Regal Partners Limited (RPL) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to today's 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. The agenda for today is that, Brendan will start with the result highlights, Ian will then cover 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 would now like to hand to Brendan.

Thanks very much, Ingrid. My name is Brendan O'Connor, CEO and Managing Director of Regal Partners Limited. Thank you very much for joining me this morning to give you an overview of what is Regal Partners Limited calendar 2024 results. It's a great delight to be able to present Regal's results in what has been a transformational year for the Group. On this slide, we show that Regal seeks to be recognized as the leading provider of alternative investment strategies across Australia and Asia, and now 2.5 years on since the listing of the business in June 2022, the Group is materially diversified across 4 key asset classes in long/short equities, credit and royalties, real & natural assets and private markets. We are fortunate to be managing over $18 billion on behalf of many of Australia's domestic retail and wholesale clients as well as many international clients. And we have 1 of the largest investment teams in this part of the world with over 95 investment professionals. As Ingrid mentioned, I'll provide a brief overview of the results for 2024, then I'll pass to Regal's CFO, Ian Cameron, who will take you through the financials. I'll then jump back to provide a brief business update before we move to Q&A. So as I highlighted, 2024 was a transformational year for Regal overall. We generated normalized net profit after tax of $97.5 million, up materially on the prior year. Importantly, that translated into strong cash generation and gave the Board confidence to recommend a $0.10 fully franked dividend for the second half of '24, taking dividends paid for calendar '24 to be $0.18 per share fully franked. Our FUM is now $18 billion and up materially. And whilst that includes the acquisitions of Merricks Capital and Argyle during the year, if you excluded those acquisitions, FUM has risen 25% to 2024, a culmination of a lot of hard work and great investment outcomes. One of the great outcomes about the year that we've had is we've had a record year of net flows. So we've had $1.9 billion in net flows, meaning additional subscriptions greater than redemptions into our business over the year. Importantly, the vast majority of those flows all are performance fee eligible. And recognizing strategic effort we've made over the last years, 30% of those flows came from offshore investors. Revenue, therefore, was up strongly period-on-period, including a strong contribution from performance fees of nearly $85 million. Importantly, we have a large portion of our assets under management that are at or within 5% of high watermark or above high watermark, and that gives us confidence around future performance fees for the Group overall. Finally, I'd like to highlight that we continue to execute on our strategic goals. We are diversifying the business, we see ourselves as being a leading provider of alternative investment strategies and the opportunities for further organic and inorganic growth for the Group has never been stronger. I won't dwell too long on this slide, but it's pretty clear that the key metrics across the Group are growing strongly with the diversification of business translating into growing earnings, further translating into strong EPS growth, and that is generating strong cash outcomes, which is translating to strong dividends per share growth. With significant capital on our balance sheet and surplus franking credits with $0.18 per share dividend over the 2024 year fully franked. Digging into the growth of FUM over year, we started the year with $11 billion worth of FUM. And broken out here by first half and second half, you can see that flows -- net flows and investment performance contributed strongly in each of those halves. But as I've highlighted, we've also had the benefit of the Merricks Capital team joining us as well as Argyle Group, the specialist water manager, led by Kim Morison, $18 billion, and that's now $18.3 billion as at 31 January. I highlighted before that a large portion of our flows and indeed the $18 billion that we're managing is performance fee eligible. So as you have a look at December 31, 2024, here you can see that we've got $8.7 billion of our FUM at/or within 5% of high watermark. I think importantly, the other point to note here is that the diversification of the strategies as we've grown the business has never been stronger. And as I highlighted, that gives us increased confidence that performance fees will be generated in each half and further accelerates or reinforces the diversification of the business. I'll now pass on to Ian, Group CFO, who will give you an overview of the financials.

