Regal Partners Limited (RPL) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to today's First Half 2024 Results Briefing by 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 6, the agenda for today is that Brendan will start with the result highlights. Ian will then cover the key financials and hand back to Brendan for a business update and outlook. This will be followed by a short question-and-answer session. We will provide more details on how to submit questions over the phone at that point. But for those online, please feel free to submit your questions at any time during the briefing so that we can leave with those. Please note we may have media in attendance today. I'd now like to hand to Brendan.

Thanks very much, Ingrid, and good morning, everyone. As Ingrid said, I am Brendan O'Connor, CEO and Managing Director of Regal Partners Limited. I am joined today by Regal's Group CFO, Ian Cameron; and our Head of Corporate Affairs, Ingrid Groer. We will take the next 20 minutes to present Regal's first half '24 results and then we will be available for questions post that. This slide shows the highlights from the half. Our normalized NPAT was $59 million, up materially on the prior corresponding period. Our normalized EPS was up strongly and our interim dividend up 60% to $0.08 per share fully franked, reflecting the strong organic cash generation of our business model, our surplus capital and excess franking credits. FUM at 30 June 2024 was $12.3 billion, but is now $16.5 billion post the completion of the acquisition of Merricks Capital and Argyle. During the period, we had strong revenues of almost $150 million, $148.5 million, driven by nearly $60 million in performance fees. From an outlook perspective, we have made a significant increase in Regal's investment capability as well as experienced an acceleration in the diversification of our FUM by asset class and investment strategy over the last 12 months. Regal Partners Limited, RPL is Australia's leading alternative investment manager. Today, we have a team of over 90 investment professionals who manage $16.5 billion for a diverse range of clients across 4 key asset classes; long-short equities, credit and royalties, real and natural assets and private markets. And post the integration with PM Capital and Merricks Capital, our investment team in capabilities have never been stronger. As a founder-led business with a strong growth mindset, our investment team is led by like-minded individuals with an unwavering focus on generating attractive risk-adjusted returns for our clients. Importantly, complementing the investment team is a highly experienced management team that is executing Regal's growth agenda and strategic partners. I will now dive a little deeper into the composition of our first half results and hand to Ian Cameron, our Group CFO, to explain the financials. This chart simply highlights the strong contribution from FUM made by net flows positive in each half over the last 12 months and a strong investment performance as well as the material additions of the acquisitions of 100% of Merricks Capital, which are completed last month and 40% of Argyle. Argyle being a specialist water manager. The net flows in the half of $745 million have previously been released to the market. And this table hopefully summarizes our FUM today on a pro forma basis by asset class post the acquisition of Merricks Capital and Argyle, summing to over $16.5 billion. Importantly, we have a significant and growing proportion of fee-earning FUM above high watermark, a distinct and positive trend over the last 12 months. The FUM above high watermark has never been more diversified, increasing the likelihood in our view of crystallizing performance fees in future periods and enhancing the intrinsic value of Regal's performance fee earning capability. Today, we have over $1 billion of FUM in closed-end capital vehicles within 10% or thereabouts of high-water marks with a 15% performance fee share over a zero hurdle. We believe that we will see the real power of our operating model over the next 12 months as we grow our performance fees. I will now hand to Ian Cameron, who will take us through our financials.

