Good day, welcome to Pacific Current Group 2023 half year results conference call. All lines have been placed on mute to prevent any background noise. After the speech marks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press Star followed by 1 on your telephone keypad. If you would like to withdraw your question, please press star one again. For operational assistance throughout the call, please press star zero. Finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Paul Greenwood, Managing Director, Chief Executive Officer, and Chief Investment Officer, to begin the conference. Paul, over to you.
Thank you very much, and thank you all for joining us for the Pacific Current Group H1 23 results call. We appreciate your time and interest in our company. We look forward to providing an overview of the H1 of fiscal 2023 and then some thoughts about the future. As we go through the presentation, I think it will become clear that the strength of our business continues to grow and our strategy of building a resilient, diversified, private capital-centric model continues to be validated. Indeed, one only has to look at some of the large traditional equity-oriented businesses that have announced results around the world and to understand the risk of having so much of one's revenue attached to equity markets.
We think this period has been a wonderful period of validation for our overarching business strategy. Our portfolio performed well during a market environment that continues to be challenging. While it was not without some frustrations, the revenue growth we had called out ahead of this half has indeed become evident. We believe this growth will continue beyond this fiscal year. On page three of the presentation, you'll note some highlights for the period, including continued growth in FUM. FUM was up 3.5% during the period. PAC's portfolio has now experienced 24 consecutive quarters of positive net inflows. This growth was widespread with the non-GQG managers actually growing faster than GQG.
We at long last secured a credit facility, albeit the timing of that was less than ideal given the trajectory of interest rates since then. The financial highlights for the period included a 52% increase in management fee revenues, driven by our Banner Oak investment and recognition of six months of earnings instead of four months of earnings for GQG Partners. When combining management fees and performance fees, you actually get a 29% increase in boutique contributions, excluding mark-to-market adjustments. Those that you'll remember are non non-cash adjustments or it's a non-cash item, I should say. Underlying EBITDA grew 24% if you strip out those unrealized mark-to-market gains. We're also announcing a fully franked dividend of AUD 0.15 per share for the period. On page four, we show results in both USD and AUD.
I'd like to highlight a few items here. First, performance fees were actually quite strong for the period, though lower than last year, as last year's were enhanced by Victory Park's realized incentive fees that stemmed from its SPAC exposure. Corporate revenues, which are basically sales commissions, declined notably because our sales team had less product to work with during the period. Interest expense was up as a result of PAC drawing $30 million on its credit line. This contributed to a decrease in underlying NPAT of 12% in USD. This interest drag was unintended and arose from the fact that we terminated a deal at the eleventh hour after the capital to fund the deal had been drawn.
While regrettable, our experience has taught us the necessity of walking away if something isn't right, even if you've incurred costs or drawn on a credit line. Such broken deal costs are an inevitable sort of occupational hazard of what we do. Our NAV, the reported NAV declined modestly due to the slight fall in GQG stock price during the period. Our internal estimates of fair value for the aggregate portfolio actually increased during the period. Page five provides a simple look at the components of revenue. This highlights the growing strength of the business. You notice that the pink bars are the mark-to-market adjustments, which sort of ebb and flow over time. The yellow bars are commission revenues, which are also episodic.
In fact, it's worth noting that the commission revenues are expected to be more volatile in the future due to the fact that we are now primarily raising private capital strategies. When we do that, those revenues tend to be recognized all at once as compared to long-only manager, where those revenues are recognized over time. This half, this current half, should see an uptick in commission revenues as compared to last half. On page seven, it highlights the size and the growth of our managers. This chart is important because at the end of the day, when you're investing in a PAC, what you're really investing in is you're really betting that these boutiques will grow. If you look at this chart, it's clear that the trend for our portfolio has been strong, consistent growth in recent years.
If the majority of our boutiques grow over time, we should be in good shape as a business. pages eight to 12 just highlight, provide brief overviews of our portfolio companies. I won't elaborate on those here, because I wanna move on to page 14 through 16, which provide an overview of PAC's business model, page 14 does, and a new way to better understand the relationship between funds under management for our boutiques and the revenue we receive. We appreciate that PAC at times can be complex to analyze, and the link between aggregate funds under management and revenue can be difficult to discern. We think these pages hopefully go a decent way to clarify some of that. page 15 introduces a new concept, at least for that PAC is articulating.
Other firms have done this before. It's intended to highlight the relationship between the funds under management of our boutiques and the revenues we receive. I'll go over it briefly, but if I don't do it justice or if it's confusing, I'm happy to chat with anyone offline about it to make it clear. First, we start by multiplying each boutique's funds under management by PAC's equity percentage. This gives us what we are calling our ownership adjusted fund. You can think of this as PAC's share of their fund. For example, if a manager manages $4 billion and we have a 25% ownership stake, then our ownership adjusted fund is $1 billion. Page 16 takes the revenues we receive from the boutiques and divides them by the ownership adjusted fund. This provides a measure of the ownership adjusted yield.
