Intermediate Capital Group PLC

LSE:ICP

Earnings Call Analysis

Earnings Call Transcript 2021-Q2

[Ian Stanlake]

Good morning, everyone. It's Ian Stanlake, the Head of Investor Relations here at ICG. Welcome to our first half results presentation for the 6 months ending of 30th of September 2020. Without further ado, I will hand you over to Benoît. [Operator Instructions] So Benoît, over to you.

[Benoît Laurent Pierre Durteste]

Thanks, Ian, and good morning, and thank you very much for joining us today. We're in lockdown again in Europe as we were for our full year results presentation back in early June. I hope you're all still keeping safe. It does feel quite different, however. And while economic uncertainty will persist for some time, we have much greater visibility on our portfolios and their performance on fundraising prospects and ultimately on fund management company profit outlook. Let's start with key highlights for the half year. Our AUM is now over EUR 46 billion or just under $55 billion. We have raised EUR 2.6 billion in the first half. Importantly, we have just over EUR 3 billion of additional commitments in documentation today. This points to a total fundraising for this year which should reach our long-term rolling average target of EUR 6 billion. Considering that this year was always going to be a low point in our fundraising cycle, and that was before taking into account any pandemic impact, this would be a very strong achievement. FMC profit is solid, as was to be expected. It is up 6% at GBP 90 million. Also notable is the speed and materiality of the bounce-back in IC profit, up 56% on prior year. This reflects the strong performance of our portfolios. We have delivered strong investment performance for our investors through this crisis. In addition, we have experienced a surge in deal activity since June, and in particular for 2 flagship strategies, Strategic Equity III and Europe Fund VII. We are, as a result, accelerating our fundraising timetable for both strategies. We have launched Strategic Equity IV 2 weeks ago and Europe Fund VIII will launch next year. We ambition to upsize both funds meaningfully. This considerably uplifts fundraising prospects for next year. In this context, interim dividend is up 13% at 17p per share. And we, of course, maintain our commitment to a progressive dividend policy linked to the growth of FMC profit. Our business model is powerful one. It combines long-term contractual fee streams, increasing margins through operational leverage, high cash generation, together with a strong growth profile and structurally positive market trends. We are an investment business. The quality and length of our track record is a key differentiator a few can replicate. As a leading alternative asset manager, we manage long duration, closed end funds. This entails high visibility on fees, not just over the contractual period of existing funds but over subsequent vintages as well. As our funds have invariably grown in size from one vintage to the next, our business benefits from structural long-term organic fee growth. In addition, we have built our operations, our platform, for accelerated growth. We have launched more new strategies in the past few years than most managers. Our balance sheet is a key component of this growth strategy, enabling us to seed new strategies and warehouse assets for fundraising. New strategies only become profitable in their second or sometimes third vintage. Funds launched in recent years, therefore, do not yet show in our numbers but represent significant value. We will continue to take advantage of our capital to expand and diversify. Underlying market trends support this growth story. We benefit from three powerful trends. One, there is growing appetite for our products from an expanding investor base. Two, there is a general shift towards private markets. This is translating into greater deal flow. And I believe the COVID crisis will accentuate this. And three, market polarization, larger established managers attract more capital and have demonstrated greater access to deal flow. Our industry is consolidating, and we are capturing this opportunity. As you may remember from our Capital Markets Day back in January and what seems another lifetime, ESG is not new to us. It has been a focus for over a decade. Through the crisis, we have not slowed down but actually redoubled our efforts on ESG. I fundamentally believe it is even more of an imperative now in the wake of the crisis. We, therefore, continue to further embed ESG considerations in all aspects of our investment process and portfolio management and for all of our funds, not just a token few. Recent developments include being one of the founding signatories of the U.K. network of iCI, which is a private equity-led, climate-focused initiative. We have also developed our own climate risk tool to ensure that we systematically assess climate risk for each investment opportunity. Following the recommendations of the Task Force on Climate-related Financial Disclosures, or TCFD, we have incorporated disclosures in our annual report and we'll, of course, continue to do so going forward. Our recent sustainable strategies, sale and leaseback and infrastructure equity continue to make good progress with the infrastructure equity team recently committing to a EUR 96 million investment in a renewables energy producer involved in solar, hydro and biogas. In addition, we are about to launch our third sustainable investment strategy, a real estate debt fund, which will promote a more sustainable-built environment through the issuance of green loans. As a corporate, we continue to focus on reducing our own emissions and offsetting unavoidable emissions through our partnership with SolarAid. We continue to promote gender diversity through several internal and external initiatives, including Level 20, of which we are a founding partner. We have also signed up to the #100BLACKINTERNS program here in the U.K. and we have become a core partner and sponsor of SEO, a charitable organization in the U.S., which provides education and professional career opportunities for disadvantaged people of color. This year, we donated over