Good day, and thank you for standing by. Welcome to the Perpetual Half Year Results presentation. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Susie Rei nhart, Head of Investor Relations. Please go ahead.
Good morning, everyone, good afternoon or evening to those joining us from other parts of the world. Welcome to Perpetual's Half Year 2023 Results Briefing. I'm Susie Reinhart , Perpetual's Head of Investor Relations. Before we begin today, we would like to acknowledge the traditional owners and custodians of the land on which we present from today. Here in Sydney, the Gadigal people of the Eora Nation, and recognize their continuing connection to land, waters, and community. We pay our respects to Australia's First Peoples and to their elders, past and present. We'd also like to extend our respect and welcome to any Aboriginal or Torres Strait Islander people who are listening in today and also acknowledge the traditional custodians of the various lands on which you all join from today.
Presenting here with us is Rob Adams, Perpetual's Chief Executive Officer and Managing Director, as well as Chris Green, Perpetual's Chief Financial Officer. There'll be an opportunity to ask questions at the end of today's presentation. Before I hand over to Rob, we would like to draw your attention to the disclaimer on page two of the presentation. Rob, over to you.
Thanks, Susie. Good morning, everyone. Thanks for joining us for today's first half 2023 results briefing. A key theme for the first half of the 2022/2023 financial year was the continued execution of our strategy to better position each of our businesses to manage effectively in their respective environments and to drive future growth. While our headline earnings numbers were impacted by the volatility seen in global investment markets during the half, which I'll comment on shortly, you'll see that despite these conditions, we have delivered a solid result, and we have positive momentum. Our unique combination of businesses continues to set us apart from our peers, with non-market-linked revenues in our Corporate Trust business in particular, and within Perpetual Private as well, providing us with the capacity to continue to invest for growth through the market cycles.
In our asset management businesses, PAMA and PAMI, as we refer to them, revenue was, of course, impacted by the volatility in global investment markets during the period and net outflows. In addition, cautious investment sentiment towards equities. Importantly, our investment teams are delivering outstanding relative investment performance, with nearly 90% of our funds outperforming their benchmark over the all-important three-year timeframe. Following the first half, the acquisition of the Pendal Group completed on the 23rd of January, 2023. Whilst we're only 1 month in, the integration of our asset management businesses has commenced, and the new executive team is fully focused on driving the benefits of what we expect to deliver, that we expect to deliver from this transformational acquisition. That includes our enhanced global distribution reach, our materially strengthened ESG positioning, and expected expense synergy realization.
Today, we will confirm our previously stated synergy target of AUD 60 million, a AUD 60 million reduction in run rate expenses on a pre-tax basis to be realized over the next two years. Turning now to the high-level results for the first half of 2023. Perpetual delivered total revenue of AUD 388.3 million, up 1% on the first half of 2022. Underlying profit after tax was AUD 67 million, delivered within previous earnings guidance of AUD 65 million-AUD 70 million, down on the prior corresponding period. Our net profit after tax was AUD 26.8 million, down 55% on the prior period. Prior corresponding period, I should say. Our return on equity decreased to 14.8%, which was a 25 basis point drop from the prior year.
As I mentioned in my opening comments, we believe this is a solid result in what has been a difficult operating environment and one that demonstrates the strength in our combination of businesses. Importantly, we have continued to invest for growth in the long term, and we've done so with discipline, and we've done it across all divisions, particularly to support growth in Corporate Trust, growth in Perpetual Private, and the continued build-out of our global distribution team. Expense growth was 4% on the prior corresponding period, excluding the impact of foreign exchange, foreign exchange rates and interest rates. Our board has declared a dividend for the second quarter of AUD 0.55 per share. When added to the first quarter dividend of AUD 0.35 per share, the total dividend for the first half was therefore AUD 0.90 per share.
Turning to some of our operational highlights for the half. The first half of this financial year saw further important developments as we executed our strategy to build stronger foundations for future growth. Across our asset management businesses, we are delivering very strong investment outcomes for our clients. As mentioned, 89% of all strategies outperformed their benchmark for the three-year timeframe. Reflecting this strong performance, Perpetual Asset Management Australia was awarded both the Lonsec and Zenith Fund Manager of the Year awards for 2022. In Perpetual Corporate Trust, which as you know, provides essential infrastructure for the financial services industry, we continue to deliver strong growth, with PCT's revenues growing 16% compared to the prior corresponding period. An outstanding result for PCT. In Perpetual Private, we saw yet another half year of positive net inflows.
The 19th consecutive half of positive flows for Perpetual Private. This consistency over the last nine and a half years, despite the market environment during the half, is reflective of Perpetual Private's market position as one of Australia's most trusted financial advice businesses. In Perpetual Asset Management International, Trillium continues to go from strength to strength, with over AUD 1 billion in Australian dollar terms that is, AUD 1 billion of net inflows for the half. Barrow Hanley reported a strong AUD 1.3 billion in net inflows across their various global equity strategies for the half. As you can see across the firm, we are delivering some really positive outcomes, and that momentum is pleasingly continuing into the second half of this financial year, which I'll comment on shortly.
