Good morning, everyone. Hopefully, you can hear us clearly. Thank you for joining us today. I'm Luke Ellis, the CEO of Man Group, and I'm joined by our CFO, Antoine Forterre. As you may know, earlier this year, I informed the board of my decision to retire after nearly 40 years in the industry. It's been an enormous privilege for me to lead the firm for the last 7 years, and I've loved every minute of it. Well, almost every minute, anyway. I'm delighted that Robyn Grew, our current president, has been appointed the next CEO of Man Group. Robyn and I have worked together very closely for over 10 years, and she's been instrumental in helping Man Group achieve the growth we've seen in the recent years. She's an exceptional visionary leader with deep.
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More than enough energy to take the firm forward to even greater heights. Robyn will take over on the 1st of September, which makes this my last set of results. As usual, I'll start with some highlights, then Antoine will take you through the numbers. After that, I'll talk about positioning and strategy, and we'll finish with the Q&A. As a reminder, to ask a question today, you'll need to access the presentation via the Webex link rather than the dial-in option. Global equity markets powered past the challenge from the higher interest rates implemented by monetary policymakers and the turmoil in the banking sector to deliver strong positive returns in the first half of 2023.
It turns out that the huge injection of liquidity from monetary and fiscal policy has so far been more than impactful than the change in the price of that liquidity. We ended the first half of the year with GBP 151.7 billion of assets under management, another record. The client-led growth in our business remained strong over the period, with total net inflows of GBP 2.6 billion during the first half. On a relative basis, total net inflows were about 2.5% ahead of the industry, reflecting the merits of our distribution model and the quality of our long-standing relationships with allocators around the world. I'm delighted that we continued to grow our market share again in the first six months of 2023. We also delivered positive investment performance across all product categories.
March proved to be a difficult month for trend following absolute return strategies, as the collapse of the regional lenders in the US led to a rapid flight to safety, with the 2-year yield on the US Treasury note registering its biggest fall since the 1980s. This was a significant reversal of the higher-for-longer-rates theme that have permeated markets since about November and negatively affected our investment performance. Therefore, performance fees in the AHL strategies. Our clients' focus, they look over the longer term, and they've been very understanding, noting that the strategies have performed as expected and that we've delivered returns in line with or better than our peers. Investment performance has recovered since then, with AHL Alpha and AHL Dimension ending the period in positive territory.
Core management fee earnings of $0.087 per share were resilient, demonstrating the diversification of our total return on long-only strategies, adding to our overall business. Total core earnings per share reflect lower revenue from performance fees in the first half of the year. The board has declared an interim dividend of $0.056 per share, in line with the half one 2022 and our guidance. As we've said previously, just to repeat, although our policy is progressive, we will keep our interim dividend fixed until we reach an interim versus final dividend split in line with the market, and therefore, any progression this year in our total dividend will come through in the final.
M&A is a core part of our strategy. Last month, we were delighted to announce the acquisition of Varagon Capital Partners, a U.S.-based private credit manager. I'll talk about more of that later. Net inflows of GBP 2.6 billion and positive investment performance of GBP 5.1 billion, taken together with FX and other impacts of GBP 0.7 billion, increased the AUM to GBP 151.7 billion at 30th of June. This was 6% higher compared with the 31st of December, reflecting another good period of organic growth and a new high for the firm. On an asset-weighted basis, relative investment performance across the firm was positive for the first half of the year.
Our strong risk management and powerful central platform meant we were able to reduce positions quickly during the market volatility in March, driving relative outperformance of 0.4% from our alternative strategies, although obviously, as mentioned, the absolute performance was more muted. Our long-only strategies performed well over the period, helped by positive momentum in equity markets, delivering overall investment performance of 9.1%. They also outperformed again by 1% in the half, with noticeably strong relative returns from our Man GLG Continental European Growth strategy, which was 4.4% ahead, and Numeric Global Core, which was 2.6% ahead. As I've repeated regularly, we're a client-focused firm. By that, I don't mean a distribution-focused firm.
We make a conscious effort to listen and respond to our clients' needs and provide them with a single point of contact that really understands their unique requirements across the range of market environments. The breadth of what we do at Man Group and the tailored nature of what we offer is extremely compelling to clients. It allows us to appeal to a wide range of sophisticated clients around the world. The first six months of the year highlighted the broad-based demand for our differentiated offering, as we recorded net inflows into both alternatives and long-only strategies, and across quant and discretionary investment styles. Our solutions offering continued to be a bright spot during the period. While only representing a part of the overall customized mandates we offer, our Man institutional solutions, AUM, has now grown to $14.7 billion.
Pleasingly, we also saw strong growth in our liquid credit strategies, with AUM in discretionary long-only credit and converts up $1.8 billion compared to this time last year. I'll talk about more of that later. Clients have confidence in our ability to manage, protect, and grow their assets. We continue to be able to attract and retain assets faster than our industry peers. Diversifying our client offering has been a priority for the firm, and we're delighted to announce the acquisition of Varagon, a U.S.-based private credit manager with $11.8 billion of assets under management. I've always talked about the criteria that I thought were needed for us to make an acquisition.
The acquisition target needed a repeatable source of alpha, a culture that believed in the same things we believe in, needed to do something we don't already do, and of course, it needed to be at a sensible price. We believe Varagon firmly ticks all of these boxes. Varagon focuses on senior secured loans with multiple covenants to cash-generative, high-performing, sponsor-backed companies in non-cyclical industries. It typically serves as a lead or co-lead lender with superior origination capabilities. Varagon has established itself as a leading provider of differentiated capital solutions in the core middle market since its inception in 2014, with a high-quality, sophisticated client base in the insurance channel. The team, based across offices in New York, Fort Worth, and Chicago, have a really strong track record of underwriting discipline, risk management, and generating differentiated returns for their investors.
