Hello and thank you for standing by. My name is Regina and I will be your conference operator today. At this time I would like to welcome everyone to the Omni Bridgeway webcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a Q&A session. If you'd like to ask a question during this time, simply press star then the number one on your telephone keypad. If you'd like to withdraw your question, press star one again. I would now like to turn the conference over to Raymond van Hulst. Please go ahead.
Good morning. My name is Raymond van Hulst, Managing Director and Chief Executive Officer. Welcome to Omni Bridgeway's first-half result for the six months ended 31 December 2023. Joining me today are Guillaume Leger, Global Chief Financial Officer; Jeremy Sambrook, Global General Counsel and Company Secretary; and Mel Buffier, Global Head of Investor Relations. This is my first results presentation since taking over as Chief Executive Officer four months ago at the annual general meeting, and I've had many meetings with investors pre and post at AGM. I've noted a strong desire and expectation for changes to be made towards increasing and reporting shareholder value, and specifically through increased cost coverage, simplification of our reporting, and transitioning to fair value.
I am pleased with the progress made during the recent months in these areas, and while some changes made will take some time to become visible, I'm confident shareholders will have noted some of the first changes and results in our reporting and disclosures since the AGM. This includes the increased cost coverage for my new Series II funds, the simplified quarterly reporting, and the first steps towards non-IFRS fair value reporting in this results presentation. In addition to this progress, I'm particularly satisfied this period with our investment performance metrics, as I will also present today. I will cover the highlights from the half, the performance of our portfolio, introduce our new fair value measure, as well as our strategic focus areas for the 2024 financial year and beyond. Guillaume will take you through the key elements of our financial results. Now onto the highlights.
During the half, we made a net profit after tax and before NCI of AUD 33 million, which, compared to the first-half 2023 financial year loss of AUD 30 million, represents a 211% turnaround. Investment income and fee revenue derived from diversified sources comprising both completions of investments and secondary market sales grew by 53% to AUD 155 million. This was biased towards the second quarter and included the sale of a 25% participation in Fund 4 IP assets for an initial amount of AUD 31.5 million, which occurred in December. We had an additional AUD 89 million of income yet to be recognized at 31 December, which comprises AUD 29 million income recognized post-31 December and AUD 60 million relating to substantially completed investments with conditional settlements or judgments on appeal, which will be recognized in future periods if and when they complete.
As announced at the AGM and in our quarterly, we are in the process of transitioning from estimated portfolio value, or EPV, to fair value as a non-IFRS measure of investment and portfolio values. In this results presentation and as a next step in the transition, we have reported a total portfolio fair value of AUD 2.5 billion. This represents the net present value of the expected loss-adjusted and probability-weighted investment cash flows of our full portfolio of over 300 investments. This is the total fair value and includes the share of both third-party fund investors and OBL. Fair value better captures the duration, pricing, and other value and risk drivers of legal finance investments. It aligns better with general financial market metrics as well as with disclosures of our peers. I will explain the fair value framework and methodology in the latter part of this presentation.
As indicated and similar to EPV, we report fair value as non-IFRS. We do not currently intend changing the basis of presentation for our statutory accounts. The commitments towards new investments amounted to AUD 260 million. This represents 42% of our 2024 financial year target and 58% of our full-year value goal. Average pricing on these new commitments was 38% higher based on the fair value per dollar of new commitments and compared to commitments that were made in the 2023 financial year. An additional 29 exclusive term sheets have been agreed, representing over AUD 180 million in investment opportunities, which, if converted into funded investments, is a further 29% of this financial year's target. Funds under management increased to AUD 3.2 billion, driven by the first close of the Fund 4 and Fund 5 Series II capital raising. At period end, our cash and receivables were over AUD 290 million.
On an OBL-only basis, including OBL's proportion of cash in its funds, we have around AUD 120 million in cash and receivables, together with an undrawn debt facility of AUD 60 million to support our operations and fund investments. This excludes any cash proceeds from income recognized post-31 December and any cash proceeds from income yet to be recognized. Investment highlights. The 22 full and partial completions for the financial year to date demonstrate industry-leading performance metrics with an overall multiple on invested capital of 2.3x and a provisional internal rate of return of 58%. We achieved income of AUD 175 million, provisional share for OBL. Completion activity and momentum is expected to continue in the next 12 months based on investments which are subject to anticipated or current settlement discussions or for which an award or judgment is expected.