Drilling down into some of the inflows in our asset management businesses. Given the strong performance profile, our pipeline is building across regions and channels, with growth, in particular, coming through our various global equity strategies. The chart on the left-hand side, the first of the four charts on this page, shows first half net flows for the combined asset management business by asset class. As you can see, net flows into global equity strategies managed by both Barrow Hanley and Trillium are strong and growing. U.S. equities continues to be a challenging asset class, not just for our business, but across the sector, impacted by the current risk-off environment and asset allocation shifts. In Australian equities, we're seeing a continued improvement in the net flow position, particularly through the intermediary channel.
Once again, driven by our Aussie equities team's exceptional investment performance. The second chart on this slide shows Barrow Hanley's net flows by asset sector. I wanted to really evidence here, the tale of two stories, if you like. The positive net flows that are coming through Barrow's various global equity and global emerging market equity capabilities, Of course, the challenges that remain in U.S. equities. When we acquired Barrow Hanley back in November of 2020, we stated that our aim was for Barrow's total net flows to turn positive in the third year following the acquisition. Since then, of course, we've seen the impact of COVID globally. We've had very volatile investment markets and a rising interest rate environment.
As I've mentioned, there's still work to do in relation to improving the net flow position in the U.S. equity sector. While these challenges exist, we still retain that original objective. With our growing pipeline, we remain optimistic that it can still be achieved. What provides us with this optimism is the very strong investment performance Barrow Hanley teams are delivering and our investment in distribution and product development, including opening up new channels for Barrow. Of course, there are, as always, a myriad of factors that can impact this objective, including market volatility, further interest rate movements, and investor sentiment. The third chart, in Trillium, we continue to see strong interest in our ESG, in Trillium's ESG capabilities. Despite near-term performance challenges impacted through the ongoing strength of the energy and defense sectors, which their funds have little or no exposure to.
Regardless of that, we expect the interest in Trillium's global capabilities to continue. Within our Australian asset management business, an area of continued improvement has been our net flows via the intermediary channel across sectors. In this fourth chart, I've highlighted the growing momentum of net flows from the intermediary channel into the Barrow Hanley Australian Domiciled Global Share Fund, which is now amongst the top five global equity funds on a net flow basis over the last 12 months. Recent upgrades in ratings from both Zenith and Morningstar to their highest categories have contributed to seeing Barrow Hanley replace incumbent global equity managers in a number of model portfolios just recently, coming from leading dealer groups and asset consultants.
With a broad presence across major platforms and approved product lists now, and given Barrow's exceptional investment performance, we expect this trend to continue. Our confidence in the intermediary channel in Australia extends into other important asset classes, most notably Australian Equities and Multi-Asset. Once again, due to the very strong relative investment performance our teams are generating for our clients. Here you can see on the next slide the proportion of our investment strategies across asset classes outperforming their benchmarks as at 31 December. This strong performance profile, particularly over the all-important three-year timeframe, leads us to be confident that our net flow trends will continue to improve across investment capabilities, across regions, and across channels. Okay, next slide. As you know, Perpetual has what we refer to as being a truly unique combination of businesses.
This is indeed one of our greatest strengths, particularly during periods of investment market volatility. As a diversified financial services firm, we have exposure to both equity and general market-linked revenues and non-market-linked revenues. Our non-market-linked revenues come to the fore when investment markets are volatile. PCT, as mentioned, continues to be a standout performer for Perpetual, while helping to provide the stability of earnings through market cycles. PCT is again seeing growth across all segments, with total revenue increasing 8% when compared with the second half of 2022 and rising 16% when compared with the prior corresponding period. For Perpetual Digital, we are encouraged by the growth in new clients, which will take some time to onboard, but we expect to benefit from that growth over the next 12 months.
Our Debt Market Services business has benefited from continued growth in the non-bank segment, while our Managed Fund Services business has delivered growth across all its underlying segments. I've mentioned Perpetual Private's consistent net flows outcome once again growing despite the market conditions we've seen in the last half. PP also saw during the period a strong rebound in non-market-linked revenues, with Fordham in particular, having a positive half following the return to in-person client engagements in a post-COVID world. I'll now stop there and hand over to Chris to go through the financials in more detail, and I'll be back with you shortly to talk about Pendal and our outlook.
Thanks, Rob, and good morning, everyone. Turning to our results at a glance. Operating revenue of AUD 388.3 million was 1% higher or AUD 3.4 million greater than the prior corresponding period. Primarily driven by a stronger performance in PCT and PP, and the PP non-market revenue growth. Group investments and foreign exchange movements, partially offset by lower average markets impacting in asset management and in private, and net outflows in Perpetual Asset Management. Performance fees ending the half were AUD 7.2 million or AUD 900,000 lower than the first half of 2022. Total expenses of AUD 298.3 million were AUD 23 million higher. Controllable costs were 4% higher, while higher interest rates and foreign exchange impacts contributed an additional 4% growth in expenses.
Our growth in expenses reflected a number of areas of investment, which I'll talk to shortly. Also included the normalization of employment costs following the very tight labor market we experienced in the first half of FY 2022, which led to our highest vacancy factor on record, and did impact the expense line there. Underlying profit was, after tax, was AUD 67 million, down 15%, driven by lower revenue in our asset management businesses, along with higher expenses. Net profit after tax was AUD 26.8 million lower on the prior corresponding period. There were a number of significant items through the period, totaling AUD 40.3 million. AUD 26.6 million of those related to Pendal transaction integration costs. Note that at the time of the acquisition, we said we would incur approximately AUD 40 million in transaction costs.
