Omni Bridgeway Ltd

ASX:OBL

Earnings Call Transcript 2023-Q2

[Operator]

Thank you for standing by, and welcome to the Omni Bridgeway Limited 1H 23 results. [Operator Instructions]I would now like to hand the conference over to Mr. Andrew Saker, Managing Director and CEO. Please go ahead.

[Andrew Saker, executive]

Thank you. Good morning. My name is Andrew Saker, and I'm the Managing Director and CEO of Omni Bridgeway. Welcome to our half year results call for the 6 months ended 31 December 2022. Joining me today is Guillaume Leger, our Global CFO; Raymond van Hulst, Executive Director and Co-Chief Investment Officer of EMEA; Jeremy Sambrook, Global General Counsel and Company Secretary; and Mel Buffier, our Global Head of Investor Relations.Today, I'd like to take you through the operational and financial highlights and the performance of the portfolio over the last 6 months and then open the briefing for questions.But first, I'd like to take the opportunity to inform you of my decision to retire from Omni Bridgeway effective from 26th October 2023 at this year's AGM. It has been my pleasure and privilege to be part of the leadership team at Omni Bridgeway. I have witnessed our company grow from a small Australian-centric operation to a market-leading global business.The Board has resolved to appoint Raymond van Hulst as Managing Director and CEO from after the AGM, which provides me with a great confidence that our company is in secure hands with an experienced team who will continue to grow our business and achieve great success. I would like to thank the Board and the broader Omni Bridgeway team for their support over the last 8 years.Moving on to today's presentation. The first half of FY '23 was another busy period for Omni Bridgeway. Pleasingly, we delivered strong portfolio growth. New commitments were up 60% on the prior corresponding period to a record $304.2 million for a half year period, representing more than 50% of our FY '23 commitments target to $550 million and more than 95% of our FY '23 commitment target, including our current pipeline of agreed term sheets with clients. This strong growth in new commitments increases our potential future income, diversifies risk and provides risk-adjusted returns.Heightened activity in the Americas and APAC portfolio during the half underpinned a 9.6% sequential increase in the estimated portfolio value, or EPV, of all investments to $29.8 billion and a 5.2% sequential increase in implied embedded value or IEV after completions. Importantly, we continue to maintain a high success rate of 76% and strong returns from our completed investments. Our cash and receivables of $220 million, together with $100 million of undrawn lines of credit is expected to support ongoing corporate initiatives and objectives.During the half, we successfully executed upon our strategic and operational objectives. Importantly, the substantial growth in new commitments represents an important forward indicator on our path to achieving our FY '25 targets, including $5 billion in funds under management, or FUM, and $1 billion in annual commitments.Completions during the period were modest, following a number of protracted settlement mediations as we recognized $92.3 million in investment income. Over 40% of this amount was from 13 fully completed investments with an EPV of $1 billion.We continued to develop the secondary market for legal investment assets with the completion of a secondary market sale during the half. This delivered approximately USD 20 million into Fund 1, facilitating the reallocation of capital within the group and importantly, decreasing the fund NCI balance to approximately $12 million.Another important driver for the business is our ability to identify quality legal investment assets and price fees appropriately. To this end, Omni Bridgeway maintained a high success rate of 76% after withdrawals and a ROIC of 115% with an IRR of 35% over the last 3 years. These consistent long-term performance indicators demonstrate the strength of our portfolio and highlight our industry leadership position.The Series I investment period was extended for both Fund 4 and Fund 5 and by period end, we're at 79% and 68% respectively. We commenced the Series II USD 1 billion upsizing process of these funds, taking us closer to creating additional FUM to reach our FY '25 target of $5 billion. Additionally, we continue to assess the feasibility of structuring Fund 9 with an emphasis on higher management fees and lower performance fees and anticipate commencing marketing of this fund in this financial year.We continue to strategically invest in the business. This included expanding our geographic footprint in the northern hemisphere with office openings in Miami, Chicago, Paris and Milan.Finally, we also made important executive leadership appointments, including a new global CFO based in New York and a Co-Chief Investment Officer of EMEA based in Amsterdam. These appointments reflect our global focus and expanding footprint in the northern hemisphere.Looking at our financial highlights, we have continued to develop sources of income to increase a more sustainable business model and superior risk-adjusted returns for our shareholders. Whilst completions this half were modest, we did generate income from diverse sources, including litigation completions, a secondary market sale, management fees and interest revenue.Net loss was $30.1 million, down $21.4 million on the first half of '22. We have disclosed income yet to be recognized of $37.1 million, which relates to substantially completed investments with conditional settlements or judgments on appeal, which will be recognized in future periods.There is an estimated profit before tax of approximately $33 million inheriting these matters, which if unlocked prior to the H1 '23 period end would have resulted in a profit for the period. Satisfaction of the income recognition criteria may result in recognition of this profit in future periods.During the half, costs were consistent with growth targets. Employee expenses were up 29% on the prior corresponding period with almost $7 million of the $9 million change relating to head count growth. This expansion in our productive capacity delivered significant efficiency gains demonstrated through the significant 60% improvement in commitment levels.Corporate overheads reflect resumed levels of pre-COVID expenditure for certain categories, strategic investments in new operating locations and marketing efforts. Pleasingly, significantly lower impairments drove impairment expenses and adverse costs down 88% to $3.7 million.Of significance, we continue to drive consistent and sustainable increases in key business efficiency metrics whilst creating value as we scale our team of legal asset specialists. Put simply, we are working more productively and doing more. A good example of this efficiency and value creation relates to our investment managers. The EPV per investment manager, or IM, increased 28% to $303 million during the half and over the last 2 years, has achieved a CAGR of 30%.Another notable metric is new investment EPV per IM, which grew 43% in the period to $86 million. This important measure reflects that we are leveraging our talent to produce more EPV per investment manager, enhanced by our ability to attract, retain and develop the best talent in the industry globally. Furthermore, it also highlights we have generated significant value over and above costs for the period.As previously highlighted, our team has increased to 214 as we continue to make strategic business investments and generate higher levels of future income. We are now the largest manager of legal risk in the world with a presence in 5 continents across 