Tikehau Capital (TKO) Earnings Call Transcript & Summary

Good morning, everyone. This is Mathieu Chabran. Thank you for joining the Tikehau Capital First Half 2020 Results. I'm joined today by Antoine Flamarion and Henri Marcoux, and we wanted to thank you to join us this morning. So let's start with a quick overview of the H1 2020. At the end of June 2020, our assets under management reached EUR 25.7 billion representing close to 10% growth over the last 12 months and 1.2% growth over Q2 despite a fairly unprecedented context. The first 6 months of 2020 have demonstrated our capability to achieve a very solid level of fundraising in a complex and uncertain context with EUR 1.1 billion of net new money for the asset management activity. Our teams have been fully operational and showed an impressive level of dedication in spite of the context. This level of fundraising in H1 is very much in line with the amount we raised in H1 2019, a year ago, even though the environment is dramatically different, as we all appreciate. This is clearly a strong achievement from our teams, and we are grateful for the contribution. We're also improving our revenue mix with the continued growing contribution from real estate and private equity. You know one [ act ] that we've been very focused on over the past few years, which accounted for 80% of the H1 fundraising. In private debt, as some of you may remember, we didn't have a flagship fund in the market this year. Yet, we remain active, and we have been selected to manage Novo 2020, a new institutional fund designed to support French SMEs. We already have several funds like that, that goes back to 2011 and 2012, under management, and this is new success that confirms our positioning as a key player in financing the real economy. I should also add that we remain active in the management of our portfolio. In particular, we saved the opportunity to crystallize some value from our investment in DWS. In parallel, we remain strongly committed to developing our strategic partnership with them, and we have a very positive interaction with the group. So despite this unprecedented situation caused by COVID-19 pandemic, H1 has definitely been a positive period for us, where we demonstrated our ability to maintain our growth momentum. Now we wanted to give you a quick update on the first cutoff June 30 to July 30, today, and Q3 is starting very well. Since end of June, we have gathered a number of major commercial successes, which in total, represent an extra EUR 1.6 billion of assets under management added in just 1 month's time. More than EUR 1 billion comes from organic growth. So we raised in just 1 month, effectively the equivalent of the whole first half. We will get back to these milestones, be in private equity with ACE Management or in private debt. And last but not least, we closed yesterday, the acquisition of Star America Infrastructure Partners in the U.S., which we announced after the Q1 results a couple of months ago. So moving on to the next slide, a quick snapshot on fundraising. What is important to highlight here is that during H1 2020, we have raised EUR 1.1 billion. As I was saying, almost the same amount as in H1 2019, keeping in mind that the circumstances were obviously fairly different. This growth was quite well spread between Q1 and Q2, and Q2 was even a bit better as EUR 600 million fundraising. You will see that this is exactly the same amount that we had been raised in Q2 2019, which, once again, we see as quite an achievement. All of our asset classes contributed positively to the asset management fund raising, but it is important to note that real estate and private equity have largely driven fundraising for the period, attracting 80% of net new money in the first half compared to 60% last year, confirming the [indiscernible] of our clients for these 2 asset classes and also helping us further rebalance our business mix towards highly revenue-generating strategies. As a reminder, our average management fees was 71 basis points in 2017, 83 basis points in 2018 and 94 basis points in 2019. We are obviously very much focused on keeping this trend and growing our top line asset management revenues. Moving on to the next slide, Page 6. The slide here gives you a view on our assets under management evolution over the last 12 months and over the last 6 months for our 4 asset classes. I think it's important to know that for our business with long-dated, closed-end funds, quarterly analysis can sometimes be misleading, and the last 12 months' view brings some long-term perspective. So private debt is slightly down on a yearly basis, but remained stable in Q2. This has to be put in perspective with our natural fundraising cycle since we didn't have any flagship fund in the market for the past 12 months. Yet we have had the success of the Novo 2020 I was mentioning, and we made some distribution to investors, mostly related with our leveraged loan and direct lending activities. And another piece of good news that Henri Marcoux will come back on is that we had the first closing of our fifth Direct Lending fund in July, but Henri will comment further on that. As for real estate, assets under management are up by a solid 20% on the last 12 months basis. In 2020 after a dynamic Q1, marked by the final closing of our value-add fund, TREO, Tikehau Real Estate Opportunity, and a solid fundraising momentum at Sofidy, our assets under management increase in Q2 was lighter given the context. Our real estate business is very diversified across European geographies and also across asset classes since we operate