Good morning to all. Welcome to Eurazeo's Capital Markets Day. Christophe and I, and the whole team of Eurazeo, would like to thank you for joining us today. Let me first introduce the speakers of today. Beyond Christophe and myself, you will hear Sophie Flak, member of the Executive Board, who spearheads Impact and Digital; Edouard Guigou, Managing Director in our Mid-Large Buyout Strategy; Solomon Moos, in charge of Investor Coverage in Asia; David Yang, Head of Eurazeo China; Luc Maruenda, responsible for our Wealth Solutions; Agathe Bubbe, member of the Wealth Solutions team; and Domitille Doat, our Chief Digital and Tech Officer. Today, we will concentrate on Eurazeo's future and the way forward. Our ambition is to build a leader in the attractive private market industry, delivering steady earnings growth and superior return to our shareholders.
Over the two hours or so, we will first lay out the details of our value proposition as an asset manager. Second, we will show how we are shifting towards an asset-light business model. And third, we will explain our growth and profitability drivers. We will then be happy to take your questions. Before we set off, let us open by reminding you of all of Eurazeo's heritage as a leading European investor, as you've shown on the video previously. We consider this heritage as a springboard for our future growth. For 50 years, Eurazeo has created value through building and supporting European economic champions with global ambitions. For 50 years, we have enjoyed the trust of landmark entrepreneurs, blue-chip clients, and long-term institutional shareholders. And for 50 years, Eurazeo has consistently embraced change, transforming its business model successfully, all the time preserving its core skills.
Born as one of Europe's most influential investment holding companies, Eurazeo pioneered the listed private equity market on the continent 20 years ago. Today, now well-established as an asset management group, we are embarking on the next stage of our ambitious journey. The transformation of Eurazeo into an asset manager has been executed successfully, notably with the acquisition of Idinvest in 2018, and the expansion of our client franchise ever since. Third-party capital now represents roughly 70% of the capital we deploy. So the next phase of our development will be about acceleration and leadership. Before we dive into our long-term ambition and strategy for the years to come, we want to share with you our diagnosis. During the past month, Christophe and I have been focused on shaping our midterm strategy together with the top management of the company and our board.
We also have been focused on accelerating the transformation of the company. In a nutshell, there are fundamental strengths that we want to keep and nurture. We have a strong and loyal client franchise, including a well-developed wealth client base. We are diversified across asset classes, sectors, and geographies. We have developed a best-in-class ESG practice and an already significant franchise in impact investment, and we can count on a highly skilled workforce with an entrepreneurial mindset. We are working on four key dimensions as we think that they are essential growth enablers as we scale. Scaling requires step changes. It is not a linear process. First, client centricity. Client centricity requires to work on multiple dimensions, such as product structuring, client service, alignment of interest, and of course, involvement of the whole organization in the client interactions. We are talking about mindset, products, and processes. Second, operational excellence.
To scale, we needed to review our operations, simplify and clarify the organization, and foster our digital roadmap. Third, capital allocation. We have defined clear strategy guidelines in terms of capital allocation, consistent with our strategy. That led us to review commitments in the funds and exit from minority stakes, such as Rhône. Fourth, HR and culture. We have launched important projects to align internal policies with best practices, including remuneration, talent management, diversity, and inclusion. On culture, we are focused on three pillars: more collegiality, starting with us at the top, more autonomy and responsibility, and more transversality. As we accelerate our growth and position ourselves as an industry leader, it is important that we take stock of the broader environment in which we operate. Let me share two convictions. First conviction, the private market industry is set to grow significantly in the years to come.
True, in the short term, the uncertainty surrounding interest rates, together with a less favorable macro environment, translate into slower fundraising and lower M&A volumes. However, taking a long-term view, the case for private market asset classes remains strong, with superior risk-adjusted returns, large pools of capital still untapped, and a trend towards disintermediation that is only just starting to materialize on this continent. Our second conviction is that private markets, the private markets industry is undergoing fundamental changes. Clients are concentrating their capital on fewer platforms. This makes it essential for actors like us to offer deployment capabilities on the right scale and with a clear value proposition. Higher rates are here to stay. The winners will be the active PE players who pick the right sectors with a transformational value creation playbook.
Private debt, impact, and wealth are set to grow faster than the rest of the market. We expect consolidation in the industry, driven by the search for scale and higher operating costs. And finally, we view a strong capital base as a key for the future of alternative asset managers. So what is our ambitions going forward? Our ambition is to build the leading alternative asset manager across European mid-market, growth, and impact. This is central to what you are going to be hearing today, and Christophe is going to explain in more detail exactly what this means. To achieve this ambition, we have defined, as management, four major midterm strategic objectives. First, we will focus our value proposition. Second, we will accelerate our shift towards an asset-light model. Third, we will expand and scale our client franchises. And fourth, we will improve operational efficiency.
We believe success in executing our strategy will allow us to deliver steady earnings growth, generate attractive returns to our shareholders, and ultimately, close the valuation gap. I now hand over to Christophe.
Thank you, William. Focusing on a clear value proposition for clients is key to succeed in competitive markets. Over the years, we, Eurazeo, have developed a strong and diversified platform, positioned on the full spectrum of alternative asset classes, private equity, private debt, and real assets. Out of EUR 35 billion of total AUM, three quarters are in private equity, in which Eurazeo stands out by covering the entire range of investment strategy, mainly through buyout, tech, and secondaries. We also are growing player in private debt and in real asset, meaning real estate and infrastructure. As William mentioned, we are building a leader in Europe in the three categories in which Eurazeo has a competitive edge. This is a key part of today's message, as this focus is the backbone of our ability to generate regular outperformance.
First, the mid-market segment, with a uniquely strong expertise and a local presence that we can leverage. Second, growth. We back companies with structural growth, helping them to grow further and faster through a transformational approach. Third, impact. Our long-standing, science-based ESG approach is being leveraged to develop into the impact market, and we have already started the journey to be a leader in this fast-growing segment. So let me start with the mid-market platform. European mid, European mid-market is the right place for us to continue grasp investment opportunities. Europe is a large market, and its mid-market segment is exceptionally deep. What makes it unique is the 50,000 companies generating more than EUR 100 million in annual revenues. In this deep investment universe, many of them are hidden champions. These companies need alternative sources of capital as traditional funding from banks and capital market recedes.
