Pollen Street Group (LSE:POLN) — H1 2024 results

0:01 Good afternoon and welcome to the POLLEN STREET GROUP LIMITED investor presentation. Throughout this quarter presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time by the q and a tab situated in the right hand corner of your screen. Just simply type in your questions and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company can review all the questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to CEO, Lindsay McMurray. Good afternoon.

0:33 Good afternoon, everyone, and welcome to the 2024 interim results presentation for POLN STREET GROUP LIMITED. Thank you all for attending, and apologies for the short delay. I'm Lindsay McMurray, CEO, and I'll be presenting today with Lucy Tilly, CFO. Today, I'll cover the key highlights of our performance, the overall strategic vision of POLN STREET and our AUM evolution. Lucy will present our financial results and then I will provide a quick recap of our investment strategies together with the outlook of the group, followed by the opportunity for Q and A.

1:13 So taking a look at the key highlights for the first half of twenty four. We've increased our total AUM to £4,500,000,000 as of the half year and to £4,800,000,000 as of the 07/31/2024, which is a 42% growth over H1 twenty twenty three. This includes raising £600,000,000 in credit funds with the first close of Credit Fund IV together with a new SMA. Private equity strategy is progressing well with continued fundraising for Private Equity V, which is on track to reach its €1,000,000,000 target by the end of the year. Fee paying AUM increased by 35% over the last twelve months, with good visibility of further growth in H2 with a robust pipeline in credit funds.

2:08 Our fund management profitability is up 54% year on year, reaching GBP 8,000,000 in fund management EBITDA, underscoring the operational efficiency.

2:19 The balance sheet remains strong, delivering 9.7% net investment return and £15,800,000 income and net investment assets. Fund management revenue continues to grow as a percentage of total, standing at 63% today, and we expect this percentage continue to grow over time.

2:46 We're aiming to deliver strong AUM growth based upon our specialist investment focus and well aligned to investor allocations. We focus on sectors where we have deep expertise and as we grow, our operational efficiency improves, leading to expanding margins and increased profitability. Our balance sheet gives us financial flexibility and we have a clear capital allocation framework to optimize shareholder returns. We are pleased to see this vision translate into financial performance.

3:25 Now to our strategy at the highest level, our strategy is clear: we aim to generate consistent high quality returns for our investors with a disciplined risk framework that supports sustainable long term growth. We achieved this by leveraging our deep industry expertise, making targeted investments in high quality businesses that enable us to maintain a strong track record and continue to build support for further funds. This approach drives AUM growth and builds high quality income. It also boosts investment returns, enhances operational efficiency and deepens engagement with our investor base.

4:12 Simply put, we're committed to delivering value while managing risk effectively to continue to support growth in our strategies. And our platform continues to scale with the growth trajectories clear and robust. Looking at our fee paying AUM, we have steadily increased with a 29% compound annual growth rate since 2021, reaching 3,400,000,000 And our total AUM mirrors this trend, with growing to £4,500,000,000 at the half year and £4,800,000,000 at the July 31.

4:54 And with this strong AUM growth, it's demonstrated a consistent trajectory aligned with our guidance. We set out our £10,000,000,000 AUM target earlier this year and with our total AUM now at £4,800,000,000 we have a clear path towards this target. This is also supported by investment company commitments in the asset manager to help accelerate growth in the asset manager. I will hand over to Lucy to cover the financial results.

5:32 Thank you, Lindsay. I'm pleased to present POLN STREET's financial results for the first half of twenty twenty four. We have continued to build on our success in 2023, as Lindsay set out earlier. This has driven strong growth in our financial performance with fund management income increasing by 23% to £26,800,000 The inherent operating leverage of the asset manager combined with disciplined cost management has led to modest growth in fund management administration costs and therefore considerable growth in fund management EBITDA, which increased by 54% to £8,000,000 This is equivalent to an EBITDA margin of 30% for H1 twenty twenty four, up from 24% in the prior period.

6:21 The margin is on track to exceed 50% in the long term consistent with the guidance previously issued. Investment company delivered strong returns in the period with return on net investment assets increasing to 9.7% and income on net investment assets of £15,800,000 This was driven by robust performance in the underlying portfolio with strong levels of risk adjusted income. With the benefit of unused tax losses arising from previously incurred management expenses in the investment company, profit after tax was up 35% to £23,600,000 for the half year. We expect the balance of available tax losses to be utilised in H2 and with the impact of the share buybacks in H1 earnings per share increased by 36% to 36.9p.

7:17 We have declared an interim dividend of 26.5p per share representing a cash outlay of £16,500,000 which is in line with our guidance of a minimum of £33,000,000 for the full year.