residentials, offices and some retailers. Private equity has also seen very solid growth over the last 12 months, more than 50%, with now EUR 2.3 billion of asset under management. We are convinced that equity financing solution will be a key tool to finance the economic recovery and the verticals in which we are positioned, such as the growth equity, the energy transition through our fund, T2, are proving increasingly relevant. Just as a reminder, 2.5 years ago, when we went public, we had just shy of EUR 100 million of asset management in private equity. So we are clearly delivering on that front as well. Finally, regarding our capital market strategies, fundraising for the asset class proved very resilient in a particularly deteriorating market environment. Fundraising was positive in H1, and Q2 market rebound contributed to offset part of the negative market effect seen in the quarter. So moving on to the next slide, 7. Overall, at the end of June 2020, total group AUM stand at EUR 25.7 billion, representing almost a 10% growth compared to the same period last year on a stable level compared to end of December 2019, despite this very specific environment. Regarding the asset management activity, on the back of what I described in the previous slides, we generated more than 13% AUM growth, 1-3, over the last 12 months with AUM of EUR 24 billion, thanks to our unique positioning on diversified and complementary asset class, on which we can very much differentiate ourselves. You can see on this slide that the rebalancing of our business mix is real. Again, that is a key component of our strategy and model evolution towards a higher fee-generating strategy. On top of that, bear in mind also that 80% of our asset management AUM stands with a long-dated, closed-end fund, which leads to a very solid visibility on future management fee generation. Also, our assets under management is rather young, if I may say, and our model does not rely on short-term carrying interest generation. So at the end of June 2020, the dry powder within our funds reached EUR 4.7 billion. That is a very important item as well, which gives us significant means and resources to invest going forward. At the end of July, on the back of the fundraising I mentioned for the 1 month starting of Q3, we are closer to EUR 6 billion. Direct investment AUM amounts to EUR 1.7 billion at the end of June. The change in assets under management over the first half is mainly due to new commitments we made to our own fund -- into our own fund as per the strategy to align our interest with one of our clients. This aggregate, obviously also includes some market effects on the direct investment portfolio as well as the dividend payment. We will also see some impact related to some financial instruments we implemented during the first half, which can be considered as a hedging tool for the investment portfolio in the very specific and particular in certain market environment, but we'll come back to that later. Moving on to Slide 8. This is now a more detailed graphic view on the asset management AUM evolution. The slide, I think, is self-explanatory. It shows a solid sales momentum regardless of the period you consider. Our asset under management growth is, first and foremost, driven by a solid fundraising. You can see a strong progression in asset management AUM on the last 12-month basis of more than 13%, 1-3, driven by EUR 4 billion of fundraising, mainly private equity and real estate, as we mentioned. And we also gave back to investor a little bit more than EUR 1 billion, and market effects were actually, in fact, marginal over the period. So over the first half, asset management AUM proved resilient with a 1.7% increase. I said before, we raised more than EUR 1 billion for the first 6 months of the year, which is a strong achievement in this very specific environment. We distributed EUR 500 million to investors and market effects stood at a negative EUR 200 million, with Q2 positive market effect, the market rebound effects partially offsetting the Q1 negative market effect. So asset management overall AUM stands at EUR 24 billion at the end of June 2020. And before handing over to Henri, a last comment on Page 9 on the direct investments assets under management. At the end of June 2020, direct investment AUM stands at EUR 1.7 billion, representing a EUR 500 million decrease compared to December 2019. This evolution is proceeding to new commitments from our balance sheet into our own funds, in line with we've been -- repeatedly announced as a strategy of alignment with our investors' client. So you can see that we have distributed over EUR 80 million in dividend over the period. Regarding market effects on our direct investment portfolio, they amounted to around EUR 70 million negative impact in the first half, mostly linked to listed investment. And it should also be noted that Q2 positive market effect of EUR 100 million have partially offset the Q1 negative market effect of EUR 117 million. As touched upon in the previous slide, we call it also EUR 165 million negative impact linked to some financial instruments, hedging that was implemented during the first half as hedging tool for investment portfolio, especially for its various listed components at the time of the market were undertake -- going very high volatile and uncertainty and that major systemic crisis was highly probable. Finally, we also have other items reflecting the cash positions, such as financial expenses or operating cash flow. On that, I will leave the floor to Henri Marcoux to discuss the investment portfolio.

