Earnings Call: Q3 2022

Nov 8, 2022

Hello, and welcome to the Euroseas Financial Information Q3 2022 Results Call. My name is Laura, and I will be your coordinator for today's event. Please note this call is being recorded and for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing to an operator. I will now hand you over to your host, William Kadoush Chasang, the member of the Executive Board General Manager, Finance and Strategy to begin today's conference. Thank you. Many thanks, Laura. Good morning to all. Thanks for joining this call. I'm pleased to welcome you all for to our Q3 2022 and 9 months trading update. I will take a few minutes to walk you through the performance and developments we recorded in the quarter. In a nutshell, we continue to make progress in our developments and post good growth in spite of an obviously more complex and uncertain economic and geopolitical background. Let me start first with the asset management activity. We continue to grow our asset management revenues at a strong pace. In fact, we post double digit growth. Management fees are up 22% in the period and management fees from 3rd party grew 25%. We also recorded EUR EUR 73,000,000 in performance fees in Q3, thanks to the exits which we have realized, and there will be More to come later. In total, revenues from Asset Management for the 1st 9 months of 2022 amount to EUR 383,000,000 up 16% from the same period of last year. Turning to AUM. Obviously, the revenue growth is linked to the growth in our AUM. AUM are up 20% year on year in the past 12 months. As a reminder, We do not reevaluate portfolio assets in the NAV. So this is only due to the fundraising, and the past increase in the AUM. Fee paying AUM are up 23%, thanks to total fundraising and the fast deployment in private debt particularly. Focusing on fundraising for the quarter. We raised EUR 2,100,000,000 from third parties in the first 9 months of the year. Let me stress that all the strategies that are in the process of fundraising benefit from a good reception, good traction from investors In spite of an obviously more challenging environment, this is something you will have heard from others in the street. In Private Equity, we achieved successfully the fundraising for a small buyout strategy, more than EUR 1,000,000,000 smaller funds which we have in the market, in ventures and Biotech, Digital and Smart City enjoy a satisfactory reception. We are still in the process of fundraising. And the flagship fund Private Debt 6 continues to enjoy strong momentum. This is, as you know, a fund which is focusing on direct lending in euro denominated. And we are confident it shall reach EUR 2,000,000,000 in total towards the beginning of 2023. An important element in the fundraising, As we mentioned in the previous quarters is the strong flows we enjoy from retail. Inflows from retail for the 1st 9 months of the year are up 61%. They stand at EUR 600,000,000. The total of the money we've collected from retail investors stands at EUR 3,200,000,000 at the end of September, which is 14%, 1 4% of our total AUM. We struck additional partnerships over the quarter, some of which you may have seen with the leading online bank, for example, issuance. Overall, given the current pipeline, and this is a very important point, because Fundraising is not a linear thing. Fundraising is a combination of market appetite and the pipeline we have on the road. But based on the current pipeline we have on the road, we expect our total fundraising for 2022 to reach around €3,000,000,000 Importantly, we will launch towards the end of the year The marketing of several of our large flagship funds, mid large buyouts, growth, 2ndries. On top of the marketing of our sustainable infrastructure fund, Article 9, which is now starting its marketing. All these marketing efforts should yield in full in 2023. Let me turn to the second key point in this results, which is a good execution of the exit program. And obviously, I will start with the exits This is an area under legitimate scrutiny by the market. We continue to realize exits at the pace that we had anticipated. Overall, we realized EUR 2,400,000,000 of exits in the 1st 9 months, which is an amount equivalent to what we did in the 1st 9 months 2021. And clearly, this is very satisfactory when combined with the multiples we are achieving through the sales given the more challenging context I was referring to at the beginning of this call. As a case in point, you may have seen that we announced yesterday an additional sale, the exit of Our consumer growth brand strategy asset Nest New York, which was valued $200,000,000 and is consistent with the cash on cash of 2.7, cash on cash multiple of 2.7. Focusing only on balance sheet investments. We have no quasi completed or planned exit program. Together with Nest and Dita Protect, we announced also in the previous quarter and which will closed both are expected to close both towards the end of the year. And adding to it, the already closed transaction, We should have completed by the end of the year around EUR 1,300,000,000 of sales from the balance sheet, which is Roughly 18% of the NAV of the portfolio based on end of year 2021 and very consistent with what we had said to you in terms of the amount we wanted to sell. Let me stress again the good terms at which we made those balance sheet exits. This was done at an average of 3.5 times cash on cash, consistent with roughly 33% IRR and this balance sheet exit will translate are expected to translate into capital gains for an amount of about EUR800 1,000,000 net, which will be booked in H2 2023. We obviously continue, because