Pollen Street Group (LSE:POLN) — Results for the year ended 31 December 2023

0:01 Good afternoon, and welcome to the POLLEN STREET PLC investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be dismissed anytime by the q and a tab situated in the right corner of your screen. Just simply type in your questions and press send. The company may now be in a position to answer every question received in 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, Lucy McMurray. Good afternoon.

0:31 Good afternoon, and welcome to our results for POLLEN STREET, where we outline our 2023 annual results. It's great to have so many of you with us able to join today. I'm Lindsay McMurray, CEO, And today, I will cover the key highlights, provide an overview of our investment strategies, and provide an overview of the financial section and our guidance. Having built strong foundations within the business, we have an exciting time ahead to present a very attractive investment proposition. The execution throughout the year by the team has been exceptional. We're delivering strong AUM growth, capitalizing on the structural expansion across private capital markets.

1:19 Our specialist investing approach provide us with a competitive edge. Through our recurring fee structure, we generate high quality earnings from our asset manager coupled with financial strengths strength of our balance sheet, enabling us to accelerate fund formation. Across the group, we benefit from attractive operational leverage demonstrated by the strength of our team. Our seasoned team combines expertise with agility, ensuring efficiency and adaptability in a dynamic market landscape. We have proactively established a capital allocation framework and announced a share buyback program, which will allow us to deliver attractive returns for shareholders.

2:08 Here, we present our financial results for 2023. These numbers reflect the momentum we've built and the opportunities that lie ahead. The financial performance for 2023 was ahead of target, and looking at the outlook, we're upgrading the guidance, which we'll come to later on in the presentation. I'm pleased to share that the POLN STREET strong performance in 2023, both financially and strategically. The group recorded strong performance across the board, significant progress against fundraising targets, and benefited from attractive deployment opportunities in both private equity and private credit. Our 2023 results were underpinned by accelerated growth in the asset manager and consistent performance in investment company returns.

3:00 We've raised £1,300,000,000 in private equity, including securing approximately half of the fundraising for private equity fund five. In private credit, we closed a £225,000,000 separately managed account where we anticipate the first close of private credit fund four imminently. Our fee paying AUM grew by 36% in 2023, and this strong fundraising led to fund management EBITDA growing by 79% to £15,200,000, demonstrating strong operational leverage in the business, driving fund management EBITDA margin improvement of 8%. The investment company returned £30,200,000 of income from investment assets, and we made progress rotating our balance sheet from predominantly holding direct investments to holding investments in POLN STREET funds.

4:02 This shift enables the investment company to benefit from returns generated by diverse portfolio across private credit and equity while helping these funds reach scale and providing a catalyst for raising additional third party capital, driving higher management fee income for the group. Our solid fundraising growth is testament to the support of our clients. And in the last three years, fee paying AUM has increased at a compound annual growth rate of 33%, followed by growth in deployment of funds and total assets under management growing by 28%. We delivered consistent growth in line with our guidance with especially strong growth in private equity AUM.

4:50 As we look to the future, we look to exceed the £4,000,000,000 of fee paying AUM in 2024 and to grow overall AUM to around £10,000,000,000 over four to five years. Our success in fundraising means that asset management represents an increasing contribution to revenue now over 60%. Overall, we delivered 23% AUM growth with total AUM rising to £4,200,000,000, up from £3,400,000,000 in 2022. We closed 2023 with fee paying AUM of £3,400,000,000, which is a 36% increase and well on track to exceed £4,000,000,000 in 2024.

5:41 All of this translated into profit before tax of £43,100,000, a 25% uplift over the previous year, and we expect to maintain this momentum in fundraising with the first close of private equity for actually now closed. Over the past eighteen years, we've been building deep capabilities across financial and business services sector. Our approach has been aligned with megatrends that are shaping the future of the industry. Our sector focus is strategic and deliberate, aiming at delivering high returns with low volatility. This approach has not only served us well, but has contributed to our zero loss track record across both strategies, an achievement we are immensely proud of.

