Good day, and thank you for standing by. Welcome to the Pacific Current Group 2022 half-year results. At this time, all participants are in the listen-only mode. There will be a presentation followed by a question- and- answer session. At which time, if you wish to ask a question, you will need to press star and one on your telephone. If you require any further assistance, please press star and zero. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Paul Greenwood, MD, CEO and CIO. Thank you. Please go ahead.
Thank you very much, and thank you all for joining us today for the Pacific Current Group first half 2022 update conference call. We're excited to walk you through the first half and more importantly, provide our outlook on the future. Before we get into the details, I wanna thank the PAC team for its exceptional performance in the first half and the PAC board for its leadership and support. There's a bit to wade through here, and we will be having a more granular discussion than is typical, but I think as we do, you'll get a sense for the growing momentum in PAC's business. Jumping right to page three of the presentation. Page three provides a reminder of our business strategy and some highlights for the first half of 2022.
For those not familiar with PAC, I would note that our business strategy is to make investments in a broad array of investment management firms and work with those firms to help them grow their businesses. By using bespoke economic agreements and diversifying across different business models and asset classes, we believe we can build an earnings stream that is not highly sensitive to equity markets and demonstrates strong organic growth. We explicitly are trying to avoid creating a company whose financials are excessively linked to the stock market. The first half was an exciting and strong half for us. Funds under management grew 16% for the half. 11% growth if we strip out the new investment in Banner Oak, which happened on the last day of the period.
It should be noted that Victory Park Capital had the highest growth rate in the first half of the year at 25%. Investment performance was strong among private capital strategies. Our active managers had a decent, though not spectacular year of performance, with the exception of Blackcrane , which lagged significantly. I should note that GQG has had a great start to 2022 in terms of performance, due to some timely modifications in their portfolios. This has resulted in the firm largely avoiding the large declines in growth stocks that many managers have experienced. In fact, as of Friday, they were larger than they were at December 31st, despite market corrections globally.
Obviously, their strong performance helps their revenues because their assets under management don't decline as much, but it also helps future growth prospects because of the strong relative performance. The major highlights for the half year are really first 21% growth in underlying revenues and 26% growth in underlying NPAT. We note that this was achieved despite only recognizing four months of GQG earnings in the period, and I will elaborate on the reason for that later. PAC declared a AUD 0.15 per share dividend, up 50% from last year. We note that this increase is consistent with our prior statements about reducing the skew in PAC's dividend toward the second half of the fiscal year. Obviously, the biggest portfolio development was the IPO of GQG on the ASX in one of the largest IPOs of the year.
Once again, we'll elaborate a little bit more on that later. Then lastly, we made a large investment in Banner Oak Capital on the last day of the period. We're very excited about that. While I'll elaborate on our outlook later, I would note that while we expect FY 2022 to be a really solid year, things are really shaping up for FY 2023 to be particularly strong with projected revenue growth in double digits. Go to page four of the presentation. You'll see it shows the PAC's income statement in both Aussie dollars and U.S. dollars. The management fee revenues would have been perhaps 20% higher if we could have recognized all of GQG earnings.
I believe net profit before tax would have been close to 50% year-over-year increase, had we been able to do that. On page five, we are showing what we call management fee profitability. As a reminder, management fee profitability is defined as management fee revenues less all costs. This did not grow on a year-over-year basis but would have grown more than 25% were it not for the GQG earnings recognition issue. Going forward, we expect this number to grow meaningfully as management revenues accelerate across the portfolio and new investments like Banner Oak come online. Page six covers GQG. While obviously a big success, the listing of GQG has some accounting implications for us that investors should understand. Specifically, it changes how we recognize earnings, and we also change it.
It changes how we would reflect changes in its value. First, with regard to earnings recognition, we are moving from an accrual basis to a cash basis now that we own common stock and not a preferred security. This means that the dividend GQG declared today for the two months ended 31 December is not something we can recognize in the first half, but rather it must be recognized in the period it's received. GQG has stated that it will be declaring dividends quarterly. For the first half of FY 2022 we are only recognizing the four months of earnings through the date of the IPO, which I believe was October 28. In the second half of the fiscal year, we will recognize five months of GQG dividends.