this is the core of our business, to do selective investments. As you can see, we completed EUR 4,100,000,000 of Investments in the 1st 9 months 2022. This is a tad lower than the EUR 4,100,000 we had in 2021. We are having a slightly different mix. As you can see, we have more Investment in private debt, a little less in private equity and for the period, which is very consistent with the dynamics that we see in the market, very, very good traction for private debt overall in the market. I mentioned it in fundraising. This is obviously true in deployment and returns. On private equity and real assets, as we said, we are very focused investors. We pick Leaders in Very Specific Sectors. We mentioned it a few times, health care, tech enabled services, energy transition. And this is what you see on the page and in the press release with investments such as Icarosolar photovoltaic farms, Imaton, which is in the health care or in the Wealth Management, some buildup with a good premium for our small and Mid Strategy. A point on the portfolio, This is obviously a very important element. This is a key factor behind the performance of our funds and hence our capacity to fundraise going forward. This is also a very important element in the computation of our NAV and valuation and going forward. Focusing on consolidated portfolio companies, as you can see on the chart, at constant scope and exchange rate, The economic revenue for the company we consolidate is up 38%, roughly 40% year on year. This growth is visible across all strategies. So you can see that in the press release. We provided you with the details. So that is quite satisfactory because this is very broad based. Focusing on the growth Companies. You know that these companies are not consolidated, but we like to give you figures because this is a very important element for you to gauge the quality of the portfolio. The performance is strong. Revenues for growth companies are up 42%. Last, let me stress particularly in this context, in this more challenging context, the importance of having a robust Financial structure and flexibility for to gauge opportunities in the future. The Euroseo net cash position is positive at EUR 164,000,000 at the end of September. You know that we have credit lines undrawn for about EUR 1,500,000,000 maturing 2026. And we have also a significant level of dry powder, close to €5,000,000,000 which we stem from the money we collect with LPs. And this in total give us ample flexibility to weather potential challenges in the market, but more importantly, Grasp opportunities in the next quarters, and there will be opportunities, as I'm sure you've already heard, Industry. I'd like to stop there and leave the floor to you for questions. Thank you very much. Thank you. We'll now take our first question from Patrick of Societe Generale. Your line is open. Please go ahead. Hello. Good morning, William. Can you hear me? Very well. Hello, Patrick. Okay, perfect. Hello. First question is About the NAV. So the NAV has not changed materially since mid June, which is, Let's say, given because you have not updated the valuation, but do you think that this Enavive valuation of €116,500,000 reflects the current reality and what have you done with the contingency buffer? My second question is assuming that NAV reflects reality and there is currently a 50% discount to NAV more or less. So do you intend to accelerate share buybacks based on that? Or Could you explain a bit what is your philosophy or your strategy regarding share buybacks? And finally, on Nest, Could you please help us with the percentage you had before, your percentage you have now? To what extent the cash on cash multiple has been impacted by U. S. Dollar strength. Yes, that's it. Thank you. Okay. Well, thank you. As you know, we don't update NAV on a quarterly basis. We do a few adjustments for cash position. Obviously, you're also taking into consideration The change in foreign exchange. So you see a rather stable NAV as you would expect. So I'll go Straight to your point with regards to the so called provision or the buffer. We haven't done anything with this buffer. We will see if we write it back or if we use it line by line when we compute the NAV at the end of the year. However and without going into the detail, As you know, we do value markup of companies and assets we own in through the funds. And what I can say is that we are we feel good about and our valuation given the strong growth in the underlying of the portfolio combined with the fact that As you know, and this is something we commented a lot during the half year results, we continue to have What we consider is rather conservative approach to multiples. You may remember that in H1, we had said We don't have, except maybe for a very few number of items, Companies which we value at multiples, which are above the spot multiples. I mean, not even using spot multiples, but we continue to check where we stand when we do valuation. So the combination of the strong underlying growth in the portfolio and fairly conservative approach make us feel that so far It should be okay without obviously giving you more indication as to what it will be at the end of the year. On Nest, we add 80% of the company. We'll be above 15% after with a rolling up of close to $35,000,000 of equity in the company. The multiple is 2.7, of which 20 basis points, 0.2, is associated with foreign exchange. So it's 2.5, still a Very good multiple. On the share buyback, We continue to execute our share buyback program, as you've seen. We consider it is A rational thing to do in the context given what you said in terms of