Welcome to the 2023 interim results presentation for Pollen Street PLC. It's great to have so many of you with us today, and also welcome to those who have joined by video call. I'm Lindsey McMurray, CEO, and today I'll be presenting with Julian Dale, CFO. Today, I will cover the highlights, operating overview, the market environment, and positioning of our strategies. Julian will present our financial results, and I will come back to present the outlook for the group, followed by Q&A. I'm thrilled to present these interim accounts for the six months to June 2023, and to demonstrate the clear progress in delivering on the strategy that we set out when we completed the combination in September 2022.
Total AUM was GBP 3.4 billion at the 30th of June 2023, rising to GBP 4.2 billion on a pro forma basis due to significant fundraising activities after the half year. This represents an impressive 33% increase from H1 2022. Overall, group EBITDA for the half year was GBP 20.6 million, resulting from robust performance in the investment company, driven by increased interest rates and resilient credit performance to deliver 9.1% return on net investment assets. Early H2 fundraising activities have not yet fed through to actual performance in a half year, but with strong tailwinds to pro forma performance. We set out the following as our key priorities for 2023 in our full year 2022 results.
Private equity, we've completed the first close of Private Equity Five, and we're thrilled with the support we've received from both existing and new investors and expect to build on this strong first close over the coming months. We remain confident in reaching the target fund size for Private Equity Fund Five of EUR 1 billion. We've also raised GBP 840 million of capital for a continuation vehicle under our private equity strategy to enable us to continue to support and grow two of our high-performing portfolio companies. In private credit, we completed the final close of Credit three in April 2023, with total investor commitments into the fund. Together with our SMAs, we have GBP 1.1 billion of commitments to our private credit strategy.
Supported by strong origination, Credit Three is now close to fully invested, and we will be launching Credit Four imminently. Performance across both strategies has been strong, maintaining our top tier through cycle track record as we seek to identify and build the next generation of leaders in financial services. We're continually looking to deliver tailored solutions and value-added services to meet the evolving needs and preferences of our investors. Now, looking to the Pollen Street Group. Pollen Street offers a unique combination of high-quality, stable income generated by the investment company, together with growth of long-term recurring fee income. The group benefits from a complementary and synergistic set of asset management activities focused on managing third-party assets and on-balance sheet investments.
On the asset management side, we've been successful in our fundraising efforts in the period, but with the current environment, meaning that the timing of completion was after the half one date. We have GBP 4.2 billion of AUM, a 33% uplift in last year, with the first close of Private Equity Five, completion of the continuation vehicle adding GBP 840 million of AUM before the end of the year, and with good visibility to further growth in H2, with subsequent closes on Private Equity Five. This takes us a significant way towards the GBP 5 billion medium-term target, and with asset management revenues forming an increasingly large share of the total. In our investment company, the portfolio continued to...
Its track record of strong performance throughout the first half of the year and delivered net investment asset return of 9.1%, driven by increasing interest rates on our predominantly floating rate portfolio. In terms of returns, both strategies are well-established and are performing well, demonstrating resilience and consistency of strong returns at low risk. Our private equity strategy, we continue to deliver 29% Gross IRR with no losses, and in private credit, we have delivered a Gross IRR of 11% and expected to increase as the benefits from higher interest rates work through the portfolio. We highlighted at the time of the merger that we expected to transition the investment company from holding direct investments in transactions to holding investments in Pollen Street funds.
This transition has started with 15% of assets held in funds that Pollen Street manage, with a near-term expectation that the allocation will increase through commitments in the recently closed continuation fund, PE Five and Credit Four. We think this creates a strong alignment and synergies, whereby the investment company enjoys the returns generated by these investments, while helping each of the funds reach scale and providing a catalyst for raising additional third-party capital, in turn, driving higher management fee income. We'd expect funds investments to represent a majority of the investment company assets over time. Now, turning to the market environment and how each of the strategies are positioned. In private equity, we focus on the financial services sector and its ecosystem, which is critical infrastructure across the economy.