GBP 900,000 to charities supporting COVID relief efforts and our existing educational charity partners. I'm proud to say that our portfolio companies also stepped up their social engagement during the crisis. There are a number of great stories. We have, for instance, a Spanish company that made beds for hospitals; a U.K. business reassigned 1,000 employees to volunteer for food delivery to hospital, another donated 91,000 food products, mostly to hospitals again; a company in Korea repurposed some of its manufacturing to produce over 1 million face masks a month and donated several hundred thousand masks to local Korean authorities. And the list goes on. A number of these case studies can actually be found in our latest responsible investing report, which you can find on our website. Our ESG efforts have been recognized in the industry recently with an impressive A+, A+, A score from the PRI and earlier this year, an A- CDP score. This puts us at the very top of ESG ratings in our industry. I'm now on Slide 5 if you're following separately the deck. And this is a snapshot of the favorable structural supply and demand trends for our industry. The COVID crisis has not affected the tailwinds supporting the growth of our industry. If anything, these have been reinforced as the prospect of low interest rates for a long time intensifies the search for yield. The frequent survey shown here in the pie chart is quite telling, particularly as it was done in the middle of the pandemic. So we benefit from growing demand. What about supply? We have experienced an impressive rebound in deal activity since June. For the European market, this is illustrated by the deal flow data on the histogram here. And this data does not capture refinancings or off-market transactions, which have experienced a resurgence as well. We have invested over EUR 2 billion in the first half, but that is really since June. And we have an additional circa EUR 4 billion of investments in documentation or exclusivity today. We are seeing greater deal flow this year than in 2019 despite the pandemic. And we have not relaxed our investment discipline. We are finding truly attractive opportunities. Deal activity is up generally therefore in the market. And we seem to be doing even better than the overall market. Now why is that? Some of this activity is probably attributable to a catch-up in M&A activity, but I think there is more at play. One of the unique features of this crisis is the extremely wide spectrum of outcomes for industries and companies. At one end, some companies are enjoying record profits, highly attractive prospects and sometimes increased valuations, while at the other end, companies are fighting for survival, sometimes with structurally broken models. And you have every situation between these extremes. Whereas previous crises were sequential, a period of disruption followed by a recovery, this time, everything is happening concurrent. As a result, we are accessing simultaneously traditional financing deals for companies that are performing well and more structured optimistic transactions all the way to special situations and rescue deals for those companies not faring so well. This combination of a wide array of transactions against a backdrop of further retrenchment of commercial banks explains the steep increase in deal activity, which I believe will last. It does not explain why we appear to be outperforming the market on deployment. We understand from our LPs and some consultants that there is a wide dispersion in volume of activity between GPs, between managers. The market seems to be bifurcating in our industry as well. This is an observation, I'm not entirely sure why that is. Certainly, the fact that our portfolios have done well through the crisis helps. If you're not firefighting, you can focus on new opportunities. I also think that key aspects of our investment approach work in our favor, the flexibility of our capital, our ability to do complex structuring. And certainly, having local teams cannot hurt origination when there are travel restrictions in place. This intense investment activity is the most significant development of this half, more so than the rebound in valuations as it has important positive implications for the scalability of our funds and fundraising prospects. Turning to portfolio performance. To this day, all of our funds have performed well through the crisis. We have benefited from four main factors. One, extremely limited exposure to those sectors and companies most affected, we largely avoided the worst-hit sectors either because they are inherently cyclical or because we disliked preexisting underlying industry trends. Two, our portfolio companies came into the crisis strong, most enjoying double-digit growth and, as we discussed in our full year results presentation, much lower leveraged than industry averages. Three, a faster and more pronounced rebound than we had anticipated or feared, this is true across funds and across geographies. And four, a valuation re-rating of some industries in which we have significant exposure, and this includes health care, tech, software, in particular, and education. We were incredibly active on portfolio management throughout the crisis. And this clearly made a difference. Initially, the focus was essentially defensive. But very quickly, our attention turned to opportunities. A staggering 50% of portfolio companies in our European flagship funds, for instance, completed an add-on acquisition since March. The crisis has undoubtedly unlocked significant value creation opportunities for portfolio companies in strong financial health. Speaking of our COVID response, client relations and transparency of information with our LPs was also a key area of focus. We organized over 200 dedicated COVID update calls. We also produced more than 90 dedicated COVID reports across our funds during the period from March to July, huge effort from our investment and marketing teams, which did not go unnoticed and was praised as best in the industry by both clients and consultants. There were unsurprisingly no realizations in Q2 as the market was taking stock. But this has picked up markedly since June. As