discount, it translate immediately into accretion for our shareholders. We don't intend to increase The pace at which we execute the share buyback program for reasons we've already mentioned, which are due to the fact that we want to maintain good liquidity of the stock And that's obviously a balance between the economic benefit completing a share buyback and the fact that we want to keep good liquidity in the trading of our stock. Thank you very much. Thank you. We'll now move on to our next question from Murat Lomiti of BNP. Your line is open. Please go ahead. Good morning, William. I have three questions, please. The first one is on the AUM evolution. If I look at it on a quarter to quarter basis, AUM in Q3 is €300,000,000 shy of the AUM in Q2. So maybe you can give us the 3 main moving parts on the quarter by quarter. So you have fundraising of EUR 300,000,000. I guess you have changing value and distribution in between. Can you share with us these figures? The second point is on the exit program. Can you give us the and the uplift of the asset sales that you've done since the beginning of the year. And finally on the performance of portfolio companies, so 38% in 9 months, 40 2% for growth companies. Maybe you can share with us the number for Q3? Thank you very much. So I'll start with the first question. Thank you very much, Murad. Hello. I won't give you the exact numbers, Biren, because we don't disclose it details, but you fundamentally, this is what you said. We have effectively EUR 300,000,000 of collection. We have NAV stable and then the rest stems from redemption step down, and that's what explained the evolution between the two quarters. On The exit program, so let me add because we provided you with a detailed page In H1, which I would refer you to with regards to the NAV uplift for each asset that we've been talking about at the time, Namely Redensola, Aurolia, Trader and Vitaprotec. Let me add that on Nest, The uplift is about 20%. So on top of my head, because I don't have it all in front of me, Trader was 0 because we had marked up trader the value of the coal already in our NAV. Also a trader, obviously, cash on cash for people in IRR was very strong. Redensolar 2 50 percent something, Aurelia 100% and Vitaprotec looking at Pierre 60 something. So overall, stronger piece in all cases relative to the last In Q3, We don't provide the Q3 specific, but I would tell you that this is very consistent With the numbers we have given you, I mean, there is not the specific There's no specific to it during Q3. If you look at H1, We were at 46% for growth. We were at 43% for consolidated portfolio company. And we are telling you This is 42% for portfolio sorry, 38% for portfolio companies, 42% for growth. So year on year, there is a bit of slowing down, but it's that lower as you can see. I mean, remains very dynamic year on year. Okay. Thank you very much, William. Thank you. We'll take our next question of Jeroen Van Aken of Degroof Petercam. Your line is open. Please go ahead. Yes, good morning everyone. Just one remaining question from my side. Recently, we've been seeing some articles in the press criticizing continuation funds. So on that topic, are you also shifting remaining assets from 1 vintage to the next vintage? So as an example, can assets move from PME 3 to PME 4, which was raised recently. Thank you. Not exactly thing we like to do. Thank you. We'll now take our next question from Alexandra Gerald from CSC. Your line is open. Please go ahead. Yes. Good morning, William. Good morning, Pierre. Three questions on my side, please. The first one is regarding asset rotation for 2023. So for 2022, We are I mean, you are in line with our targets with an asset rotation close to 18%. Can we expect maybe a lower asset rotation next year to a slowdown in the activity. Also maybe some comments regarding financing conditions, which might become more difficult. So that's my first question. 2nd question, that's also the same thing, maybe a forward looking judgment on your side regarding fund raising for 2023. If we add up all the targets that you have set for The strategies which are about to be launched mid large by house, growth, secondary etcetera. What kind of fundraising can we expect for you have in mind for 2023. And my last question is related to The profitability of your portfolio company. So you comment on a dynamic which is still good for your companies in terms of revenues, but in terms of margins and their ability to pass on inflation, can we have maybe a comment on Well, thank you. Hello, Alexandre. Nice try, but we don't provide guidance at this stage what is said at this point in time in the Europe. But maybe let me give you some elements, some qualitative elements behind some of your first two questions. Asset protection. What we see is that for a company like us, Positioning Small Mid Buyout and Private Debt, Congrues, There's a mix of asset class, which continue to and Joy liquidity. We should be able to continue rotating our portfolio. You know that in the market, there is a lot of talks about the difficulty of raising money for large scale deals because of the stage What's happening in the high end market because of banks or lack of banks appetite and so forth, what We see in the mid market where we operate, whether we see private equity, direct lending or secondary to name a Few of our strategies, remains fairly active. Obviously, debt is repricing or has reprised, and this may have impact on valuation going forward. So that would be potentially the only criteria that we will consider when potentially putting an asset on the block, which is whether or not we