One way to think about this is assume PAC is an investment manager that manages the AUD 13.3 billion of assets shown on page 15. The ownership adjusted yield is akin to the management fee that PAC is charging on that AUD 13.3 billion. The two tables on page 16 break out this ownership adjusted yield separately for our public-focused boutiques versus our private capital-focused ones. One thing the graph highlights is the greater consistency of management fee yields with the private capital managers. In the appendix of this presentation, you will find an ownership adjusted fund reconciliation that explains which managers are private, which are public, and what their ownership adjusted fund is. Page 19 provides some thoughts on the operational outlook for the business.
PAC continues expects continued flows into our boutiques at roughly the pace we've experienced over the last few years. We expect to make a significant investment in this half, though, as we've recently demonstrated in the last half, these deals are never done until it's over, but we certainly is our expectation that we will finalize a significant investment. We continue to believe that we could experience some liquidity in our portfolio this year, though once again, that is not not yet certain either. Expenses have edged up with resumption of travel, although, you know, not dramatically. The biggest sort of change on the expense front is the interest expense that we are now incurring as a result of drawing on our credit line.
We hope to deploy that capital soon so that to help mitigate that interest expense drag. On page 20 of the presentation, we get into our financial outlook. We continue to expect FY 23 to be a solid year of revenue growth. In fact, we expect record revenues in both FY 23 and FY 24. We expect this to be driven by growth in key boutiques like Pennybacker and Roc, and looking into FY 24, Victory Park. Performance fees should grow and stay higher for multiple years, really beginning in FY 24. This will primarily be driven by Victory Park, particularly in the H2 of FY 24. We also expect enhanced earnings from the new investments we anticipate making.
The H2 are, of this fiscal year, so one we're in currently, is expected to be modestly higher than the first half, though ultimately this will come down to timing on performance fees and one or two binary developments that are difficult to predict, but that generally fall into the fundraising camp. We also expect a modest uptick in commission revenues in this half. Lastly, at year-end, we intend to release our fair value estimates for all of our portfolio companies. Right now, we don't disclose the fair value of managers like Victory Park, Roc, and Pennybacker, where we report them as a share of associates.
We will release those fair value estimates at when we announce our year-end results. Currently our assessment of the aggregate for fair value of our portfolio exceeds the book value by a significant margin. We anticipate that will become apparent when we when we release that at year-end. That is it for the overview of the half. We'd be happy to take any questions that people have.
As a reminder, if you wish to ask a question on the phone, please press star followed by one on your telephone and wait for your name to be announced. Your first question comes from the line of Nicholas McGarr with Barrenjoey. Your line is open.
G'day team. It's Nick McGarrigle. Just a question on predominantly Victory Park, just how do we get comfort around the outlook for performance fees there? I assume management fees will be ticking up over the coming year just on the book of new business. How do we get comfort around the outlook for performance fees? Is a lot of that accrued, or does it require public markets to cooperate? Like, what are the fine points for us to look at as external people?
Well, good question. What I'd say is most of the performance fees you'll be seeing are not related to any public vehicle they have, and they're predominantly pure private credit. What I can tell you is the performance of their private credit strategies continues to be consistent with the strong results they've produced in the past. Because it's private credit as opposed to private equity, it's much more predictable. Obviously, private equity is subject to the vagaries of valuations and exits, whereas private credit, you're just expecting, you know, you'll sort of have good idea of the return if they just don't have any credit issues.
What I'd say is, you know, and we've said this in the last call, I think the performance fees alone will from Victory Park will should put us, put them into the, you know, as big a contributor as GQG. On a sort of FY 2024 going forward, we expect those stats to grow significantly from that level. We can't share much other than, you know, largely these are funds or those performance fees are, they're not fully baked, but they're largely baked because you're getting toward the end of some fund's life. It means that these forecasts, a lot of that has essentially been earned. All we have to do is continue at the same level and we would achieve those same results.
Can you just refresh us on how those funds work? Because obviously the capital is deployed into loans. Are they not perpetual amendments that keep that loan book funded or does this one fund wrap up and then they typically look to refund that same borrower in a new fund in an upsized manner?
Yeah.
How does that typically work?
Yeah, Nick, it's more the latter. Their funds will wrap up, and yet they can continue to fund those platforms through subsequent vehicles. There doesn't have to be a realization event. Yeah.
Yeah. I mean, effectively, given how much of the return is accrued at the time and how much equity they've created, if they're lending, you know, they're obviously looking at spread as they go. I would have thought that the security of those performance fees should be fairly high. Like, there's not a crystallization value on exit.
