Good morning, everyone, welcome to ICG's results for the 12 months ending 31st of March, 2023. I am joined by our CEO and CIO, Benoît Durteste, and our CFO, Vijay Bharadia, along with our CFO designate, David Bicarregui. The slides for today's presentation, along with the accompanying results announcement, are available on our website.
For those of you joining online, you can submit questions through the webcast messaging function or by telephone. Details are on the portal. As a reminder, all information discussed today is based on Alternative Performance Measures, which exclude the consolidation of some of our fund structures required under IFRS. At this point, I'll pass over to Benoît.
Thanks, Chris. Good morning, everyone, thank you for joining us today. You may remember this time last year, I said that we were entering full year 2023 in a position of strength, we were confident on the outlook. I'm pleased to report today that this confidence was justified and that we are delivering financially and strategically.
Ours is a long-term business model, over the last five years, we have grown AUM, fee income, and fund management company profits at very significant annualized rates. The results we are reporting for full year 2023 continue that trajectory. Fundraising remains on track to achieve our accelerated target. We have had our second highest levels on record of deployment and realizations.
Our management fees, the main driver of shareholder value, have increased by 23% year-over-year. We are reporting record levels of fee-earning AUM and FMC profitability. Importantly, we are increasingly well-positioned to deliver further future growth.
We already have significant embedded growth in our existing strategies. I believe it possible that as markets reopen, we could see a rapid increase in activity levels amongst the larger, more established managers such as ICG.
Turning to our performance over the last 12 months, we will cover each of these areas in more detail later. The key takeaway is that we have grown at impressive rates, our levels of investment activity remain strong by historical standards. We have made further progress in executing our strategy around sustainability and people.
Indeed, on this last point, we were pleased to receive a number of external plaudits during the year, including a first place globally in D&I from Honordex, and for the first time, becoming included in the Dow Jones Sustainability Index for Europe. This is reflected in our financial performance. I have mentioned management fees up 23%.
This has led to third-party fee income surpassing half a billion GBP. We have enjoyed high growth, high margin, and a balance sheet that has demonstrated robust performance. The scale and breadth of ICG today is evidenced by the amount we had going on during the year. The three final closes we held were all for flagship funds and all at or above their original hard caps.
Those 3 funds alone account for over $13 billion of third-party AUM and all charge fees on committed capital, resulting in a material step-up in profitability. The benefits of our historical investments are increasingly visible, with three second vintages in the market. As these strategies grow up and start generating compounding fee streams with second vintages and beyond, that bodes well for future profit growth.
We continue to invest in the for the future, in new strategies, in new teams, as well as in our client and operating platform. From a fundraising perspective, we're pleased to report that we raised $10.2 billion during the financial year and are well on track to achieve our accelerated fundraising target. This is a very strong achievement, indeed, even stronger than it may appear at first glance.
Full year 2023, you may remember, was always going to be a lower year in our fundraising cycle after the peak of last year, and this happens to coincide with what is probably the most challenging fundraising environment since the GFC. To have achieved over $10 billion, which we've guided to as our average annual target for this fundraising cycle, is indeed a great achievement.
There are, I think, two main reasons for this. First, diversification at scale. There were four different strategies that each raised over $1 billion this year and despite it being an off-cycle year. Second, we have a marketing and operating platform that is set up to raise for multiple strategies concurrently. This is very demanding and requires a radically different organization and model to those players that raise strategies sequentially.
Supporting this fundraising performance, our client base has continued to grow by some 10%, and today we boast a very diversified range of nearly 650 clients. Even in this environment, we are continuing to attract new clients, and not only to new strategies, but to well-established strategies as well. As an example, some 30% of Europe Eight's third-party AUM is coming from clients that are entirely new to ICG, and that's for a strategy that is several decades old.
As you heard during our client and fundraising strategy seminar back in January, we have historically focused on driving client numbers. In the years ahead, there's also a significant opportunity for us to increase the AUM per client, the share of wallet, if you will, by getting larger commitments and by cross-selling.
To that end, we are constantly assessing and enhancing our marketings and client relations platform, and in recent months have been making selected hire to focus on specific products and specific client types. Insurance is an example which represents about 20% of our AUM, or wealth, where we have already had several successes.
Wealth, specifically, it is admittedly early days for our industry and with some challenges, no doubt, but I believe this could become a significant source of capital in the future, and we want to ensure we are well-positioned and established while keeping our options open on the routes to market. Turning to our investment activity.
Despite a globally slower M&A environment, we are continuing to deploy and realize capital at pace and scale, reporting, as I said earlier, our second-highest levels of activity on record, second only to last year's exceptionally high levels of activity. Our main products and recognized areas of expertise happen to be very well suited to the current environment.
The CIO of one of the largest pension funds in the world was reported as saying recently that, "Private debt is the new private equity," it is true that it's a great time to be a debt provider. Private debt, driven by senior direct lending, is enjoying strong deployment, largely because other sources of debt financing are basically shut. With high interest rates, high margins and fees, low default rates, reasonable leverage, and, you know, overall favorable legal documentations, what's not to like?
Within our structured and private equity strategies, our flexibility to invest across the capital structure is enabling us to pivot to structured debt solutions and sidestep the difficulties of equity valuations. That is proving to be a major competitive advantage, and it really resonates with LPs as they look to diversify away from plain vanilla private equity, but still require high returns.
From a realization perspective, we have continued to find opportunities to crystallize gains and further anchor portfolio returns. This is important as it enhances our already strong DPI numbers and is highly valued by LPs temporarily starved of capital inflows. Our realized portfolio weighted average return for the year was just under 19%, and although, I mean, this number is the result of a mix between strategies, such a high average level clearly points to very strong exits during the year.
Our realization numbers do not only represent high volume, but high performance as well. The net effect of this fundraising, deployment, and realization activity is that our total AUM is now $80 billion, and our fee-earning AUM stands at $62.8 billion, up 10% during the year on a constant currency basis, and 20% on an annualized basis over the last five years.
Growth in fee-earning AUM came in part from fundraising, $4.2 billion from strategies that charge fees on committed capital. The largest contributor was from deployment in strategies that charge fees on invested capital, in particular, the strong deployment we saw in direct lending. I would like to highlight here that debt strategies with fees on invested are countercyclical in nature.
