Regal Partners Limited (RPL) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to today's briefing by Regal Partners Limited. Today's session will be presented by Chief Executive Officer, Brendan O'Connor, and the briefing is being conducted by webinar and phone. The agenda for the briefing is that Brendan will firstly provide an overview of today's announcement regarding Regal's agreement to acquire Merricks Capital. This will be followed by a short question-and-answer session. We'll 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 note we may have media in attendance today. I'd now like to hand to Brendan.

Thanks very much, Ingrid. We're delighted to announce this morning that Regal Partners Limited has acquired 100% of Merricks Capital subject to a shareholder vote that will occur in early July. Just a short disclaimer here. I'd like to bring everyone's attention to Slide 3. And I think there are a couple of key points we'd like to emphasize here. Firstly, the acquisition of Merricks Capital increasing our fund to $15.1 billion. Obviously, it's a key part of our growth in Regal Partners being a diversified alternative investment specialist. The acquisition of Merricks Capital is a very exciting development for us, [ easing ] FUM as at 30 April, as I said, $15.1 billion. I think from an acquisition highlights and transaction rationale, it provides a significant expansion in the scale and capabilities of Regal's current offering within private credit. Credit and royalties across Regal Partners overall will now represent close to 40% or $6 billion of group fund. It brings on board a highly complementary range of investment strategies, with Merricks being a hard asset investment specialist offering attractive risk-adjusted returns very complementary to the broader array of investment strategies that Regal has. Under Adrian Redlich, Merricks Capital's founder, they've developed a wonderfully deep experienced investment capability and have a long track record of originating wonderful assets, managing them well and, therefore, generating good returns for investors. I will add that we have asked Adrian -- and he's delighted to assume this role, and asked him to be the Chief Investment Officer for Regal's income strategies going forward. And finally, the structure of the transaction provides for great alignment of interest. Not only is it financially accretive, but with ultimately up to 85% of the total potential consideration being provided in RPL shares, we really have strong alignment of interest, and I can confirm that the transaction is accretive pre any synergies to Regal's 2024 earnings. The acquisition price is an approximately $235 million, comprising $40 million in cash and about $195 million in RPL scrip priced at $3.05 a share. At $3.05 a share, it's a 0.6% discount to Regal's 10-day VWAP or a 3% discount to the 5% VWAP. As I highlighted earlier, the transaction will be subject to a shareholder vote, which will occur in early July, subject to shareholder approval, but I'm pleased to say that over 50% of shareholders have voted already or provided statements of intention to vote in favor of the transaction. We have a look at Slide 4. The acquisition further accelerates the growth of Regal Partners' fund, as I said, into that leading provider of alternative investment strategies. From April 2024 at last week's AGM, I had highlighted that Regal Partners' fund was $12.2 billion. With a further $2.9 billion as part of the Merricks Capital transaction, Regal Partners today is a diversified asset manager with over $15 billion worth of FUM. We think there are enormous synergies by Merricks being part of the Regal Partners Group, and we're very excited to be partnering with them. To that, I think there are 4 key parts I'd like to highlight as part of the acquisition. Firstly, the Merricks team, with their deep experience in private credit, represents a significant expansion from Regal's scale and capability in private credit. Combined with Regal's existing funds and team in private credit, Adrian will lead, I think, what is one of the best-in-class private credit managers across Australia and New Zealand, and we look forward to working with them to develop that capability further in growing the business. The Merricks Capital business is also highly complementary. We have a diverse range of products within the Regal Partners Group. And I'm pleased to see that now a $6 billion or 40% of our FUM is now in credit and royalty-related instruments, providing, I think, an exciting and diverse range of product sets for our growing pool of clients. Credit is a specialized area, and when you're talking about providing capital