consider we will have the best valuation for our stakeholders in the funds. So this would be Fundamentally, the criteria, the days liquidity for the assets we own. And as you can see, we realized Nest in this quarter in an obviously quite difficult environment for consumer companies. On fundraising, again, I won't give you a number, What you can hear from me and you can read from the slides as well as the press release that we consider that from a supply standpoint, we have more larger funds and on the road on the block in going forward than we had in 2022. You also heard from me that for the funds we had on the road, marketing for fundraising in So 22, they had good reception. So if I combine the 2, that gives you an indication that We are quite confident that we will continue a good pace of fundraising Going forward without mentioning more obviously. Can you remind us the targets that you've set for the funds which are on the road at the moment. Sorry, can you repeat that? Can you remind us the targets that you've set for the funds which are on the road at the moment? We don't disclose that. The targets and the hard caps, etcetera, you don't disclose that. Well, we usually don't I mentioned that we had initially target of €1,000,000,000 for example for small buyout. We have done more than €1,000,000,000 that was 2. I mentioned because we are very well into the fundraising that EUR 2,000,000,000 was what we think we can achieve in private debt. We've done obviously more than half On that at this stage, you can expect looking at previous funds, What could be the size? I mean, if I take our growth fund, the previous one was 1.6. You see that comparable funds in the market, one recent competitor closed 1 at around €2,000,000,000 Just to give you indications, but we don't disclose at this stage for each and every fund target In a nutshell, as I said, expect that we will have more ambition in 2023, given the size of the funds we're talking about relative to 2022 and we will be obviously very pragmatic depending upon the market context, but Sort of direction of travel. Profitability, I can just confirm that we only published revenues on a quarterly basis. So without giving you the details, which Don't provide at this stage. I can confirm that the EBITDA growth The portfolio, the consolidated portfolio, post a strong double digit increase. To your point, which is more specific, are the companies able to pass on pass through prices to consumers. Are they inflation proof? As we said in the first half, I think we provided some details to you. Generally speaking, yes, we have a few companies. They may be able to pass through prices, but they may be impacted, however, by a strong increase in input prices. But Certainly a few companies we have operating in sectors where it matters. We only have a few industrial companies in the portfolios. So for all the companies in the sectors where we operate, I'd say that generally speaking, revenues is a good gauge of profitability growth. Thank you, William. Thank you. Thank you. We'll now take our next question from Philip Middleton of Bank of America. Your line is open. Please go ahead. Yes. Good morning, William, and thank you very much for the update. You've been talking so far about what's happening at the moment. I mean, I wonder what conversations you've been having with your investee companies about how they see the environment developing and how Thank you very much. Again, Another important question, which ties into the comment I just made on profitability. The company we invest into, I mean, clearly, we've asked them and they've taken themselves The initiative of reforecasting in this, I'd say, complex and uncertain rather than deteriorated environment. I mean, we there are element of deterioration, but clearly, we don't see that as of yet in the numbers. But it's no doubt I'm not going in the right direction as far as GDP is concerned or inflation, and it's clearly more uncertain than ever. However, again, the main factor that stresses companies is inflation and the related impact on the cost of funding excludes interest rates. As I said, most of our companies, they are not inflation neutral, They are greatly inflation proof. And that's something we monitor company by company within the strategies. We get some help for that, including with sometimes when appropriate consultants. We get We do some hedging when appropriate for some inputs. So that comes at a price that protects going forward the profitability and we revised price. So that's where we are On interest rate, we'll be very cautious as well. As we said in first half, We don't have significant refinancing in the next quarters. We have Large stack of the portfolio using debt for which we hedge The interest rate, so it's more than 60% in buyout globally and 90% in real estate. So the sensitivity on the performance of the portfolio linked to an increase in interest rate is tamed through this hedging. So that's what How we monitor things. Okay. Thanks very much. We'll now take our last question from Oliver Crotus of Goldman Sachs. Your line is open. Please go ahead. Hi, it's Oliver Carruthers from Goldman Sachs. Good morning, William and Philip and thank you very much for the presentation. Can I ask about the retail momentum, which has obviously been very strong for you this year? I think you called out Private Value Europe strategic opportunities and the Entrepreneurs Club chunk of this, which is both life insurance policyholders and direct investment. And obviously, this is a vehicle which allows for quarterly Investor Redemptions. So the first question is, do all €3,200,000,000 of your retail