Investing in the mid-market is attractive as it combines underlying potential growth with comparatively low competition. European mid-size and buyout funds have proven over time to be an attractive option for LPs, generating higher returns than large cap buyout, as you can see on the chart. Lastly, the GP landscape in this segment remains fragmented. Eurazeo's competition remains fragmented, with several smaller players, but very few sizable platform, and this represents an attractive opportunity for Eurazeo. We have chosen to position our investment strategies on the most attractive asset categories within this segment. In private equity, we operate in buyout and manage about EUR 11 billion AUM, from small to mid-large companies. We typically invest equity tickets from EUR 15 million up to 250. Secondaries. Secondaries represent almost EUR 5 billion of our AUM.
This growing trend in the private equity industry is rapidly developing within the mid-market. This strategy is currently very well positioned in a slower M&A environment, with investors looking for liquidity solution. Similarly, in the fast-growing private debt market, Eurazeo is positioned on the very attractive small- to mid-cap unitranche market, and we provide flexible financing for cash-generative companies backed by blue-chip sponsors. In real assets, we focus on a value-add approach, both in real estate and infrastructure. Our new sustainable infrastructure fund is a great success, having already reached its initial target before closing, before final closing. In mid-market, Eurazeo has a clear value creation playbook. Leveraging upon our specific DNA, we identify companies that have the potential to go global and help them to grow faster.
First, it starts with sourcing, with a deep and extensive network locally all over Europe, shared across the Eurazeo platform. This is how we identify those hidden champions. Our global presence also allow us, allows us to opportunistically identify companies in the U.S. and in Asia that can become European success stories. So how do we create value? How do we power better growth? The next point is that we bring Eurazeo's expertise to help mid-market companies in scaling up operation, adapt their business model when needed. Let's take one example, Aroma-Zone. Aroma-Zone is a do-it-yourself cosmetics business, and just after financing the company, we re-platform the e-commerce site, and we started the rollout of stores to accelerate growth with great success. Third, Eurazeo has a strong track record in transformational growth through Buy and Build, internationalization, as well as strategic repositioning.
The case of how we supported our portfolio company, DORC, in its developments in China is quite illustrative. DORC is a Dutch-based equipment company specialized in ophthalmic surgery devices. We drew on Eurazeo's local team, based in Shanghai since 2013 to accelerate its FDA registration in China and to hire a general manager. We also leverage our strategic partnership with the Chinese sovereign fund, China Investment Corporation, CIC, to fast-track growth. Fourth, we support our portfolio companies to reach best-in-class standards of management, ESG, and digital capabilities, allowing them to further improve productivity. The result of all this work with our portfolio companies is a growth in earnings. This is how Eurazeo generates sustainable outperformance, and this, this is even more important as we are now evolving in a higher-for-longer interest rate environment.
As you can see on this chart, about two-thirds of the value creation in our mid-market buyout funds stems from earning growth with limited dependence on leverage. We will give you a clear example of how this works with Planet. Planet is an Irish-based company, and Edouard Guigou, Managing Director in our mid-large buyout strategy, will now take you through that example.
Hi, I am Edouard Guigou, and I'm a Managing Director in the Mid-Large Buyout Eurazeo team. The Eurazeo value creation playbook is centered around transformational growth. We take quality companies with local reach, and we build champions with global ambitions. Let me take the example of Planet. When we bought what is now Planet in 2016, it was mainly a VAT refund service provider based in Ireland. Through M&A, repositioning of the offer, and international development, we were able to create a world leader in this category while starting diversification in payment. This first leg of the story led us to externalize the value creation of 2.5x cash and cash multiple in 2021 for our limited partners. 70% of the value creation was based on earnings growth. We then reembarked with new investors on the second leg of the story.
This time, we completely overhauled the business with the aim to create a leader in integrated payments, combining software with payments focused on luxury retail and hospitality merchants. In the past 3 years, our value creation drivers have been continuous investment in software and in the payment platform, cross-border M&A with five strategic acquisitions, and the cross-selling on an improved offer. Planet today has a much stronger and more diversified business model with a more global footprint. It also delivers best-in-class operating margins and free cash flow, which will translate in continuous value creation for our investors.
5, 4, 3, 2, 1.
There, you've just seen just one of many equally exciting stories in our portfolio. That's why Eurazeo is the go-to investor for hidden champions. Let me now turn to the second focus of our value proposition: growth. First, we invest in selected sectors benefiting from structural tailwinds. We have five sectors of choice: tech-enabled B2B services, healthcare, specialty financial services, new consumer trends, and climate transitions. We leverage this sector knowledge throughout the platform to identify the best market opportunities at every level, from seed to buyout, with sector specialists from all strategies sharing insight and networks. As you can see on the slide, on this slide, the underlying growth of our portfolio companies in buyout is strong, +10% per annum in the 5 last years, despite the COVID crisis.
That number would have been +13% if we exclude travel and leisure companies, which obviously were severely impacted in 2020. For companies in the growth equity portfolio, the annual growth rate has been close to 40% for the same period, and this 40% is a great transition to my next point. We, Eurazeo, are by far the leading tech platform in continental Europe. Together, our venture and growth equity strategies represent around EUR 8 billion of AUM, with over 20% growth IRR for each of the latest vintages. Our advantage here is that as a group, we are able to harness our resources, senior advisors, networks, market analysis, and more, to detect early disruptive trends and capture the best investment opportunities. We are convinced that the European tech innovative environment will continue to offer significant opportunities for us.
Europe is gradually catching up, becoming a significant tech hub with strong public and private support. Tech ecosystem are constantly evolving. It is the nature of innovation. But the pace, the pace is accelerating, with new trends emerging, like applied AI, green tech, impact tech, and others, which will bring significant need for capital and also new investment opportunities. Tech is a typical example of how we leverage sector expertise. Take a look at this impressive list of successful companies that we've backed recently. I'm sure you will recognize many of them. Our investment flywheel is powered by our expertise across the full life cycle, from startup to SMEs, unicorns, mid-cap, and international groups, from venture to growth to buyout. I will now hand over to Sophie Flak, Member of the Executive Board in charge of impact and digital, who will highlight the third focus of Eurazeo: impact.