As the private credit market continues to grow in relevance for the world's largest institutions, this transaction adds a U.S.-focused direct lending strategy to provide consistent, risk-adjusted outperformance at scale, and a highly customizable strategy as well. We see significant growth opportunity in this space, and we're confident that our extensive distribution network and our operational expertise will support Varagon in its continued growth and delivery for clients. We very much look forward to working with such a strong team. Antoine will provide more detail on the financial considerations that I'm sure all of you are keen on. Since I took over as CEO in 2016, we've consistently focused on adding value to our clients, and so delivering growth and increasing the diversification in our business. I'm proud to say we've made real progress against our key strategic priorities in the last seven years, and these charts reflect that.
I guess when you look at it, the only metric we haven't managed to more than double in that time is our multiple. I guess, Robyn, one for you to work on. We've grown by adding new sources of alpha through organic innovation, recruitment, and acquisition, and by building long-term partnerships with many of the world's largest institutional investors to understand and help solve their most complex requirements. Today, we're a multidimensional active asset management with a global presence and a clear advantage in liquid alternatives. Our investment capabilities, powered by our advanced technology platform, are designed to deliver alpha to the world's largest and most sophisticated investors. With that, I'll pass it on to Antoine to take you through the numbers.
Thank you, Luke, and good morning, everyone. As usual, I will start with some financial highlights before covering our AUM, PNL, and balance sheets. I will also provide some further details on the announced acquisition of Varagon. In the first half of 2023, we reported net revenues of $513 million, a decrease compared to the same period last year, driven mainly by lower performance fee revenue. Net management fees of $460 million were 2% lower than last June, given the underlying mix of assets under management during the period, which I will go into more detail on later. At $32 million, performance fees were materially lower than in June 2022, reflecting a difficult first quarter for our trend following strategies, some of which, AHL Evolution, for example, crystallized the performance fees in June.
Our core PBT margin consequently decreased to 27% in the first half of the year. Fixed cash costs increased to $180 million in the first half, driven by planned and announced investments in the business. The compensation ratio was also at the top of our guided branch, given the lower level of performance fee revenue recorded in the period. Overall, core PBT decreased to $137 million, primarily due to the decrease in core performance fees. Core performance fee PBT was also impacted by accounting charges related to deferred variable comp awards made in previous years. We continue to have a strong and liquid balance sheet, with net financial assets of $618 million at the end of June and seed investments to $634 million dollars.
As Luke said earlier, assets under management reached a new high at $151.7 billion, with net flows, investment performance, and effects and other movements all contributing positively. At $2.6 billion for the period, net inflows were positive across all product categories. Alternative flows of $1.3 billion were driven by liquid alternatives and in-state solutions, while the $1.3 billion inflows into long-only strategies were driven by Numeric Emerging Market strategies and GLG credit. On an asset-weighted basis, overall net flows were 2.5% ahead of the industry, which demonstrates continued strong relative demand for diversified product offering. Investment performance of $5.1 billion was primarily driven by long-only strategies, which benefited from the rebound in global markets, as well as positive alpha generation.
Finally, the weaker US dollar in the first half of the year drove an increase in our reported AUM, 43% of which being non-US dollar denominated. The growth in assets under management led to an increase in run rate core net management fees from $917 million at the end of 2022 to $946 million in June. At the end of June, our run rate net management fee margin was 62 basis points, 2 basis points below the run rate as at the end of 2022, although margins at the product category level have remained stable. As I've said before, we consider net management fee margin an output of the underlying mix of assets we manage. During the first six months of the year, our long-only AUM increased as a proportion of our overall AUM.
Given long-only AUM is typically at lower margin, this effect broke the overall margin for the group down. You'll remember that we experienced the same opposite effect in the first half of last year. We do not target specific net management fee margin and remain focused on generating profitable revenue growth in the various product categories that we run, considering their positioning, performance, and capacity. Moving on to performance fees. On the back of two strong years, our trend following strategies had a tougher first quarter. While most strategies finished the period up, performance fee generation was weaker in the first half. Performance fees were GBP 32 million for the period, including GBP 30 million from alternative strategies, most notably, Man AHL 783, which we spoke about at the full year results, as well as from GLG Absolute Return Strategies.
Separately, we generated gains on investments of $19 million, predominantly from our seed positions in credit strategies. A short, sharp reversal is always painful for trend following strategies, and the March episode was no different. While it results in softer performance fee generation, H1 does not change anything over a longer time horizon, which is a horizon relevant for our clients. We continue to have confidence in our strategies ability to generate alpha and deliver valuable performance fees for shareholders as they have done in the past. At the end of June, we had $62.1 billion of performance fee eligible AUM, and as of 2 days ago, had accrued roughly $75 million performance fees due to crystallize in 2023 in our funds. This number is not a projection, but a snapshot of the position accrued in the funds at a point in time.
The amount that crystallizes over the remainder of the year will therefore vary up or down, based on the performance of the underlying funds over that period. We now turn to costs. Our guidance for 2023 accommodated for selective investment in certain parts of our business. In line with this guidance, the increase in fixed compensation was largely due to the planned increase in the headcount to support business growth. Other cash costs increased by 11% to $62 million, driven by an increase in utility costs and property rates. While most currencies, particularly sterling, have strengthened against the dollar in the first half of 2023, they remain weaker on average than in the first half of 2022, resulting in a reduction in fixed compensation and core other costs, which partially offsets the underlying increases.
Variable compensation costs decreased due to lower revenue in the first half of the year, with our compensation ratio for H1 at 50%, the top of our guided branch. As you will be aware, our previous fixed cash cost guidance of $355 million for 2023 assumed a dollar to sterling FX rate of 1.21. Adjusting our guidance for the H1 actuals and current spot rate of 1.3, will result in a updated guidance of $370 million for 2023. For the avoidance of doubt, this does not reflect any changes to underlying costs, purely the impact of FX, given roughly 60% of our fixed cash costs are incurred in sterling. In summary, management fee revenues were resilient despite the market volatility and other headwinds facing the sector.
