Finally, I would like to advise all participants that this call is being recorded. I'd now like to welcome Andrew Schwartz, Group Managing Director and Co-founder, to begin the conference. Andrew, over to you.
Good morning, everyone. Welcome to the Qualitas 2026 half year results presentation. I'm Andrew Schwartz, Group Managing Director and Co-founder. Joining me today are Mark Fischer, Global Head of Real Estate and Co-founder, Kathleen Yeung, Global Head of Corporate Development, and Philip Dowman, our Chief Financial Officer. Before we begin, I would like to acknowledge the traditional custodians of the land from which I'm presenting, the Wurundjeri people of the Kulin nation. I also acknowledge the traditional custodians of the lands from where you are participating. We pay our respects to their elders, past and present. Turning to the agenda and the presenters. Today, I will start with an overview of our performance and key highlights for the first half of the financial year. Mark will share insights into the market and our funds management business.
Kathleen will provide an update on our ESG initiatives, and Philip will take you through our financial results. Finally, I'll conclude with our outlook for the remainder of the financial year before we open for questions. I'm very pleased to report another strong half financial performance from Qualitas. Over the past six months, we delivered a record deployment and achieved a record gross operating margin in our funds management business. Strong deployment contributed to a 38% increase in fee-earning FUM. This lays a solid foundation for earnings growth in the second half of the financial year. This time last year, we spoke about early green shoots of a residential super cycle emerging. Over the past six months, that momentum has accelerated, and our results clearly confirm it. Market conditions are evolving across parts of the global private credit market.
We are pleased that our business has remained anchored to real asset subsectors with long-term demand drivers. This supports consistent growth and stability across the business through periods of market volatility. In the first half, AUD 3.7 billion was deployed, an increase of 57% on first half FY 2025. This drove 69% transaction fee growth. We achieved record six-month net deployment of AUD 2.2 billion, well above previous reporting periods. This was supported by subdued portfolio attrition. It also underpins base management fee growth in the second half. Two managed fund mandates from new institutional investors were secured. One, from one of the world's largest pension funds in our private credit strategy, the other from a global pension investor in our build-to-rent strategy. Net funds management revenue was up 53%, driven by strong base management and transaction fees.
As we continue to scale our funds under management, it is pleasing to see the recurring fee-related earnings is now driving margin accretion more than balance sheet earnings. In other words, our funds management profit is growing much stronger than our balance sheet earnings. In turn, this is having a positive impact to our return on equity, which is exactly what we want. A strong feature of this half year result is that approximately AUD 12 million of previously accrued performance fees were realized in cash. Further, it is pleasing that our unrecognized performance fee pool continues to grow, reaching AUD 99 million. Co-investment drawdowns increased in line with strong investment activity, enhancing the stability of balance sheet earnings. We reported normalized net profit before tax of AUD 30.2 million, a 30% increase on the first half FY 2025.
Given this strong performance, we have reaffirmed our FY 2026 net profit before tax guidance of AUD 60 million-AUD 66 million. Overall, our first half results highlight the strength of our core funds management business. Our results demonstrate that our investments in the platform are delivering meaningful, scalable outcomes. We continue to assess accretive growth opportunities, both organic and inorganic activities, always applying a disciplined lens with a clear focus on maximizing shareholder value. At our full year results, we announced the appointment of our Chief AI Officer, and I'm genuinely excited about the opportunity this presents. We see AI as a powerful enabler for our platform, enhancing efficiency and unlocking new avenues for growth across the business. Moving to our financial results highlights.
As illustrated in the chart, we saw strong top-line growth across all key revenue categories in the first half of FY 2026 compared to the same period last year. Importantly, base management and transaction fees also increased from the second half of last financial year.... compared to the first half of FY 2025, base management fees increased by 28%, now representing 70% of our funds management revenue. This underscores the stability and consistent growth of our earnings. Principal income increased by 15%, maintaining a 9% balance share yield in a lower rate environment. Net performance fee revenue increased by 75%, driven by strong performance across our credit funds. Funds management EBITDA increased by 42%, with further margin expansion to 55%.
Importantly, the last time we reached this margin level in the second half of FY 2024, it was largely driven by highly accretive principal income. This time, margin expansion was driven by operating efficiency from our core funds management platform. Statutory net profit after tax of AUD 21 million is up 27%. Cash balance was AUD 33 million. Qualitas had AUD 80 million of underwriting positions pre 31 December, all of which has now been repaid, with our current cash balance being in excess of AUD 100 million. Our only corporate debt position, the QRI manager loan, reduced to AUD 19 million from AUD 20 million. An interim fully franked dividend of AUD 0.035 per share will be paid, representing a 40% increase.
We are proud of the growth and margin expansion we have achieved while investing in our platform and distributing attractive dividends to our shareholders. Now moving to key operational highlights of our funds management platform. As we grow, capital under management will be increasingly driven by deployment momentum. Our growth is backed by deep institutional relationships and access to capital beyond committed sum. Our 18-year track record continues to generate a strong deployment pipeline as borrowers seek experienced partners who can provide structured capital solutions at scale. Our results show fee-earning FUM increased 38% to AUD 10.9 billion. In terms of capital available for future develop deployment, peak draw allocation methodology has provided an estimated AUD 1.1 billion of available capital, on top of AUD 907 million in conventional dry powder.