Two months from the interim dividend they declared today, and then the dividend declared for the quarter ended 31 March. After the 30th of June, every half year we will receive six months of earnings. To be clear, none of this has anything to do with cash. We actually expect that we will receive cash faster now than we did beforehand. It does mean we will miss out on recognizing three months of earnings in this fiscal year from GQG. With regard to marking the investment to market, once again, the accounting standards are not our friends. You can see from the graph here that at the time of the IPO, our stake in GQG was marked up in value by $185 million. We then received $59 million of proceeds out at the IPO.
The stock then declined. The write-up of GQG went through equity reserves and not the income statement. Now, because of the different accounting treatment, changes in the value of GQG go through the income statement. This is the reason for our statutory loss in the first half of the year. Moving on to page seven. We provide net asset values, net asset value per share and share price, and compare these. I think the important takeaways here are really, one, PAC continues to trade well below NAV. Two, our NAV does not necessarily reflect the full value of our assets because some portfolio companies cannot be written up.
For the first time here today we are actually noting that we're sharing some of our internal fair value estimates. In aggregate, they exceed the values at which we carry these assets by an aggregate of $ 40 million, which is about $0.78 per share. These fair values are not audited, but are calculated identically to our other valuations, and using the same methodology. I would note in cases like Aperio, IML, RARE or GQG, we've noted that when there's actually transactions, prices tend to get done at values significantly greater than even our fair value estimate. Moving to page nine. The page nine just touches on some of the portfolio highlights for the period. I won't go through all of them.
Happy to answer questions about them, but I would highlight really the last one here is Victory Park had a great period, largely due to enhanced incentive fees, in part due to the SPACs that they sponsored during the year. While we don't expect the same level of incentive fees next year from them, the Victory Park's business is now growing quite rapidly, so management fee revenues should grow very nicely. One thing I wanna note about private credit managers in general is that private credit managers typically get paid as they invest capital, while private equity managers generally get paid on committed capital. In other words, private equity managers start to get paid immediately after securing those allocations, and private credit managers start to get paid once they deploy capital.
This means that for private credit managers, there's a lag between when fund growth occurs and the resulting revenue occurs. In fact, I would refer you to the very last page of the appendix under key concepts. There's something called key concepts where certain revenue and expense recognition concepts are discussed in a little more detail. On page 10, highlights performance. As I mentioned, in general, it was a good year. I would note that, you know, the real interesting performance that's occurred is, has actually been what GQG has done post December 31st. Because of how they position their portfolio, they've produced very noteworthy outperformance in, you know, sort of, generally across the board.
Their emerging markets product is the only one that's still above average, but not as the other ones are literally first percentile year to date. Then page 11 just shows the growth of our boutiques. It's worth reminding people that private capital strategies or firms, sort of by nature, can't grow as fast as long only boutiques can, but they do have more resilient, you know, business and assets under management. But you can see across the portfolio that all of, you know, almost all of these companies have strong records of growth in over the last three years. Page 14 is just an update on deal flow and I'm glancing over just the list of our companies.
On page 14, the deal flow has really accelerated in recent months, and we are finding no shortage of attractive opportunities. We expect 2022 to be a record year in terms of the number of investments we reviewed, and we're starting out way ahead of sort of pace already. Moving on to page 15. We feel quite good about the future, particularly as we get into FY 2023. We have intentionally been building our business differently than others. We don't want our company to be a leveraged beta play. All you have to do is look at the experience of the last four, five weeks and market declines to appreciate why how that could be problematic.