We will provide an update on our strategic initiatives during an investor day scheduled for the 27th of March in Sydney. We will then discuss the milestones we have already achieved as well as initiatives planned for the short and medium term. During the investor day, we will also provide background on our fair value methodology. We have already made good progress on our strategic objectives. In relation to our capital raising objectives, the first EUR 135 million of debt was raised in September as part of our EUR 300 million Fund 8, which is focused on global enforcement investments. In December, we completed the $485 million first close of the Fund 4 and Fund 5 Series II capital raise on improved cost coverage terms. The continued and additional investments by existing investors alongside OBL's co-funding provides a strong base to market the remaining capacity.
We significantly expanded our capabilities in the U.K., the world's second-largest legal finance market. The associated cost is included in the AUD 95 million of cash operational expenses indicated for the 2024 financial year. With the build-out of our global platform now complete, our efforts have shifted towards optimizing operational efficiency, refining fund terms, and increasing funds under management. Additionally, we are simplifying our reporting to facilitate better benchmarking against our industry peers. The transition from EPV to fair value is an important element of that. Our medium-term target remains to achieve approximately AUD 1 billion in annual commitments or equivalent value. Key business performance drivers include optimizing the volume versus pricing trade-off, improving operational efficiencies and cost coverage, and diversifying our investor base. I will now hand over to Guillaume to take us through the financial results in more detail.
Thank you, Raymond, and good morning. We have incorporated new elements into our results presentation at the request of multiple stakeholders. Now included is financial information on an OBL-only basis representing the performance of the group, excluding the external investors' interest and reflective of the amount attributable to equity shareholders. During the first half of 2024, we generated AUD 23 million of positive net cash flows from investment activities derived from investment completions and the cash proceeds from the sale of a participation in Fund 4 IP assets. This was offset by making AUD 32.5 million of deployments and AUD11 million in interest payments. Given higher deployments and other fee-generating activities, management fees collected increased to AUD 7.6 million. A further AUD 3.2 million was accrued during the period. The introduction of Fund 8 and other fee initiatives, our target for the year is approximately AUD 24 million.
We have received performance fees of AUD 6.2 million from Funds 4 and Fund 5 completed investments. Cost management initiatives have reduced platform expenses to AUD 49.2 million with actual cash outflows of AUD 47.8 million with a difference due to positive changes in working capital. Cash flows from the prior slide, this chart provides a bridge of cash usage for the half. On an OBL-only basis, we have around AUD 120 million in cash and receivables and an undrawn debt facility of AUD 60 million. This is sufficient to support our operations and fund investments without relying upon cash inflows from future investment completions, secondary market sales, management, and performance fees. This chart excludes cash proceeds from completions post-December 31 and projected cash proceeds from matters classified as income yet to be recognized. Slide eight provides a detailed breakdown of management fees, acknowledging that some of the granularity is not transparent in our financial statements.
Putting to one side these nuances, you'll observe that we have actually generated notably higher management fees and other fee income than previous periods. Our cost coverage ratio increased to 22% during the half and is anticipated to further improve to around 25% for the 2024 financial year, above the 23% previously indicated. This comprises Funds 4 and Fund 5 management fees on externally deployed capital, cost recoveries from funds, receipts from Fund 8 cost coverage agreement offset by reduced Fund 6 management fees given this fund is now in harvest mode. This table does not include Funds 2 and Fund 3 management fees that have accrued to AUD 6.6 million and will be payable to OBL after preferred entitlements.
We achieved an important milestone with the first close of the Series II capital raise for Funds 4 and Fund 5 at improved cost coverage terms through the inclusion of transaction fees on new investments. Transaction fees comparable to facility fees in traditional lending will typically be payable to OBL in the first years of an investment's lifecycle. We expect to earn these transaction fees starting in the 2025 financial year. This represents a significant improvement versus the Series I fee terms and is in line with our stated objective to increase cost coverage contribution from future funds. As we prioritize the enhancement of our cost coverage, our efforts have also centered on maximizing income per dollar of platform cost. This involves leveraging the capabilities of our team as well as refining systems and processes. Furthermore, we've taken note of our shareholders' concerns regarding the expended cost base.
