Foresight Group Holdings (LSE:FSG) — Half Year Results

0:01 Good afternoon, ladies and gentlemen, and welcome to the FORESIGHT GROUP HOLDINGS LIMITED half year results investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged. They can be submitted at any time via the q and a tab that's just situated on the right hand corner of your screen. Please just simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today, and we'll publish those responses where it's appropriate to do so. And before we begin, as usual, we would

0:33 just like to submit the following poll. And if you'd give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to CFO, Gary Fraser. Gary, good afternoon, sir. Good afternoon, and and thank you for that introduction, Jake. Good afternoon, everybody. As Jake said, my name is Gary Fraser. I'm the CFO of FORESIGHT GROUP, and I will take you through the interim results of FORESIGHT for the period ended September 30 right now. So without further ado, let's crack on. So first of all, a summary of of FORESIGHT, what we do and and the areas that we're involved in. So just a bit of a recap, the investor base is approximately 70% institutional and 30% retail. We continue to see both strands of that investor base being important. We'll continue to raise both retail and institutional money going forward. They're very good offset against each other, and both are important sources of further fundraising for our strategies.

1:29 In terms of those growth strategies, we have regional private equity. We have tax efficient products. Within infrastructure, we have energy transition and decarbonization beyond power. And then on FORESIGHT capital markets side, we have listed equities. Those products and strategies are addressing huge market opportunities. So within the private equity side, there's a 15 plus billion equity capital gap in The UK alone. And so our regional strategy is really trying to address that large market. And at the moment, we're only about £1,000,000,000 in terms of how much we've invested in the regions. And in terms of the energy transition and infrastructure more generally, you know, the requirement is to invest, you know, $4,800,000,000,000 a year over the next few years and then even more thereafter. So the opportunity, the sheer scale of that around the world is enormous.

2:25 So positive momentum across our diversified strategy. So we'll just drill down a little bit there. So, you know, within the private equity and tax efficient side, we've got highly profitable growth strategies there. Within regional private equity, we've been raising a number of funds that have both generated nice performance fees, but also recurring annual revenues as well. Our tax efficient products, whether that's VCTs, whether it's CIS or whether it's a business property relief, have had a record first half of the year, raising GBP $241,000,000, and we expect to do even better in the second half. In terms of infrastructure and FORESIGHT capital management, these are highly scalable strategies. So in terms of energy transition, we had a first close, a 1A close almost EUR300 million of the second vintage of our flagship pan European energy infrastructure fund, FIP two.

3:20 And a FIP one investment into a three hundred million two sixty seven megawatt solar power portfolio in Greece effectively closed out the investment phase of that fund. So moving, you know, segueing from one fund to the next very quickly indeed. We also have a dedicated natural capital fund that's commenced pre marketing, and that will effectively target, you know, principally forestry, afforestation, land regeneration, and various, you know, variations on a theme in that regard. And then within listed equities, we have FORESIGHT Capital Management, which had a positive performance of 56,000,000 in the first half of the year. That is a tougher fundraising environment. There's no question these interest rate sensitive strategies has suffered a from the high interest rates that we've seen recently, but also from recent commentary around higher for longer interest rates. But I do think we'll see an easing of interest rates over the next months and years, and therefore, I'd like to think that the the scale of that part of the business, which is only GBP 700,000,000 out of GBP 12,500,000,000, will start to increase over time.

4:28 So in terms of our recent track record, over the last five or six years, we've seen AUM increase by 27%. And core EBITDA since we first launched our IPO in 2021 of 29% compound annual growth rate. So we're seeing real growth in both AUM but underlying profitability as well. So in terms of the financial results, AUM, just a shade under 12,500,000,000 at twelve point four, and that was up 300,000,000 or 300,000,000 during the first six months of the year. Funds under management, slightly different metric, not including the debt within several of these investments or funds, was up to $8,700,000,000 up also up $300,000,000 during the period from GBP 8,400,000,000 at the end of the financial year in March.

5:20 Revenue was up GBP 5,400,000 to GBP 73,200,000, a healthy increase over the first six months of the year, and we expect to see that maintained or even increased during the second half. Recurring annual revenue, effectively management fees, the real high quality revenue within FORESIGHT's business, remained stable at 87%, and we're very pleased with that. Going forward for the second half of the year, the outlook remains the same for 87% plus in recurring annual revenue. And then our profitability metric core EBITDA pre share based payments was $29,000,000 up $1,400,000 from 27,600,000 a year ago. So very healthy progress indeed. And in terms of dividend per share, a 7.4 p, so up about 10% during this the same period last year. So very healthy dividend yield. And I think at the current share price, it's probably five and a half percent or thereabouts.