Thanks very much, Brendan. It is a privilege to be here today. I will now spend 5 to 10 minutes of your time in running through our financials. Turning to Page 12, which shows our normalized or underlying P&L. At 30 June, we had spot FUM of $12.3 billion. That excludes the Merricks Capital and Argyle Group acquisitions that were completed after 30 June. Average FUM of $11.7 billion at 30 June at an average management fee percentage of 1.04%. And that is after the benefit of the staff rebates reducing from 100% to 50% from 1 January of this year on funds managed by Regal Funds Management. That equates to management fees of $60.6 million. Performance fees were $59.6 million, which were primarily driven by the Regal Small Companies Fund, the Regal Resources Long Short strategy, the PM Capital Global strategy, the Regal Tactical Opportunities Fund, along with our multi-strategy funds. Other income of $28.4 million. That relates to our mark-to-market and change in fair value gains as well as the cash received as dividend and distribution income from seed investments. So, total net income, $148.5 million, up 212% versus the PCP. Employee benefits expense of $46 million for the half. That includes both fixed staff costs as well as discretionary bonus costs payable in cash. The deferred compensation and grant amortization of $2.9 million, that relates to the prior year STI bonuses that amortize over the 1- and 2-year vesting periods. Interest expense of $1.0 million. That's the interest expense on our HSBC debt facility. So, total expenses for the half $63.5 million. Profit before tax of $85 million. Adjusting for corporate tax as well as our non-controlling interest in Taurus Funds Management, Kilter and Attunga of $2.5 million, you get to a normalized NPAT for the half of $59 million and a cost to income percentage of 43%. Turning to Page 13, which shows our pro forma normalized P&L, inclusive of Merricks and Argyle. So, what we are trying to do here is show what would our 30 June results have looked like if we had owned Merricks and Argyle from 1 January this year. You can see that they would have contributed a normalized NPAT of $15.2 million. The performance fees that we've included for Merricks and Argyle, that's on a crystallized basis. So, the same as the approach of Regal. And at 31 July, total ordinary and convertible redeemable preference shares equate to 390.5 million shares. Turning to Page 14. You can see there that we've got a strong balance sheet at 30 June of cash and cash equivalents of $78.1 million, trade and other receivables of $87.2 million. That largely relates to the management fees and performance fees that crystallized at 30 June, where we received the cash in July and August. Investments in financial assets of $134.5 million, that's our seed investments in both listed and unlisted funds. Our intangible assets of $371 million, that is increased due to the acquisition accounting for the acquisition of PM Capital. Other assets of $63.8 million largely relates to the equity accounting for Taurus Funds Management. You can see further down the page, corporate credit facility, $22 million drawn at 30 June and net assets of $621.9 million with surplus franking credits. Page 15 is the new slide that we've included to show the strong net cash position after the recent acquisitions of Merricks Capital and the Argyle Group as well as our proposed dividend payable on 1 October. You can see there that after adjusting for our corporate credit facility, at 30 June, we had $278 million in net cash, receivables and financial assets. We've collected the cash from management fees and performance fees that were receivable at 30 June where we now have got the cash in our bank account. We've used $3.5 million of that to repay the HSBC facility, which now sits at $18.5 million drawn. And we paid cash consideration or net cash consideration of $51.2 million for Merricks and Argyle and adjusting for the 1H dividend, we get to a net cash receivable and financial asset position of just under $200 million. I will now pass back to Brendan.

Thanks very much, Ian. I will finish now by highlighting a little bit more detail on some of the financial highlights and business highlights over the last 6 to 12 months. Importantly, our FUM up to $12.3 billion, as I said, at 30 June, but on a pro forma basis, is now $16.5 billion, including the benefit of Merricks Capital and the Argyle Group. Revenue increased materially on the prior corresponding period. Obviously, performance fees have been a key driver of that and it provides us confidence around our outlook for performance fees going forward. The strong momentum that we have experienced in net flows continued and we had $745 million in net flows during the half. Importantly, experiencing -- we are experiencing heightened interest from a number of institutional allocators who are seeking our uncorrelated alternative strategies across a range of asset classes. We have growing investment capabilities as well as further diversification of our FUM by asset class, strategy and channel. And finally, we continue to execute on our growth ambition supported by a highly credentialed investment team and corporate platform across the group. I have mentioned before that we are a founder-led business and delivering attractive risk-adjusted returns for our clients remains a key focus across all our investment strategies. However, as we all know, investment performance alone does not translate into net flows and FUM. This chart here shows how we have grown our FUM and evolved materially over the last 2 years since the merger with VGI Partners. Importantly, while our disciplined approach to attractive and accretive acquisitions has helped grow our FUM to $16.5 billion today, it should not be lost that we have achieved $1.9 billion in organic net flows post the merger with VGI in June 2022. The strong momentum that we have experienced in net flows continues with key allocator interest across a diverse range of strategies. Our growing distribution and marketing team are executing a client-focused sales approach, which is driving net flows, including the creation of tailored structures for clients such as SMAs, Funds of One Cayman structures as appropriate. We are encouraged by the growing number of offshore institutions, including some of the world's largest sovereign funds who are actively reviewing our investment strategies today. Importantly, we see ourselves and we are starting -- as one of the largest providers of capital to Australian companies and we are starting to observe the power of being one of the largest providers of capital to Australian corporates across equities, debt and royalties. Scale is critical in asset management across both public and private markets. And with a highly skilled investment team, scale, assist deal origination, which increases our relevance to corporates and ultimately leads to delivering superior performance for our clients. We truly are a differentiated Australian asset manager in that regard. And focusing on our -- one of our most recent acquisitions, the acquisition of PM Capital that completed in late December 2023, 8 months on from that acquisition, we are pleased with the progress of integrating the business and delighted with the performance that Paul and his investment team have delivered. The PM Global company strategy is up over 22% post fees over the last 12 months. And whilst strong investment performance has been a mainstay of PM Capital, through integrating with Regal's distribution and marketing capabilities, we are starting to see an acceleration of net flows across the business. Almost half the growth in FUM since the acquisition of PM Capital has come from net flows, including the money recently raised for the listed fund PGF, the largest equity raise in LIC for over 5 years. I will finish by talking around our growth-focused strategy and it remains unchanged. We believe that we have a diversified, scalable and growing platform. And I think the results that we have delivered today really be a testament to that. I think the attractive market tailwinds that we have previously highlighted around investors, whether they be institutional investors, family office investors, high-net-worths or retail investors remains the same today. Increasingly, investors are looking for a more alternative strategies to diversify their portfolio and create better risk-adjusted returns. I think we have demonstrated a strong economics of the business model with very much a performance fee element to the strategies, aligning the investors' outcome with the manager's outcome. And finally, we continue to observe multiple opportunities for growth and as we have done previously, we will take a disciplined approach to make sure that any transaction is not only accretive to the RPL shareholder that culturally is aligned to the growth of our business. I will finish there and see if there are any questions.

