Ladies and gentlemen, thank you for standing by, and welcome to the Omni Bridgeway Limited Fiscal Year 2023 Results Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question- and- answer session. If you would like to ask a question during this time, please press star followed by 1 on your telephone keypad. If you would like to withdraw your question, again, press star 1. Thank you. Andrew Saker, Managing Director and CEO, you may begin your conference.
Thank you, Josh. Good morning. My name is Andrew Saker. I'm the Managing Director and CEO of Omni Bridgeway. Welcome to our results call for the year ending June 30, 2023. Joining me today is Raymond van Hulst, Executive Director and current co-CIO for EMEA, and the incoming CEO, Guillaume Leger, our Global CFO, Jeremy Sambrook, our Global GC and Company Secretary, and Mel Buffier, our Global Head of Investor Relations. Over the next 15-20 minutes, we will look to cover off the highlights from FY 2023, key elements of our financial results, the performance of our portfolio, as well as our strategy for FY 2024. This year, much like last year, is a tale of two halves. With the few material completions in the first half, we made a loss after tax of over $30 million.
However, the second half, we saw a 95% increase in completions and secondary market sales, biased towards the fourth quarter, resulting in a 400% increase in total income on a group consolidated basis and a 200% turnaround in profit after tax between the two halves. This reflects the nature of the underlying asset class, a topic we have discussed repeatedly. The life cycle of our investments means that evaluating performance over short-term, six-monthly intervals does not truly represent the nature of our assets. Furthermore, this highlights the fluctuations of returns in investments with binary outcomes. We have seen strong growth in most of our key metrics. Of note, we have delivered total gross income and revenue to a record level of over $330 million, up 51% on last year.
This was derived from diversified sources, comprising both completions of investments and secondary market sales. We have materially grown annual commitment to a new record of close to approximately $550 million for the financial year, meeting the target commitments that we set for May, set in May 2022, a growth of 17% for the year. Following on the growth in commitments and notwithstanding the record number of completions and secondary market sales in the year, and after impairments, our Estimated Portfolio Value, or EPV, increased to a new record of over $30 billion, up 12% in a year. The growth in EPV has translated into a rise in implied embedded value, or IEV, in our funds, marking a 9% growth over the year to $3.9 billion.
IEV is based on the realization of the currently unconditional funded portfolio, using a normalized 15% Estimated Portfolio Value as a conversion rate. We currently estimate that the value from these future completions, provisionally attributable to OBL, is $1 billion. This excludes estimated management fees and potential performance fees, which I will cover later. Whilst attaining these milestones, we continue to have industry-leading performance metrics with a ROIC of 1.1 times and an IRR of 77%. We end the year with a strong financial capital position, with over $360 million in combined cash and receivables on a consolidated basis.
Of that, the OBL balance sheet currently holds about AUD 130 million in cash and receivables, with access to additional AUD 60 million in debt, which can be allocated for operational needs to fund investments and potential expansion opportunities. Not recognized on a consolidated basis, OBL has provided its proportion of capital to its funds, so our cash and receivable position also includes a portion of those liquid assets within our funds. With this liquidity, the upcoming launch of our new Fund 8 and promising indications of upsizing in Funds 4 and 5, we're in a unique position in both our sector and the alternative asset management industry. I note that some shareholders have differing views on the level of liquidity we should retain. Some shareholders believe our current level of liquidity is too little, and some shareholders believe it's too much.
We're committed to continuously assessing our cash retention policy, considering the following factors: our requirement to fund projected investment growth, ensure suitable liquidity, and support corporate initiatives, while also factoring in our capacity to generate cash from completions and secondary market asset sales. This approach aligns with our strategy for sound capital management. Furthermore, we are equipped with a leading platform to generate future growth and revenue for our stakeholders, in our funds and for our public equity. This effectively diminishes any valid concerns about the need for raising funds from public equity in the immediate future.
as you will see in the following two slides, there was a significant turnaround from the first half and a 31% growth on a year-on-year basis in total income on a consolidated basis, that financed the, the continuing growth of our platform, such that profit after tax was relatively flat between the periods. Breaking this down further, I'd like to emphasize the following: We achieved a 30% rise in litigation income proceeds year-on-year, derived from completions and cash proceeds from the sale of our participation in Fund 1 assets, which generated a net gain of over $27 million upon its deconsolidation. We saw a 31% increase in management fee income compared to FY 2022, which I'll discuss in more detail later.