Since March 2023, we have been implementing a strategy for optimizing expenses and increasing cost recovery. These efforts will continue to materialize in the 2025 financial year. OBL's current cash OpEx run rate is improving, which indicates a budget of approximately AUD 95 million for the 2024 financial year. I will now hand it back to Raymond.
Thanks, Guillaume. We have seen the investment-carrying value increase at a compounded annual growth rate, or CAGR, of 16% over the past four and a half years to approximately AUD 823 million after completions, secondary market sales, impairments, and the deconsolidation of both the Fund 1 portfolio and the Fund 4 IP portfolio. During the half, the increased carrying value was driven by approximately AUD 177 million allocated by the group towards deployment in both new and existing investments to generate future income. New commitments of AUD 260 million were made in the first half of financial year 2024. As indicated earlier, this accounts for 42% of the full-year commitment goal and compares to an average 47% of commitment target reached at 31 December over the last three years.
On an equivalent value basis, this accounts for 58% of the full-year value goal of AUD 625 million, reflecting our focus on value over volume, improved pricing, and capital efficiency. In this slide, we present a detailed breakdown of each fund, including its size and the capital contributed by third-party investors and by Omni Bridgeway. This highlights the successful capital raising for Fund 8 and for the second series of Funds 4 and Fund 5. The continued reinvestment by the existing investors of our first and second-generation funds underscores the confidence of leading institutional and legal finance investors in our track record, investment origination, and underwriting process. For the second series of Funds 4 and Fund 5, we continue raising capital from both existing and new investors. Our objective is to grow each fund to its cap size of $500 million and to expand our private capital investor base.
Series II will commence investment activities following the expiry of the first series commitment periods. Collectively, the Series I funds have approximately $176 million still available for commitments, with the ability to recycle capital from completed investments until the end of their commitment period. Fund 8 secured EUR 135 million as a first tranche in debt capital and has begun making new investments. It has also successfully completed a first investment. For the first time, we are reporting our portfolio on the basis of a fair value measure. Our portfolio, for which the fair value is calculated at AUD 2.5 billion, remains well-balanced between the regions and the different investment types. This diversification is unique to Omni Bridgeway and mitigates the risks associated with adverse regulatory, legal, and economic events.
We are also satisfied with our limited exposure to single large investments, with the largest 10 cases representing less than 15% of the commitments and less than 25% of the fair value of the portfolio. The transition to fair value is a key part of our stated objective to improve our communications and disclosures. Unlike EPV, fair value is widely used for valuing financial assets in general, and there is an evolving use of fair value accounting by our industry peers. We have now adopted the use of a fair value measure on a non-IFRS reporting basis to assist with peer comparison and to enhance the assessment of the embedded value of our portfolio. At a high level, I will step through the methodology. The basis for our methodology is what is called probabilistic scenario analysis and involves the following steps.
At inception, for each new investment, the likely outcome scenarios are identified, which will typically include multiple loss scenarios as well. The probability of each outcome scenario is then assessed, as well as the cash outflows and cash inflows associated with the scenario. The combination of these allows us to calculate a total loss-adjusted and probability-weighted cash flow for the investment. This cash flow is subsequently discounted at currently 12% to arrive at the fair value of the investment. In order to assess the cash flows for each of the scenarios, we need to make assumptions, including in relation to probability of success, duration, budget, expected judgment or settlement amount, also called quantum, as well as recoverability. To the extent possible, we will rely on observable data inputs for this, such as external legal opinions, expert reports, and legal statistics.
But there remains a significant amount of subjective judgment involved from our experienced investment management team and pricing and structuring team. In subsequent periods, the fair value will typically increase as a result of deployments made and the unwinding of the discount due to the passage of time. Only when there has been a material litigation event will the probabilistic scenario model be adjusted, leading to a further fair value change, positively or negatively. This probabilistic scenario analysis is the same process as used for pricing and structuring our investments and for supporting investment management decisions. This framework and the discount rate used has been developed and benchmarked in consultation with our auditors. Using this methodology, we have calculated the total at 31 December 2023 to be AUD 2.5 billion. This is the total fair value and includes the share of both the third-party fund investors and OBL.