to a diverse range of private credit situations, whether it be in agriculture, commercial real estate and industrial and infrastructure lending, you need to have not only scale, but you need to have deep expertise. Adrian has demonstrated, since starting the business in 2007, a dramatic capability across that team to provide capital in a range of complicated lending situations to develop attractive returns for clients. And finally, the strong alignment of interest, as I said, financially accretive to Regal Partners' stakeholders and very attractive in providing alignment between ourselves in Regal Partners and our new partners, Merricks Capital, with such a large part of that consideration in Regal shares, and we welcome on board our new shareholders. Focusing back up to Page 7 and the diversification of the Regal Partners Group overall. I've already highlighted that now 40% or over 41% of Regal's FUM is in credit and royalty-related strategies. Importantly, our bias in our client base or fund base towards term and closed-end capital remains significant. And when you include the institutional and family office client base that the Merricks Capital brings as part of the Regal Partners Group, we continue to diversify our client-by-client channel further, and particularly with some large institutional clients out of North America. Turning to Slide 9 and providing an overview of the business. So as I've highlighted, Merricks is a leading alternative investment manager focused on private credit, headquartered in Melbourne with a small office up in Sydney. Established in 2007, they're managing $2.9 billion across 3 key strategies at the moment: commercial real estate, agriculture and specialized industrial infrastructure assets. Immediately prior to the completion, which were expected to occur in early July, Merricks Capital will be 50% owned by Adrian and the other half owned by the Liberman family and the Abeles family being the vendors. RPL's consideration will pay $235 million for the acquisition of the business, with cash consideration of $40 million. And as I said, RPL shares are making the remainder, approximately $195 million. From a funding perspective, the funding, $40 million, in cash will simply draw upon cash and investments on RPL's balance sheet. And as I've highlighted already, the timetable will be an EGM held in early July. The transaction will be immediately accretive before any synergies. And in the year to 31 December 2023, Merricks Capital earned normalized revenue of just under $60 million and generated EBITDA of just under $36 million. Slide 10 provides a little bit more detail on the business, as I said, the detail between those 3 key areas of lending of real estate, agricultural and specialized industrial infrastructure. I would highlight that the team has about 44 staff, including investment -- 20 investment staff, as I said, headquartered in Melbourne with an office in Sydney. And there are 3 key pools of capital within the business: a very well-performing Merricks Capital Partners Fund, a multi-strategy private credit fund that was launched back in 2017, now has approximately $1.3 billion in FUM and has delivered over 10% per annum since inception. The Merricks Capital Agriculture Fund is a dedicated credit agricultural fund launched in 2021 and has just under $500 million in capital and delivered over 10% per annum since inception post fees. And then further, they have a range of vehicles, in particular, set up for international investors or offshore investors that provide access to commercial real estate and other lending opportunities across Australia and New Zealand. Further detail in respect of the funds that Merricks Capital are running in the pack. But why don't know I go jump straight to Slide 18, just to round out? So from a Regal Partners strategy perspective, the business has continued to grow with significant momentum across strong net flows, particularly through 2023, great investment performance and now through very accretive inorganic growth options. So fresh from the acquisition of PM Capital and 50% of Taurus late last year, the acquisition of Merricks Capital today is a significant advancement of our strategic objective to be recognized as a leading provider of alternative investment strategies across Australia and Asia. With the business in 2024 carrying significant momentum from a net flow, a FUM and performance perspective with performance fees tracking ahead of -- well ahead of consensus, today's acquisition, I think, puts the business in a wonderful platform for further growth and delivering strong returns for shareholders. I'll pause there and see if there are any questions.