Thanks, Brendan. To those on the call, thanks very much for taking the time to join us this morning. I know you're all busy with reporting season. My name is Ian Cameron, I'm Regal's Group CFO. We are going to spend the next 5 to 10 minutes discussing Regal's financials. The key thing to note is that in CY '24, Regal's financial metrics grew strongly. To show this, we will run through Regal's normalized P&L, balance sheet and net cash position. Turning to Page 11. Page 11 shows the normalized P&L. Focusing on the column second from right, for the year to December 2024, spot FUM at year-end of $18 billion, at an average FUM of $14.3 billion. The average management fee for calendar year '24 was 1.3%. And for 2H '24, the average management fee was 1.2%. That change in average management fee percentage was due to increased diversification and product mix as well as the acquisition of Merricks Capital and Argyle in 2H '24. Moving down the page, management fees and loan management fees of $162 million, and FUM performance fees of just under $85 million. The strong performance fees were primarily driven by the Regal small companies funds or strategy, Regal Resources Long Short, the Regal Resources Royalties strategy, Regal Private Credit, the PM Capital Global Strategies Enhanced Yield Fund, the Regal Tactical Opportunities Fund, the Attunga Power Strategy and Regal's multi-strategy funds, primarily relates to us the return on seed investments, both from the mark-to-market movement as well as dividends and distributions, taking total net income to $281 million, up 151% versus the PCP. Moving down the page, employee benefits expense of $88.5 million, includes both fixed remuneration and add-on costs as well as variable remuneration, deferred compensation grant amortization of $10.3 million, that relates to prior STI bonuses that get amortized over the 1- and 2-year vesting periods. Moving down the page, interest expense, $1.6 million and other expenses of $34.5 million. Whilst up from the PCP, that primarily relates to the timing of acquisitions, both in 2023 for Taurus and PM Capital as well as the acquisitions of Merricks and Argyle in July 2024. Moving down the page, profit before income tax of $146 million and a normalized NPAT of $97.5 million. As you can see already, this is a strong result. Turning to Page 12, which shows the balance sheet. Focusing on the right-hand side for December '24, we've got cash and cash equivalents of $52 million and receivables of $60 million. Those receivables of $60 million primarily relates to management fees and performance fees that crystallized in December, where we received the cash in January and February. Investment in financial assets of $120 million. That's our seed investments in both listed and our unlisted funds. Intangible assets of $634 million, that has grown from the -- versus the PCP because of the acquisition accounting of Merricks Capital. Moving down the page, the corporate credit facility is nil at year-end. And we took the opportunity to repay the drawn amount in the 2H '24 and net assets of $854 million. This is, again, a very good position to be in with a robust balance sheet. Turning to Page 13, which is our net cash position. And starting with the column fourth from the right-hand side, so at year-end, we had net cash receivables and financial assets of $233.7 million. Moving to the right-hand side, you can see there $40.6 million, that's the cash we received from management fees and performance fees in the month of January and February, that relate to fees crystallized at December. The dividend of $0.10 per share, which is the $37 million. And after those adjustments, we've got approximately $200 million in net cash receivables and financial assets. And we've also got an undrawn facility of $100 million, which demonstrates we have a strong capital structure. As noted at the bottom of the page, subsequent to 31 December, the Group upgraded its credit facility to a larger $100 million facility with Standard Chartered with a 3-year term. I'll now hand back to Brendan.

