Good morning, everybody, and welcome to Bridgepoint's 2023 full year results presentation. I'm William Jackson, Bridgepoint's founder and chairman, and I'm joined this morning by Raoul Hughes, our CEO, and Adam Jones, our CFO. Now, before I hand you over to Raoul, I'd just like to take a minute to talk about where the business stands at the start of 2024. Our key message today is that Bridgepoint is in great shape. Looking back, in our investor update in 2021, we were probably the first to call publicly, and I think very transparently, the start of some more difficult times in the alternatives market, and especially that's, that's coming slow down in the fundraise market. Today, we're making the call that that period is coming to an end. We're seeing an improvement in market conditions right across all our activities.
But importantly, right through that period since November 2021, Bridgepoint's been able to continue to raise, deploy, and realize capital, while also executing on our business development strategy. And I think that just shows the strength of our model and the depth of our platform. As a result, today, on many measures, we're now well ahead of where we expected to be when we IPO'd in 2021. Two specific highlights I'd just like to mention from our year in 2023. In September, as you'll recall, we announced the combination with ECP. Once that transaction is closed, Bridgepoint will offer exposure to the three largest and most important strategies in private markets: private equity, infrastructure, and private credit.
And that's at a time where the breadth of off- offering is really of increasing importance, both to fund investors and to shareholders, but very importantly, our off, o ur ability to have high quality, operations on our platform of our group earnings. Secondly, BE VII. We've talked about BE VII for a long time. We've long been advocates of the robustness and opportunity that's presented by the European middle market. It's actually the premise on which our business has been built, and I'm pleased to say that BE VII is set to close at the end of this month, right on its target of EUR 7 billion. It's a great result. I'm now gonna hand over to Raoul and Adam, who are gonna talk you through the performance and progress in 2023, and after that, I'll conclude with our outlook for 2024 and beyond. So with that, over to you, Raoul.
Thank you, William, and good morning, everybody. I'm pleased to be reporting a compelling set of financial results. Investment performance continued to be strong across private equity and credit. Importantly, deployment and fund returns both remained in line with expectations. In fundraising, BE VII and ECP V are on track, and we expect a good year of capital raising ahead. The balance sheet is strong and will be further strengthened following a U.S. private placement, which we will cover in more detail a bit later. The platform is well positioned as activity accelerates and the market recalibrates. Now, as you will have seen, on ECP, we are waiting on the final regulatory clearance from the U.S. Energy Regulator, and we expect the transaction to complete in Q2 this year.
Had ECP been formally part of the group, closing AUM for the year would have been EUR 62 billion, split across private equity, infrastructure, and credit, 2.3 x the IPO 32 months ago. Excluding ECP, our FRE margin grew from 31% to 36%, thanks to increased management fees and careful cost control, something which Adam will say more about later. The addition of ECP will result in a higher FRE margin than for Bridgepoint standalone, taking account of the normal margin cycle, which peaks when new funds come on stream. Looking at the performance of our existing PE and credit businesses, management fees grew by 10% to GBP 265 million, and underlying FRE grew by 28% to GBP 95 million.
With encouraging signs that the exit market is now recovering, we are pleased to report PRE, which, while 15% down year-on-year, as we foreshadowed it would be in September, was nonetheless ahead of market expectations at GBP 55 million. As a result, underlying EBITDA increased by 7% to GBP 149 million. Now, I thought it would be also worth quickly looking at our performance over the slightly longer term. Since 2020 and the IPO, we will have grown AUM by an annual rate of 32%, including ECP, and for the existing Bridgepoint perimeter alone, our fee income by a total of 79% and PRE by 31%. Amortizing our cost base over larger AUM and fee income has resulted in the underlying FRE almost quadrupling and our FRE margin more than doubling.
All this has been achieved while growing our investment team by just 9% and maintaining a consistent blended fee rate with a minor reduction due to the mix shift between private equity and credit. Importantly, we've been doing this for a long time, and over the last 20 years, our strategy of pursuing both organic and inorganic growth has resulted in AUM growth of 15% per annum. This has been achieved over the long term, cycle in, cycle out. Now, having talked about the financial performance, on the next few slides, I wanted to touch on the drivers of that performance in the business: fundraising, deployment and capital returns, and valuation progression. Despite a challenging market backdrop, we made good progress with fundraising in 2023, with over EUR 4.5 billion of capital raised across the firm and ECP.
Combined with fund performance, this gives us confidence that we can achieve our capital raising aspirations for 2024 and beyond. Credit had a particularly strong year, with over EUR 1.5 billion raised for 2023 vintage funds, between Bridgepoint Direct Lending, Bridgepoint Credit Opportunities, and two more CLOs. This positions the credit business well to continue to take advantage of the more favorable interest rate environment. As William mentioned, in the near term, BE VII is expected to close this quarter at the EUR 7 billion target. ECP V is expected to close at the back end of April. We guided in September to a target of $4 billion, and we expect it will end up a bit ahead of this number.
Both of these are great results in the current market and set up these funds with plenty of capital through their next cycles. I'd particularly like to thank William, sitting next to me, from Bridgepoint's perspective, but also Doug Kimmelman at ECP, for their continued tireless efforts, in particular, traveling around the world, meeting investors. In 2024, credit will see Bridgepoint Direct Lending IV, Bridgepoint Credit Opportunities V, two further CLOs, and ECP ForeStar, which is the new ECP credit vehicle, all raising money. While in private equity, BDC V and Bridgepoint Growth II will both be in the market. The prospects for BDC V are particularly strong, given the outstanding performance of BDC III, which is among the top performing European low- and mid-market funds in its vintage. All of this activity is underpinned by continuing investment in our capital raising capabilities.