They generate greater profit in a downturn, and that's because in times of credit scarcity, there is hardly any repayment activity for debt strategies, and any new investment translates into higher fees and directly profits. This mix of strategies we've built, some with fees on committed, some with fees on invested, is one of the reasons why our business model does well, even at a low point in the economic cycle.
Turning to the performance of our portfolio companies, which are continuing to do well, very well, actually, seeing double-digit growth in LTM EBITDA in many strategies, and with modest levels of leverage. The relatively low levels of leverage also result in high interest coverage. Across our European corporate portfolios, for example, the median interest coverage is four times.
This combination of our realization profile and the strong operating performance of our portfolio companies brings us to the performance of our key strategies and funds. Unsurprisingly, given what I've just described on portfolio company performance, and also given our focus on downside protection and the significant contractual component of return in most of our deals, our funds are showing strong performance, with the majority enjoying continued NAV growth. That said, and as I've underlined in the past, short-term movements of fund valuation is not a particular focus for our clients. We show here two more meaningful metrics for them. First is realized performance of a fund at exit, which is why DPI is so important. To give you an idea, Europe Seven has already returned almost half the capital with just three deals having fully exited, and we have 12 years to realize this fund.
Not only is this fund off to a very strong start, but we have a lot of time to ride out any cycle. If we look at the predecessor fund, Europe Six, it has a 171% DPI, so it's already a very successful realized vintage with a further EUR 1 billion of unrealized value. That's what LPs are looking at. Second, another way to look at our investment performance is a life-to-date IRR for the strategy as a whole, and which we show here as a weighted average gross IRR of vintages in the strategy, weighted by cost. That comes out as 18% for European corporate and 10% on an unlevered basis for direct lending. These are very attractive long-term results for clients who have invested consistently, vintage after vintage, in these strategies.
ICG has a reputation of very strong investment culture and performance, and these numbers should serve to reinforce this. The headline on today's announcement is that we are delivering through cycles, and our results today clearly support that. Strategically, as you know, we have been focused on growing up and growing out. The resulting diversification and increased scale are clear in our performance for full year 2023, I think. It's a case of right time, right strategies for us. The current market environment favors strategies in which we have a leading position. Any debt strategy, senior or subordinated, as well as more optimistic structured solution. Looking forward, there's still significant runway for us. As our more recent strategies scale and launch subsequent vintages, they are becoming increasingly meaningful to our group results.
As I will elaborate on at the end of this presentation, I'm convinced that managers like ICG, that have the scale, breadth of products, and importantly, track record, are likely to experience a period of markedly accelerated growth as the market recovers. On this note, I'll pass on to Vijay to discuss our financial performance in greater detail. Vijay?
Thank you. Thank you, Benoît, and thank you all for your time today. First, a brief snapshot of our key financial results. We've generated record levels of fee-earning AUM, fee income, and fund management company profits. These results underline the strength of our business, the resilient nature of our fee-centric fund management business, with long-term visibility that drives impressive growth through uncertain times, and supported by a strong and resilient balance sheet. These results are also enabling us to deliver our 13th consecutive year of our annual growth in our ordinary dividend per share. We are maintaining our progressive dividend policy and over the last five years have delivered an annualized growth of 21% in dividend per share. I will now go through each of our key financial results in detail.
I mentioned the long-term visibility of our business, and to expand on that point, as you can see on here, our management fees are generally charged on committed or invested cost, and as such, are largely immune to market volatility and fund NAVs. To illustrate this, at the year-end, we had $62.8 billion of fee-earning AUM, and if all of our business activity stopped, meaning we didn't do any fundraising, we didn't deploy any capital, or we didn't realize any dollar, that AUM alone would generate GBP 460 million in management fees. Furthermore, because we have $14.7 billion of AUM that charges fees on invested capital, we will start earning a further GBP 116 million of management fees when we deploy that capital.
All things being equal, our fee model today gives us visibility on nearly GBP 600 million in annualized management fees. That dynamic of long-term fee visibility and its resilience is very powerful, as it enables us to operate through cycles, make long-term investments in our people and our operating platform, and deliver shareholder value. Turning to our fee income. Over 95% of our fee income, as you can see on here, is management fees, which grew 23% year-on-year, and total fee income as a whole grew 12% in the year. As Benoît mentioned, both strong fundraising of strategies that charge fees and committed capital and good net deployment of funds that charge fees on invested capital, particularly our flagship strategy, direct lending strategy, contributed to the growth of our fee income.
Taking a longer-term perspective, our fee income has grown at an annualized rate of 25% for the last five years and are now generating over half a billion pounds in LTM third-party fee income. Moving on to our operating margin. This grew roughly 170 basis points year-on-year to 57.5%. This growth was in part due to 31 million GBP of catch-up fees, which we do not expect to recur in FY 2024, as well as a strong focus on cost control, with total operating expenses being flat year-on-year. Within operating expenses, employee costs were up 8.6%, while administrative expenses were down in absolute terms due to lower professional and consulting costs and lower recruitment costs. During FY 2024, we anticipate a modest acceleration in hiring, including into our marketing and client relations capabilities.
We also expect to make investments in our operating platform, especially in smart sourcing processes, by leveraging low-cost jurisdictions such as India. Finally, seed strategies. During FY 2023, we recognized in the investment company about GBP 24 million of expenses relating to seed strategies. Once these strategies have their first close, costs associated with such strategies are recognized in the fund management company, and we'd expect to see some of that during FY 2024 as we launch new strategies. In respect of our operating margin in FY 2024 as an outlook, while it may soften from FY 2023's very strong outcome, we continue to reiterate that we expect it to be above 50%. Turning now to FMC profits. These grew by 9% during the year, or 14% on a constant currency basis, excluding the impact of FX hedge derivatives.
The growth in fee income, along with flat expenses, materially increased our fund management company profit before tax, which is partially offset by a GBP 27 million reduction in the fair market value of FX derivative hedges. Towards the end of the year, we decided to stop hedging non-sterling net fee income on the basis that commercially we do not need to do so. Going forward, the impact of FX movements on the FMC will be more transparent, and we'll be disclosing the FMC results on a constant currency basis. Taking a longer-term view, the growth of our FMC profits is closely linked to the growth of our fee-earning AUM, and over the last five years, have grown our FMC profits at an annualized rate of 27%, which is quite remarkable. Turning to our balance sheet. This remains robust, well-capitalized, and valuable.