In total, this is approximately AUD 2 billion of available capital for future deployment in addition to repayments. It is pleasing to now report our fee- earning FUM stands at AUD 10.9 billion and have line of sight to a further AUD 2 billion of available capital to fund future net deployment. It certainly sets us up well for continuing growth in fee earnings, given existing high FUM levels and also future deployment capital being available. Of the total deployment of AUD 3.7 billion, 76% came from repeat borrowers, including a AUD 1.2 billion-dollar construction credit investment. 28% of deployment from follow-on investments, including projects progressing to the next stage of development, facility increases, and renewals. This offsets portfolio repayments and supports a stable pipeline of deployment.
I'll now turn to how capital growth and fee-earning FUM continue to underpin our future earnings growth. Beyond upfront transaction fees, each additional dollar of deployed capital generates multiple streams of earnings over time. This includes base management fees, principal income, and performance fees. In respect of 32% of our fee-earning FUM, base management fees increase over time as construction progresses. Deployment drives growth in fee-earning FUM, which supports sustained half-on-half earnings growth. As a result of increased deployment, the opening fee-earning FUM position for the second half of FY 2026 is 24% higher than the monthly average in the first half. This supports half-on-half growth in base management fees. Higher investment activity boosts drawn co-investment capital, together with the recent rate rise, are expected to support principal income growth in the second half. Strong deployment also increases the performance fee potential.
Over the past six months, this grew by AUD 12 million or a net AUD 7 million after accruing performance fees in the first half. This brings the total performance fee potential to AUD 99 million. I'll now hand over to Mark to provide further update on our funds management platform and the market we operate in.
Thanks, Andrew, and good morning, everyone. Over the past six months, capital raising activity globally for private credit has evolved amid a changing macroeconomic environment. We noted in our full year 2025 results that significant retail and wholesale capital had been raised for private credit in Australia, increasing competition at that point in time. At Qualitas, we maintained discipline throughout that period, owing to our conviction that historically, when this has occurred, the next part of the cycle is for those newer entrants to retreat while they deal with the challenging aspects of their portfolio. In the first half of FY 2026, we saw this play out with our strong growth in deployment and capital raising. Particularly pleasing for us is that our capital raising outcome in the first half of FY 2026 occurred in a period where fundraising conditions were more difficult generally for the market.
This was particularly the case in Australia, where heightened regulatory scrutiny elevated investor understanding of the private credit market and resulted in more discerning allocations to the sector by investors, with flow heading to institutional platforms such as Qualitas. We secured new mandates and increased allocations from existing investors, which was reflected in the AUD 2.2 billion increase in our fee- earning FUM, reinforcing our standing with global institutional investors. Domestic regulatory scrutiny has also reshaped the competitive landscape from a deployment perspective, evidenced by our record deployment of AUD 3.7 billion for the half as Andrew noted. We achieved this while maintaining a high-performing portfolio, which is paramount for our fund investors. This core investment capability has delivered strong returns for fund investors, and over 80% of our fee- earning FUM that is subject to performance fee eligibility is currently exceeding hurdle rates.
Despite an increase in new entrants, we gained market share in our areas of focus, highlighting the high barriers to scale and profitability as an institutional manager when compared to raising retail capital. This remains a key differentiator for Qualitas. Over the half, we continued to invest in attracting and retaining top investment talent, demonstrating our conviction in the runway on the opportunity for the firm. In a rapidly changing environment, our platform has not only remained resilient, but continued to deliver strong outcomes, reinforcing the strength and scalability of our platform. I'll now talk in some more detail about the capital raising environment. During calendar year 2025, Qualitas delivered a standout result, raising AUD 1.7 billion in new capital commitments, a 56% increase on the prior year, despite global fundraising being down.
This underscores the depth of investor confidence in our strategies, and in fact, global private credit fundraising actually declined by 12% in 2025, driven by a 33% fall in the U.S. as investors diversified away from that market. Looking ahead, there's been a meaningful shift in investor sentiment. Europe continues to narrow the gap with the U.S., with the U.K. and Europe now experiencing the strongest increase in investor interest, followed by key APAC markets, including Japan and Australia, where demand for private credit remains steady despite the volatility I referred to before. Over the next five years, private credit capital raising in APAC and Europe is expected to grow faster than in the U.S., supported by regulatory initiatives and low levels of private credit penetration on a relative basis.
Our strong increases in capital commitments clearly indicate a growing global appetite for Australian commercial real estate private credit, with our market seen as a safe haven investment destination. Returns remain attractive for international investors when working with institutional managers who are capable of deploying at scale, such as Qualitas, with the forward interest rate environment now more attractive for credit investing. I'll move to update on trends we are seeing in the residential market. The residential sector remains our preferred exposure, particularly multi-dwelling assets, where we see ongoing structural undersupply and resilient demand, which provides for a long run opportunity to finance development activity. As the economy has transitioned into a higher cost of living and interest rate environment, we're seeing a stretching of affordability in residential, especially for detached housing.
What we are seeing, however, is that given the ongoing severe housing undersupply, demand has not disappeared, but rather it has shifted. Apartments are increasingly becoming the only viable ownership option for a growing segment of the market. As a result of that, we expect ongoing momentum in apartment development across segments of that market. At the lower to middle end, demand is being driven by first-time buyers and households priced out of the detached housing market, and at the upper end, downsizers are also supporting demand. Median house prices across Australian capital cities now sit at a record 51% premium to unit prices, which continues to make apartments a more economical and affordable option.
