Pinnacle Investment Management Group Ltd

ASX:PNI

Earnings Call Transcript 2022-Q2

[Operator]

Good day, and thank you for standing by, and welcome to the Pinnacle Investment Management Group Limited Half Year FY 2022 Financial Results Teleconference. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I'd now like to hand the conference over to your first speaker today, Mr. Ian Macoun. Thank you. Please go ahead.

[Ian Macoun, MD & Executive Director]

Thanks, Kevin, and welcome to everyone who's joined us on the call this morning. Thank you for your time. Thanks for being with us.So as you've heard, this call is to discuss our results for the first half of the 2022 financial year. We posted with the ASX last night our formal results announcement, our directors' report and audit reviewed financial statements for the half year, our Appendix 4D and, importantly, our investor presentation. We'll be speaking to the presentation this morning or rather to a few parts of it.The colleagues with me on the call are Alan Watson, our chairman; Andrew Chambers, Executive Director with particular responsibility for institutional and international distribution; Ramsin Jajoo, who leads our retail distribution function; and Dan Longan, our CFO.So I'll simply call out the main themes and highlights of our results, and briefly elaborate a few aspects that we feel are particularly important for analysts and shareholders. We'll leave plenty of time for questions, which you're welcome to direct to any of the Pinnacle representatives on the call.As you can see on the agenda, Slide 3, there are sections where the relevant executive will probably be Andrew or Ramsin or Dan rather than me.At Slide 2 is a disclaimer that is important, and we would ask you to read this at your leisure. Slide 3 is an agenda. Slide 5 is titled a broadly diversified platform in place to move ahead with sustained growth. This is really our theme slide for the half year period that we're reporting on. As that heading indicates, we believe very strongly that we have in place a broadly diversified platform that gives us great confidence that we will be able to move ahead with continued sustained growth.We made 4 major points in summary. We have ongoing opportunities for growth from multiple sources in 3 horizons both in Australia and overseas and in a range of markets and a range of asset classes. We have a diversified, increasingly international platform, generating sustained and resilient performance.We are prepared for and are seeking attractive inorganic growth. We have approximately $135 million in dry powder available to apply to investments that will provide inorganic growth. And though we recognize the possibility of further external adversity such as equity market downturns, we have seen these before and proved ourselves to be resilient to them and increasingly so, given our growing and increasingly diverse platform.Now the first subpoint under point 1 relates to Horizon 1 growth. Although we've had some net outflows from the domestic institutional market over the 6-month period due to client rebalancing, we believe this is a short-term factor and those outflows have been more than offset by the combination of international inflows, which tend to be at higher fees and most importantly, our record retail inflows the highest of any 6-month period in our history at $2.9 billion, yielding overall net inflows for the half year from all markets of $2.2 billion, setting aside the $3.9 billion very low fee Omega mandate that we've discussed in previous presentations.So when you consider the much higher fees, not to mention the stickiness of these retail net inflows, the financial impact, so the ongoing revenue and profit impact of the strong retail and international inflows well and truly overwhelm that of the short-term domestic institutional outflows.We continue to make Horizon 2 investments which have negatively impacted, in the short term, the profit outcomes of both Pinnacle itself and the Affiliates. And the returns on these investments will be another factor driving future profit growth through the market cycle irrespective of equity market conditions.Funds under management attracting performance fees had continued to grow, up 9% from $28.7 billion at 30th of June, to $31.2 billion at 31st of December. And we emphasized that the timing and size of performance fees, the 18 significant performance fee strategies, are uncorrelated with each other strategy and almost entirely uncorrelated with equity markets being based on outperformance of benchmarks, not absolute returns.Our average base fees have increased again, albeit fairly modestly, and we have continued to increase the diversity of our client base. And there's been ongoing evidence demonstrating another important factor that we believe will continue to add to our profit growth, namely the operating leverage that is embedded throughout our business, particularly in virtually all of the Affiliates, which results in far greater percentage revenue growth than cost growth as funds under management grow over time.Take as a simple example, the expansion of Hyperion margins. As Hyperion funds under management in its global equity strategy increase from the current fund of just under $4 billion towards the capacity of that strategy, which is a multiple of that. Think similarly of strategies such as all Antipodes' strategies, Plato's global strategies, Spheria's global strategies, Firetrail's global strategies, most of Coolabah's strategies, Aikya's emerging market strategy and so on to name just a few.This operating leverage factor has to date been masked to some degree by the commitment of most affiliates as well as the Pinnacle itself to add resources ahead of and for the development of additional strategies, paving the way for future revenue and profit growth.Now in terms of point 2 on this slide, we have in place a platform by which we mean high-quality distribution capabilities, high-quality infrastructure capabilities and a reputation in the market for partnering with high-quality investment managers, each among the very best in their fields and for consistently delivering to the needs of both the affiliates and their clients. We will continue to add funds under management and profits by way of organic inflows into our high-quality existing affiliates, incubating new affiliates and strategies and careful but deliberate acquisitive growth into new asset classes and markets.We are prepared for and seeking attractive inorganic growth. Multiple attractive opportunities are emerging, but the discipline and patience that we demanded ourselves means we can't know what the timing of proceeding with any of these will be until the stars aligned, and we're actually ready to commit and consummate a transaction. We are indeed committed to taking advantage of the significant offshore opportunities that exist for us to evolve into a global multi-affiliate by exporting our model. But again, we don't want to place pressure on ourselves to achieve outcomes by any particular dates or times as that is how bad decisions and bad acquisitions happen.And point 4 on this slide, I've already mentioned that we've demonstrated that although we are not immune from market downturns, a significant portion of our FUM moves with markets that can be quantified fairly easily. We have proved ourselves to be resilient. We are far more diversified than many other fund managers and increasingly so in recent years. We believe we can continue to grow in those kinds of conditions should they eventuate. And there's no reason to believe flows would be negatively impacted.We've explained previously that periods of market downturn have actually been beneficial for us in several respects. It emphasizes and demonstrates strongly the benefits for clients of our business model. Stand-alone boutiques can experience stress and institutions often respond by cutting costs and reducing the quality of their services and resourcing. And down markets control up acquisition opportunities at more favorable prices.Turning now to Slide 6, a few financial highlights of our results. I've mentioned that the revenue growth resulting from our strong retail and international inflows has far exceeded any financial impact of the institutional net outflows. The raw net flow numbers don't provide a good representation of the ongoing financial impact. And in any event, we are confident that these reflect short-term factors, and our institutional pipeline remains strong.Our aggregate funds under management at 31st of December, were $93.6 billion, up $4.2 billion or 5% from 30th of June. Retail funds under management...[Technical Difficulty]