The investor services team has more than doubled since 2021. We now have a global presence with new IR colleagues on the ground in China, Singapore, South Korea, and Japan, as well as to specifically cover the DACH region. Along with the strengthened team in the U.S., as well as our first individual dedicated to the private wealth channel. One positive consequence of the congestion in the fundraising market over the past two years, has been the addition of new LPs into BE VII , which has significantly diversified our geographic mix and brought in a number of new sovereign wealth funds to the platform.
Where historically, Bridgepoint had over-indexed in the U.S., the most mature LP market, and which represented some 56% of BE IV's capital, we now have a much broader exposure globally, with a material increase in the proportion of capital raised for BE VII coming from Asia and the Middle East, at almost a quarter of the fund. This diversification and expansion of our investor base positions us well for future fundraising in 2024 and beyond. Now, deployment pace. Deployment pace is always lumpy. There is a certain seasonality to our business in the way processes start and finish, and after a strong H2 in fund deployment, particularly in BE VII , we finished 2023 with all funds broadly on track against their deployment targets. Perhaps even a deal ahead in BDC IV, at 79% invested. Importantly, our guidance for the timing of subsequent funds remains unchanged.
This is a strong endorsement of our team's approach to origination. For example, the European private equity team typically tracks opportunities for, on average, three years pre-investment, getting to know founders, families, and management teams very well. This means that in our middle market, often transactions are happening outside typical full auction processes, and therefore potentially less subject to wider trends in M&A activity. While M&A markets were subdued in 2023, we nonetheless returned GBP 1.8 billion of capital to investors, having exited six private equity investments at an average multiple of 6.8x money invested. I'm particularly pleased that we have a healthy pipeline of potential exits for 2024. As ever, these things are binary and the timing uncertain, but I'm confident, sitting here in mid-March, that we can continue to deliver in the year ahead. And finally, fund performance.
This continued to be strong across private equity and credit, and progress in fund valuations underpinned the PRE we have reported today. Bridgepoint Europe VI remained ahead of plan with a MOIC of 1.8x, while BDC III showed strong momentum to grow from 3x to 3.8x during the year. In credit, Bridgepoint Direct Lending III and Bridgepoint Credit Opportunities IV both remained on plan, with net IRRs of 10.4% and 13.8% respectively. In infrastructure, ECP III made good progress with its MOIC increasing from 1.9x to 2x.
Importantly, we continue to record exits at a premium to fund valuations, with the average valuation uplift on exit across our private equity funds of 34% over the last five years, and actually 48% in those exits in 2023, maintaining our strong track record of top quartile DPI. This strength in fund performance, which means that we are continuing to record valuation progression, is no accident, and is at the core of what the business does and what we do very well at Bridgepoint. This slide is something that Xavier Robert, our Chief Investment Officer, covered in detail at the interims last year, but it's worth repeating. We are very structured and disciplined in our investment approach. Defined asset selection and our value creation toolkit are at the heart of what we do, helping us deliver premium performance and valuation progression without multiple expansion.
This is illustrated by the fund metrics you can see on the right of this chart. High growth, high EBITDA margin, strong cash conversion, and relatively low leverage. So, strong performing, sensibly run growth businesses. Indeed, a lot of these are replicated in our credit business, too, where sector selection away from more volatile sectors and significant equity value cover sets that business up to do well despite changing markets. Next, a couple of thoughts on ECP and the wider strategy before I hand over to Adam to talk through the numbers in more detail. As I mentioned, we anticipate the ECP transaction will close in quarter two. In the meantime, the businesses are spending a lot of time together. Planning for global LP coverage is advanced.
As a reminder, ECP brings over 170 new LPs to the platform, with an attractively low overlap of about 20%. We have established mechanisms for sharing transaction opportunities post-closing, and we are expecting critical functions to be integrated quickly, and product and strategy extensions will come into focus after closing. In terms of ECP's performance, Fund V fundraising is going well and should close a bit ahead of target, as I have said. Importantly, deployment is on target at 40%, and with a number of interesting opportunities in the pipeline, provides comfort that their fund cycle, too, is on track. As we spend more time working together, I'm increasingly excited about the future of the combined group. There is a real cultural fit between the two teams as we get to know each other more.
Now, we plan to host a Capital Markets Day later in the year, including the opportunity to meet the wider ECP team, and I hope that many of you will be able to join us for that. ECP will be an important step forward for the Bridgepoint Group, but I'm conscious that we need to be prepared for further opportunities as the pace of our industry consolidation continues to increase. To this end, we recently took the decision to partially refinance the existing ECP bond following closing of the ECP transaction and raise incremental capital through the U.S. private placement market. These facilities are conditional on closing and will replenish the balance sheet capacity to fund the next series of opportunities and investments in funds following capital use for the cash component of the ECP deal.
We are well positioned to continue as a global leader in middle market added value investing and build on our strong position and continue to look at both organic and inorganic growth across investment strategies and geographies through scaling existing strategies, product strategy extension, and expanding into new alternative asset classes and diversifying our sources of capital. With that, I'll now hand you over to Adam to take you through the numbers in more detail. Adam?