15 countries and 24 offices globally.The group's on balance sheet cash and receivables at 31 December 2022 was $93 million, noting there are $24 million of receivables relating to Wivenhoe, of which $15 million is anticipated to be collected in April 2023. Strong completions are also expected in second half 2023 and the ability of OBL to access up to $100 million of undrawn debt.It is worth noting we did not buy back Omni Bridgeway shares in a material manner. Our buyback program is ongoing and depends on market conditions and other factors, including capital allocation that is in the best interests of shareholders.We identified and deployed capital in other potentially higher returning areas above the cost of capital, which is highlighted in the record level of commitments made this period. We will continue to monitor this and other capital management options.The metrics on Slide 7 are similar to those in previous reporting periods, which continue to reflect consistent annual growth in our key metrics. Since FY '19, the carrying value of our investments, EPV and commitments have experienced compounded annual growth rates of 20%, 41% and 38% respectively, a testament to the team and the resilience of the business model.You will see in the chart on the right-hand side, we have provided a quarterly breakdown of our annual commitments. The group remains on track to achieve the FY '23 commitments target of $550 million, given strong activity in the first half of '23 and a significant pipeline of indicative investment opportunities.Slide 8 is also similar to our previous disclosures, which continue to reflect our diversification by geography, investment type, funding source and by size. We continue to see diversification as a key risk management tool to mitigate against binary and idiosyncratic risks within our investment portfolio as well as regulatory intervention and competition arising in any single region.Some pertinent points to highlight include our top 10 investments represent 25% of the total portfolio EPV compared to 46% just 3 years ago. These 10 largest investments are spread across Funds 1 to 5 with no balance sheet exposure and no concentration in any single fund.One of the investments is a law firm portfolio comprising multiple individual cases. Additionally, the average investment size across the portfolio is $1.7 million. This is consistent with reducing concentration risk.The diversification of funding sources through our external fund model, whereby investments are funded through dedicated investment vehicles with global co-investors and joint venture structures. The portfolio is balanced with growth potential in all regions. However, the predominant weighting towards the northern hemisphere reflects the significance of these markets, as well as the diversification opportunity and we anticipate an ongoing trend towards investments in these regions.We continue to anticipate a decrease in our concentration of Australian class actions in our portfolio, currently representing 12% of our total portfolio and approximately half of our global class action investments. Single-party litigation and arbitration remain the predominant portion of our portfolio where we continue to enjoy high success rates and pricing.Another good example of recent growth and the evolution of our portfolio is in intellectual property and patents or IP. It is the fastest area of growth within our portfolio, comprising 14% of total EPV compared to 9% just 2 years ago. During the period, IP represented 12% of new commitments.Within the marketplace, we are seeing economic and market pressures driving companies to monetize and enforce their IP assets at an increasing rate. Portfolio investments in IP typically generate a higher EPV per dollar of commitment and higher-than-expected conversion rate due to client acceptance of lower shares of earning of early campaign recoveries.Turning to Slide 9. Similar to disclosures in previous periods, we provide complementary views of our investment portfolio across time. Slide 9 focuses on past performance, whilst Slide 10 on anticipated outcomes.We continue to enjoy industry-leading success rates and returns for large-scale dedicated industry participants. This reflects our specialist investment management team, our pricing, structuring and other risk management systems. It also reflects the entrepreneurial spirit within Omni Bridgeway to evolve, build our global ecosystem and capture growth opportunities as an alternative asset manager.Through this, we aim to achieve a pricing advantage over our peers while delivering a superior value proposition to our clients. Our competitive advantage is also demonstrated through our differentiated product, our sourcing and underwriting and our continued innovation.Slide 10 provides a provisional attribution from estimated future completions or anticipated outcomes. It is based on realizations from the funded portfolio and utilizing past performance of 15% EPV conversion and management fees that excludes performance fees.The implied embedded value, IEV of our portfolio attributed to Omni Bridgeway is around $1.2 billion and continues to grow alongside the total investment portfolio. Over the near term, we anticipate an important transition in the source of our future revenues from first-generation funds to second-generation funds.Whilst excluded from this analysis, we also expect the growing secondary market will provide an alternative to waiting for legal outcomes or settlements, which should provide an improved liquidity, ameliorate duration risk, while enhancing overall risk-adjusted returns across the portfolio.We have a strong platform for growth and a balanced portfolio that continues to deliver against our FY '23 strategic and operational objectives, including generating new commitments for high-quality investments of between $550 million and $600 million, representing a 20% to 30% growth year-on-year. Extending second-generation Funds 4 and 5 Series II upsizing process totaling USD 1 billion and further progress on our EUR 300 million global enforcement Fund 8, which together are expected to increase funds under management to approximately $4.5 billion.Explore the launch of new funds to expand our product suite and fulfill latent market demand for our investment capital, expanding into new markets in the Americas, EMEA and APAC and making strategic investments to generate future income. This is now largely complete. Continue to explore M&A opportunities on a select basis, which either complement or expand our geographic footprint and enhance portfolio diversification. We continue to make steady progress towards achieving our longer-term FY '25 targets through growth in commitments, secondary market sales, investment completions, sustained improvements in operational efficiencies and continued expansion of products and diversification of risk.Omni Bridgeway remains uniquely placed to benefit from a variety of economic environments and ongoing global uncertainties, as an alternative asset manager and investor in litigation and enforcement assets, offering a model that is typically uncorrelated with economic cycles and macro events.Since launching our external fund model, we've been able to scale rapidly to successfully execute our group strategy and transition to an alternative asset manager. We remain positive around the significant opportunities ahead for our industry with Omni Bridgeway continuing to be at the forefront of its growth, innovation and evolution. We expect our recent investments in the half will increase our productive capacity into the future extending our global leadership position for the benefit of our shareholders.I would now like to open the call for questions.