Thanks, Brendan. [Operator Instructions] I might just start with a couple of questions online. So the first question is, as fund managers flock to private credit, why is Regal confident that there's no bubble? And how is it managing credit risk?

Yes, that's a great question. So private credit has become increasingly popular, but that in itself reflects some of the tailwinds that exist in the marketplace. So the constraints that have been placed on banks either by regulatory capital changes, ESG changes or a lack of ability to act nimbly to provide credit to situations has allowed a flourishing nonbank sector. There are 2 comments I'd make there. So one, like anything in asset management, scale is really important to achieving and originating great assets and managing those assets well to generate investment returns. But equally important is having best-in-class credit skills. And as I mentioned, Adrian's team, after he established the business in 2007, has a wonderful track record of not only originating and managing those assets well but is being able to generate strong returns as demonstrated by a growing portfolio of clients that are investing with Merricks Capital. We think it's a wonderful advancement of our capabilities in private credit, and we're looking forward to combining our resources to grow in private credit further.

Thanks, Brendan. The next question online is, how does the 6.5x EBITDA multiple compare to similar transactions in the market?

I think it's attractively priced. So I think there are a number of transactions that have occurred within private credit markets, both in Australia and New Zealand but also offshore. Another way of thinking about this business is that the upfront consideration that we're providing of $235 million is on an NPAT multiple of less than 10x. And if the contingent consideration or the options are exercised, the earnings attributable to vesting those options will mean that we're paying less than 10x NPAT. I think if I look forward to Regal's earnings for 2024 and I look forward to the earnings that we think that Merricks can generate going forward at all levels, I think we're paying less than 10x NPAT, and that is at an attractive multiple when we look at other multiples in the marketplace.

And related to that, is there anything further you can say about the EPS accretion?

The EPS accretion will be immediately -- is immediately accretive to RPL shareholders. That is before any synergies. I don't think there'll be anything of significance from an expense and synergy perspective. The synergies we're really focused on as we look to partner with Adrian and the team is how we grow the business. And we see run rate for taking the business from $2.9 billion of FUM to over $6 billion of FUM as we grow the business going forward.

And the next question on line is the 2.2% average management fee. Is that sustainable? Or is there anything in there that is one-off in relation to origination fees?

Yes, the 2.2% management fee is sort of effectively an all-in take of fees in respect of the lending that they're providing. If you have a look at the management fees that the borrower is paying, that represents possibly about half or maybe 1% of the revenue. The other half represents establishment fees and extension fees and reflects a continuation of the velocity of the loan book that Merricks have. So they're not -- they represent, I guess, fees charge as borrowers draw down or extend loans.

And the next question online is Regal has been doing quite a few acquisitions recently, which can carry some integration risk and risk of underperformance. Is there any intention to pause and fully integrate or to keep up the pace?

That's a great question. We're very conscious of that. So from a Board down, this is very much a Board-endorsed strategy of growth. We have a management team, firstly, that, I think, is match fit in respect of looking at and executing on transactions. Secondly, I think we've got a technology platform that, as we look to integrate these businesses, reduces the risk of those acquisitions as we come on to one technology platform as quickly as we can. But more importantly, I think it's being able to harness the best of these acquisitions by freeing up people like Adrian to focus on running the investment side of the business, so delivering opportunities for clients; freeing Adrian and the rest of the management team up for my management team, the Regal Partners management team, to focus on running the business. We've successfully done that at Regal for several years now in respect to the long-short equities we've filled. We've been doing that more recently with Paul Moore and the PM Capital business. It's that same approach we'll take with Merricks. I think that will deliver great outcomes for investors within the Merricks Capital business.

Thanks. Next question online is, can you give any more detail about any distribution synergies that you might see between Regal and Merricks?

Yes, it's interesting. The -- as I mentioned, the synergies that we expect to achieve are very much revenue related and opportunities to go forward. Some of that will be in respect of distribution. And what I mean by that is they're providing the ability to collaborate between the Merricks distribution team and the Regal Partners' broader distribution capability to take that product further forward. That means into deeper segments that were already existing within Australia. So the high net worth and family office channel in particular. There is some crossover, but for the generalization, there is lots of opportunities for us to be able to work together for mutual benefit. But also shareholders or people following Regal Partners will understand our offshore distribution capability. We're very excited to be able to add Merricks' capability to that product set and look to grow with institutional investors offshore to add to Merricks' existing international investor base.

I'll just do one more online, and then we'll go to the phones. Next question online is a quick one. Why was this not announced at the AGM last Thursday?