Thanks, Raoul. Good morning, everyone. I'm now going to take you through some more details on our financial performance in 2023 and update you on guidance for 2024. Overall, financial performance was very strong in 2023, underpinned by the strength and resilience of Bridgepoint's business, as you've just heard from Raoul. Careful cost control and strong investment terms both played their part in today's results, and I'll say a little bit more about those each shortly. As you have heard, we've recently taken steps to further strengthen the balance sheet to support our strategic growth plans with an incremental $430 million private placement of debt. We are today announcing a final dividend of GBP 0.044 per share, subject to approval at our next AGM.
This means that our total capital distribution to shareholders in 2023, between dividends and share buyback, will be GBP 0.164 per share. That's more than twice the GBP 0.08 per share from 2022. We are today setting out our guidance for FY 2024, and in summary, we are well placed to meet current market expectations. Let's start with assets under management. We raised a total of EUR 2.7 billion in Bridgepoint in 2023 across BE VII , Direct Lending III, and Credit Opportunities IV, and also delivered EUR 1.9 billion of realizations. Valuation gains linked to the strength and resilience of our aggregate fund performance added a further EUR 1.7 billion. These valuation uplifts were trading driven, with weighted average EBITDA growth of 19% across our private equity funds, versus -5% for the MSCI European Index.
Importantly, 81% of our unrealized valuation multiples were flat or reduced in the year, which really does underscore the strength of earnings performance within our portfolio. Consequently, AUM finished 7% ahead of the prior year at EUR 40.5 billion. If we were to adjust those figures for the addition of ECP, assuming the transaction had closed in 2023, total group AUM would have grown by 62% to EUR 61.6 billion. Now, turning to fee-paying AUM, we raised a further EUR 1.4 billion of capital commitments and deployed EUR 2 billion of new fee-paying capital. Set against this, fee-paying asset realizations from both the sale of equity investments and the return of capital on credit strategies total EUR 0.8 billion. So in total, our fee-paying AUM grew by 11% year-over-year.
Again, with the addition of ECP, fee-paying AUM would have grown by 57% to EUR 36.7 billion. This growth in fee-paying AUM obviously delivered strong growth in management fees and other income, which grew by 10% to just over GBP 266 million in the year, including catch-up fees of GBP 6.7 million for BE VII . In aggregate, revenues grew 5% year-on-year to just under GBP 322 million. Fee margins across all of our strategies were stable in 2023, with a slight year-on-year decrease driven by the increased proportion of private credit in our fee-paying AUM.
As we'd previously guided at the interim results in 2023, PRE was materially skewed to the second half of the year and represented 17% of total revenues, with the assets that we chose to sell delivering an average 6.8x money multiple. This result was slightly ahead of our previous guidance of 15% due to the strength of trading performance in our funds over the last six months. As you know, PRE is not linear across the year, and it is dependent upon both the progression in fund performance and the timing of exits. We do expect PRE for 2024 to be similarly weighted to the second half of this year. Before we move on, I would like to just highlight the significant potential future value of our fund co-investments in carried interest, which will collectively drive PRE over the coming years.
Since 2018, we've recognized nearly GBP 300 million of PRE, but the embedded potential value of future PRE remains very material, with over GBP 1 billion expected from current funds, including those materially raised to date. Let's just break that down into its constituent parts to illustrate that point in more detail. In the second bar of the graph, the right-hand side of the page, you can see that GBP 67 billion of carry is still to be recognized from current funds if they are to be fully realized at their Q4 2023 valuations. Next, there's a roughly GBP 400 million of PRE to be earned from fully invested funds if they deliver on their target returns. And finally, there is illustratively a further nearly GBP 700 million of PRE from funds that are not yet fully invested, if those two ultimately deliver their targeted returns.
If you compare the split between the carry and co-invest on the graph, you can see that as you move from the left to the right of the graph, there is a material growth in carry within PRE, which obviously reflects the fact there is a higher corporate share of carried interest in newer funds. Now, let's move on to operating expenses. Those totaled GBP 171 million for the year, an increase of just 1.6% from 2022. Careful cost control was an important contributor to overall performance in the year, with prudent management of cost growth and headcount investment during what was an uncertain macro environment. Total personnel expenses were essentially flat year-on-year, with headcount investments largely phased over the last six months, offset by a lower bonus expense, which reflects the lower number of exits that we realized in the year.
FTE growth at 3.7% in 2023 was principally driven by continued investment in portfolio support teams, investor relations, and our credit team. Other expenses grew by 7% to just over GBP 45 million, mostly relating to increased travel and higher legal and regulatory spend, with the completion of our AIFM registration in Luxembourg. Having looked at revenue and expenses separately, let's now review the impact on group profitability. Fee-related earnings grew by 28% to GBP 95 million in 2023, reflecting the first full year of fees on BE VII , combined with our cost control efforts that I mentioned. Our FRE margin continued to expand, reaching 36%, which is now more than double since the IPO. The combination of FRE and resilient PRE saw underlying EBITDA reach almost GBP 149 million, a 7% improvement on 2022.
If we turn to the reconciliation between underlying and reported profit before tax, this is driven by obviously exceptional expenses, which consist principally this year of expenses incurred in the combination with ECP. Looking briefly at our tax charge, this increased from GBP 6.8 million in 2022 to just over GBP 50 million in 2023. The increase in underlying effective tax rate to 11.4% is caused by the lower level of completed fund exits relative to the prior year. Now, here's a high-level summary of the underlying Bridgepoint balance sheet, which excludes the presentational impact of consolidating our CLOs, since that accounting requirement does somewhat confuse the underlying position, as I previously mentioned.