It's also worth highlighting that we have over AUD 55 million in income pending recognition due to matters that have not yet satisfied our income recognition criteria per IFRS accounting regulations. Amongst these, over 40% has already been recognized as income during the initial quarter of FY 2024. Had this income been realized prior to June 30, our pre-tax profit would have been approximately AUD 12 million. Employee expenses have increased by 20% over FY 2022, this was part of a planned growth in FY 2023. We have driven a 10% reduction in these expenses between the two halves, representing the initiation of our ongoing cost optimization process. Turning now to our operating efficiencies. As we have previously identified, our focus has been on enhancing the utilization of our platform to generate more income per unit of cost.
Notably, in FY 2023, we've once again achieved material growth in both the value managed by each investment manager and the value created by each investment manager, expanding by 22% and 16% respectively. These advances build upon the efficiency gains we achieved in FY2022, which grew year-on-year by 38% and 28% respectively. In aggregate, this translates to a 50% improvement in efficiency over a two-year period. This underscores the capabilities of our team, systems, and processes, as well as the evolution of our platform. It's important to recognize these types of efficiency improvements within the context of cost discipline. I note that our management fee cost coverage ratio decreased from 20% -1 6% during the year.
This was a function of the reducing management and servicing contribution from Fund 6, coupled with the investment made in headcount, increasing from 199- 224, and the expansion of our global footprint, with locations opened in the U.S., Italy, and France, combined with previously subdued expenses during the COVID period. As the investments that are newly committed continue to deploy, management fees will increase. Having said this, we've taken note of our shareholders' concerns regarding the expanded cost base. Since March 2023, we've been implementing a strategy for optimizing costs, with the full impact of these efforts expected to materialize in FY 2024.
This strategy encompasses several aspects, such as the deliberate withdrawal from less productive locations, a reduction in headcount in specific functions, and the planned pass-through of certain costs to be borne by our clients or allocated to our funds. As we put our cost optimization strategies in place and coupled with our anticipated growth in management fee income, we expect our cost coverage ratio to improve in FY 2024 to around 23%. As noted in the annual report by our chairman, there is an evolving use of fair value accounting and reporting by our industry peers, and we intend to explore the use of fair value reporting to assist with appropriate peer comparison and to enhance the assessment of the embedded value of our assets.
As will be apparent from this slide, we've seen the investment carrying value increase at a compounded annual growth rate, or CAGR, of 16% over the past four years to over $740 million after completions, the deconsolidation of Fund 1 in May 2023, secondary market sales, and impairments. These investments are predominantly carried at cost and could see a material change if reported on a fair value basis. The increase in the carrying value of investments was driven by approximately $270 million in deployments made by the group towards both new and existing investments in FY 2023 to secure a strong future for our shareholders.
Our commitments for new investments, including conditionally funded and investment committee-approved investments, reached an all-time high of almost $550 million during FY 2023 and have grown at a CAGR of 25% over the past four years. This, in turn, has fueled expansion of our EPV to an unprecedented $31 billion, growing at a CAGR of 34% over the past four years. This progress stands in comparison to the $1.8 billion in EPV we had at December 31, 2014, when I joined what was then known as IMF Bentham. The key insight from our portfolio is that we remain focused on diversity across geographical regions, case types, and capital sources. The outcomes for FY 2023 reflect the sale and subsequent deconsolidation of Fund 1 during the last quarter.