[Operator]

Please continue.

[Ian Macoun, MD & Executive Director]

Okay. So I was just turning now to Slide 6, a few financial highlights. And I was mentioning that the raw net flow numbers don't provide a good representation of the ongoing financial impact. And that in any event, we're confident these reflect short-term factors, and our institutional pipeline remains strong.I mentioned our aggregate funds under management 31st of December, $93.6 billion. Retail funds under management increased 17% to $23.8 billion over the half. Aggregate affiliate revenue was up 19% to $240.5 million with base fee revenue up 42% and performance fee revenue 58% lower than the high level of performance fees in the prior comparable period.Our net profit after tax at $40.1 million was up 32% on the PCP. It would have been $41.9 million, up 38% were it not for the write-off through the P&L of $1.8 million for Reminiscent. Basic earnings per share was up 23% to $0.215 per share and diluted EPS up 26% to $0.21 per share. And we've declared an interim dividend of $0.175 per share, up 50% on the prior comparable period, 100% franked. And 7% of strategies with a track record in excess of 5 years have outperformed their benchmarks over the 5 years to 31st of December with further detail on investment performance in Slides 10, 49, 50 and 51.Slide 7 has further detail on our platform, including the 16 affiliates and some business highlights, including the Horizon 3 acquisition of 25% of Five V and the Horizon 2 incubation of Langdon Capital Partners in Canada and some additional initiatives in Palisade.Slide 8 shows our continued track record of earnings growth over the 6 years since we became a pure-play listed funds manager, our EPS have grown at 47% per annum compound to the end of the last financial year. You can see the growth -- yes, dividends have grown at over 50% per annum compound as well.Slide 9 shows our growth over the past 2.5 years, which encompasses the whole of the COVID crisis period to date.Slide 10 shows the specifics of the affiliate 5-year performance records.Slide 11 shows the growth in our funds under management over the years. Note that our closing FUM is 21% higher than the average through the first half.Slide 12 provides some detail on the affiliates performance fees earned and potential. The volume of performance fee FUM continues to increase.Slide 16 and 17 show further details on our financial results. I've already called out the highlights.And Slide 18, further details on our balance sheet. We have cash and principal investments of $176 million having drawn down a further $70 million of loan facility, giving us $135 million of dry powder.Now the remaining slides provide detailed information on institutional international distribution, retail distribution, our growth agenda and our commitment to corporate responsibility, including our highest ever donation to the Pinnacle Charitable Foundation. But I'll stop there and invite questions now.

[Operator]

[Operator Instructions] We have multiple questions in the queue. Our first question comes from the line of the company Morgans from Scott Murdoch.

[Scott Murdoch, Senior Analyst]

Just a couple for me to start off, if that's all right. I want to start on retail flows. I guess, to the extent that this is possible to enter the current volatility and pullback in some of the high-profile names that have attractive inflows over the last half. Just interested in your confidence that the current run rate in retail can be sustained.

[Ian Macoun, MD & Executive Director]

Yes. So I'll start off, Scott, and perhaps turn to Ramsin. Look, the main point I'd make, look, it is very difficult to predict short-term movement inflows. Retail perhaps easier than in-state, but still difficult to predict. I'd make the point, our retail flows are very diversified. So we have quite a range of affiliates that are all experiencing quite strong inflows.Now you're right, the largest have been Hyperion, Res Cap, Coolabah metric. And there have been changes in the marketplace recently. But the [Technical Difficulty] in retail, including some such as the metrics retail fund that's been recently launched. That really does underpin growth. Ramsin, did you want to say anything about retail flows?