Hello, everybody. As expressed by Christophe, impact is at the core of our strategy. I'm very happy to be here today to share with you why and how impact investment is a key driver to profitable growth. At Eurazeo, we are eager to make a difference while seeking growth and profitability. Impact is a purpose to generate both positive financial and societal results. It goes well beyond ESG, which is about de-risking and making our company future-proof. The transition towards a low-carbon economy and sustainable lifestyle is an imperative. It also presents us with new investment opportunities. Eurazeo has already EUR 5 billion of assets dedicated to sustainable products and services. These EUR 5 billion are spread across 150 portfolio companies.
Let me highlight a few in which we very proudly invested, such as Vestiaire Collective, a leading second-hand tech platform; 1KOMMA5 , the one-stop shop for renewables; M2i, a biocontrol enabling low-carbon agriculture; or Cranial Technologies, dedicated to infants' health. Those investments sit either in our generalist funds or in one of our seven impact funds. Seven impact funds which target high performance at par with their non-impact peers. Now, let's turn to the second point I want to share with you today. Why do we have such an appetite for impact? First, let's look at the market dynamics. The environmental crisis is generating a massive need for investment. It is evaluated up to $3 trillion. A quick glance at the storms, droughts, fires, or water shortage is enough to convince us all of the urgent need for adaptation and transition.
It also translates into massive public fundings, up to $1,500 billion, and a set of very constraining regulations, which will make the transition, hence impact investments, unavoidable. There is a growing client appetite. Our clients are directing significant flows of capital to impact. Over the last 15 years, impact funds AUM have encountered a tenfold growth. This trend should accelerate, with 85% of all LPs claiming to maintain or increase their impact allocations. At our level, at Eurazeo level, this trend is already there. Our sustainable infrastructure fund is about to exceed its initial target of EUR 500 million. The second vintage of Smart City has become one of the largest European venture funds for climate. Back to my question: Why do we have such an appetite for impact? Simply because impact drives return.
With Christophe, William, and the teams, we are convinced that impact has a strong, profitable growth potential for Eurazeo. This will happen through a dual course of action: scaling our existing funds and diversifying our offer across asset classes. Our goal is to harvest the impact market potential, and our next move is the launch of an impact buyout fund. Impact investing requires a very specific skill set. I've been working in this space for 25 years and advising the European Union on sustainable regulation. It's very clear: developing impact product is not something you can improvise. At Eurazeo, we have carefully crafted this expertise over the last 20 years, and we are recognized for it. The market potential is not a passing trend. It is here to last and accelerate. Our teams are impact-savvy and eager to make a difference. The momentum is unique.
All the ingredients are united for promising AUM and offering growth, hence returns to you, our shareholders. Now, I'm handing back to William, who is going to go through our second strategic objective.
Thank you, Sophie. I said our second objective is to accelerate the pace towards an asset-light business model. Let's be clear, having a strong capital base is a competitive advantage. It allows us to align our interests with our clients, who are increasingly requesting more skin in the game by alternative asset managers, to accelerate the organic development of asset management through the seeding of new vintages or the warehousing of assets. That is particularly relevant with the wealth franchise, and it provides us with a means to participate in the industry consolidation. Nonetheless, our balance sheet has been somewhat overused in the past, based on a hybrid approach of the business model. Our goal is to optimize the use of our capital, which will be considered as a scarce resource.
Going forward, balance sheet commitments in the Eurazeo funds will be used for the sole purpose of generating competitive advantages as an asset manager. Right-sizing our balance sheet and commitments in funds will allow us to generate significant excess capital in the next 4 years. Our priority is to return the majority portion of this excess capital to our shareholders. Let's do the math. Where do we stand? First, the net value of Eurazeo on-balance-sheet portfolio amounted to EUR 8.5 billion at the end of Q3 2023. This corresponds to the market value of our balance sheet. Invested capital in our funds represented an amount of about EUR 6.6 billion. Change in the invested capital amount is a result of new deployment at cost, less divestments. It reconciles with the market value of the balance sheet by just adding value creation.
Balance sheet, as an investor, accounts for roughly 30% of the committed capital in our funds, with 70% coming from third party. Going forward, we will steer the balance sheet investment in the funds according to the following two key principles. First principle, our objective is to reduce the balance sheet commitments in our funds to a maximum of 20% in aggregate by 2027, with a long-term objective closer to 10%. We also want to be more agile in the way we use capital. That's the second principle. Concretely, it means that we will actively manage our balance sheet through potential secondaries over the lifetime, the lifetime span of a fund.
Our intention is to downsize the invested capital amount from the balance sheet by about 30% over the period 2024 through 2027, taking into account, of course, the exit schedule. So let's talk about the exit schedule. We talk about invested capital from the balance sheet into our fund. This is the first driver behind excess capital. The second key factor driving generation of excess capital is coming year, in the coming years, is realizations. Our target is to sell 25% or more of our portfolio per year in the coming 4 years. This is consistent with our historical average, which you can see on the page, of 24%. In a nutshell, we will generate about EUR 4 billion of excess capital through 2027.
This will be the result of around EUR 7 billion of realizations and other positive cash flow events over the period 2024-2027, less reinvestments amounting to around EUR 3 billion over the same period. We intend to use 60%, close to 60% of this excess capital for shareholder remuneration, and keep a buffer of EUR 1.7 billion, which will also give us strategic flexibility. Concretely, what that means is that we will be returning around EUR 2.3 billion of capital to our shareholders in the next 4 years. This will be done through a combination of regular increase of the ordinary dividend on the one hand, with a significant share buyback on the other hand.
The ordinary dividend should represent roughly EUR 8 million over the period, with already a planned increase of 10% of the dividend per share in 2024, and a steady increase thereafter. We will allocate EUR 1.5 billion, which is more than 30% of the current market cap, to buying shares, with a doubling of our continuous share buyback program from 2024 onwards, that will reach EUR 200 million from EUR 100 million previously. And in addition, we will consider blocks of share buyback, ramping up with realization. Very importantly, we intend to continue the buyback to buy back shares as long as a discount to fundamental value, i.e., the sum of our portfolio plus the market value of our asset management business persists.
I will now leave the floor to Christophe, who will guide you through our plan to grow and expand our client franchises. To you, Christophe.