After two very strong years, performance fee revenues were lower for the first half of 2023. As I said earlier, it does not change our confidence in the strategy's ability to deliver for clients and shareholders over a longer-term horizon. We continue to make previously planned investments in the business to support our growth, adding talent and technology to diversify our business further and continue to build our competitive advantage. The strength and flexibility of our balance sheet allows us to invest in the business to support our long-term growth prospects, evaluate M&A opportunities, and ultimately maximize shareholder value. At the end of June, we had GBP 618 million of net financial assets. This is before the receipt of cash from performance fees crystallizing in June, the interim dividend, and the completion of the Varagon acquisition, which will be funded using existing internal resources.
We continue to consider the most efficient financing available for our business, which includes financing some seed positions and using our revolving credit facility. This is why we had $65 million drawn at the end of June, compared to $120 million last year. You can expect us to continue to manage our liquidity more dynamically going forward. This slide provides more color on the terms of the Varagon acquisition, which Luke talked about earlier, and how you should think about it going forward. Under the agreement, we will acquire 73% stake in the business for $183 million, implying a total valuation of $250 million. The management team is rolling over the entire 27% equity stake, which can be liquidated via output call arrangement at fair market value, eight, nine, or 10 years following completion.
The acquisition of Varagon is an important and exciting strategic step for us, and all parties were pleased with the outcome, including the terms of the transaction. The selling shareholders are also large clients of the business. It is testament to the autonomy we provide our teams to make investment decisions, our respect for talent, and the quality of our institutional franchise, that after a competitive process, those shareholders decided to entrust us continuing to manage their assets for longer. On the right of this slide, you can see some key assumptions to model the Varagon business going forward. We expect the combination to be meaningfully accretive to EPS in the first full year following completion, which we expect to happen in Q3. We are confident that our global distribution network and institutional infrastructure will support Varagon's continued growth, creating significant value for shareholders over time.
Although Varagon is the first sizable acquisition we announced for some time, it fits firmly within the strategy and framework we discussed previously, and importantly, does not change our capital allocation policy. When approaching shareholder returns, a progressive dividend remains a primary method of returning capital. The board then considers potential strategic growth opportunities, both organic and inorganic, and in any event, we have capital surplus to requirement, aims to return it to shareholders over time by way of share buybacks when advantageous. As we have done in the past, we will therefore continue to return to shareholders capital that we consider to be in excess of our medium-term requirements. In application of that policy, we announced and completed a GBP 125 million share buyback program in March of this year, having previously completed the previous GBP 125 million program announced last December.
Including the interim dividend proposed today, we will have returned roughly GBP 190 million to shareholders in the first half of 2023, taking the total capital returned over the past 5.5 years to GBP 2.1 billion, over 50% of our market cap. On that point, let me hand back to Luke one last time, and in doing so, thank him for his guidance and support over the last 12 years.
Thanks, Antoine. Give you back the clicker. From speaking to clients this year, it's clear that large institutional investors continue to have an insatiable appetite for alpha to enable them to reach their target returns. Our business is designed to deliver them that alpha at scale. By trading a wide range of macro instruments as well as traditional asset classes, our strategies have the potential to generate alpha irrespective of prevailing market conditions. Investors are also increasingly looking for differentiated investment offerings that meet their particular portfolio needs and the option to customize based on risk, appetite, and market exposure. They're also looking for help managing the risks from the beta and correlations exposures in their overall asset allocation. There are a few firms with a range of high-quality solutions that we offer.
It allows us to always remain relevant to our clients, CIO, and investment committees throughout market cycles. Our institutional resources and infrastructure are designed to deal with the scale and complexity, which enables us to evolve and adapt as markets and clients need to, and gives us a real competitive advantage. Underpinning all of this is the combination of our talent and technology, which drives the sustainable growth in our business and creates compounding value to shareholders. The volatility we've seen in markets makes a strong case for investing in liquid alternatives, where we are a global leader with over 35 years of experience. This year, we've continued to deliver investment performance ahead of our peers, which, together with our long-term track record, reinforces our belief that our diversified range of strategies are well-placed to generate alpha for clients in the future.
We bring an allocator's mindset and use investment capabilities and portfolio management skills from across the firm to create a powerful combined offering, deepening the partnership and longevity of our relationships. As we've said previously, we're one of the largest liquid alternative providers in the world. 45% of our alternatives AUM has daily or weekly liquidity terms, up from 41% at the end of last year. That's truly differentiating as allocators reevaluate liquidity in their portfolios. At the full year results, you heard us talk about the clear trend of clients doing more things with pure providers as their problems are becoming more complex, requiring specific tailoring. We're really well-placed to benefit from that, given the breadth of our strategies, the quality of our institutional resources, and our cultural DNA to work with clients to build solutions.
The rate of growth in our solutions business is a testament to that. We now run more customized mandates than ever before, offer solutions that can scale to many of our largest clients, and we've seen a consistently low redemption rate in this category. We will continue to expand the breadth and depth of our offering, and that presents several opportunities for growth with both new and existing clients, and across differentiated distribution channels. One recent example of this is the strategic partnership with Fideuram Intesa Sanpaolo Private Banking.
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There's a lot of economic uncertainty, and trying to predict exactly where markets will be a year from now is not a straightforward task. What we do know is that we're in a period of heightened inflation that is unlikely to disappear entirely anytime soon. Even the Fed agrees with that. Heightened inflation creates economic uncertainty and volatility, and that creates market, which is a great potential or talent, unique skill. Not all active managers will outperform. Alternative managers with excellent risk management skills, with a track record of delivering returns for clients, will, we think, see strong demand, and that's an area in which we're very well-placed. We can help clients achieve their aims in the current environment, whether that's managing the beta in their portfolios or providing access to discretionary credit capabilities.