Starting to see this more in the data, where apartment commencements and approvals increased by 18% and 23% respectively over the past year, whereas activity in detached housing has remained subdued in comparison. Despite this rise in apartment activity, it remains well below the levels required to reach the National Housing Accord target of 1.2 million homes over the five-year period from July 2024, which highlights the persistent supply gap. As Australia's cities and population continue to grow, they are increasing in density. Data shows that the average number of apartments per building increased by 64% over the past years, showing that the average size of a building has nearly doubled in that time. When combined with rising construction and labor costs, what this means for Qualitas, when you put it all together, is that demand is pushing towards more apartment development.
Those apartment buildings are getting larger, and the quantum of capital needed to fund them is also getting larger. This is a key driver for our deployment opportunity set going forward, and our access to institutional capital continues to position us well in this space and creates a meaningful barrier to entry for other market participants. I was very pleased that we maintained an 11% market share in financing multi-dwelling developments over the 12 months to September 2025. More interestingly, for larger developments exceeding 160 apartments, our market share increased to approximately 18%, which highlights our capability and reputation in financing large-scale projects. What we experienced in the last half only continued this trend, and we expect our market share to increase in the December 2025 quarter once that data is released.
Collectively, these dynamics reinforce our confidence in a strong and growing residential pipeline for FY 2026 and beyond. As a leading financier to the sector, we are typically one of the first to benefit as development activity accelerates, without being entirely reliant on the ultimate sales outcomes of the underlying projects, like a developer. Moving to Slide 13, I'll talk through the increasing ability of the firm to access opportunities in other commercial real estate sectors. As the scale of the firm and the sector grows, we are seeing an increasing number of investment opportunities emerge across non-residential real estate sectors. We flagged this trend previously, and it is being driven by growing recapitalization and repositioning needs for completed real estate, alongside demand for more creative financing solutions for new developments in other sectors.
While residential continues to currently offer the most scalable and attractive risk-adjusted returns and currently represents 82% of our fee-earning FUM, our existing fund capital allows us to invest across other commercial real estate sectors where those opportunities arise and where Qualitas sees compelling value. During the half year, we deployed into industrial, retail, and office assets in our credit portfolios, and we deployed into build-to-rent in our equity strategies. Our current pipeline also includes a large office repositioning investment, which has been approved by our investment committee. All of these lean into our strengths of structuring complex, hard asset-backed investments. Despite some reemergence of traditional financiers, their appetite remains highly restrictive, with constrained credit metrics resulting in many non-residential repositioning and development projects being unviable within traditional financing structures, which creates opportunity for us.
Importantly, as Andrew mentioned, Qualitas is differentiated from many global private credit peers because we have 100% exposure to commercial real estate. We focus exclusively on asset-backed lending and do not offer leverage loans to software or technology companies, where many offshore peers are more heavily invested. Our capital is deployed into real assets, supported by long-term, stable demand, sectors with lower volatility that are relatively insulated from AI-driven disruption. Moving on to deployment and pipeline. As has been noted, in the first half of FY 2026, we delivered a record six-month deployment of AUD 3.7 billion, with residential remaining the key sector underpinning our growth. Investment sizes are increasing across both our income and construction credit strategies, which remains a key differentiator for the firm. During the period, we provided a AUD 1.2 billion construction loan to a multi-stage Melbourne residential development.
However, excluding this transaction, investments of over AUD 100 million represented 57% of FY 2026 year-to-date deployment and pipeline. Construction financing accounted for 67% of deployment during the period, which extends portfolio duration and delivers greater economies of scale across the platform. Alongside this, our income credit strategy scaled in line with overall deployment, supporting growth in base management and transaction fees. Momentum is building in our build-to-rent equity strategy, and during the first half, we acquired a fifth BTR asset, onboarded two new investors into that program, and have now identified a sixth asset. We are experiencing strong leasing on our completed assets, and the platform is scaling as planned and beginning to generate profits.
Reflecting on our performance over the last few years, we have delivered a 33% compound annual growth rate in deployment from FY 2022 to FY 2025, despite what was a challenging environment in real estate. Over the same period, interest rates rose sharply from 10 basis points to 4.35%, while residential commencements and approvals fell to historically low levels. We have had strong growth in deployment against that difficult backdrop. With the interest rate outlook now broadly stabilizing compared to recent years, we believe the conditions are becoming increasingly supportive of continued deployment. Looking ahead, January and February are typically a quieter period for activity in real estate markets. However, financial year-to-date deployment and our pipeline are well ahead of both the same point last year and our total deployment in FY 2025.
Our prospective list of potential mandates is also beginning to build, providing us with confidence around second half activity. Finally, we continued our investment in the platform to support future growth and appointed three senior investment professionals in New South Wales and Queensland during the first half. We've also rolled out enterprise-grade AI tools across the business, with strong adoption improving productivity. We're now testing how AI can support parts of the investment assessment and asset management process, with a focus on governance, risk, and scalable implementation of AI. Finally, before I hand to Kathleen, I will talk about net deployment and fee-earning FUM. We saw AUD 2.2 billion of net deployment in the first half of FY 2026, representing another record six-month period. This was driven not only by strong deployment activity, but also an easing in portfolio churn.
Steady flow of follow-on investments, including facility renewals and funding for later stage developments, continued to offset portfolio attrition. These investments generate both transaction and base management fees at a lower incremental origination cost. In the first half of FY 2026, 81% of investments over AUD 100 million were secured, despite us not financing the prior stage. This demonstrates the strength of our capital base in attracting large-scale opportunities, even where earlier stages of a project were financed by others. Over the past three and a half years, our fee-earning FUM, excluding Arch Finance and the BTR equity platform, has grown at a compound annual rate of 45%. We are very proud of this achievement, which is a result of the whole team's relentless commitment to the business and their excellent track record. I'll now pass to Kathleen to provide an update on our ESG initiatives.