We have total liquidity of GBP 1.1 billion, including an undrawn revolver of GBP 550 million. At the year-end, our net gearing was 0.5x. During the year, we repaid two debt facilities totaling GBP 194 million from our cash resources. Our drawn debt is all at fixed rates, with an average weighted cost of 3% and a weighted average maturity of just over four years. We were upgraded by S&P to BBB during the year and as a result, are now rated BBB with a stable outlook by both S&P and Fitch. Our NAV per share was 694p, up 5% from September 2022, and broadly flat year-on-year. In short, the balance sheet performed in line with our expectations during a period of macroeconomic uncertainty.
The largest component value, of value in our balance sheet is our investment portfolio, and I will now turn to how that performed during the year. Our balance sheet invests alongside our clients and seeds new strategies. During the year, we invested GBP 660 million, of which GBP 214 million was in respect of seeding new strategies. Realizations totaled GBP 794 million. This activity in total resulted in net realizations for the balance sheet of GBP 128 million. There was also a valuation gain of GBP 100 million, which I will discuss in the next slide, and an FX tailwind of GBP 108 million. As a result of our balance sheet investment portfolio modestly increased by 3% during the year and closed at GBP 2.9 billion at the year-end.
Aligning interests with clients is expected in our industry and to our long-term success. In aggregate, our balance sheet investment portfolio now represents only 4% of total AUM of $80 billion. This scale of proprietary capital is a huge strategic and in 2018 and seeded the first strategy in 2019, and successfully closed the first fund at EUR 1.5 billion in FY 2022. This is the economic outcome of our growing out strategy that we have discussed previously. We also remain focused on allocating capital appropriately. During the year, we reduced, in absolute terms, the firm's commitments to ICG Europe Fund VIII, ICG Europe Mid-Market Fund II, and ICG Strategic Equity Fund V, and also sold down positions in two of our credit funds, which generated approximately GBP 100 million of cash.
These steps we are taking today will take a number of years to have a visible impact on the absolute size of the balance sheet. The longer-term direction of travel is very clear. Our balance sheet is therefore generating attractive standalone returns and, more importantly, is efficiently supporting the future growth of our business. Turning next to our net investment returns. This has averaged 11% over the last five years and generated a positive return of 4% during the year. Of the GBP 102 million net investment returns, GBP 113 million was from investments that are charging interest, and there was a small loss of GBP 13 million from valuation movements. This interest-bearing component is very important. Given the range of our strategies and our ability to invest across the capital structure, our NIR is not purely based on valuation changes.
There is also a meaningful underlying income component derived from the structured and debt-like nature of many of our investments. Structured and private equity, which accounts for roughly 60% of the balance sheet portfolio, private debt, and real assets all generated positive returns. The negative NIR in credit was in part due to the GBP 40 million of amortization of CLO dividends, which is included in the GBP 13 billion valuation loss that I referred earlier, as well as an increase in the assumed default rates for our CLOs that we implemented in the first half of the financial year. For real assets, you will remember that the focus of this asset class is shifting dramatically away from lower return real estate debt strategies and towards higher return strategies such as infrastructure, sale and leaseback, and in the coming years, Real Estate Opportunistic Equity.
As these strategies grow and become bigger, they become a major proportion of real assets, and we would expect the NIR, therefore, to reflect the higher returns those strategies are expecting to generate. In summary, a very resilient performance of the balance sheet portfolio, which should be no surprise given our approach to structuring investments, our focus on downside protection from a risk management perspective, and the income component of our NIR. Our confidence in the business model and our prospects is underlined by the fact that our guidance remains unchanged from what we set out at our FY 2022 results. Notably, the fundraising is on track with $33 billion of the accelerated $40 billion target raised in the last 24 months. Through a testing period, our portfolios are performing in line with expectations, supporting our medium-term guidance on NIR.
Finally, on a personal note, I'd like to thank you all for your challenge and support over the last four years. I've thoroughly enjoyed our discussions and look forward to seeing many of you in the coming couple of weeks before I leave in July. With that, I'll pass back on to Benoît. Thank you.
Thank you, Vijay. Looking ahead, I expect the market environment to remain challenging for some time. In that context, we are fortunate in that the investment landscape and client appetite has shifted towards our areas of strength, namely debt products and structured transactions. It's the private debt is the new private equity comment. Looking further ahead, I believe the structural drivers supporting the industry remain very much intact and could even lead to accelerated growth coming out of this downturn. The investments we have made in recent years are having a material impact on our business now, and the visibility of those benefits is likely to increase in the coming years. We have ample runway for many years of profitable growth from our current waterfront of products alone, and let me expand on this.
The growth we've achieved in recent years has been very strong, and the benefits of our increasing scale and breadth are visible in our results today. The benefits coming through today are only part of the story. The real work we've been doing is laying the ground for further growth to come from a broader range of strategies as they scale. The compounding nature of fee streams as we raise subsequent vintages, alongside a more diversified fee income profile, is likely to create substantial value in the years ahead. All the ingredients are here. We now have the investment teams, the balance sheet, the marketing and operating platform, and importantly, the brand. We are, I believe, on a clear trajectory towards lower capital intensity, a more FRE-centric profit stream, and higher margins and cash generations over the long term.
I also believe that there will be substantial rewards for the winners emerging from this more challenging period, and that is because there is a very possible scenario in which when the market turns, there is a sudden wave of M&A activity, of deal flow, which would trigger a wave of realizations across the industry. In turn, this means significant capital being returned to LPs, who will find themselves with significant liquidity. In that scenario, it's highly likely that public markets would be rebounding, and many LPs would experience a reverse denominator effect and end up being severely under-allocated to alternatives. We could very well experience a rush by LPs to redeploy into alternative, and obviously, with a focus on those managers that will have done well through the cycle.
To be amongst that relatively small group, private markets managers will need to have a broad product offering, a differentiated origination capability, a track record through cycles, of course, and a sophisticated client strategy and operating platform. ICG possesses all of those qualities. Today, we are larger, broader, more financially resilient, and the FMC more profitable than at any point in our history. We benefit from significant and better growth from our existing product suite and could enjoy an accelerated growth phase on the other side of the current economic period. This concludes our results presentation for today. Did want to point out, as Vijay said, this is Vijay's last full year presentation.