Fair value will be a key topic at our upcoming Investor Day for further background and examples. We look forward to discussing this and our strategic priorities more extensively in March. I would now like to open the call for questions.
At this time, I would like to remind everyone, in order to ask a question, press star followed by the number one on your telephone keypad. We do ask that you please limit your questions to two and return to the queue for any additional questions that you might have. Our first question will come from the line of David Fraser with MST Financial. Please go ahead.
Morning. Can you guys hear me?
Yes.
Morning, Raymond. Morning, Guillaume. Morning, Mel. Look, I've got about five questions. I'll have to jump back in the queue. But first one, medium-term commitments of EUR 1 billion per annum. Raymond, could you define me what medium means?
Yes. Well, first of all, it's not commitments. It's commitments or equivalent value. I'm very strong on that difference. Medium-term is in the next three years.
Great. Thank you. And second one, probably for Guillaume, but either one. Cash costs first half last year were around about AUD 67 million-AUD 68 million, come down to AUD 49 million. That's including the capitalized costs. And as you said, on target to get to less than AUD 95 million cash costs for the year. Is that the new base, or can we expect some continued cost management and costs to continue to come down?
So what you see in the first half, David, we said it's AUD 49.2 million of operating costs. And because of working capital benefit, actual cash outflow is AUD 47.8 million. And with the annual target of AUD 95 million, so the second half will be slightly less than the first half. And we continue to believe that AUD 95 million is the right level for us. Of course, in the future, we'll give better guidance on the target, but we think AUD 95 million is the right amount.
Your next question will come from the line of Jason Palmer with Taylor Collison. Please go ahead.
Yeah, thanks. Good morning. Just in terms of the cost coverage, you're guiding to 25% for the year, which implies second half may be run rate in 28%. What does the transaction fees and some of the other structures you've got going do to that cost coverage?
Transaction fees have the potential to significantly increase the cost coverage. The attractive element of it is that it's typically very front-ended. One of the issues that we've been facing is that our management fees are a percentage of deployed, and that increases only slowly. The next step up would have been management fees on committed. That would have increased it a little bit. But transaction fees, given that they're typically charged as a percentage of commitment at day one, have the potential to add significantly to next years and the year after in commitment fees or in management fees.
Jason, as I mentioned earlier, transaction fees are starting in 2025. The 25% you see there does not include transaction fees.
Sure. I still think this is question one, so I don't want to be put back in the queue, please, operator. But the transaction fees, you've said a significant step up in cost coverage. What does that really mean? Because you haven't really given any disclosure around what the nature of those transaction fees might look like, and you've obviously modelled it. So I think given that the market's had some uncertainty around the cost coverage of the model and the platform more recently, I think you probably need to give a bit more detail around what that cost coverage looks like in your modelling, please.
Sure. I'm quite happy to talk to that at the Investor Day. That will prepare something on that. I don't have a number in front of me right now, and I'd like to give that now. But I think generally, we expect, and based on some experienced numbers, we expect transaction fees to be in the 2%-3% range of commitments. And so once the Series II starts, it could be 2%-3% of new commitments that come in. Now, not all commitments will have transaction fees, and not all transaction fees will always be in full upfront. They may be spread out over time. But this should give you a little bit of guidance.
Thank you. My second question is around completions, please. You put out a really good slide around basically cash flow neutral for the period, albeit you started the period with a lot of receivables. It kind of has gone a bit backwards in terms of cash and receivables for the period, but that's the sort of semantics. The completions for the second half, please. Can you maybe talk to some of the major milestones or completions that are on your books, in particular some of the more public cases?
Yeah. Given the sensitivities of the follower, I follow the policy of not taking individual investments, so I'd like to avoid doing that. There is a substantial number or significant number of investments that are scheduled to complete this year, including a few substantial ones in Australia, and some of them are public. There is no material news on those, but they are scheduled to complete.
You're saying this year, FY2024. Will they be enough, if they do complete, to pay down the pref on Funds 2 and 3 to the extent that shareholders and analysts can get some comfort around your ability to be sustainable from a cash flow perspective as you build your business?
