Good day, ladies and gentlemen, and welcome to Bridgepoint Group plc 2023 interim results. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session through the phone lines, and instructions will follow at that time. Participants can also submit questions through the webcast page using the Ask a Question button. I would like to remind all participants that this call is being recorded. I will now hand over to William Jackson, Chairman, Bridgepoint Group plc, to open the presentation. Please go ahead.
Great. Thanks, Irene. Good morning, everybody, and welcome to Bridgepoint's 2023 interim results presentation. I'm William Jackson, Bridgepoint's Chairman, and I'm joined this morning by Adam Jones, who those of you who tune into these presentations regularly will know is our CFO. Xavier Robert, our CIO, is with us this morning. Xavier hasn't been at one of these presentations before, but he's a long-standing senior member of the Bridgepoint team, and is well-placed to talk about the current market. Of course, Andrew Konopelski, who's the Managing Partner of Bridgepoint Credit, is also with us to share his enthusiasm for current market conditions in the credit markets.
firstly, it's a pleasure to welcome everybody to the call, and equally importantly, to present a robust set of results for the first half of 2023, and most importantly, reiterate our guidance for the full year. This morning, we're gonna cover three topics. I'm gonna talk through a summary view of where we stand today and what's been going on in that first half, including an update on the market and our fundraising progress, BE VII now, in particular, coming towards a successful conclusion. Xavier is gonna update you on our investment activity. Andrew will take us through a review of the credit business and the progress that's been made since the acquisition of EQT Credit a couple of years ago.
It's an especially interesting time in the credit markets, and we're keen to make sure that shareholders understand how we're driving value from the opportunities that are around. Following Andrew, then, Adam will talk through the details of those first half numbers, and we'll, of course, then, open up to Q&A, which will be managed by Irene. I'd like to just start on slide three, and a quick summary of the performance in the first half and where we stand today. You may remember that earlier in the year, when we reported our full year results for 2022 in March, I said that we were entering 2023 in a strong position despite market uncertainty, and that we were confident in our ability to deliver in this environment.
I'm pleased to confirm that that remains the case, and that our fund performance continues to be resilient. As you know, we're one of the world's leading alternative middle-market asset managers. We finished the first half with 35.5 billion EUR of AUM, diversified across private equity and private credit. What have the highlights been for the first half of the year? Well, firstly, we continued to make progress in capital raising, despite some of the well-documented slower fundraising markets. I'll talk about this a little bit in more detail later, but we've now closed Bridgepoint Direct Lending III, the main senior debt fund for Bridgepoint Credit, and we continue to make good progress on B7, which is now well on the way to completion.
Fund performance remains strong, Xavier is gonna cover that, and we continue to deploy capital across all our strategies, pretty much in line with expectations. You can see some of the PE investments made in the first half of the year along the bottom of this page, and we've got a couple of further investments to announce pretty shortly. As anticipated, we've had fewer exits in H1. That was in our thinking, but we have a very strong pipeline of targeted exits going into H2. In terms of financial performance, fee-paying AUM is up 24% year-on-year to GBP 24.6 billion. Correspondingly, management fees are up 24% to GBP 125 million in the first half of the year.
As we look to match the evolution of our cost growth with our AUM growth, FRE is actually up 91% year-on-year to nearly GBP 43 million. As anticipated, H1 EBITDA is down year-on-year, principally as a function of the fewer exits in the first half of the year, especially versus H1 2022. Our exits this year are weighted to the second half of the year. That was the plan when we started the full year. But it's also worth noting, we had a very, very strong H1 2022, which provides quite a tough comparator. Now, before going deeper into our performance, it's just worth providing a quick reminder of why we're excited by Bridgepoint's future ourselves, 'cause we're, of course, major shareholders in the company.
We think Bridgepoint has a great market position, which is extremely well suited to the current times. We benefit both from pretty long-term tailwinds in private markets, but also focusing on the middle market, which has remained probably the most active area during this recent period of market rotation. We have significant medium-term organic growth potential for the business, both in our existing strategies, but also as well as our opportunity to develop complementary products organically and by acquisition. For those of you who joined us at the full year 2022 results presentation in March, you might remember that Raoul Hughes, again, one of our senior leadership team, provided a pretty detailed update on our strategy in this area and our approach to business development.
I'm not gonna go into that in further detail today, but we've got really good momentum in that area, and we hope to be able to provide good clarity on this by the year-end. However, what I hope the update today will demonstrate is that Bridgepoint's proven ability to partner with new teams as we build out our strategies over time, is illustrated by what Andrew and the team have been doing in Bridgepoint Credit. Bridgepoint has a deep and resilient investment track record. It's been developed over 30 years, and it's accompanied by a highly experienced leadership team, certainly weathered by cycles as well. All of this has helped us build resilient investment performance using a platform that has significant financial operational leverage, which drives our performance, which Adam's gonna talk about.
Of course, all of this drives shareholder value with a strong balance sheet that remains asset-light, with high and stable margins and very strong cash conversion. Of course, today, we have over GBP 650 million of cash and investments on our balance sheet as part of our current market cap. And we also pay a high dividend yield, and with our share buyback program coming to a completion later this year, the combined contributes significantly to total shareholder return. Turning to page 6 and fundraising, I think everyone listening today will be acquainted with the fact that fundraising markets have had their challenges over the last 18 months.
The market has recalibrated materially, and I think investors, now more than ever, are focused on realized returns as the best performance benchmark. Bridgepoint's strong investment performance in recent times, its disciplined investment strategy, and highly experienced team are really relevant at this point in the cycle, and that's proving increasingly attractive to our fund investors, especially those currently in due diligence, as those markets recalibrate. That's reflected in the progress we've made over the last 6 months, with half a billion of commitments coming in to BE VII since we last spoke to you in March. The fund now stands at having EUR 6 billion of commitments, nearing completion on with the target remaining unchanged.
Alongside that, Andrew will also talk about BDL III, which where we've recently completed the fundraising. I should also note that we're actively in the market with Bridgepoint Credit Opportunities IV, with Bridgepoint Growth II, which is now halfway towards its target, launched at the beginning of the year. We'll probably be launching our fifth CLO later this year. Of course, behind that, Bridgepoint Development Capital V, a highly anticipated fund, is coming down the road and planned for early 2024. Lots of activity on capital raising, both currently and over the next period of time.