I would like to take this opportunity to thank Vijay personally and on behalf of the board and the whole of ICG for his commitment and dedication over the past four years. It's been a period of incredible growth. Fund management company profit has more than doubled. The net gearing has practically halved. We've launched many funds, including a number of first-time funds. We've issued two bonds, both with impeccable timing, I might add. All of this would not have been possible without the tremendous effort and progress made specifically in finance and operations. Vijay, thank you very much. I'm also delighted that we have appointed David Bicarregui to succeed Vijay as CFO.
Many of you will meet David in the coming weeks, and months, but before we open up to Q&A, I'd like to invite David to maybe say a few words. That's fine.
Thanks very much, Benoît, let me add my thanks to Vijay as well. We're in the middle of a transition period, it's going incredibly smoothly, thanks to Vijay's dedication. It's great to see many familiar faces in the room today. I'll look forward to meeting more of you in due course. Been here eight weeks. It's been invigorating, exciting, a little bit intense, which is what you'd expect. I've been really impressed by the energy, the enthusiasm, and the entrepreneurial spirit of everybody at ICG. My summary is, we're large enough to be relevant to our clients on multiple levels across multiple strategies, we're also nimble enough to take advantage of market opportunities. Extremely well-placed, as you heard earlier, to benefit from long-term structural growth in our industry.
We've experienced a lot of that growth, obviously, in the last few years, but there's a lot more to come. My focus is gonna be on helping the company and clients reach their full potential. We're gonna grow and scale the platforms that we have. I'm really looking forward to doing that here at ICG. As you heard earlier, we've got a clear strategy, and we're going to execute on it. Over the next few weeks, look forward to meeting more of you. With that, maybe, Chris, we can turn to some questions.
Perfect. Thank you all very much for your time today. As a reminder to those online, you can submit written questions through the portal, we will start with any questions in the room. David? Sorry.
Morning. David McCann from Numis. I just wanted to touch on something you were talking about at the end there, Benoît, but obviously, it won't have escaped your attention that, you know, a number of your peers in the industry have been consolidating or have been talking about consolidating recently. Two main reasons being for diversification and for scale. I would argue you've got the diversification box ticked, but, yeah, scale, bit more questionable. You did obviously make some references at the end. I guess that, you know, that scale is becoming important as, you know, the asset owners, people who buy these kind of funds, are looking to do with a smaller list, and you've alluded to it in then your comments. I guess that your kind of current GBP 80 billion scale, is that enough to really compete at that level?
If not, do you need to do something sorry, inorganically to enhance what you're doing organically?
Yeah. Well, is it enough? I mean, you always want to get bigger, and we will get bigger. We've turned that corner. I think I mentioned that a couple of years ago. I mean, we really felt it in our discussions with clients when we started getting to a scale where we were really becoming meaningful. In order to do that, really, you have to be able to absorb at least $1 billion from these, from these investors per, you know, per cycle, whether it's on a single strategy or across several strategies. To me, that's the minimum level where you start to really be, you know, you're on their radar. We've crossed that threshold a couple of years ago, so we're there.
Having said that, you know, you know, being bigger is always helpful, but, you know, it's a trade-off. You know, the, you know, these are people businesses, and so making acquisitions can be a good idea, but it can also be quite risky. We've been very successful at growing organically, and it's obviously less risky, also incredibly profitable. Yes, it takes an enormous amount of effort, but if you look at, just to pick one, you know, look what we've done in infrastructure. Yes, we could have gone out and tried to buy an infrastructure player, probably at a massive valuation. We've built it organically. We're now raising our second fund. We're on track to basically create our own infrastructure fund internally. Yeah, I quite like that model. I'm not excluding it, by the way.
We're not excluding, we're optimistic looking at things, but we have to be mindful that there are cultural issues. We have to be mindful about valuations as well, particularly at this point in the cycle. Yes, you're right, this industry, which is not a surprise, by the way, that's why we've been growing all this time and expanding the platform. Any industry that matures, at some point, goes through a consolidation phase. I think we're, you know, we have the size, we're one of the, you know, biggest players in Europe. We're gonna keep on growing. We'll keep our options open, but we're not in a position today, you know, to answer your question a bit differently, do we have to do something? No.
You know, if we find something that makes sense for us and may help accelerate in one area or another, maybe we'll look at it.
Nick, I think you had a question.
Yes, I actually have loads of questions. I'll stick with three for now. First of all, just, Vijay, the best wishes on your next move as well.
Thank you.
Thank you for the help in recent years. In terms of my questions, the first one's on fundraising. Can we just dig into the outlook and pace of fundraising for this year? I think you referenced some first closures of some first-time funds, so interesting to dig into that, and presumably you do have confidence there. I guess also from a flagship strategy perspective, I guess Strategic Equity V is pretty critical now, given that Fund IV is now 95% deployed. That's, yeah, that's the first one, please.
On the broader fundraising topic, we, you know, we have two funds that, you know, perhaps you could qualify as flagship that are in market. SDP, which was in market last year and continues to be in the market. I think, you know, as we've pointed out during this presentation, direct lending is clearly an area of interest from investors. You know, we're reasonably confident that, you know, there is going to be continued appetite for this strategy. The Strategic Equity, it's a different situation. That's very much of a niche strategy where ICG is the global leader, which has advantages and complexities.
That part of the market is, it's the only part of the market that I know where there's such an imbalance between supply and demand. Like I say, there is a huge need, a huge need of capital, there's huge demand for deals, particularly in the current environment. Just as a reminder for everyone, if you, if you're not aware, Strategic Equity does GP-led continuation transactions. That's essentially when private equity sponsors decide they like an asset particularly and want to continue owning it through a subsequent vintage. We come in to help them through that transaction and, you know, fund a significant part of the transaction as well.
You can imagine in the current market environment, where there is huge uncertainty around valuations, people who do not want to give up on assets that they quite like, you know, there is huge appetite for these types of transactions. Not much capacity, 'cause not that many managers have raised money. As I said, we are the largest globally. Because of this, you know, the amount of deal flow is immense. Origination is not an issue, the question is choosing your fights and where are you going to best invest the capital. As a result, we finished raising Fund IV last year. We're already done. It's all invested. We're looking for more capital to keep on investing. This is really a strategy where we're optimizing.