6:33 We've carefully created a deep ecosystem which consistently delivers a strong deal flow and execution. Approximately 80% of our investments are sourced internally and negotiated bilaterally across both strategies. And with this, we've delivered 29 gross IRR for private equity and 13% gross IRR in our latest private credit fund. We continue to enjoy strong support from existing investors and build new ones. Our clients now span a range of geographies and investor type. Our focus is on fostering deep relationships that cater to the needs and objectives of our partners with an on a recurring basis.

7:22 As is well documented, we operate in markets with strong structural tailwinds in private markets. This growth is greatest in our strategies of private equity and credit. In private equity, we're able to take if you go to the next slide, please. In private equity, we aim to take a long term perspective and commit capital to deliver strong performance over the longer term. Investors are increasingly allocated to specialist strategies, and we're positioned to better on this. In private credit, we see wider opportunity set emerging as traditional banking institutions continue to retrench from markets.

8:10 With rising interest rates, we are presented with an opportunity to achieve higher yields with lower risk. Private credit stands as a consistent and reliable income producing asset class, and asset backed lending is positioned to benefit from larger allocations to private credit. Turning to our strategies more specifically. Our private equity strategy delivers high quality earnings for the group. Our approach is focused on building tech enabled, customer centric, and data driven organizations to create fast growing market leaders. We make primarily controlled investments in mid market financial business services businesses with conservative leverage levels and revenue led growth across the portfolio.

9:03 We maintain a target three times gross return, and we're currently raising our flagship fund five targeting a billion euros, of commitments. This chart aims to outline our target market and why it is deep and powerful. In the horizontal access, we assess a business' ability to benefit from strong digital adoption capability. Of course, to win today and tomorrow, we look for businesses on the right side of the chart, progressive and well placed to take share. The vertical access is customer relationship and retention. We aim to be at the top with businesses that have strong customer relationships and retention and position to take share to deliver strong operating performance.

9:55 This enables us to grow businesses through different economic cycles. Our credit strategy is dedicated to asset backed lending. We're one of the largest and best established lenders in the sector in Europe, having invested more than £3,500,000,000 across over a 100 transactions since 2015. Our strategy is focused on providing senior loans to companies secured directly on diversified portfolios of assets that have real tangible value and where it's those assets that generate the cash flow and revenue for the borrower. This asset security combined with borrower guarantees mean our lending has significant downside protection.

10:42 Yet we're able to earn premium returns because the market is significantly underpenetrated in Europe with barriers to entry from its fragmented nature and being not well intermediated by advisers. This means you need a team to be able to originate, underwrite, and structure deals in house. We have developed this over the last ten years with one of the largest teams in Europe and a top tier track record. These dynamics combined with the vast size of the market and the shift in market share from banks to private capital means we're confident we have significant long term growth prospects for the strategy. Our next flagship fund is, actually going through its first close already ahead of target, before Easter with a full target of £1,000,000,000 across, the fundraise of that.

11:40 The assets we take security over can be either financial assets, loans and leases, or hard assets, cars and residential property. And while we address a wide range of asset types, the consistent themes of direct asset security, diversification, conservative leverage levels, comprehensive covenants, and corporate security are fundamental pillars of the strategy, meaning it can be resilient through market cycles.

12:10 This all of this means that we've delivered a very strong financial results for 2023. Another successful year with fundraising activity and deployment that we outlined, described it earlier in the presentation, leading to fund management income growing to £49,200,000 for 2023, which is up 32% from £37,400,000 in 2022. High operating leverage for the business combined with disciplined cost management has led to modest growth in fund management EBITDA administration costs and considerable growth in fund management EBITDA, which closed the year at £15,200,000, a 79% increase on the £8,500,000 for 2022.

13:04 This is equivalent to an EBITDA margin of 31% for 2023, up from 23% the prior year. And the margin's on track to exceed 50% in the longer term consistent with the guidance previously issued. The investment company has performed well, generating £30,200,000 of income. This is a 7% increase from prior year. Overall, profit after tax was up 23% at 40,400,000 in 2023, which is equivalent to earnings per share of 63 p per share. We've declared a dividend of £32,000,000 of dividends in relation to the year, which is in line with target.

