Good day and welcome to the Pacific Current Group 2024 Half-Year Results Conference 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, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. For operator assistance throughout the call, please press star zero. And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Paul Greenwood, MD, CEO, and CIO, to begin the conference. Paul, over to you.
Thank you. Welcome to the Pacific Current Group Mid-Year Results presentation. We appreciate your time and interest in our company. We will be reviewing our financial and operational results for the first half of fiscal 2024, as well as discussing our outlook for the business and the rest of this year and beyond. I'd like to start by thanking our CFO, Ashley Killick, and the finance team he manages for their great work in finalizing our financial results. I should also say thank you to the finance teams at each of our portfolio companies. The PAC results are largely driven by the information we receive from our boutique managers, and we work hard to invest in strong relationships with boutiques and also rely on them to help us meet our own reporting deadlines.
Let's begin with page three of the results presentation, which offers highlights for the period, including continued strong FUM growth with ownership FUM increasing 8% during the period from $14.1 billion to $15.2 billion. We made a new investment in a very exciting company, Avante Capital Partners, during the period. We also saw notable increases in fair value at GQG, Pennybacker, and Roc, though these were offset by an impairment at Aether and at Banner Oak. Financial highlights for the period included a 20% increase in boutique contributions driven by 30% growth in management fee revenues. The growth in management fee revenues was primarily a result of increases in Banner Oak and Pennybacker Capital. Our underlying EBITDA grew 26% during the period, and underlying NPAT grew 15%. NPAT declared AUD 0.15 a share dividend for the period.
I'll save comments about our business outlook for the end of the presentation. Let's go on to page four of the results presentation, which highlights the underlying results in greater detail. The only thing I would really note here is that our underlying operating expenses were very controlled with just 3% growth, and then that the obvious difference between the EBITDA growth and the NPAT growth was the interest expense related to our debt facility. Page five illustrates the strong progress we have made over the last several years in terms of growth in management fee revenues. In this period, our performance fees were very much a function of contributions from Roc, whereas last year they were driven more by SCI.
Page seven of the presentation builds upon the disclosures we made at our FY 2023 year-end results presentation, where we provided our internal estimates of NAV adjusted for fair value of all our assets. This graph shows that our fair value adjusted NAV fell by AUD 0.23 a share during the period. The reason for this was primarily currency fluctuations, which detracted AUD 0.23 a share. In other words, fair value NAV would have been flat if currencies had been stable. In terms of simple changes in the fair value, the period saw increases in GQG, Roc, and Pennybacker offset by the impairments at Ather and Banner Oak. It is worth noting that at the 31st of December, GQG sold at AUD 1.71 a share and that the increase since that time would add nearly AUD 1 a share to PAC's fair value on a gross basis.
Moving to page 10, I'm sure almost everyone is well aware that in the first half of the fiscal year, PAC went through a strategic review process driven by interest from a couple of parties to acquire PAC. PAC created an Independent Board Committee that we called the IBC to lead this process. Ultimately, it became clear that PAC would be unlikely to obtain shareholder approval for the highest bid, so we ceased proactively trying to find an acquirer for the business. Since completion of this strategic review, PAC has been actively soliciting input from shareholders and exploring other avenues to unlock value. During and after the IBC-led process, we received numerous questions about whether we can sell to parties our individual assets. The reality is that there are complexities around selling individual assets that are often overlooked yet are of paramount importance. These are worth reviewing.
Specifically, asset sales are almost always driven by the portfolio company and when they decide that they would like to sell some or all of their company. As a minority investor, PAC essentially never has the right to sell its stakes in companies without the consent of the investment manager. In other words, we sell them if ever have the ability to compel a transaction. Lastly, our business is all about relationships. When companies decide to partner with us, they do so because of this trust relationship we have developed with them. In a sense, the partnership is more personal than corporate. The relationship is important because they are trusting us to ultimately do things like approve their budgets, assist them with distribution, and provide advice and counsel to them as they grow their businesses.