The recently executed private placement totals $430 million, with a mix of three-, five-, seven- and 10-year tenors, but at a blended coupon of just over 6.17%. The additional funds raised will be put on deposit at an interest rate of approximately 5%, and therefore they will only have a marginal impact on our expense, interest expense line until they are deployed, obviously, at which point they will start generating incremental profits and cash for the group. This now gives us substantial new capacity to support our business development strategy, and it actually fully replenishes the liquidity we had following the IPO.
If you combine the GBP 239 million of cash and the undrawn GBP 250 million revolver, that means we have liquid resources at the year-end of nearly GBP 500 million, ahead of a cash funding obligation of just over GBP 230 million on the completion of ECP. Co-investments on the balance sheet continues to represent just 1.3% of total AUM, which again underscores our capital light profile. As you know, we completed our first GBP 50 million pound share buyback program in October, and then launched a second GBP 50 million pound share buyback, which at the year-end still had GBP 40 million pound remaining to deploy. The combination of that proposed dividend and the share buyback means that our total capital distribution shareholders this year will be GBP 0.164 per share.
Now I'd like to finish my section of the presentation by turning to guidance for 2024. In summary, as I said, we believe that we are well-placed to deliver the market's current expectations for this year. For the sake of simplicity, now and going forward, we are going to present and guide the underlying performance of the group, assuming a full year of the combined group of both Bridgepoint and ECP. Other than the fact that ECP V is now aiming to close a little ahead of its $4 billion target, we are today reiterating the guidance we gave in September relating to ECP. On fundraising, we expect the group to raise at least EUR 20 billion over the next fundraising cycle. We expect Direct Lending IV to start generating fees in the second half of this year.
Bridgepoint Development Capital V and Credit Opportunities V in the first half of 2025, and ECP Fund VI in the second half of 2025. As Raoul and William said, BE VII is expected to close this quarter at the EUR 7 billion target, and with approximately 10% of fund commitments actually completing in 2024, catch-up fees are expected to be around GBP 12 million this year. In credit, we expect to deploy approximately EUR 1 billion of net fee-paying AUM in each of the next three years. As it was in 2023, we expect PRE to be materially weighted to the second half of this year, let's say roughly 2/3 of the four years total. We expect PRE this year to be at the upper end of our normal range of between 20% and 25% of total income.
Excluding the impact of ECP, total costs in 2024 are likely to represent high single-digit compound growth from 2022, because inflation does still remain. Exit activity will pick up with a corresponding increase in the bonus pool, and the phasing of 2023 hires, combined with the delayed recruitment, does impact the full year cost base in 2024. As a consequence, our short-term guidance for FRE margin remains unchanged in the low- to mid-30% range until BE VIII starts to generate fees in 2026.
That represents a slight reduction from the 36% margin that we realized in 2023, but that is to be entirely expected and just reflects the usual margin profile of the private equity cycle, where the fee-paying AUM will now naturally shrink in 2024 as we start to successfully realize investments ahead of the next material fundraise. But importantly, our long-term FRE margin guidance at 45% and above remains unchanged. Finally, we expect the effective tax rate for the enlarged group to now be around 15%. The Bridgepoint element is unchanged. The increase simply reflects the impact of ECP's profits at U.S. federal tax rates. With that, I'll hand back to William for closing comments.
Great. Thanks, Adam. We've covered a lot of material this morning, but just to conclude, if we look back at 2023, we've continued to make really significant progress against that strategy we set out at the IPO, as I noted earlier. Investment performance continues to be good across both private equity and credit. Importantly, fund deployment and fund returns both remain strong and on plan. In fundraising, we and, and ECP are on track to close our flagship fundraisings on or slightly ahead of target. The balance sheet's strong. It's been replenished and recapitalized. These all contribute to strong financial performance in 2023 and that outlook that Adam's just talked about for 2024. Looking ahead, I think our industry outlook is increasingly positive after the hiatus of recent years. We've started 2024 with a really healthy investment and exit pipeline.
We can continue to invest in our people and platform. That's really important. We continue to explore growth opportunities, both organic and inorganic. And I think we're really well positioned to benefit and lead further industry consolidation. In summary, the platform is well positioned as activity accelerates and recalibrates in the alternatives market. So I'd now like to hand back to Paulie, our operator, who's going to manage the Q&A process. Paulie, back over to you.
. Thank you. And ladies and gentlemen, we will now begin the question and answer session. We will begin with questions from the phone line, followed by questions received via the webcast page. As a reminder, participants can submit written questions using the Ask a Question button on the webcast page. To ask a question on the phone line, please press star one on your keypad to raise your hand and join the queue. If you are called upon to ask your question and are listening to the conference via your device loudspeaker, please use your handset to ensure your question can be clearly heard. Again, that is star one on your phone keypad. And your first question comes from the line of Arnaud Giblat from BNP Paribas Exane. Your line is open.
Yeah, good morning. I've got three questions, please. Could I first ask on fundraising of BDC V? What other parameters are you looking at to think about sizing that fund? I mean, with BDC IV now at 3.8x money multiple, I'd assume that there'd be quite some good demand there. So I'm just wondering how you're thinking about sizing it, any constraints? My second question is actually related to that. With BDC IV at 79%, how many more deals do you require there for a BDC V to be activated? My third question is on the headroom you've built on your balance sheet, so $430 million dollar placing.