Within that, we look at buying attractive mid-market businesses that have been built on strong customer proposition, but are well-positioned to accelerate growth and take share in a fast-changing environment. We aim to drive revenue growth by taking market share, which is why the strategy is resilient through different macroeconomic environments. We're excited about the current environment, where our businesses can look to take share, where others are internally focused. Within each of our target sub-sectors, we have deep sector-led origination, where we look to the key drivers of change and megatrends to select and invest in the best, best growth areas. A few case studies to highlight some new investments. Finsolutia is an Iberian loan and real estate management platform, providing end-to-end solutions via its integrated SaaS platform. It's purpose-built and functionally rich technology, built for the loan servicing market.
It's a successful track record of organic growth and new customer wins with a highly experienced and highly regarded founder-led management team. We have experience in this sector and believe we can help the business expand in product and geography, both organically and through M&A, to make the business the leading technology-driven real estate servicing platform across Europe. Wide Group is an insurance distribution business in Italy. It offers a diversified range of insurance and a highly differentiated technology platform that makes it well-positioned to lead consolidation in a highly fragmented market. Another sector where we have significant experience and will work with management to accelerate the consolidation through M&A. Assessio is a leading Nordic provider of talent assessment solutions. It has a diversified customer base across sectors, including financial services, business services, and public sector. Has a clear value proposition, offers a great ROI for its clients.
It operates in an attractive market with strong tailwinds, and Pollen Street will work with the team through our hub to accelerate go-to-market in its target markets. Now, I mentioned that we successfully completed a continuation vehicle. This is a vehicle which is GBP 840 million of new funds, new capital, that will acquire two highly performing successful assets from Pollen Street existing funds. This delivers successful exits for Fund Three and Fund Four, but provides for the dedicated pool of capital for Pollen Street to continue to support the growth of both businesses through further acquisitions. Aryza is a leading global provider of case management and process automation software solutions for regulated industries. Markerstudy's fast-growing, multi-channel digital insurance platform. Pollen Street's investment will support Aryza to deliver additional bolt-on acquisitions, building on its position as a growing global business.
We will also support Markerstudy to combine with Atlanta to create a major new digital retail insurance player, managing over GBP 3 billion of premium. So, so very strong momentum across all aspects of private equity business and strong market dynamics going forward. Now, turning to credit. As a reminder, the credit strategy is focused on asset-backed lending to lenders, leasing businesses, and technology businesses. Our loans are directly secured on diversified portfolios of assets that generate the revenue and cash flows of the business. The deals are structured in a bespoke basis by our team. We typically lend on a senior basis, and the amount we lend is set to withstand significant economic and business stress. One of our borrowers, Onto, went into administration last week, and we still expect full recovery of our facility.
We believe that this strategy provides us with very resilient transactions, and they're designed to generate attractive returns and perform through cycle. The current environment is a very attractive one for our strategy. We have a large pipeline, returns are up, LTVs are down, and terms have swung generally in lenders' favor, where borrowers are focused on minimizing execution risk and therefore prioritizing working with lenders they know are long-term participants market. We think the current vintage of deals will deliver top-tier results. In terms of areas of focus, we look for sectors that are underbanked, creating a dislocation so that we can enjoy strong returns for the risk that we take... SME finance is a large and diverse market, with nearly GBP 200 billion of outstanding loans in the U.K. and EUR 1 trillion in Europe.
It's a market that's poorly served by mainstream banks due to technology and operating inefficiencies. This structural undersupply of finance has led to growth in non-bank institutions that target specific funding needs and products with modern technology and timely access to data, driving better decisions. We have worked with a number of these businesses, financing their portfolio while securing a loan on their portfolio of assets. Another area is short-term residential loan sector, where we're financing the build of mass-market residential family homes in areas of structural undersupply. We do this by financing portfolios of loans to small and medium-sized developers, typically on a super senior basis, working with a specialist real estate platform that's been established to address the sector. It's another large and diverse market that isn't well served by the banking industry, and where we can deliver 12%-13% returns with conservative loan-to-values.
We also have a role to play, as the rapid pace of energy transition continues to outweigh the availability of finance for driving social and economic impact, and we work with counterparties who are working to embed infrastructure across various markets. Again, a number of strong trends to support significant growth in our credit strategy. I will now hand over to Julian to cover our financial results.