13:52 The strong growth in asset management this year continues the longer term track record. Average fee paying AUM has grown 27% per annum from '21, from 2021 to 2023, driven by fundraising across the strategies and deployment in private credit. And we've maintained our fee rates across the products with fund management income growing at 20% per annum over the same period with further contractual step up due in 2024 as management fee revenue is re recognized on a AUM already raised in 2023. Fund management EBITDA has grown 47% per annum over this period, reflecting the high operational leverage of the business as a well invested cost base.

14:45 The investment company has a stable and growing income stream with income increasing to £30,200,000, up from £28,300,000 in 2022. The key drivers of this are the higher interest rate environment, strong credit performance in the credit assets, offset by low lower balance sheet deployment to create capacity to invest in our funds. We have more than doubled the investment company's commitment to our funds since the start of 2023 so that over a £120,000,000 of investment company balance sheet is committed to support fundraising efforts of the asset manager. This has more than doubled the commitments as at '31 to December 22, and we have created capacity for a commitment into the first close of private credit for also.

15:39 This reflects our plans to steadily grow the investment company's commitments in the asset manager to help accelerate growth of the asset manager. We expect the allocation to higher yielding equity assets to increase to approximately 30% over time. This capital should deliver higher returns than the investment company as it's deployed. The tangible NAV per share grew to 530 per share as at the 12/31/2023, up from 540 p as at the same period last year. We announced a capital allocation framework and share buyback program. Under this framework, we'll allocate capital as follows.

16:26 Firstly, as I outlined, to invest in our funds to allocate to accelerate the growth in asset manager while also taking advantage of attractive investment opportunities, aligning the interest with our investors to grow AUM. Secondly, to support the dividend policy, which has declared dividends no lower than £33,000,000 in respect to '20, 2024 and dividends growing progressively thereafter. Thirdly, to maintain strategic flexibility for inorganic options should opportunities arise. And finally, at the current share price, the share buyback will create significant value for shareholders, and we're currently planning on buying back two to 5% per annum of the outstanding share capital of the group.

17:17 We'll continue to maintain a prudent balance sheet. The group's net debt to tangible equity ratio was 54% as at the 12/31/2023. This is lower than it's been historically to create capacity to make commitments for our funds, leaving significant flexibility to create shareholder value. Our financial results have met or exceeded each of our targets. For the asset manager, average fee paying AUM was $292,900,000,000 pounds for 2023, in line with target. Fund management income was £49,200,000, fractionally ahead of target. Fund management EBITDA was £15,200,000 exceeding target.

18:06 And for the investment company, income of net invested assets was £30,200,000, again, exceeding target. Having delivered on these targets, we're upgrading the financial guidance for the business. We had previously issued financial guidance that fee paying AUM would be 4 to £5,000,000,000 between the 09/30/2425. Fee paying AUM was 3,400,000,000 as at the end of twenty twenty three, and we expect to exceed the 4,000,000,000 threshold in 2024. We're therefore raising guidance to grow total AUM to around £10,000,000,000 within four to five years.

18:54 We previously issued guidance for the return on net investment assets to be around 8% in the longer term. Given the performance over 2023 and the outlook for the portfolio, we're now revising our guidance for return on net investment assets to rise to low double digits within two to three years. Our other guidance is maintained with management fee rates at around one and a quarter to one and a half percent of average fee paying AUM over the longer term, performance fees of around 15 to 25% of total fund management income on average over the longer term, and fund management adjusted EBITDA margin in excess of 50% in the longer term.

19:44 So with these strong foundations that we have built and by excellent execution by the team, it gives us an exciting opportunity ahead. AUM growth is strong. Our specialist investment approach is serving as well, allowing us to generate high quality earnings through our asset manager, bolstered by strong balance sheet that supports further fund formation. We have outlined our capital allocation framework and initiated a share buyback program With 2023 surpassing expectations, we now look to deliver £4,000,000,000 of fee paying AUM for 2024 and more than double total AUM to £10,000,000,000 within the next four to five years.