A lot of the M&A you've done, the ECP transaction you did was, a significant proportion was in equity. I'm just wondering, clearly, you, you've built a, you've rebuilt a capacity to do M&A. Is, is that something you could envision? Could you be opportunistic, if anything does, does pre-present itself, or, or are you first gonna focus on integrating ECP? Thank you.
Okay. Thank you, Arnaud. Morning to you. Gonna pass those over to Raoul.
Morning, Arn aud . BDC V. So it's BDC III that's at 3.8x. It's the sort of... Which is the fund before last, which is the one that really drives the performance of the fund. One before the current fund is the one that really drives your sort of performance and your fundraise the next time around. BDC V, we have a target fund size of EUR 2 billion, and we're in the market at the moment. I think the best thing to say on that, we wanna be cautious about individual fund-raising amounts as we move forward to the next phase of our growth. So the target fund size for BDC V is EUR 2 billion.
We are, as I think I said in my part of the talk, we're pretty confident in that fundraising, given the performance of the business. I think it's also one of the things that we are very disciplined about, is making sure that we raise the right amount of capital for any one of our strategies, so that we can continue to invest it well through a sensible sort of timeframe through the next fundraising cycle. So we're not. We clearly wanna grow the business, we wanna raise more capital. We wanna do so in a very disciplined way and raise the right amount of capital for each strategy.
I think the other thing, Arnaud, that one of the nice things about having probably the top-performing fund in its kind of peer group, is that it's gonna give us a good chance to shape the investor base of that fund for the next decade-
Yeah.
... with the demand that we've got for that program.
So EUR 2 billion is on the cover. We'll be disciplined about it. In terms of BDC IV's position, I guess ultimately, they invest in a reasonably wide range of equity-sized deals. I would anticipate it's probably three or four deals to get them over the line. It depends on very much what they're actually gonna, you know, individual deals, but three or four, that sort of number. And then talking about M&A, I think the USPP has put us back in the same liquidity position that we're in at the point of the IPO.
So we've effectively replaced the cash element of the ECP transaction, which is a broadly similar number to the amount of primary capital we raised at IPO, to put us back in the same position to continue to develop the firm through various forms of M&A. I think you're absolutely right, and the transactions that we do are likely to contain reasonably significant elements of shares in the transaction. That's mainly because I'd expect deals that we do would be with independent firms, where founders are looking to come and join the platform.
And part and parcel of that, we want them tied in with equity, and indeed, they want to be tied in with equity, and it's one of the beauties of our position as a listed business; we can offer this. So I think you could think in terms of the capacity of that quantum of cash being, you know, a minority of any wider transaction that we do. So we feel we're well placed to continue to develop the firm and to grow through M&A. But clearly, it's all about finding the right opportunities at the right time with the right people.
The cultural fit, as we touched on with ECP, the cultural fit with this business is really, really important. We are a very much a people business. We're focused on any deal that we do, we need to partnering with like-minded people who we feel can be additive to the wider platform and the culture of the firm.
So it's actually just, you know, we have the capacity to do an ECP-
ECP.
... II, too. But, you know, I don't think you should expect to see that come down the line anytime soon. We would be very cautious and sensible about finding the right thing as ECP has shown. Does that answer your questions, Arnaud?
Yeah, that's great. Thank you very much.
Great. Paulie, back to you for the next question.
Yeah, next. Your next question comes from the line of Nicholas Herman from Citi. Please go ahead.
Yes, thank you. Good morning. Thank you for the presentation. Good morning, three questions from my side. Just to follow up on the growth question. I think, so beyond inorganic growth, I think you also referred to using the incremental capital raise through the private placement to accelerate organic growth as well. So can I just ask you to provide more detail on what you're referring to? Are you talking about the a build out lateral strategies at Bridgepoint and ECP, or ECP, regional expansion, and so on and so forth? So detail there would be much appreciated, much appreciated. Secondly, on exits, could I just ask you to provide a bit more detail, please, on behind the guidance?
I guess, so how many exits do you have in process or are expected to commence, and how many exits underpin your guidance? And I guess, as part of that, do you typically see the buyers of your assets being more biased to being sponsors or strategic buyers? And then the final question, please. In terms of... So I guess, you talked about healthy pipelines and health. I think you can find the update on deployment. So I guess, can you just be a bit more specific on which funds... Well, I guess, I'm sorry. I guess how you see the current fund cycles across the various strategies. So that's my question. Yeah.
Okay, Raoul, do you want to take the first one?
Yeah, so accelerating our organic growth. So I think that comes with building out the existing strategies within the markets that they're in and expanding into wider geographic markets. So we will continue to grow and expand the private equity business across the mid-market verticals that we're in, and we'll expand a bit more geographically, I suspect. With ECP, we do think there is a real opportunity to develop ECP's business into Europe. One of the real attractions of the transaction was the network and the contact base that we have in continental Europe, providing them with an opportunity to deploy capital there, which they haven't done before.
And if you think about the whole energy transition market, which is sort of a really hot space at the moment, and you look at the Inflation Reduction Act in the States, there's a lot of talk of a similar type of thing happening in Europe. Sort of, the new Labour government in the U.K. is making similar sort of noises, or the potential new Labour government, rather. So I think there's a real opportunity for energy transition in Europe, and I think the platform that we now have in the U.S. with ECP is going to be additive to our wider equity business in the States.