Thank you, Lindsey. It's been a successful period, with strong fundraising performance, stability in our financial results, and progress towards our targets for the year. As Lindsey covered earlier, there has been a lot of activity over 2023. Total AUM was GBP 3.4 billion as at 13th of June. With the first close of Private Equity Five and the continuation vehicle, AUM has increased to GBP 4.2 billion on a pro forma basis, with a further step-up in AUM expected in the second half of the year as fundraising for Private Equity Five continues. Fund management revenue grew by 23% to GBP 21.7 million for H1 2023. The pro forma fund management revenue for H1 2022 was GBP 17.6 million. The revenue growth has been driven by increases in the group's average fee-paying AUM and income from carried interest.
We continue to see a high drop-through from revenue to EBITDA, with fund management EBITDA closing the period at GBP 5.2 million, representing a 41% growth over fund management EBITDA in H1 of the prior year. The continuation vehicle will provide a GBP 0.8 billion step-up in AUM with a GBP 5 million cap on annualized fees, which is in line with industry pricing for continuation vehicles. We've maintained stable fee rates in our flagship funds and have good visibility over further fundraising. The investment company continues to deliver stable financial performance with a strong dividend yield. We're starting to see the effects of increased interest rates on the portfolio, with income on net investment assets growing by 12% to GBP 15.4 million in H1 2023, compared to GBP 13.7 billion in the prior period.
These returns are expected to increase as capital is recycled from investments made and hedged in a lower interest rate environment, and as we deploy more of the balance sheet into Pollen Street's other strategies that have higher returns. The tangible NAV per share was GBP 5.42, as at the thirtieth of June, up from GBP 5.40, as at the end of last year, reflecting the stability of the investment portfolio. We're well positioned to meet our full year targets and continue to drive long-term organic growth. The fundraising activity on Private Equity Five and the continuation vehicle has materially increased AUM. On a pro forma basis, total AUM is GBP 4.2 billion, and average fee-paying AUM is GBP 2.9 billion over the year. We have clear line of sight to further fundraising in Private Equity Five to close the year in line with consensus.
Fund management revenue was GBP 21.7 million for the first half of the year. We expect to have raised the significant majority of Private Equity Five by the end of the year. This would increase revenue in the second half of the year, given that fees are charged from the date of the first closing. Revenue from the continuation vehicle is expected to commence towards the end of the year or at the start of 2024, from the point of completion of the asset transfers into the vehicle, which is subject to a regulatory change in control approval. Fund management EBITDA was GBP 5.2 million for H1 2023. We expect to close the year in line with a consensus of GBP 15 million, as the incremental revenue drops through to profitability.
Turning to the investment company, the investment portfolio delivered GBP 15.4 million of earnings over the course of the first six months, reflecting a 9.1% return on net investment assets. This strong performance is driven by the increasing interest rates. We anticipate outperforming consensus of GBP 28 million for the full year. The dividend yield at today's share price is 11%. And finally, we've reiterated our medium-term guidance.
The company expects to publish a shareholder circular imminently, inviting shareholders to vote at a general meeting on the eleventh of October on proposals previously announced to change the listing chapter to that of a commercial company from an investment company, and to introduce a Guernsey holding company to simplify the group structure. The purpose of these proposals is to better reflect the group's operation as a commercial enterprise, broaden the universe of potential investors, improve the marketability and liquidity of our stock, and bring the listing classification in line with our quoted peers. We expect the transaction to complete in early 2024. I'll now hand back to Lindsey.
With the foundations of a successful first half of the year, we are proud and excited by our achievements and performance. While not feeding into the numbers for the half year, the pro forma position is very strong, and we're well on track for our 2023 outturn, in line with market expectations. To recap the proposition, we have market resilient strategies with consistent track record. We have strong AUM growth with high visibility and consensus and medium-term AUM. We're able to maintain a stable management fee rate on flagship funds, ensuring highly predictable recurring revenue streams. We have the ability to execute on transactions to deliver incremental AUM. We benefit from significant operating leverage, and along with a very promising growth, Pollen Street offers a highly attractive dividend profile.
I want to thank our fund investors and shareholders for their support, our team for all their hard work to achieve this strong first half year result, and the board for its guidance. We're energized and look forward to the rest of 2023. I'm confident our potential for continued growth and consistent delivery for our investors and shareholders. I will now open up to questions. A question as to what are the fee arrangements for Pollen Street's holdings of the Pollen Street funds? Pollen Street balance sheet will pay the on a standard basis, so the balance sheet pays the same rate as the third parties will pay. And there is only one fee charged.