Thanks, Mathieu, for that. Good morning to all of you. So Page 10. Maybe to give you a bit more color on the asset management, management of our investment portfolio. At end of June 2020, we had a little bit more than 210 investment lines in our R&D portfolio with a high level of diversity and granularity in terms of asset type. Should also bear in mind that the investments we make in one of our funds actually typically accounts for 1 line. But as you know, each fund has a variety of underlying position so our portfolio is even more granular as it seems. We'd like to emphasize on that slide that now 65% of our portfolio is now exposed to our own funds compared to 61% at the end of December 2019. And remember, it was 49% a year earlier. So we are now fully on track to deliver our 2022 targets by exposing between 65% to 75% of our portfolio to our own funds. This differentiating approach clearly enables us, first, to fully align our interest with those of our investors and clients, therefore, offering, I would say, a particularly unique model serving growth in our asset management activities. And second, also to have a more recurring revenue stream. We've been also be very active in managing our direct investment portfolio over H1. As such, we took advantage actually of market condition in Q2 to reduce our investment in DWS by a bit more than 50%. As you know, we've been developing on that. We have a very good relationship and collaboration with DWS as part of our strategic partnership, which is actually not at all affected whatsoever by this portfolio management decision. Finally, we've been recently informed that Conforama, which is a financing that has been implemented by the group early 2018, will be soon repay the loan that was granted. And though it will actually -- it will generate some cash flow for, partially our balance sheet and some of our funds as well. Page 11. I'd like to give you a bit of a snapshot of the post end of June event that took place. So you will see on that, that we've been achieving, since end of June, many projects and many very positive things have happened. So as you can see here, we've been very active in the early weeks of Q3, adding a total of EUR 1.6 billion in 1 month. So this compares actually to the EUR 1 billion that we have raised during the first 6 months of 2020, as previously explained by Mathieu. This is really, I would say, Mathieu and our teams have shown here a great and a really great dedication in all of our business units. In private equity, ACE Management, which I remember is a company with purchased, an M&A operation we've been doing in 2018, which is our subsidiary specialized in investment in companies in the aerospace, maritime, defense and security sectors has been selected by the leading aerospace players and the French state to manage the support fund for the aerospace industry. Antoine will come back to that in a minute. We have also raised EUR 55 million as part of the institutional fund Novo 2020 within the private debt segment. In the same segment of private debt, we are pleased as well to announce that we have now received around EUR 220 million of commitment as part of the first closing of TDL V being the fifth vintage of our flagship direct lending strategy. Tikehau Capital committed EUR 60 million in this first closing, and we are now actively marketing that fund. So this is the very first positive milestone in that respect, even more in the current environment. Also, Tikehau Capital has been chosen to manage an ever great (sic) [ evergreen ] mandate for top-tier French institutional investor. This is the first, actually, evergreen SMA we've been closing in private debt, and we hope we'll be able to achieve more of that kind in the future. And last but not the least, actually. So we have finalized yesterday the acquisition of Star America. You know this acquisition announced in May and which is quite instrumental in our North American ambition and which allows actually the group to expand in a new asset class being infrastructure. We are very much looking forward to develop that business just like we did with Sofidy and ACE Management back in 2018. Antoine?