6:20 So in terms of the AUM bridge, how did we get from point a to point b over the last six months? I well, we started at 12.1. We'd gross inflows in terms of AUM during the period of 600,000,000, but also outflows of 300,000,000 during that period of time and taking us to a 12,400,000,000 at the period end. If you reflect a constant currency basis within those numbers, it's slightly higher at GBP 12,500,000,000, and that principally takes into account the variations of FX in our Australian business. So revenues, which I touched a little bit earlier, up 5.4 to 73.2 during the period. So, you know, healthy increase during that period. And it's probably worth noting that we see an increase in revenue usually during the second half of the year because a lot of our retail fundraising tax efficient flows tend to be weighted towards the second half of the year and the run up to the end of March, start of April with the tax year end.

7:24 In terms of those revenues, 21% was non GBP denominated, which is a small increase from the prior year. And that just shows the sort of increased geographical diversification of the business. You know, over a period of time, more of our revenues have come from either Europe or Australia, and we expect that to continue both in the short and medium term. Costs always want for a focus aim from a lot of people. So if I just touch upon that, in terms of, you know, what I consider a normalized cost base of 45.4, that was up 4,000,000 during the period. You know, principally, that cost increase of 4,000,000 was an annualization of prior year salary inflation, which was during a a very high inflationary environment in 2023, and further investment employees during the fundraising cycle.

8:19 In terms of current year salary increases, that returned to the historical average of about 5% per annum. And just looking ahead, I expect moderation both in terms of headcount and future salary increases. The latter partly because there'll be a balancing of the increase in national insurance contributions that we saw from being implemented in the recent budget. In terms of, you know, the far left hand side and the impairment, So just touching upon that. So the impairment that's going through the P and L is effectively a write down due to redemptions within our Australian business. Now I think we've been prudent in terms of that write down. The net write down is not 9.3, it's 2,900,000 after we take into account an earn out adjustment, but also a deferred tax charge. And the reason behind that, you know, we've got a redemption window within one of the funds out there, and the redemptions were higher than we budgeted for. And because we acquired that asset, the impairment charge needs to be taken through the P and L. But that is a noncash item in terms of profit in the current year.

9:28 Profitability, up five and a bit from 27.6% up to 29%. Last year, sort of first half, second half, looked roughly about 45%, 55% in terms of the split. So went from 27.6 up to 59.3. I think this year at '29, consensus has us for the year ranging between 20 sorry, 63.7 and 66 in terms of core EBITDA, PSVP for the year. You know? And as I look ahead over the next few months, you know, I have a high degree of confidence that will fall within the analyst consensus range for profitability for the period. So in terms of outlook, if I just tackle each of those in turn. So within the various growth strategies in the business, I'll take those one by one.

10:24 In terms of regional private equity, we've had a very successful fundraising period over the last number of years actually and very recently as well. So just taking that a little bit further, we recently announced fundraising with a new fund in the Southwest Region of England where we'll open offices in in Bristol and Exeter. That initial fundraising is 50,000,000, and we expect, you know, or hope within the next few months to to close to double that fundraising from 50 up to 90 or a 100. I'm assuming that, you know, we can attract further investments in that fund. You know, we now cover about 14 offices across the regions in The UK, so we very much got the regional private equity strategy, you know, around the whole of The UK, and that really enables us to see most of the opportunities in terms of new deals flow within our target sector, which is typically check sizes up to about £5,000,000, although we can do a bit more. And on an annual basis, we probably see 3,000 new deals, and we filter that down into about 50 actual transactions in terms of new deals and perhaps 50 follow on deals as well. But it's been a very successful strategy, and I expect that to go from strength to strength over the next five years.

11:43 In terms of tax efficiency, again, successfully fundraising, our business property relief assets have been raising money successfully, as I said earlier, record first half of the year. Nothing in the budget that, should impact those strategies at all. So if anything, I would expect to see an acceleration of that in the second half. In terms of Venture Capital Trust, which we also manage, FORESIGHT Enterprise VCT launched about a month ago. I expect that fund will close today fully having fully raised its investment in target fundraising. And then, you know, during the rest of the year, I'd expect us to see, you know, more fundraising. FORESIGHT VCT, I think, will be very close to launching its product in the next week or two. It's been previously announced.

12:32 And I would expect that one to go very quickly as well. Performance of both of those VCTs has been very strong over the last five years, and I expect that to continue given the pipeline that we have access to, given the regional capability of FORESIGHT. In terms of the highly scalable strategies in terms of infrastructure, energy transition, again, I mentioned FEED II earlier, had a first close euros 300,000,000 in June, July time. I expect we'll see another successful fundraising, another close before the end of March twenty twenty five. And that fund overall has a target fundraising of about €1,250,000,000 and so we'll be well on our way after those first two fundraisers to raising that target.