[Operator]

[Operator Instructions] Your first question comes from Michael Peet from Goldman Sachs.

[Michael Peet, analyst]

First question, just on the upsizing in Series II for Funds 4 and 5. Is the term sheet pretty much the same in terms of your co-investment and the fee structures, et cetera?

[Andrew Saker, executive]

We're through the process of due diligence of some of those upsizing exercises, more particularly focused on Fund 4, Michael. And the mechanisms under the fund structure provide for just an automatic rollover of those existing terms.Having said that, obviously, we'd be open to discussion about opportunities to optimize the economics for us, which might include reducing the code contribution or some other treatment of the management fees. But otherwise, we're fully -- we're expecting the commercial terms to be pretty much the same as what they are.

[Michael Peet, analyst]

Okay. And just you mentioned Fund 9, that sounds logical or higher management fee, lower performance. But can you just give us a bit more color on that in terms of potential size and maybe co-investment what you were intending to -- we would desire in terms of a current investment percentage?

[Andrew Saker, executive]

At the moment, we haven't finalized the offering. We're anticipating to go to market on that in the next month or so. What we would anticipate is that it will be a lower co-investment portion and we'll be focused on specific opportunities that have a lower targeted IRR to produce -- that are differentiated from our other offerings.

[Michael Peet, analyst]

Okay. That's good. And then just finally, just on the secondary market. Obviously, you've made some sort of sales there over the last little while. Could you just give us a sense of maybe how many other matters of [indiscernible] are sort of in discussions potentially at the moment? And how active is the market becoming? And what can we expect from this sort of going forward?