We want to build a business that's as resilient as possible, so that our earnings are not wiped out in times such as these. Now I'll walk through some of the specifics of why we are particularly bullish on FY 2023. First off, we believe we will experience growth across a broad growth across the portfolio. Even in the last two days with conversations with portfolio companies, I have received confirmation of recent milestone victories that are, you know, consistent with what we expect, but very good news. You know, while today's headlines underscore that the world is an uncertain place, the combination of these recent achievements and additional fundraising milestones we expect to achieve in this fiscal half year should result in pronounced acceleration of revenue and profit growth.
I'll get into the specifics of why that is. First off, next year we will recognize 12 months of GQG earnings. In FY 2022, we have so far received $2.9 million from GQG. And if we add to that five months of dividends at the rate they just announced today, we get projected earnings from GQG for fiscal 2022 of $7.5 million, which is a little over AUD 10 million. If we take 12 months of dividends at that rate, so not even assuming growth rates, but just assuming GQG produces the same level of dividends that it declared today, we get an estimate of $11 million. It's an increase of $3.5 million, which is about AUD 5 million just from GQG, assuming no growth.
On top of you know this last half, we did about AUD 25 million of revenue. If you think of the second half of our fiscal year was similar, and we had AUD 50 million for the year, that suggests GQG alone could be about 10% revenue growth. Second, we'll receive 12 months of earnings from Banner Oak this year versus six months in FY 2022. As a reminder, we did that deal the last day of the year, so we'll only get six months of earnings in that FY 2022. If Banner Oak delivers consistent with our expectations and the expectations we shared at the time we invested, their additional contribution sort of in FY 2023 versus FY 2022 should be similar to GQG's.
Third, we expect some new fund commitments in this half for specific companies to have a big impact on FY 2023, but they may arrive too late in this half to have much impact during this half. Lastly, we expect some of the early-stage investments like IFP and Astarte to move toward and hopefully become profitable in FY 2023 versus losses in FY 2022. Both of those firms seem to be tracking very well. Obviously, there's caveats around any of these sort of forward-looking suggestions.
You know, I would note that the macroeconomic concerns, I think at the current rate or level, I think those don't represent an issue, but obviously if something happened so that people would really change their fundraising or halt their fundraising or new allocations and fundraising or not fundraising, the capital allocation, if that gets impacted by events, then obviously that could hurt us. Equity market declines certainly don't help us. Some of our clients or some of our managers, I should say, have some marketable securities on their balance sheets, and we're always subject to reflecting our pro rata share of the gyrations in those assets as well. Absent sort of extraordinary items, I think that explains why FY 2023 is looking quite promising.
Those are all the prepared remarks we have. Operator, we're happy to entertain questions now.
Thank you so much. Ladies and gentlemen, if you wish to ask a question, you'll need to press star and one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or the hash key. Again, it's star and one if you wish to ask a question. Our first question comes from the line of Jim Craig from River Capital. Jim, your line is now open.
Thank you. First of all, congratulations, Paul and Ashley. I think you've done a great job explaining clearly how GQG's accounts flow through. Not an easy task. It's been done well. I also think the presentation just gets better and better in terms of understanding the value of what you're doing. Two, one a comment and one a question. The first is it would be very useful to have a table showing the values on an asset-by-asset basis. I know I can chase through the actual accounts to find them, so you do publish them, but it'd be very helpful if we could see that so that we could just understand relative values. The second one is Victory Park. Victory Park's performance fees were obviously significant to this half's result.
I know you push us towards thinking about management fees and not so much performance fees. But how do we get any insight into what performance fees could be going forward or any real analysis of how that major asset's going, other than funds under management?
Great questions, Jim. On your first observation, I would say that when I mentioned that there's, you know, roughly AUD 40 million in aggregate value not reflected on our balance sheet, that is largely limited, and Ashley might correct me if I'm wrong, but it's largely limited to Victory Park and Roc.
Okay. Thank you.
Secondly, with regard to performance fees. Well, Victory Park is by far and away the most complicated manager to get one's arms around from a financial perspective. Think of them as really having their management fees. They have something they call incentive fees, which are essentially performance fees that get crystallized annually, largely based on a London-listed vehicle that they manage. Then the third component is what they would call performance fees. Once again, we're sort of splitting hairs here or carried interest, and that would be sort of traditional performance fees based on their separate accounts and commingled funds that would apply to them. What would be noteworthy in this fiscal year was the high incentive fees.