13:18 In terms of decarbonization beyond power, that's more focused around our natural capital strategy. And again, we're in pre marketing there, but we've had very good feedback from our target market. And I expect us to, you know, fully start fundraising that in FY '26 with, you know, potential closes in both FY '26 and FY '27. Finally, on the listed equity side, know, in the first six months of the year, we saw decelerating net outflows. Those strategies within listed equities are very much interest rate sensitive strategies. So it's no surprise when people, are looking at a five plus percent return in equities and a 5% return in the bank, that they're looking at the bank as rather than taking equity risk in these types of strategies.

14:07 But that said, performance was strong in the first six months of the year, and that's probably, you know, partially why we saw a deceleration of net outflows. And as we start to see interest rates moderate over the next year plus, I expect we'll start to see real inflows in that strategy as well. In terms of, you know, our longer term goals for the business, we can't boiled down most of the targets at IPO into to one core target, which was to organically double core EBITDA pre SPP in the next five years, which given the sort of levers, the growth levers we have in the business, some of which I've just touched upon, we think is eminently achievable. Also, where it's opportunistic to do so, we look at M and A as strategic lever to accelerate growth even further.

14:55 I'm you know, at any point in time, I probably see, you know, three, four, five opportunities come across my desk, and so it is something that we're actively pursuing and reviewing. But by no means will we do any deal. We see a number of deals, most of which we don't do. In terms of the retail tax efficiency products, we've had extremely strong performance across both inherent tax and flagship VCT products. For for instance, know, I think if you look at TrustNet, FORESIGHT VCT's performance is second over one year, first over three years, and second over five years. So not only you've seen really strong short term performance, but you're seeing that performance over a prolonged period of time as well.

15:43 You know, the fundraising for those two strategies is from our large and established in house distribution team. You know, we've got 50 to 55 people across those teams, and so we've got very deep IFA and wealth management relationships. And they're, you know, constantly enabling us to push forward and raise money for those strategies. But we'll only ever raise as much money as we need to fund the acquisition, to fund the investment acquisitions that we're looking to make. We've also seen some regulatory support following The UK autumn budget. VCTs, the government committed the VCT legislation for another ten years to 2035, And I think there was also a greater deal of clarity across business property relief as well. Know, 1,000,000 exemption for individuals, so potentially 2,000,000 per couple, and also clarity around the assets that will be included with that and those that won't.

16:42 In terms of regional private equity, that's been an extremely successful strategy for both us and our investors over the last ten, twelve years. We've issued a fourth new fund in the last two years, 50,000,000 first close post the period end. It's an evergreen fund providing a permanent pool of capital for FORESIGHT. And as I said earlier, Bristol and Exeter offices to open shortly. Again, second close expected in the current financial year. I think you can see the coverage there. I mean, we have one office in Scotland, but we've got a couple of funds in Scotland. And, you know, we also have two offices in the island of Ireland as well, and a greater degree of coverage than a lot of private equity firms who just deal in the sort of mid market and are pretty much London focused. So we try and get access to a greater number of deals, which then really drives pricing and also the ability to get a greater multiple on exit.

17:42 FORESIGHT Energy Infrastructure Partners, know, Feet one was about €851,000,000, but once you add co invest, was over 1,000,000,000 in terms of total secure commitment. 29 investors, 14 investments, and it's pretty much closed in terms of its investment, maybe one or two little follow ons, but 97% has been allocated to investments already. You know? And although it's only just completed its investment phase in in about January this year, you know, the signs are very good in terms of performance of that fund. And I think it's that confidence in the performance that led to a very quick first close of two. So not only closing FEET one in January, but first close of FEET two was in June this year. So I think that's borne out of the confidence in terms of, a, what we're trying to do in terms of sustainability, but also the performance of the underlying assets within FEED one. And as I said earlier, just to reiterate, 300,000,000 first close, 1,250,000,000 a fund size in total, GBP 12 to GBP 15 investments and IRR in the 12% to 15 range.

18:54 So in summary, a very profitable record of both AUM growth at 27% CAGR over the last six or seven years and core EBITDA of slightly above that at 29% CAGR since we launched the IPO in February 2021. I mean, you can you can see that, you know, the the upward trend is continuing within the business. I think you see that AUM has flattened a little over the last couple of years, but that's explicable in that, you know, the the lower margin capital management products has seen outflows as as as I mentioned earlier due to the interest rate sensitivity of that asset. But that money has been replaced by both institutional capital and also a, you know, the tax efficient retail product money. So overall, although assets look relatively flat, the profitability of the of the the remaining assets has actually increased during that period, as you can see from the graph on the right.