[Ramsin Jajoo, Head of Retail Distribution]

Sure, Ian. Can you hear me?

[Ian Macoun, MD & Executive Director]

Yes.

[Ramsin Jajoo, Head of Retail Distribution]

Excellent. So thanks for the question, Scott. But we've talked on numerous occasions about the momentum being a big factor of driving flows. And in retail, when you get an allocation in model portfolios, when you get strong research ratings, short-term volatility doesn't impact what advisers are doing on a month-to-month, quarter-to-quarter basis. So our confidence remains that we have strong exposure in models and that should continue for the foreseeable future.

[Scott Murdoch, Senior Analyst]

Okay. I'll just ask the easy ones on flows, while I've got the line, just on the in-state pipeline. Obviously, you've expressed confidence in that pipeline for some time now, and that's largely come through especially in the FY '21 year. But just, I guess, interested in a bit more color given there has been outflows in this period. Just that pipeline, where you see areas and funds that give you confidence to make those strong statements around in-state flows?

[Ian Macoun, MD & Executive Director]

So Andrew, do you want to take that?

[Andrew Chisholm Chambers, Executive Director]

Yes. Thanks for the question, Scott. So you think about flows from an institutional perspective versus retail, you typically find that retail investors tend to be more cyclical and institutional investors tend to be countercyclical in terms of the way to allocate flows.So what we've seen over the last half is a lot of rebalancing -- a systematic rebalancing back to target weights in asset allocation within portfolios, particularly equity markets as they continue to rally through the course of the second half. Obviously, markets have fallen during the course of January, which we believe obviously removes that probably that impulse to continue to rebalance away from equities. And so we do that headwinds potentially over time, come from more of a tailwind. So that's probably point number one.I should also highlight in the first half that our combined institutional international gross flows were 27% higher than PCP. It's just that the outflows largely owed to rebalancing, obviously, the Omega outflow was higher more elevated than previously.In fact even our domestic flows, we're 40% higher than PCP. So certainly, the sales momentum is there. But obviously, the rebalancing, which is kind of cyclical, as I mentioned, can be pronounced from time to time.Now in terms of our pipeline today, if I look through the pipeline we put together, and we've done looking our own sales force, it's never been bigger than what it is today. And it's -- obviously, we have a larger sales force, but we also have a very large global addressable market.If I think about the boutiques, a very strong potential upside in the likes of Hyperion, Antipodes and Aikya. So 2/3 of their pipeline sits outside of Australia today for those 3 boutiques. So they have potentially a very good pipeline ahead.The likes of our credit managers given the magnitude and direction of base rates around the world, running 0 duration paid strategies such as Coolabah and the public markets, or floating rate strategies such as metrics in private credit, which has enormous structural growth behind it provides us a lot of confidence in ongoing AUM growth towards [indiscernible] in the first half. Does that give you sufficient color? Or would you like me to elaborate it further?

[Scott Murdoch, Senior Analyst]

No, I think that's good. I've just got a couple more before I pass it on, if that's all right, just on performance fee. Performance fee FUM, obviously, you gave us sort of details there. But just interested if you have this number, what percent is currently above its necessary hurdles? And just, I guess, high level on a second one on performance fees. There has been a certain amount of performance fees linked to unlisted assets sort of sensitive to interest rates. Palisade comes in line with a big tailwind from interest rates in recent years. Just your view on the potential for some of the performance fees to be at risk, given that interest rate environment has shifted.

[Ian Macoun, MD & Executive Director]

So perhaps I'll start off on that. Palisade, you're absolutely correct, Scott, Palisade has historically produced quite large performance fees, and that's a fundamental part of their business model. Their FUM is not huge and doesn't grow in the billions in the way that some of the other affiliates do. But they earn quite high base fees and more so performance fees.So we always have to be careful about making predictions. But what I can tell you, Palisade is in very good shape. The assets that it owns by and large are doing well, notwithstanding there's been some short-term issues with airports and so on. But they're in very good shape. They're adding assets, they've announced they've added a wind farm in the port of Geelong and then making other investments deploying more capital.So all I can say is I feel very confident about Palisade's performance fees. I recognize the point about higher interest rates, increased the discount rate. But no, I don't see any fundamental problem in the performance fee potential of Palisade. And they're a very good manager. They've made very good investments. And I feel good about them.

[Andrew Chisholm Chambers, Executive Director]

Ian, probably just adding additional point to that, if I may, is that if you look at what's actually value it has done with real assets, is they typically haven't followed base rates, they got an analysis factor to find a midpoint for long-term base rates, which is higher than the current rate. So as the degree that rates go up, there's no need to necessarily move -- adjust that discount rate. And therefore, have the same impact on the valuation of those assets.

[Ian Macoun, MD & Executive Director]

That's right. They've taken a kind of a long-term average view of interest rates rather than marking the discount rate down to market for short-term rates.Yes, that's right. Now Scott, you also asked about the proportion that are sort of at or above the high watermark. We're not publishing that number because it -- honestly, it moves around a lot even in a fairly short space of time. Hyperion, for example, we've seen their performance relative to benchmark moved quite a lot with market conditions. So I'm going to pass on that number for you.But what I would point out is there are 18 strategies. So at any point in time, there are typically a number that are sort of in the money and a number that are out of it. There's significant FUM in Antipodes that's under. Firetrail that has quite large performance fee FUM, its performance has been quite strong. So I'm just going to duck the question not because we don't like to be as transparent as we can be, but it just moves around so much.