Thanks very much, Ian. I'll just spend 5 minutes now going through a bit of a business update that really showcases, I think the transformational year that 2024 has been for Regal Partners. Our 95-person strong investment team is led by 3 highly experienced and credential CIOs. I think it represents the strongest team in Australia. Each CIO has built a successful business as a founder in their own right and is highly aligned to Regal Partners Limited through material shareholdings in Regal Partners Limited, but importantly, also through material investments in Regal Funds. This is a team that really eats their own cooking. Our investment performance has been strong in 2024. And as I highlighted, that has generated significant performance fees for the Group. And with the increased diversification of our funds above high watermark, we think that we've got great confidence around continuing to generate performance fees in the years ahead. Importantly though, the second derivative of that great performance is that creates great tailwinds for our distribution marketing efforts. And talking about net flows, as I highlighted earlier, we had a record year of $1.9 billion in net flows in calendar 2024. One of the most pleasing aspects about that is that almost all of those flows have performance fee or a performance fee eligible and recognizing the strategic efforts we've made over previous years. Greater than 30% of those flows are from offshore investors who obviously have a significant level of both investment due diligence, but operational due diligence and it's always wonderful to be endorsed by some of the world's largest allocators to alternative investment strategies. Importantly, the second point here is that the Regal culture and a process around sales has further accelerated our net flows. So product innovation getting close to our clients and understanding exactly what they're seeking in coming up bespoke solutions has further supported net flow growth. So we've actually had 5 new discrete mandates from new and existing strategies funded in 2024, representing just under half of those net flows. We've also had 11 new strategies, discrete mandates or vehicles launch since we listed the Group 2.5 years ago. Today, that represents about $2.2 billion of current FUM. And I think it's a great evidence of our ability to be able to understand what our clients are seeking and be able to manufacture a product that meets that need. Looking forward, offshore fundraising momentum continues to increase. We're increasingly meeting with offshore allocators. And increasingly, we have confidence that, that will translate into additional wins over the periods ahead. Our flows are accelerating. If you see this chart on Slide 18 here, you can see the net flows by quarter. I think a clear trend that 2024 has been a breakout year not just the growth in flows of $1.9 billion, but the diversification by asset class. In the call out, which I'll talk about a little bit more later on, is that orange color there, and that is Regal success and leading position as a provider of multi-strategy solutions. We expect strong momentum to continue into '25. And whilst the large offshore mandates can be very, very large, obviously, it could be hard to predict precisely as to which quarter they'll land in. Highlighting that the strategic efforts we've made around offshore clients have also been to improve the level of longer-dated capital across the Group, as well as prosecuting in the retail market, the successful and exceptional investment performance delivered by the PM Capital team. So we've actually have a look here, the organic development of offshore and tailored solutions has been a big driver of our net flows. You can see that represented by the Cayman Company in the SMA or Fund of One structure. You can also see that in the Institutional & Other column in the middle chart, that is really driven by significant offshore client wins from material offshore allocators. And then if you have a look at our FUM by liquidity, I think a real differentiator to other alternative asset managers or other asset managers in Australia that are large increase around the term and closed-end capital. Obviously, we've been busy over the last 2.5 years, acquiring businesses, but underneath the surface, we've also been very busy integrating them. And so obviously, we operate the business on the philosophy that the business of investing is very different to the business of running an investments business. And so while in each acquisition, they have added additional investment capability to the Group, we're not changing the invested philosophy or the security selection process, but what we are doing is getting our arms around the People, the Distribution & Marketing, the IT & Operation, the Risk & Governance to integrate those businesses into the broader Regal Partners Group to allow the investment team to focus on what they do best, delivering good outcomes for their clients. One case in point around that, I think as a case study is PM Capital. So we completed the acquisition of PM Capital in late 2023, 20th of December. And you can see by the chart, the material uplift we've had in net flows. Now the PM Capital team has generated strong investment performance for a long period of time, but it would be wrong of me to assume it was just that investment performance alone driving these flows. I think it's a concerted effort by coordinating early on with the broader Regal Partners distribution capability investing in that team, and that is translating to flows. And you can see net flows in calendar 2023 were $114 million versus $533 million in Calendar '24. We're very confident about the team's ability to generate further flows in future years. And finally, that product innovation that I talked about before, when coupled with a highly credentialed management team and the diversification of the business we have today, I think we can truly say that Regal is a leading provider of multi-strategy investment solutions. It's certainly unique in Australia. I can't think of another Australian-based manager that could assemble the products that we have here. It's unique in the combination of both public and private asset investment strategies with the 1 vehicle. And we now have $1.1 billion within our multi-strat offering represented by the ASX listed RF1, which has generated a near 19% return per annum to investors since listing in June 2019, and more recently by the Regal Partners Private Fund from marketed to wholesale clients in Australia and offshore clients generating a 24% return to investors since December 2023. We believe that there are further opportunities for us to develop additional strategies that can be put into the multi-strat and it will be increasingly a product of demand and possibly even a flagship product for Regal in future years. Finally, turning to strategy and outlook. It's very much a case in my mind of doing exactly what we said, but being able to demonstrate the success of that. So firstly, we have a diversified and scalable and growing platform. We believe it's highly scalable and is increasingly seen as an attractive platform for individuals, teams, businesses to join to grow within the alternative sphere. The market is attractive. Increasing allocations to alternatives is not just a global phenomenon but it's particularly an Australian phenomenon when allocations to alternatives are coming from such a low base. The nature of alternatives is they typically command stronger economics relative to long-only strategies in equities or fixed income. And finally, as we grow and accelerate the development of the business, we're increasingly seeing multiple opportunities for growth. But just to remind you, whilst those opportunities for growth are accelerating both organically and inorganically, we always remain highly disciplined in evaluating those opportunities to ensure we're only doing deals that are accretive to the RPL shareholder. I'll pause now for Q&A.