That's a very good question. And on the weekend when we're looking to finalize the transaction, I asked myself the same question. The cadence of these transactions can offer some -- obviously be very long in detail. You're not in control of the timing. So as at the AGM on Thursday last week, we didn't have a signed transaction. We reached signatures at some stage very late last night and, therefore, in a position to update the market accordingly. I would have loved to announce it by the AGM, but there are practical realities of just getting all the stakeholders involved.

Thanks. Operator, we might now go to the phones. Could we please go to the first person in the queue, which is Laf from MST?

Two questions for me. First is on the makeup of the performance fee structures for the underlying funds. Is it 100% of the fund that can own performance fees? And what do they look like?

Yes. Good question, Laf. Thank you. So it's really 2 pockets of capital that has the performance fees in there. And that's not the partners' fund. So it's about 30% of the fund overall that has a performance fee. The performance fee has a share of earnings above a hurdle. That hurdle is set at about 2% above the RBA cash rate. So if you think about today, the hurdle for the relevant funds or pools of capital is about 6.35%. Returns generated to investors above that, 10% of that return, is shared with the manager, Merricks Capital.

Got it. And can you just talk through the net flow profile in a bit more detail? So are you expecting to be launching new strategies as a case of trying to beef up the existing strategies? What's the thought process around net flows for this business or growing the business?

Yes. I think there are 2 areas. One is the ability to be able to roll out the Merricks Capital product base to Regal Partners' broader set of clients here in Australia and New Zealand. And I think that's something that can have immediate impact in respect of net flows. Offshore, I think it's the ability to be able to harness our distribution capability based out of Singapore to be able to sell what is a wonderful product with great track record to international investors. I'm not in a position to be able to put a net flow target on there or indeed say what new products may be coming, but we're very excited to be working with Adrian as he leads Regal Partners' income strategies going forward, and no doubt, we'll be rolling out new product where those opportunities present themselves.

Thanks. We now might go to Liam from Morgans.

Can you hear me there?

I can.

Just sort of observing, the offshore peers are trading at sort of double the multiple that you're buying Merricks for. Can you just talk about Merricks' discretionary mandates and how long that fund duration is and then perhaps maybe fund source, that retail versus [indiscernible]?

Yes. Good question. So the majority of the FUM from a channel perspective is wholesale rather than retail. What I'd say from a fund duration perspective, it's ultimately a function of the underlying assets within there. So the underlying nature of these are bilaterally negotiated loans for either real estate. In fact, I've got a good chart on Slide 13 there. Having a look at that sort of breakdown of -- Slide 12, I should say, the breakdown of the portfolio for the partners' fund by subsector. So the nature of the lending opportunities they're providing, they're not liquid assets. They're bilaterally negotiated with sort of, say, a duration of the book roughly around a year. So this, it has an average duration across the portfolio of roughly a year, and that speaks somewhat to the term-based nature of the client base.

Thanks. We now might go to Marcus from Bell Potter on the phone.

Can you hear me okay?

Yes, Marcus.

Congratulations on another deal. I've got 2 questions. Firstly, I noted the financial information you gave us on one of the slides. I see a generated $4.9 million in performance fees last year. Can you just say something about how consistent those are over time over the 4-year trading period you've given us? I guess my concern here in the background is perhaps you're paying a multiple of performance fees that are slightly one-off in nature. I'd like to be comfortable that they're more ongoing.

Yes. Good question. So as we said, it's about 30% of the fund that has performance fee earning capability. If you have a look at sort of the fund returns we've provided for the agricultural credit fund, for example, and that is one that has performance fee earning capability, those funds are generating an annualized return since inception of 10.2% post fees. The large [ mean ] that they have offshore is also -- has performance fee earning capability. If you have a look at the hurdle for that performance fee earning, it's 200 basis points above the RBA cash rate, which is 6.35%. Now in the due diligence we've done, the Merricks Capital business, I can't think of the pool of capital where they've generated return for their investors of anywhere near that level. The returns are either high single digit or double digit. So I'm not going to say that they're going to generate performance fees every year, but I think the opportunity is there for them too and, in our experience, have had a consistent basis of being able to generate performance fees where those pools of capital have had the performance fee earning capability.