I think there's... We really feel there's a, there's a real opportunity, there's a need and a real opportunity to scale our credit platform, both in Europe and outside Europe. And I think credit is one of the... is a, is a product, product class, which, we, we should be able to scale organically very quickly. So that's probably sort of slightly waffly answer.
Do you want me to do exits?
Yeah, well, yeah. Have it.
I mean, listen, on exits, it's all about portfolio management across the different funds. So we set ourselves up to have vintage year discipline, both on new investment and on exits. So we're trying not to particularly time the macro. The nature of the assets we have helps us to do that. So we probably have 20%, 25% of the portfolio at any one time as potential exits, and we start the year looking at how much capital do we want to return back to drive fund performance. We're focused on net IRR, total value, and the amount of capital we've returned, the DPI metric, to investors, and we want to make sure we've got optionality.
So, you know, ultimately, these are individual events, and as Raoul said many times, they kind of either happen-
They either do or they don't.
They either happen or they don't. But we normally have double the number of exits in our sights for the target we're trying to deliver. So we're reasonably confident about that.
And that's across the equity businesses.
Yeah, yeah.
So sort of, and one of the things in the 23 exits, it happened that the more of those were in the growth and the BDC side of the business rather than the BE side of the business. But we, so we look across... And you slightly commented about the different fund side. We're looking at exiting across all of our private equity businesses.
Yeah, and I think on deployment, there's a healthy pipeline. Deployment doesn't kind of work on a linear basis.
Yeah.
It's sort of like buses. You get two or three come. We had a very, very active Q4 in BE. We've got a nicely rebuilt pipeline there. BDCs-
The same.
... got the same, isn't it, Raoul?
T here's a real seasonality to the private equity business-
Mm.
... in that you tend to find that transactions get initiated at the start of the half years, and then they, people aim to try and have targets of completions and signings before major holidays and breaks. So you tend to find that you could be working on transactions for quite a while, but they tend to consummate either just before sort of Easter or just before the summer or just before Christmas or Thanksgiving in the States. So it's a sort of seasonal process.
When you look at, on the equity funds, which I guess is where there's a lot of focus, you, you're sometimes ahead of the game, sometimes a little bit behind the game. If you look at BDC, it's, as Raoul said-
It's ahead.
... it's ahead of the game, which is nice. BE VII is actually bang on the same spot as BE VI was at the same time.
Exactly the same amount at the same time.
Yeah, and it was invested over 3.5-4 years, and we'd expect it to be the same.
Be the same.
Yeah.
And the same applies with ECP. Their—if anything, even slightly more lumpier than we are. A classic Bridgepoint private equity fund will have 16-20 deals in it. And so the ECP is a more concentrated strategy, and so they may have 10-12, and so by definition, their deployment is also lumpier.
Nicholas, hopefully that answers your question, and we'll-
Yeah.
We'll go back to Paulie for the next one.
Can I just follow up with that, please?
Yeah.
Sorry, yeah, I just wanted to follow up again on the potential buyers of your assets.
Oh, yeah.
Um, between-
Yeah.
... the mix between sponsor and strategic. And I ask because one of your listed peers had previously noted that it sees potential buyers of its assets now becoming less willing to go through with the transactions, as those potential buyers don't want to deploy in the current tough environment and have to go back to their own LPs for more capital. So I wanted to see if there's something, ask if that's something you're seeing as well?
No.
And kind of if you're exposed to that?
Not an issue at all. I mean, actually, at the moment, we've just gone through quite a number of things with strategics, which is always pleasing to see strategics back. I think as we've said before, you know, people are more comfortable making a EUR 1 billion, EUR 1.5 billion acquisition at the moment than making a EUR 10 billion one. And that plays right to us. When we look at the large buyout market, one of the things that makes Raoul and I smile is when you see the huge amount of capital sitting there waiting to deploy, and we've got the store with all the assets in. So come on down.
Very helpful. Okay, thanks very much.
Paulie, come back. Okay, over to you for the next question.
Thank you. And your next question comes from the line of David McCann from Numis. Your line is open.
Morning, David. Good to see you too.
Morning, everyone. Yeah, you too. Frequently as well, I'm afraid. So firstly, on the consolidation, in touch with a couple of times here. You previously spoken about real estate being an obvious private asset that you obviously don't currently have and maybe a gap portfolio, but there's obviously been dislocation in that market in recent years, should we say. So would that sort of be the obvious, still the obvious gap for when you're thinking about your own potential future M&A plans, yeah, expansion in other areas, perhaps building up some of the existing capabilities in adjacent areas? How do you think about that first question?
Secondly, on sort of timing of BE VIII and the next ECP funds, I appreciate, might be slightly premature to be asking about this, but, I mean, any color on timings around that sort of 2026, 2027, something else, some, yeah, just some color on what your expectations, given the current state of the market in total would be, would be helpful. And then finally, slightly more technical one on, yeah, the carry receivable accruals are noticeably increased in the second half, I think was touched on the presentation as well. Maybe just talk through some of the mechanics of what's driven that increase. Is it based on the activity level of the period, based, how much is based on marking to market, and how much is based on the expected pipeline, I guess, getting a bit closer to fruition?
And indeed, any other major drivers of what's driven those numbers up quite notably in the second half. Thank you.
Okay, we'll pass the first two to Raoul and the third one to Adam. Raoul.
Yeah. Well, if you look at the classic verticals in alternatives, real estate—you are right. Exposure to the real estate vertical is something that is missing in the portfolio. Whether it's the right thing for us to do will really depend upon our views on the development of that market and our ability to find the right way in at the right time with the right partner. So I wouldn't rule it out, but nor would I say it's the most advanced of our thinking. There's plenty to go at in expanding the existing verticals.