We are actively mitigating concentration risk, with the top 10 cases now representing 22% of the portfolio, down from 28% at 30 June 2022, and 35% four years ago, which helps with the consistency of our returns. In contrast, some of our peers face substantial concentration risk from a few significant key investments. The sale of a participation in Fund 1 assets, which was a US-focused investment vehicle, has resulted in a rebalancing of our portfolio, making regional distribution more pronounced. Anticipating team expansion in the UK, we expect a further moderation of our US proportionate exposure in the future. Furthermore, the Fund 1 transaction impacts our diversification by investment type, particularly in relation to the reduction in single party matters and the expansion in class action and law firm investments.
We continue to seek investments that optimize risk-adjusted value and will be agnostic to the type of investment where that may be achieved. Our appetite for large single-party investments has moderated, given the other investment opportunities that are now available to us. In this slide, we present a detailed breakdown of our investments by fund, along with remaining balance sheet investments. The left-hand portion of the slide displays a breakdown of each fund, including its size and the capital contributed by third-party investors and by Omni Bridgeway. The middle portion provides data on our existing and ongoing investments. Moving to the right, it includes data on matters that are completed up to 30 June 2023.
It's important to note that whilst historical performance is available, it may not necessarily be an indicator of future performance, particularly in the context of the unique, uncorrelated investments in which we invest. The outcomes of individual cases are independent of one another. Whilst historical performance offers some reassurance, it's crucial for the number of investments to be substantial enough to hold statistical significance. Consequently, the historical performance of a fund with insufficient number of completions lacks statistical relevance. This tends to be true for most of our funds when evaluated individually. However, when we assess our collective fund and balance sheet performance over time, the picture changes, which is noted in Slide three, provides a historic and historic return on invested capital of 1.1 times and an internal rate of return of 77%.
For example, although the Fund 4 metrics at 30 June 2023 fall short of our long-term historical performance and show a negative weight in IRR arising from a few but large completions, we hold the belief that these figures will experience significant enhancement, considering the inherent value remaining within the portfolio. With the few additional completions and partial completions that have occurred this August, the metrics have changed to a 1.05 MOIC and an IRR of 7%. Our assurance in achieving improved results is, to some extent, supported by the interest shown by our investors in Fund 4 to commit additional funds to the second series of these funds.
To this end, we note that we have indications from several investors of their appetite to provide between $400 million and $600 million in a first close for the upsizing of Funds 4 and 5. We will continue to work on this first close to occur in the first half of FY 2024. Given the rate at which our annual commitments are growing, we plan to pursue a second round of fundraising. This additional close will supplement the initial round and provide access to additional capital for investment purposes. Our intention is to seek fund term adjustments to improve our cost coverage ratios on more favorable terms for the second close. In the first quarter of this year, I'm confident that we will complete the initial capital raising for Fund 8, a global enforcement fund totaling over EUR 300 million.
We're in the advanced stages to close a limited recourse debt facility of up to EUR 135 million, along with standby equity of up to EUR 15 million to be provided by OBL. This debt is backed by an existing principal protection insurance policy and the investments made in Fund 8. We will disclose full details to the market once this is finalized. In the next three slides, we provide a comprehensive breakdown of the value we anticipate will be created from our investments, encompassing both our role as a fund manager, comprising our capital and returns, as well as management fees and performance fees. In Slide 15, we provide the EPV and IEV breakdown by fund and the estimated completion date for our investments, applying our normalized EPV conversion rate of 15%.
The EPV used relates solely to investments that have received unconditional approval. On this slide, for unconditional investments to June 30, 2023, we estimate that an aggregate of around $1 billion of attributable IEV will flow to Omni Bridgeway, excluding estimated management fees and potential performance fees. Furthermore, there is $4 billion of EPV relating to additional investments conditionally approved or approved by our investment committees, which aren't reflected here. Should these investments proceed and yield successful outcomes, they're estimated to generate an additional $600 million in attributable income, a material portion of which would flow to Omni Bridgeway.