So Lindsey . Yeah, morning.
Morning.
Jens Ehrenberg here from Investec. Thank you very much for taking the questions. Just a couple from my side, if that's all right. I mean, if we look at the wider fundraising environment in the market, we have a number of players that basically say they see quite significantly extended fundraising periods. And yet you guys seem to have raised funds really well during the period. How are you seeing the market? And in terms of the funds you've raised, how difficult is it to get sort of new LPs on board rather than working with existing LPs? And then, I suppose, on the other side of the spectrum, I've seen your private equity returns are still sort of holding up at 29% growth IRR.
How does that sort of stand in the current market environment in terms of exit activity and these sorts of things? Is it the function of basically seeing relatively stable exit multiples, or is it some exit multiple compression, but better operating performance? Yeah, any color on those two would be appreciated.
So on the fundraising, I always say the fundraising is always, you know, has its challenges. But because it's a, you're bringing on investors that are making a long-term decision, and so you have to nurture these relationships over many years. That's what we've been doing. So we're not at the starting point of raising. We're working with relationships, both existing and new investors that we have been working and nurturing for many years. And what we do have is a clear strategy, a clear proposition. It is differentiated in this environment. And so we also have pre-planning for our fundraising.
So we had been working with investors before we launched the fundraise, and therefore, we are expecting to raise within the timelines that we had originally set out. So it's all of that coming together, but it's long-term nurturing, clear strategy, and then planning accordingly, so that investors know how to put you in their schedule, 'cause they have schedules of allocations.
Mm-hmm.
On the return side, I would say, again, there is still a lot of capital in the marketplace. There is still good pricing for good assets. I would say that there's no good pricing for every asset, but there's good pricing for good assets. We also, across the portfolio, the point I was making about growth through taking share, we've had very strong operating results in our underlying portfolio. So the performance that we're showing is from us maintaining stable multiples, which we didn't ever mark up in 2021 to high levels, and therefore, we have not had to absorb compression of multiples through our portfolios. But the underlying portfolios themselves are also... This performance is supported by strong underlying results and stable multiples.
Thank you. If it's all right, just a quick follow-up on the exit piece. In terms of the exit routes that you see, and I assume the IPO route at the moment is rather challenging. You mentioned there's still quite a lot of capital in the market. Is there sort of... Do you still see both strategic buyers and secondary activity in terms of exits, or is it geared sort of more towards one of the two?
It's, I mean, at the simplest level, we always aim to create great businesses and then look for the best next owner for those. It is a combination, and in some ways, you're then finding that some of the strategics are themselves private equity-backed. So there is a growth of the private markets supporting those bids, but we are looking to both to private equity and to strategic .
Thank you. Two questions. First of all, last month's rule change by the SEC, the impact on kind of compliance and regulation. Does that have any cost or other impacts for you, or was that kind of covered in your kind of build-out of infrastructure, you know, in the last year or so? And the second question is, the other topic that seems to be buzzing around is M&A. Quite a lot of activity there. So just your thoughts on what's happening, your thoughts on the role you'd like to play in that process. Thank you.
M&A for the asset management world?
Yeah, as M&A for the private capital firms. So things like, you know, Bridgepoint buying ECP, got it the right way around, et cetera. Thanks.
SEC, look, they're not-- there's still a road to travel, I think, on where they settle. We have, you know, we've got a developed, proportionate compliance team to sort of support us globally. And therefore, you know, and to... Still waiting to see what the final outcome is. We think that we can manage it within our current setup. In terms of M&A, I think the private market is undergoing, you know, clearly for a number of years, a maturity as a market itself. It's existed for decades with a very narrow set of ownership models, and now that's opened up for change. No longer is this of partner-owned model, the only model that's an acceptable model.
So I think you will see, as a consequence, a continued move for, you know, it's in some ways what private equity has been doing to many other industries for decades of bringing different ownership models in. And I think it's now the industry itself is undergoing its own maturity, and therefore, that will bring with it multiple different types of ownership. It won't all, you know, just like any other industry, one size won't fit all, but there will be a continued maturity of the acceptance of different models for different players.