And another area is the secondary world and how we think about the right way to play in the secondary world as that develops and bifurcates a bit between LP secondaries and GP-led secondaries and how we get into that part of the market. So, wouldn't rule it out, but it really comes down to can you find the right partner firm, both in terms of scale, location, and cultural fit.
As you were saying earlier, the organic-
Yeah.
... so the combination of organic and M&A with ECP is really interesting in Europe.
Yeah, it is. There's plenty... I think, yes, that's the other way to look at it. There's plenty of ways of delivering the growth aspirations that we have without having to deliver a real estate transaction.
Yeah.
That's the way to look at it, rather than ruling it out.
Timing of the next generation of funds.
Well, that's probably all for you, isn't it?
Well, we're just finishing the last lot. We know, so-
I mean, look at him. He's aged an awful lot in the last... I mean, having a look at this, having gone around-
Thank you very much.
... raising the existing fund, I think we sort of would like to have a bit of a pause-
No, but we, I mean, I guess the answer is the next one. There's no change to the timing, David, of those funds. I don't think we're expecting fundraise market conditions to massively improve in the next few years. You know, there's the pigs going through the python of the size of portfolios and getting cash back to investors, that will improve things a lot. But you know, we've got a very diversified LP base now.
I think that's-
And as Raoul was saying earlier, you know, the addition of the new LPs from ECP is great to have that breadth. And we're pretty confident that that we're well-placed for next time, and it'll be at the timetable that Adam's described. Carry, Adam?
Sure. Morning, David. If you look at PRE for 2023, its progression was really, really driven by BE VI, BDC III in particular, and our growth from BG I. BDC III and BG I, in particular, were sort of the areas where we concentrated exits and significant fund progression. But importantly, they're both made material progress on their fund performance through repaying entirely their preferred return to investors, and therefore freezing the carry hurdle, and therefore, the fund is substantially de-risked, which then allows us to obviously recognize more of that carry component. But as I said, going forward, when you look at the quantum of inherent PRE that's locked up, there is substantial more value to come over the, you know, the next sort of four to five years.
That progress in BDC III has driven things-
Yeah.
-significantly.
Absolutely.
Really.
Yeah. BDC III, there is a reasonably high corporate carry relative to other of our historic funds, and the fund is performing so well. When you get to sort of 3.8x your money, current value, and we expect it to be accompanying all that at the end, the carry opportunity is tremendous, and it's sort of really coming through in the valuations. And I think it's an interesting... PRE is an interesting part of the business in that the, you know, we've talked a lot this morning about the lumpiness of exits, and it's really not linear. The way we really look at it internally, I guess, is twofold.
From a fund management perspective, as William says, we're constantly looking at which of our assets, which of the 25% on average of our assets we want to try and exit. What's the constantly working proactively to think about how do we exit businesses and what's the right timing and money back? And then from a sort of a management company impact and fund perspective, we really look at the total embedded value of that investment. And then, the chart that Adam showed, there's a significant embedded value at on the balance sheet of the current value of our funds. But there's an awful lot of value that will flow through over the course of the next five years as our existing funds mature and get better and deliver the returns.
Then you add on to that over time, there is a greater proportion of corporate carry sitting in the management company for the newer funds and the older funds. So that will really turbocharge this as we go forward. So although the you guys tend not to value PRE as well as FRE, with in this business, although we are a sort of an asset-light model, the assets that we do have and invested in our funds are set to drive significant profit and cash over the course of the next couple of fund cycles. As the carry comes through, the funds perform, and the higher proportion of corporate carry is realized.
David, any follow-ups from that?
No, that's great. Thank you very much for all that. Very helpful.
Paulie, back to you.
Before we continue to the next question, a quick reminder. If you would like to ask a question via the phone, please press star one on your keypad. Your next question comes from the line of Angeliki Bairaktari from JP Morgan. Your line is open.
Good morning, and thank you for taking my questions. Just a couple of follow-ups, please. Just to come back to the question of carry that was asked right now. Out of the GBP 55 million PRE that you had in 2023, can you tell us how much of that is actually reflecting exits and how much is just value, just to have an idea? And second question, I can see on slide eight that Bridgepoint Credit Opportunities IV is actually now 85% deployed. So does that mean that we could expect the next vintage of that strategy to get activated in 2024? And lastly, if you can also talk about the target size that you have on BDL IV, please. Sorry, BDL V. Thank you.
Okay, Adam, do you want to do the PRE point?
Yeah. Hi, Angeliki. If you break down the PRE for 2023, that total of 55 million, it breaks down to GBP 30 million of carry and GBP 25 million of co-invest. Now, remember that co-invest is simply the proportion of a value increase for the GP co-investments on our balance sheet, added straightforward mark to market based on the fund elements. The carry is obviously then driven by the exits and the discount unwind, which, as I said, was concentrated in BDC III and BG I.
Okay, Raoul, the credit funds.
Yeah, I mean, of the two, the direct lending fund is the focus for the first half of the year. When we look at the sort of the quantum and the size of direct lending, you need to look at it in a totality for the vintage. In that, what we're finding in that market is that there is a mix, discussed this before, mix between people investing into the fund itself and people investing in dedicated SMAs that sit alongside it. So you need to look at that in totality, 'cause the mix between the two may well shift. The total target is in the order of GBP 4 billion across all of those.