Thanks, Mark, and good morning, everyone. We've continued to make good progress across our ESG priorities, whether that's supporting lower carbon buildings, delivering impact for our communities and our people, or continuing to strengthen our governance so it remains best in class. Starting with our people. Our investment capability is one of our core strengths. With our internship program kicking off in March, we're being very intentional about building succession across our key investment functions. It's not just about bringing in talent, it's about embedding the Qualitas way from day one. That means our rich framework, our credit discipline, and the way we make decisions. As we grow, we want to make sure that discipline scales with us. We're also broadening our talent pipeline. We're targeting 50% female participation in the program and creating more diverse entry pathways into the firm, including for First Nations talent.
Alongside that, we're excited to have launched two employee-led networks, Compass and Access. Compass focuses on strengthening cultural connection across the business, and Access supports working parents and carers. Engagement and wellbeing aren't soft outcomes. We believe they directly support high-performing teams and better decision-making. Turning now to sustainability within our investments. Under our sustainable finance framework, we closed around AUD 264 million in green loan financing with third-party financiers across two key equity assets. That's a practical demonstration of our ability to access capital aligned with lower carbon buildings. In our credit strategies, we're also seeing sustainability considerations embedded earlier at origination. That's important because it strengthens downside protection and improves long-term asset resilience.
Our most recent PRI assessment reflects this progress, particularly the uplift in our direct real estate rating, which recognizes the work our team are doing in identifying and delivering sustainability initiatives across our assets that make commercial sense. Finally, we strengthened governance through publishing our first mandatory modern slavery statement. I'll leave it there for now and pass to Philip to provide further detail on our financial results.
Thanks, Kathleen, and good morning. I'm delighted to report a record half-year result with normalized net profit after tax of AUD 21.1 million and statutory net profit after tax of AUD 20.7 million. This represents growth of 30% and 27%, respectively, on the prior corresponding period. This strong growth was achieved through continued momentum in our core funds management platform, reflecting four fundamental revenue drivers over the period, complemented by prudent cost management. Firstly, as Andrew and Mark have highlighted, was the exceptional growth in fee earning funds under management, up 38% year-on-year to AUD 10.9 billion. This, in turn, drove a 28% lift in our base management fees versus prior corresponding period, a key recurring revenue stream.
Secondly, record total deployment of AUD 3.7 billion for the half year, underpinned record transaction fees earned in the period of AUD 12.9 million, up 69% on the prior corresponding period. Thirdly, there was a strong contribution from net performance fees of AUD 5 million, up from AUD 2.9 million net earnings in the prior corresponding period. The growth in performance fee contribution is a result of our growth in fee-earning funds under management and strong fund returns. And lastly, earnings from our balance sheet investments contributed AUD 15.3 million to our revenue, up 15% on the prior corresponding period, as deployment increased the balance of our drawn co-investments. These revenue drivers exceeded our growth and expenses, leading to a material expansion in our normalized group EBITDA margin to 51% from 49% in the prior corresponding period.
As a result of the strong performance, we are pleased to announce a 40% increase in our interim dividend to AUD 0.035 per share, compared to the AUD 0.025 per share interim dividend last financial year. This underscores both the strength of our earnings this period and our strong balance sheet. Moving to our funds management results. Looking now in detail at the funds management segment results, we achieved 42% growth in total funds management EBITDA, earning AUD 34.3 million for the period. A particular highlight of this result is the 53% increase in net funds management revenue to AUD 19.7 million, from AUD 12.9 million in the prior corresponding period, as revenue growth materially outpaced growth and expenses.
Our performance fee contribution was up 75% versus the prior corresponding period, reflecting continued growth in performance fees earned on our expanding credit funds under management. Overall, we achieved a material step change in our funds management EBITDA margin this period at 55%, up from 51% in the prior corresponding period, whilst continuing to invest in new talent and growing our investment capacity. Corporate costs were up by 15% over the period, a modest increase considering the underlying revenue growth in the business. Part of this increase is attributed to our investment in data standardization and implementation of AI initiatives. We are currently assessing how agentic AI systems can be applied to our investment processes, aiming to deliver a set of internal applications over the coming year that will support scalable execution and deliver measurable productivity benefits.
For our shareholders, this means recurring revenues are growing faster than costs, resulting in improving net operating margins versus prior corresponding period. Moving to key earnings margins and trend analysis. Referring to the chart on the left of the slide, our funds management EBITDA margins, both including and excluding performance fees, are showing an improving trend. This illustrates the scalability of our platform. Looking at the chart in the center of the slide, this shows the steady growth in total average fee-earning FUM. While there has been a marked divergence between our base management fee as a percentage of invested FUM versus fee-earning FUM. This is a function of the increasing proportion of construction loans in our portfolio, with the undrawn portion temporarily diluting base management fees as a percentage of fee-earning FUM early in the life of a loan.
As these loans are progressively drawn down, the gap between base management fees as a percentage of invested FUM and as a percentage of fee-earning FUM narrows. Importantly, our key relationship and product fee margins remain unchanged, and fee margin movement is purely driven by the stage of construction drawdown and product mix. As construction deployment occurred late in the half, we do expect a further modest decline in the base management fee as a percentage of fee-earning FUM in the short term, which is then expected to increase as these loans are drawn. Looking at the chart on the right-hand side of the slide, we wanted to highlight the higher average cash balance early in the period. This was a deliberate strategy to preserve cash, to underwrite fund investments, which supported our record deployment. As a result, it did temporarily reduce revenue efficiency early in the half.