With that, one of the key features of our strategy in the last few years has been to move into new market segments where we can differentiate ourselves with talented, specialized teams, and we've made very good progress building our credit platform in the past few years. As you can see from the chart, today, we have both alternative and long-only credit strategies run on a quantitative and discretionary basis across liquid and now private markets. Our discretionary long-only credit strategies in high yield and investment grade have grown strongly since launch, and as I mentioned earlier, continued to see strong client demand during the first 6 months of the year. Interestingly, our quant credit strategy was short, both Silicon Valley Bank and First Republic Bank in early March, showing quant really can work very well to identify issues in single name credits.
Here at Man Group, we have no house view, which allows each investment team to retain their independence and focus on the alpha opportunities they identify through their bottom-up research. We do, however, use our scale to our advantage, with teams utilizing the firm's relationship, central platform, and quantitative tools to aid their investment processes. In March, we announced that Bloomberg will integrate ArcticDB, a tool we developed in-house, into B-Quant, Bloomberg's analytics platform for quantitative analysts and data scientists. That was a huge validation of the quality of the technology we built at the firm. I want to spend a few minutes talking about the tool itself, how it was developed over time. 10 years ago, when we first started work on ArcticDB, general problem-solving in the data industry was more focused on time series data.
In practical terms, this meant the data frame solutions available in the market were focused on very long and very narrow time sets. Within Man Group, we're often dealing with asset classes that encompass an enormous universe of individual instruments, as well as long and deep time series. We had a growing need for something that could scale horizontally as well as deeply, in a way that was a challenge for any of the third-party vendor solutions we were seeing at the time. At that point, we decided to build the technology in-house. The first public web-facing version of Arctic was launched on GitHub in 2015, so far it has had over 1 million downloads. Guess what? The challenge of extracting value from ever-increasing datasets is one shared by the entire investment management industry and beyond.
Several years of investment and development later, we have ArcticDB, a Python native data frame database, and our response to the ever-increasing amount of data and complexity used in front office research. The ability to represent such a large universe and its evolution over time in a single prime dataset, and to do that quickly, is invaluable. This technology is now driving investment decisions across Man Group's front office, including product innovation, and hopefully, in the future, many other organizations, either directly or via B-Quant. As you'll be aware, it was the technology giants putting wind in the sails of the equity rally this year, as investors flocked to companies that they expect will benefit from the growth of AI. AI is a story everywhere.
Hopefully, you'll also be aware that we've been heavily investing in technology over $100 million annually for many years now, ensuring a strong technology-driven infrastructure is in place. We've been exploring how to deploy and integrate new technologies across all areas of our business for years. We've considered AI to be a core competence pervading all aspects of our investment process for a long time, with a steady adoption of machine learning throughout the last decade, both internally and via our unique partnership with Oxford University, which is focused on machine learning in finance. AI can automate, innovate, and increase productivity if used well. We use it in our data management, models, portfolio construction, to aid PMs in our discretionary business and for our trading processes.
Examples of its use cases include trade order routing and natural language processing for sentiment analysis, both of which have featured in our previous Investor Days, if you attended them, the first time back in 2018. This isn't new news at Man. We've been doing it for years. Generative AI has taken many by storm. We actually think ChatGPT itself has major potential, specifically to increase research efficiency and help humans upskill and execute. It's still early to speak of its investment market impact, and we must also address the risks. Generative AI always thinks there's an answer to any question, but what we all know is that in market, some questions just don't have answers. We've implemented our own version, Man GPT, which you can see on the right of the slide, and are researching several other use cases for Generative AI across our business.
The largest areas of focus include exploring copilot-type tools tuned to our technology and code base as productivity aids, improving accessibility and search within our document database, and auto-generating charts with accompanying macro description. We've always looked to align the latest technology with our underlying investment philosophies and processes, and this is no exception. Its applications will only complement and enhance our existing efforts. The first half of 2023 was a period of sustained organic growth for Man Group. While turmoil in the banking sector in March affected short-term investment performance in our trend following absolute return strategies, our results highlight the benefit of our diversified model and the continued demand for our strategies and solutions and our relationships with our clients.
We're in great shape. Our focus is on delivering further in the second half of the year. It's been a great privilege leading Man during a period of major evolution and progression. Through our unwavering focus on investment performance, client service, and on our culture, alongside investing strategically in our talented technology, the business has grown and diversified significantly since my appointment. I'm proud of what we've delivered, I'm excited about what the firm can do from here. I'm a long-term shareholder, after all. I could not be leaving this firm in better hands. Robyn is truly great, and I have no doubt that the firm will continue to go from strength to strength under her leadership and the highly talented team around her, building on our position at the forefront of the industry and continuing to deliver for our clients, our people, and our shareholders.
On that point, I'd like to thank our shareholders and analysts for your interest and attention over the last 7 years, and your mostly polite questions during my tenure. Most of all, I'd like to thank the team here at Man for making my 13 years at Man, and especially the last 7 years, such a great ride. With that, over to you, Robyn, and the team to take the firm to ever greater heights. I'm looking forward to a life of leisure come September and watching a lot of rugby. With that, we'll open up for questions. As a reminder, to ask a question you need to have joined the presentation via the Webex link. I can see we have a number of questions already on that.
On your screen, and this may vary by device, press the Raise Hand button to notify us that you'd like to ask a question, and you will automatically join the queue. Please note that you will need to unmute yourself once we call out your name. With that, Antoine, who is first?
With Haley. Haley, you should be able to unmute yourself.
Haley, are you there? You have to unmute yourself, as a reminder.
Seems to have disappeared.
Okay. You've dropped off. Maybe we answered your question, or maybe you've moved on to the next one.