19:58 So I've talked for a while now, and hopefully, of the detail in the slides is clear. But I'd be more than happy to take the Q and A now if there are any on the call. Perfect. Gary, if I may just jump back in there. Thank you very much indeed for your presentation this afternoon. And gentlemen, please do continue to submit your questions just by using the q and a tab that's situated on the right hand corner of your screen. But just while the team take a few moments to review those questions that were submitted already, I'd just like to remind you that a recording of this presentation along with a copy of the slides and the published q and a can all be accessed via your investor dashboard. Guys, as you can see there, we have received a number of questions throughout your presentation this afternoon, and thank you to all of those on the call for taking the time to submit their questions.

20:45 But, Ben, at this point, sir, if I may hand over to you just to chair the Q and A with Gary. And if I look to pick up from you at the end, that would be great. Thank you. Great. Thank you, Jake, and thank you to everyone for submitting your questions. So now just taking the first, Gary. We've got a question around our guidance that we published as part of our full year 2024 results. So the question being, the guidance of doubling core EBITDA per SPP over five years implies a large increase in growth. What are the key elements that will drive the achievement of this guidance?

21:18 So, I mean, in terms of, you know, the implication within that. So let me go back to that. So if we look to the growth in profitability over the last few years since IPO, I mentioned it was 29% compound annual growth rate. To deliver a doubling of core EBITDA between 2024 and 2029 requires organic growth of about 15%. Now the 29% is organic and inorganic together. But I think if you look at it over that period of time, we've definitely delivered around 15% or even greater than that during that period. So I think it's it's not a real increase. It's a really absolute increase in terms of pounds profitability. But in terms of the growth rate of the business, it's in line with what we've seen in recent years. And, you know, if you add M and A on top, as you see, it's gone up to 29%.

22:12 So it's I think based on what we've seen today and also the visibility that we have in terms of, you know, the the the successful fundraising, both in terms of institutional

22:22 and retail that we're seeing at the moment and have visibility on going forward, gives me confidence in terms of that guidance. Great. Thank you, Gary. The next question is on our private equity division and the GBP 4,300,000 of performance fees generated during the periods. The question being, how sustainable is this level of performance in the near term? So, I mean, we've got you know, at the moment, there's probably four or five funds out of probably 14 plus funds generating performance fees because a number of the funds are relatively new and therefore during their investment phase. So I would say that it's it's eminently possible and probable that we'll start to see that we'll see those maintained in terms of a percentage of the overall total of revenue and go up in terms of absolute pay in terms of our, you know, the medium to long term. I think we've made a number of very successful investments

23:15 within the regions over the last few years, and we've seen the benefit of that coming through. What I wouldn't say though is, you know, you're gonna get peaks and troughs over over a twelve month period. So we've had a very strong first half of the year in terms of performance fees. We'll see more performance fees in the second half, but perhaps not strong because it really is timed on when you make realizations. But that said, as I mentioned earlier in the presentation, the overall percentage of recurring annual revenue to one off fees, if you like, will remain the same. And the reason for that is in addition to performance fees in the second half, I think we'll see an increase in arrangement fees from new investments made, so new deployment, but also in terms of upfront fees on retail fundraising as well.

24:06 Great. Thanks, Gary. The next question relates to the 10% increase to the interim dividend that you mentioned earlier, up to 7.4p per share. How confident is the board in maintaining or increasing this level? So the dividend is a function of our core EBITDA. So the payout ratio is 60% of a core EBITDA basically in terms of profitability. You know, it it so in terms of confidence around that, so we'll always maintain that, you know, unless things change, but clearly, that would be the case. But in terms of the 60% period ratio we'll maintain, the growth in the underlying business will continue, you know, over the next five years, which I've described and beyond. So in terms of the absolute dividend continuing to go up as the business goes up, I'm very confident indeed.

24:58 And I'm one of the biggest shareholders within the FORESIGHT GROUP. So I must say pleased about the dividend yield as anyone else, and I think it will continue. Great. And just linked to that, in terms of the future growth of the business, are there any plans to introduce any new investment products to our portfolio to help drive that growth?

25:21 I mean, look. We're always looking at opportunities. So I I think the answer to that is almost certainly yes. You know, but there will be adjacent strategies to what we already do. So, you know, adjacent strategies within the private equity, within infrastructure, within FORESIGHT capital markets. So we wouldn't make a leap into asset classes where we have no experience. So certainly new products, know, one or two already in the pipeline, but nothing that would would mean that we'd be leaping too far from our our our core skill set, if you like. Okay. Great. And then one final question we've got here is just on how do you assess your positioning against peers in the FTSE two fifty?