7:36 This slide breaks down the revenue from our two operating segments, the asset manager and the investment company as as set out in note six of our interim results. The asset manager earns core management fees based on fee paying AUM, which provide a steady and predictable income. These are typically one to 2% of fee paying AUM annually. These fees are an increasing proportion of our overall revenue. In addition to management fees, the asset manager earns performance fees and carried interest, which are linked to investment performance and are typically 10 to 20% of profits above a hurdle rate. Combined the core management fees and performance fees are an increasing proportion of our revenue streams.

8:23 Our net investment return in the investment company is generated from the balance sheet investments in direct holdings of investment assets as well as from holdings in our credit and private equity funds. In summary, these are recurring and high quality revenue streams as demonstrated through our track record.

8:46 Turning to the investment company performance, the investment asset portfolio delivered another period of strong and stable performance in the first half with an increased return of 9.7% on average net investment assets for the period of million. At the 06/30/2024 the investment portfolio was £430,000,000 and was well diversified across deals and borrowers. It was 91% invested in credit assets and 9% invested in private equity assets, so that is either in direct deals or through POLLEN STREET managed funds. With high realisations in the period, the portfolio generated cash of 170,000,000, an increase of 26% on the prior period demonstrating the quality of the portfolio.

9:34 This cash generation combined with the phase draw down of our balance sheet fund commitments reduced our net debt to tangible equity ratio to 28% from 54% at the year end and enables us to support commitments to POLLEN STREET managed funds. As funds are deployed and as our fund commitments are drawn down, leverage will normalize and this will drive returns to shareholders. This next slide sets out the balance sheet transition in more detail. Reflecting our plans to steadily grow the investment company's commitments to the asset manager, which act as a catalyst for the growth of the asset manager. Our low leverage position facilitates the rotation of the portfolio to focus on investing in POLLEN STREET managed funds as these funds draw down on their commitments.

10:26 At the June 30 the balance sheet had a 15% exposure to POLLEN STREET managed funds. With our balance sheet commitments to POLLEN STREET managed funds at June 30 of £163,000,000 £67,000,000 of which is drawn down. The fund exposure of the balance sheet will increase to 35% as these funds continue their phase drawdown over the next few years.

10:51 Within the allocation to POLLEN STREET managed funds, we expect the balance to shift slightly towards private equity funds with private equity funds representing circa one third of the amount committed to our funds over this time horizon. In the medium term, we will continue to transition to further fund commitments.

11:14 In June, we refinanced our previous facility with a new four year 200,000,000 senior debt facility at a lower margin. We will see the benefits of this lower cost of leverage coming through in the second half of twenty twenty four and beyond and this new facility also gives us flexibility that supports the rotation of the investment company to POLLEN STREET managed funds. As at 06/30/2024, we had drawn £85,000,000 on this facility and alongside the asset specific facilities the total leverage for the group was £130,000,000 leaving significant headroom of £115,000,000 on our overall facilities. In addition, the group had £30,000,000 of cash resulting in a strong liquidity position to both deploy funds into our large pipeline of attractive new deals, many of which we expected to complete in the second half of the year and fund drawdowns on our commitments to POLLEN STREET managed funds.

12:15 I'll now hand back to Lindsay to cover our core investment strategies. Thank you. So by way of recap, are and many of you will have heard this, but I'll recap how we position ourselves with our underlying strategies. We are focused holistically on aligning ourselves with deep structural changes that are reshaping the financial services industry. This has been our consistent long term focus.

12:45 Within that then, as we look at private equity, we take a deep thematic approach to identify the structural trends driving growth across the relevant sub sectors, outlined here.

13:00 Some of the key themes are middle and back office transformation. How do we modernize the way we deliver financial services products? The highest standards of regulatory compliance and cyber security consistently embedded across the industry. And of course the consolidation of distribution channels are three core deep themes that we've been aligned behind for going on twenty years.

13:33 We take some of the within these thematics that have been active, especially in the wealth and insurance sectors. Two platform acquisitions and 19 bolt ons enhancing our portfolio companies' capabilities and enabling them to scale efficiently. Firstly, NEO, a consolidator in the fragmented wealth tech market in the DACH region. It aims to capitalize on the demand for digital wealth tech solutions by leveraging cloud based technology to gain share and scale. Second, Mattioli, and a number of you may be familiar, but a wealth management business with the potential to become a leading vertically integrated advice business in The UK, powered by modern technology and processes.

14:29 In insurance, Marcus Studies stands out as a prime example of how we are creating leaders in our industry from number nine to number two in personal lines insurance in The UK in less than three years. Wide Group in Italy is one of the leading consolidators in insurance in a very highly fragmented market. Turning now to private credit.