mentioned earlier, this was accompanied by a meaningful valuation uplift for some sectors. The Visma exit this summer, for instance, was done at a valuation 33% higher than our June valuation, which in part reflects the fact that our valuations err on the conservative side, but also that software businesses have been re-rated. And this is not surprising. In a low interest rate environment, businesses with strong growth and cash generation are extremely valuable. We were fortunate to have significant exposure to health care, tech and education, and in particular in strategies and funds that have a greater equity component. Our European flagship funds VI and VII, for instance, are over 60% invested in these 3 sectors. This bodes well for the ultimate performance of these vintages. I also want to emphasize the merits of our disciplined approach to realizations. This is something I have highlighted for years in these results presentations and Capital Markets Days. It is essential in order to derisk portfolios and preserve consistency of performance through cycles. For investors, a key metric is the distributed to paid-in ratio or DPI, which is essentially how much of the capital you have returned for any given fund. And as you can see on the chart on the right-hand side of the slide, Europe V, which is a 2012 vintage, has returned 150% of capital. This compares to an average for top quartile PE funds of that vintage of 100%. Europe VI, a 2015 vintage, has already returned 65% of capital compared to a top quartile average of 29%. And the same applies even to a greater extent to the strategic equity vintages, which are showing even faster return of capital. I chose these 2 strategies on purpose. These metrics clearly help when you're about to go fundraising. A bit fast. Deployment. After a logical drop in Q2, the number of buyouts has considerably increased in Q3. Interestingly, 80% in value of the European M&A activity -- and that this would largely apply across geographies. So 80% of the M&A activity is in health care and IT. In other words, the buyout market is not taking much risk. It's backing the obvious winners and most resilient sectors. That is not altogether surprising and we play our part. We invested this summer EUR 315 million in the largest French testing lab business, which as it turns out was great timing. But it also leaves a wide space of perfectly solid yet underserved businesses, which represent fertile investment ground for our funds. We've had an incredibly busy summer and autumn. And our current pipeline is at a historically high point. And this does not seem to have slowed with the second COVID wave. As mentioned earlier, we have today some EUR 4 billion of investments in exclusivity or documentation, pending close. We've also benefited from deployment linked to add-on acquisitions executed by portfolio companies. For many of our portfolio companies, the crisis acted as a catalyst to consolidate their market position. This will ultimately enhance the performance of our investments and funds. This upsurge in investment activity will -- with not only more deals but larger deals as well, is the most significant development of this half. It underscores an opportunity to meaningfully upsize future vintages and it has major implications for us for our fundraising agenda. And switching to fundraising precisely. In an off-cycle fundraising year for ICG and a pandemic year to boot, we are expecting to meet our long-term rolling average target of EUR 6 billion. We have reasonably good visibility with EUR 3 billion-plus of additional commitments in documentation today. This would be an outstanding result, which illustrates the merits of diversification. We have no flagship fund in market this year, save for the tail end of SDP and very low CLO activity, given market conditions. We are, however, raising for real estate, infrastructure equity, sale and leaseback, Australian senior debt, capital market strategies, including a special situations vehicle. And I'm pleased to report we've had our first close for the Recovery Fund II. It all adds up. This ability to raise numerous funds even through a severely disrupted year is a real strength. Looking forward to next year. 2 flagship funds, Strategic Equity IV and Europe VIII, will be key drivers. We are aiming to upsize both funds. ICG Strategic Equity IV has already been launched, essentially 2 years ahead of plan. And Europe Fund VIII will come to market during the course of financial year 2022. Both funds feature fees on committed capital, and as such, will positively impact FMC profits for next year. The key variables are size, of course, and timing of the various close. These 2 funds, while important, will not be our only fundraising focus next year. We will also still be in market for our Asia Fund IV, for Real Estate Fund VI and for 3 new strategies, which have already had a first close, namely the Recovery Fund II, sale and leaseback and infrastructure equity. The COVID crisis does mean that investors focus on existing funds and existing GP relationships. We will have to wait, therefore, for the situation to normalize to launch brand-new, first-time funds. And I'm thinking in particular of North American Private Equity and LP secondaries. We are not, however, slowing our efforts to diversify and broaden our product and geographic offering. We are in constant discussions with new teams and will likely move forward with 1 or 2 opportunities in the coming months. There is always uncertainty when it comes to fundraising. Europe Fund VIII will straddle financial years '22 and '23. And it is hard to know how much will fall in which year. It's likely weighted towards 2023. We also do not know when the market will reopen for CLO issuance. Nevertheless, next year is looking like a very strong fundraising year. This prospect, combined with the anticipated performance this year, which was supposed to be a trough year, thanks to the question of the continued relevance of our 3-year rolling average fundraising target, we may have outgrown it faster than expected. We will look into it and amend it as appropriate for the full year results. And on that, I'll pass it on to Vijay. Vijay?