Looking ahead, we have a good pipeline of fund investors finalizing diligence on BE VII, the flagship fund, and we're keeping that open for LP commitments into the 1st quarter of 2024, just to enable some of LPs, mostly recommitments, to use their allocations out of 2024 if they've got some of those challenges. I'd like to turn to slide 8, I'll talk about Bridgepoint how Bridgepoint's approaching investment across our funds. A few key themes for the times in my mind. We're in a totally different environment today to 2021 or 2022, I keep repeating that internally to our own teams. Pricing is different. There are new thematics around. The world continues to change very fast, as you'll hear from Xavier, we've tilted our investment strategies accordingly.
If you're in a market where you have lots of liquidity, where interest rates are low, where modest economic growth is helping drive returns, you have rising valuations, you've got huge tailwinds behind investment activity, especially in these very large transactions that go on. That's now gone, certainly for now anyway. Returns today are generated from real growth, from hands-on value creation strategies, and from focusing on cash generation. All of these are strengths of Bridgepoint and what we do in the market today. Within this changing market dynamic, we're beginning to see momentum building back in M&A activity, which is encouraging as we enter the second half of the year. Portfolio construction, investment discipline, sector conviction all remain critical. I think to create alpha today, you need to be in the right space.
You have to have genuine tools to create value. You really have to be very hands-on with the portfolio. I could go on, but I hope that gives you a view of how we're thinking about the current investment market, and I'm now gonna hand over to Xavier, who will expand on those comments. Xavier, over to you.
Thank you. Thank you, William, and good morning, everyone. What I would like to do this morning is really take a quick step back and spend a moment giving you another view of Bridgepoint's investment strategy, because it's applying to all the funds. Our aim, obviously, is to generate outstanding returns, and that's a goal that is built on two cornerstones. We need to have an impressive asset selection on one hand, and then we need to have strong portfolio value creation once we own the asset. The way we select the businesses we invest in at Bridgepoint follows a clear and focused thematic approach, which targets areas where, you know, Europe is leading. For example, energy transition, AgTech, pharma products, just to name a few.
Once we have invested in a business, particularly on the PE side, we apply a multi-layer value creation approach, leveraging a network of local offices that allows us to take our businesses into new geographies or execute value-enhancing M&A, but also leveraging our OSG team to deliver operational excellence. I'd like to do now is spend a couple of minutes giving you a bit more detail on each of these two cornerstones, starting with asset selection. A thematic approach is central to everything we do, and you can see on the screen the verticals we focused on, and obviously, technology and as an horizontal, touching everything. Even within these sectors, we don't invest everywhere and anywhere. We focus on a few subsectors which we have specifically identified due to their structural growth.
It's not only our sector teams that are doing that, but it's the entire organization that is focused on these subsectors. That creates what we believe is a fantastic origination machine. The origination machine we have created, therefore, means that we will invest about 80% of our funds in the subsectors that we've selected. It also means that we expect to generate most of our deals in a bilateral way or outside conventional auction processes. This approach to deal sourcing also results in us typically having interacted with the managers or the owners of the companies we invest in more than 4 years. If I turn to slide 14, you can see this approach in action with the 3 deals we have now signed with our latest private equity fund, Bridgepoint Europe VII. These 3 deals are all on thematic.
They're all bought from founders of families with whom we have developed long-term relationships. All of them have organic growth more than 20%. I'm often asked, you know, the question: What is the typical Bridgepoint deal? My answer is, you know, it's a deal that is within these niches that we're focusing on. It's usually, you know, with a business we've developed, you know, long-term, trustworthy relationship with a good product, a leading position. What is very important is we need to have room also to improve the operations and the geographical coverage. On top of this thematic approach, what we like also to do is to embed a number of financial characteristics in our portfolios across the PE, but also the credit funds, to build resilience into our funds.
We like to have, you know, high revenue visibility, high EBITDA margin, strong cash conversion, also strong equity cover. The numbers that you can see on the slide, you know, really speak for themselves. William has touched a little bit on investing in the current market, but on the screen now, you can see the deployment across the key funds in H1 2023, which illustrates that, you know, we are still finding attractive middle market opportunities that meet the criteria that I've just laid out. All the funds are currently on track against their deployment targets. That is the main message. I'd like to move to the second cornerstone, which was, you know, the value creation post-acquisition.
Once we've acquired a company, we then deploy a well-structured playbook and develop a value creation plan that we then track, obviously at the board level within the company, but also at Bridgepoint level through regular portfolio management committees. This value creation plans typically comprises several common elements. We put the right governance in place. That's absolutely fundamental for all the companies we invest in. Then we're gonna select the two or three operational levers which have the biggest impact on the company, and we're gonna execute on them with the help of our OSG team. Also something that sometimes people don't realize is we spend also a lot of time repositioning the companies we invest in to make them more strategically appealing for buyers at exit.
Of course, when we do that, digitalization, tech enablement, sustainability are central to this approach, and we've built the necessary in-house capabilities to make this happen. I think what is really important when you look at all of this is that it allows us to generate very strong returns, not only in one sector, but in all of them. This is quite fundamental to the consistency of our returns fund after fund, and a very useful tool to make sure that we're not dependent on one sector outperforming the market. Just to close this presentation, you can see on the screen now probably something that is, you know, the most important graph for me, and we're using here, Bridgepoint Europe VI as an example.
You can see the organic revenue growth of the portfolio, Bridgepoint Europe VI, every year versus the European GDP. You can see that we systematically outperform thanks to a thematic approach and strong portfolio value creation. In 2022, for example, we grew a portfolio revenue organically by 22%, despite the challenging macro environment that we're all aware of. For me, this is probably the best proof that our strategy is the right one. I will now hand you back to William, who is going to talk you through the latest fund performance.
Thanks, Xavier. Not surprisingly, everything that Xavier has just talked you through goes to fund performance, and I'd just like to cover that for a second now. As you can see from slide 23, fund valuations were up or flat at the June 13th, and valuation progression remains in line with targets. That's extremely encouraging. We're pleased with that performance, and whilst we're definitely not immune to macro trends, and you see that within the portfolio in certain places, and we're not complacent, we're well positioned for current market conditions, and our middle market growth positioning, with access to leverage for new investments in the space, and activity still going on in the middle market, is really a great place to be.