First of all, when I speak about the year, in line with what we've done in the quarterly, it's always on a rolling 12-month basis. I'm not referring to the financial year. It's nearly impossible to predict timing on specific months. What we've indicated is that we have about AUD 1.5 billion in EPV that may complete within the next 12 months for Funds 2 and 3. If that would complete, and if it completes as anticipated, then that would be more than enough to repay the pref on Funds 2 and 3.
That's in the 12 months, but not the.
That's a rolling 12 months, indeed.
Okay. Thanks. I'll jump back in the queue.
Your next question will come from the line of Peter Meichelboeck with Select Equities. Please go ahead.
Hi, guys. Thanks very much for taking my questions. Just firstly, on Funds 4 and 5, given that you've now secured the $ 485 million capital for Series II, can I ask firstly what the investment deployment period on that Series II capital is? I think it was four years for Series I. And furthermore, given the go-ahead for Series II, we'll probably or possibly see a re-acceleration in capital calls from those two funds. When you expect Funds 4 and 5 to effectively become self-funding for OBL on a net cash basis, what I mean by that is that the cash coming out of the funds to OBL is enough to fund the company's cash calls into each of those funds.
Okay. Thanks, Peter. On the first question, it's, again, four years. So the commitment period is four years, or the earlier of the full commitment of the fund before it would go into possibly a third series. We haven't run an analysis on a fund-by-fund basis for kind of the evergreen. But indeed, with the maturing of the investments in the first series and excluding the performance fees, the return of capital on completed investments should typically in full or largely offset the capital calls for the Series II. I don't have an immediate date in front of me where we to even out.
Fine. Okay. And my second question's in relation to Fund 1. At the time of the sale of Fund 1 interest to Gerchen last May, there was the residual interest of $36 million, and I think you ended up recognizing a profit and pre-tax profit in the last year of AUD 27 million. Given the update you did the other day, in this result, I think there was AUD 15 million of write-downs and then the residual interest. I think most of that was in Fund 1.
So I'm just wondering, with the booking last year of the AUD 27 million and this write-down of AUD 15 million, I guess I'm just wondering how confident you are in the remaining value in Fund 1 and essentially just trying to work out how much cash you think you'll ultimately get out of Fund 1 over and above that original $30 million that you received at the time of the sale.
So, Peter, the reduction in value that you're referring to that we announced last week relates to a case that we actually had a positive judgment, but the quantum came in less than expected. And as you point out, the value that we established back in May of 2023 for Fund 1 included the value for this case, and that ended up coming back with a judgment much lower. The value that we use to establish Fund 1 and the same for the sale of the IP portfolio in December, those are based on the fair value framework that we have and been reviewed by our auditor. So we're confident with the values that we put out. Unfortunately, in cases like the one that they judge them different than what we expected, this happens in our business, right? Could be positive, could be negative.
Thanks. Are you able to just on that last point that I had around for the cash you ultimately think out of Fund 1, are you able to provide any color around that?
It could vary. It depends on the cases and the outcomes that we see in the cases. The case that I was talking about earlier, it's not over, right? We were looking at different types of appeals. So it always depends on the outcomes of the cases.
Our next question will come from the line of David Fraser with MST Financial. Please go ahead.
Welcome back, David.
David, your line might be on mute.
Thanks, guys. The last two questions. In your fair value calculation of AUD 2.5 billion, just a simple one, does that include conditionally funded and investment committee investments?
It's about AUD 200 million in conditionally funded and IC approved.
Sorry. So I missed the first bit, Raymond. Of the AUD 2.5 billion, about AUD 200 million for the conditionally funded and IP.
That is correct.
Cool. Okay. And then again, minor question. Slide eight, management fees that was broken down by Guillaume. Did that include the performance fees of AUD 6.2 million?
No, no. This slide is just management fees and other fee income. Yeah. Our cost coverage, we want to show the recurring fees like management fees. Performance fees depend on completions and a bit more bumpy. So cost coverage, we wanted to maybe as the industry call it more recurring. So that's what we include in cost coverage.
Great. Thank you very much, customer two.
Our next question will come from the line of Peter Meichelboeck with Select Equities. Please go ahead. Hi, Peter. Your line might be on mute. Our next question will come from the line of Jason Palmer with Taylor Collison. Please go ahead.