[Scott Murdoch, Senior Analyst]

No, that's fine. I'll work for my money there and work it out myself.

[Ian Macoun, MD & Executive Director]

Yes, that's your job.

[Scott Murdoch, Senior Analyst]

Yes, exactly. Just one last one. I know there's others want to question, but I just had one more if that's okay. Just your statements around exporting the model. Clearly, you've flagged off your expansion for some time. It's pretty clear you're keen to do something offshore. But just interested in the term exporting the model.Clearly, in Australia, you're strong capital operation and distributional support for your affiliates. One of those things is really easy to export. The other 2 maybe not so easy in terms of time or investment. I'm really interested in what investment and time you plan to put into operational and distribution support in offshore jurisdictions or one or multiple jurisdictions.

[Ian Macoun, MD & Executive Director]

Yes. So Capital is the one that's easy to export, I'm sure you're referring to distribution and ops more difficult. Yes, so look, exporting the model, we've sort of already we've started. So Aikya is going very well, and that was an incubation offshore. Langdon is an incubation offshore. Again, it's our model. We've said -- we've been pleasantly surprised. So Adrian Whittingham, who is sort of leading this, is pleasantly surprised at how receptive talented investment professionals have been coming into our model. And we've had quite a lot of people, very keen. We are careful, and this is what you're referring to, Scott. We are a conservative cautious group. We believe we're well disciplined. And I think the inability to travel has held us back a bit, but we've done a lot of work.So we think we can export distribution. I might shut up and let Andrew Chambers speak to that. We're doing that already. We've got a significant force overseas. We tend to have smaller numbers of very high-quality people, and it's very manageable. Ops, we also have done a lot overseas already with our UCITS platform, our Cayman platform, et cetera. And we do have some people. We've got a senior ops person in London.But you're right, we will need to add resources to that. We pull that out. We will do it progressively and carefully. We're not going to make huge impacts on our P&L. But when I boringly kept talking about our Horizon 2 investments in Pinnacle, that's a big part of it.But Andrew, do you want to speak to offshore distribution?

[Andrew Chisholm Chambers, Executive Director]

Yes. So we made a couple of additional hires I've called out in the presentation over the last 6-month period in London and in Pennsylvania, as you may have seen in the press in the last day or so. But the speed of hiring in terms of international distribution is really in proportion to 4 key factors.The first of all is the growth in revenue, both expected as well as current. Then there's the commitment of our affiliates themselves to doing international marketing, we need their full commitment to doing that. Then there's the breadth of native products for local investors. And what I mean by that is ensuring that we have products which are relevant to, say, investor base in the North American market. Obviously, asset classes, which are domestic based in Australia, like Australian equities aren't sellable over there. So we need sufficient breadth of sellable products into those local markets. And obviously, we're increasingly expanding that product set. And then there's the availability of cultural line distribution talent. That also -- we're not going to hire anyone that doesn't see a much more collaborative sales culture and intense working culture as well.So it's really those 4 key factors which determine the pace of it. But expect us to be adding additional hires over the coming 6 to 12 months because we feel optimistic about what's in front of us given the ongoing flows we have and the current FUM we have from 37 countries outside of Australia. And of course, flows from 32 countries in the last 6 months.And we could talk a bit more about ops too. But the theme's the same. We will add ops resources as we need them. We're not going to sort of damage our P&L with the extent of that investment. But we will keep resourcing ahead of need.

[Operator]

And our next telephone question comes from the line of Macquarie from the line of Mr. Tim Lawson.

[Tim Lawson]

Ian, just a couple of questions for me. Just in terms of the growth in these relationships. Andrew, you might have sort of touched a little bit on it. But can you talk about that the $260 million now up from $190 million a year ago. How much is organic? How much is bringing on new acquisitions? Just trying to understand where that's coming through from.

[Ian Macoun, MD & Executive Director]

Yes. Happy to answer that question, Tim, good to hear from you. So that net 30 new institutional clients in the half excludes anything, for example, based on an acquisition, such as the case of Five V because that's not included in the numbers. So that's net new institutional clients added. Most of those have come largely from outside of Australia rather than inside of Australia. And obviously, matches the run rate of the 6 months prior as well.Your most also is the diversity of the FUM by institutional client. I think you may even call that out in your own report, where our largest institutional client only represents less than 2% of Pinnacle's NPAT as well. And obviously, within the institutional clients themselves, we have a lot of affiliates represented. They're quite deep relationships. So within our top 20 clients, it's really 4.5 based on average. That range between one at the low end to 9 affiliates within client portfolios at the upper end to give you business yield. Does that help answer your question?

[Tim Lawson]

Yes, that's great. And also, you made a comment in the slide pack on gross institutional flows. Obviously, there's some moving parts in the half around the low-fee mandates, et cetera. But you talked about the gross flows being higher than comps. Can you talk about how sort of stable that is through time? And then obviously, the net number being affected by the gross outflow, so how stable that gross inflow is?