Okay, cool. Thank you. Andrew Sherperd from Peel Hunt. Thanks. Three questions, if I may. Firstly, continuation funds. I think there's some reference that fees, you won't be charging fees on continuation funds. So as assets move out of private equity, whatever, is that all fees, or is there performance fees that can be paid on it, or a little bit on that would be great. Secondly, on Credit Three, so the actual amount you've raised, fund close to Credit Three, is below what we were expecting, but there are SMAs attached to it, which makes it slightly complicated to know exactly how it's performed.
Could you talk a bit about the demand for SMAs and why they aren't wanting to go into the mainstream fund? And third question from me, if I may, is on the investment company. You've put in your slide there. You said it was going to outperform. Could you give us some sort of thoughts about the full year for this year for the investment company returns? I'm talking about net investment returns, as, as I assume you are, and for next year as well. Thank you.
Okay. So the continuation vehicle, there are fees. They're, they are a lower level than you would have in the flagship fund, and so what we would try to do is to give clear guidance as to where that would be. So it's 840 million of AUM. The fees are charged and then cap at GBP 5 million of management fee. So they do exist, but they, they're at a lower relative headline rate. So it'll be a sort of one-time step up in the fees of that amount that we will have. And then there are also performance fees. They're more staged, so they kind of come in stages.
They're not just one rate, so they step up, and the percentage increases as returns increase. But they do have both management fee and performance fee, so that the manager is very much aligned with the performance of those vehicles. On Credit Three, we raised in excess of GBP 400 million against the GBP 500 million-GBP 600 million initial target, with more SMAs, as we say, so that overall, we raised more capital. The SMA market and the credit market, it's one of those things that has simply developed as there are just more SMAs in the credit market than there are in private equity. And it goes to investors having larger size investment commitments. So the investment commitment you get from investors is larger than you would typically get.
Often, ironically, investors are capped at the percentage they can have in a fund at the percentage they can own, but they're not then capped at the total investment amount they can have in an SMA if they define the profile of the SMA. So they have greater ability to bespoke the risk parameters that they're looking for. To give an example, we have a U.K. pension fund that prefers only U.K. assets, so they're willing to provide a larger commitment, but within their defined parameters of investment criteria. So it's somehow where that market, the credit market, has evolved, where the larger investors would like to have greater say in the definition of their investment criteria, which is in some ways understandable.
So that's, that's the reason we end up balanced, is actually, ironically, the larger investors then don't make a fund investment, or they make a fund investment. In some cases, they make a fund investment up to their, up to their limit on the fund, and then they'll provide additional capital outside.
And, and on the investment companies. So investment company performance next year, et cetera.
The net returns?
Sure.
Yeah.
So our guidance for the investment company is still 8%. We've not formally changed that guidance. As you can see from the numbers we've been through, we're obviously performing in excess of that. The net or the income on net investment assets for the period was about 15 million GBP. The, we've talked about momentum behind those numbers.
I don't think for the full year we'd expect a material change from the 15. And we talked in the longer term about deploying more of the balance sheet into some of Pollen Street's other strategies that obviously have higher-yielding returns. That will probably take some time to actually come through in terms of P&L, but hopefully, that gives you a bit of a guide as to where you might expect the full year numbers to land and beyond that.
I've just two questions. The first is in terms of asset mix between private equity and private credit. Have you had any sort of change in your expectations in terms of fundraising, in terms of mix, sort of the next 2-3 years? And then the sort of second one was just around the U.S. business and the prospects for that, and is there any sort of update as to how that's going?
Yeah. So not overall strategically in terms of mix, but where you'll get changes is where, for example, we do something transactional, like the continuation fund, which will add AUM disproportionately onto the private equity side for this. But overall, our strategy is very, very aligned with what we set out last year. So we don't expect any fundamental changes. In the U.S., what we are proposing with the U.S. is actually to integrate it more into the overall credit strategy, so that we will then look to provide an allocation of capital of the credit fund into Credit Four.
So with the U.S. being part of that, that's a more efficient way and a more integrated way to take full advantage of the entire infrastructure we have on the credit side to enable the U.S. business to deploy its capital.
Morning. Michael Sanderson, Barclays. Just a couple for me as well, please. I'd love to understand the logic and the thinking behind the continuation fund and which assets come out of your three and four, why you choose to do them, why you're the best owner for the longer term, why there aren't other people who could make that step and make the investment, and you could crystallize that point. And then the second one was around the credit strategies. Clearly from the slide you put up, so the transition elements around environmental moves, et cetera.