As a result of these points, there is no reason for portfolio companies to consent to being sold to a party they are unfamiliar with or uncomfortable with. And so those are the primary reasons why we can't sell off individual assets unless there's a willing party at the boutique level. Page 12 summarizes FUM growth over the last several years, which you can see remains quite positive and with almost everyone above the line in terms of positive growth. Page 13 provides an update on the ownership-adjusted funds under management that we have begun providing to the market, the biggest contributor to these figures during the period were GQG, Banner Oak, Pennybacker, and Roc.
Page 14 of the presentation provides an update on the ownership-adjusted yield, which, as a reminder, is calculated by taking the earnings we receive from each company and dividing it by the ownership-adjusted funds under management. If we take a several-year view of this figure, our expectation is that the ownership-adjusted yield on both management fees and performance fees will trend upward, though not in a straight line. This is because, one, our more rapidly growing companies should benefit from their high operating leverage, and two, our portfolio companies will increasingly have more mature funds that should generate greater performance fees. Moving to page 15, it just summarizes developments at tier one boutiques. There are a few of these I'd like to elaborate on. On the positive side of things, everyone is aware of the robust growth and performance and stock appreciation at GQG.
Pennybacker has also had great fundraising success recently. Specifically, in the face of a very challenging commercial real estate market, the firm has been able to raise more than $1.5 billion for its recent flagship fund. The value of this to PAC is large because we fully benefit from the firm's operating leverage, and thus the contributions we receive this year and next will be a multiple of what we have received in prior years. On the negative side, we have two impairments during the period. The first is for Ather. The firm has been raising its first seed fund, but the raise has gone slower than expected.
We expect them to modestly increase the size of the fund from where it sits today, but the slower pace of fundraising means we expect the contributions we receive from them to decline over the next couple of years, and this has been reflected in our valuation. We do believe there's a good chance that the performance of this initial seed fund ultimately drives growth, but if this occurs, it could be down the road a couple of years. Banner Oak is the other one where we have taken an impairment. And this one may look funny as its FUM has grown nicely and its contributions to PAC have been very strong. In fact, I believe they were the second largest contributor during the first half of this fiscal year.
As a reminder, when we invested in Banner Oak, we were keenly aware that the largest business risk related to it was only having one very large client. In the course of our diligence, we met with that client and were comfortable they would remain supportive of the business. Nevertheless, we structured our investment to help mitigate the client concentration risk, and we did this by receiving a disproportionate share of the profits of the business until certain return thresholds had been met. Even though Banner Oak continues to deploy capital from its client, the client has expressed its desire to gain control over some assets earlier than initially contemplated. The net result is that we don't expect new allocations from the client anymore, and we now have less visibility on what will happen to the business and the assets it currently manages beyond 2028.
Until or through 2028, our visibility remains quite strong. Banner Oak may very well raise its own fund, but the uncertainty around the timing and size of such a fund is such that we need to discount the prospects in our valuation models. Moving to page 18, where we talk about the operational outlook, we are gratified that the events of the last year have highlighted the value in our portfolio. And while some of this value may be better reflected in our share price now, we believe there may be additional ways to unlock value in the future, and this will remain an important focus of the board and management. We continue to expect strong FUM commitments through this fiscal year and through fiscal 2025. This is primarily due to more of our managers returning to the market to raise the next funds in their fund series.
Moving to page 19, we believe FY 2024 will be a strong year for PAC, the first half was. In fact, FY 2025 and FY 2026 look good as well. We note that some of our fastest-growing managers have invested more in their businesses than we expected, and thus their earnings contributions during this half were less than expected. We are actually quite supportive of such aggressive reinvesting, though, because in our experience, the payoffs for this are well worth it. Lastly, we believe there's a meaningful probability of having one or more partial or full asset sales during this period. That concludes our prepared remarks. Before we jump into questions, I thought I would preemptively answer one question we've already received.
This relates to the financial statements where it made it seem that the way the financial statements read, it makes it seem like the revenues at Victory Park grew very modestly, only 5%. In reality, the gross revenue growth was notably higher than that, but the reporting standards result in us or in their revenues being shown net of placement agent fees. And so that results in a sort of a muted growth profile. With that, we are happy to take any questions that people may have.
If you wish to ask a question, please press star followed by one on your telephone and wait for your name to be announced. That is star one if you wish to ask a question. And your first question comes from the line of Nick McGregor from Barrenjoey. Your line is open.