Moving to our principal income and Arch contribution. As previously highlighted, our principal income grew by 15% to AUD 15.3 million over the period, driven by growth in recurring income from investments as we deployed more capital into co-investments alongside our funds. Both interest income on cash and underwriting were lower, reflecting the increase in drawn co-investments and decline in interest rates versus the prior corresponding period. Principal income in the second half is expected to increase relative to the first half, reflecting the recent rise in interest rates on the higher co-investment balances at 31 December. The total contribution to our results from Arch Finance, inclusive of the return on our co-investment in the warehouse, was AUD 1.6 million. The business is now showing renewed growth in the loan portfolio following late 2025 management changes.
We remain confident in Arch Finance's market position and expect an improving contribution to the group in future periods. Moving to our balance sheet. The Qualitas balance sheet remains strong, with much greater deployed cash now earning higher returns than in previous periods. The full utilization of our cash position as at balance date has supported increased deployment, momentum, and fundraising activities. During the half, we also cash collected AUD 12.1 million of previously accrued performance fees, reflecting the terms of various institutional credit mandates. For shareholders, our consistent earnings growth, strong balance sheet, means we have adequate capital to pursue value accretive opportunities, supporting co-investment and underwriting opportunities, whilst also sustaining attractive dividend flows, as evidenced by the 40% increase in the interim dividend to AUD 0.035 per share.
I will now hand back to Andrew for his closing remarks and confirmation of our guidance range. Thank you.
Thank you, Philip. As we've discussed throughout this presentation, we are well-positioned for the second half of the financial year. As a consistently growing funds management business, strong investment activity in the first half supports half-on-half growth in base management fees. It also drives higher principal income through increased co-investment drawdowns, further supported by the recent rate rise. Performance fees from our credit funds are expected to increase, supported by strong deployment in credit strategies. Recognition and cash receipts should also become more consistent as these funds mature. Importantly, we will continue to invest in our platform with the implementation of AI across the business to enhance efficiency and support sustainable long-term growth. We will complement our growth momentum with targeted organic and inorganic activities, maintaining discipline and a strong focus on shareholder value creation.
It is with this lens, we have reaffirmed our FY 2026 guidance, net profit before tax between AUD 60 million-AUD 66 million, and FY 2026 earnings per share of AUD 0.139-AUD 0.153 per share, excluding mark-to-market movements for Qualitas co-investment in the Qualitas Real Estate Income Fund and the fund's capital raising costs. Our success ultimately comes down to our people. The talent, commitment, and collaboration I see across Qualitas every day makes me incredibly proud to lead this organization. That concludes the formal part of our presentation, and we are now happy to take any questions. Thank you.
Thank you, Andrew. And as mentioned, we will now begin the Q&A session. If you're listening by phone and would like to ask a question at this time, please press star followed by the number one on your telephone keypad to raise your hand and join the queue. To withdraw your question, please press the star one again, and when called upon to ask your questions, please use your device handset and ensure you are not on mute. And your first question comes from the line of Tim Piper of Jarden. Please go ahead.
Good morning, Andrew and team. Thanks for taking the question, and well done on the really strong result. Just a question on the interest rate outlook, and you obviously talked a lot about this in the presentation, but you know, the very strong deployment that you've seen in the first half, it sounds like what we've seen in interest rate expectations so far hasn't slowed that. I think you actually talked to that accelerating. Maybe just in the non-residential side of commercial credit, so refinancing and transition financing, is the change in interest rate expectations there going to make any difference to your outlook in that sector, or are one or two rate rises just simply not enough to kind of move the needle?
Thanks for the question. Just I'll hand it over to Mark to answer the bulk of the question, but I mean, one point that I'll make at the outset is Qualitas has experienced a lot of growth through the last interest rate cycle, where if you recall, interest rates bottomed at 10 basis points, and we went through consecutive raises to 4.35%. And during that period of time, you know, we continued to grow the business, 30%-35% CAGR, you know, year on year. So in many ways, interest rates can also be our friend. It's also fair to say that credit spreads also rise in times of rising interest rates as well.
So, you know, we can sort of prove that relationship over multiple interest rate cycles, but maybe over to you, Mark, in respect of the bulk of the question.
Yeah. Thanks, Andrew, and good question, Tim, given perhaps how the world has changed since we last delivered a set of results as it relates to the interest rate outlook. What I'd say about the non-residential space is, particularly from a credit perspective, as distinct from being an equity investor in it, such as the REITs, is a lot of the transaction flow or the opportunity set for deployment is driven by needs for recapitalization or needs for reinvesting in the buildings. And in particular, to your question around interest rates and how it may impact that deployment opportunity for non-residential. The traditional financiers are typically sizing their debt capacity based on interest cover rather than loan-to-value ratio. And so as rates are rising, what it does is reduces the availability of debt, and that creates gaps in capital structures.
The type of capital that we manage within our funds looks for those opportunities. We either refinance the gap plus the existing debt in a whole loan structure, or we can look at mezzanine-style investing into those. And we are starting now to see a significant increase in that type of deal flow coming through in our pipeline. So I'd like to think that if rates are in a world now of more normalization and potentially a few more increases from here, that transaction flow and a need for people to reset capital structures will lead to great deployment opportunity for us.