Historically, I guess you've been a bit more SME, and you'll probably correct me, but so the SME and the finance side, but how are you thinking about the mix of that portfolio into the medium term, moving from that SME across to environmental transition, such exposures?
Yeah. So there is a lot of commentary about continuation vehicles and, you know, and so there are some high-profile discussions about different examples. In this one, we think it's the best reasons for a manager to engage and create a vehicle like this. So to be clear, we do create cash exits for fund three and fund four, and there are new investors. There are some investors in fund three and four who have the option to... So investors in fund three and four get the option to roll into the new fund. So to the extent they don't want to realize, they don't, they're not required to. But it does provide an exit and recycling for those in fund three and four that prefer that as their option.
We then bring in new capital from new investors to refresh the ownership. Now, the reason the two assets... And, in among the market commentary, in some ways, as an asset manager, managing the assets and buying the assets that you know the best are the best assets to own, because you've lived with them for the last three, four years, you understand them intimately. And, and what we are saying very clearly is the size of capital in fund three and fund four had reached its limit to support those businesses. And therefore, what we're able to do is to be even more ambitious than the funds could be on them in themselves, and bring in new capital. So Aryza started in our portfolio making GBP 4 million.
It's now making GBP 25 million in profitability and has become seen as being the lead consolidator in its markets. It started in one market, it's now in nine markets. It's global, it's in four continents. So it's a true global operator from where it was, from what we operated in fund three. And what we're able to do is to continue that. So we are. You know, in terms of taking an investment risk decision, we are very close to that business, and we can see huge opportunity. So it gives us and Pollen Street the ability to take advantage of that. In the case of Markerstudy, it's similarly, we invested in that only a few years ago, but already the capital that...
And the scale of opportunity for that business, you would have seen possibly that we announced a combination with Atlanta on Friday morning, making a GBP 3 billion gross to written premium business. It's as large as any personal lines insurer in the U.K. now. So it's a proper scale player. So what the continuation fund does is enable us to execute the true potential of the assets that we start and create in the funds. So I see them as being, you know, a good strategic additionality to what we're doing. We don't set up investing in an asset on the basis that we can do that.
But where the assets get to that scale, I think it's a brilliant way for us to continue, you know, on both sides, economically for Pollen Street, but also for us to take what we've done and to continue to support the business to become true leaders in their field. Credit, I might ask Matthew, 'cause I think the, you know, SME energy transition has actually always been, has been a core part of what we've been doing, for a number of years, so I'll let you talk.
I mean, what we look to create on the credit side in terms of the portfolios is, first and foremost, a portfolio that's well diversified. So for Credit Four, we'll look to 20-30 different investments. We want it broadly split across each of those four sectors. And the allocation will be pretty dynamic based on where we're seeing best risk return at any given point in time. If I look historically, SME, you're right, it has been a slightly larger sector. So there's a good chance that we'll continue to be slightly outweighed to SME, but kind of sticking to the core principles of wanting to get a good spread across each of those four different end categories.
Sorry if I may. Andrew Sherpa of Peel Hunt, and again, Credit Four. Can you... The last, I think, we heard was that you were targeting over GBP 1 billion commitments, and it was expected, I think we were still in the medium term. Can you sort of tighten that slightly?
So Credit Four, we have, as of last week, has started the marketing. That's probably ahead of our original expectations. In this market, one has to be conservative and grounded in any fundraising projections. So it was in the medium term from September 2022, and it probably took us towards the back end of that. We're probably looking at that fundraising during the quarter, the back part of 2023 and 2024.
So initial close on time, well?
It'll be Q4, Q1.
Okay.
Yeah.
The final close next year.
Q4.
Hopefully. Okay, thank you.
I think we've guided to GBP 1 billion, not over GBP 1 billion. I think that's technically what we've done.
There's only one other question that I'll just make sure I've covered off. Prospects for a dividend rise in the investment company. I think that aligns with what Julian said in terms of, you know, a bit of our performance in the investment company returns and that continuing through 2024. I think we maintain our progressive dividend policy. We're not deviating from that, so I'd imagine that we would maintain that overall position. Thank you. Well, if there are no further questions, as ever, we're always available, and please get in touch with any further questions, and thank you all for attending.