[Operator Instructions] So I might go firstly to Liam from Morgans.

Just on Slide 18, those FUM inflows, can you just talk me through what drove that sequential improvement through the calendar year? And maybe just sort of thinking about it within the context, was it BD efforts? Was it infrastructure around additional Cayman's vehicles? What caused that trajectory? And how do we think about that as you go into '25?

Yes. Thanks, Liam. I think the marginal growth there is coming through -- from an offshore perspective. As I highlighted, 30% of the flows are sort of coming from new offshore clients through the period. You may have heard me speak about the investments we've made into marketing efforts offshore more recently. These are some of the world's largest allocators to alternative strategies, including sovereign funds across Asia and including the Middle East. The gestation period to marketing to that class of investor is longer than the domestic client, as you can imagine. But let me finish by talking about it is recognition of the sustained period of strong investment performance that, that 95-person strong investment team has delivered, coupled with the ability to prosecute that into attractive markets.

And so just to dig a bit deeper into that, in that sort of global LP market, there's these themes around mandate consolidation, you see takeovers in that space this week with Apollo. Do you guys have enough sort of touch points with those largest investors? Or are they kind of -- do they want more strategies and a single point of contact as they look to allocate into AsiaPac?

Yes, it's an interesting point. It's the latter, which is probably more the dominant one. I think once they've found a partner that can offer a range of solutions to them, they want to deepen that relationship rather than do less with them. And so we are increasingly looking at product opportunities with them to develop further net flows in future periods.

Can we now go to Laf from MST, please?

I just wanted to sort of go around the grounds on some of the acquisitions you made and just how they're tracking because you can see it on a consolidated basis, but sometimes -- we can't really break up and see how are they going versus expectations. So can you give us an update on things like Argyle, Merricks, PM Capital, we can see clearly the net flow is improving. But even still wouldn't mind a little bit of color there around what's really driving that acceleration there and also Taurus as well.

Yes, certainly. So I think the best indication will be from a revenue perspective, and that's the proxy for that is flows. So PM Capital is doing extremely well. Obviously, Paul and the team there have a long track record of generating strong alpha that we've been able to translate that into fundraising success. And I think we're sort of just scratching the surface there. I think there's more to do. I think from Merricks perspective, the other 100% owned acquisition we made during the period. I think probably second half '24, so the first 6 months of ownership, was probably a softer period for them, just recognizing that the private credit market was suffering from a degree of indigestion given the number of offerings coming on through. And to some extent, possibly a bit of a stalemate in the market as buyers expectations and vendors' expectations weren't met. We see that changing now and reacceleration of activity within the Merricks business from a lending perspective in the first few months of this year. So that's pleasing to see. Taurus has launched its resource royalty strategy in the last 6 months. That continues to go well. That has been part of the flows in the period as some of their U.S. LPs have backed that strategy, which is good to see. That strategy is now over USD 400 million of committed capital. And our goal, a manager of about $1.4 billion, $1.5 billion worth of assets, is continue to sort of market principally to offshore investors around their capabilities. So I think each of the businesses that we've acquired over the last, call it, 12 to 18 months, they're doing exactly as we'd hoped they would at this stage of the market.

Can we now please go to Nick from Barrenjoey.

And just a question around what the acquisition pipeline looks like. You made comments around the -- obviously, the couple of hundred million dollar fashion investments balance and then you've taken on a $100 million facility undrawn. Just wanted to get a sense of what you're looking at. If you can give us some guidance on that.

Yes. Obviously, being a listed Group, it's probably hard to sort of give you too much color there, Nick. But it would be, as I've guided before, areas that -- or individual teams businesses that would expand our capability and/or diversify our offering. So that could be a combination of distribution capability in retail, for example, and/or capabilities in other areas that we're underweight. I've mentioned before that we'd like to do a lot more in credit than royalties. So there are opportunities from that perspective. But there are other alternative asset classes that we're not in today that would like to expand into.