I'll expand on this in more detail, but you will note that the potential performance fees are approximately AUD 240 million, assuming the group's historic rate of 1.1x in achieving a 20% management fees of around AUD 20 million per annum. Both performance and management fees are payable from the Omni Bridgeway. Slide 11 provides a detailed breakdown of management fees, acknowledging that some of the granularity is not transparent in our accounting practices. Putting to one side these nuances, you'll observe that we have actually generated notably higher management fees than we have, what has been previously disclosed in our presentations. We expect to collect approximately AUD 22 million of management fees in FY 2024, in accordance with the arrangements with each of our funds, implying a cost coverage ratio of more than 20%.
This forecast includes a nominal fee for the ongoing management of Fund 1 post the deconsolidation. For Fund 4 and 5, we earn management fees on external deployed capital. As you will note, management fees for these funds will continue to grow with the estimated increase in net deployment in these funds. We also earn administration fees on these funds. As previously noted, we intend to seek a revised management fee for Series II of Funds 4 and 5, which we will look to attach management fees at an earlier part of the investment life cycle, of course, will be determined in the context of the market conditions the time we seek to raise this capital. Finally, the forecast includes receipts from cost coverage arrangements as part of the expected Fund 8 debt facility, offsetting reduced Fund 6 management fees. Turning now to performance fees.
Performance fees are payable only in relation to Fund 4 and Fund 5. In Funds 2 and 3, Fund 6 and Fund 8, we have a predefined profit share, which is captured in our allocation of IEV in slide 10. Performance fees in Fund 4 and Fund 5 depend on the overall achieved profit or ROIC and IRR for that fund, and as such, are difficult to estimate with any precision. However, I note that even now, we receive cash from performance fees as a matter, as matters complete or soon thereafter, subject to an annual true-up based on the actual performance of the fund. Our performance fee structures are typical for a fund management business, other than the supernormal performance fee of 30% above a 20% IRR.
If performance of the fund achieves less than an 8% IRR, which is the hurdle for these funds, then the performance fee is zero. If the performance of the fund is more than 8%, but less than 20% IRR, the performance fee is up to 20% of the profit attributable to external capital, with a catch-up of the first 8%. If the performance of the fund is more than a 20% IRR, then we pay the performance fee of 30% of the profits above the 20% hurdle.
Whilst we have yet to meet the income recognition thresholds for performance fees associated with Fund 4 and Fund 5, the terms of these funds entitle us to approximately AUD 240 million, based on the group's historic ROIC of 1.1x and achieving at least a 20% IRR hurdle for the fund. If the ultimate IRR achieved exceeds 20%, our performance fees will also increase. Our historic IRR is 77%, so if we maintain that, we could expect that the fund terms would entitle us to a higher performance fee. I also note that our estimate here relates to existing unconditionally funded investments, and will also increase for future unconditionally approved investments as they convert into unconditionally funded investments.
I would now like to hand over to Raymond van Hulst, our incoming CEO, when I retire in October at this year's annual general meeting, to elaborate on his immediate focus for the company's future.
Thank you, Andrew. Good morning, everyone. I'd like to start by saying a few words about Andrew. Under Andrew's leadership, we've successfully established a global funds management platform spanning the Americas, APAC, and EMEA regions, scaling rapidly and launching diverse fund structures in an emerging asset class. He has created a world-class dispute finance team with enterprise-wide capability in developing unique products and fund structures to expand market reach, scale, and improve returns. He leaves the group in a strong position after recently strengthening core parts of our business, whilst maintaining the highest industry standards. It was through his vision and drive that the merger with the European business was successfully completed, and it has been a pleasure and privilege working closely together during the last four years.
I'm honored and humbled to lead the transition to the next phase of our strategy, and will outline this in more detail after I commence formally as the CEO. Of immediate focus are our financial year 2024 results, our goals, which include achieving AUD 625 million in new commitments or equivalent value through improved pricing and attribution terms. Exploring the transition to or adding fair value reporting. Finalizing the establishment of Fund 8, our new global enforcement fund. Increasing funds under management via a first closing of Series II of Funds 4 and 5, and a potential launch of new funds. Continued focus on cost coverage improvement initiatives. Accelerating realizations and mitigating risk through secondary market transactions. Moderately expanding our UK team to increase our presence in the second-largest litigation finance market, and aiming for approximately AUD 95 million of cash operational expenses.