15:01 In private credit, our strategy is designed to deliver strong risk adjusted returns with a robust downside protection. We focus on secured lending to non bank lenders, leasing businesses and technology companies with large diversified asset portfolios. Our portfolio is diversified across sectors, including SME lending, real estate, energy transition and asset finance. Now turning to some examples on the credit side, Nave is a business in France that is provided we provided a €75,000,000 senior financing to a business in France providing leasing vehicles through the dealership networks with very strong protections against the valuation of those vehicles.

15:57 Solboy, we have delivered in excess of a £100,000,000 senior facility on residential real estate to one of The UK's most dynamic property developers. And Capify, we provide a 40,000,000 senior financing secured in UK and Australian SME loans aligned with the thematic trend of supporting the SME financing space and the gap that's provided that's being created by the banks. These case studies demonstrate our ability to structure and secure loans across diverse sectors, each contributing to our strong risk adjusted returns. So with that recap and turning to the outlook.

16:46 As we look forward to the remainder of 2024, our focus remains on driving growth through fundraising and deployment. We continue to fundraise in Private Equity five and Credit Fund four. The deployment in private credit funds already raised during the first half of the year will increase our fee paying AUM and our goal is clear to achieve £4,000,000,000 of fee paying AUM by the end of twenty twenty four. We reiterate our wider financial guidance. We continue to review the capital allocation strategies where it enhances shareholder value and we aim to declare dividends of no less than £33,000,000 for 2024, with a progressive outlook moving forward.

17:37 Our delivery has been strong and we look forward to a very attractive medium term outlook. Now with that, I will now open up to Q and That's great, Lindsay, Lucy, thank you very much indeed. Can you see the Q and A tab open on the right hand side of your screen? If I just give you a couple of moments just to review those questions submitted from investors, just want to remind those on the call that recording of this presentation, along with the copy of the slides and the published Q and A will be available from your Investor League company dashboard. Lindsay, Lucy, as you can see, you've had a number of questions from investors throughout your presentation. So firstly, thank you to everybody for engagement. If I may just hand back to you, Lindsay and Lucy, just to take us through the Q and A and then I'll pick up from you at the end. Thank you. Okay. So a couple of questions on strategy, which I will address and then some of the questions on buybacks, which I'll hand over to Lucy in a second.

18:31 So in the priorities for deploying new funds consistently, so we are deploying private equity five and credit fund four at this moment in time. Private equity five, All of our strategies are consistently doing what we've been doing for the last going on two decades. We're firmly in the mid market, investing in businesses that we believe have a strong integrity of product and proposition for their customer. And we are there to help those businesses, often founder led, to scale up, especially deploying modern processes and ways of engagement. So delivering the product in a modern way.

19:23 Maybe we can stop moving this slide. And then so it is we have in private equity five, we now have completed five deals and therefore it is well on track arranging some of the deals that I mentioned earlier. They're all on our website if you'd like to learn a little bit more and of course we're happy to discuss them in detail, but they all fit within those thematics that I outlined. Key deep thematic drivers across and we aim to get a good spread across the sub sectors and then we aim to get a geographic spread and that's often determined by the pace of change across the different markets. So thematics that we've been operating and investing behind in the last fifteen years in The UK, where often it's been the lead adopter of some of the technological change, we are now working our way and kind of applying in other European markets.

20:22 But a good blend, it tends the portfolio tends to be about fiftyfifty UK rest of Europe. It tends to be well spread across the sub sectors. So we've gotten off to a good start. We're about 50% deployed and the business has a great portfolio and we're very excited about that. So we're now being very selective in our pacing from here. On the credit side, similarly, we're deploying in Credit Four. That is a billion pounds sterling and we're aiming to get something like 20 deals across there. So the team are moving the pacing is a little bit different. And so it's keeping to the heritage of great deals in line with that strategy and kind of being very selective through the pipeline.

21:09 So it's pacing, selectivity and making sure we're getting that right balance of alpha and the strategy, but I also always like to say by cutting off the kind of left tail of the distribution of outcomes is what we're aiming to do by being deep in our sectors. There's then a question about allocation increasing to the balance sheet in private equity. So historically, of course, our allocation to the balance sheet was almost entirely to our credit strategy because that's the heritage of Honeycomb, where it was in fact the vehicle that deployed the credit strategy. As we've moved to deploy the balance sheet strategically to support the overall asset management business, We have increased the allocation towards private equity to enable us to support all parts of the business on the asset management side, but still keeping the weighting towards credit funds. So a bit of a move. It also enables us to then align to deliver a sort of we're guiding to a lower double digits net return for that balance sheet. So it serves a number of purposes.