[Ian Macoun, MD & Executive Director]

So the trajectory has tended to be rising through time. But obviously, based on particularly equity markets, given how much of our FUM is dominated to our equities overall. As markets tend to run you tend to find there is this rebalancing effect. So that, therefore, the redemption rates tend to lift as markets. Obviously, your FUM is going up, but investors rebalance back to strategic weight. But the general trajectory of our inflows has been positive and rising over time. And that's reflective of more boutiques, more diverse boutiques and sellable to a global marketplace rather than just the local one as well.

[Tim Lawson]

Yes, yes. And just a question to finish just on costs. Can you categorize sort of the investment in both across the affiliates and then at the sort of head office? Maybe mix on sort of how much is fund investment from the increase of costs and how much is distribution investment? Is there some way you can sort of split that for us?

[Ian Macoun, MD & Executive Director]

Dan, I'm not sure if we can help with this. I mean, we obviously look at our expenses by category and so on. We've increased each of those, Tim. And in my head, Dan, that sort of proportionately going up similarly distribution, we've certainly added a lot of resource -- quite a lot of resource there ahead of more revenue. And we've also been growing our fund services capabilities. But I don't know whether you can be a bit more specific, Dan.

[Dan Longan, Chief Financial Officer]

That's about right. So traditionally, Tim, people have been split almost down the middle between ops and distribution, and we're sort of maintaining that trajectory to grow.

[Ian Macoun, MD & Executive Director]

That equal numbers of people in distribution and ops or they both growing at similar sort of rates.

[Dan Longan, Chief Financial Officer]

Yes, yes.

[Operator]

And our next telephone question is from the company Barrenjoey from Mr. Nicholas McGarrigle.

[Nicholas McGarrigle, Analyst]

There's obviously a lot of commentary around offshore expansion, and Ian touched on the method on how you're looking at acquisitions and expanding. Can you talk through what some of the key strategic attributes of an offshore acquisition would be? Is it really around distribution? Or is it sector or strategy capability? What are the key attributes you're looking for strategically?

[Ian Macoun, MD & Executive Director]

Yes. So yes, thanks for that, Nick. And the answer to it is that, look, we have a number of sort of criteria that are very important to us. And they all are in the mix. I should also say we're doing a lot of work on things offshore, but we don't know when we'll actually do things. But the things we're looking for, our preference is in diversifying asset classes. So we're certainly putting a lot of effort into private market asset classes.Having said that, so as everyone else. And so the multiples on those businesses are higher. But we do have a preference to do things that would be more diversifying of our existing sort of asset class coverage.You mentioned distribution, that's absolutely correct. We are not a financial investor in fund managers or in anything. So we are looking to invest in businesses where we can add value, particularly through our distribution, but sometimes also through our experience with business strategies and so on. So we are definitely looking to add value to anything we do. But there's quite a range of things that we're looking at, Nick.

[Nicholas McGarrigle, Analyst]

So in terms of any acquisition that you might execute on, is it not necessarily to provide some of that administrative distribution support services capability? Do you think you can build that out organically and then invest in more asset manager focused investments in North America or Europe?

[Ian Macoun, MD & Executive Director]

Yes. So look, could be that we acquire things like that, that would help. I would say sort of thematically, we're very confident of our ability to build our institutional distribution, including offshore, maybe retail distribution and maybe some of capability could be part of any acquisition, but it really depends.Look, the main thing we're looking for always is investment excellence. It's exactly the same as what we've done in Australia, is this team that we're looking at, are they best of the class? Are they excellent talented investment professionals? And is there a major market for what they do? That's still the most important thing. Recognizing at the same time, we've got the objective of diversifying asset classes. And yes, building our distribution and ops capability offshore as well. So [indiscernible].

[Nicholas McGarrigle, Analyst]

Yes. That's good to understand. I mean, I suppose it's easier to build out that operational capability when you've got profitability coming from an existing asset manager in that market as opposed to building that Pinnacle overhead and support structure well ahead of the revenue. Is that the way you think about timing?

[Ian Macoun, MD & Executive Director]

Yes, that's true. We like to know the revenue is there or coming. But also that also informs us as to exactly what the nature of those ops capabilities should be. So the ops that you need for this asset class is not exactly the same as that asset class. So it helps to inform the emphasis in our ops capability as well.

[Andrew Chisholm Chambers, Executive Director]

And it's probably where the undertakings part as well. The #1 reason why people want to partner with us ultimately is large-scale distribution. Because globally, you tend to find anyone that's looking to acquire interest in [indiscernible] asset manager [indiscernible] majority shareholder, the majority shareholder in the firm, we have marked them being a minority shareholder with protections. And typically, any competition we have in the minority staking business here, the GP staking firm, they are like [indiscernible] and others, but they don't provide large-scale distribution. That's a real competitive advantage is we really marked to the minority shareholder ownership with large-scale distribution and operations infrastructure, which makes that model overly unique globally.