Our medium-term target is to achieve approximately AUD 1 billion in new commitments or equivalent value annually. Key business performance drivers include optimizing the volume versus pricing trade-off, velocity and investment completions, secondary market sales, portfolio optimization, and sustained improvement in operational efficiencies and cost coverage. I will now hand back to Andrew for his closing remarks.
Thank you, Raymond. As you'll be aware, this is my last full year result and investor roadshow with Omni Bridgeway. I'd like to take the opportunity to thank our shareholders for their support through the past eight years. I acknowledge our journey has been complex. Raymond and I remain convinced and excited that the investment made in developing our platform and refining our business model will continue to yield the anticipated outcomes, as evident from our recent performance in this last half. I would also like to take this opportunity to thank our other key stakeholders, including our private investors, the dedicated team members, executives, and board of Omni Bridgeway. I'd now like to open the call for questions. Thanks, Josh.
At this time, I would like to remind everyone, if you would like to ask a question, please press star followed by 1 on your telephone keypad. Your first question comes from the line of David Fraser with MST Financial. Your line is open.
Hi, David.
David Fraser, your line is open.
Oh, hello. Can you hear me?
Yes, Dave. Thank you.
Thanks, Andrew. Thanks very much, and good luck for the next couple of months. And enjoy your retirement. I'm sure you won't retire, but anyway. A couple of notes from me. Basically talking about your outlook for 2024 and going forward, historically, we've had a, I guess, a target of $1 billion worth of commitments, new commitments in 2025. I just wonder what the sort of timing on the new commitment of $1 billion. Then for $625 million in 2024, you talk about equivalent value through improved pricing and attribution terms. Could you explain a bit more what you mean there?
Sure. I, I'll actually get Raymond to address both of those questions, David. Thanks.
Thanks.
Thanks, David. Yeah, so actually, value to OBL is the combination of volume, pricing, and the part of value attribute, attributable to OBL. It's a matter of price elasticity on the commitments. If we, if I can achieve, or if we can achieve slightly less commitment but at a much higher pricing level than actual value created for OBL would be higher. Similarly, if we can increase the attribution to OBL through our fund structures, and for example, Fund 8 is expected to have a higher attribution to OBL, $1 of commitment at a higher implied pricing in Fund 8 adds more value to OBL than $1 at a lower pricing in another fund.
We want to set the target at value to OBL rather than at a pure commitment level or volume level.
Okay. Simplistically, if you're seeing that, including the performance fees, you're getting $1 billion worth of returns, plus $240 investment fees, what we should be looking at for going forward is, is what your forecast returns are from IEV plus performance fees. Because, if you're getting, as you say, more attractive terms and pricing, the $625 that we would have done in, say, 2023, you might be able to achieve with $550 in 2024. Is that a simplistic way of looking at it?
Yes. It's, I won't use simplistic, but it's a way of putting it. I intend to give more explanation on that in the next presentation. Indeed...
focus more on growing volume, growing, pricing, and growing the attribution to OBL. All three lead to value, increase for OBL.
Okay. Going back to full year 2023, just achieved, I mean, AUD 544 of commitments was a pretty damn good outcome compared to the previous year. But at the bottom of your target range, can we assume that some of what you've just been talking about is reflected in that AUD 544?
It's Andrew, and yes, the, the short answer is, we started changing the pricing and structuring arrangements, approximately six months ago. The impact of that is now starting to flow through. As a consequence, we can achieve more per AUD invested based on, on the revised pricing and structuring.
Okay, thank you. I've got lots of questions, but I'll, I'll just ask one more and then leave it for others. Could you give us an update on what's happening in the UK, and the impact on the, the DBA regulation impacting, and whether that's had any impact on your, I guess, current forecast EPV and IEVs, or whether, as, as you said in that first ASX release, that it's not material?