20:30 And with that, I'd now like to open to q and a. Perfect, Lindsay. Thank you very much for your presentation. Ladies and gentlemen, please do continue submit your questions just by using the Q and A tab, which is situated on the top right hand corner of your screen. But just while the company take a few moments to read those questions that have been submitted today, I'd like to remind you that the recording of this presentation along with a copy of the slides and the published Q and A can be accessed via your investor dashboard. Lindsay, as you can see, we have received a number of questions throughout today's presentation. And if I could just hand back to you to read out the questions, I'll pick up from you at the end. So we have a question around the dividend, which perhaps I addressed, presubmitted perhaps I addressed during the presentation, but it asks given that we're moving the frequency as we move from an investment trust to a commercial company, the frequency of the dividend will move from quarterly to semiannually, which is correct.

21:26 But with that, does the guidance for dividend change? The guidance will continue that we have announced a dividend for the year of 2023 of £32,000,000, and then that with guidance to be no less than £33,000,000 for 2024 and progressive thereafter. So the the guidance remains the same on an annual basis. It will change, however, from annual to semiannual.

21:58 Another question, asking about given the strong performance and growth in both private equity and credit, are there plans to go into new sectors and geographies in the near future? And the answer to that is that the guidance that we have provided on AUM growth is very much, simply applying simply, well executed and focused on the strategies that we have already. So completing, fund five for private equity and, you know, firmly in the mid market of private equity for financial business services. And then steadily, we're we're deploying we're raising and deploying that fund well already so that we'll then look to in time being very selective as to how we compose the rest of the portfolio from here and in time in line with normal planning cycles, we'll move on to fund six doing precisely the same, perhaps kind of increasing the size of the fund to allow us to say, quarter strategy, but perhaps adding one or two more deals progressively into each fund.

23:07 Similarly, with private credit, we will be we're, making good progress already with fund four. As I outlined at the time of the results, we were looking to an imminent close. We have already successfully completed a first close of private credit four. And, again, the cycle of raising, funds for, credit is shorter. They tend to kind of be running a more eighteen month cycle than three year cycle. So the the the fundraising for private credit will be fund four, during the course of this year. And then, with a bit of a pause, we'll then move into fund five. So we'll then probably then start to align the cycles of fund six for both private equity and credit. But it is doing what we're doing to deliver the guidance that we have and executing and doubling down on very strong execution, which we believe is what will be rewarded by LPs.

24:07 A question on has the acquisition of POLN STREET been positive, for the Honeycomb shareholders? We believe that the strategy is very strong and one that we believe on, is very, strong and, as I say, a strategy that we believe will prove out. We've clearly had, a bit of dislocation in the share price, and that is quite separate, from what we believe in terms of the strategy and delivery of that. That has been as we've moved into a commercial company, again, the, that change has been very well received by shareholders, and there is being a very, strong kind of, diversification of the shareholding base, which we the reason that we have made the commitment and the changes the the the changes that we've made, and and we're starting to see early sight of that. We think there's more to go, but we think that there's early sight and longer term, we fundamentally believe in the overall strategy for that.

25:15 Question on the transitioning of the balance sheet from direct investments to what is referred to seed capital skin in the game. Is it a differentiator? It's a differentiator, but it's it's not seed capital is what I would say. The capital that we are allocating from the balance sheet is pari pursue with LP investors. So it is entirely where we are selling, and presenting product for investors, which predominantly on the credit side is offering 11 to 13% from a proven strategy, which is indeed what was the honeycomb strategy and moved in to the private credit. So it's not seed for new strategies.

26:01 It's very proven over the last ten or more years that we have been delivering. It is more alignment, and the alignment and the the balance sheet enables us to increase the amount of investment we are making aligned with our investors, which in turn, they see that alignment positively and can help us accelerate the size of the fundraising that we're making there. So just to be clear, it definitely helps the alignment, but it isn't seed capital for unproven strategies. It is, proven strategies. Do we, I'm trying to just, read these. The, like another question on the dividend, which I think is, I've already covered. So I think it's been, there.