Thank you, William. Let's now turn to how we expect to grow our client franchise and accelerate the development of our asset management business. Eurazeo has the potential to scale across all strategies. We are working on two major growth drivers. First, we want to expand further our base of limited partners in key geographies where we can increase our share of wallet. Second, we are replicating the success of our French wealth platform in other major savings market in Europe. Let's start with our strong existing client base. We have a large and loyal institutional client base with roughly 350 LPs, more than twice the number we had 5 years ago. Equipment rate is high, which reflects our ability to cross-sell our funds. Our top 20 clients have invested in nine of our funds on average.
Our wealth management franchise is a key differentiating factor, which we have developed over the past 20 years. It's a B2B2C business model. We have access to more than 120,000 private individuals through more than 25 blue-chip distribution partners, insurance companies as bank, as well as 350 family offices and wealth advisors. Let's move to institutional clients. We have significant potential to increase the weight of some of key geographies. Our AUM is skewed toward France, our historical market, and remains under-penetrated in key pockets of capital, such as Northern Europe, Middle East, Asia, and North America. Regarding our client type, almost two-third of our LP base is composed of insurance companies, fund of funds, and investment managers.
We therefore see an opportunity to further diversify our relationships with other types of investors, like pension funds and sovereign wealth funds. The majority of our annual fundraising is now secured internationally. Year to date, 64% of our institutional fundraising has come from international clients and this compares to only 37% on average between 2018 and 2020. Our truly pan-European investment capabilities, our ability to strike partnerships globally, the quality of our operations, and our local presence in 11 countries are all key enablers to spark new client onboarding. A case in point is Asia, where we registered significant successes. To illustrate this, I would like to share with you a word from Solomon and David, our colleagues based in Seoul and Shanghai.
Hi, my name is Solomon Moos, and I cover the growth of our Asian limited partners at Eurazeo. With a local presence in Asia across three offices, Shanghai, Seoul, and Singapore, Eurazeo has built the right framework to service and develop locally our LP base in the region. We have been continuously increasing the number of new investors and amount of asset managed, welcoming key sovereign wealth funds, insurers, pension funds, and even blue-chip corporates from the region. Eurazeo's unique investment platform, dedicated to European mid-cap companies, is a clear differentiating factor in this region. Asia is a large and complex market, and investors in each region show different risk-reward profiles. For example, in today's high-interest rate environment, Asian investors are favoring yield-generating strategies. Here again, Eurazeo's platform allows us to provide to each and every investor the right strategy for them to achieve their objectives.
We have also been able to fully utilize the synergies of our platform by helping investors who invested in one of our investment strategies to get exposure to another investment strategy or asset class. One recent illustration of these synergies has been with the Korean Sovereign Wealth Fund, which invested last year in one of our strategies and has committed this year to another one. We are very excited about the future growth and acceleration in the region, and David is going to highlight our achievements in China.
Hello, everyone. I'm David Yang, the head of Eurazeo China, based in Shanghai. 10 years ago, Eurazeo has decided to build its office in Shanghai as the very first international presence. Over the years, we've brought over 20+ portfolio companies into China, build their presence, open a market over there. In 2019, another chapter opened. CIC, China Investment Corp, one of the largest sovereign fund, has decided to work together with Eurazeo and BNP to build ECA Fund. In the past 4 years, we continue our successes on this even bigger platform. We have created solid performance operationally as well as financially. Our successes has caught the eyes of other investors, such as New China Life, as well as Taiping Financial. We are very confident about our ability to continue our successes in this massive market.
Thank you, guys. Let's now take a closer look at our wealth franchise and how we want to take it to the next level. As of today, wealth represent 17% of our third-party AUM, a percentage that is already well ahead of most of our peers. Our wealth fundraising has been growing by 30% per annum on average over the last 5 years, as we have been onboarding new distribution partners and as private clients have been increasingly willing to invest in private markets. In 2023, wealth management should represent between 25% and 30% of total fundraising for Eurazeo. The wealth market is bound to grow strongly in the next years, faster than the institutional market, which is why you see many private market players willing to create a dedicated franchise.
Yet, it's also a market with high barriers to entry, where a long-standing track record is essential, and it requires very specific skills. Looking forward, we see a great potential in expanding further our franchise in three major saving markets in Europe: Benelux, Germany, and Italy. This will be done by reinforcing our presence on the high-net-worth segment with higher tickets, leveraging our existing partnership with pan-European partners, capitalizing on our institutional coverage to sign new partnerships outside of France, and by using the new digital platforms like Moonfare or iCapital to accelerate our distribution capabilities. All in all, we expect that wealth AUM could represent close to 20% of the third-party AUM by 2027. To illustrate this, here is a short video from our wealth team and a few words from one of our major partners.
... Hello, I am Luc Maruenda, Head of Private Client Solutions at Eurazeo.
I'm Agathe Bubbe, Director in our Wealth Solutions team.
With the launch of our franchise back in 1999, our team stands as a pioneer of wealth management in Europe, and is the first French player to offer private clients access to private market. Thanks to the quality of our products, our engineering, and the benefit of our platform, we can offer to private clients the same investment opportunities that we offer to our LPs, with an extensive range of solutions adapted to their needs and constraints. We expanded and reached our franchise through the years. Today, we are happy to make all Eurazeo investment strategies accessible to private clients in private debt, buyout, growth, secondaries, and real estates. We are proud of our achievement, but we are strongly convinced that we can go beyond and continue to expand our presence to better direct private client savings and increase our value proposition.
Our journey to further accelerate our development is not a one-character story. In recent years, we've progressively embarked key stakeholders and partners to penetrate the market deeper. We signed several distribution partnerships with Tier one banks and insurers like CNP, La Banque Postale, and Boursorama. But also with digital platforms like Moonfare, and more recently, iCapital, which will allow us to replicate our success abroad and penetrate new markets such as Benelux, Germany, and Italy. But to illustrate those achievements, we would like to let one of our key partners, Stéphane Vidal, CEO of Primonial, share with you its experience with us.
We start to work with Eurazeo in 2019. We decided to design and to launch together the first private equity fund, quite institutional and bi-monthly liquidity. It was such a success that we decided to launch a new one, Primo Pacte 2, in 2022. We built this partnership with Eurazeo for two main reasons. First of all, is that Primonial is known to be a quite innovative company, working every day on innovation, and we were quite aligned with Eurazeo on that subject. Private equity is a very important asset class for our customer, normally dedicated to institutional customers. We wanted to be able to propose to our customer an asset class with low volatility and very good visibility on the underlying assets.