I'll say again that if our funds perform for our investors, which is always our number one focus as a team, then our shareholders will also do well. Finally, before I hand over to Andrew, 2 minutes on exits. As I mentioned earlier, exit markets have been more challenging. I'm gonna focus on P because credit is obviously not driven by exits in the same way. As we indicated, during our full 2022 year results in March, we expected H1 2023 to be a little bit slower for exits than the previous year, with 2023 exits phased principally in the second half of the year. What's encouraging is that despite everything that's going on, we have a very, very good pipeline of exits.
Inevitably, we may see one or two of those slip into 2024, on the basis of where we are today, we currently expect to fully deliver our expectations for 2023. Definitely we're confident about the full 2023, 2024 investment income in aggregate, and remain positive about what's going on in the market space in that regard. With that, I'm gonna pass you over to Andrew to update you on our credit business. Andrew?
Thanks, William. I'd like to give you a short update on the Credit business, as well as our view on the current market. Turning to slide 25, let's start with an overview of the progress we've made since the acquisition of the Credit business from EQT in October 2020. Over those last two and a half years, we've been on quite a growth journey. I'd like to share a few of the highlights. We started by seamlessly merging two fantastic Credit teams into an even stronger combined group, with a presence in eight countries and access to the full strength of the Bridgepoint network that William and Xavier were speaking about. With that strengthened team, we've successfully raised EUR 6.2 billion of investable capital. That's over 40% of the total capital we've raised in the 15 years since our inception in 2008.
We also launched a new CLO initiative, investing in diversified portfolios of senior secured floating rate liquid loans. The first CLO was launched in the fourth quarter of 2020, and we're now on track to price our fifth CLO in the next few months. When considering the capital that's run off over that same period, total credit AUM has grown by a very healthy 76% to EUR 12 billion of capital across our three investment strategies. As William mentioned, in May this year, we held a final closing on Bridgepoint Direct Lending III, which at EUR 2.85 billion, which when combined with the fee-paying managed accounts, has added a further EUR 3.4 billion of investable capital to our direct lending strategy.
This is substantially larger than the preceding vintage, underlying the strong investor appetite for the direct lending product in the current market. We've also successfully raised approximately EUR 1 billion for our credit opportunity strategy, which we're close to holding a final closing on our latest fund, Credit Opportunities IV. Now, to support all this activity, we've also been busy building the team, which has grown considerably. We're currently 65 dedicated professionals, which is an increase of over 50% since October 2020. Moving to slide 26, you can see the growth in fee-paying AUM has been quite consistent year-on-year since 2020, and we anticipate a strong second half to this year. As you know, our credit funds receive fees on invested capital, so the amount of capital invested at any one time broadly dictates the revenue of the credit business.
There are two points I'd like to draw your attention to here. The first is that increasingly, we're raising capital through separately managed accounts and co-investment vehicles, as well as through our flagship funds. We're pleased with this development as it indicates the strength of our origination and the sophistication of our platform, which enables us to provide our investors with vehicles that can match their risk appetite and their investment criteria. Secondly, our credit funds are able to reinvest capital for the full investment period. When we realize capital during the investment period, we can reinvest it, at least the principal amount again. I mention this because it's different than the typical PE model. Importantly, this enables us to generate a higher money on cash for our investors, but it also increases the total lifetime fees that we generate from our funds.
Both are positive developments, but differ a bit from the typical private equity fund model that you may be more familiar with. Finally, I'd like to talk briefly about the current credit markets and touch on the progress we're making in investing in our latest flagship funds. It's certainly an interesting and exciting time to be a credit investor. After the rapid rise in interest rates over the past year, we now have a meaningful base rate for the first time in a decade, with 3-month Euribor currently about 3.7%. The majority of our investments are floating-rate loans, so that has a material impact on the total return that we're delivering for our investors. The interest rate rises, plus the broader macroeconomic environment, has also increased risk premiums, again, adding to the total returns we're able to generate.
Of course, this increase in returns needs to be balanced against the health of the businesses we're lending to. We're highly vigilant, and view the current market environment as a significant positive, and one in which we believe we are well-placed to deliver our credit investors the best returns for a decade. When coupled with the fact the public debt markets have now been largely closed to new issuance, allowing the private debt asset class to gain further share, we're really enjoying ourselves at the moment. Where does that leave our three credit investment strategies? If I start with our syndicated debt strategy, our CLO business continues to go from strength to strength and aims to price its fifth CLO in the next few months.
The first four CLOs are all performing well, with the portfolios in a strong position and target returns above our initial expectations. We currently have the highest average asset price across active CLO managers in Europe, which, when combined with the overall returns we are delivering, is a testament to the team's ability to find optimal risk reward in this market environment. In direct lending, I'm pleased with the progress we're making, the sponsor relationships we're building, the investment risks we're taking, the health of the portfolios, and the returns we're delivering. In the latest fund, BDL III, we've already made 28 investments to date, lending to 22 different financial sponsors, of which nine are new in this fund.
To give you a few statistics that speak to the quality of the investments we're making, our average loan-to-value for those 28 investments has been 33%. We have a very strong equity cushion behind us. With an average to EBITDA margin of 30%, it really speaks to the high quality of the businesses we're lending to. In credit opportunities, BCO IV is at a similar point in its investment cycle, with over 60% invested in 26 transactions to date. Now, it's a particularly exciting time for this strategy because we look to make investments in both the primary markets, where the pipeline is benefiting from the growth in private debt, but also in secondary markets, which has become particularly interesting in uncertain times.
Both are providing strong investment opportunities at the moment, and this is allowing us to build a nicely diversified portfolio that's capable of delivering mid-teens returns with attractive downside protection. Now, both BDL III and BCO IV are on track to meet their target returns, and we aim to be back in the market talking to investors about their successor funds within the next 12 months. In summary, we continue to build on the good progress we've made and are confident in our ability to deliver across all 3 strategies in the current market environment. Now, I'd like to hand you over to Adam to talk you through the group's interim financial results.