I'll get you, Mike. Michael Werner.
Mike Werner, if you unmute yourself, and you can ask the question.
Okay, excellent. Thank you. I've got two questions, actually. I have one for Antoine and, and then one for Luke. Luke, first of all, it's been a pleasure. I just want to wish you all the best in the next stage of your life. It's been
Yeah.
It's been a lot of fun watching, you manage this business over the past seven, six years, I guess.
Thank you.
Yeah, I guess, Luke, you know, I guess looking at Man Group right now, just from a high level perspective, what do you see as the biggest challenge or risk facing Man Group? Then potentially, what's the biggest opportunity? Then also, just looking back at the financials, we saw quite a high comp ratio within the performance fee earnings. Was just wondering what was going on there. Was there any one-offs? I think the comp ratio there was around 80%-85% or so, and how should we think about that going forward? Thank you.
Do you want to knock that one on the head?
Exactly. comp ratio, we give a range of 40%-50%, which is over the entire PNL, but was measured in performance fee. as we've said in the past, when you have softer performance fee periods, like we've seen, we'll be at the higher end of that, that range, hence 50%, which we've been at, I think, in H1 2020 as well as in 2015, so we've been there in the past. When it comes to then the performance fee-specific comp ratio, the, the other thing that you have to overlay is previous compensation deferrals. That feeds through the PNL. on the back of two very strong years, performance fee year, where obviously compensation was fairly high, the deferrals feed through in the performance fee line.
It's in relation to, last year particularly and the previous years, deferred awards that, that feed through, and that drives a higher comp ratio within the performance fee line in particular. The key point, though, is the 40%-50% overall comp ratio that we manage the business to.
I guess you asked me a sort of very big-picture, thoughtful question as I finish, about the biggest challenge and opportunity. Look, I consciously wanted to hand over the business at a point where the business had really good momentum, and I think that creates both the biggest opportunity and also the biggest challenge. The opportunity is to keep delivering for clients. The demand out there from clients for the sorts of things that Man does is tremendous, you do have to keep very focused on executing and not getting caught up in the short-term noise. Clearly, this morning, the world's got a bit caught up in the short-term noise about performance in a month, in a quarter. You know, the clients, I was talking yesterday to one of our large sovereign wealth clients.
You know, he was asking about succession process, how we think about it, how we thought about getting here. He was talking about the fact that they have a 100-year expected tenure for the money at that sovereign wealth fund. You know, he's not thinking about performance in a quarter, in a month, in a whatever. And I think the, the, the opportunity is to deliver for those people, the challenge is to make sure you focus on the long term and not get caught up in the short-term noise. You know, that, that, I guess, is the thing, maybe the, the If I was being trite, I'd say the biggest opportunity is to get the multiple up to the same as, pick your equivalent. The challenge is, well, I didn't succeed in seven years, so maybe that's the biggest challenge.
Arnaud, I'll ping you.
Arnaud, can you hear us? You have to unmute yourself. We're not having the best technology day today. Try again. Ah, Arno, there we go.
Hopefully you can hear me.
Yep.
Yep. Got you.
Great. Great. Thanks. Yeah, congratulations, Luke, on, on your turnaround of Man Group. It's been great, working with you over, over the, over the past few years, and it's been quite a few quarters, since we've last talked about guaranteed products. So well done there.
Hooray!
Actually, I'd like to bounce on that point. With interest rates being so high, I wonder if there's not an opportunity to actually have a comeback in the retail space. Secondly, on Varagon, I was wondering if you could give us a bit more on the terms of the earn-out of the acquisition, at what level of AUM is the earn-out not paid at all in 9 years' time? What, on distribution as well, distribution synergies among your clients, is there a lot of overlap between those buying liquid alternatives and private assets? I suppose, what's the key learning here from GPM? I think, there was little cross-selling that actually happened there, so how is it gonna be better with Varagon?
Yeah.
Sure. Okay. Let me do with the first and the last one, then Antoine can come back on the details on the earn-out. I guess you conflated two questions. With the question on higher rates and structured products, I guess yes, if rates are higher, the math of doing a structured product start to work again. I would say, look, what's very clear is the fees on structured products today look like the fees in a normal fund investment. They don't look anything like the fees that Man used to earn pre-financial crisis. You know, that massively high fee load that they used to charge, that's gone and not coming back.
You've seen, I, I talked about, you know, we have this partnership with American Beacon in the US, a product in Japan, particularly with SMBC, which have... You know, that, those have both been very successful things at raising assets on a continuous basis over the last three or four years. I, I think the Fideuram opportunity is also very interesting. I, I think the firm is in a place where we can do more with retail, but I don't think it will be at net different fees to the firm than the other things we do. In terms of Varagon and the distribution, what did we learn from the, the real estate private markets business we brought in? The existing overlap between their clients and our existing client base is low.
They, they, they have a significant insurance presence in the US, which isn't somewhere we've historically had a big presence. It's very clear that clients, in recently any area you'd like to talk about, are interested in private credit. You've written about it a lot. Everybody's written about it. You know, so the, the, the client demand we're seeing for the strategy should be very interesting. I would say the thing that we learned was that Man's distribution works in big lumps. So, you know, we have a lot of things where we write. You know, a $100 million ticket is a small ticket for us often.
We have a lot of things where we write a $500 million ticket or a $1 billion ticket, and that our distribution works best when you have a strategy which is capable of taking in those large-scale investments. The great thing of Varagon is, by working with their original shareholder partners, you know, they have several multi-billion dollar investors, and so they understand how to do that. They can scale in a way which meets with our distribution capabilities. I think we are excited about the ability to do that. The really good thing is, they don't need to change anything they're doing, and they have no interest in changing what they're doing. Just by taking larger proportions of the loans, where they lead or co-lead, actually, you can significantly scale the assets.