[Ian Macoun, MD & Executive Director]

Absolutely. And when we talk about exploring our model, that's all part of it with our model for supporting talented investment professionals, but it's also the distribution value that we bring to them. And that's -- yes, as Chambers said, that's really important.

[Nicholas McGarrigle, Analyst]

Yes. I mean in that context, you mentioned that some of the asset classes and things that you're looking at are competitive. I imagine, to your point, there's very few players in the U.S. that are providing minority investment and distribution support hand-in-hand. Usually it's passive minority or distribution support but owning the majority. So does that mean that you're actually in competitive processes or you tend to self-select the less competitive processes because they want that distribution support?

[Ian Macoun, MD & Executive Director]

Yes. So what you said there is absolutely correct. But it doesn't mean that they can completely ignore valuations. So we're always, to some degree, in competition. It's not the -- competition is not as sharp because as you say, we have some special advantages. But when the multiples in private asset classes are elevated, we can't completely protect ourselves from that.

[Nicholas McGarrigle, Analyst]

And just in terms of the appetite to acquire, you've obviously got $185 million of dry powder. There's obviously large acquisitions that put you on the table in North America. Does the current clinical share price create complications in doing some of these deals? Or do you feel like you're comfortable with the balance sheet position and equity if it's needed?

[Ian Macoun, MD & Executive Director]

Yes. So look, we don't like to speculate on these things, Nick. I don't think the current share price should lean too large in our thinking. Our thinking is dominated by the opportunities, the quality of them, the growth that we believe can be generated and so on. And if we find the right things at the right price, then we'll figure out funding.But having that dry powder, we raised that capital as sort of replenishment capital. That's very helpful. It puts us in a much stronger position when we're talking to people when we know we've got that money sitting in the bank or sitting in the liquid strategies of affiliates.

[Nicholas McGarrigle, Analyst]

I might just ask one last one if I'm being a bit long on the questions. But obviously, the Pinnacle parent profitability was quite high in the half year compared to prior years. Can you just -- I think you might have partly answered this in previous responses, but is there any intention to reinvest some of that profitable run rate given it is sustainable because it's revenue share driven? Is there a plan to reinvest that in offshore, particularly in certain domestic strategic priority?

[Ian Macoun, MD & Executive Director]

Yes. So we don't really think of it Nick, that are well, we're generating bigger profits in Pinnacle parent, therefore, we'll put the foot down on spending on for Horizon 2. The Pinnacle parent P&L is just an outcome. And we don't sort of particularly target things. We said we won't let it become substantially negative. But look, we will invest in additional resources for Horizon 2 as needed and as dictated by the opportunities. We like to think that we wouldn't be constrained from being ready and servicing any opportunities that we find that are attractive. So it's like the opportunity first, and then we'll decide the resourcing, not sort of ration how much resourcing we'll put in while we're always sensible about it relative to revenue. Does that sort of answer it? We've always signaled to people don't budget for substantial profits or losses in Pinnacle parent. Now obviously, our revenue is growing very nicely, but so will our costs keep growing as we expand.

[Nicholas McGarrigle, Analyst]

Yes, I guess you probably can't make a comment on this, given you would constitute guidance. But you've obviously produced a $4 million profit in the half year. Usually, the second half is stronger because of institutional success-based fees. So potentially annualizing a better than $8 million result, which would be "substantial". So that's probably just where I'm thinking in terms of what the implication is about really strong result in the first half.

[Ian Macoun, MD & Executive Director]

Well, you're right, we can't forecast those things. And so I'm going to respectfully duck that a little bit, Nick.

[Nicholas McGarrigle, Analyst]

That's fair.

[Ian Macoun, MD & Executive Director]

There's a lot of moving parts there in Pinnacle parent.

[Nicholas McGarrigle, Analyst]

Yes, I mean, I noticed that you made a couple of relatively senior appointments in the U.S. in the last couple of months as well. So I'm sure that, that adds to that cost growth in the second half.

[Ian Macoun, MD & Executive Director]

Yes, that's true. And our costs have grown significantly, which is a significant part of that has been adding resource ahead of Horizon 2 resource.

[Operator]

And our next telephone question is from the company of Morningstar from Mr. Shaun Ler.

[Shaun Ler, Equity Analyst]

I just have 2 quick questions. The first one, probably to you, Ian. Today's release, Pinnacle's recent news, which you explained superfunds for sort of sticking to benchmark tracking and then the newer strategies and each funds are -- an area of superfunds has loss appetite. So I'm this curious, how should we make on this thing. And does this imply Pinnacle has better ops to be the superfunds or Pinnacle can better fill some of the gaps in the superfunds asset allocation or there's just less demand for Pinnacle's alternative strategy. So is it overall a positive or a negative?

[Ian Macoun, MD & Executive Director]

Yes. So this might be one for Andrew. But the general comment is, I mean there are certain trends in the institutional market that we've been calling out for quite some time. And we've been explaining how to some extent, that's a negative for all active fund managers. But equally, we have a range of strategies that are ideal for those trends. So on a net basis, we're not saying it's particularly either negative or positive. There are swings and roundabouts. We did mention there was rebalancing, which we think is a short-term factor. We did mention more so to your future which is exactly as you said there, Shaun, which is causing people to be -- take less active positions. And that varies by superfunds according to how close they are to their failing performance tests and so on. So that's not uniform either. But we do have quite a significant range of strategies that are very suitable for that particular market.Andrew, did you want to say anything about that?