Understand. That's clear. Just... Sorry, a second question. Just on the performance fee outlook, and you outlined in the presentation that pool of potentially accrued fees increased 10% to AUD 99 million. Can we just understand the mechanics of the growth in that pool? That 10% growth is obviously lower than what you've deployed in terms of growth in deployment and growth in invested FUM and fee-earning FUM. Is that more driven by a lag impact, and as that sort of works its way through that pool will accelerate? Or is it down to a mix of where that capital is being invested from a performance fee point of view?
Look, thanks for that question. You've actually really answered it yourself, but it is a function of both of those two features. There is a lag in how we recognize the performance fees. The FUM has to be first deployed, and we then have to get some time to ensure that it's you know, embedded and starting to flow through from a performance fee future pool perspective. And then secondly, it does depend slightly on the mix between different products across our portfolio. But really the key point is that pool is increasing year-on-year and has been now for the last two or three years. And that's really a function of that strong deployment with a small lag, as you point out.
Okay, so it's sort of fair to assume that as these investments kind of season, assuming performance is maintained, that that growth in the performance fee pool should actually accelerate based on what you've seen in deployments now?
That, that's correct.
Great. Thanks. I'll, I'll leave it there.
Your next question comes from the line of David Pobucky of Macquarie Group. Please go ahead.
Morning, Andrew and team. Thanks for your time. Just thinking about the period that just passed, Qualitas was mandated on a number of large opportunities with check sizes over AUD 300 million each. Looks like you closed that AUD 1.2 billion construction credit investment. So I was just curious if you could talk about where you're at with the other opportunities, you know, in excess of that AUD 300 million loan size, please.
Yeah, it's Mark here, David. Thanks again for the question. So I called out in my section that we are working on a number of large transactions and that we have investment committee approved a very large office recapitalization transaction. So when we previously talked about the trend on big investments, they were at mandate stage. That transaction has now been approved by our investment committee, so in the final stages of a closing of a transaction. Not done yet, still things to be resolved, but certainly materially progressed from when we last updated on it. In addition to that, what I'd say is, if I compare how the business feels from a pipeline perspective today to how it normally feels in the middle of February, I've never seen so much activity and prospective pipeline.
We talked about AUD 5.5 billion of total transactions that have been closed plus already approved, plus mandated. If I talk beyond that, things that we're working on that we are not yet mandated on, the activity is incredibly strong. Usually, it's a slow start to the calendar year in the real estate industry. It did not feel like that this year, and the team certainly have been busy this year already. David, to just the other comment I'd make around that is, I think Qualitas has really made its mark in large transaction sizes overall. You know, we've found that just the level of competition is significantly less, you know, above that AUD 300 million mark.
And, you know, certainly as we've seen in the past, Qualitas has been able to write checks of, you know, AUD 300 million, AUD 500 million, AUD 700 million on various deals, now, AUD 1.2 billion. And we do find a lot of clear air at that altitude of check size. Our ability to really have strong terms and conditions, favorable pricing, really works for us. And also, I'd add that it's hard to do unless you're an institutional manager of choice, with just the level of capital support we have from some of the largest global investors who have really taken to Qualitas and its strategy. So we really play into that, and it's really been working for us.
Thank you. And perhaps just to follow on to that, can you talk a bit about your risk processes when it comes to these larger loans? How should we think about that concentration risk that comes with it, and perhaps, you know, the pricing you achieve versus, you know, lower loan sizes? Thank you.
Yeah, so I'll take the second part first, David, around pricing. These are transactions that are very large, and the gestation period to get them from concept of a transaction all the way through to closing is longer than smaller transactions. And the reason for that goes to what Andrew just mentioned. There's limited capital availability or competitors who can bring together transactions of that size. You do need support from the largest investors in the world to be able to play in that space. And so what that means is, the counterparty, the borrower, is looking for capital certainty. And so some of the other aspects of the transaction, particularly around pricing and terms, end up being more favorable to us as lender in that scenario.
So very difficult to say precisely how much of a premium we may get, but it's where our capital wants to play because there is a premium for doing it. So that's point one. Around concentration risk, it's important to think about it from the Qualitas Limited perspective as well. These are transactions happening within funds and mandates that we manage, which are very large portfolios themselves, and our exposure as manager is our co-investment within those funds, which is obviously a materially smaller amount. So these are transactions that get put together within the context of the portfolio for a strategy. Typically, in the case of these large investments, they are for very, very large institutional investors. We're not using our wholesale capital channels to do them.
It's a large institutional mandate, and therefore, from a concentration perspective, both the investors themselves and our, ourselves, from a co-investment perspective, are very comfortable with those exposures. Not sure if anything you'd like to add to that, Andrew?
No. Thanks, Mark.
Thanks for your time.
Thanks for your time.
Your next question comes from the line of Olivier Coulon of E&P Financial Group. Your line is open.
Oh, hi, guys. Thanks for taking my call, and congrats on what's a very strong result. Can you just expand a little bit more on the mandate environment? I know you've obviously got a lot of sidecar and peak draw capacity, and you've obviously had some, you know, pleasing kind of wins. But you are kind of shorter on dry powder than you've been for a while in comparison to, I suppose, the deployment, you know, cadence. So, yeah, the thinking as to when you might see conversion on some of those conversations?
Thanks, Oli, for the question. Look, I'd describe the current mandate environment as extremely favorable. You can see through the presentation that we've noted a new, one of the world's largest pension funds, who first time mandated Qualitas into our credit strategies, was a very significant win for our business over the period. And secondly, a European pension fund who committed into our build to rent strategy, which was also a very strong commitment. And so I would describe the current environment as being particularly healthy. You wouldn't be surprised to hear that Qualitas has a number of new prospective investor discussions that are happening at the moment. They involve further new pension funds and also new sovereign funds who are looking at the Qualitas strategy.