products allow for quarterly redemptions? And the second question is how do you expect this to evolve next year? Or how do you expect this could evolve next year given the uncertain macro backdrop you were highlighting in the Thank you. Thank you, Oliver. You're right to point out that IPV 3, which is a mix of secondaries and private debt strategies With a kind of unique combination of performance Low volatility in the performance has been very successful over the years. It continues to be very successful. It fits very well to what distributors be it insurers when you need the product as you mentioned it or bags, Private banks, in particular, like to offer. On top of it, as you mentioned, there is liquidity feature which is fairly attractive to retail investors. So to your question, €3,200,000,000 do we have 100 percent of funds Behind that offer that the same liquidity feature? No. For some funds, This is less applicable. There will be closed funds. So we have a secondary fund in that case distributed by Wealth Managers Private Bank. We now launched a mix of private equity with growth and buyout. We have a pure growth fund. I mean you can't offer the same pattern. You need to have assets which rotate more rapidly to typically private debt a year from day 1. Typically, The J curve is more attractive, so to speak, if you take this angle in consideration for secondary. So you can't do that for all products. That being said, These products are also very well suited to retail investors. I mentioned the second refund with the strategies we distribute through a private bank, very, very effective given although it is Given although it is a totally closed fund given the performance and the resilience in the performance, The traction we have for the growth fund is also important. And the more you have people looking at their time horizon being driven by pension needs. For example, the more you see people Accepting investing into a close fund. You know that we enlarged distribution. This is a key driver of growth going forward. We struck an agreement in the past quarter with a very important life insurer In France, we also struck an agreement with a leading online bank in France, and we think it's and important case in point because you have here 2 type of distributors which are very different in nature, More traditional and more new entrant like and it shows the traction of the product. Okay, very helpful. Thank you. Do you disclose the split of that EUR 3.2 billion between Closed Vehicles and Those That Are Like Redemptions, Rough or the Rough Split? No. Okay. Thank you. Well, I take your We may shed some color over time, but there is nothing to hide, but we don't disclose it Understood. Very helpful. Thank you. Thank you. We'll take one last question once again from Alexandre Girard of CIC. Your line is open. Please go ahead. Yes, William. Just two remaining questions on my side. On the development side, firstly, at Euroseo's level, I mean on the corporate development side, I know that Cuazo has always been on the lookout for acquisitions. Are there any Interesting alternative asset managers for grabs on the market. Are you on the lookout for such deals firstly? And Development. 2nd question on the in terms of new verticals and new strategies. You've developed an strategy, health care strategy, can we expect in the coming years the news for this is to be deployed. Thank you. Thank you. As you heard Virginie, more saying and for the Patrick's most me saying, We are an ambitious company. We have ambitious targets in in terms of AUM going forward. And logically, we consider that we can or should use the 3 levers at our disposal at our hands: organic fundraising, Value Creation Through the Portfolio and Potentially Acquisitions. Now obviously, We look very carefully at what's happening in the market. There's still Movement. There were some consolidation moves announced very recently, particularly in the debt sector. And so we monitor those, but we won't obviously elaborate more on that Until we are sure about what we want to do and so expect from us that If we were talking about acquisition, this would be because we are on the verge of announcing an acquisition. But I'll stop there I think that it could be part of the equation in a cautious and responsible and pragmatic manner. Verticals, yes, I think as we said The asset multi geographic operator, your place which we like, goes in sync with Sector Focus and Sector Specialization of the teams. It is clearly paramount important if you want to generate Synergies between the different stage of investments and differentiated capacities in the way you assess Investments. So you mentioned a few like Health Care. I'd say that going forward, because this is your question, We have obviously an important effort towards ESG. Sustainable infrastructure, as you mentioned, is an area where we invest a lot of efforts and everything that goes into the sort of new wave of economic needs linked to decarbonation, in particular, is an area where you should expect that we invest more in the future. Thank you. Thank you. There are no further questions in queue. I will now hand you back to your host. Well, if there are no more question. I'd like to thank you very much for attending this call and for your questions. And we're looking forward to be talking to you in the next quarter. Should you have any questions, please feel free to call Pierre Agathe and myself. Have a good day. Thank you very much. Have a good day. Thank you very much. Thank you. Ladies and gentlemen, this concludes today's Call. Thank you for your participation. Stay safe. You may now disconnect.