We're reconfirming that today, along with AUD 110 million in integration costs, with the majority of those to be incurred over the next 18 months. Given completion only occurred about a month ago, we aren't yet in a position to give more detail on those costs, but we expect to be for our third quarter update in April. It's also worth noting here that the effective tax rate on NPAT during the half year was 40%, up from 30% in the first half of 2022. This was mainly attributable to the non-deductible Pendal acquisition costs, which were partially offset by prior year adjustments, non-assessable income, and lower tax rates in some of our offshore jurisdictions.
Earnings per share on NPAT were 16% lower, with return on equity on NPAT 14.8% down from 17.3% in the first half of 2022. The dividend includes a dividend for the first quarter of FY 2023 and a further dividend for the second quarter, which I'll explain later in the presentation. Turning to the next slide. In terms of key movements at the divisional level, there was mixed performance. Asset management revenue was down 6%, impacted by a decline in average equity market levels and net outflows for the period. PP revenue came in flat on the prior corresponding period, also impacted by lower average equity markets, offset in an improvement in non-market revenue through both our Fordham business and returns on cash. PCT's revenue is up 16%, with strength across all areas of that business.
Looking at our segment NPAT performance in detail. NPAT this half was low, lower due primarily to our equity market linked businesses, partially offset by continued growth in PCT. PAMI's UPBT decreased by AUD 19.2 million and PANA's by AUD 3 million, driven by those lower average equity markets, net outflows, lower performance fee revenue, and continued investment in global distribution. Partially offset by favorable FX movements on the revenue line, stronger investment performance, and lower variable remuneration. In PP, PBT decreased by AUD 1.8 million, influenced by lower average equity markets and investment in people following a tight labor market in that first half of 2022, along with an increase in marketing expenditure following a return to in-person events post-COVID lockdowns.
This was partially offset by improved performance in Fordham, which benefited from a return to in-person engagement with its clients, with revenue also higher from interest on cash holdings. In Perpetual Corporate Trust, we saw PBT growth of AUD 4.6 million, with continued profit growth from both DMS and MFS, and continued momentum in Perpetual Digital. In Group Support Services, PBT decreased by AUD 200,000, predominantly related to an increase in interest expense offset by higher revenue on principal investments. The tax impact on the above resulted in a half-on-half movement of AUD 7.6 million due to that lower NPAT outcome. We continue to take a disciplined approach to our expenses, with expense initiatives focused on growth areas. During the half, controllable cost growth was 4%, most of which was attributable to new FTE and PP and PCT to support BAU growth across their businesses.
We also saw higher expenses from investment in PCT's digital business and in distributions and support functions to support our offshore asset management business. Cost growth from high interest on in-at interest rates and FX impacts on non-Australian expenses added 4% to our expense growth. We are working through the combined Perpetual and the Pendal Group forecasts at the moment, and are planning to provide FY 2023 expense guidance for the combined group in our quarter three update in April. Turning to the cash flow. Free cash flow was negative this half, mainly due to the overpayment of tax expenses in this half, which will be recovered in the second half. Lower average markets impacting headline revenue in the asset management business, and increased expenses associated with the investment in distribution and group support for PAMI.
After paying dividends totaling AUD 52.6 million, the result in net cash position prior to acquisitions and seed funding was AUD 103.4 million. Total cash as at 31st of December was AUD 133.6 million. The balance sheet at 31 December was strong, with a debt-to-capital ratio of 24.7%, which is below the target upper limit of 30%. In the first half, the decrease in cash and cash equivalents was mainly driven by payment of the final FY 2022 dividend, offset by inflows from operating cash activities and the additional drawdown of debt. The increase in borrowings reflect that additional drawdown of AUD 25 million to fund working capital requirements. Retained earnings decreased primarily due to the payment of the FY 2022 final dividend, again, the accrual of that special dividend.
Post the Pendal acquisition, as at 20th of February, we have drawn debt of AUD 769 million with undrawn facilities of AUD 75 million. As mentioned previously, our gearing ratio remains below the targeted limit of 30% with a pathway to reduce this, we will reduce this gearing. Our current leverage ratio based on pro forma EBITDA is 1.6x gross debt over EBITDA, and we are targeting a pro forma leverage of 1.2x gross debt to EBITDA by 2026. We retain our dividend policy, which is to pay out within the range of 60%-90% of UPAP on an annualized basis. Turning to dividends now.
The board has declared a total interim dividend of AUD 0.09 per share for the first half, which reflects both a fully franked ordinary dividend of AUD 0.35 paid on the 8th of February, and a partially franked ordinary dividend of AUD 0.55 per share to be paid in March this year. As we've been emphasizing for some time, going forward, the level of franking will be driven by the proportion of Australian earnings included in our overall earnings. It should also be noted that the first quarter 2023 dividend was paid to the then Perpetual share base of around 57 million shares, while the second quarter dividend will be paid to our new combined share base of 112 million shares, and paid from the combined earnings of both Perpetual and Pendal for the December quarter. Excuse me.