Your next question comes from the line of Nick Burgess from Ord Minnett. Your line is open.
Yeah. Morning, Paul. Just a couple of questions on your outlook statement that I'm a little bit confused with. So, the first half has seen very strong management fee growth, but you're talking about a reduction in the second half. Now, the GQG dividend is annualizing about 30% growth, and that is a big part of your management fees as well. So, if we put that to one side, based on those comments, it sort of implies, I think, a pretty big step down in management fees. And obviously, over the same time period, flows have been growing very strongly. So, a little bit more color on that would be helpful.
Sure. Happy to respond, Nick. Great question. So, there are a couple of things going on.
One is Banner Oak had a very good period, but part of that, $2 million, was I'd call it management fees being pulled forward. And that ultimately sort of comes at the expense of some future management fees. They sort of wound up an investment sort of sooner than expected but brought those revenues forward. So, the other component is Pennybacker has, as I mentioned, had great success in raising their most recent fund. And in the context of raising that fund, or when you raise a fund like that, the latter commitments to the fund have to pay management fees going back until the time of the inception of the fund. And as a result, that results in what they call catch-up fees, so some revenues that they hadn't received earlier get paid.
And so, there's a little bit of one-time revenues in Pennybacker's results as well. So, now we do get placement fees or catch-up fees. We tend to get them every single period, but I'd say it was a little higher than normal this period with regard to Pennybacker. And then next period, as I mentioned, we expect higher performance fees. I think if you take a look at the two halves, I would say they're going to be our forecast would be they would be roughly similar, though the second half might be slightly lower than the first half in aggregate revenues. But that's assuming no performance fees beyond Victory Park in the second half, which is probably not a fair assumption. So sorry, can you just say that again?
So aggregate revenue, performance fees, and management fees, second half, broadly similar to what the aggregate fees were in the first half?
I would say broadly similar, maybe $1 million lighter, but that assumes no performance fees really other than Victory Park, which we feel like we have good visibility on. And so that's a bit of a wild card on the performance fees.
Okay. And my second question, just around your comments that some fast-growing boutiques have been reinvesting, that doesn't sound like it's GQG from what we know. And a lot of your other exposure is through revenue or management fee exposure. And I thought your exposure to bottom-line results is reasonably modest. So, where is that exposure to growth investment coming from?
Yeah. Great question. Primarily, Roc and Victory Park, which are both bottom-line deals and both growing very rapidly.
And in fact, it's worth noting, too, that the same experience we were having if you look at our experience with Pennybacker before this year, they invested the same thing. They invested probably more than we expected into their business. And this year and going forward, we're now reaping the benefit of that because these businesses do have high operating leverage. And so, if they can get that incremental fund raised, you really start to feel it. And so, I think that's why what we get in this fiscal year from Pennybacker will more than triple, I think, from FY 2023. And so we hope to be beneficiaries of that, but it comes at the expense of this period's earnings.
Lastly, since I've got the floor, just the dividend was flat despite strong profit growth, and I think the payout ratio is sort of below 50% versus a 70%-plus average. Then you're talking about realizations. So how should we interpret that? It seems like you might have some additional capital coming into the business from the realizations, and yet you've kept the dividend sort of lower than previously.
Yeah. And what we've tried to do on the dividend is we use the final dividend to do the sort of differentiation. We still are targeting those same sort of payout ratios. So, we would expect the if we have a very strong year, that that would be reflected in the final dividend. So, it's just we've always had this sort of second-half bias. And so I wouldn't read much into the AUD 0.15 staying flat.
Okay. Thanks very much. Yep.
Your next question comes from the line of Nick McGregor from Barrenjoey. Your line is open.
G'day. Thanks for taking questions. I just wanted to dig into the Pennybacker result because in the notes to the accounts, it looked like it made $27 million of profit for the year, which was a material amount. I mean, does that number go down next year because there was some pull forward or some kind of catch-up on the fundraising? Just trying to think about the profile of that. It seems like a huge spike up.
Yeah. It is. I mean, look, in reality, it is a huge spike up. There will be some I wouldn't expect necessarily that level next year because of the there will be some catch-up fees in that number.