26:07 So, I mean, we're you know, we compare ourselves to, you know, financial sector peers on a regular basis. I mean, I think, you know, the one thing I would say that that sets us out from a lot of our, you know, financial sector peers is that because we're, you know, predominantly alternatives with a a much lower exposure to listed equities, that we've been able to maintain both growth and profitability on an upward trend over the several years since we IPO ed. And I believe that will continue going forward. I also, know, if you look at the way the business generates, a lot of our revenue is very high quality. That flows through very quickly into cash flow, which then is demonstrated through our confidence in the underlying dividend. So, you know, we do look at other businesses.

26:53 Many of them have a lot more volatility than we do because they're they might be pure equity exposure or they might be monoline infrastructure. I think what gives FORESIGHT its resilience is the fact that we've got three different a parts in business, you know, private equity infrastructure as well as

27:10 the listed space, the first two being in unquoted. And I think that resilience will maintain, you know, as we go forward and continue to have that three different divisions within business. And as I say, even during really tough markets when it might be difficult to raise money for traditional equities, we've still been able to push up both AUM and profitability, and I don't see any change in that in the future. Thanks, Gary. We've actually had another question come in on the listed alternative investment trust sector, which has been under pressure now for a couple of years. Do you regard it as now in structural decline? It's a big question to answer that. I I mean, I do think the market grew the market in that space grew very quickly.

27:57 I'm you know, and it traded at premium for, you know, since maybe two thousand twelve, thirteen, it probably traded at premium for eight or nine years, so until the last two or three years. So, I mean, I think how I would view, you know, the investment trust sector, and I started out in that in the nineties, is that there are certain periods of time where you can raise money and raise new investment trusts. I don't see that being the case in the near term or even maybe the medium term for the foreseeable future. So I think the ability to create liquidity for existing investors within the funds will be a key thing. We may also see some m and a activity within it. I think people on the call may or may not know, but we did a public to private of our forestry investment trust during the course of the summer.

28:47 So whether it's in structural decline or it's just going through one of these medium term cyclical volatility issues, I can't honestly answer. But what I would say is that investment trusts have been around for a hundred and fifty years, and therefore, they'll have seen a lot of these cyclical, you know, troughs during that period. And so I don't think I wouldn't I'd be I think I'd be foolish to call the end of investment trusts. In terms of the alternative space, I think we'll see a contraction and perhaps some M and A in that space. But I do think in terms of, you know, what they're raising and where they're investing is still critical for infrastructure, only within The UK but internationally. And so I do think they have a place to play in terms of investment going forward.

29:34 Thank you, Gary, and thank you, everyone, for your questions. Jake, I'll hand back to you. No more questions online. Perfect. Ben, Gary, that's great. Thank you very much indeed for being so generous of your time there and addressing all of those questions that came in for investors this afternoon. And, of course, we'll publish those responses on the platform. But, Gary, perhaps before really just looking to redirect those on the call to provide you with their feedback, which I know is particularly important to yourself and the company, if I could please just ask you for a few closing comments to wrap up with, that'd be great. Sure. So firstly, I'd like to thank everyone for for taking time out of I'm sure they're busy days to listen to me today. Thank you. Secondly, I'd just like to say in terms of FORESIGHT and looking ahead, you know, that I said the three parts of the business, you know, even when one part may be not working as well as the others, the resilience that it gives us and the quality of the underlying revenues and profitability means that I have a high degree of confidence in terms of driving the business forward, you know, and that's why there's a high degree of confidence in terms of the medium term targets for the business. So, you know, all told, I think we're on exciting journey at FORESIGHT. I think if we see a turnaround in lower interest rates, that will accelerate.

30:44 And who knows, we may even see a little bit of m and a that will will help accelerate the business even even faster. So I think we've got a lot to go at. We've got big markets that we're targeting, and we've got a very good team, you know, within the FORESIGHT GROUP that are helping us deliver on those targets and promises. So, you know, I'd say watch this space, and thank you once again. Perfect. Gary, that's great. And thank you once again for updating investors this afternoon. Could I please ask investors not to close this session? She will now be automatically redirected for the opportunity to provide your feedback in order that the management team can really better understand your views and expectations. This will only take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf the management team of FORESIGHT GROUP HOLDINGS LIMITED, we would like to thank you for attending today's presentation.

31:33 That now concludes today's session. So good afternoon to you all.