The first and second quarter dividend taken together reflect a payout ratio of 81% of UPAP, in line with our dividend policy. As we integrate Pendal, we expect the dividend payout ratio to be around the midpoint of our range of 60%-90%, acknowledging the need to balance shareholder returns with the cash needs of integration and our stated intention to pay down our debt. Before I hand back to Rob, I'd like to draw your attention to the detailed divisional results and further information that sits in our appendix. With that, back to you, Rob.
Thanks, Chris. Now turning to the acquisition of Pendal. As I mentioned, the acquisition is most certainly transformational for Perpetual and indeed Pendal, and is a critical moment in the histories of these two storied brands. Through this acquisition, we have created a global leader in multi-boutique asset management with more than AUD 200 billion in assets under management, covering all key regions globally with a broad array of quality active investment capabilities across global and emerging markets, U.S., U.K., European, and Australian equities, cash and fixed income, and multi-asset strategies. The combined business materially accelerates the global growth strategies and ambitions of both firms, and we expect to benefit from the now materially enhanced scale and distribution reach into and across all major markets globally.
Our global multi-boutique model will support, promote, and grow the seven highly respected asset management brands that today make up our Group. Across these seven businesses, we now have a total of 146 investment strategies across all asset classes. Moreover, across those strategies, we have significant capacity for future growth as we have previously outlined. Turning to the next slide. Our total assets of AUD 200 billion now provides us with material and diversified exposure across all asset classes. Let me just briefly run through those. Of course, Australian equities, which the definition now includes property equities, previously reported by Pendal.
The global/international sector, international also known as EFI, which will bring together both businesses' collection of global equity capabilities, noting that this definition will also include Asian equities. US equities managed across Barrow, TSW and Trillium UK and European equities managed by various Hambro teams. Emerging markets capabilities managed by both Barrow Hanley and Hambro. Together this creates an equities book of over AUD 160 billion with significant exposure to several higher margin global equity capabilities, each differentiated by style and each with significant capacity for future growth. In fixed income, we have Australian fixed income combining assets managed by both the Perpetual team and the Pendal local team, and US fixed income assets managed within Barrow Hanley and TSW.
One group, our multi-asset AUM is now significant, we are creating a new reporting line for that important sector, and we will be separately reporting our cash book as Pendal have done historically. As you can see, our AUM is well-balanced across sectors and regions. Importantly, it's further diversified by investment style and by distribution channel. Across our equities capabilities, we have a growing position in dedicated ESG capabilities with our combined dedicated ESG AUM totaling around $17 billion as at 31 December. Like our other capabilities, our ESG funds have significant capacity for future growth. Importantly, as you can see on the table on the right-hand side, the majority of our capabilities sit in higher margin asset classes. Excuse me.
With our expanded global distribution team and reach, we are in a stronger position to build our AUM across our capability set over time. Turning to the next slide now. As I think we've talked about previously, the global boutique model was common to both Perpetual and Pendal, and this differentiated model will be materially leveraged through this business combination. Our model is focused on attracting and retaining the best investment teams within our boutiques, supporting independent investment thinking. Our global multi-boutique model is focused on supporting our boutiques with institutional strength support services. This will include our immediately enhanced global distribution capability, which importantly, which will have a multi-channel approach across all key markets. With the benefit of scale, we also have further capacity to expand our capability set globally and to generate improved economies of scale through central global support and oversight where it makes sense.
Both Perpetual and Pendal have been focused on globing, on building out their global distribution footprint. As a combined firm, we have brought forward those plans of each company by many years. As we now combine our distribution teams, they will be managed in line with the three key regions. The Americas with around AUD 116 billion in AUM. Australia with around AUD 60 billion in client assets. The U.K., Europe, and Asia together with around AUD 24 billion of AUM. In the Americas, our expanded intermediary team will improve our reach for all relevant capabilities. We will be focused on channel expansion opportunities for every boutique using data and analytics to better inform decision-making while also leveraging existing product structures in place.
In the U.K. and Europe, where our client base is relatively evenly spread between intermediary and institutional clients, we will be leveraging our complementary distribution capabilities. Over the medium term, we'll look at how we can improve coverage across key markets, along with leveraging our ESG capabilities, which are of real interest to European and U.K. Clients more than anywhere else in the world. In Asia, where we have key client exposures and are seeking to build that exposure as a combined business, we will plan to sensibly accelerate our build-out in this growth region. Our shared base in Singapore provides a synergistic foundation for this expansion over time, and we will explore other key markets such as Japan, which to date have been largely untapped for both firms.
In Australia, we are seeking to improve our channel and segment focus, supplemented by bespoke investment solutions, which are increasingly a focus amongst key clients and prospects. As we previously stated, with fully established and clearly differentiated brands, teams, and investment styles, our Australian equities teams and distribution teams supporting them will be kept entirely separate. Turning now to the next slide. With the transactions completing just a month ago today, I'm pleased to report that we have already made good headway into bringing our businesses together. Our new executive leadership team has been appointed, and those team members are now fully focused on integration, including finalizing our target operating model and team structures. Pendal client engagement has been extremely positive, with 98% of consenting clients approving the transaction and continued positive client engagement throughout this process.