But I would expect that number certainly north of 20. We're still talking numbers north of 20 of expected profit. Yeah.
Okay. And then Banner Oak, is there a risk that the large client start to take money back off Banner Oak with a view that they wind down their relationship, or where's that kind of commercial relationship positioned right now?
Yeah. It's a good question. I feel like we are in reasonably good shape on the visibility of what to expect through 2028. And so, I don't think there's, as far as I know, there's no risk of they can't grab all the revenues back. So, I think we're in good shape. And through that period, we expect a really healthy yield. Ultimately, in our we always make bull and bear and base case models.
In our bear case, we still don't lose money on the investment. We just don't make a good return. Right.
So, in terms of the protections that you've got there, is it kind of a preferential dividend or preferential revenue share?
That's right. Yeah.
And so you'll expect to kind of recover your capital, but you don't make kind of the returns that you might have thought on in the base case? In the bear case, that's right.
Yep.
And then you mentioned in the outlook statement that you're considering one or more full or partial asset sales. I just wanted to get a bit more context around that. Are those processes that are in train and high certainty of happening? And then I guess as an extension, what's the capital gains consequence on those sales?
And then particularly, if you partially divest some GQG shares, what's the capital gains consequence of that?
I will let Ashley speak to the tax consequences. What I'd say is we can't talk about anything even if we wanted to, we couldn't talk about things that could be in the works. What I'd say is there are multiple situations with probabilities ranging from reasonably more likely than not to possible. But I'd say what's different from this period is it feels like there are more assets where those sort of that are potentially in mode to see some sort of transaction. And Ashley, once you speak to the capital gains or the tax treatment of any of our assets, probably notably GQG.
Yeah. I think it was Benjamin Franklin who said there's only two certainties in life, Nick. There's some taxes.
So, typically, because most of our assets are offshore and U.K. and U.S., rates are pretty much around that 25% mark. So, the capital gains that's taxable would pretty much be the difference between what we sell it for and our cost base. Tax cost base is reasonably consistent with cost base. And I mean, for GQG, for instance, has that been provisioned on the balance sheet? And is there any consideration of tax in the kind of management NAV? Sorry. Sorry. Cut in on you on the second part.
Oh, sorry. Just maybe we'll do the tax provisioning first.
Yep. So there's about AUD 40 million in the different tax accounts that relate to the implied capital gain in GQG.
And is that amount netted off in the management kind of underlying NAV analysis that you do?
Yes.
So, that NAV is a GQG post-tax NAV, not a pre-tax NAV?
Yep. Correct.
and GQG's the only boutique for which you recognize that tax liability on sale?
No, no, no. Everything pays. So, when we calculate the different tax provisions, we assess the current market value or book value, sorry, share value for GQG compared to its cost base and provide for it at the appropriate tax rate. And then on slide 7, because we have implicit gains in Victory Park, Pennybacker, and Roc, we've. And on that slide, increase the different tax liabilities to show the additional tax that would be applicable if we realize those assessments.
Okay. No, thanks for that. That's very clear. Maybe just a final question from me on Victory Park. I mean, they have lost money in the first half based on the notes to the accounts.
I understand there were some mark-to-market movements there, but can you just give us the ins and outs on, I guess, new fundraisings and old fund closings and the management and performance impacts of that? Sure.
So, the business continues to actually perform well. The sort of lackluster bottom line that you're seeing is a reflection of those significant placement fees, which are one-time fees going through the system, as well as a new investment they made in a new business line. It's called Triumph. I think there's public announcements about it, but it's a capital markets initiative that they have invested in, and it's already getting some traction, already producing some revenue. So, I think that's what you're seeing there. They are, as we have reported beforehand, their last fund they called the ABOC Fund, Asset-Backed Opportunistic Credit Fund, was a big, big fund.
They are now raising the successor fund of that at the very end of the calendar year. They secured the first commitments for that fund. We expect those that I mean, those are multiple nine-figure commitments. We expect that fund to ultimately grow significantly throughout this year, and it has a target certainly north of $2 billion.
And then I guess just thinking about that, if they close that fund this year, are there placement fees that we recognize this year, and then you get the run rate benefit of this couple of billion dollars into more FY 2026?