[Vijay Vithal Bharadia]

Thank you, Benoît. Hello, everyone. I hope you and your families are keeping well. I will now provide an overview of our financial performance during the first half, and at the end, will touch upon our guidance. I'd like you to take away 3 key messages from this half year presentation. One, our fund management company profits have continued to grow, reflecting the strength of our business model. Two, given our dividend policy is linked to the growth of our FMC profits, we are uniquely positioned to continue to grow dividends. And three, we have a very robust and diverse balance sheet with GBP 1 billion in liquidity and low leverage. Starting with our fund management business. Our pace of growth over the last 3 years has been exceptional, as can be seen from this slide. The key driver of our management fee income and therefore profitability is the fee-earning AUM. The first chart on the left-hand side of this slide shows the average fee-earning AUM over the last 12 months in each of the 3 periods. As you can see, it has grown by a compounded annual growth rate, or CAGR, of 26% per annum, given our successful fundraises. And this provides a solid foundation for our future fee growth. The growth in fee-earning AUM has translated into growth in management fees, as shown in the middle chart. Our management fees have grown at a CAGR of 21% per annum in the last 3 years. During this half year period, we have maintained our average fee margin of 85 basis points. Our fees remain a roughly equal blend of those charged on committed and those charged on invested capital. This enables us to continue to generate fee income through economic cycles, which may impact investment or realization activities. Looking at profits on the last chart. We generated a profit before tax of GBP 90 million during this half year, up 6% from the prior year. This is despite lower CLO dividend income. And excluding that, our year-on-year growth is 16%. Our profit before tax for the FMC has grown by a CAGR of 18% over the last 3 years. And once again, if we exclude CLO dividend income, this is 28% over the 3-year period, very much in line with our average LTM fee-earning AUM. In fact, our half year profits are now equal to what we earned in the full year in FY '18. Also, as Benoît mentioned, with 2 flagship fundraises on the horizon for next year, we expect profitability to continue to grow meaningfully as these funds will charge fees on committed capital and are expected to be larger than the current vintages. This demonstrates that as we grow, we've continued to deliver growth in profits and therefore shareholder value. Moving on to the management fee profile. We've shown variations of this graph before. But the message remains the same. Given our long-term closed-end fund structures, we have long-term predictable fee streams. We expect to earn GBP 1.8 billion in management fees from our existing AUM. However, this is without factoring in any fee growth. If we remain in a steady state, meaning raising the same sized funds of our existing strategies, then that fee level is over GBP 3 billion. But usually, our subsequent vintages are larger. And if we maintain that same track record, then our future fee visibility will be much larger than GBP 3.1 billion. This is the fundamental strength of our business model. I will now talk about other sources of income: performance fees and CLO dividends. These are more unpredictable, and I will go through each one of them. Starting with performance fees, as a reminder, our performance fee recognition criteria is based on IFRS principles. This requires a test of high probability that such fees will not reverse in future and is dependent on visibility of future realizations. We recognized GBP 15.5 million in performance fees in this half year, representing 10% of total third-party fee income, which is in line with our long-term guidance. During this period, we have gained more visibility of realizations from our European Fund VI. And therefore, we have, for the first time, started recognizing performance fees in respect of this fund in addition to continued recognition of performance fees from our other funds. Now touching on CLO dividends. At the year-end, we had indicated that these are dependent on the underlying credit ratings of the CLO portfolio. As expected, we saw more rating downgrades during the period. And this has resulted in lower dividend income compared to the prior year. We expect this to be temporary and that CLO dividend income will rebound once there's recovery in the underlying credit ratings. Moving on to operating margin and our expense base. As you can see from the left-hand chart on this slide, our FMC operating margin has remained above our long-term target of 50%. The right-hand side chart provides a walk-across