Thanks, Brendan. [Operator Instructions] I would like to start with a question online. Just in terms of the dividend, Brendan, there is quite a bit of cash on the balance sheet. Can you provide any thoughts on how the Board came to the $0.08 dividend?

Yes. The Board post the merger with VGI committed to paying a minimum 50% of normalized profit after tax. So that provided a great starting point for assessing the dividend for the interim period to 6 months, 30 June, 2024. Obviously, with strong organic cash generation in the half, a strong balance sheet and excess franking credits, we have put a 60% increase in our interim dividend forward. I think it leaves room for the Board to reconsider the final dividend in the second half of the year.

Great. We might go to questions on the phone now. Could we start with Laf, please?

Laf from MST. My first question is in relation to the confidence in net flow outlook. If we sort of go back 6 months, one of the key features of the presentation, results presentation was your confidence on the outlook of the net flow environment and you talked specifically to some institutional mandates. Can I just check, are you still equally confident that you still have a positive net flow environment outlook over the next couple of years?

Yes, certainly over the next couple of years, the nature of those institutional mandates that I have talked about and the active review that we're under means that the timing of those mandates being awarded will be lumpy. So, whether it falls in this quarter or next quarter, frankly, again, as a founder-led business, we are not really obsessed about that. We're really just focused on making sure that we can actually prosecute those opportunities well and they'll fall as they fall. But no diminished confidence around those net flows maintaining.

Okay. And just moving to capacity for further transactions, of course, we can look at your balance sheet in large parts sort of work that out from that perspective. But often with these transactions, it is one thing to see the FUM combined on a presentation, but could you talk a little bit more about how the integrations or parts of the businesses that are being integrated or worked through? Where are you at with that? And do you have capacity to be doing further transactions later this year? Or how should we think about it?

Yes, certainly, the prospect of further acquisitions remains very real. We are looking at other possibilities. Again, remind you, we will take a disciplined approach to executing those and only do so when I think it is closely aligned and sort of accretive to the RPL shareholder. However, one of the slides we have put in here in this slide deck is to sort of highlight the investment capability we have got, that the complementary management team we've got now. I like to think that we are match fit to look at further acquisitions as well as bedding down what we currently have. Slide 22 is a good summary of some of the success that we've had with the PM Capital team. We've now brought on board the circa $2.5 billion of equities within PM Capital on to our corporate platform. That gives them immediate access to our dealing team, our risk management capability and will help us unlock some of the risk management compliance and back office functionality of the system as well. That will then allow us to ensure that we can extract the right synergies from the business over time.