An immediate focus in the first 100 days post-acquisition is to finalize our global distribution leadership and teams across the regions, with some key appointments already having been announced earlier this month. Importantly, through our dedicated integration team led by Amanda Gazal, who has moved from her role as Group COO to manage the integration, we are finalizing our organizational design, communicating closely as we bring the businesses together as smoothly as possible. Today, we reconfirm our targeted pre-tax expense synergies of AUD 60 million, with approximately 50% of those synergies to be delivered in the first year post completion, so that's by the end of January 2024. Synergies are expected to be delivered from a number of areas across the business, including the consolidation of listed company expenses, management duplication, as well as efficiencies across technology, operations, distribution, and marketing.
We're also reviewing areas of product structure duplication so we can best leverage our combined product footprint. Today, we are also reconfirming the $110 million in costs which we expect to incur in order to integrate the businesses. The majority of these will be incurred, as Chris said, in the next 18 months. We are 100% focused on driving the benefits from this enlarged group, including our broader and deeper distribution team, our enhanced ESG presence, and driving the benefits of our improved scale across all parts of the business. Turning to the next slide. In summary, we are laser-focused on delivering our targeted benefits from the significant investments we have made across all areas of our business. Of course, most notably Pendal. For Pendal, our immediate focus is on integration, client retention and growth, and achieving our expected synergies.
In bringing our businesses together with Pendal, we are taking the opportunity to refresh and simplify our approach and processes, including how we communicate. Today, this includes new descriptors for our divisions going forward, which we will refer to as asset management, wealth management, which is a more globally accepted term for our advice business, and corporate trust. Across asset management, we will be leveraging the recent outstanding investment performance through our enhanced global distribution team to derive net flow improvement. The second half of FY 2023, so this calendar year, has started well in that regard.
Despite the challenging environment, we have seen a clear moderation of outflows from the US intermediary channel for Hambro, and we've seen some great wins for Barrow Hanley in particular, including finalizing the pricing for their new, their first CLO capability, which has now locked in $550 million of flows for this quarter. In wealth management, we are focused on driving operational leverage in Perpetual Private and realizing growth across all business lines. Finally, in corporate trust, we will continue to leverage our premier market position across all segments, whilst seeking to diversify our earnings growth through our range of proprietary digital solutions. With that, I'll now close and let's hand over to questions. Over to you, Susie.
Thanks, Rob. Just a reminder, if you'd like to ask a question, please press star one one on the phone. First question comes from Andrei Stadnik from Morgan Stanley. Andrei, over to you.
One moment, please.
Andrei.
Your line is open.
Yeah. Can you hear me okay?
Yep.
Yeah.
Brilliant. Thank you. If I can ask maybe two or three questions. Firstly, in terms of, you know, the product mix within investments, going forward, you certainly have a lot of bases covered. How are you thinking about alternative asset classes? Like, do you think you have enough in terms of alternative products?
Hi, Andrei. It's a good question. Yeah, this, the transaction's obviously important, brings together, yeah, terrific capability sets. It's not a total panacea, that's for sure. We do have exposure to some quality alternative capabilities, and each of those with plenty of capacity. I think, yeah, over the course of time, I think we would, ideally have, you know, deeper exposure to a broader definition of alternatives. For example, yeah, we don't have exposure to private market capability sets, either debt or equity. That definitely will be a focus over the medium to longer term.
Thank you. If I can ask... Sorry.
You can keep going.
Go ahead, Andrei.
If I can ask around ESG. You now have, you know, two recognized dedicated ESG brands. How are you going to, you know, use those to grow the business?
It's a good question, Andrei. I think, you know, the, obviously the, you know, I think I've previously referred to ESG investing as the permanent global megatrend in asset management. I still believe that to be the case. To be in a position where we have two terrific firms with terrific heritages, respectively, who run money very differently, whose product propositions, their investment capabilities set are quite different, I think puts us in a uniquely strong position. You know, it's, the differentiation between the ways, the way that Regnan teams run money and Trillium is quite clear. And I think we've got two very strong growth engines for the business going forward.
You know, I look at the Regnan team, for example, in the U.K., where we have a terrific global impact strategy with, which is, I'm looking across at Alexander, probably three, not even three years, three years in the, in the running with terrific prospects, great capacity, yet terrific investment team. I look at the global thematics, the first global thematics that Bertrand Lecourt is running, water and waste strategy, which I think is the top performing water and waste strategy globally, with significant capacity, and that will be the first of many global thematics we run in ESG investing. That's very different to Trillium's integrated ESG investment approach, which in itself is proving to have very high market appeal.
I think we're blessed to have the two brands, and we'll support the two brands.
Thank you. If I can ask the final question, just around crystallizing value in the Corporate Trust division. There were some articles, you know, recently highlighting the opportunity, well, a lot of interest from other parties to buy that business or buy a stake. What are your thoughts in terms of crystallizing the value in the Corporate Trust?
Well, I mean, Chris will comment on this as well, I'm sure. I've now been in this role for four, coming up to four and a half years. I think, you know, since the first few months I started in this role, there was speculation about Corporate Trust. It's been pretty consistent. It probably got a bit peaky last year. You know, I think great businesses, like Corporate Trust, attract a lot of interest. Great businesses, you know, like Corporate Trust, businesses that other people would like to own rather than us. The fact of the matter is we have been a great owner of this great business. We will continue to be.