Thanks, Andrew. Good morning, everyone. I'm now going to provide some more details about our financial performance for the first half of 2023. To, of course, clarify our full year guidance. First, let's start with our fee-paying AUM metric. Fee-paying AUM grew by 24% over the last 12 months, reflecting both the switch on of BE VII fees following the fund's first formal close last year. Of course, the growth in invested capital across our credit strategies, with credit fee-paying AUM growing by EUR 1.2 billion or 18.5% over the last 12 months. This growth, this impressive growth, is actually net of EUR 2.4 billion of fee-paying capital reductions associated with realizations and a return of capital to investors across both equity and credit strategies, as well as step-down fee adjustments.
That growth in fee-paying AUM drove strong double-digit growth in fee-related income, up 23% in aggregate over the 12-month period. Management fees for the first half of 2023 reflect a more normalized profile than the second half of 2022, which include a material amount of catch-up fees on BE VII, as well as a higher fee base on older funds, which have since reduced with divestment. Of course, fee margins are stable and unchanged across both periods. On the subject of obviously reducing capital base for the same reason, fee income will naturally decline in 2024 as the net invested capital base on older funds shrinks further through the portfolio realizations that William's referenced. Fee income will step up once more in 2025 at the transition to the next material new fundraise, which is obviously Bridgepoint Development Capital V.
Investment income recognized in the first six months of 2023 is just under GBP 13 million. That's exactly in line with our own budget expectations. As I previously said, investment income is not linear across any year, and it's dependent on both the progression in fund performance as well as the timing of exits. To illustrate that point, the graphic on the right side of this slide shows that investment income in 2021 was materially skewed to the second half of that year, while we saw the reverse profile in 2022, both driven by obviously the timing of exits across those years. The pipeline of planned activities we have for 2023 is heavily skewed to the second half of this year, which means that our own expectation investment income is also heavily weighted to the next six months, as it was in 2021.
While we're confident in the delivery of these exits over the next 18 months in aggregate, there does remain the possibility of some slippage of investment income from 2023 to the benefit of 2024, based purely upon the timing risk associated with completion dates for those realizations. Remember that we are not entirely in control of that process based on external factors such as regulatory clearances. Let's look at our operating expenses, which total GBP 82 million for the first six months of this year. These expenses have grown by 4% over the prior year period, and that reflects prudent management of cost growth in light of the current macro environment, despite the inflationary pressures being evident.
People costs are by far the most significant expense at 75% of this total. Full-time employee headcount has grown by 3% to 379 over the last 12 months, reflecting prudent phasing of personal investment in line with the pace of fundraising. Other expenses grew by 22% to GBP 21 million, reflecting principally higher premises costs associated with our new London office, as well as higher legal and regulatory spend to support the growth of the group and its listed status. The cost growth in H1 '23 was slightly below the previous guidance of high single digit, this reflects the timing of personnel investments that I've just mentioned, plus a more modest bonus accrual, which obviously relates to the first half investment income performance, and again, the bonus accrual will be skewed to the second half.
The guidance for high single-digit growth, therefore, for 2023 remains unchanged. Beyond 2023, we expect more modest growth in headcount and personnel cost, again, reflecting the benefits of the operating leverage with our fundamental business model. Our growth in fee-paying AUM led to fee-related earning growth of 91%, as William said, over the 12-month period. FRE margin materially improved from 22%- 34% for the first six months, exactly in line with the guidance I've previously given. EBITDA for this period was just under GBP 56 million. That's about 10% down on the same prior year period, purely reflecting the lower recognition investment income in the current half year due to the lower number of exits, as previously explained. Here's a high-level overview of the underlying Bridgepoint balance sheet, excluding the presentational impact of our consolidating our CLOs.
As a reminder, we are a capital-light business. Aggregate co-investments represent approximately 1% of our AUM. Our net cash position at the end of June 2023 was GBP 258 million, plus undrawn facilities of some GBP 200 million. Those facilities were recently renegotiated to reflect the growth in the profitability of Bridgepoint since the IPO, and obviously, the combination of these two clearly gives the company significant resources to support its M&A activities. Before I move on to guidance, I thought it would be helpful just to dig into our balance sheet a little further and illustrate the potential future value of fund co-investments and carried interest. As a reminder, the value of co-investing carry on the balance sheet is currently GBP 357 million.
The first column in this chart shows that Bridgepoint has enjoyed strong investment returns over the last five years, with nearly a quarter of a billion pounds recognized since 2018. Based upon expected fund performance, we see the potential for a further GBP 220 million-plus of investment returns, which is illustrated within the dotted line. The carry recognized on the balance sheet is associated with unrealized investments, and in accordance with accounting rules, that receivable is recorded at a discount. Obviously, once the underlying investments are sold, the carried interest will then be recognized with the reversal of that discount, which equates to an additional GBP 67 million of carry value based purely on current valuations. That's the second column in this chart.
The absolute amount of investment return will, of course, be dependent upon the performance of the relevant fund. For illustrative purposes, we see in the third column an incremental GBP 159 million of investment returns if the existing funds deliver to our expectations. Importantly, this analysis does not include any contributions from those funds that are currently investing, being Bridgepoint Seven, Development Capital Four, Direct Lending Three, and Credit Opportunities Four. The group's co-investments in those funds, and therefore its absolute returns, will obviously be larger than prior funds because the fund sizes have increased. In conclusion, there is very significant upside potential to the values that are reflected in the interim results. To conclude my part of the presentation, I wish to now clarify our guidance for 2023 and confirm our dividend for the current year.
We continue to make strong progress on the BE VII fundraise, having raised a further EUR 500 million of commitments over the last three months. We now expect to hold our final close in early 2024. The target remains EUR 7 billion, as we said before, unchanged compared to now GBP 6 billion of commitments received as of today. Investment income is expected to represent around 20% of total revenues in the short term. However, in 2023, we now prudently expect investment income to be in the 15% range based on the current exit pipeline, with a corresponding upside in 2024 above the 20% guidance. Whilst cost growth in H1 2023 was slightly below the previous guidance, again, due to that deliberate phasing of headcount investments, the guidance for high single-digit growth for the full year 2023 remains unchanged.
On FRE margin, the short-term guidance again remains unchanged in the 30%-35% range, although, as I said before, 2024 will be slightly below the bottom end of that range, purely reflecting the usual margin profile of the private equity cycle. Fee-paying AUM will naturally reduce as we successfully realize the investments ahead of the next material fundraise, being BDC V from January 2025. Credit deployment and therefore the growth in fee-paying credit AUM, is expected to be at least EUR 1 billion annually in the short term, including the launch of new CLOs.... On tax, the effective tax rate we expect to be at the top end of the 5%-10% range for 2023, but again, of course, subject to any potential changes in the U.K. tax code.