We also have existing, excuse me, existing investors who are talking to us about re-ups into their, their strategies as well. I think it's really a function of the fact that, you know, Qualitas now has an 18-year track record. I don't say this lightly, but, you know, we continue to have an excellent portfolio of credit investments. Our impairments continue to be zero at this particular point of time, and I think our global investors see all of that, see the strategy of writing large check sizes, and basically is one that has found globally a lot of favor amongst them. So, that would be really point number one.
The second point I'd make is that, as you can see, during the period where, you know, we have, investments that are abnormal in size, being our, our AUD 1.2 billion, I don't think, you know, you write an investment like that every, every month of the year. Our investors, particularly those that have sidecar commitments to our firm, also get behind us and, see that as incremental opportunity. And so one of the things that, you know, I don't worry about too much, doesn't mean I don't worry about it at all, but I don't worry about too much, is, the sourcing of the capital, just given the amount of momentum, you know, we've got in the market at the moment.
So really, a lot greater focus on the quality of the transactions, maintaining our discipline, looking at the pipeline, choosing what we do want to do versus not want to do... and reshaping our various underlying portfolios is where most of our concentration goes at this point in time. So big, big picture, Oli feeling really positive about, you know, the capital sourcing and, the continuing momentum of the current investors, new investors, and existing investors.
Okay, got it. Perfect. Just on performance fees, I mean, hard to miss that you've got an incentive credit, which probably suggests that there was some sort of reversal. Is it fair to say that the underlying rate of performance fees, ex any reversal, might have been a little bit higher than what you kind of reported in that result?
Look, I'll get Philip to answer part of that question, but I might just take it at the macro level first, which is, it shouldn't be a surprise that our performance fees embedded into the business is growing at the rate that we're reporting. And if you go back to the fundamental principles of the three paths to our performance fee, one of those is performance fees we receive in cash, and we're really happy to report in this period that we received AUD 12 million in cash from previously accrued performance fees. So, I think that you know is testament to the fact that these performance fees do monetize, and certainly in this period, that's what occurred. Then we accrue a certain level of performance fees, which is evident in our accounts.
And then the third level, which is that AUD 99 million of performance fees, is really what we call our embedded, unrecognized performance fee pool. It should not be a surprise that that pool is growing, given the criteria which we apply before we actually put it into the bucket of unrecognized performance fees. That is, that we've raised the capital for the fund, we've deployed the capital, and then the calculation gets made according to the underwrite by which we approved the actual investment. The capital's there, the deployment has been made, and now we're waiting for the underlying investment to monetize.
The fact that most of them are in the form of credit also provides a higher level of certainty over time in regards to the ultimate recognition into the accruals and ultimately by way of cash receipts. Given that, just by way of reminder, at the time of our IPO, we were circa AUD 4 billion of funds under management, and today we're reporting close on AUD 11 billion. Clearly, we are a significant growing company, and it shouldn't come as a surprise, therefore, that our unrecognized performance fees continue to grow, mature, and and have seen more steady flows of both the accruals and the cash. Just in regards to the performance fee reversal, which was part of your question, I'll ask Philip if you could address that question, please.
Thanks, Andrew, and thanks, Oli. But yes, you are right, Oli. There was a small reversal in our first half. All other things being equal, we would expect our performance fee contribution to be higher in the second half as a result.
Yeah, perfect. Thanks, guys, and congrats again.
Your next question comes from the line of Liam Schofield of Morgans. Please go ahead.
Morning, guys. I'm just comparing that deployment chart from the AGM to the updated results. Clearly, a lot has converted in that last couple of months. What does that mean for the earnings skew for the second half of FY 2026, and how does that sort of manifest in the P&L?
Yeah, thanks, Liam. Mark here. I'll go first, but I will hand to Philip for the P&L impact. You're right in the sense that if you're looking at the AGM pack and where we were at on closed transactions and pipeline compared to where we ended up, it was a very busy period of time in November and December for closing out transactions. I think something we've always talked about is the deployment is not a week by week proposition. It is something that comes when the transactions are ready. Once we've done our work, once we're feeling good about the transactions, then they close. And so being precise on specifically which week we might close something in is obviously very hard as a result.
In this half, what did happen was a, you know, a very busy November and December, which you can see come through the numbers. I'll make one more point before I pass to Philip to talk to P&L impacts of that. Unusually, for middle of February, we have very strong mandated deal flow and already investment committee-approved deal flow. So what I expect to see is that we continue to execute on those transactions and convert them into closed over the next little while. Over to you, Philip.
Thanks, Mark, and thanks, Liam, for the question. Look, I think, again, you've answered the question. We had a very strong first half deployment that definitely benefited our arrangement fees, and it's 69% up on prior corresponding period. We, as you know, the deployment is binary. If it had deployed in January, it would have changed our transaction fee mix for the half. And really, as Mark said, it's now very much the focus for the second half, how much transaction fees we get, which ultimately will drive out the final... ... 5% or 10% of where we finish on guidance.
And just Philip, just further on, Mark sort of touched on some increased headcount during the first half. Was that a cost headwind that you sort of now coming into the second half year? I suppose you've got a bit more clean air where they're producing more than maybe when you first brought them on, and can you just sort of touch on that headcount ad?