The only thing I'd add to that is that that speculation that Rob talks about in terms of PCT being sold has been going on the 16 years that I've been at Perpetual, so.
Thank you.
No worries.
Thanks, Andrei. The next question comes from Lafitani Sotiriou from MST. Laf?
Good afternoon, everyone. Can I start off with Barrow Hanley and the Trillium acquisitions? Can you just clarify what's happened to the upside to these acquisitions that you flagged before making them? Let me just walk through some numbers. PAMI's underlying profit for the last half was AUD 12.7 million. They're down by over 60% versus PCP. Given over AUD 500 million was spent on acquiring both Trillium and Barrow Hanley plus the integration costs, it is less than a 5% annualized return. This return fell to about 0% when we include the step-up in the group cost which occurred, which is worth around AUD 6 million and a half.
When we also include the one-off costs in the last result, which for Barrow Hanley and Trillium added up to over AUD 6 million, again, which is stripped out of this underlying number. When you sort of add these things together, there's actually largely no real return from the two acquisitions you made in the last six months. Can you just talk us through what's happening in these businesses? Then secondly, why we should have confidence that you should be able to deliver upside in the Pendal acquisition, given that there's a lot of similarities?
Sure. Shall I go first?
Yeah.
Yeah. Hi, Laf. Thanks. Detailed question. I mean, I think with, you know, yeah, with Trillium, we acquired Trillium, 100% of Trillium in July, I think late June, July of 2020. You know, just as COVID was obviously setting in. I think, you know, what we've demonstrated with Trillium is, yeah, an ability to take a quality capability to market, to build distribution from scratch around it. Bear in mind, you know, Perpetual at the time, we had no distribution capability outside of Australia, so we started that build, you know, from scratch. When we announced the transaction, we talked about the investment we needed to make to build that distribution. That distribution is working.
You know, I think, you know, we've had, you know, consistent record net flows for Trillium. That's building, you know, very nicely, but it comes at a cost, you know, in the early stages. That's why, you know, because we had to build the distribution capability and product platforms, mutual fund platform, usage platform, platforms from scratch. You, you know, it's, the pleasing part of it is the growth that we're seeing, yeah, and our expectations for that growth to continue. You know, it is expensive to set up distribution from scratch, to set up the product structures from scratch. Yeah, and, you know, we expect to see the return on those, on that investment start to be realized in the, in the future.
Bear in mind also, you know, and this associates with Barrow as well, you know, we accelerated some of our spends in distribution in the U.S. when we saw the market opportunities being greater. You know, make that point with Trillium. Barrow Hanley, you know, I think we've been very upfront. You know, we've been disappointed by the flow profile in initially U.S. fixed income and, you know, probably pretty consistently U.S. equities. We've been very pleased with the progression we're making in the global equity strategies. We've been, again, investing in the distribution at Barrow as well as Trillium and in the intermediary team in the U.S. and then outside of the U.S., all of that from scratch. It takes time.
It's, yeah, and it's not inexpensive to attract world-class distribution people and build those platforms. We expect to, you know, deliver the return on investment over time. Bear in mind, from an environmental perspective, you had two of the three years that we've owned Trillium has been COVID, was COVID affected, and similarly with Barrow. We acquired Barrow in November of 2020. Then the volatility that we've seen in markets and the risk off, you know, obviously a number of things that we couldn't predict at the time. You know, these investments are long-term investments. We expect them to deliver our shareholders the right sort of returns over the long term, you know, we're confident that will happen.
I don't know, Chris, if you want to add to any of that.
The only thing I'd add there is that we have made a lot of investments in the offshore business in terms of platforms. One of the reasons that we're coming together with Pendal is that where we have 2 usage platforms, we will have 1. Where we have 2 mutual fund platforms, we will have 1. We'll get synergies from our global distribution platform. You know, there is a relationship between Pendal and the other 2 transactions in that, and I think we're pretty clear about this throughout, that even with Barrow Hanley and with Trillium, we didn't think we were at a scale globally to really take advantage of the opportunities.
With the breadth and quality of the investors that we have and the distribution platform and the support that goes into supporting a global business, we think we're well set, and we will be patient.
Well, the interesting thing with all of that is that a lot of this extra and additional expense that you're talking about, as though that was necessary, wasn't really flagged at the time of the acquisitions and the metrics that you presented in terms of providing upside and, net the markets are up. You have actually had a tailwind over that period, and there should be upside. Nevertheless, the point stands that in the last six months, you've really got no profit from those assets. Can I just move on? We haven't really had a chance to ask some questions around the Pendal, Perpetual transaction properly since the deal is completed.
Can I start off with, can you please explain why the transaction was not a merger of equals rather than Perpetual paying a premium as the independent expert's report indicated it was about 25%-40% control premium? We can see it in the numbers. There was a large cash component. You had a higher earnings base. Can you just explain clearly to us now why Perpetual paid a significant premium for Pendal, and it wasn't a merger of equals?
Do you wanna go first?