It's really a distribution opportunity, which is where we're very good.
On the earn-outs, beyond the upfront cash outlay, you have two additional payments. The first one will go to the shareholders that are rolling their stake, and that's a 27% stake that we talked about. This is, this is not really an earn-out in the sense that it's, it's earned equity. The value of that stake will go up or down, depending on how valuable the business grows under our ownership over the next 10 years. Hence, the sort of alignment of interest that we have with the team managing the assets.
The second set of payments is specifically one intended for some of the largest shareholders and clients, and it's additional incentives that they will get in year 3 and year 6, collectively up to $93 million, if they maintain or even extend their AUM with us, over, over up to 9 years. Those will be reflected in our accounts, possibly not actually like earn-outs, possibly more like kind of client relationship type payments. Those are the two payments. The main one you referred to is, is really earned equity.
I think it's a really important thing that that none of the existing employees is taking cash off the table. They've all rolled 100% of their investment, keeping it in the business for very significant long term because of their belief in the growth opportunity in the firm. That's a real alignment of interest, which they were keen on. It wasn't something we had to force in the negotiation. That, for us, makes it feel a very good match of people with our culture. Thank you, Arno.
Thank you. We'll go to Hubert. Hubert, over to you. You should be able to unmute yourself.
Can you hear me?
Yeah.
Yep.
Great, thanks. Thanks for taking my questions. I'd first like to thank Luke for everything over the last years. Wish you all the best, we'll definitely miss your opinions of the markets and the world. Thanks for everything. A couple questions. Firstly, on flows. I know it's only a quarter, alternative flows were a bit soft in the quarter in Q2. Just wondering, is this a reaction to the weakness they saw in March and the clients waiting to see how you react to it in terms of how your performance responds to the weakness in March? Just wondering if there's anything specific in the quarter, and how do we how should we think about the pipeline as well going forward in alts? Second question is on your reported JV with SBI Holdings in Japan.
It's wondering if you can just talk a bit about the rationale behind the joint venture, any targets you may have for flows or assets, in that venture? Thank you.
Sure. On the flows and l ook, flows within a quarter between different product times is just noise. Honestly, there is really nothing interesting one can read into it. You know, and sort of some of it is, wait, when it's 45 degrees, you, you probably get less people wanting to go to the office than otherwise. But I really wouldn't read anything into within-quarter relative flows, I, I, with by product type. You know, as you know, we have an extensive process for looking at the pipeline of flows. You know, we're always in communication with these large clients about significant opportunities over time, and which ones happen to hit in which quarter is not something we target or spend much time and energy on. You know, where it's about delivering for the clients, the ongoing demand is significant.
The timing will be whatever it'll be, will be my answer. On SBI, this is a really interesting potential opportunity. It's obviously new. SBI, for those who don't know, has a dominant position in the online retail market in Japan. Through the things we've done with SMBC and Mitsubishi, Morgan Stanley, and others in Japan, you know, we've got a good presence in the high net worth market, but as you get to the more retail market, it's a different market and SBI is the number one dominant player in there. Really delighted that they wanted to partner with us on distributing liquid alternatives to that market.
I've long believed, and I know Robyn agrees with me on the democratizing of access to liquid alternatives, that the sort of generic regulation that's existed in the world that says alternatives are okay for rich people, but not for smaller savers, because they're too risky, is just the wrong way around, right? That good liquid alternatives, good alternatives are less risky than just buying long-only equities. SBI believes in that, and we're really hopeful that together, we can deliver some interesting product into that market and use the power of their platform to raise assets over time. You know, we'll see how much it is, but I. It's quite exciting, I would say.
Hayley, I noticed you reappeared. Well, try again. Should be able to unmute yourself.
There you go. Hayley, can you hear us? and
Yes.
Yay, there we go!
You can. Oh, fantastic. Thank you for that. If I can just add my thanks to Luke for the last 7, 13 years. Take your pick, I guess, wish you all the very best of luck for your future of watching rugby. That'd be great.
Thank you.
If I can ask a few questions. I apologize if these were answered already. I did have some technical issues at the beginning. A quick one on Varagon. Thank you for the additional information you gave us. In terms of the mix of earnings, $31 million of PBT in 2022, which I think was just $2 million performance fees, is that a reasonable mix for us to think about going forwards? In terms of AUM growth and future timings, perhaps of fundraisings, should we just think about 13% AUM CAGR in the past few years as a reasonable guideline, smooth, or is there something even higher, perhaps, given the distribution network and the feedback you've had from your existing clients?
Then the second question, if I can, in terms of compensation costs, obviously, as you say, the top end of your guided comp to rev range, given the lower performance fee revenues in H1, could you tell us exactly how much of the GBP 257 is actually deferred compensation? We can think about what level perhaps might just stay in place, whatever performance fees are for the rest of this year. Those are two key questions. Thank you.
Sure. Mix of earnings is vastly management fee and origination fees. For the sort of forecast period, we expect it to be the same there. Varagon has built structures that enable them to charge carry and performance fees, and over time, we'd expect that line to increase, but for the next year or two years, the mix will be permanently management fee focused. Timing of fundraising, in line with our current approach, we're not going to comment specifically on future flows, for Varagon. There's obviously great potential for their existing client sets and insurance and over time with our clients, and we wouldn't be doing the acquisition if we're very excited. We'll see what, you know, what it gives us next year.
On the front costs, the previous years, let's look at the numbers here. Previous years. Apologies. Where is it? I'll come back later on that with the answer I have in front of me here. Sorry, apologies. I've got it here. The deferred comp in the 257, you have it on page 20, is around $60 million, and that's up from around $47 million last year. To give you a sense of the increase that you've seen. As of the end of June, we have $184 million of unamortized deferred comp, with around 2.1, so 2.3 years to amortize. You'll see the ramp up, but it's quite front-loaded.