That's correct. That's correct. It's just based on you know, cash returned and exceeding the preferred return of the fund. So we have, you know, internally, we receive forecasts. It goes out multiple years of what we can expect from them if performance is consistent with expectations. Performance has been consistently consistent with expectations.
Can you just talk to, I mean, a lot of the underlying borrowers potentially have found it a bit harder to fund the equity in their businesses, just given where the capital and other funding sources for the types of businesses they were funding have gone. Can you talk to the health of their underlying clients and I guess the health of the loan book?
Yeah. Well, yeah, to the extent, to the extent I'm aware. Well, I know what their performance is. It's been very strong. I think the results or their, the health of their investments has been very strong. I really can't speak to the health of the underlying companies. What I'd say is, when times get more challenging, it allows Victory Park to engage at more attractive attachment points when they, when they, you know, create these facilities. It, you know, it creates opportunities for them to either get a better, you know, a better return outcome or a more attractive risk profile on their investments. They're seeing some of that for sure.
Is it fair to say that the contribution from Victory Park is gonna be, you know, highly H2 skewed in light of those performance fees?
It is definitely gonna be H2 skewed. Of course, you know, when you're talking about these crystallization events, things can always slip, you know, a month or two, or things like, you know, modestly. I would say, yeah, I would say, you know, at least two-thirds to the H2, maybe.
Okay. Just in terms of progress on commitments, you're obviously tracking well from the initial guidance that you gave, which was an 18-month period. Can you just talk to the, you know, the particular trends that you see amongst allocators at the moment? I presume that there's a pivot away from public equities and more towards alternatives, which has probably helped.
Well, you know, I wish, I wish that were the case. It's not quite the case. Because one of the things that has happened with the decline in equities is you have, you know, they call this denominator effect, where public equities have gone down. There's some plans are feeling a need to rebalance toward equities. That said, I often say that when you invest in PAC, really one of the primary risk you're taking is called idiosyncratic fundraising risk for these companies. We continue to the fundraising environment has become more difficult in the last year, but sort of on a, you know, asset by asset level, we, you know, we really feel, you know, feel good about the progress we expect to be made.
That's why we think that at a sort of portfolio level, we will continue to see aggregate flows in the ballpark of where we've seen them in the last 18 months. You know, These are big institutional flows, so it can be a little, it can be a little chunky. You know, we expect firms like Roc and EAM and Pennybacker, Victory Park to all make, continue to make significant progress over the next, you know, 18 months.
Can you just talk to, I mean, because obviously a couple of managers are on the cusp of being T1 , can you just talk through the progress?
Yeah.
the ones that are more on that cusp?
Yeah. There's really two, and those are Roc and Pennybacker. I think there's a, if both of them sort of execute as we would expect, I think we probably at June 30th we would, you know, we'll likely reclassify both of those as tier one.
Even just on the current progress, not assuming any additional flows and sort of rolling forward a couple of years, they're sort of at that point now.
Well, I would say I would expect them to be at that point by June 30th, is the way Pennybacker and Roc.
On a run rate basis.
Yeah, on a run rate basis. That's right.
Yeah. Okay. Cool. In terms of the balance sheet, can you talk to the funding, cost of funding and what that means in terms of the price you're prepared to pay to invest that new facility?
Great question, Nick. You know, unfortunately, our market timing on our debt facility was suboptimal. As a reminder, our debt facility, it's a SOFR plus 40. I believe 30-day SOFR right now is about 4.45. That can give you a sense. I'd say, you know, most of the deals we're looking at are sort of at that would be, you know, give or take, a point or two, are gonna be close to that breakeven. Might be modestly, you know, accretive. It might not be if it has a real strong growth profile, but it's...
I think we'll probably deploy that capital at a, you know. The way I think is we'll probably deploy it at a rate that will cover the interest expense.
In the view-
Was something that we would.
There's a growth profile.
Yeah. That's right. Something we would expect to have double digit growth.
Right. It might be neutral in the, in the first instance, and you're buying a manager that's growing, and it would be the decision, right?
Exactly. Exactly. Yeah. We're not gonna pay 10 times for no growth.
Great. I might leave it there and let someone else ask some questions.
As a reminder, if you wish to ask a question on the phone, please press star followed by one on your telephone. That is star one to ask a question on the phone. Currently, there are no further questions on the phone, so
Well, great. We, you know, appreciate everyone's time. Appreciate there may be additional questions as you go through the material. Please feel free to reach out to me or Ashley with those questions. We, you know, in the week of, I think March 13th, we'll be doing a roadshow in Sydney and Melbourne. If you're not on the agenda and you'd like to be and we have time, please reach out. I think that's all for us. Thanks again for your time and interest.