I think we've always been clear that the Pendal transaction and asset management businesses in particular, and Rob's got more experience at this than me with previous experience, that we're not big believers in mergers of equals in asset management scenarios. There needs to be a party in control. There needs to be a really clear single narrative, quick decisions, you know, the establishment of a single unified leadership team quickly, which we've done, for example, which would be much more difficult in a merger of equals scenario. It was always going to be the case that there was going to be a control transaction, and that a merger of equals was not something that we were attracted to. You've probably got more context on that.
Yeah. I mean, you have the former Pendal board to speak for themselves, but I think, you know, a merger of equals was not something that was contemplated at the time as being something that would be acceptable.
Sorry. Can I just be very clear here? You've just told us that, the reason why Perpetual shareholders paid a 25%-40% premium to the Pendal shareholders is because you ultimately wanted to be the party in control?
That was a contributing factor.
Is that right?
That was a factor, Laf. You know, I think, you know.
Sorry. This is a very significant amount of money that was paid, as a premium to Pendal shareholders. Can you provide us a clear reason? So far, you've only said that it's because you guys wanted to be the party in control.
No. That was. I just said, Laf, that was a contributing factor. Yeah. There. A host of factors comes into that, into such an important decision, which included the general feeling that, you know, there still would have been some form of premium paid if there had have been an acceptable way to merge the two businesses. That wasn't acceptable at the time.
Why is that? Sorry, 'cause you had the high-quality business. You could keep talking about corporate trust being very high quality, people needing it. You traded on a premium beforehand. Can you just... This is really important. Why was there a 25%-40% premium paid for, to get control of the business?
Ultimately, it was the judgment of the boards that that was the only way the businesses would come together.
Laf, that we'd also picked up a high-quality business in Pendal with some fantastic investors across the globe, that we are bringing into our asset management business that give us both scale and capability. There was quality on both sides.
Well, we've seen.
There was quality on both sides of the transaction.
We've seen the upside you've been able to deliver with the PAMI businesses so far. you know, the independent expert's report showed a earnings, huge earnings deterioration coming through in the next year of 30%, 40% for Pendal. you know, you have to qualify those comments you just made. Can I just move on to the next point in relation to the transaction? Now, why was there not an out for Perpetual shareholders for you guys receiving another bid, for change of control for Perpetual, in the scheme of arrangement? Who was responsible for not providing an out for Perpetual shareholders, which could end up being very material for them?
It seems pretty elementary that you guys had been up receiving offers for your corporate trust business ahead of you guys announcing the Pendal acquisition, which means that there's overall interest into Perpetual shares. Why was it, and who was responsible for not giving you guys an out to accept a competing bid in the best interest of your own shareholders?
Laf, I'll start with the fact that we at no point have wanted to engage with a party or had an offer capable of engaging with a party on an alternative offer here. We've always wanted to complete the Pendal transaction and been consistent about that throughout, even through getting clarity on that point at the end of last year. This is a transaction we have at all times wanted to get done and are very happy to have got done.
Is this going back to your being the party in control? Did you purposely put a poison pill in place so that your shareholders, they were not able to accept a superior offer during this during what happened in the last 3-6 months? Again, what you've just answered doesn't provide any clarity because this is pretty elementary. Why weren't Perpetual shareholders provided with an opportunity to accept a competing offer for Perpetual shares, knowing that there was interest in your business?
I don't know. If you wanna go on the legal case, then you know, it was still yet to be tested. There was an indication, you know, made, you know, by the courts and, you know, could have.
No. Sorry. Within the Pendal...
Sorry, Laf. I'm not too sure. In some ways, I'm just a little bit worried too that we're taking up all the time. We have other people with questions as well. I'm very happy to.
I'm sorry, but this is very important
take some of these matters.
These are very big decisions. These are very big decisions that have been made or not made. Can you just clarify? I've only got. There's only two questions left. This is one, and then I've got one left. Now, if you can just answer the questions rather than trying to fob me off.
We're not fobbing you off, Laf. We're trying to answer the questions as best as-
Well, you sound like you are. It was a very big deal for Perpetual shareholders in the last period while you guys didn't provide yourselves with an out to accept a competing bid. I wanna understand why?
Laf, as you'd be aware, there was a proceeding to determine whether we had an out or not. That ultimately determined that we didn't.
Sorry, but you could have got legal protection. You could have put specific paragraphs in place to make it very clear, and you haven't. This is, like, legal 101. Are you saying that you were not aware that you didn't have that ability?
No, I'm saying, Laf, as I said before, that it's not relevant because at all times we wanted to complete the Pendal transaction.
Okay, it goes back to being in control rather than necessarily acting in your, in your shareholders' best interest. Can I just finally finish?
No, that's.
In a lot of the language of the presentation before, you completed the deal, you were referring to the transaction being accretive in the first year. It seems like the presentation today, we don't have that language anymore. Can you just clarify, is this deal still accretive in the first year?
Yeah. As we sit, we believe this deal will be accretive within the first 12 months, yes.
Based on the synergy run rate.
We believe the
Actual synergy run rate, not all of it being lumped in the first year.
No, no. Based on the same methodology we've been talking through prior to the transaction as well.
Which is all the synergies in the first year, which is you just said today that only 50% will be realized in the first year. Can you just clarify, will it be accretive in the first year based on the actual run rate you think you can achieve the synergies?
We have said that it will be EPS accretive based on full run rate synergies in the first year.