We never thought we'd be back in the market so quickly. It's good news because the strategy has done incredibly well. The IRR numbers, you would hardly believe. At the same time, coming back so quickly on the back of the previous fund creates some difficulties because LPs have just given us money. That's what we're dealing with. Having said that, you know, there is appetite for that strategy because in the current market where, you know, where do you invest, particularly if you're looking for higher returns, you know, if you're looking for, you know, low double digit, direct lending, debt strategies do that very well today. If you're looking for higher returns, it's much more difficult to know where you're going. Niche strategies can offer that, you know, there's appetite for that as well.
It'll take time, and by the way, in the current market environment, you know, as I've said, the overall fundraising environment is more challenging. You know, LPs have limited capacity. As a result, you know, fundraising takes longer typically. We're quite confident. The timing is, there's more question on, but in the end, you know, I know we'll raise well. Over what period of time? It's impossible to know.
Understood. Thank you. That's helpful. Just the second one was on fund valuations. Relative to when you last reported back in November last year, it's interesting to see that, you know, LTM portfolio company EBITDA growth has actually improved in Strategic Equity and in SDP. Just curious where that improvement is coming from, what you're seeing. Then, as part of that as well, I mean, can we just disaggregate between EBITDA growth and, let's say, multiples on the valuations? Just quite a strong improvement in the valuations that you put through this period. I guess, is that public markets or private markets?
If it's the latter, what are you seeing that can kind of reassure investors that these are, you know?
Yeah. maybe I'll take what we're seeing at portfolio level.
Valuations.
You can take valuations.
Yeah.
Yes, I mean, at portfolio level, the performance of portfolio company has been remarkably strong. That's not, by the way, just an ICG phenomenon. When we look throughout the market, by and large, there are always exceptions and people who do not perform as well, but by and large, you know, the performance of companies in the buyout space, which is skewed towards services, towards, you know, you don't have that much in cyclical. Nevertheless, that performance has held up very, very well, and this is reflected in numbers we're seeing. For now, looking at the more recent numbers we've seen, looking at the budgets for this year, I'm not seeing that changing for now.
Now, that's not to say if we have a recession that finally comes in at the back end of this year or early next year, you may see some of that coming in. What's important to understand, particularly for us, where we have very significant debt exposure, is that compared to previous crises, in a sense, we've seen this one coming. You know, I've pointed to our numbers of leverage and interest cover, and the thing is, you know, with every month that passes where companies deliver higher EBITDA, more cash, you end up in a position. Yeah, they're in a much stronger position.
Even if you do end up with a recession later this year, or sometime next year, you know, companies certainly in our portfolio are in a much better position to just, you know, to weather that period. Maybe on valuations?
Yeah. Thank you. For valuations, we take sort of two-prong approaches. One is looking at portfolios and comparing that to transactions in the market, and we don't typically anchor to public market comps. We tend to look at private transactions in the industry, and separately, we also do DCF valuations as well. The question was focused on the DCF valuation in terms of multiples. What we are now doing in terms of DCF valuations, we are actually seeing, to Benoît's point, increased growth in performance of the portfolio companies. However, we are actually reducing the levels of multiples that we're actually applying to that portfolio by a couple of turns, actually. If you were to look at year-over-year, you'll be able to see a reduction in the level of multiples.
A couple of other points on that. For DCF calc valuations, we are actually having lower exit multiples compared to our entry multiples in many cases. Finally, we do have quite a lot of assets where there are other third-party private equity investors in the same asset. We have visibility as to where they are actually valuing their asset compared to us. In all cases, all cases where we have that, our valuations are actually lower than their valuations. Just since the year-end, we've actually had a close of one transaction, as an example, which was actually above our valuation at year-end. I guess it just gives another sort of perspective in terms of how conservative the valuations are for our portfolio.
Very helpful. Thank you. Just the last one, I'm conscious of time. On costs, I think I guess there's going to be a lot of moving parts in the FY 2024. I guess you might expect some rebound in admin costs because of higher recruiting, maybe pay higher placement fees. It's, I don't know if maybe if incentive fees per head might come back a little bit. I guess what I'm trying to get at here is consensus has cost growth of 12% this year. I mean, does that make sense to you? Can we just dig into the moving parts a little bit? I guess also, you've got the costs, some of the costs from the investment company coming into the FMC, by the sounds of it, if there's any first-time closes. Just kind of disaggregating the moving parts here, please.
Sure, yeah. The way to think about cost is first of all, during FY 2023, and I'd mentioned this at the half year, actually, interim results, that we had slowed down in our hiring in the second half, and we did apply that strategy during the second half. For this financial year, the new financial year, FY 2024, we expect to accelerate hiring, as I mentioned, and particularly in our marketing and our client relations capability. In marketing, Benoît touched on different client types, or different product capabilities from a marketing perspective, in addition to different markets, by the way. We're thinking about hiring, for example, in places like the Nordics. We've just hired somebody. We're hiring somebody in the U.S. from a marketing perspective.
Benoît touched on insurance and the wealth channel, so that's where we're adding some talent. We're not talking lots of people here, by the way. It might be one or two people here or there, but I think the point is that actually we are now beginning to sort of put the right foundations in place in our marketing capability as we continue to grow the business and if there is an opening in the markets as well. At the same time, we are also investing in our client relations capability, where we are adding more senior-level product specialism in the client relations team to be able to deal with the growth in the clients that we've experienced. Benoît touched on it, six or just over 600 clients, 650 clients, nearly.
That obviously is quite, becoming quite demanding. We're basically making that a little bit more structured in terms of how we support the client base. We'll add some capability in our operating platform as well. Those will be the drivers for the cost base. In respect of the new strategies, we may have maybe one, maybe two at most, new strategies to launch. We'll see how the market evolves, of course. We are mindful in terms of where the markets are, and it's incredibly hard to raise first-time strategies. But if there is an opening, we might raise one strategy, and as you highlighted, yes, the cost of that would come in only once we've had a first close. Not whilst we are raising, but only once we've had a first close.
yes, in terms of the first part of your question, is the consensus reasonably there? We think so, in terms of FY 2024 versus FY 2023.
