see come up through the P&L in future periods.

Thank you. And I guess thinking about costs and investing, are you expanding at the moment the distribution team or where's that heading?

Yes, we've got a slide deck on sort of Slide 8 that sort of showed looking forward. I think the investments we've made in the distribution market team in the prior 12 months have really starting to help deliver some of those flows. We continue to invest in that team. More recently, we've invested in a specialist family office distribution professional within the team. And even more recently than that we've added a professional that has deep experience within the alternatives market, particularly around among independent financial advisors within Australia. So we want to continue to build out that distribution and marketing team to bring what we think are great products and institutional-grade products to an expanding client base.

Thanks, Brendan. Checking. So I can't see any questions in the phone queue and we may have one more online question. So I think you mentioned briefly before about Rob Luciano, but there is a question on Rob just saying is there an update on his return to VGI and would there be any plans for Regal funds to take over the management rights for VG1 similar to RG8's last year?

No specific update since we last announced the market that Rob was taking a sabbatical, 3 months sabbatical. I think that was around mid-June. I haven't spoken to Rob whilst he's been on sabbatical, but I plan to do so in mid-September when he is due to return and sort of go forward from there. So no specific update other than just to highlight again that I think Marco Anselmi and Simon Birrell are doing a wonderful job under the stewardship of Phil King looking after VG1. They're generating good numbers and I think that will be ultimately demonstrated to the market over time.

I think we've just got one last question here on performance fees. Thank you very much for providing the high watermark slide. You did mention earlier some of the funds that generated performance fees in the last period. Which other funds close by watermark, where do you see the biggest opportunities?

Yes. Well, I'm not sort of going to break down each of the strategies more specifically than what we've put there, but I'd say that we've said in the past that some of the heaviest contributions or the biggest contributors to performance fees more generally have been our listed vehicles. RF1 is closest to its high watermark in that regard. And I think it's got sort of good performance coming through there. RG8 sits behind that and VG1 behind it again. So we've got good breadth coming through in our performance fees, but not prepared to give sort of further guidance as to specifically which ones will provide performance fees in the period ahead.

Thank you. So I think we are getting close to time and so would you like to make any concluding remarks, Brendan?

No, other than to reiterate what we've said before, I think we're very focused on sort of extracting the value from the business that we have today, the organic growth profile. We've got good momentum in the business from a distribution and marketing perspective, great client relationships and we're developing that further and we are innovating by bringing new product to the market. So very much head down, bum up as we look to prosecute that business case.

Sorry. I just maybe have a late message. Operator, is there anybody in the phone queue at the moment?

This is the operator. We do not have any audio questions.

Okay. I think we might wrap it up there then.

Thanks, everyone, for their time and their interest.

Thanks, everyone.