The sort of normal cycle for a three-year deferred award is two-thirds gets amortized the first year, and then it sort of tails off in the second and third year. Go to Bruce. Should be able to unmute yourself, Bruce.
Try again. Yes, hopefully. Nope?
No. We'll come back to you again.
Somebody else can come back, Bruce.
Jerry K, we'll try you.
Okay, we've got both of you joined together, so take it in turns. Bruce?
Okay.
Bruce? Yeah, go for it.
Sorry about that. Tech issue. Firstly, just congratulations, Luke. I've do enjoyed our interactions over the last few years and your always strong views on many topics, but all the best for the future.
Thank you.
In terms of questions, firstly, you partially answered this. I think in terms of pipeline, you're saying the flow mix looks pretty good. Q2 is not representative. Demand for the absolute return in higher areas remains good, what I take from that. Secondly, on the Varagon deal, we should think kind of mid-single-digit accretion, I think? Are you saying that? Is that GBP 31 million PBT a good number? I had run rate at about GBP 112 million revenues and I think GBP 50 million comp. I don't know what the other costs are, but is that, sort of, that GBP 30 million is a pretty good guide?
Yeah, that's correct. That's around $11.8 billion of AUM, 90 basis points management and origination fee margin, 50%-48% comp. Fixed costs gets you to around $38 million profit before tax.
Just if it's not obvious to people, the 11.8 is fee earning AUM as opposed to commitments, which is a higher number. To make it consistent with the rest of what we do, we'd rather talk about it in terms of where the fees are getting earned. Look, yeah, I, I think your comment was right in terms of I, I, you know, What do I think? I, I, I think that the demand for alpha remains incredibly high. I, I think that the, you know, clients are always looking for things they can get with alpha, and they'll take that in the liquid alternatives, they'll take it in the less liquid alternatives, they'll take it in the, in the long only. That will depend on their particular demands at any one time.
When everybody feels super bullish on equities, maybe they get more into the long only equities when. You know, but that, that's sort of noise in the balance of what we do. We've always talked about the fact we don't target a particular mix. We let the clients. This is what being client-driven is all about, right? You have to let the clients' needs drive what they, what they invest in from you. I'm very sure that that will continue to meet a blend of all the different things we do.
Angeliki, we'll try you again. I'm sorry. It's very hard to hear you, Angeliki, I'm afraid.
Me too. Can you hear me better now?
A little bit.
Okay. Well, good morning. Yeah. Oh!
No. We've lost Angeliki .
Well, Angeliki dropped off. It wasn't our scuff.
Samarth, we'll go to you. You should be able to unmute yourself.
Hi, Samarth?
Do you hear me?
Yes, we are.
Yeah, we can.
Awesome. Great. First, thank you, Luke, for all the support over the past few years, and wish you all the best for your future. I had 3 questions. First on Varagon acquisition. I just wanted to confirm if Varagon will be run as a separate entity for the near term, and how should we think about collaboration and revenue synergies over the medium, medium term, in terms of cross-selling Man's alternative products to their insurance client base or developing new products? Yeah, anything around that would be quite useful. Secondly, on retail investors. There were a few partnerships over the past few months. I just wanted to understand, how have been the intermediary flow trends over the past several quarters?
Are you seeing increased retail interest in liquid alternatives and your long-only products as well, over the past few quarters? More broadly, what do you think is the growth potential for Man Group from intermediary assets, and if more such partnerships are in the pipeline? Thank you.
I, I guess on the Varagon question, the structure is very similar to Numeric when we bought Numeric 6, 7 years ago. No, 8, 9 years ago now, sorry. It will be another investment engine within the firm, but it won't be a separate entity. There are obviously some elements that need to be done in order to respect the shareholders in the ongoing basis. From a distribution point of view, from an integration point of view, it will be an integrated part of Man. It's, you know, we've never been a multi-boutique structure. It's a single firm with a single point of contact, and Varagon will fit into that with some nuance around accounting in order to make sure that we respect the shareholders. I think that's a fair way of describing it.
On the retail partnerships and distribution, you know, I think that the. Look, we, we are predominantly a sort of large-scale institutional business. You know, that is roughly 80% of our business. But I think we recognize that a number of the things we do, do work in the retail distribution market. Certainly under my tenure, and I don't think it will change, we've never tried to sell directly to individuals because that requires a whole different infrastructure, a lot of costs, a lot of compliance infrastructure, so on and so forth. We found partnerships the best way of accessing those client segments.
you know, now, as you know, each country, the client segment is actually really separate, both in the sorts of products they want to buy and in the dynamics in the local market and who are the best players. Whether it's been SMBC and now SBI in Japan, whether it's been American Beacon in the US, Fideuram in Italy, you know, finding good partners who understand the value of quality product in their underlying clients' portfolios, is something that we like doing when we find the right partner. There's no target on the number of it, but it has definitely been a good source of flows in particularly the total return space for us in the last three, four years, I guess. I think we would see that continue to be true....
in a mixture of liquid alternatives and total return, as well as sometimes in, in some of the more high alpha, long-only strategies. Is Angeliki back?
Angeliki, he came back and left again. Arnaud, I think you reappeared. Go back to you just in case you have further questions.
Oh, yeah, sorry, I, I forgot to drop my hand, but since, since you have me back on, I, I do have a couple of questions. You, your net financial assets, pro forma is GBP 395. I'm just wondering what level of headroom would you feel comfortable with there?
We don't, we don't need a headroom in the sense we don't have a capital, formal capital requirement. As we said, we'll manage the balance sheet dynamically and think of the best and most efficient way to fund ourselves, which could include financing some of the seed position that, you know, support our net financial assets. We don't, we don't have a specific target in mind there.