Thank you very much.
Any more questions in the room? Luke?
Thank you. It's Luke Mason from BNP Paribas. Best wishes, Vijay. Just, first question on deployment outlook. You talked about a potential re-acceleration as we move through this period. I guess, as we think about that, what conditions should we look out for, to see that re-acceleration? What are you seeing in the market today in terms of deployment? You talked about strong demand for debt, et cetera. Then just secondly, on the fundraising outlook, the new strategies, can you just clarify in FY 2024, you mentioned a couple there, what new strategies we may be looking out for, to come? Then just thirdly, interested in the conversation you're having with LPs, just around allocations to different areas, different asset classes.
Just given the strong demand or high yields in fixed income, is that offsetting some other areas like real estate, infrastructure, for example? Just how LPs think about that when they can get higher returns from fixed income. Thank you.
Yeah. Several questions there. On the deployment piece, I think I need to separate the overall market from, you know, ICG's experience because of our focus on either debt strategies or strategies that are highly structured, we are in a more favorable position than if you're just doing plain vanilla PE right now. The comment I was making about the overall market is that, you know, the current environment where there is low M&A activity level and there is a low level of traditional buyouts, that's just creating, you know, pent-up demand. I mean, you know, those deals are not disappearing, you're just creating a backlog.
I'm not sure when that is, but there is going to be a point where the market is going to bounce back with a vengeance. That's a general market comment, and it has a number of implications for our industry and those who will end up doing incredibly well coming on the other side of the cycle. For ICG, it's a bit of a different situation, is, you know, we're fortunate because of the strategies that we're focused on and where, you know, where we are recognized, because these are strategies that can actually deploy today. Because direct lending, there is very significant demand, because, you know, not because there is huge deal flow, but because there are no alternatives.
You know, I mean, just now we have something like that's only Europe, about EUR 4 billion worth of deals in the pipeline. We're certainly not going to do them all, but they're just there. It's people asking for financing. This is just senior direct lending. If you think about what's happening in the overall market, you know, with the increase in rates, there are a number of transactions that find themselves with probably too much leverage and will need to find some sort of solution and refinance. That works very, very well for us, and we're already starting to have those discussions where people are coming to us because they need to rejig their capital structure.
They need someone who can put in a slide of subordinated debt or something, you know, help in the structuring. We've seen it already in the U.S., and we're starting to see it in Europe, which is a number of private equity firms have invested in transaction on the basis that they're essentially they're M&A machines. They're platform deals where you're creating value by making accretive acquisitions, which is a very good model. It's less of a good model when you no longer have the financing to execute on that strategy. What we're seeing is a number of private equity sponsors coming to us to look for some sort of financing.
They don't want to change or touch the senior piece because that would be very expensive, so they're looking for something to slot it in, and they're prepared to pay quite high levels of remuneration because that's what's preserving their valuation and the hope of preserving a high EBITDA multiple at exit. They need to keep the M&A machine going. For all these reasons, we find ourselves with, you know, most of our strategies actually have quite, you know, reasonable, actually very good deal flow, as you've seen in the numbers this year. We're a bit different from if you're looking at the overall market and particularly the more traditional PE type market. That's for, that's for deployment.
Your second question on fundraising, I mean, w e always have a number of ideas, that, you know, could fit at, you know, a given point in the market. You know, to give you a few example, we have launched a traditional LP Secondaries strategy. Now, admittedly, we're clearly not the first to come into that part of the market, but the reason that we think that there is an interesting opening there is, one, we're a natural player in that, just because of our knowledge of the industry and all the market participants, so it's a natural move for us.
The other thing is, and we've learned that by, you know, the success we've had on Strategic Equity, so the GP-led part of it, is what's happened is, most of the large LP Secondaries players have started doing a bit of both in the same funds, in order, if only as, you know, the GP-led transactions are boosting overall returns. They're actually very different activities. One is very much of a private equity activity, the other one is a pure secondaries, which is more volume driven. A number of LPs are not particularly enthused by this. They think you're mixing and matching two very different asset classes. To come to these LPs and say, "You know, we can recreate a pure LP Secondary product, which is what you want," there's actually appeal for that.
It's early days. As Vijay said, quite rightly, in the current market environment, it's a bit heroic to launch first-time funds, but we still think it's worth going out there. In a sense, it doesn't really matter how much you raise. You're putting a stake in the ground. As the market starts reopening, you've established those relationships, you start having a track record. Those efforts are not, you know, tough efforts on our marketing teams, but they will not be wasted over the long run. I wouldn't put a big number on those for the fundraising for this year. Thinking long term, in value creation, they're meaningful. You can include in that Life Sciences, incredibly difficult to raise right now.
Still, you know, there is interest for some LPs, and it's great to be out there with that sort of highly specialized product. That's another one. You mentioned Real Estate Opportunistic. The timing could be incredibly fortunate because obviously, you know, the real estate is going through a very difficult patch, particularly if you've been doing equity in those past years. We haven't. We were focused on debt. To be able to launch from a complete clean slate, an opportunistic real estate strategy now that could take advantage of, you know, some of the tension in that market, sounds like a good idea. That's what our LPs are telling us as well. You know, that's another one where we're gonna put in some efforts, but again, don't put a big number against that for this year in fundraising.
Do think about it as we're thinking at, you know, value of the business in the coming five years. Yeah, sorry. I know, I thought you were asking. Finally, your last point, which is on what are LPs saying? Without an exception, all of our LPs have been telling us that medium long term, they are at least preserving, but actually most of them increasing their intentions to allocate to alternatives. Where there might be a shift is some of them are saying, "We think the next decade is going to be a better decade for debt products than equity products." We're hearing that. By the way, that doesn't mean they won't invest in private equity funds.
It's just that they might rebalance a little bit because, you know, historically, in those portfolios, they were heavily skewed toward private equity. You know, private debt is only a nascent asset class for most of them. You're hearing some of that. We've seen some evidence of that, by the way. You've seen in the U.S., in part because they needed to deal with the denominator effect, but there is more than that. Many pension funds have increased their maximum allocation to alternatives, so many of them have increased it from 20% to 30%, and we're talking about some of the largest, public pension funds in the U.S. That's a massive increase, huh?