Sorry, there was a comment in the presentation around, I think, 5 discrete mandates and then you've obviously had a U.S. sovereign commitment, which I think presumably gets funded this quarter that we're in now. Can you just talk through how those relationships have developed and how that differs to what distribution footprint look like a number of years ago?

Yes, certainly. So we've got about 25 institutional clients across North America today. That's a combination of what we've organically acquired as well as additional clients through acquisitions, principally the Taurus business. They are clients that we're getting closer to better understanding what their needs are and the opportunity going forward. If I just sort of look forward over the next sort of 2 to 3 years, we're possibly having boots on the ground in North America to help prosecute that sales effort directly in North America.

And I mean, I think you've talked about consolidating some office space and other things. I mean, is there a number that you'd point to in terms of synergies from the businesses that you've acquired over the last number of years? It feels like they've kind have been left to their own devices, and there's been some efficiencies and things through dealing and other functions. But is there any kind of offset to natural cost pressures that comes from specific merger synergies?

What we've tried to do, Nick, as I mentioned this in previous periods is, as we integrate the, what I'd call the sort of operational spine of these businesses, so we avoid duplication. We've tried to dismantle key duplicative roles and generate efficiencies there, and we're looking to reinvest those efficiencies ultimately into more distribution and marketing capabilities to sort of grow sales. So I can't give you an empirical answer on the cost savings there, but we're trying to be disciplined around the integration of these businesses to reinvest in those businesses to grow funds under management.

You've obviously not provided any outlook on flows for calendar '25, but often you've got intentions around particular -- more of the LIC, LIT kind of closed strategy. I mean are there intentions to raise funds into those vehicles again this year?

Yes. I think where those -- so talking about the LICs, LITs, obviously, I think if we're performing well and it's recognized in the market that we're performing well and those vehicles are trading at a premium, that could be something that we look at, absolutely. In the meantime, there's the bulk of our FUM, which is in unlisted funds that we continue to sort of prosecute and sort of look to grow.

Could we now please go to Marcus from Bell Potter.

Firstly, congratulations, good figures. Well done. I've got sort of 3 points I'd like to touch on. Firstly, dividend. I think we've spoken about this before, but can you just talk about sort of considerations in setting the dividend between the ongoing management fees and the performance fees, which clearly are more volatile year-to-year. How will the dividend reflect that going forward? Secondly, I think you've kind of answered this, but in terms of offshore, I mean, there's clearly a lot of untapped potential for the Group. I think you mentioned you were going to -- you're thinking about boots on the ground in North America. Is there any other infrastructure you need to put in place for the offshore distribution? And thirdly, on the sort of untapped areas where you mentioned credit and royalties, are you still thinking about private equity as an area? I think you mentioned that a couple of years back, but I think you've gone a bit more quiet on that lately. I think I'm just interested in your thoughts there.

Yes. Why don't I take them in reverse order. So just on private equity, there's nothing sort of near term, but it would certainly be part of an alternative house as a house of alternative investment strategy is that private equity would sort of be a natural fit within there. But I've got no specific update on that for you there. In respect to offshore distribution, there's not a lot really of additional infrastructure. It's really great people and in good locations. And as I keep on using that term to prosecute the investment performance and the opportunity there. So from an infrastructure perspective, the most material aspect of that would be headcount. The vehicle structure itself and even things like the premises to work out are sort of relatively minor to -- relative to sort of having the right people there. And then the dividends, the framework that the Board sort of uses to assess the dividends is, when we listed 2.5 years ago, I think we adopted a dividend policy of paying out a minimum 50% of our normalized after-tax profit. If you take that as a starting point, you have a look at the surplus capital on balance sheet, the surplus franking credits on balance sheet and look forward to any other future sort of capital payments that could be required, I think they're sort of -- they use that framework. And I note that the dividend payout ratio on that basis this year is around 70%. So I think we've given ourselves an opportunity to, as we grow the earnings, so hopefully do better on a payout ratio going forward.