That's great. And the second question is more on strategy. You put the slide up recently highlighting you wanted to get into real estate infrastructure and private equity. I don't think this sits in any of those 3 areas. Does that mean you're still actively thinking about how to grow those areas? Or are you going to pause while you digest this? I think it may have already been answered, but your thoughts on that.

Yes. No, fair question. We put that slide in there to give some further direction to the strategy we have, that being recognized as that leading brand around alternative investment strategies. I think those areas of alts still remain of interest to us. I don't think there's so much a need to sort of pause whilst we bed this down. We're looking very much forward to working quickly with the Merricks team to sort of grow the business and delighted to have Adrian come on board on an expanded role to lead Regal's income strategies going forward. So we're not ruling anything out. At the same time, we're absolutely looking forward to growing this business as part of Regal Partners.

We now go to Olivier from E&P on the phone, please.

Just wanted to ask on duration and maturity of the funds, is it fair to say that the open-ended fund, does that have like a date to it? Is that why it's included in -- looks like it's included in quarterly, semiannual and annual liquidity?

There's not so much that it has a gauge of it, but it has a monthly and quarterly redemption process.

Okay. So it is kind of somewhat limited in terms of -- it's not purely open-ended, and therefore, you kind of manage the risk around the inherently illiquid nature of the underlying assets through that mechanism?

No. No, it's not a daily liquid fund. There is a process there, and that is a function of the asset class that sits behind the investment opportunity.

Yes. No, perfect. And then I couldn't help but notice the guys appear to have had a bit of a crack at the rising margins available in office. What's their view on the risk/reward on that front?

Well, the first thing I think I'd say is that Adrian and the team there have built a great business around being very selective in respect to the deals that they're doing. So I don't know that any comments I make around the broader office market necessarily translate into the loan book, but they have a great track record of choosing or originating, I should say, good assets. There was a period of time back in late 2019, where they actually reduced the level of real estate exposure in their book. They also added a level of credit hedging within the portfolio. I think that served them very, very well. I suspect that if you look at the market today, they're more constructive on the opportunities within there. But as I said, the nature of the loan book, the nature of the opportunities is very idiosyncratic. It's very hard to have a general comment overall.

Yes. Appreciate it, and congratulations. It looks like a pretty reasonable deal and presumably you're looking to grow the FUM pretty substantially.

I think the stage is set for us to do that. We're very excited about working with Adrian and the team, and I think looking forward to updating the market in due course.

We're just coming up to time, but I probably just will do one more question online. It's similar to something we've touched on before, but someone was just asking: Of the client channels, high net worth, family office, institutional, et cetera, where are you most excited about the opportunities? And where do they overlap with our existing clients?

Yes, fair question. So I think -- we're not looking to reinvent the distribution channels that Merricks already operates within, but I think there's opportunities for us to do more. So mean deeper within those wholesale segments that they currently operate within high net worth, family office clients within here in Australia and New Zealand. I think the opportunity from my perspective, though, that I'm most excited about is often be able to take this capability that Adrian and the team have built here to international investors. They're already a range of international investors within the business already. I think combined with Regal's growing capability around offshore distribution, I think that provides an exciting opportunity for us to significantly grow the business going forward.

Great. Well, we might wrap up now. So Brendan, are there any closing remarks that you would like to make?

Well, no, thank you very much for listening today. We're very excited. I've used that term a number of times now to be able to announce the acquisition of Merricks Capital. That transaction should complete in early July. To have Adrian and the team choose Regal Partners to partner with as they take the business forward is a wonderful endorsement, I think, of the business that we're building here at Regal Partners, and looking forward to providing another update to the market as part of our August results announcement in terms of how the business is growing. Thank you.