I mean, if they hit 30%, I mean, the increase in allocation, I'm not even sure that the alternative asset class today could absorb that sort of increase. Yes, you're right, that the increase, the increase in interest rate does mean that for some strategies, you know, it may become more difficult, but they're typically not, you know, they're not significant strategies, certainly not strategies that we're involved in. Think Infrastructure Debt, for instance. You know, Infrastructure Debt today, unless it reprices significantly, yes, you're coming head-to-head with what you might be able to generate in more, you know, traditional and typically more liquid fixed income. But for most other strategies, that's not the case, you know?
I mean, if you think the premium you're getting, for instance, in direct lending today is just as high, actually, it might actually be higher than it was pre the increase in interest rates. You know, that's why suddenly you're getting 11%, 12% for senior debt at lower leverages than, you know, two years ago. We're not seeing, you know, except maybe at the margin, but that's not really where we operate. We're not seeing that, overall, it's true if you listen to all the consultants, actually, the intention is for a further increase into alternatives. That's before we get into... I touched on that, but I think it is early days, that could be a very long discussion.
you know, there is huge potential in the whole wealth channel because there's a point where.
I mean, you know, you can't have, well, you can, but I mean, you could see the tension of having, you know, and, you know, institutional investors being 20, 30, 40, you know, we have some investors who are saying they want to go to 50% allocation to alternatives, and then have, you know, the, on the more retail side, no allocation at all to the space. You know, that's something that doesn't work. Now, you know, there are challenges. You know, how do you make that happen? How do you deal with the absence of liquidity? I mean, there are a number of issues or questions that need to be answered, but you could see how that could create a very, very significant potential.
Maybe with some intermediaries, by the way, emerging out of that, then there might be some interesting businesses being created out of that, but you could see that. Long term, you know, I think, you know, it's hard not to be optimistic about the potential of growth for the overall asset class, and hopefully ICG is part of that.
Justin?
Thank you. Just building on that, is it possible to take your performance over the last three years in terms of new client growth versus the fundraising, to see average size of allocations or understand what proportion of fundraising has come from those new clients, and therefore, also how that feeds into your thinking about targeting of new clients over the next three to five years, and if there are clients within that sort of target universe that you just simply couldn't have attracted, say, three years ago because of scale or?
Yeah, it's because, it in a sense, it's still early days for us. In a way, you're trying to do everything at once. It's been a combination of more clients coming in, some from new strategies. You know, infra, for instance, enabled us to attract, you know, a number of clients that we've never, you know, been in touch with before. It's also, as I pointed out during the presentation, even well-established strategy, at some point, create their own momentum and attract new clients as well. That was the case for Europe Eight. As I said, you know, 30% of the AUM in Europe Eight comes from new clients. You're getting a combination.
You're also getting, at the same time, investors putting in more money with you because you're becoming much more significant for them. You know, for some of our clients now, we are, for instance, their main partner in Europe. That wasn't the case three to five years ago. Yes, that creates its own momentum, but we have a bit of everything right now. You can't really, at this point, it's too early to say there's a trend of this. It's a bit everywhere. I think looking forward, we've been through a phase where deliberately, we were pushing to diversify the client base. Deliberately, because we started from having no client base.
We started early on with essentially with one fund and essentially 50 clients, and, you know, that's not a good place to be. We pushed a lot to diversify. We're now at a level with, you know, call it 650 or so clients. If you compare us to other managers, actually, we, in terms of diversification, we look quite good, better actually, than a number of managers that have higher AUM than we do. I think, you know, it's likely we're still going to wanna grow that base because, for instance, in the U.S., there's plenty more we could do. I think we've only scratched the surface in the U.S., but we're also at a stage where you're deepening some of the relationships.
You're broadening them, not only on a single fund, where, you know, you hope that they will accompany you as you grow the size of each vintage, but you're also trying to broaden the relationship where they're coming into more strategies. We're just beginning with that. For me, there's significant potential there.
Helpful. Thank you. Robert?
Yes, it's. Okay, sorry. It's Robert Sage from Peel Hunt. I was just sort of building on some of the earlier questions in terms of what the LPs are sort of talking to you about at the moment and wondering whether you consider that through, say, a geographic lens. I do recall that in a previous one of these sessions, you commented on sort of lack of appetite for U.K. investment, for example, and I wonder whether that still persists and sort of whether there's any sort of strong geographic preferences being expressed?
Well, they're never, or they're rarely expressed. They're inferred p eople, you know, people vote with their feet. Listen, I mean, historically, there's always been a favorable bias towards the U.S., particularly in a downturn. Now, part of that is because, you know, the, you know, the, most of the AUM comes from the U.S. But there's kind of almost a default play, where if things are harder, people tend to default to the U.S., which, you know, they feel, you know, historically looks stronger. You always have that. We've had that in previous crises. We're seeing it today. If you want to break it down by country, that's more difficult to assess. I mean, yes, it's true that, you know, the appetite for U.K. investment is not at a high.
We don't really have, except for, in real estate, where we have a couple of products that are purely focused on U.K. investors, but otherwise, we don't really have U.K.-focused strategies. They're at least Pan-European or they're global. In a sense, it doesn't matter all that much for us. I mean, you know, in a sense, LPs are asking us, you know, when they're saying, you know, they're coming into Europe Eight or they're coming into SDP, they're saying: Where do you see the most interesting opportunities? Rather than: Could you please not invest here or there? That's not what they're looking for in their investment. They're looking for us to allocate.
If you want to boil it down purely to U.K. focus, yes, there's no doubt that if you're a fund that's purely U.K.-focused, it's more difficult right now. We don't really have that situation.
Good morning. It's Angeliki Bairaktari from JP Morgan. A couple of questions from me, please. On fundraising, on the growing up theme, in terms of the scale factor, I mean, obviously, you've been able to scale up quite significantly, the flagship European corporate.
But also Senior Debt Partners.
How should we think about sort of the scale-up factor going forward? I am thinking some of the larger players in the space, for example, Apollo or Blackstone, who have notably bigger funds in the $20 billion area, they're now saying that flat is the new up. Is that something that we should be expecting for ICG as well, or not really?
Yeah.
Second question on the wealth space. I was wondering, in terms of the opportunities you see there for ICG, is that more of a question of increasing your allocation within the existing fund structures to private wealth customers, or are you also considering doing a semi-liquid fund which is a very different proposition?