22:28 The the balance sheet the the we the one of the key reasons for the combination was to enable us to deploy the balance sheet to support asset management. So it makes sense to employ some of that towards private equity, but still maintaining the integrity of having a dividend yielding balance sheet and enabling us to get a bit of a pickup in yield. So it's a kind of three pronged thinking there. Lucy, would you like to pick up the dividend Yes, thank you. Lindsay, yes, so on dividends, firstly as Lindsay said, yes we do intend to have a progressive dividend policy moving forwards and on the buybacks this is something that we monitor very carefully.

23:15 It's been well received to date. We're approximately halfway through our £30,000,000 so just over £15,000,000 to date. Obviously we monitor the equivalent rate of return very carefully and we do this on a monthly basis so we're absolutely mindful of the impact it's having. I'm just trying to do, there's a simple answer, we, as a question, do we have any crypto exposure? No, absolutely none. I never have. That was a very conscious question. There's a question about custodian REIT that's it is part of our portfolio company and doesn't cross corporate, so it doesn't fit into the allocation at all.

24:03 There are portfolio companies that kept very discreetly and have to, as a regulatory matter, be kept separately from the corporate. Do the regulators pressures on charges challenge the model? No, the private markets have, you know, I'm not saying there are, it's not a regulatory pressure and where, so on private equity, the flagship funds have very resilient two and twenty fee structures that's across the industry and where there is, you know, and the way we work with our investors is an occasion we'll allocate some co invest which they get without fees, but the core funds have very clear fee structures of two and twenty.

24:52 On the credit side similarly it's one and ten, but occasionally if you've got a large, the tickets, the investor allocations on the credit side can sometimes be larger and sometimes that can come with a fee discussion. We're able holistically to maintain that over 1% across the funds and typically where we've got those larger tickets, they are increasing AUM and beyond our planning. So the net net is a positive one. So the private markets have, as I say, there's no pressure but the pressure tends to come more on the credit side but more with those larger tickets which we have not planned. So we're able to kind of manage and reaffirm our guidance on the overall financial profile of the business.

25:47 Is there any target that enables full allocation of the balance sheet? That will be progressive. So the question is, as I think the question is at some point, could the full $3.50 be allocated to funds? It could be, but it will take another set of vintages at least. So we have made our allocation to these vintages private equity five credit four. I don't expect those will increase materially and therefore the next allocation to funds will either be when we start thinking about alternative strategies or the next vintage. So that will happen in the medium term, but it won't happen in the near term. There's a question on buybacks, is the £30,000,000 of buybacks Lucy referred to?

26:38 Lucy, why don't you pick that up? Yes, Yes, so it's 30,000,000 sterling is the answer to that one. There's a question on Mattioli again. It's been interesting, we completed that deal just a couple of weeks ago. We've been working with the team, we'll differentiate ourselves on service, on process, on, you know, great client service, a very strong product proposition, but slick ways of operating and engaging with clients to bring, to give the greatest bandwidth to what is a great talent pool. So it's about bringing modern efficiencies and ways of operating into a business that's got deep heritage is how I would try to say.

27:34 There's another question on charging structures and credit funds, as I said, typically 1% management fee on the credit side of the business. It is 1% on net invested assets and 10% performance fee. How much co invest in AUM? Sorry, I don't understand that question. But if you mean how much is invested in funds, we have committed as at the balance sheet, at the half year £160,000,000 as at now about £185,000,000 of which about 66 to 70 has been drawn, and so there's another 100,000,000 of commitments broadly to be drawn down over time.

28:31 The dividend policy, there are a few questions on that. I think we have broadly covered that. And then there's a question on the carried interest and the budget. We align ourselves. We have always been, you know, very compliant in relation to tax. If it increases tax, it increases the tax for the team as it does for everyone that we're impacted by that. Not something that we can control and you know, it's something that we believe will be manageable. That's great. Lindsay, Lucy, you've been very generous. You've taken every question that people have submitted. So thank you to everybody for engagement. Lindsay, Lucy, I know investor feedback is important to you. I'll shortly redirect those on the call to give you their thoughts and expectations.

29:21 But before doing so, if I could ask you for a couple of closing comments. Well, know, I'd like to thank everyone for their attendance today. Thank you for your support to the extent that you are a holder of the shares. Thank you for your interest to the extent that you're an interested potential holder of the shares. We're always available if you didn't get your question addressed as fully as you would like on the call, trying to kind of make sure we get the chance to cover all of the questions, but please reach out to us if you would like to discuss any of the matters more fully. Thank you for your time. Thank you, Lindsay, Lucy, thank you once again for updating investors. If I could please ask investors not to close this session as we're now automatically redirect you for the opportunity to provide your feedback in order that the company can better understand your views and expectations. It only take a couple of moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of POLLEN STREET GROUP LIMITED, I'd like to thank you for attending today's presentation and wish you all a very good afternoon.