Thank you, Henri. Thank you, Mathieu. Slide 12, please. Hello, everyone. I hope you're all safe in this context and environment. I'm very happy to comment the strong achievement for ACE and its team, led by Marwan Lahoud and Guillaume Benhamou. ACE has been selected through a very competitive tender by the French government as the sole manager for a private equity fund aimed at supporting and strengthening the aeronautic industry. The fund has achieved a first closing of EUR 630 million, with EUR 200 million coming from leading space industry players, namely Airbus, Dassault, Thales and Safran, EUR 200 million from the French states and EUR 230 million coming from Tikehau balance sheet as strategy of alignment of interest. The goal is to reach more than EUR 1 billion and provide support in transforming and consolidating the sector supply chain. This is a major recognition of ACE Management expertise in the field of investment in analytics and confirm that Tikehau is a key player in the financing of the real economy. As a reminder, we bought ACE in 2018 because we saw the growth potential. This is a perfect illustration of our M&A approach to scale up promising asset management team, focusing on [ streaming ] verticals and continue to be innovative. ACE has a healthy structure, historically very similar to what we developed in the energy transition with Total. So its LPs are mainly corporate, and we're going to scale that with institutional investor. Next slide, please. Just a little bit of market sentiment here. The COVID-19 outbreak has first led to massive shock on the market, severe liquidity challenges and a surge in credit spread. However, Central Bank's action by fueling the market with liquidity, maintaining lower rates have helped stabilize market quickly, leading to a strong rebound. The risk of the real economy remain high at various levels. The virus is still spreading, leverage is high. And as you noticed on various H1, including this morning, a lot of industrial company are going through massive losses. Therefore, in this context, a disciplined approach is essential. We are convinced that discipline, deep analysis, reactivity, high selectivity will enable us to come across the situation. Now it's all about asset picking. Our business is to raise money, but also to make sure we invest in a very selective manner. Next slide, please, 14. In spite of a very challenging cycle, we would like to reiterate our strong conviction that the tailwind underpinning private markets are structural. You saw this slide a couple of times before, but more than ever, we see it as very relevant. We are indeed positioned on the market segment that benefit from continued client demand, institutional clients need performance to sell their long-term liabilities and retail clients, which is a pretty new trend, are more and more willing to enter alternative asset classes, regardless of their illiquidity. This had -- this adds up to our disciplined approach in a particularly volatile and uncertain market environment and through our unique setup of alignment of interest. Next slide, please. In the face of the various challenges raised by the COVID-19 pandemic, we have all the needed assets to perform well through the cycle. We have built over the years a unique platform with strong financial means and a unique tier. Asset selection, investment discipline, alignment of interest, sustainable performance, these topics are a good summary of our investment DNA, and we will remain more than ever entrepreneurial. We are confident that this culture, amid the strong and unique liquid balance sheet, is a key asset to navigate the current cycle. And finally to the next slide, 2020 is still full of uncertainties, but we are confident in achieving our 2022 targets, thanks to our strong setup and selective and disciplined approach. Thank you very much, everybody. And I think we are ready to answer questions. Louis?

Yes. Operator, can you let us know if there are some questions?

[Operator Instructions] We will now take our first question from Jens Ehrenberg from Citibank.

Just hopefully 2 quick questions for me. One is a bit more particular. So you've mentioned the ongoing fund raise for the fund for ACE Management. And that I think currently that spend is at EUR 630 million after the first close, EUR 230 million contributed by Tikehau and that is hopefully going somewhere up north of EUR 1 billion. Just in terms of the Tikehau contribution there, do you expect that to stay at the EUR 230 million? Or would that basically increase with the size of the fund? That's the first question. The second question is more a broader question on how you see the market. So we had -- I mean we had the large investment bank reporting that overall M&A activity has to remain rather than muted, but that there has been some, yes, indication of a pickup over the last month or 2. And how do you see that for your capital deployment and investment exits? Do you see some signs of recovery there? Or is everything still relatively quiet?