Well, I don't... I think that will be raised during the course of 2024 and 2025. And don't forget, in credit, the fee base of this is different from equity, where the fee base is based upon the deployed capital as you deploy it. So the important metric in credit is to make sure that your fundraising is running ahead of your deployment speed. And therefore, you've always got a bit more capital to deploy than you are deploying, and that makes sure that you can keep in the market. And so although the total is that sort of number, we expect to raise that over the course of 2024 and 2025, and that doesn't, you don't need it for certainties.
You don't need to raise the $4 billion to start doing it. You raise it over time, and you deploy it as you go along.
Date of transition between four and five, when are you, when are you expecting that?
Well, I think it's less of a date of transition in credit than it is in sort of-
Right.
'Cause it's effectively once you, once you've closed the capital, you just start deploying the capital-
Okay.
... into different bits. It's not, it's not the same sort of-
So you can-
Cliff, once you-
Invest the two together in that sense?
Yeah, you could if you wanted to.
Okay.
You just allocate it differently to different pools.
Angeliki, does that answer those questions for you?
Yes, just on the BCO IV, sorry, on the BC O V then, that is the same interplay, I guess, where-
Yes.
... 'cause the fund is currently 85% deployed-
Yes.
... so it doesn't leave much more firepower for you to deploy out of that fund. I presume you have already then raised some capital for BCO V-
No.
... which you can start potentially investing?
Yes.
Yes, but the other thing about the Credit Opportunities Fund is it tends to have a slightly higher velocity in that quite a bit of the capital they deploy comes back quite quickly in the nature of what they're doing. So it's currently deployed-
Right.
... to that sort of level.
And you can reinvest that-
Yeah, you do.
... potentially?
Yes. Yes, you do. It's not, it's again, it's not quite the same sort of structure as having a private equity fund. You actually sort of can deploy-
Yes.
... you deploy within the investment period. And it's all about the balance between deployments, deployment, and the rate of repayment. And there is an element, in a direct lending strategy at least, there is an element of sort of it sort of come together in the times when you're deploying more, you tend to have more repayment coming back 'cause the exit markets are stronger. And in times when you're deploying a bit less, the assets that you've got are a bit stickier. Credit opportunities is a bit more of a, I suppose, going in and seeing opportunities and buying positions, and then trading it a bit more. But so the way you...
The way I would look at it is what is maintaining the deployment, and that deployment quantum in total, gently ticking up over time.
It's net deployment.
It's net. And when you look at the guidance that Adam was giving, it's, we're-
It's about 25.
... we're guiding sort of GBP 1 billion a year-
Yeah.
... plus of net increase in the credit deployed capital.
Okay.
That, that's fair, but can I just... Sorry, one more thing. On BCO then, is it fair for modeling purposes to expect that the next vintage starts deploying in 2025 and not in 2024?
Yes.
Yes, but, yes.
Thank you.
Okay, Paulie, next question, if there is one.
There are no further questions on the conference line, and we will now address questions submitted via the webcast page. I'll hand over to Adam Key to read out the written questions.
We have, we have two sets of written questions. First, from Tom Mills at Jefferies. First question: There are two high-profile IPO processes ongoing from two of your European sponsor peers at present. If those go well, do you envisage it having a galvanizing effect on the European IPO markets, as well as sponsor-to-sponsor exit deal flow? Secondly, those two deals currently in the market are having to deleverage quite materially. Is that something you would also envisage having to do with potential exits, whether sponsor to sponsor or via IPO, to the extent relevant?
Do you want to do it?
Yeah, I mean, I think, Tom, you have to recognize that the IPO market is the arena for the large buyout world. You know, when you look at the size typically of companies that are floating, it's typically in the several billion. So I think we've done, you know, a huge number, 250 exits over the last 15 years, and we've had one IPO. So it's not that significant in a Bridgepoint context. But yes, I mean, I think these are important tests of whether that market will be open this year. It will have implications for the whole market because obviously it's driving return of capital. And yes, deleverage is an issue because the quoted markets are intolerant about lots of things, one of which is leverage.
Next question.
And then, secondly, from Nicholas Herman at Citi. A technical follow-up for Adam: Can you please remind us of the tax rate differential between fee-related and performance-related earnings at Bridgepoint and ECP? And is tax on net carry negligible, while tax incurred is based on FRE and investment income streams?
Well, Nicholas, in short, there is no quick answer to that, and we could get ourselves completely lost in the science of the relative components of how the tax liabilities that arise. But which is why we've always simply tried to guide you to an effective tax rate of 5%-10% on the Bridgepoint-only elements. And the exits really determine whether you're at the higher or lower end of that range. So in 2022, we had a large number of exits. The effective tax rate had come down.
This is all about the release of deferred tax, and then with a slower exit environment in 2023, the effective tax rate goes up, and we'd, we'd previously guided to 10%. We came marginally higher than 11%. The relative increase into 2024, as I said, is all driven by the ECP effective tax rate. That is obviously an offshore payer, although we look to whether we can try and find efficiencies in that going forward. Perhaps from a modeling perspective, we can go into it, but I think it, we could get ourselves wrapped up. It's, you know, we should probably continue to guide at that 5%-10% for Bridgepoint is the right way to think about it.
Okay, I think that ends the questions and ends this set of presentations. I hope it's been useful. Please feel free to talk to Adam Key if you have any questions. But with that, thank you very much for joining us this morning, and Paulie, thank you for managing the question process.