Sure, thanks. Look, definitely as our business scales, we are adding selectively headcount into the business. That will have some both cost implications in the second half, but to your point, also helps underpin our view on future earnings from a revenue perspective. I think the business has certainly demonstrated an ability to balance the investment in capacity and then the translation of that capacity into future earnings.
Perfect. Thanks, guys.
Okay, thanks guys.
Before we move on to the next question, a reminder, if you would like to join the queue, to please press star one now. Your next question comes from the line of Peter Davidson of Pendal Group. Your line is open.
Hi, guys. Just a few questions today. Four, I think in fact. Firstly, can you talk about the cash coverage of your base and transaction fees? What, what, what's that like? And, and does the nature of loans change the cash coverage?
Hi, hi, Peter. I'm not sure exactly if I understand the question, but if you're asking, do we receive those transaction fees in cash upfront? The answer is yes, we do. Was that the question?
Yes, it's well, what's accrued and what's cash? It's like, simple as that. Yes. So it's cash.
Yeah, it's cash.
Okay, got it. Great. Thanks.
Okay, next question. You know, we're seeing the traditional banks competing now and margins coming way down. Is there a point at which their margin reductions impact on your business? And how should we think about that, the competition from traditional banking?
I might answer it first, but Mark, feel free to also pass comment. Look, what I would say is, I think bank pricing is not really the relevant factor so much for Qualitas in determining our win rate on investments that we'd like to make, but rather the level of risk appetite that the banks are prepared to take at any particular point in time. I think that my observation would be, Mark, feel free to pass comment here, but my observation, Peter, would be that we've probably been through a period where the banks have swung back on risk appetite. You know, we've seen them step up more in respect of transactions that perhaps one or two years ago we would not have seen them participate in.
But I would just make a couple of macro comments in regards to it. One is, it's, it's relatively sporadic, so I wouldn't say it's consistent behavior, certainly not amongst all of the four trading banks on a, on a regular basis. And perhaps the second one I'd make is if I sort of reflect on 18 years of running Qualitas, there's certainly been periods of time where the banks compete stronger. They've generally fill their books and their budgets, and, you know, they seem to sort of be less in the market at other times. So I really don't sort of read too much into, you know, a, a narrow period of time and a set of, a set of behavior.
But as you can see, it certainly hasn't held the Qualitas business back, and I think it reflects just the fact that you've got a very strong growing market in CRE debt. You know, the alternate lenders, such as Qualitas, continue to gain market share. You know, we think the alternate lenders are as high as 20% of the circa AUD 500 billion market that exists. And, you know, worrying too much about the odd deal or two that the banks might win in order to, you know, replenish their books and budgets, just doesn't really, you know, affect the Qualitas business too much. But I would, in summary, say it's more about their risk appetite than necessarily their pricing. Not sure, Mark, if you want to add to that as well.
I agree, Andrew. If you think about the Qualitas business, it's about raising capital from sophisticated investors and finding them the best relative risk-adjusted returns in the market from time to time. And so what that means is we look for areas outside of the sandbox within which the banks are looking to play. Now, that sandbox of the banks can move from time to time. They can fight themselves within that sandbox and compress margins, to your point. But ultimately, what we're looking to do is consider investment outside of the sandbox where they play. And so I don't get too concerned when they might be compressing margins in the areas that they play, because it's just not where we go looking for investment opportunity.
And to emphasize Andrew's point around them replenishing portfolios, I think that is happening, and we have seen them swing back a little in certain areas, but it's in areas that are the absolute blue chip of blue chip transactions in the real estate market, and they're really not deviating much from that. And so we certainly haven't seen it impact our prospective pipeline and deployment at this point.
Okay, so last one from me, just around your issue about appointing a Chief AI Officer. Are you going to be an AI beneficiary? And what are some of the use cases you've found, and how might that feed through to earnings and outlook? Greater use of AI.
Sure. Yeah, you're probably, you're probably raising my most favorite topic, that you, that you could have raised, and, and-
I like your AI.
Thank you. I mean, it's a topic that I could talk about for a very long period of time, but to keep the attention span of everybody on this call, I'll keep it relatively short. I'm very excited about it. I think that we are making good, solid gains in the area of AI. I feel that a lot of what we do involves a very detailed data collection, analytical work, triangulation of information that we're receiving, processes in terms of money flows within the business itself. I think there are so many parts to what we do that are capable of effectively having an agentic AI take over those processes, you know, under the watchful eye of humans who, you know, can ensure data quality and everything else.
So I think it does lead to very substantial efficiencies. I think like a lot of industries, that it'll be transformational over a period of time, and my job is to make sure that Qualitas stays on the front of that. And I see it very much as significant opportunity for us. Now, mainly also because of our size, Peter, and our, you know, the fact that we are still a relatively nimble firm, and therefore, we can move with these trends at some speed. And I think, Qualitas can really take advantage of it, and certainly, you know, I'd be happy to talk to you more offline about, you know, where, where I see those opportunities. But needless to say, I'm very excited about it.
Okay, thank you.
This does conclude questions via phone. I would like to hand back to the management team for closing remarks.
Thank you. Look, I just wanna thank everyone on the call, and, you know, we appreciate all the focus on Qualitas to our team at Qualitas. I do thank you all for the dedication and the excellence of what you bring every day to our firm. I wanna thank the investors in the continuing confidence that you have in our company, and on that note, I'll formally conclude the call. Thank you.
This does conclude today's conference call. Thank you all for joining us. You may now disconnect.