And just to add to what Brendan said, so when we announced our 1H '24 dividend of $0.08 per share, that equated to about 53% of payout ratio on normalized NPAT. And so we gave ourselves the flexibility to revisit that at the end of the year once the full year results were known. And that's what the Board has decided to pay out a $0.10 per share dividend.

Could we now please go to Nic Burgess from Ord.

Just a couple of quick questions from me. Just firstly, Brendan, on the flow pipeline or sales pipeline, could you maybe mention a couple of products or strategies where you're seeing the most interest at the moment and have the most confidence, let's say, for the rest of the calendar year? I guess a follow-up question would be, is it still dominated -- is the pipeline interest still dominated by PM Capital and the Partners Fund? Or there are other things that you have a similar amount of confidence on?

Yes, it's a good point. So I think both PM Capital's momentum and the momentum within the Regal Partners Private Fund, I think, will sort of hope underwrite the sort of flows in 2025. But in addition to that, we're seeing opportunities within long/short equities and bespoke mandates from offshore clients that could be quite meaningful in their contribution, as well as sort of opportunities within credit & royalties. So to answer your question, I'll endorse that view that I think the multi-strat products as well as PM Capital have significant month-to-month momentum. It's the bespoke mandates and sort of tailored solutions in some of the other asset classes, which I think will be the really interesting things to see if they drop in 2025.

Just a couple of questions from more of a modeling perspective. I think the management fee margin implied in the second half was about 120 basis points. Obviously, that will move with potential flows, but is the base is at the right sort of starting point? Are there any other influences on that number that we need to be aware of?

Yes, correct. So back in August last year, we said that post the Merricks acquisition, Regal plus Merricks on a combined basis, there was an average management fee of about 1.21%, that ended up being on the money and the management fee margin for 2H was 1.2%. And obviously, on a go-forward basis, that's obviously path dependent in terms of where the flows and land in terms of each of the funds.

Okay. And just final question. Just the other income line, sorry, I haven't had time to look it up in the Annual Report. But are you able to just break out on that other income line. What the mark-to-market component was versus the cash received dividends and distributions?

So we haven't provided a split by fund, but there was a material portion of that from -- and it's probably a reasonable split between mark-to-market and dividends and distributions. But there was also some interest income and FX in that line as well.

Okay. It looks like there's a fair bit of volatility, if my numbers are right, half to half. First half was a bit higher than the second half. How should we think of that line moving forward?

So that's right. It was a softer performance in 2H, but probably the best way to answer that question is, if you turn to Page 13, you can see we've got net cash receivables and financial assets on a pro forma basis after those receipt of management fees and the upcoming dividend of approximately $200 million. We would like to hold ourselves accountable to earn at least 10% per annum on that money. We've also got the additional flexibility of the credit facility.

We probably only have a few minutes left. So I just might do a couple of questions online and then wrap up. So the questions online. There's been a few on Platinum. So 1 was regarding having CC acquisition bid, what was the reason for this? And would you consider other deals, which I think we've sort of covered a little bit already and also is Regal reconsidering its interest in Platinum?

To answer the question, we walked away from Platinum because we couldn't agree price. Obviously, our great concern was that FUM was eroding faster than we could get our heads around on that basis and couldn't build sufficient conviction in the price that we're looking to pay. So we walked away there. I think that's probably the best way of summarizing why we walked away.

And then the last question online, I'm just going to squeeze in is just, do you have any thoughts on ASIC's review of private assets? Will this tension help or hinder private capital managers?

Yes, great question. So I think we welcome ASIC's review of sort of private markets. I think Regal as a highly credential manager of both public assets as well as private assets is well placed to participate and help in any way we can in sort of improving reporting around private assets. Obviously, as ASIC recognizes themselves, both public assets and private assets are really important to the health of the Australian capital markets, and we see a very valuable role for both going forward.

Thank you, Brendan. So I think we'll finish questions there. So I'd now like to hand back to you for closing remarks.

Thank you, Ingrid. As I highlighted at the very beginning, thank you for joining us for what was Regal Partners Limited 2024 calendar year results presentation. It's been the culmination of a lot of hard work from our staff. I'd like to thank them for their efforts. I'd also like to thank our shareholders for their support over 2024. The business has never been in a stronger position to deliver on our strategic ambitions and look forward to providing further updates through 2025.

Thank you. That now ends the call.