Yeah. Thanks again for taking my follow-up. Can you hear me okay?
Yep. We can hear you.
Great. All right. Wonderful. The fair value of AUD 2.5 billion sort of implies relative to EPV about a 30% discount. So I'm not sort of saying that EPV conversion should be 10.5% rather than 15%, but are you sort of saying with fair value, that's sort of exactly the type of cash inflows you would expect to realize on the portfolio now if you were to liquidate it?
Well, I'm not sure how you arrive at the 30% discount. Based on our own review and inclusive of all fees, I think it aligns relatively closely. So this is certainly something we will be talking about and presenting at the Investor Day. But I think on a high level, there's a difference between EPV and IEV and fair value. EPV/IEV is an undiscounted measure of income, whereas fair value is the discounted measure of gross investment profit. So the difference that you refer to may be the result of discounting.
I think, Jason, conversion rate of 15% you referred to is upon completion of the investment, right? So there's no discounting at that point.
I get that. I guess what I'm saying is that it's, I mean, with the weighted average cost of capital at 12% and let's say an average duration of three years, it kind of says that maybe the true conversion is 10.5, not 15. That's sort of what I'm sort of pointing to. I'm just trying to work out sort of when you're managing the business, what you're thinking about from a cash flow perspective. That's the heart of what I was sort of getting at with the question.
I think this offline if you can go into the details maybe offline, Jason, make sure we understand your.
I'd certainly like to address that alignment of EPV/IEV and fair value later on. I generally don't want to steer away from the EPV and EPV conversion. It's all about MOIC and IRR and fair value. But I fully understand that while we transition, we'll make that. We'll show how the two are connected.
Yeah. Just my last question is just around managing of cash flows going forward and your view, Raymond, around whether you should try and accelerate returns now or whether you're about building this book for the next four to five years to provide greater returns for shareholders. There's a trade-off.
Yeah. That's fair value.
Pay specially to pay down debt, or you can reinvest back into the business with a higher platform cost and try and defray that over time, but it might mean that shareholders don't see a cent for four years or five years.
I have picked up strong feedback from shareholders that cash conversion is high on the wish list. And so I don't think I'll be further expanding the platform or growing the book in that sense and want to show that the book that we've built is able to show. Before developing any other new strategic initiatives to further grow the book or the platform.
Our next question comes from the line. Our next question comes from the line of Peter Meichelboeck with Select Equities. Please go ahead.
Hi, guys. Sorry. Can you hear me this time?
Yes.
Yeah. Sorry. Sorry about before. Just a couple of quick questions. I may have missed this in the presentation or in the results. The headcount, can you tell us where headcount is now currently sitting?
Sure. We are at 213.
213. Great. And the other question I just had was once again, I may have missed this in the detail. Is there any update on the West gem situation in terms of the adverse cost payment? I think it was AUD 17 million, but any update in terms of timing or anything like that?
This goes into individual cases, so I don't like to comment on individual matters that are still subject to litigation. But on a more higher level, there is no material development on any of our adverse cost exposures.
Okay. Thanks.
Our next question will come from the line of Mark Southwell-Keely with Select Equities. Please go ahead.
Hi, guys. Thank you very much for taking my question. Can you hear me?
Mark.
Yeah. Cool.
Yeah. Yeah. Hi, Mark.
Hi. Just a quick question, and I'm sure there's lots of different ways of interpreting this, but in terms of the fair value of AUD 2.5 billion on slide three, the OBL kind of proportion of that, how much is it?
So the OBL attribution of that, we haven't presented yet, and that is on the agenda as well for the Investor Day. Each fund has a different attribution ratio, and it's the combination of the co-invest and performance fees that apply. Whether it's an American waterfall fund or a European waterfall fund has an impact on what the discounted attribution rate is. That is exactly a topic we're going to be addressing at the Investor Day.
Cool. Thanks, guys.
Thank you, Mark.
With that, I will hand the call back to Raymond van Hulst for any closing remarks.
Hopefully, we have answered all of your questions, but if you have any follow-up questions, please do not hesitate to reach out. We will be sending out further information on our Investor Day and hope to address any other questions that you may have at that moment. Thank you, everyone.
Thank you.
This concludes today's call. Thank you all for joining, and you may now disconnect.