[Andrew Saker, executive]

We anticipate that secondary market sales are going to be a material portion of our income generation. As we look to mitigate risks, particularly associated with completion and duration, the duration being the biggest bugbear that we have to manage. The secondary market is continuing to grow. There's new entrants that are participating in that process. And we're an active participant on the sell side as well as on the buy side.

[Michael Peet, analyst]

And maybe just a little follow-up on that, if I may. Just duration, I mean, what sort of impact overall do you see that having? I mean could it halve the duration, for instance? Or is it at the margin?

[Andrew Saker, executive]

No, it will be where investments have gone through a period of our management. And then we're in the process of wanting to mitigate risk of either duration extending or budgets are blowing out where we can manage that risk, we'll do so through the secondary market. I'm not sure that you could be precise about it halving duration and it will be case specific.

[Operator]

Your next question comes from Jason Palmer from Taylor Collison.

[Jason Palmer, analyst]

Congratulations on what you've achieved at OBL, Andrew, over the last sort of 7 or 8 years.

[Andrew Saker, executive]

Thanks.

[Jason Palmer, analyst]

Yes. No worries. Just a question sort of as Fund 1 now is approached -- or is approaching runoff. Is there any mechanisms that you can put in place around carving out a portion of that portfolio, maybe taking some level of insurance cover over the portfolio and selling it in the secondary market?

[Andrew Saker, executive]

I think the answer is yes to most of that other than the insurance part. It's difficult to get prejudgment insurance in most circumstances. It's not unheard of, but it is very difficult and can be quite expensive. The more likely insured scenario is where it's post judgment and it's the judgment subject to appeal in some sense. But yes, there is certainly opportunities to carve out a portion of that and dispose of it in the secondary market. And that would be a way of mitigating duration risk.

[Jason Palmer, analyst]

Yes. And so do you have to get approval from your co-investor in Fund 1, once that hits run off or do you -- or are you free to do what you want once you've met that hurdle rate?

[Andrew Saker, executive]

Well, I think the technical requirement would be to get their consent. It would be the politically correct thing to do. And from our perspective, once we've repaid the preferred amounts that are due to the investor. And as long as we're not impacting on their back-end returns, it's economically agnostic for them.

[Jason Palmer, analyst]

Okay. I have 2 more questions, if I could, please. The judgment that was appealed that you removed from income yet to be recognized. I think you said the back to the first instance court. Has that got some level of judgment preservation insurance on it? Or is that an uninsured judgment in the first instance?

[Andrew Saker, executive]

That was in -- yes, it was an uninsured judgment. It was an uninsurable judgment because of the protective orders that were associated with that judgment. So we weren't able to obtain insurance for it.

[Jason Palmer, analyst]

Okay. And my last question was around cash flow. And I think in the -- at the quarterly, which is only 3 or 4 weeks ago now, you talked about significant second half cash flows. And I apologize if it's in the slide deck, but I have no chance to have a look at it. Are you able to sort of talk through any significant cash flow events that have occurred between 1 January and now that you haven't included in there and your level of conviction or stage of completion around some of those major milestones that gives you that comfort to say you expect second half cash flows to be more significant?

[Andrew Saker, executive]

Sure. I'll get Guillaume to respond to that one.

[Guillaume Leger, executive]

So to your first question, no, there hasn't been any significant events in the first 2 months of the year. Your second question, so we have a strong cash and capital position from our cash receivable and the undrawn portion of our facility that we believe is our strong position for us to invest in our business.

[Jason Palmer, analyst]

Yes. I appreciate that. It was more so around your comment, Andrew, in the deck where it sort of said that the cash inflows in the second half would be much stronger. So more sort of looking for some time lines or some events that we can kind of look out for that – that might be suggestive or proceedings that are sufficiently progressed that might be suggestive of more cash flows in the second half. That's what I was kind of getting at.

[Andrew Saker, executive]

So the table that we have in the presentation to schedule out the IEV, I think is what would give you the best picture for that. And this continues to be based on the expected completion date for each matter. This is how we build up the schedule, the cash flows would follow that shortly thereafter completion.

[Jason Palmer, analyst]

Okay. I'll just ask one more question in respect that. I'm just trying to draw out a bit more detail, if I can. It's around -- is there anything in the secondary pipeline then that you suggested that there could be reasonable secondary transactions in the second half?

[Andrew Saker, executive]

Jason, we continue to explore all opportunities to monetize the assets as long as it optimizes the outcome and mitigate the risks. So I would anticipate there will be some secondary market transactions in the second half. I don't think it's appropriate or possible to foreshadow exactly what they're going to look like. But clearly, we'll announce them when they are completed.