Okay.
Driven from those listed vehicles. We expect to receive performance fees or carried interest from them. We will receive a little in this next half. But what I would note is we do have a multi-year projection there. We will see that, you know, I would say we're gonna see that accelerate fairly dramatically over the next three or four years.
Okay.
To give some approximate quantum is that it's not inconceivable three or four years down the road, we receive $10 million in performance fees from Victory Park alone.
Okay. That's very.
Yeah. Obviously that's yeah.
Well, what I'm hearing is I've started to read across from incentive fees, which are effectively disclosed through the London Stock Exchange to the carried interest. The carried interest comes through later, and is a different calculation.
That's right.
Okay. Thank you. That's very helpful.
Yeah. The other thing is, I would note one other thing. You know, when we include some of these things, we like key concepts. We do it for a reason because one of the things to help people appreciate when a firm is a private capital firm growing rapidly. Let's say I grew up, I had an external placement agent, so some firm helping me grow my assets, raise capital for me. They raised AUD 1 billion, and let's say we get paid, that manager charges 1% on that. That's not uncommon for that fee, the placement fee to be $ 10 million. So 1%. In other words, the challenge that fee gets recognized all at once by the manager, even though paid over multiple years.
One of the things that does is it tends to, in periods of very rapid growth, obscure some of the economics because of some of the additional expenses going through, layer, and then add on top of that, the manager may not get paid until that capital is deployed. You can see that there's this little lag effect that exists in some sort of private capital situations where they're using outside placement agents.
That's very helpful. What I'm hearing is that you guys are very excited about the outlook for Victory Park. You know, as an investment, it looks like it's going very well. Thank you.
Yeah. Well, look, it clearly started slow, and now the momentum appears to be building fairly dramatically.
Thank you.
Thank you so much. Your next question comes from the line of Nick Burgess from Ord Minnett. Nick, your line is now open.
Morning, Paul. Thanks for taking my question. A few questions. Just on your outlook statement of double-digit growth, can you just confirm you're talking about revenue or underlying profit there?
Yes. Well, I mean, certainly talking about revenue, so I would hope the underlying profit grows faster than the revenue. I'm talking top line.
Yeah. Okay. Just some comments on.
Our costs won't. The only cost that would go up in any notable way, frankly, would be commission expenses from raising more money.
Yeah. Okay. That was my next question. Just part of that, if you could just restate. Apologies, I just missed your point on all of the numbers when you're talking about GQG as a key contributor to that outlook. Can you just run through those numbers again?
Sure. So far in fiscal 2022, in the first half that just ended, we recognized $2.9 million of earnings from GQG. That represented the earnings we were entitled to under the old preferred security we held from July 1 through the time of the IPO. Because we can't, we have to now recognize dividends when they're received. If you then estimate what we should receive from GQG, they declared their dividend today, I think it was AUD 0.154 a share.
If you look at that, what that means, and you add, and you give us fiv months of that for this fiscal year, which would be representing the two months for the interim dividend and the three months for the March 31st dividend, not assuming any growth, I come up with an estimate of about $7.5 million we would recognize in FY 2022 from GQG. If you just take then on a FY 2023, if you just take that monthly dividend rate or that quarterly dividend rate, assuming no growth, you actually get, you know, everyone can do their own math, but I get $11 million for next year, like I said, assuming no growth and assuming the same rate.
You pick up $3.5 million incrementally just because frankly, we weren't able to report so much, you know, we missed out on these three months of reporting. Does that make sense?
That's where the AUD 5 million.
That's correct.
Yeah. Okay. That makes sense. Thank you for that. Just moving on to the potential deal outlook. You mentioned that the deal flow had accelerated. Just wondering on any comments around quality and whether that's deteriorated with an increase in volume or any comments around quality of deals that you're seeing at the moment.