Okay. Antoine Flamarion speaking, I'm going to try to answer your 2 questions. First of all, your ACE illustrates perfectly what we'd like to develop. So we hired a very small team of 20-plus people 2 years ago with the real idea to expand that. At the time, IRO fund #3 was a circa EUR 200 million fund, so a pretty small fund, but a pretty good track record. Obviously, with the current pandemic and turbulence in the aerospace sector, we consider that expanding this platform was very relevant. At the same time, French government with the 4 largest European -- 4 of the largest European industrial company in the sector decided to launch this tender. We submitted a proposal with strong competition from pretty large private equity players. And [our win, when ] part of our DNA, as you know, is to commit large amounts of our balance sheet. So we committed EUR 230 million. We're going to stick to that to answer your question. If it's a EUR 1 billion fund plus it's, let's say, 20%, which is a pretty large commitment. So we are going to stick to this EUR 230 million commitment. It's a pretty strong initial closing because we did not have to market the funds yet. So it's been the tender. The fact that we have the 4 industrial companies investing there, which create pretty strong alignment of interest with them. And I think they're going to help us on the fundraising. So the target, as mentioned, the EUR 1 billion target fund with a EUR 230 million commitment from us. And that's -- I'll let Mathieu touch base on that, but it's private equity. So that's create a better mix products, if I can say, within our asset management because it's private equity. So this fund is a 1.5%, plus 20% carry interest. So that should help the business mix and therefore, the profitability of the asset management. On your second question on M&A, I make 2 comments, more general M&A comments and asset management M&A comments. First of all, this crisis has been very quick and very unique. It's been initially sanitary crisis, financial market crisis, and then probably now, we are entering an economic crisis, which will be very different around the world, but we see a lot of bankruptcies and special situation coming and pointing everywhere. Obviously, investment banks are pushing very hard to create M&A opportunities. As you all noticed, they had some very strong second quarter, thanks to huge and unique capital market activities, primary and secondary. But we think that investment banks will push to TROE to create M&A opportunities. So we're going to probably see be -- there some M&A opportunities. But if you remember, some pretty large deal collapses and have been not concluded during H1 because very often buyers decide to walk away. And with this economic uncertainty, it's difficult to see if we're going to have yet a huge M&A activity in broader terms. But we see -- our view is that it's probably too early to see a lot of activity because multiples are still very high and economic downturn is only going 1 direction. So multiple should decrease. So that's one. Two, in our sector, in the asset management sector and the alternative asset management sector, as you know, there are only, let's say, 12 listed as alterative asset manager in the world. But you have a lot of private alternative asset manager. So we see some activity there, very similar to what we announced on the Star closing and infrastructure. So we see some M&A activity in the alternative investment space, probably more on smaller companies. We are managing from EUR 500 million, sorry, to EUR 5 billion. We don't see, for the time being, some pretty large transaction there. Obviously, we continue to monitor a lot of situation around the world in various geographies and various asset classes. Does that answer your 2 questions?

Yes. Those very clear. Maybe just a very quick follow-on, on that, given that your comments around the M&A market activity at the moment. How do you think that will impact your funds directly in terms of how well positioned do you see yourselves to being able to deploy significant amount of capital over the next 6 months or so? Or do you think focus will remain more on developing the existing investments in your funds?

Yes. I think the answer is that it will really depend on asset class -- on an asset class basis. So for instance, we are raising, we start raising TSO, Tikehau Special Opportunities, which is a fund investing in special situation and stress credits. We start deploying a little bit there. We are monitoring a lot of real estate transactions because, as you know, traditionally, people put a lot of leverage on real estate, and we see some good situation coming there. So we are monitoring a pretty deeply real estate situation. So we could probably deploy there. On our private debt activities, we see a little bit of pickup. So that's some either M&A or acquisition from private equity shop. And as you know, we finance them. So we are -- show active situation there. And then on our private equity bucket, as you know, we have a general approach and 2 specialized approach, ACE, which I discussed and also T2, our energy transition fund, which is really sitting in the middle of a lot of activity because, as you know, for instance in Europe, all the governments want that all the money flow led by government need to be channeled through a green recovery plan, let's say. So we are going to probably see some activities in our energy transition space. But overall, we remain very cautious, valuations are very high. We've just entered the economic downturn. So we're going to be probably active but very selective, as usual. Our level of dry powder at the end of July, is higher than the one we published at the end of March. So that means that we remain selective, and we're going to continue to raise money and invest in a very selective manner.