We are planning to pay an interim dividend of GBP 0.044 per share in September. That represents a 10% increase on the 2022 interim dividend. When you combine that with a capital return, which is roughly GBP 0.038 per share via the share buyback program, that means the total capital return to shareholders in the first half of this year will be more than double that in H1 2022. In summary, we are very well placed to deliver within the range of current expectations for FY 2023. With that, I'll hand back over to William.
Great. Thanks, Adam. As usual, we've covered a lot of material this morning, at some speed. What I hope you take from the presentation is a few things. Firstly, that Bridgepoint has delivered robust financial performance in the first half of 2023. We're confident, but as I said, not complacent about the full year prospects, in line with consensus, given the good momentum we have right across the business. With that said, we're well positioned to deliver in line with those expectations, but recognizing that in the current markets, precise timing of completing exits, which drives part of our investment income, splits between 23 and early 24, isn't entirely within our control. We have a good pipeline to hit our numbers.
Our Bridgepoint Seven fundraise has now attracted strong support from new and existing investors, and it's coming near to completion. Our business continues to have multiple avenues for organic growth, not least with momentum in the funds we have in the market, and strong prospects ahead for BDC V and the other funds coming to market in the next 12 months. We remain committed to deepening and broadening our middle market investment platform. It's our key competitive advantage, and we'll do that organically and by acquisitive growth. Obviously, as Raoul Hughes talked about in March, acquisitions have to be accretive, and that remains a key strategic focus. We're a balance sheet light company, as Adam's just spoken about, with 1% of our AUM on the balance sheet.
The assets that we do have on the balance sheet are a hugely valuable part of the current market capitalization of the business. Finally, we believe that Bridgepoint today continues to offer shareholders both good growth potential and real value in the balance sheet. Thank you for listening to the presentations this morning. Irene is the facilitator for this morning, and we're now gonna open up to questions. Back to you, Irene.
Thank you. 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, and then one on your touchtone phone or on the keypad on your screen. If you, however, wish to withdraw your question, you may press star and then two to remove yourself from the question queue. Once again, if you would like to ask a question, you may press star and then one. We will take our first question from Arnaud Giblat of BNP Paribas Exane. Please go ahead.
Yeah, good morning. I've got three questions, please. Firstly, can I ask about the GBP 500 million of BE VII raised in Q2? I suspect that these haven't earned any catch-up fees yet. Is that the case, and will they be earning catch-up fees in H2? My second question is generally on the portfolio companies. You show a high level of growth in EBITDA within the underlying companies. I'm just wondering if there are any portfolio companies that are causing trouble in the private equity or even in the private debt portfolios? Just continuing on the credit side, it's good to see you come back to market with a CLO.
How have the asset spreads adjusted there? Are we at attractive levels to be generating attractive returns in CLOs? I mean, obviously, the CLO market feeds off the syndicated market. Understood what you're saying about there being a huge opportunity with direct lending, taking market share away from the syndicated markets. If we're having a healthier CLO market, I'm just wondering if we don't see the syndicated markets come back in force. Thank you.
Great. Thanks, Arnaud. Great to have you with us this morning. Adam, do you want to talk about the financial, the GBP 500 million and when that comes into?
Yeah, absolutely.
-numbers?
Yeah. The GBP 500 million was commitments that had been agreed in this, in the second quarter. You are right that not all of the catch-up fees on that were billed in the first half of the year, there will be some further catch-up fees in Q2 2023. Fee margins are entirely stable across both 2022 and 2023. The blended fee margin on P was 1.3%, both for 2022 and 2023, and the credit margin, 90 bips, again, across both periods. Fee margin's stable, it's all about the... Any change of profile is really due to the catch-up fees, which obviously were more significant in 2022.
Does that answer that question for you, Arnaud?
It does. Thank you.
Great. Moving on to the health of the portfolio is a really good question in these times. I mean, when you look across Bridgepoint's activities, we have a huge exposure to a whole range of companies. It's quite an interesting window on what's going on in the markets. A couple of observations for you. I mean, firstly, inevitably, anything that is consumer-facing is definitely softer. We see that in the portfolio. I mean, fortunately, across what we do, Xavier will probably have a number, but our exposure to discretionary spend is-
It's below 10%.
Well below 10%. We've been cautious on the UK since Brexit. We currently have in our equity funds, probably again, similarly 10%. Slight different weighting between BE and BDC, but in BE, the flagship fund, it's under 5% of exposure to the UK economy. What I think we're seeing is inflation actually coming down pretty quickly across Europe. Probably in advance of some of the numbers you're seeing from the macroeconomists. That's interesting. Overall, our portfolio is in pretty good shape. I mean, inevitably, with the number of companies we've got, in the most buoyant times, you always have one or two that are laggards.
I think it's fair to say, Xavier, there's nothing that we're getting sleepless nights about at the moment. No complacency.
No, exactly. We had some companies that, because of COVID, if I go back a bit further, were impacted, but these companies have all, you know, rebounded.
Yeah
you know, with the markets and the work we've done. But also, if you look at the portfolio as a whole, we've got very high EBITDA margin, of, you know, close to 30%, as Andrew said. Which means that we've got really strong pricing power within the companies we have. So, you know, we've been able to pass the inflation that we've seen to the clients, so we've had very, very little impact on the margins.
I think one of the interesting observations we'd make about the market, is that in the mid-market space, and our definition of mid-market is up to about EUR 1 billion of enterprise value, there's a lot of activity going on, and if you've got high-performing businesses, there's a lot of interest from buyers in that. While we've been... You know, as you can imagine, we're a long-term business, so we don't typically run these things on, you know, what's gonna happen over the next quarter, because the nature of sale processes is that they take much longer than 1 quarter to deliver.
When you look at what's going on out there and what we've delivered in earlier funds in the first half, 'cause obviously, the financial numbers that we're reporting on for the company, the company's interest is in our most recent funds. There's strong demand for exits out there, which I think also gives a sort of feel for where the market is. We'll just now move to your CLO question. Andrew is best to answer that. Andrew, over to you.