26:56 The, there's a question about dividend coverage. And the way we are looking at different coverage is that, the return from the balance sheet broadly covers the dividend. And as we build fund management AUM, historically, clearly, we were investment trust and paying out the bulk of the or all to all intents and purposes, all of the income. So as the fund management, EBITDA grows, thereby, dividend coverage grows. So we then end up with an overall very healthy covered dividend. Do we use NAV loans for our funds? Predominantly, no. There are occasional. We use we have leverage on the balance sheet that is well documented.

27:43 And so we use that. And as I mentioned, that was sitting at 54%, to, debt to tangible equity, debt to equity in, for the end of the year. We have a very stable approach to dividend for the balance sheet. On credit, we will offer investors unlevered and levered classes, but that's more of as a client demand as opposed to, a NAV basis, for the funds. How much of the share buyback has been completed? We provide I I, we actually provide a discretionary mandate. We don't have control over the mandate, so I don't have the precise answer. We've said that we will do it steadily. So we announced it on the March 21 and that we would do it steadily over the coming months. So it's broadly somewhere around 5,000,000 a month. But once we allocate that, we allocate to to a broker so we don't have control of that.

28:44 What we'll say is that yeah. So that that is in process, and I can get an update offline. There there's questions in the Feet about, leverage and PE. The the Feet cover private markets in a very generic way, I would say. And they they cover it almost as if it's new. The, the private private capital markets, especially private equity, are very mature markets. And when you go to see pension plans in The US, they've got, you know, programs that are decades, you know, probably, in many cases, four decades long. It's a very refined it's a very multidimensional market. And so there are headlines of trends in the Feet, which are red. I don't think they do justice to the the the refinement and the multidimensional nature of a very mature and very sophisticated market.

29:50 So are there head are there potential dangers to leverage if used if used badly? We don't use a lot of leverage in our strategies. It's not been the reason, and the the, driver of growth and return in our strategy. So we're aware of the headlines, but we don't believe that it's a it's a a a it's something that we're mindful of, but not a danger for our returns. FCA investigation into private markets valuations. Like, time will do. There's a lot of, debate as to which mark which will be right. And there's a question as to the drivers. You know, you can take both sides. Yeah. The private markets have been, have had very well structured pricing and valuation principles that have been audited, very, very thoroughly over the years. There's also a question as to the motivations as to why public markets are so volatile in some ways if they believe in the long term fundamentals.

30:55 So which is right. One is being marked to fundamentals and long term growth, and one is being marked to short term. I think what I would say is the alignment of returns and rewards of private managers where they're only paid, once investors in their funds are returned their cost basis and, a preferred return. And only then after the return of cash and not that private managers do not make returns based on the the mark of their funds, and that makes a fundamental difference. So I think the FCA will have a look at it. I think there've been a lot of detail that has gone into that, over the years, and so, we'll see what comes out of it.

31:49 It's something that we are alert to participate in the wide group, but, yeah, we'll take in due course. Types of assets included in the portfolio. So it's a question that says, can you provide examples of the types of assets included in the portfolio and how they, contribute? So to be clear, we are the the corporate is receipt on on the private so I'm not sure whether the question is in relation to the funds and whether they're related to the private equity or private credit. As it relates to private equity, we are investing in, as I say, businesses in the mid market of where we we're taking typically a controlling stake, and we are looking to grow those businesses based on them having a good solid customer proposition and franchise that we believe we can use, you know, modern practices to grow in a in a in a, you know, in a strong way to take share.

32:55 And and it is simply by looking to build businesses in in and around 30% that we think that we can that we can drive good risk adjusted returns. The the the corporate is broadly not exposed to those assets except for ultimately the performance fees that come out and the small contribution from the from the balance sheet. On the credit side, similarly, we're investing in, these borrowers that I outlined earlier, where we're getting very strong risk adjusted returns. Some of that is on the the balance sheet isn't we're getting the the corporate is receiving fees from those funds, and the balance sheet is investing alongside those.