Thanks, Laf.

Thanks, Laf.

Thanks, Laf.

We might now move to Liam from Morgans on the phones.

Just two quick questions. Just on average management fee, what can we sort of expect that step-up to be once you have got full allocation from Merricks? And then secondly, just on the $3 million to $4 million of expense savings that you flagged in '24, what sort of contribution happened in the first half? And what can we expect in the second half?

Yes. Thank you. So, from a margin perspective, if you exclude Merricks, just to focus on that for point, I think you've seen a trough in management fee margin. Management fee margin in first half '23 was 110 basis points. It's gone to 104 basis points. Excluding Merricks and Argyle, I think you'd see that rebound to sort of around a level of management fee margin that's sort of closer to the 110, then the 104. And then obviously, with the addition of Merricks, the average management fees we are presenting there is basically bringing in a very accretive fee structure relative to management fees. The nature of the Merricks businesses, it has less from a performance fee contribution but a higher element of management fees as well as deal origination and loan establishment fees. So, the overall fee take from that coming through what we see as our average margin will be accretive to RPL's management fee margin going forward. And sorry, you asked another question there. I will just ask you to remind me of that second half.

Sorry, Brendan, it was $3 million to $4 million of expense savings in '24. What did you sort of achieve in the first half? And then what is the second half contribution to that saving?

Yes, we will probably experience around $1.5 million to $2 million in the first half. We're on track for sort of achieving sort of the requisite additional $1.5 million to $2 million in the second half as well. What we've noticed is obviously, the action to extract those expense synergies will occur in the half. But obviously, there's probably a six-month lag between experiencing the expense benefit in the P&L that will pop through in the second half. But we're $1.5 million to sort of $2 million is probably the figure we're probably realized in the first half '24.

That is correct.

Thanks. We might now move to Olivier from Evans & Partners, please.

Can you hear me okay?

Yes, Olivier. How are you?

Yes. I'm well. Thanks. Yes. Just on performance fees, it's obviously a really nice trend there of getting your funds back up to high-water mark. And you've already seen that kind of pay off in the first half. The key -- look, the VG1 funds, how far away are they from being in that ducking blue or whatever you want to call it, color on Chart 10? I'm just conscious that, obviously, the fee structure is very attractive for the generation of performance fees.

You've been reading the Dulux color chart, recently Olivier. Yes, they're roughly within 10%. So, VG1 is roughly 10% away from high-water mark. RG8 is about sort of 2% to 3% away. So, they're close and underscores my comment previously that I think we'll really see over the next 12 months, some of the performance fee generating capability from an earnings perspective being delivered.

Yes. Perfect. And then sorry, just PM Capital, was that -- did that fall under the Regal schemes kind of short-term incentive bonus structure? Or was it all paid out as cash under the old structure?

No, it's broadly consistent with us, although there's not the deferral into RPL shares. So, there's broadly a cash element to it and there's a deferral element to it once bonus is above or a similar amount. And it's close enough to effectively what Regal has been doing and what you're used to from a Regal perspective.

Okay. But there wasn't as much benefit, I suppose, from the deferral in the first half '24? Is that the way to think of it?

It's probably the same. The [indiscernible] broadly the same in relation to the deferred component.

Okay. We might now move to Nick from Ord Minnett.

Just a couple of quick questions. Firstly, perhaps a question for Ian. I was wondering if you could help us out with a bit of a breakdown of the components of other income across the half.

Yes, sure. So, the other income of $28.4 million, a strong contribution from the Small Companies Fund, the Australian Long Short Fund, VG1 and RG8. So that includes any share price gains as well as dividends and distributions and Taurus Funds Management as well.

Yes, I was just going to say, are you able to say what the actual cash received or distribution was as a component of that $28 million?

The Small Companies Fund was about $5 million. The Australian Long Short Fund was about $3 million. VG1 and RG8 was about $8 million to $10 million in total and Taurus Funds Management was about just over $10 million.

Yes. But just trying to get a sense of what the actual cash distribution versus any fair value or market moves?

Of the $28.4 million, about 1/3 is or about $12 million is being realized, whether in realized seed investments as well as cash distributions.

Okay. That's helpful. And just on seed capital, it looks like it's taken a step down over the half. Would we expect that to rebuild over the next sort of 6 to 12 months? Or you're happy with seed capital levels at the moment at around, I think, it was 134 or something?