Sure. I think, Arno, if I got your question correct, I mean, what matters to make the CLO attractive is the net spread between assets and liabilities. We've seen liability costs gently creep down to a reasonably attractive level, at least if we look over the past 18 months, and asset spreads have held up sufficiently, such that the net is delivering a nice equity return. You know, as you know, we invest a portion of that equity off of our own balance sheet. There is a nice window at the moment. In terms of the whole market does work in a form of symbiosis in terms of the issue of new syndicated loans helps fuel CLOs, et cetera.
We have seen sufficient issuance that we can ramp a CLO this spring. You know, we haven't rushed to issue this one, but there has been enough issuance. The secondary market in Europe continues to get deeper, in terms of the market size is now about three times the size it was in the GFC, for instance. There's a fairly deep pool of secondary investments that we can use to fill in. We think it's quite an attractive market environment now. There may be a window before the summer. If not, we'll come back after summer and try to get it done.
Andrew, of course, the really interesting about the CLO activities for the business is that as you do sequential funds, starts to make a much more meaningful difference to the company.
Yes. Yeah, absolutely.
Arno, does that answer your question on CLOs?
It does. Thank you.
Great. All right, Irene, we'll open up for the next question.
Thank you. The next question is from Bruce Hamilton of Morgan Stanley. Please go ahead.
Hi, thanks. Morning, guys. Couple of questions from me. Just on the credit business, obviously, the opportunities on new investments sound good, but how do you think about the sort of potential default cycle, given, I think at an industry level, interest cover's fallen pretty significantly over the last 2, 3 quarters? How are you feeling about that? Secondly, can you just remind us on the sort of debt refinancing maturities for the broader PE portfolios? I think most of it's beyond 2025, but a bit more clarity there would be good. Then finally, in terms of fundraising, clearly sounds as though private equity is tougher than credit and infrastructure, listening to other people, and that the challenges are most acute with U.S. pension funds and better in Asia and Middle East.
Does that kind of square with your experience, and how are you sort of tilting your fundraising in terms of clients, maybe, you know, via Asia, Middle East, et cetera? Thanks.
Great. Thanks, Bruce, and morning to you as well. Credit, Andrew?
Default cycle. It's been great to have higher base rates, of course, because most of what we do is floating rate. Risk premiums have increased, but of course, with that comes the underlying performance of the businesses. I think Xavier picked it up quite well. I mean, I think the first line of defense is the types of businesses you're lending to. You know, average EBITDA 30%, going into these investments with interest covers in the high 2s, highly cash generative businesses, no retail, consumer, very little industrial. Looking for a resilience, we've actually seen that come through. We have seen a little bit of pressure, as you'd expect, on interest cover, and we did an analysis based on our second direct lending fund to try to keep a consistent cohort.
What we saw was that interest coverage ratios didn't fall as far as we thought they might, partly because these businesses have continued to grow. Similar to the private equity business, strong businesses in the middle market have many levers they can pull. While we've seen a little bit of EBITDA compression, we've seen a continued growth in revenue that's actually brought EBITDA up on an absolute basis. We drop all that through, we've seen interest cover come from about 3 times on those businesses to about 2.3-2.4. There's still quite a healthy buffer, partly because these businesses are very well positioned in their industries, and we're picking them, we're diligencing them based upon the network, the subsector thematics that Xavier laid out.
I think we have quite a few advantages on the way into these investments. Of course, you monitor them closely, but one of the benefits of direct lending is the very direct dialogue that you have with management teams, with private equity sponsors that we're lending to. There is an ability to address any issues upfront, or I'd say more quickly than the syndicated debt market. All in all, we're quite happy with where the portfolio is positioned, and there are no investments in the direct lending portfolios, the BDL funds, that we think would lead to a potential loss at this point.
Track record on losses historically?
Has been zero. I mean, it's, I think in direct lending, that's what you look for.
Yeah. Touch wood. Touch wood. Actually, one of the interesting things there that's a point worth making, that I think as people look at private markets, they don't often appreciate, is that there's real sector biases within private markets. When you look at the performance of private markets versus the overall equity markets around the world, you've got sector biases, and indeed, niche biases, which drive performance. The sectors tend to be higher growth, higher margin, and, you know, that reflects pricing as well, but you would expect better performance in those times. Xavier, actually, yesterday we went through all the debt.
Yeah.
Bruce's question is a timely one. We went through all the debt maturities yesterday.
Yeah, yeah.
you're well positioned.
Exactly.
to talk about that.
I've got the very current update. Within the private equity team, we have a very strong capital market team. They spend the time, you know, raising the most efficient debt packages for all the deals across all our private equity funds, but they also monitor very closely the debt maturity, the hedgings that we have, and the interest cover across the whole portfolio. The good news is, we have almost zero debt that are maturing in 2024 and 2025. We have obviously more debt maturing in 2026 and 2027, and the team is actually, that's a conversation we were having yesterday. The team is starting to work on the 2026 debts that are maturing. We look 2- 3 years ahead, you know, in that respect.
No, no issue whatsoever on that side.
Well over, probably 60, 70% is more than 3 years out, isn't it now?
Yes, correct.
In refinancing dates. Really important thing to keep an eye on, and also interest rate hedging. Very strong interest rate hedging in the portfolio. Historically, over the last 10 years, that's been an expensive insurance. Today, it's extremely valuable. Just moving on to the fundraise question. I mean, I guess a couple of observations here. Sometimes when you hear announcements in the market about fundraisers, and it's happened quickly or it's happened slowly, you need to remember that most private equity groups are fundraising the whole time. While you might open a fundraise from a marketing perspective on 1 date and close it quickly, you've generally been in the market from the day you've started investing, 'cause that's the nature of the business that we're all in.
I think, you know, when you go through times where capital is more rationed, there are certain thematics that come through, and people suddenly like, well, they're more interested in infrastructure than they are, or credit, or credit opportunities, et cetera, depending on what the sort of view of where markets are. I think in 22, there was a definite swing out of PE generally. And it's all on a relative basis, 'cause I think the absolute amount of capital going into PE was increased. In terms of weightings, general swing out, driven by a couple of things. One, the performance of PE has been very strong. As other asset classes have recalibrated, people's allocations have just been used up.