Primo Pacte was the first step in the relationship between Primonial and Eurazeo, and we are quite happy with that. Eurazeo is known to be an investor in mid-market, but able to create value, which is very important for us and for our customer. Eurazeo has an expertise in wealth management, customers, and it was a base very important for us to build this partnership. I think we found the right partner.
Thank you, Stéphane. No doubt, we too found the right partner. To meet our ambitious objectives, we will further strengthen our commercial organization. We have currently 50 professionals dedicated to sales, marketing, and client service, an area that is increasingly critical. We are reinforcing our teams to better cover Northern Europe and the Middle East, Asia, and North America with selected high-level new hires. Let's use private debt as a good example of how we scale our funds. We compare here our most recent private debt fund, Eurazeo Private Debt VI, to Eurazeo Private Debt IV, which was launched in 2016. With international inflows multiplied by 4, the institutional fund grew massively its third-party capital and announced, just this morning, at closing at EUR 2.3 billion, above its EUR 2 billion initial target.
In addition to a broader and more international institutional client base, the fund benefited from inflows of EUR 900 million from wealth management through our evergreen programs. And lastly, the balance sheet provided a commitment of around 10% in the institutional fund to show, as you know, strong alignment of interest with our clients. There you see how we are expanding our client franchise. But equally important is how we are improving operating efficiency. Therefore, I will now hand over to William to explain this important driver of our success.
Thank you, Christophe. Let's now focus indeed on operational efficiency. Let me start with highlighting the scale benefits of being a platform. Being a platform provides clear advantages that we have discussed earlier as regards deal flow origination, and the ability to help our investment grow.... But it is also essential to foster operating leverage. Now, a few examples you can see on this page. Today, we operate a network of 12 offices globally, which have the capacity to absorb future growth on a local basis as we continue to internationalize. All support functions pertaining to investment are now centralized. This includes capital markets, fund structuring, legal and tax. The same applies to ESG. Another example is client coverage, Christophe just mentioned it, marketing and client services capabilities, they are all coordinated centrally. And finally, all the transversal corporate functions operate across the group.
They are now focused on improving their operating model to absorb future volumes. A fundamental driver of improvement, of margin improvement, is obviously our ability to grow our sources of revenues faster than our headcounts, and that's precisely what you see on this page. From 2018 to date, our headcount pace has grown significantly to accompany our growth, but at a slower pace than our fee-paying AUM, particularly the corporate and support function. We intend to maintain that discipline going forward, and that will logically result in scale benefits. That's what you can see on the page, highlighting the free margin improving gradually. The combination of scaling and monitoring our cost base has led to steady margin improvement. Our FRE margin has reached 33.5% in H1 2023, up from 25.8% 5 years ago.
I will come back to future targets in the financial section. We have identified four key priorities to improve further our operational efficiency. The first one is about simplification. We have reviewed, I said at the very beginning, our organization to clarify roles and responsibilities, and are in the process of merging our main management companies, pending regulatory approval. This involves also harmonizing HR policies across the group and some key processes. Second, we are developing a tighter approach on cost management under the stewardship of our CFO, Laurence Branthomme. As a case in point, we have reviewed entirely our budgeting process and are now rolling out a new approach to expense management. Third, we continue to invest in our operations. A seamless process is key to client satisfaction.
An effective and efficient operating model is also key to our capacity to absorb future volumes in a cost-effective way. We have put our back and middle offices in France and Luxembourg under a unified supervision, and we will deploy in the next quarters a new operating model that includes enhanced automation and mutualization. Fourth, as Domitille Doat, our head in digital and tech, will explain, we believe technology will be a key lever of our future development.
Hello, I'm Domitille Doat, the Chief Digital and Tech Officer of Eurazeo. Today, asset managers are facing, among other challenges, a significant data inflation, and artificial intelligence is an accelerator to improve client satisfaction and productivity. To maximize those potential gains and make the most of these ongoing trends, we at Eurazeo have invested in a modern cloud data infrastructure, and we point at building automated data flow as much as possible. We are working under an agile model with external expertise and internal capabilities. Our first step in AI-driven project is a Eurazeo AI portal. The portal offers access across our corporate function, investment team, and companies to generative AI algorithm, boosting productivity and automation. Let me show you a concrete example with AI management for ESG questionnaire.
We all know the exhaustiveness of those questionnaires, where over 300 questions, sometimes more, must be addressed per fund and per company. You see in the current example that we drop the initial file provided by partners and LPs, and our validated data populates the answers in real time. In this case, 80% of the answers are auto-filled, and humans concentrate on the remaining and most sensitive ones. We are speaking here of double-digit productivity gains under the control of humans. In addition, our digital roadmap, as you see, aims obsessively at increasing client satisfaction and NPS with, for instance, advanced online KYC onboarding for both LPs and wealth clients, personalized fund reporting, thanks to automation, to absorb the coming growth in volumes. In summary, Eurazeo tech capabilities are data-driven, are proud of it, and we are powering better growth through data and AI.
... Thanks, Domitille. Let's now move to our midterm financial outlook. As a reminder, our PNL has been simplified with the implementation of the IFRS 10 accounting norm, which was a result of the qualification of Eurazeo as an investment company from the 1st of January , 2023. We now report on two business pillars. First, asset management, with fee-related earnings and performance-related earnings being the key components of the contribution. Second, the investment activity, where the main driver is a change in fair value of the portfolio. Other components of the PNL includes, as is customary, non-recurring items and income tax. Let me start with asset management.
We expect the average annual growth rate of our third-party fee-paying AUM and AUM to outpace the expected market growth over the forthcoming 4 years, due to wallet share gains on international LPs and the growth of our wealth franchise channel, as Christophe highlighted before. Balance sheet AUM are expected to go down as we implement our new capital allocation policy. As a reminder, our AUM has been rebased to reflect the exit from Rhône earlier this year. Rhône represented EUR 2.4 billion of AUM at the end of H1 2023, and EUR 1.3 billion of fee-paying AUM. Dynamic fee-paying AUM growth, combined with an expected stable yields through the period, will drive steady recurring revenue growth. Our third-party management fees are expected to grow at around 15% per annum between 2023 and 2027.