[Andrew Chisholm Chambers, Executive Director]

I think that you've summarized it very well. A number of our managers can run lower risk type strategies for investors and Palisade would be a very good example. That way you see more money flow to enhance passive type portfolios because the tolerance, the tracking error risk, particularly for underperforming funds has brought in their appetite for being much more actively exposed.So -- but in other cases, we're tending to find that simply mandates have been treated in size, plus the active component is not as large. And where that occurred, I think that's largely finished the worst in the last half. And that's something we're going to see on a really substantial basis in the future. But clearly, there's cost pressures in the market, and there's pressure to perform and not be in that bottom quartile of superannuation funds.I should add that, obviously, we have trended internalization, which is obviously occurring in a number of very large superannuation funds. The demand has not gone away for a high active risk management, which can complement that sort of core-based internal capabilities. And really interestingly, in some cases, we're actually in the process of taking on what was the internally managed capability to some of our managers to manage on their behalf. So it was the reverse, the externalization of the former internal capability. So it's not just one-way traffic.

[Shaun Ler, Equity Analyst]

The second question and the last question is just on further clarification on the prior question on in-store flows. So just to be clear, then in-store clients, we balance their portfolio and take profit. So where do you see this money going to? Do they flow into other Pinnacle boutiques? Or does it go out of Pinnacle affiliates? And also, does the money typically come back at the bottom of the market or do they usually come back some point of the time in the future when the market is recovering strongly?

[Ian Macoun, MD & Executive Director]

So again for Andrew.

[Andrew Chisholm Chambers, Executive Director]

Sorry, you go.

[Ian Macoun, MD & Executive Director]

Andrew?

[Andrew Chisholm Chambers, Executive Director]

Yes. So you tend to find a market extremes, then the reweighting happens with greater in testing as we saw when the market rallied, but equally on the opposite side in March of 2020, the rate of inflows was particularly strong as well on the other side of it. So we do tend to find that added market extreme points. The rebalancing can be more intense. And then there's a lot more treating and tiering based on other levels in the market in between.So -- but what's one trend in superannuation fund over the last 5 years has been much more systematic rebalancing than what they have done historically, which is much more fundamentally based. So it tends to be on mass and correlated most on a number of clients when it occurs. But obviously, during that period of time, you can still be winning net business overall in terms of appointments versus terminations of mandates, which is something we've clearly been doing with the addition of 30 new clients in the last half. And certainly, some of those -- that rebalanced money did come into other Pinnacle affiliates. Sorry, Ian, that's good.

[Ian Macoun, MD & Executive Director]

Yes, got it.

[Andrew Chisholm Chambers, Executive Director]

And then probably 2 to call out would have been Metrics Credit Partners and Coolabah on sort of the alternative credit side. So we've seen that. But obviously, a lot of superannuation funds have been accumulating larger cash levels as well in the process too.

[Operator]

Our next telephone question comes from the company of Ord Minnett from Nic Burgess.

[Nicolas Burgess, Senior Research Analyst]

Just a couple of follow-up questions. Just at the risk of laboring the point, just a previous point, Ian, on the Pinnacle parent. I think you've been quite strong previously of sort of saying to aim for a breakeven result but has been discussed. It's profitable, but you're also quite positive on the retail flow environment. So is that breakeven comment that you've previously made still valid?

[Ian Macoun, MD & Executive Director]

Thanks for that, Nic. So again, we don't want to make forecasts, sort of financial forecasts. But I mean, you're right, the trends that you called out. We have said for some time, look for Pinnacle parent revenue to grow nicely as our distribution arrangements that are percentages of retail revenue and so on. And as retail flows continue to be strong but like obviously, our retail flows have been extraordinarily strong and that has been very helpful to Pinnacle parent revenue. So that is definitely a factor that should be ongoing. But we're also equally calling out that we will be adding to our costs. We already did. Our salary costs went up like from about $6 million to $9 million. So we're not skanking on extra resources to be ready for growth. But I think what I said before is valid, which is that we don't say although we're getting it to revenue. Therefore, we'll spend more on expenses. We will spend on resourcing according to the opportunities that we're seeing. We want to be resourced ahead of growth. That's why I called out all of that Horizon 2 expenditure. But as to what the net of all of that is in the P&L of Pinnacle parent, we don't really want to forecast it.

[Nicolas Burgess, Senior Research Analyst]

Yes. Okay. That's helpful. Just a couple of further questions. Just on Reminiscent, clearly, small and not really a profit contributor. But your assessment of why that didn't work and any lessons from that venture?