Also, people have less exposure to credit because it hasn't been until 18 months ago, the yields have been lower. Similarly, you know, infrastructure is a growing asset class. I think now, what's quite interesting in the last 6 months is that as markets have recalibrated, that review of private equity has shifted a little bit. I'm really quite positive about the outlook. I think you're seeing that a bit in the U.S., where some of the congestion is easing up. I don't think 2024 is gonna be that much easier than 2022, 2023. The underlying performance is strong, and that, at the end of the day, is what drives people's commitments.
When we look at it, I mean, I guess in 2022, the U.S. market was much stickier than the rest of the world. We've built out our investor base significantly in the Middle East and Asia during this period. Actually, we're starting to see quite a lot of interest again from the U.S. in this, in this final phase of the fund, you know, and now we've got that last bit to complete on. That's where a lot of work is going on.
I think, you know, when I look back at sort of where we are and our investor base, I think the fact that we've been able to add some significant new investors, from outside the markets that have traditionally been our core base, bodes extremely well for the future, because the long-term trends in this industry are extremely positive. Irene, we'll move on to the next question.
Thank you. The next question is from Nicholas Herman of Citi. Please go ahead.
Yes. Good morning. Thank you for the presentation. Hopefully, you can hear me okay?
Yep.
Yep.
Perfect. I have a number of questions, if that's okay. Just quickly, just a quick follow-up on the credit question. You mentioned 0 defaults. Can I just confirm also 0 losses as well? I guess just as part of that, where do you see industry loss rate peaking, please? That's the first question. Do you mind if I just do it one by one, or would you like them all?
Yeah, Andrew, go ahead, sir.
Yeah, I mean, the 0% loss was, is the, I think the figure I gave. If I said defaults, I mean, I'm trying to think if we had any defaults, it's the loss rate that I have to mind. Where are they going to peak?
That is in the direct lending business.
In direct,
which is the core.
In the BDL funds, you know, in the flagship funds, yeah. Where are they going to peak? You know, I find prognostication is a willing to the mug's game. What I think is interesting though is the market level default rates, which we think about for CLOs, don't really apply so much in places like direct lending, partly because of the asset selection and the very clear kind of sector and subsector bias we have. I do believe that the very low loss rate in terms of, you know, very high recoveries, because we have quite significant equity cushions behind, I wouldn't expect loss rates to tick up much. You know, we will see a default rate, but that's a slightly different statistic that you see reported.
We are certainly vigilant, but I don't have a number for you.
I think the sort of, not more interesting, but the thing out there in the market at the moment will be the refinancing question that Bruce asked. You know, if you haven't got interest rate cover, and you've got near-term refinancing dates, it's gonna be painful 'cause you're not gonna get.
Yeah
... the same quantum of debt if you're going out into the market at the moment for very large amounts of leverage. I mean, it's out there.
Yeah, no, it's certainly, it's certainly expensive. I mean, there's a bond issuer who's come back refinancing, you know, 4.5% bonds. They come out at 11%.
Yeah
the same amount. There's a pretty material step up. The question is: Can you refinance the full amount, or do you need, you know, some form of additional capital.
Additional capital
that comes in somewhere?
Yeah, yeah. Second question, Nicky.
That's helpful. Thank you. The next question was on fundraising, please. It sounds like you're confident of hitting the GBP 7 billion target for BE7 still. Just could you please quantify the pipeline of LPs doing due diligence on BE7? Presumably, it must be, more than GBP 1 billion, but just how much more? That would be helpful.
Listen, I mean, we're in a volatile market where events happen, so we're confident, not complacent is probably the right expression. We've got lots of interest. I mean, the important thing I guess about the fundraise is that because it's now materially complete, the time that it's taking the team, as the team has largely been released from that. We do have, you know, more than a handful of people finishing off their work. You know, in this market, I think the reality is these things aren't done until the LPA is signed. We feel we're in good shape, Nicholas.
Got it. The last two, just a few, like, numbers questions for Adam, please. I guess on fee margins, if I look at the private equity fee margin, excluding catch-up fees, the fee margin has come down modestly. Just for avoidance of doubt, can you confirm that new commitments coming are coming on at same fee rates, or are they coming on at lower fee rates or other, just decide maybe just with discounts? Just trying to understand the new margins.
As a firm practice, we don't offer early bird discounts, which is plain vanilla pricing. There's no compression of the fee margin at all across the products. Clearly, obviously, the flagship funds drive the material profile, and they're at a, you know, a 1.5% in the primary period, whilst BDC and growth are higher. It's been.
The average fee on was slightly under 1.5%, isn't it, in total with the SMA?
Yeah, blended 1.3.
Blended, yeah.
Blended 1.3.
No.
That hasn't changed.
Not at all.
Yeah.
Completely stable.
Yeah.
That's helpful. Thank you. The last one, just on the FRE margin. I see you've reiterated the guidance for the 2024 FRE margin below 30%. I guess just with fundraising pushed back and exits also delayed to FY 2024, I guess I would have thought that would should imply more catch-up fees and higher ongoing management fees, which should boost the FRE margin. How do I reconcile the fact that you've maintained that guidance for the FRE margin below 30%? Is that-
Well, it's all... Yeah. Yeah. Clearly, obviously, you get I mean, my disclosure around the, is the underlying FRE margin, so I'm not focused on the catch-ups because I think that puts confusing volatility-
Right
into our numbers. The catching is just purely a timing, whether-
A one-off.
As I say, we're economically indifferent when it lands. I know that you care from half to half, but for us, we're indifferent. It's just I'm looking at the underlying long-term, long-term trend. The reduction in the underlying margin profile is simply a function of the pace of exits as those, as the net invested capital base shrinks. I mean, from our perspective, obviously, that will reduce the fee base, but obviously, it's a function of success because obviously we're returning large amounts of capital to investors. That's and it's really the weight of those exits over the next 18 months that shows that profile. But it's the underlying position that I'm talking on, rather than the absolute position.
Just, and I also just was about to say, I didn't see any mention of the long-term FRE margin guidance. Presumably, that is still intact. Again, just for avoidance of doubt.
Yeah, you'll see a, I mentioned this, the step up in 2025 as BDC V comes online. Obviously, with BE VIII, which in the normal cycle of things would be coming on sort of post-2026. Again, you'll then see a step up in FRE margin.