This includes the expected revenue growth of iM Global Partner. iMGP revenues amounted to EUR 76 million at the end of 2022. On the contrary, management fees coming from the balance sheet are expected to go down over the period, in line with AUM. As regards fee-related earnings, we confirm our midterm outlook of a margin in between 35% and 40%. We expect performance fees from third-party to grow significantly in the coming years. Performance fees are currently low due to the weighted average duration of our third-party AUM and the fact that we did not buy the right to carry for the former funds of Idinvest back in 2018. As our funds mature and we materialize gain, our performance fees should represent above 10% of our third-party revenues through the cycle, which is closer to industry standards.
Let me now turn to the PNL of the second component, the investment company. We expect value creation to be about 12%, which is in line with our historical average. The mark-to-market evolution I referred to is obviously intrinsically linked to the valuation of our balance sheet portfolio. We have a very diversified portfolio, with a net value of EUR 8.5 billion. This portfolio is invested in more than 70 underlying assets. 60% is buyout, and the largest asset in the portfolio represent no more than 6% of the total value of the portfolio. We use a consistent, and we believe, prudent approach to valuation based on a robust and audited process.
One of the consequences of the IFRS 10 norm application is that our statutory auditors now run a full audit on the valuation, notably assessing the robustness of our processes and controls. In buyout, we use average historical multiples applied to last 12 months EBITDA in most of the cases. We then cross-check with spot multiple, and the vast majority of the multiples we use are at, or more frequently so, below spot multiples. In growth, we apply discounts on the latest rounds of financing. The discount on the latest round that we applied today is 25% on average. Finally, our real estate holdings, which are, for the most part, either value-add or hospitality operations, that's a very important point, have already been adjusted to reflect higher cap rates. Finally, proof points.
Let me remind you that Eurazeo has a strong track record of selling assets at or above the latest value in the book. In aggregate, the average weighted premium to the latest mark is about 25%. 2 days ago... You've seen that we've been able to sell Efeso in our small buyout business at a premium of 10% relative to the latest mark. It is a very good operation, 3x cash on cash, 24% IRR. To finish, let me summarize our financial outlook through 2024-2027. Management fees are set to grow steadily over the period, with 15%, +15% on third-party fees and a decrease in balance sheet fees stemming from our decision to downsize the balance sheet. We confirm our target of a net fee margin in between 35% and 40% through the cycle.
We expect third-party performance fees to reach above 10% of third-party revenues. Value creation in the portfolio should amount to 12% per annum, in line with historical average. And last, as we discussed earlier, we will return to shareholders approximately EUR 2.3 billion in the next 4 years, of which EUR 1.5 billion in the form of share buyback. Over to Christophe for the conclusion.
Thank you. Before we open up for your questions, there are three things I want you to retain from this presentation as equity investors and shareholders. First, we are building a leader, a leader in the attractive private market industry. Second, we will deliver steady earnings growth thanks to revenue uplift and disciplined cost management. Third and last, we will return significant capital to shareholders, accelerating our shift toward, towards an asset-light business model. Thank you for your attention. Sophie, William, and I, we are now open for your questions.
Thank you. Ladies and gents, if you would like to ask a question over the telephone, please signal by pressing star one on your telephone keypad. That is star one for your question. Our first question comes from Arnaud Giblat, BNP Paribas. Please go ahead. Arnaud Giblat, your line is now open. Please go ahead and state your question.
Thank you. Just one quick question, please. Could you tell us what line of sight you have on the EUR 7 billion of exits? Is there a lot of processes there that are engaged? And could you perhaps tell us how these divestments will spread over the next 3 years? Thanks.
Thanks, Arnaud, for this question. This is a 4-year plan, what we're presenting today. So obviously there are processes which are not initiated as of yet because they will be initiated in 2024, 2025, 2026, and some in 2027. So this is reflecting the structure of our portfolio, particularly the on-balance sheet portfolio. As I said before, 60% of our portfolio is buyout, so there is a strong gearing towards a buyout in this sales realizations that we are contemplating. Plus, there is some real estate and obviously some growth-related assets, but the bulk is fundamentally in buyout.
As we said during our Q3 call, we have a number of processes that are ongoing, and we expect to pick up in realization as early as H1 2024. So that's all what I can say at this stage. And obviously, we will start other processes in the course of 2024. I mean, allow me not to be more detailed, but talking about M&As is never a good thing on a public call.
Thank you.
Thank you. Our next question comes from Nicolas Vaysselier of BNP Paribas. Please go ahead.
Hi, good morning. Thank you for the presentation. I'd like to come back on the guidance you give for AUM and third party management fee growth. The first thing I'd like to know is what kind of revenue growth is embedded into these expectations coming from iM Global? And secondly, you haven't given a lot of line of sight on fundraising and what's in the pipeline. So it's pretty clear to me what's currently in the pipeline for the vintages you are raising, but could you give a bit more clarity on the sizes of the funds? And roughly speaking, as a run rate, yeah, what's the run rate in terms of fundraising embedded into these growth expectations for management fees and AUM? Thank you very much.
... Thanks, Nicolas, for your question. The beauty of being co-CEOs is you're going to have a co-answer. So I'll start with i M Global, and Christophe will talk to you about fundraising going forward. i M Global, you should assume that it is embedded in the 15% third party, so you should assume this is a very consistent growth pattern than for the rest of the third-party revenues. And, regarding the pace of fundraising, well, first, you've seen recent successes. We announced the first closing of Capital V at EUR 2.3 billion. We announced also that our infrastructure fund is in the good momentum, is already above initial target at EUR 500 million. And, the latest news this morning was private debt.
So in total, in a market where statistics are showing between -30 or maybe -35% of decline in fundraising in 2023, we are expecting close to our target of EUR 3 billion in 2023, and this is better than last year. Growth, again, will come from more internationalization, more wealth management.
Great. Thank you very much.
Thank you. And as a brief reminder, that is star one, if you would like to ask a question today. And we're now moving on to a question from Alexandre Gérard of CIC. Please go ahead.