[Ian Macoun, MD & Executive Director]

Yes. So look, there was some bad luck there, to be honest. And Dave Adams had quite a lot of indications of institutions who wanted to put quite large amounts with him, which was sort of deferred and then deferred. I do think the environment of the last 2 or 3 years has not been conducive to hedge funds, macro funds and so on. And in the end, it was basically Dave and we all sort of lost patience and we said, we don't know how long it's going to be before these people will put money into it. There's also a little bit of a view that stand-alone boutiques in that kind of space are not as desirable and more as being part of something bigger, which is why, for example, Omega merged into Plato so that could be part of something bigger. So yes, there was certainly some lessons.I got to tell you, if I could be a bit cheeky, one lesson for me is that I feel it's a bit unfair that our P&L doesn't markup increases in the value of the affiliates but marks down the ones that -- the little ones that don't work. But look, we have had very few that don't work, but we've shown discipline in calling them when that's been the case. So I think that's also part of the lesson.

[Andrew Chisholm Chambers, Executive Director]

And Ian, [indiscernible] just to that point, is the capacity to be face to face to meet with people when you're a discretionary hedge fund manager versus a systematic one becomes incredibly important. The people will look you in the eyes in-person, particularly in the hedge fund well, where 70% of the capital is sourced from North America, where we're having the core enable to travel since really the establishment of the firm. So that made it challenging. And then as Ian pointed out, I think that gravitation away from boutiques we are large multi-strategy platforms, the likes of [indiscernible] Capital and others globally has also been sort of a trend towards really larger, more diversified platforms.

[Nicolas Burgess, Senior Research Analyst]

Okay, that's helpful. Just one final question. Ian, just Coolabah and Metrics, they both had extraordinary growth since you've taken your ownership stakes in those businesses. Just how should we think about the current momentum and the broader question of capacity in each of those?

[Ian Macoun, MD & Executive Director]

So both in retail and institutional, we've had very strong growth. Retail for me has been particularly exciting for both Metrics and Coolabah, but also institutional. They both have large capacity and are adding additional strategies, call them sub-strategies or adjacent strategies, which will keep growing their capacity. So both Metrics and Coolabah have large capacities.

[Operator]

And our final question on today's Q&A is from the company Wilsons from John Hynd.

[John Hynd, Senior Equities Analyst]

Just on affiliate margins, if I may. Another strong result, but they're down a little bit on the PCP and maybe perhaps starting to be reflective of a bit of a change in FUM. Can you give us an indication on what's going to drive that in the near term and perhaps what contributed to the result this time?

[Ian Macoun, MD & Executive Director]

Yes. So it's fairly straightforward in the sense that, as I mentioned, there is operating leverage in most of our affiliates. So that as their FUM grows, their percentage revenue growth is higher than their percentage cost growth. That's inherent, that will come through over time. But offsetting that, we talked about the Horizon 3 investments. Just about every one of our affiliates has added resources to add strategies to meet market demand that they're seeing. So that's an offsetting factor.So what you're seeing in the affiliates P&L is the net of those 2 forces, if you like. And so yes, to the extent that in-state flows were a bit lower, you get less of the operating leverage coming through. But we definitely have added resources in most of our affiliates. And we encourage that. It's a really good investment to add some resource, to bring in new strategies because the return you're going to get on that investment over time is going to be large.

[John Hynd, Senior Equities Analyst]

Yes. And I mean, notwithstanding perhaps Reminiscent might move to Dial, but there are other funds that have probably been loss-making. Is that expected to change within the next 6 months? Could that improve or lead to further expansion with that margin?

[Ian Macoun, MD & Executive Director]

So we always have affiliates that are still in the development phase. So Aikya has been loss-making. We're very confident Aikya is going to become profitable reasonably soon. So it flips from being a negative to a positive. And that's sort of an ongoing process. The pace of it varies by affiliate, but we typically then are always as affiliates are coming out of loss-making, we're adding new ones. So we've added Langdon, and we'll probably add some more. So it's a little bit of a revolving thing, John.

[John Hynd, Senior Equities Analyst]

Great. And last one from me is just perhaps it would be nice to get some color on the strategy you have around seeding the second -- or the next Palisade fund. I've always understood that there's a fair bit of, I guess, capital lined up to be deployed with those funds because the performance is so good. Just explain your thinking, is that an issue and you pull it back out? Or is it just an investment opportunity here that's just too good to ignore for shareholders?

[Ian Macoun, MD & Executive Director]

Yes. Well, it's sort of -- it's a bit of both of those. What happens -- so this is a bit unusual for us to put that amount of money. It could be there as long as a year. It was seen as very valuable to boost. They're doing a $250 million fund raise for Palisade impact. But there's a little bit of chicken and egg that you want to get the asset so that you can get the FUM. And so we've boosted that by investing some FUM and they gave us a bit of extra equity directly in Palisade impact.To be honest, there are other people pressing and suggesting that they could provide some seed FUM exchange to some equity. And we said, no, we'd prefer not to go outside of the family. We'd sooner have Pinnacle do that. But that money, I don't know how long it will be tied up probably up to a year, but no longer. And then we recycle it. Look, we're late for another commitment. We probably need to jump off to the organizer.

[Operator]

That's perfectly fine. Ladies and gentlemen, that does conclude our conference for today. Thank you for all participating. You may all disconnect and have a great day. Goodbye.

[Ian Macoun, MD & Executive Director]

Thanks to everybody for joining.