It's easy for people to think of us as a U.K. asset manager in the classic sense. You know, they're very driven by the need for the sort of capital requirement from the regulator. Because of the Jersey headquarters, we no longer have that constraint. We run the balance sheet how we want to run it, and there is no starting point of this is the number of assets, financial assets we need or not.
No, that, that, that's well understood. Maybe I'll just go directly to my question then. I mean, how should I interpret the fact that there's no buyback reloaded here? Is this, is this gonna remain a function of, or, or, it's the fact that there's a little performance fees related to, to then it being no, no buyback, or how should we look for, for buybacks in the future? Thank you.
The capital policy has not changed, and that's why we repeated it. Buybacks have happened, historically, sort of, discrete times within the year and don't necessarily happen, with, with results. And the way to think about it is the, the sort of capital policy and philosophy that we've applied really now for 5, 6 years will continue to be the same. We'll first return via dividend progressively now, look at organic and inorganic activity, and then, in addition, at the end, if there's surplus, we, we might look at it over the medium term, at potential buyback. It's a sort of recurring cycle that the board goes through, you know, a few times a year. There isn't really anything to read about, the lack of buyback announced at this point.
Cool. Angeliki has sent in a message with the questions. Thank you, Arnaud . First question for. I'll read them because I'm gonna guess most of them will be for you.
Yeah.
First question from Angeliki: How should we think about the potential for buybacks in the second half of the year, in 2024? Does the acquisition of Varagon put any constraints on buybacks? I guess it's a similar answer to Arnaud 's.
Yeah.
Anything-
I mean, it's the same, same answer. You know, remember, we've just announced some M&A as well. Again, it fits in the, it fits in the policy that we described.
The second one is: With regards to Aragon, more than half the $15 billion of commitments are given by the three insurers that are the selling shareholders. Can you please explain how you think about long-term growth in Aragon, and whether you expect those insurers to remain invested in private debt over the long term?
Firmly, yes. They've, as part of the transaction, agreed to extend for several years their, their Investment Management Agreements, their IMAs, and they have an additional incentive if they extend up to 9 years. Private credit is a core allocation for large insurance companies, but not just as you described, also for most of our institutional clients. We expect that to, you know, drive the growth for our business and this kind of strategy going forward.
Yeah, exactly. I think the, the, sort of the way to think about it is, you know, the, the, the selling shareholders remain very committed to the business, in large part in that, in a long term, and that they have reasons to need those assets over the very long term. The opportunity for Man is to take Varagon to all of the other clients worldwide, whether that's insurance, pension, sovereign wealth, all of whom are interested in the return stream that you get off that, especially with the very, very high-quality credit process they've had with those very low defaults in time. I think that's our opportunity, is to really drive asset flows from other clients while maintaining the existing ones. Then the last of Angeliki's question is. The good thing when you send them by email, you get more questions.
Can you please explain to us what drove the strength in systematic long-only and discretionary long-only in Q2? Do we see this as sustainable going forward? I assume she means flows.
Flows.
Look, I think the good thing when you look across a bunch of different things we do, that we've got, in the long-only side, some very good performance numbers, in both quant and discretionary. So, as you all know, when you've got good performance numbers, that drives flows. In the discretionary, it was particularly in the credit side, which I think we all know credit has been popular with clients of late. The good news is the credit numbers in our discretionary, both high yield and investment grade are very, very, very good, so that should all go well. The quant long-only equity strategies have some very nice numbers, which also appeals to people.
Hopefully it's sustainable, but as always, it's about what clients are looking for and making sure you've got something performing at the right time when they're looking for it.
We've got a couple of questions from Oliver, also on the Varagon acquisition. First one is either leg of the put call arrangement with the management team of Varagon Capital linked to the Man Group share price. So it all cash-based? So the payments will be all in cash, but, you know, that's eight, nine, 10 years from now. I guess at that time, nothing prevents us from doing a placing if we think that's the best way to fund the acquisition. The payments are cash based and not linked in any way to our share price. You mentioned the selling shareholders at Flat Corporate IG, account for half of our client commitments.
How should we think about this $55 million, which I guess is half the management fees, versus the $93 million extension payments you took in the press release? That's the first part of that question. The $93 million is payments that will be made over the next 6 years in 2 separate installments, assuming that the insurers remain invested for up to 9 years. That's how you should think about it. When will other clients make up the majority of Varagon Man AUM versus the majority today? I think it links to the, the sort of flow outlook.
Yeah. I think the process. Look, it's, it's obviously while, while it's the same people we'll be talking to that we've always been talking to, it's a new product we'll be taking to our clients. you know, we don't expect a huge jump in flows in the very immediate term, but once the clients are up to speed on how good Varagon is, we've got the story out there. We think that the medium-term flow picture should be very good for the strategy. With that, unless there's anybody you've got on line?
I think that Hailey has reappeared. Hailey, we'll go back to you just in case.
Thank you, Rudy. One last question, please, if I can. Thank you for the slides about ArcticDB and, and AI at the end of the presentation. I think it really reminded us your leadership in technology. Could you confirm for us if $100 million per annum is still a reasonable guideline for tech costs going forward? If it's appropriate, is there any comment you can make on the progress with your hub partnership, which I think was launched a couple of years ago now. Thank you.
Yes, on the first part of your question.
Yes, that was on the, the $100 million. On the hub partnership, development has been going very well. They have the first paying clients today, which is good, and I was on a board meeting with them last week, and it is running reasonably exactly on track to the original business plan, which, you know, sort of has some ways to go, but continues to be a, a well-developing thing, I would say. With that, What I was gonna say, I, you've all been incredibly nice, so thank you for the kind words.
Maybe I should have said I was retiring before and the kind words would have come earlier, or maybe it's just because the share price is down so much that secretly, while you're being nice to me, you're going on the other side saying something horrible. Either way, thank you everybody for your time and attention, and here is to the long-term success of Man. Keep well, everybody.