Look, you would see there would certainly be some placement fees, but it's not necessarily placement fees on all the revenues. It sort of depends on who the underlying investors are. And sometimes there are some investors where no placement fees are paid.
So it all depends, but you would exceed, I think, and Ashley might correct me if I'm wrong. I think the way it's recognized, I think those placement fees is recognized as that capital is not committed, but as it is put to work. So, it sorts of, in a sense, results in a net revenue number as opposed to a higher gross number where the placement fees are netted out. Is that accurate, Ashley?
Yep. Sorry. Anything off mute? Yes.
Yeah. I mean, I've still got the floor, so, I might as well just keep going. You mentioned, I think, in the outlook statement that you've kind of got a few different priorities for unlocking shareholder value, one of which is reducing overhead. Can you talk through potential capacity for that in the quantum?
And then potentially there's the other point in that our comment was around the potential for a pooled fund and just how progress has gone there since you've resumed after the potential sale process paused things.
Yeah. I'll start with the fund first, which is, it continues to be something on the, I'd say, on the drawing board. What we're finding is there's still the sort of the uncertainty that arose as a result of all the strategic discussions last year still is impacting, I'd say, market receptivity to that fund. People are concerned that if we allocate to this fund, do they have visibility on management being there? And that's hard as long as there's sort of ongoing uncertainty around the corporate situation.
So, I think if we were going to do that, we would need to sort of probably let the dust settle a little bit more on the corporate front. It is still something we are active in. In fact, I have a fundraising meeting tomorrow morning on this with a large prospect. So it remains something real, but our sales team feels like it's being a little bit impacted by some of that by some of the uncertainty around the sort of corporate ownership front. And forgive me. What was the first part of that question? The overheads. The overheads. Yeah. Look, we don't think we've had flat headcount for a while. And so all I'd say is we're limited what we can do without reducing functionality, but we can but if the cost-benefit of reducing some functionality is worth the cost savings, then that's something we'll pursue.
It is just one of the levers one of the levers we're exploring here. I think I don't think we have an imminent announcement on that front, but I'd say we're looking at everything, trying to unlock more value. I feel like we're making some good progress, but I think we still believe there's some things we can do to add additional value from here.
Okay. I might ask one last question, and I promise it's the last one. If you've got multiple potential asset sales coming through and you've got a reasonable balance sheet, what's the intention or what's the pipeline look like for new investments at reasonable prices? Then you've mentioned buybacks in that bullet point as well. How do you think about kind of use of capital in the instance that you do crystallize some positions?
Yeah. That's a good question. And look, I think we are maintaining a robust pipeline, and we'd love to put more capital to work, but I think we're probably also looking at buybacks to a greater extent than we have in the past. And depending on what assets are sold, there we could end up; some of our assets are chunky. And so you could certainly imagine a hybrid solution where some capital's returned and some is returned to shareholders. We don't have a definitive answer on that yet, but we have the investments. But like I said, we're looking at buybacks to a greater degree than we have in the past. And I think that's one way to unlock value. Well, it's a great way to unlock value given that I think we've established that there's some value to be unlocked.
I mean, given the debt cost you $3 million of interest in the half, is there capacity to retire the debt from some of those proceeds, or do you think that you'd maintain that facility?
We could if we retired the debt now, we'd have to pay some prepayment penalties, I think, and I think that that sort of run their course, and I believe 18 months. That's something that at the right it's just a cost of capital question. But if that's the right use of proceeds, we'd do that. Otherwise, we're probably a little more reticent to do that now, and we'd wait till the debt cost came down.
Okay. Great. Thanks for taking those questions. Yep.
As a reminder, if you do wish to ask a question, please press star followed by 1 on your telephone and wait for your name to be announced.
There are no further questions at this time, so I'd like to hand back to our presenters.
Well, thank you very much. We appreciate your time and attention and interest in our company. We will be doing a roadshow the week of March 11th, and happy to, if we don't have meetings set up, happy to meet with any and all takers. In the interim, we stand ready to answer any calls that anyone may have. So thanks again, and have a great day.
That does conclude our conference for today. Thank you for participating. You may now disconnect.