[Operator]

[Operator Instructions] Your next question comes from Tam Phan from Lizard Investors.

[Tam Phan, analyst]

I think you mentioned that completions were modest this first half. Could you give me a sense of why that is and why you guys are expecting kind of like more cash flow to come in the second half of the fiscal year?

[Andrew Saker, executive]

So the number of completions were modest relative to our expectation because a number of the mediations that were undertaken in the second half didn't complete and then the matters proceeded to trial. So we're expecting decisions to be handed down in the second half of the year, which will enable realizations to be achieved.We did have one secondary market sale and I'm anticipating more secondary market sales in the second half. And in those circumstances, that's where we get confident about the cash flows in the second half. We do have a reasonable schedule of matters to be completed in the second half as set out in the portfolio summary. And that should complement what we've achieved in the first half.

[Tam Phan, analyst]

But maybe can I ask a follow-up question on that? Usually mediations, usually, if you will mediate when it gets closer to the court date, right? And I -- did the court date move at all for like many other cases? Or why did the mediation that you guys expected to complete this quarter or this first half got moved to kind of like the second half of the fiscal year?

[Andrew Saker, executive]

No, the mediations didn't move. They actually took place, then if they didn't succeed in producing an outcome, the trial took place. So we're expecting decisions from court cases that followed those mediations.

[Tam Phan, analyst]

Okay. Maybe the second question I have is on the 4%, like income conversion versus kind of like IEV. This -- I think -- I don't think I've seen this number before, the 4%. But could you help me maybe contextualize what happened here to kind of see this like 4% number? And why the long-term average you guys still believe is like 15%, right? Because I...

[Andrew Saker, executive]

Sure. No, it's...

[Tam Phan, analyst]

-- kind of [ evasion ] out?

[Andrew Saker, executive]

Yes. Fair question. The lower than long-term conversion rate that was achieved in the first half was largely impacted by our first quarter completion that was an accelerated return. It completed very early in the lifecycle. The plaintiff settled with the defendant at a significantly lower amount than what we've anticipated. It was unusual and I think it will -- it's not a novel term of outcome.In terms of the long-term rate, as you see from our presentation, the long -- the 3-year average is still around 14%. We've had years where it has significantly exceeded that 21% in 2021. And it's been lower than that as well.But the long-term conversion rate measured over a 20-year period still remains above 15%. And so that continues to give us confidence that our pricing and EPV structuring estimations are appropriate. And therefore, the conversion to 15% of income is and remains appropriate.

[Tam Phan, analyst]

Got you. Understood. I guess maybe if I follow up on that, have you seen this 4% conversion in your kind of like 8 years tenure at OBL?

[Andrew Saker, executive]

Look, on individual matters when you have low number of completions, you do it -- I'm sorry, Tam, I missed the second part of it. But during the time I've been at OBL and IMF Bentham before that, you do have individual cases that have completed at less than 15%. You've got cases that completed more than the 15%.But this is a -- it's a long-term 20-year average that has driven that and given us the confidence in that as a future estimate. Our pricing, I think, remains very strong, and APV estimates are proven to be reasonably accurate. It was pretty much a one-off issue that has affected the statistics for this year or at least for the first half and anticipate that EPV conversion rate will increase during the second half.

[Tam Phan, analyst]

All right. Understood. If I can squeeze in 1 or 2 more questions. On the balance sheet investments, I think on the quarterly investments, last time you guys disclosed maybe 2, 3 weeks ago, there is a large impairment on the balance sheet investment of like around $220 million of impairments. Could you give me a little bit of context as to why that is because I think we've spoken a couple of times and I think that balance sheet was mainly in the runoff? And so yes, just some color on that would be helpful.

[Andrew Saker, executive]

So the investments are a consolidated number that comprises balance sheet and fund investments, except for Fund 5. And the impairments are spread throughout all of those. I think in terms of remaining impairments, there's only one on the balance sheet and the rest sitting in the various fund structures because they're consolidated, they sit in the investment figure.I think these were incurred maybe 2 years ago, and nothing much has changed in that. As you'll see in this half, impairments in adverse cost expense was only $3 million to $4 million. So it was pretty insignificant. This is -- I think it's a longstanding figure that's been there.

[Operator]

There are no further questions at this time. I'll now hand back to Mr. Saker for closing remarks.

[Andrew Saker, executive]

Thank you. Hopefully, we've answered all your questions. If you do have any further questions, follow-up or otherwise, please don't hesitate to reach out to us. Thank you, once again. Have a good day.

[Operator]

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.