of our cost base from the first half of last year to this half. The main increase in cost is in respect of staff costs, which have increased year-on-year due to higher headcount with the effect of prior year hires also coming through this financial year. During this half year, we have been cautiously hiring in selective functions and added 35 FTEs, which includes 8 graduates after launching our first graduate recruitment program this year. We expect hiring to increase in 2021 as we start gearing up for growth. We also had an increase in our occupancy costs, following our move to our new global headquarters in London during September. On an annualized basis, we expect this to be around GBP 2 million higher than our historical occupancy costs. Finally, as expected, given current restrictions in many parts of the world, we had significant savings on travel and entertainment during the period, which were down 90% year-on-year. Inevitably, this will normalize once we return to normal circumstances. We expect to continue maintaining our operating discipline as we continue to grow. I will now touch on our balance sheet. It is worth remembering that our balance sheet is an enabler and an accelerator of the growth of our fund management business. It mainly co-invests in our funds and is very diversified, investing in 22 fund strategies, as you can see here from the first point on this slide. And I will provide more detail on that later on. In respect of leverage, our net gearing at 30th of September is 0.67x lower than the bottom end of our guidance. And we're very comfortable with this position, given the current economic climate. Here, I would like to call out a very important point. We are aware that a number of data providers quote a much higher level of leverage for our firm. And I'd like to provide some clarity on this. Under IFRS accounting standards, we are required to consolidate some of our funds. This results in bringing in the assets and liabilities of these funds onto our balance sheet without any corresponding impact to the equity. This does not represent what our shareholders are invested in. The data providers use IFRS financials to calculate leverage. Hence, our leverage looks high. This is not an accurate reflection of our leverage under the alternative performance measures that we report on our financials. I wanted to highlight this point as it can cause confusion. And finally, on liquidity. As you can see from the last point on this slide, we remain in a very strong liquidity position with GBP 1 billion, which is made up of over GBP 460 million in unencumbered cash and GBP 550 million in undrawn revolver facilities. And this is after repaying GBP 250 million in bonds after our financial year-end. The weighted average life of our debt is now 4.8 years. Now touching on the balance sheet net investment returns. As I mentioned earlier, our balance sheet primarily co-invests in our funds and so its returns are correlated to the returns of the funds. We do not actively manage the assets on our balance sheet. Our returns of GBP 186 million in the period were as a result of the increase in valuations of the underlying fund portfolios, primarily due to the fact that the portfolio has performed well in the period. And I will discuss this further in the next slide. Whilst we've had strong returns this period, we remain cautious, given the pandemic is not over. Therefore, the same level of returns should not be assumed for the second half. This slide shows the profile of the balance sheet returns during the period. We had a recovery in our portfolio valuations during the period, as Benoît mentioned earlier, recognizing unrealized gains of just under GBP 150 million from our investments in our funds. This equates to 6.8% of the opening balance. Just touching on the key gains, which is within the box on this slide. In our corporate business segment, we have unrealized gains of GBP 126 million. And these are from our mainstream subordinated debt and equity funds. And as a reminder, we value this portfolio based on an earnings-based methodology, taking a long-term view on performance of the portfolio and taking account of comparable multiples, or DCF methodologies, where such comps are not available or deemed reliable. The unrealized gains have arisen due to increasing valuations from our fund portfolio. And there are 2 key reasons for this. First, our portfolio has had a more pronounced and a quicker recovery in activity than we originally anticipated. And Benoît touched on that earlier. And the second reason is that there has been an upward re-rating in sectors, such as health care, software, technology and education, where we have a high exposure. And these have benefited from the current crisis. We also had recoveries in our capital markets business segment, which