Thanks, David. The decision in PACCAR, I think, caught the industry a little bit by surprise. For us, we had built into our litigation funding agreements structures that addressed that as a potential risk. The impact on us is relatively immaterial. Our appetite for the market is clearly strong and continuing to grow, A, because it's the second-largest litigation market in the world, and B, one that we feel is underserviced, at least by us. We are, during the course of FY 2024, adding moderately to our team capacity in that market.
Great. Thanks very much. I'll leave it for others now.
Thanks, David.
Your next question comes from the line of Jason Palmer with Taylor Collison. Your line is open.
Yeah, thanks.
Hi, Jason
... good morning, everyone. Just in respect of the, the cash cost guidance of AUD 95 million, how does that compare to the 2023 actuals, please? I know that you've got non-cash costs included in the 2023 actuals. I'm just trying to understand how much you've actually removed.
Sure. I'll hand over to Guillaume and ask him to respond to that, Jason.
Hi, hi, hi, Jason. Our cash cost in FY 2023 was AUD 99.6 million.
Thank you for that. My, my second question, and I'll take the rest of them offline, if that's okay, on 2, 3: With Fund 1, as you got close to the, the waterfall hurdle, you did a secondary transaction of the fund. I'm cognizant that, you know, you're sort of AUD 100 million-ish away from that, that hurdle in Funds 2 and 3. Has the business looked at a similar type of arrangement? Would it contemplate a similar type of arrangement if a couple of transactions or a couple of cases fell in the, in the first half of 2024 to bring forward those, those cash flows?
Jason, we, the short answer is yes. We certainly are looking at all opportunities in relation to potential secondary market transactions, driven by risk management as it relates to either changes in duration or budgets. If there were appropriate opportunities to look at potential secondary market sales for Fund 2, 3, either in part or in whole, we'd certainly look at those. If that, you know, was in the best interest of the company, then we'd certainly look to bring those cash flows, cash flows forward.
Yeah, okay. Just to follow up on that, obviously, you brought forward the cash flows in, in Fund 1 forward last year, or FY 2023, which leaves a little bit of a gap in, in 2024, where those cash flows would have come through. How do you think about the, the cash flows attributable to OBL over this period, over this next 12 months? Can it, can it maintain-
Sure.
Can it wash its face, or do you need to sort of transaction something to arise, at a net neutral benefit as you're reinvesting back into the platform?
Sure. We'd start with a very strong cash position with, you know, $360 million, of which is cash and receivables on a consolidated basis. We have about $190 of that, which is attributable purely to OBL on our balance sheet, plus access to our additional debt facility. We have $130 with additional capacity, access to the debt facility. We have obviously preceded some of our funds with our contribution to those investments. Overall, our cash position as a starting point is very strong. In addition, we've had a good start to the year with over 40% of debtors on a consolidated basis, already convert into cash.
Equally, on an income yet to be recognized basis, we've seen, just in, in the period over the last couple of months, almost 40% of that convert into actual revenue. It, it's been a very strong start to the year. In addition, we're expecting, you know, reasonable completions over the course of the year, and consistent with our expected completion dates. If durations extend on any of those, or as I mentioned, if there's a budget change, then we've got various levers we can pull, including looking at managing risk, duration risk, particularly, through secondary market sales. I think we've, we've demonstrated our capacity to do that with the secondary market sales that we achieved in FY 2023.
For all of those reasons, we feel in a very confident and strong position in relation to cash flow during the course of the next 12 months and going forward, obviously.
Yeah. Thanks for that comprehensive response, Andrew. I'll pass it back.
Thanks.
As a reminder, if you would like to ask a question at this time, please press star, followed by the number one on your telephone keypad. We'll pause for just a moment to compile any remaining questions. There are currently no further questions at this time. I'll turn the call back to Andrew Saker for closing remarks.
Thanks, Josh. Thanks, everyone, for your attention and questions. If you do have any follow-up questions, please don't hesitate to, to reach out. Otherwise, thank you, and look forward to discussions over the next couple of weeks.
This concludes today's conference call. Thank you for joining.