We will now take our next question from Geoffroy Michalet from ODDO BHF.

I hope you are well. I have a couple of questions. The first one has to do with your hedging strategy that costed you EUR 155 million. I just wanted to know if you could elaborate a bit on that and give us more insight on what happened there. The second question was on the cash position of the balance sheet at the end of H1 because you gave it at the end of Q1, but not in H1. That would be interesting as well. A third question would be, when did you sell DWS at this part of the stake and at which IR? And the last question would be on ACE Management. Do you expect to have normal fees like the normal private equity fees of 2% or because it is a state-backed as well fund, you would have to expect lower fee rate?

Thank you for your question. I think I'm going to take hedging, DWS and ACE, and Henri will comment on cash. The way we see hedging, we have a EUR 4.3 billion balance sheet at end of December 2009, fairly invested. So because this pandemic and this crisis has been very, very unique, and we are very close to a cataclysm, we decided to put in place some, we call them, macro hedge. And more or less, it costs EUR 165 million, which is more or less 4.5% of our balance sheet. So let's say, we have a NAV reduction of 4.5% through H1 on this hedging side. On the other side, obviously, you've got asset value decline in Q1 and an increase in Q2. On DWS, part of the portfolio rotation, we decided to reduce our exposure to liquid assets. So we decided to disclose that. I think we gave the 54% of our stake has been disposed. And at this stage because it's AUM, we just -- we can -- we are not -- sorry, disclosing IR, but we took advantage of the market, and we've been [ evolved ], obviously, our investment cost, maybe Henri will elaborate on the proceeds and cash price exit. And then on ACE, as mentioned, despite the fact that it's a tender with 4 industrial company and the government, the first closing has been done on a 1.5% management fees and 20% carried. So very similar to a private equity fund. And obviously, it will increase our business mix. Henri, I'll let you comment on DWS and maybe price and cash.

So on DWS, the total disposal amount as of yesterday is EUR 110 million for 54% of the initial stake in DWS. As far as the cash position is concerned, so the cash position at the end of 2019 was standing at EUR 1.3 billion. The cash position at end of June is currently estimated at EUR 0.8 billion, so a bit close to EUR 800 million. That cash position is being actually included into the direct investment AUM. So it directly affects the direct investments AUM. Keep in mind that as end of June, our level of financial debt has remained the same as end of December, so EUR 1 billion, and we still have EUR 500 million of revolving facility, which is undrawn at end of [ year ].

We will now take our next question from Christoph Greulich from Berenberg.

Yes. Maybe just 2 follow-ups from me on the ACE Management fund and the hedging tools. So regarding the fees for the new ACE Management fund, is there a full catch-up effect for the full fees for 2020 this year? And then on the hedging tools, I'm just wondering basically those negative fair value adjustments going through the P&L to the same extent that you have shown in your presentation?

As far as ACE Management is concerned, the management fees, there is no catch-up effect starting first of January. Actually, the management fees will stop as soon as the fund is closed, but the closing was done actually yesterday. So management fees will stop to kick in starting yesterday, but not January 1, no. And your question on the hedging instruments, it will actually fly through the P&L, just below the line investment review. So it will affect the H1 investment activity within our P&L below the line investment revenue.

Okay. And can I just ask, like, what exactly are these instruments? Are these put options? Or what kind of instruments are you using there?

It's mainly a futures on Euro Stoxx.

We will now take our next question from Mandeep Jagpal from RBC.

Just 2 from me. The first one is on Star America Infrastructure Partners. Henri mentioned that the acquisition completed yesterday. Please could you provide some color on how we can expect fundraising to develop per asset class? And how you are currently thinking about leveraging the North American LP base, particularly how to other asset classes? And then the second question is just more of a general question on demand for alternatives. Given the impact of the pandemic on financial markets such as lower interest rates, credit spread increases and equity market volatility, in your view, does it make it easier to raise money for alternatives as returns look more attractive or more difficult if clients deferred decision-making to see how things develop.