Wonderful.
And that-
Very helpful. Thank you.
Yeah.
Okay, we'll move to the next question.
Thank you. The next question is from Angeliki Bairaktari of JPMorgan. Please go ahead.
It's Angeliki Bairaktari from JPMorgan. Thanks for taking my questions. First of all, on the cost front, the cost we had expected, and you do mention in the release that you have slowed down hiring or you have paced hiring in line with the fundraising pace. I was wondering, does this mean that costs for 2023 overall may end up growing less than the high single-digit guidance that you had given previously? You mentioned that you are engaged in active discussions for potential M&A. Is infrastructure still the main area of focus for a potential expansion? In terms of fundraising, I thought that BDC V fundraising would actually be kicked off later this year, I think now you mentioned it will kick off early next year.
I was wondering, is that related to the fact that Bridgepoint Europe VII is staying open for a little longer than initially expected? Very much.
Okay. Adam, do you want to do the costs question for Angeliki?
Yeah. The hiring and obviously, the timing of the headcount is obviously a function of deliberate phasing of investment into the teams to match the fundraising. Clearly, if there's more fundraising deferred into 2024, then we'll do the same with the headcount. Then there is obviously just some, a timing issue of natural attrition. Normally, you get attrition after the bonus period, and not all of our headcount has been replaced at the half-year point. The other big piece is obviously we're matching the bonus provision based on the actual profile of investment income. Again, that's skewed to the second half.
Yes, I still expect, mid to high single digit with obviously the flexibility that we've always talked about to manage into our numbers if for whatever reason, the some of the timing of fees is deferred into 2024.
I think the important thing, Angeliki, is we have the levers to make sure we hit those FRE numbers. On the, on that, bonus point, it's just simply that some of the bonuses are tied into exits themselves. To the extent.
As it should be.
To the extent they're performance-based bonuses, so to the extent that the exit doesn't happen, the bonus doesn't get paid. It's sort of linear. Just on active discussions, Raoul Hughes spent quite a lot of time at the March presentations, going through the strategies for acquisitive growth. We as we said in the release, we're making good progress on that. It's really important that any acquisition we do meets a certain number of key criteria. Those are good cultural fit, strong investment performance, significant amount of uninvested capital, and most importantly, that it's accretive to shareholders from day one. We're quite advanced in those discussions, continue to focus on infrastructure.
Quality of things that we've been looking at has improved with the rotation of valuations in the sector, and the value of our balance sheet has gone up. It puts us in a strong position. At the end of the day, this is a long-term business. We're only gonna do something if it really fits, and it enhances this middle market platform. The strategy that we've got at Bridgepoint is to have total immersion in this space, and to make sure that as we do grow, and we've grown acquisitively and organically over the last 20 years, but as we do grow, having further activities really enhances all the existing things that we do as well.
Uh, so, so yeah, infrastructure remains, uh, the, uh, uh, the, the current area of focus, and we hope that we'll be able to, uh, give you an update, uh, uh, later in the year on that. On, uh, on BDC five, um, uh, BDC, uh, four is currently or it's gonna come this summer to, uh, on transactions signed, but yet announced, yet to be announced. Currently, just under seventy percent invested. So, um, in terms of deployment, uh, we haven't talked about deployment across private equity funds, but, uh, in, in any detail, Adam mentioned it, but we're, we're kind of on track. Um, BDC in a nice position. Uh, the, the historic performance of BDC is extremely strong. It is one of the top-performing funds in Europe, um, just period. Uh, and so lots of interest in the fund.
No, no real need to start too early in that fundraise because what we don't wanna do is have investors' capital sort of sitting there unused, but we expect we've been guiding to that fund, starting investing at the beginning of 25, maybe a little bit earlier. We'll wait and see. We'll have to give an update next year 'cause it depends on where the investment rate is. We've got a strong list of interest in the fund. You know, going back to my comment, every private equity group is always fundraising, so we haven't started it, but we've been having lots of conversations and winding up to the point where the materials are ready, people can then do their active diligence.
People are scheduling it on their investment committees for the 2024 year calendar. So we feel good about that. Okay, Angeliki, should we take the next-
Follow up?
Does that answer your questions?
Just I have a small one on.
Yeah.
BDC and Bridgepoint Europe. I was just wondering if you can give us some color, you know, how many of the investors of the LPs in BDC are also in Bridgepoint Europe? To see a lot of them are in both funds, or is that sort of-
Yeah. Well, actually, the vast majority are cross-fund, investors, and, you know, inevitably, they tend to be, you know, To be in BDC, most people are already in BE, and that's a kind of gate. Not, it's not a total gatekeeping factor because, you know, it depends on the timing of relationships, but most people are in both. That's a, that's an important feature of what we do. Okay, should we move on to the next question, Irene?
Thank you. The next question is from Alexandre Tissieres of Bank of America. Please go ahead.
Hi, good morning. I had a question on M&A, but it's already been answered, so that's it for me. Thank you.
Okay. Thanks, Alexandre. Okay, Irene, next question.
There are no further questions on the conference line. I will now hand over to Adam Key to read out the written questions.
We've got one question on the webcast, and that's from Franck Dejonckheere at Millennium. Can you please comment on possible debt covenant pressure in the private equity portfolio?
I think actually, Xavier has already covered that. Do you wanna just.
Yeah.
We didn't go specifically to covenants.
Yeah, yeah. We actually, when you look at the portfolio, a lot of the debt is cov-lite. This is a question that is, you know, actually, I mean, this is a topic that is much less relevant today than it was, you know, a few years back. Most of the debts are cov-lite. When we have a covenant, it's only one of the covenants, and you know that, when you look at the leverage that we apply on portfolio when we buy them, we've always been quite cautious on that side. Usually we have about, you know, 4, between 4 and 4.5 turns of EBITDA of leverage, which is like a third, you know, of the sort of value of the company.
We have very high conversion of cash. We don't have real, you know, covenant issues now in portfolio on the P side.
I think that was the last question. Irene, thank you for managing those questions, and thank you to everybody for joining us this morning. As you get into the releases, if you have further questions, please feel free to contact Adam Key at Bridgepoint, and we'll try and answer them. I hope this has been a useful session for you, and good morning from London.