Yes. I guess that's a good reflection of being able to realize some of the benefits of the successful investments we've made. We won't leave it sitting in cash is probably the best way to give you an answer, Nick. We'll continue to invest that. So that will move up. But with strong organic cash generation in the second half, you'd expect some of it more than to be realized to pay a final dividend.

Great. We might now move back to questions online. We've got a couple of questions on Merricks, so I might combine them. Just broadly, I know Merricks have only just completed the acquisition. But can you just give an update on how the integration is tracking, any product pipeline? And do you expect a significant change in assets in that strategy based on what you're seeing in terms of early flows?

Yes, you're right. So, the acquisition of the Merricks Capital business completed around mid last month. We're delighted to have the team that Adrian Redlich has led and built a wonderful business there as a hard asset specialist lending across infrastructure assets, agriculture as well as real estate. Adrian has taken on the title of sort of leader or COO of Regal's income strategies and looking forward to working with him as we look to sort of broaden his focus across the Regal Group as well, whilst maintaining obviously attractive returns for investors in the Regal products, so in the Merricks products. So, no new product initiatives to sort of talk of at this stage. They have recently moved into new offices at 35 Collins Street. That has been great for the Regal Group because it has allowed us to be able to put some of our distribution and other investment teams alongside them as well in Collins Street there. And I think we've been sort of been fairly cautious in just sort of as we look to integrate the business, working out opportunities to collaborate with that team to generate further revenue synergies for Regal overall.

Great. And just related to that, there was a question regarding facilities integration. So, I think there was a brief mention of PM combined with Regal in Sydney. Can you just more broadly talk about facilities and logistics like that?

Yes, certainly from a Sydney perspective, I'm pleased to say that we have secured Level 46 of the Gateway Building here. So, at some point next year, call it, mid next year, we'll have the ability to be able to co-locate all Sydney staff into the one office location across Level 47, 46. Not only is there obviously a rationalization of a number of otherwise leases that we have across the Sydney premises post the acquisitions of VGI Partners and then PM Capital, but obviously, enormous cultural benefits of co-locating all our investment team, distribution and back office into one location.

Thanks, Brendan. And another question related to the product pipeline more broadly beyond Merricks. On one of the final slides there was mention of the Partners Fund [indiscernible] Cayman vehicle. Could you just talk about that and anything else that is coming up?

Yes, very exciting there. So, the proof-of-concept around that multi-strat was really delivered through the success of our ASX-listed fund RF1. A lot of people will be familiar with RF1, has just celebrated its 5-year anniversary with around 19% return for investors compound over that period of time and providing retail investors with access to some of Regal's best alternative strategies. That gave us the confidence in respect of launching an unlisted version called a Partners Fund late last year. That launched for Australian investors on 1 December. That fund has gone extremely well with returns of over 15% since 1 December last year. It provides investors access to 11 of Regal's best strategies. And then through growing client interest and the ability to secure seed capital, we are launching a Cayman version of the Partners Fund next month on 1 September. That's getting a lot of interest from some of the big allocators offshore, in particular, through North America. And looking forward to talking about more about flows and ultimately, the closing of that product over the coming years.

Great. And we're just coming up to time. [Operator Instructions] But if not, the last question I had was just, in addition to talking about product pipeline, can you just talk about how the distribution team has been evolving over time? And any further thoughts on that?

Yes, the distribution team has been growing out from a headcount perspective and I'd say geographic perspective, we've been closed the integration with PM Capital. We've made a couple of new hires within that team there. And the team is working well with the team here in Regal led by Rebecca Fesq and Rob Saunders. We've got more client-facing sales staff today than we've ever had in Regal's history. And we're pleased by the opportunities we're seeing and we expect to be able to sort of highlight that to the market over the sort of coming months as some of that sort of additional sales force translates into high net flows.

Great. So, I think that's the end of questions. So, I'd now like to hand back to Brendan for closing remarks.

Well, thanks very much for your time today. It's been great to be able to present Regal's first half '24 results. I think a very strong result, which is a wonderful position to be in because obviously, it's been a team effort and look forward to providing you with further updates as we continue to grow the business. Thank you.

Thanks. That now concludes the call.