Yeah. so on your point about scaling up, I don't know about flat at $20 billion, but if that's what it is, I'll take the $20 billion. I think what they're referring to is the current environment, where, you know, in the current fundraising environment, you know, you have a $20 billion fund. You know, in the current fundraising environment, it's hard to, you know, upsize it very much, given the lack of capacity of LPs. I think that's probably more what they're referring to. I'm sure they're hoping they can raise more. by the way, it's a mix and match because some of these funds are global, some of these funds are just U.S., some of these funds are just Europe. you know, CVC is just Europe, essentially, at $20 billion.
Some funds are just $20 billion or even $25 billion just for the U.S. In theory, you could put the two together, and you could have a $45 billion-$50 billion fund. You know, I think they're making more of a, you know, temporary. In any event, given where we are, that means even our biggest strategy still has a lot of runway before we start thinking maybe we're capping out with that strategy. It's also why, very long term, it's so important to keep on diversifying it, which is what we've been doing. You want to have, you know, newer strategies, whether it's infra, some real estate strategies or secondaries, that are early on in their phase. You know, you're raising the first fund at GBP 1 billion and then GBP 2 billion because that means you're creating new potential, you know, fee streams. That's on the.
Scaling up
The scaling up. Your second question, sorry, remind me?
W ealth channel.
Oh, wealth channel, yeah.
Yeah, yeah.
Wealth channel, I mean, for now, we are exploring well, we've raised through the wealth channel, Strategic Equity, 10% of the AUM comes from the wealth channel. Right now, we're exploring various channels. You have platforms. You may remember we were an early investor, so we're a shareholder in a platform in the U.S. You know, there are banks also that act as intermediaries and set up feeders. We're exploring all these channels because it's not clear for me which one will emerge as the clear winner, and maybe several of them, so we want to be present everywhere. Brand becomes quite important there, so we want to make sure the ICG brand is out there.
What we have not done, so that was the second part of your question, is launch a semi-liquid product. I don't know what that is, okay? You know, our products are all illiquid, so I don't know what a semi-liquid product is unless you mix and match it with liquid strategies, okay? In which case, maybe, but there are downsides to that, as I think some have experienced, which is your liquid strategies may not be liquid when you want them to because, you know, when a crisis hits, suddenly everything trades at a discount, and you can't exit without realizing losses, and it's awkward.
I haven't yet found something that I'm really convinced truly works, and I'm quite uneasy about, you know, even if the legal documentation works, I'm quite uneasy about making even inferred promises about liquidity on completely illiquid products. What I am hoping is that the market is gonna start evolving and, you know, get a bit more sophisticated, where, you know, advisors will explain to their clients that, you know, it's great for them to have part of their portfolio in alternatives, they need to understand that it's not liquid. No, we don't have any product that has a liquidity feature or. We'll see. I mean, that's why I was saying early on, I think it's early days.
People are still grappling with this and trying to find, you know, what's the best way to approach that part of the market.
If I may just follow up on the first question in terms of your strategies, European corporate, Senior Debt Partners, Strategic Equity which are sort of the flagships where we are already in the advanced vintages.
Yeah, yeah.
At the moment, if I look at consensus, the expectation is that these are going to be the next vintage is going to be larger than the current vintage.
Yeah.
Is that, do you think, a fair assumption?
Well, so, setting aside the market cycle, right? Because, I mean, it's impossible to know. I set, you know, aside the market cycle, look longer term on the, on the intrinsic potential of these strategies. Yes, I think it's a fair assumption. You look at, you look at direct lending, I mean, we could see that the, you know, the market generally is moving towards more of direct lending, and so the appetite is increasing, and also it's consolidating. You know, the larger players are just taking a larger share. In the case of direct lending, yes, I can, I can well see that. There's another aspect as well there, is that we're mostly European right now. We've only started to invest a little bit in the U.S.
We could do a lot more, and we have the teams in place, so we just need to make a bit of a push or maybe use a more favorable fundraising window, but there's clearly a lot more that we can do there, and we haven't really touched Asia. With the exception, we have actually a pretty good fund that's purely Australian-focused. Apart from that, we don't have a Pan-Asian debt strategy, that's something that we could think about at some point. There's for that strategy, for these reasons, you know, there's plenty of growth potential. You take the historical flagship fund, so Europe Eight. I mean, it's quite hard to know because essentially we've grown with the market demand, okay?
10 years ago, if you'd asked me, "Do you think you can have an GBP 8 billion fund?" I probably would've said, "No, I don't think so. I don't think there's the market opportunity for this." The market has changed. If I think about it, there's another way of looking at it. You were mentioning some funds that, you know, are managing GBP 20 billion. These are pure private equity funds. You have pure private equity funds managing GBP 20 billion for Europe. They're just, you know, they're just focusing on the, you know, the equity portion of the, of those transactions. Our European strategy has this merit that it can operate across the whole capital structure. In theory, there's no reason why it couldn't grow to be at least as large as these funds, because the market opportunity should be larger, in theory.
It's easier said than done, and it, you know, you can't just draw a line that easily, you know, theoretically, there's no reason why that strategy couldn't continue to grow. Again, I don't want people to get ahead of themselves. It's not gonna double every time, there's growth potential there. Strategic Equity? Strategic Equity, the question mark for me is on the fundraising side. It's still very early for that strategy. It's a very new strategy in the market, it's more of a question of how quickly there's a take-up from LPs. We're seeing that there's, you know, growing interest. We have some, you know, very large pension funds, that's helpful because they're sending a message to the market that they think this is an interesting strategy.
But that's, for now, and that's for ICG, but that's for the market as a whole, that's the bottleneck. It's not the deal opportunity. The deal opportunity is huge. We could easily invest a GBP 15 billion fund, easily, in that strategy, given the level of demand today. The problem is, we cannot easily raise GBP 15 billion. That's where the bottleneck is, and for me, it's not even a question of cycle, is it'll take time for the market to just, you know, integrate that as part of a standard portfolio. In our industry, things move very slowly, so it could take quite a long time.
Perfect. Well, if there are no more questions, thank you all very much for attending today, and we'll speak in the coming days and weeks. Thank you.
Thank you.
Thank you very much.