Yes, good morning, and thank you for taking my question. I had one question regarding your corporate development strategy. I would have loved to have some more details on the type of companies you're targeting in which region, in which strategies, the size of the companies you are targeting, and what AUMs could you add through M&A until 2027. For example, so the type of multiples you would be ready to pay for these companies. And the last bit of my question relates to MCH. I had in mind that you would give us some more details on what you intend to do with that stake. Now, can we have some more details on that, please? Thank you.
Thank you, Alexandre. I'll take this one. Remember, what we're presenting today is fundamentally an ambitious organic growth strategy. We consider that with the product suites we have, the positioning we have, and the capacity, as Christophe mentioned, to increase our share of wallet with that value proposition, both with institutional clients and with with individual clients, we can have this double-digit growth I've mentioned before. And in relation to that, the way we want to use capital, as mentioned, is more proactive, but with insight, serving first our shareholders. Now, I'm sure you've seen the EUR 1.7 billion related to what we call strategic flexibility. It means that we also consider that Eurazeo can be a consolidator, and for two reasons.
One is, as you highlighted, accelerating the pace at which we rebalance the business model towards a more asset-light-driven operation. And because we take stock of what's happening, including yesterday, there was the announcement of an acquisition in the U.K. in real estate. We all know the recent announcement of the past 2 months from various co-consolidators. So clearly, this could be part of the roadmap, and we think we have competitive advantages here because we can offer a strong value proposition to the people who could join us, given our capacity to operate as a platform. And we also have the means, cash and shares. We are not at the stage where we can say that we are in discussions, otherwise we would tell you more.
But to your point, we would only consider M&A if that speeds up our leadership where we have defined it. So rather European focus in terms of investment, rather more international than we are in terms of LP base, and helping us speeding up the pace at which we scale some of our strategies. As Christophe highlighted, we consider that almost 90% of our funds have a capacity to scale going forward. So somewhat it could be useful to go to M&A if we can go faster. And I won't talk about multiples other at this stage because, you know, it's obvious that it's a bit too theoretical for us today. But we are very mindful of the fact that transactions have repriced in the industry, which is a good thing, we think.
And, you know, among our criteria, I mentioned culture, capacity of integrating. I mentioned, obviously, a complementary LP base. I will mention a third one, which I'm sure you will find quite relevant, which is that it has to be earnings accretive. I'll be much shorter on that. Yes, we will come back in the next months with regards to the way forward and MCH. The reason why we don't announce anything officially today is because the agreement set forth that the parties will have to reach an agreement in the first half of 2024. So discussions are ongoing. This is not a needle mover for the group, if I may say so.
I mean, it's a great company, MCH, but, you know, whatever we do, it doesn't change much our metrics. I think you've heard from us that, in any event, we don't like to stick to minority stakes, and we also think that, you know, we can do well in organic development across Europe. So you have some clues of where we may end up.
Thank you.
Thank you. And as a reminder, that is down one for your questions via telephone. And next, we have Christoph Greulich from Berenberg. Please go ahead.
Yeah. Good morning again, it's Christoph. Thanks for taking my question.
I'm sorry, we have a technical problem, so I-
I can't hear you.
So we can't hear your question. Would you mind repeating it? No, no, it's not better. Maybe we will receive it-
I will... If it's okay, we were trying to fix this problem, and I will ask the question from the web now.
Okay.
Until we fix that. So I have two specific questions, maybe on the portfolio first. One question is on the growth portfolio. We talk about the 25% discount that-
Mm-hmm.
... we have overall on the latest rounds of financing for those growth companies. The person would like to know more about how we got to this 25%, and if we would consider selling part of this portfolio on a secondary basis.
You know, as Christophe said, we have a very deep and large, diversified growth portfolio, and as Christophe said as well, there are companies with a very dynamic growth pattern. You know, he mentioned about 40% growth between 2018 and 2022. And if you remember, with the figures we mentioned in Q3 2023, you know, we said the bulk of the companies are still growing at a pace of in between 25% and 40%, depending upon the company. So with a few exceptions, and there are always exceptions in a very diversified portfolio, we have companies with a good operating pattern and well-funded.
In aggregate, the cash they have on the balance sheet, the cash runway is 3.5 years. So there is no rush. The fact is that the markets are less dynamic, particularly the equity markets, for exits, and this is why we've been very cautious on applying discounts, because the rationale is what? The rationale is when the last round has been, it starts to date, and there's no further data point, you know, we just apply some systematic systemic discounts. And then, you know, we decide on the companies, depending upon the subcategories they operate into. The more B2C you are, usually the higher the discount.
The more B2B leadership you have and the higher the growth pattern, the less of a discount. So that the rationale. By the way, this is something that is starting to get more common practice in the market. We know from other partners, co-investors in our fund. So, you know, we think, you know, so far, we feel very comfortable given the growth pattern, the cash position of the companies, and one has to say, the positive evolution of multiples in the tech space across the board that you've seen this year. I think with 25%, we are pretty safe. Now, could we consider secondaries for any portfolio? As we said before, we can consider a more flexible approach.
What we don't want to do is what sometimes has been overused, which is to do secondaries for the purpose of raising primary, which comes at a hefty discount. But, you know, secondaries for the sake of having more breathing room in the capital management, is something we could consider. So for the right price, given the quality of the assets, you know, we would consider secondaries. Now, I speak comfortably about that because, you know, we are not about to announce any pertaining to this portfolio. But, you know, clearly there are parties who are interested, proactively approach us, on some lines which, you know, they are champions in their sector. And I'll stop there because obviously, I don't want to go further.
Another maybe specific question, very specific question then, on the portfolio. What percentage of the portfolio is invested with companies that are more than 5 years ago?
Very, very simple. The answer is 15%. It is a fairly young portfolio. You have close to 50% of the portfolio, which is invested at or below 3 years, of which close to 30% is a year, which, you know, bodes well for future value creation. And then you have another bulk, which is in the 4-5 years category. I mean, obviously, that will probably be where we will realize most of the assets in the next 2, 3 years. So there is not much. And if you were a bit beyond the 5 years, you know, take 6 years as a bar, you would go down to 5%.
Thank you. Then, we have a few questions on the buyback. One of the question is, given the size of the buyback, what do you think is going to be the impact on liquidity? Do you fear any impact on the liquidity? And, do you know if any reference shareholders might be planning to sell in a potential buyback? Another one on the buyback, so I continue. What do you think is a normal discount to NAV, referring the slide where we talk about continuing doing the buyback until we have no discount? But that's the first two questions.