33:44 I'm trying to reach. There's a question about what is the difference between fee paying AUM and non fee paying fee paying AUM. So the the con contributors to no AUM, don't attract fees, are two, large, components. One is as we're investing our private equity funds, on occasion, we will do a transaction that is larger than the fund will take for a risk capacity. So if we do a deal, for example, that is a £200,000,000 deal, we may allocate a 100,000,000 to the fund, and then we will allocate 100,000,000 to our LP investors that we work with, but they will do that side by side the fund directly.

34:39 Generally, where you're an investor in the fund and you invest on that, what we call co invest, that typically is without fees. So that's one component of a non fee paying AUM. And in some ways, that's the the support that we give or the reciprocity we give back to our investors for their support in in our funds. The other component to non fee paying AUM is on the credit side. So on private equity, we get paid on committed basis. So, commit so where we invest on private where we raise a private equity fund of a billion euros, for example, when we raise that capital, we will charge fees on the total amount even, even before it's invested. So the day when it's closed, we will start charging on a billion a billion euro basis.

35:34 On the credit side, the fund charging structure is different. We will charge not when the funds are closed in, but when they're deployed. And therefore, the other component of known fee paying AUM is where we have raised a fund on credit, but not yet invested it. So we've got the capital there, but we're not charging fees until it's actually deployed. So the two big buckets, I know of the 800,000,000, they're broadly half half, and that's where it comes from. What are the fees? What fees are charged in the investment company? They are the the investment company is charged exactly the same as the third party, funds are charged. There's a question about another corporate asking investors to purchase, shares in a multiple of their shares and incentive package.

36:39 Well, there are two executives on the board. One of them is me. I clearly own a much, much larger percentage than a multiple of income, in the stock, so I'm very much aligned. For other executives who don't own that, we have exactly that same policy already in place. So it's, without looking to others, we established that policy as we were setting up the remuneration structure. At what stage would fund management income be used for dividends? That is something that we need to consider as we build out, the combination of the the combination of dividend cover and paying dividends.

37:30 At the moment, we are maintaining the guidance of 33% of 33,000,000 and and then progressively from there. But over time, as we build out the operational leverage, that is something that we revisit. There's a question on the dividend per share. I don't have it to hand, but the clearly, the number of shares has increased that are eligible for dividends. So that's something that we can, share. There's a question of will we join the FTSE? That will depend the FTSE fifty. That will depend on the share price. And the number of exits are unlikely to impact that. The exits don't have a meaningful impact as we continue to raise new funds, then we steadily exit.

38:29 They don't have a big impact on, on, well, on the the the corporate. The corporate is looking to the fees coming from the funds as opposed to, any of the underlying assets particularly. So if you're asked if it's a question that get which we get asked, what happens, you know, on this speculation of something like Schulbrook IPO ing immaterial to the corporate. There's a question about the share management team selling shares. In fact, they've broadly been internal transfers between different members of the management team where some have, different, situations.

39:17 So you'll see that I've been, acquiring those. So it's not, it's not necessarily net sales. It is predominantly transfers. So I think those are the questions that I've received. Perfect. Yeah. Lindsay, thank you very much for answering those questions. And, of course, the company can review all the questions submitted today, and we'll publish those on the investor meet company platform. But perhaps just before redirecting investors to provide you with their feedback, which is particularly important to yourself and the company, Could I just ask you for a few closing comments? Yeah. Look. I you know, I think I've hopefully, I've outlined we've set very strong, foundations for the business. The strategy that we outlined in the combination is being realized.

40:08 The execution and the implementation of the strategy by the team has been exceptional. We're witnessing that strong AUM growth, and we know, we have outlined the capital allocation framework with the share buyback. We've, surpassed our 23 expectations. Look to deliver, again to those expectations and beyond for the 4,000,000,000, pounds of fee paying AUM for 2024 and then look to double the AUM beyond. So very excited about the prospects. Thank you all for your support, and please get in touch with the team if you have any further questions. Perfect, Lindsay. Thank you once again for updating investors today. Could I please ask investors not to close this session as you now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations?

40:58 This will only take a few minutes to complete, but some should be greatly valued by the company. On behalf of the management team of POLLEN STREET, we'd like to thank you for attending today's presentation, and good afternoon to you all. Thank you.