You've just said you're not gonna be able to do that.
It's always been the basis on which we've stated the accretion, Laf. I do think we need to move on-
You think I've been bleeding?
Provide other people with an opportunity to ask questions.
I think that's right.
Yeah. We're very happy to speak to you offline. I think we are later today anyhow, Laf.
Okay. Thank you.
Thank you.
Just a reminder, if you'd like to ask a question, please press star one one. We have a question from Marcus Barnard from Bell Potter. Marcus, over to you.
Other questions might have dropped off given the time.
Marcus, your line is open.
Oh, hi. Thank you. A slightly more less confrontational question, I hope. Could you... When you announced the merger, you set the run rate synergies at AUD 60 million, and you've said you're well on track to complete them. Given the market's now lower, you've seen some outflows. Given that Pendal and yourselves were unable to cut costs while you were in the merger process, can we expect to see that synergy target being raised when you update us in March? I realize you might not be able to say that, say anything, but can I have your thoughts on that?
Yeah, sure. I'll make some comments. Chris will too. Yeah, we're only literally one month in, into the transaction and so post-completion. You know, therefore, yeah, we're learning more every day. As we go about our active decision-making, you know, we'll... That will fully inform, you know, whether or not we can extend beyond that number. I think, you know, in general, as a response to the environment, we have implemented, you know, a number of initiatives across the business in terms of our run rate expenses and how we're managing expenses, you know, more broadly given the environment. You know, I guess, Marcus, those two things all combine to, yeah, we...
To get us to the point where we look forward to updating you and yeah, you know. There may well be some upside to that number, but today we just reaffirm it 'cause it is only a month in.
I'd go a little bit further, Marcus, to say we're very comfortable and confident we'll be getting at least AUD 60 million of synergies. To your points, the world has changed a little bit since we gave that target. We are working through that as we speak.
That's brilliant. Thank you for that.
Thanks, Marcus. Just conscious of time, we might take one more question. James from Credit Suisse. Is he still there? Looks like he's dropped off.
Hi. Hi, guys. Look, just a question. Could you maybe talk about some of the opportunities for cross-sell? You know, what's the client feedback been like, you know, on the broader product set? What are your distribution teams most excited about potentially selling?
Yeah, thanks. Thanks, James. I mean, I think it depends, you know, different things in different regions. I certainly know, you know, the distribution teams in the U.S. are looking forward to getting a more fulsome suite of capabilities. Even in some exchanges with some of the members of that team this morning, they have that enthusiasm across the board. Yeah, I think there's definitely opportunities, you know, in each of the major regions for some of that cross-sell to occur and, you know, for Perpetual to get leverage off Perpetual, you know, owned capabilities, previously Perpetual capabilities like, you know, Barrow and Trillium to leverage off the deeper distribution footprint in Europe, for example.
Yeah, similarly in the U.S. I think there's gonna be good opportunities across the board, for both, you know, sets of capabilities. And there's also some unusual, we have potential leverage points too. For example, business we acquired in Corporate Trust. A little while ago, Laminar Capital has some fixed income functionality that could well be of application to Pendal Fixed Income teams. That's being explored, yeah, as we speak. We think there'll be some less obvious, yeah, potential benefits of bringing the two firms together as well.
Yeah. All righty. Thank you. Can I just ask another question on the International Select Fund? I mean, what's the client feedback been on that strategy? Obviously, it was, there was some large outflows prior to the completion of the merger, performance is a little soft over the one-year time horizon. You know, what are you expecting from that strategy going forward?
Yeah, it's an important question. You know, International Select has been such an important capability set for Hambro, for Pendal. As you said, you know, it went through a tougher time given its style and given the concentration of the portfolios that Chris and Najim run, and as a result, outflows were peaky in the last months of last year. I did make the specific comment that there's been a material, I'd say a very material moderation in that outflow profile from the U.S. intermediary channel. Speaking with the U.S. intermediary distribution team over the course of the last few days, you know, they are, I would say, mildly optimistic about the future.
One thing we know about investors, great investors like Chris and Najim, is that they've been through these periods of time before. You know, we've spent a lot of time with that investment team and all investment teams and, you know, are completely encouraged by the skill and quality of those individuals and their ability to recover from those difficult periods of performance and to deliver to their investors over the long term. We're very confident that will happen. It's certainly been pleasing, yeah, this calendar year to see that, you know, serious moderation in the outflow profile.
Yeah. All righty. Thank you. Just a final question. On Perpetual Private, look, you talked about, you know, the benefit of cash rates rising. We can see the non-market revenue ticking up. Is the benefit from cash rates, is it capped out now, or could there be further benefits as rates rise?
I don't think it's necessarily capped out, James. You know, we obviously rode the ride down and shared the pain with our clients as rates went down. Yeah, depending on where we are in the rate cycle, if we're towards the top end, then, you know, then, yes, it probably is topping out. We certainly have seen real recovery in our earnings on those cash. As if we see two, three, four more rate rises, you'll see further benefits coming through.
All right. Thank you.
Thanks, James. I think we might close it out there. Conscious it's a busy day on markets today. Thank you all for listening in. All of our result material is on our website, and the webcast will be lodged on our website over the coming day. Have a great day. Thank you.