Listen, on the buyback, I think, you know, we will say with Christophe and the whole management, as with regards to a normal discount, you know, we feel that the zero discount should be the right answer. Now, as your question relates to, you know, how long would we execute on buybacks, there is no science. If you look at the long-term discount of the company, we are closer to 35%. Now, when things were in a more positive market environment from an equity market standpoint, discount has decreased to 20%-25%.
So I'd say, you know, when we reach that threshold, we will start to think whether it's relevant to slow down, but, you know, there is some room there to get there. But you would expect from us, fundamentally, that we say that, and we think, which is more importantly, that our duty is to reduce the discount fully. With regards to the liquidity, this is something obviously that, together with Christophe, Pierre Bernardin, our head of IR, whom you are listening to raising the questions, and the board, and the Executive Board, and the Supervisory Board, we thought through that one very carefully, because you don't want to have drawbacks stemming from a good idea.
Now, this is how it's been calibrated. It's been calibrated based on what we think we need for our businesses versus what we can give back to our shareholders, and also taking stock of this liquidity. If you assume that we are--we fail in terms of reducing the discount, and yet take into account some value creation over time, then, you know, we would drive the liquidity according to our calculation by about 20, 25%, which obviously can't, can't be a, an objective, but, you know, is, is fairly reasonable, given the fact that Eurazeo today, with 11, 12 million a day, in its particularly scope of peers, has a decent liquidity. Same applies to a comparison with SBF120 mid-market, French base.
Now, all what we are doing here is meant to help reducing the discount and improve the share price. Logically, what can happen in this context, and what is our objective, is that instead of reducing the liquidity, it will increase liquidity, liquidity being a function of volume times price.
There was part of the question on the shareholders. Are we organizing this to provide liquidity for shareholders? The simple question is absolutely no. We are obviously—We are doing it because we perceive, as a management, that it's a good move toward an asset-light manager, but it is not meant. This is not asked by specific shareholders.
Maybe last question before we go back to the phone. Still on the returns, what about the split between dividends and share buyback? What-
Thank you, and our next question now comes from Geoffroy Michalet of ODDO BHF. Please go ahead.
Thank you, gentlemen, and sorry for the technical issue. Actually, you answered the question I sent. Thank you very much.
Okay.
Thank you, Geoffroy .
Thank you.
Thank you. Sorry for that.
So Pierre was-
Pierre?
I was just saying, sorry, how did you calibrate the dividend?
Dividend.
And, you know, what do you see in terms of why this split between dividend and share buyback? Maybe one of the question is, why not more dividend rather than share buyback?
I'll comment how we calibrated it. But before I do that, let me say that talking about investors, if there is one thing we've heard in the past year or so by institutional shareholders, because you mentioned reference shareholders or family shareholders before, but you know, let's start with institutional shareholders, is that you know, there is 100% consensus that we should do more share buyback. So you have to you know, be mindful of listening to your shareholders. They are all telling you that should you do more distribution, they want more share buybacks relative to other form of distributions. Now, the distribution on the ordinary dividend, we think has to be consistent with what the earnings of this company will be in the future.
As we grow, we will increase the earnings base upon which we can distribute a recurring dividend. That's what we computed. We consider that a steady pace of increase, starting with a dividend per share of EUR 2.2 that was distributed in 2023, pertaining to 2022 earnings, is something that is compelling, in terms of ultimate payout ratio down the road, in 3-4 years. That's the way we rationalize it because we consider ordinary dividend has to be gradually, has to move gradually towards being based on cash flow from our recurring activities.
We have one last question.
Our next question now comes from Oliver Carruthers from Goldman Sachs. Please go ahead.
Hi there. You hear me okay?
Very well, thank you.
Great. Thank you very much for the presentation. I've got two questions. So the first one, you know, two of the objectives you set out today feel like they should be pretty closely related, so scaling your impact fund, and broadening your international LP base. It feels like the private markets industry is still pretty early in finding its feet, on impact fund strategies. But, you know, some of your peers have obviously come to market with relatively large, even first-time funds here, and you've obviously been doing this for a while. Can you give us a sense of how important scaling your impact strategies is for your management fee growth targets? And how much of that could come from broadening your LP base internationally here? So that's the first question.
The second question is, one of the big topics in the alternative asset management industry at the moment is thinking about FRE compensation relative to performance-related compensation for employees, in terms of balancing talent retention, aligning incentives, but also maximizing shareholder benefits over the medium term. You know, as you go through this transition from a private equity investor to a third-party asset manager, how are you thinking about that balance between FRE compensation and performance-related compensation for the group? Thank you very much.
One more then, you know, the projection of AUM, you know, that encompass, obviously, what we think we can generate with certainly a prudent approach in terms of scaling existing impact funds and potentially, although with some consciousness, new impact funds. But I'd like Sophie maybe to highlight what she thinks is the dynamic and the competitive advantage we have there, because we have an experience already.
Yes. Thank you, William. So, what we're seeing is that, when there is this trend on the market where LPs mostly want to stay with their, existing GPs, definitely impact is a door opener. And we have many prominent, clients telling us, "For impact, we really are looking to open new discussions," and these are very international discussions. So a very dynamic trend, and all the, studies we see on the market are converging, with 85% of LPs wanting to either maintain or increase their allocations.
Maybe to complete what Sophie is mentioning, obviously, an impact fund is a first-time fund, so we don't rely only for growth of asset under management and first-time fund. As Louis mentioned, there are already plenty of existing lines of business that are ready to scale Capital V secondary debt. But what is important is to consider that when we talk to sovereign funds, when we want to attract new money with new prospects, with new investor base internationally, there is a nice appetite, a nice welcome. And being based in Europe, being a European player in impact fund, is perceived as, I would say, a competitive advantage. Regarding what you mentioned regarding performance-related earnings, the first starting point of our analysis is that we need... Yes, so your, your question is very true.
We need to consider the competition, and we want to stay first attractive regarding the stability of our people. Again, we have talented people, and obviously, we do best market standards to maintain them within as the organization. So the majority of the performance fees of the carried interest are allocated to the people, just to maintain their. And this is obviously a request of our investors, of our LP investors. No more question? So again, in the name of Sophie, William, and I, we'd like to thank you for being with us today. Thank you very much.