You know, I would say it's actually an interesting question. We've never looked at as many high-quality deals as we have now, and we've never seen as many low-quality deals either.
Yeah, right.
By that, I mean, you're starting to see investment bankers taking deals, working on deals that frankly are not bankable and shouldn't be in market. We're also seeing some really interesting, unique deals. I'd say the common thread among what's interesting is where for us are some we always like things a little off the beaten path, and we're looking at some deals across Europe, even South America. We're trying to find deals that are less trafficked. We're thrilled with the quality, but absolutely, we're seeing some lesser quality deals brought to market.
Okay. Still on the subject of deals, what do you regard your funding capacity at the moment?
Yeah. Right now, I think we certainly have the capacity to do some small deal or two. We will need additional capital to do something on the order of the next Banner Oak. As I've mentioned before, we are pursuing borrowing. We fully expect to secure debt financing this year. The slowness in this process is sort of on us, but it really relates to us trying to make sure we do this right and don't incur large interest costs too far ahead of any investment. We're still. We don't have any impediments there.
We're just trying to finesse that, but any larger deals we would need to access external capital like that.
Yeah, broadly the size of, you know, round numbers, the size of the facility that you're targeting.
You know, I think we'd be, you know, sort of in our comfort range. You know, we're not gonna go high. You know, there's firms in the U.S. that will leverage even investment firms that will put six turns of debt on a business like ours. I would never do that. So I think we're probably comfortable in like, you know, 2x EBITDA range. That sort of ballpark.
Yeah. Okay. Last question just on, again, on the outlook for FY 2023, just the. You've mentioned Victory Park, but the fundraising pipeline, just the couple of boutiques there that you're seeing the most interest in at this point.
Sure. Well, I think we're going to see, I think, some great strides at Pennybacker Capital this year. We'll see progress at Roc. There'll be some progress at Proterra. I'd expect progress at Carlisle. I always hate doing this off the top of my head because I can always forget someone, but those are ones that sort of leap to mind.
Yeah. Okay. That's helpful. Thanks very much.
Thank you so much. Once again, ladies and gentlemen, it's a star and one. If you wish to ask a question on the phone. Again ,it's a star and one, if you wish to ask a question. Our next question, or a follow-up question from Jim Craig of River Capital. Sorry. Jim, your line is now open.
Thank you. Paul, just following up on Nick's questions. In the last.
Yeah.
In the presentation, or actually I think it was in the annual report, there was discussion about a number of boutiques being approached. It wouldn't surprise you if the founders of some of them decided to divest. I don't see any mention of that here. Has that sort of phase moved on? How should I think about that?
I would say no, that phase has not moved on. I have not learned of one of our boutiques being approached by an external party in the last 45 minutes. There's a high level of activity, whether they're interested or not, you know, that is a whole nother matter. There's a high level of activity. Frankly, one of the challenges, if you're growing your funds, you know, we have a whole bunch of these firms that are growing their funds under management very rapidly right now or will be. You know, I think that makes it difficult to want to sell. No, none of our managers are engaged in any process. But they, you know, many of them are being approached frequently.
Thank you.
Yeah. By the way, I should add, like I don't expect any. I don't have any reason to expect any transactions. If any transactions get done, the type of multiples people are paying these days are, you know, well beyond what we would. You know, I think if we had to lose a great portfolio company, we'd at least do it at a really attractive valuation.
Thank you.
Thank you so much. Again, it is star and one if you have a question on the phone. Ladies and gentlemen, if you wish to ask a question, it's star and one on your telephone keypad. There are no further question at this time. Speakers, you may continue.
Great. Well, I'd like to thank you all for joining us today, and I know we are, you know, happy to, if we haven't already, people wanna chat more with us, happy to set up meetings and answer any questions that you may have. Thanks for your time and attention and have a great day.
Thank you. That does conclude our conference for today. Thank you for participating. You may all now disconnect.