comprises of liquid funds and CLOs, with unrealized gains of GBP 26 million in our liquid funds as they recovered from the year-end lows. In respect of CLOs, we have reduced the assumed level of defaults. But given the pandemic is not over yet, we remain cautious. And therefore, we have extended our assumptions of how long these default levels will last by a further 6 months to 30th of September next year. And this has resulted in a small unrealized loss of GBP 9 million. We will continue to monitor the situation as we progress through the rest of the financial year. I will now touch upon one of the key reasons for our balance sheet resilience, which is the diversity of the fund portfolio it is invested in. Looking at the right-hand side of this slide, nearly 80% of our investments are in higher-yielding strategies, which are invested in over 300 companies across 37 sectors in 33 countries. The remaining 20% of our investment portfolio, shown on the left-hand side of this pie chart, comprises of investments in our capital market strategies. We have a very diverse balance sheet. And I'd like to provide more context on this on the next slide. We've shown a version of this at the year-end. Looking at our portfolio sector diversity, this slide shows why our fund portfolio has performed strongly in the half first. The right-hand side shows the portfolio's top 10 sector exposure, which makes up nearly 70% of our entire portfolio across all of our strategies. You will note that it is heavily weighted towards sectors that have been relatively less exposed to COVID-19-related issues. As mentioned earlier, notably health care, IT and software services are performing better under current circumstances. Within real estate funds, which comprise of senior debt investments, our largest exposures are in residential, followed by industrials, which have been resilient during the crisis. Overall, for our balance sheet fund investments, we have minimal exposure to sectors most directly impacted by COVID-19, such as energy, hospitality and travel, which remains unchanged from the year-end at 5%. I will now touch upon our guidance. As you will have seen from our presentation so far, we've had a strong first half. I don't intend to go through each of the points on this slide but would like to highlight that we have maintained our long-term guidance throughout. The main points I wanted to flag are fundraising. As Benoît mentioned, after a stronger-than-expected start, we expect to raise around EUR 6 billion in this financial year, in line with our long-term guidance. I would like to highlight that with 2 flagship fundraises on the horizon, next year is expected to be materially higher. The other area I wanted to touch upon is net gearing. We expect this to be below the lower end of our guidance. And we are very comfortable with our position in the current environment as it allows us optionality. Throughout this crisis, we have remained committed to a progressive dividend policy. And today, we reiterate our guidance on this matter. We have therefore announced a dividend of 17p per share, which is 1/3 of last year's total dividends, which were up 13%. Overall, we are very proud of our strong performance in the first half. And I'd like to take this opportunity to thank the ICG team for their tireless efforts and dedication shown during the last 6 months. Thank you all, and I will now pass over to Benoît for a wrap-up.

[Benoît Laurent Pierre Durteste]

Thank you, Vijay. In conclusion, we have delivered strong performance for our fund investors this year in keeping with our 31-year track record. We're also enjoying strong capital deployment, demonstrating an ability to access attractive investment opportunities through the cycle without compromising our investment standards. This bodes well for the future and has positive near-term implications for fundraising as we have heard. The prospects for continued strong growth of FMC profits are, therefore, excellent. Our recent fundraising performance and fundraising prospects for next year will lead us to revise our guidance on fundraising at year-end. There is strong demand for our products as investors are more than ever searching for yield in a low-for-long interest rate environment. Market polarization benefits the larger managers. And we are reaping the benefits. These are strong results in what remains a challenging environment. I'm incredibly proud of the commitment and performance of our teams as well as that of our portfolio companies. On that, this concludes our half year results presentation. Thank you again very much for your time and attention. And Vijay and I will now take your questions.

[Ian Stanlake]

[Operator Instructions] Benoît, the first question comes regarding the EUR 4 billion of future deployment, the stuff that's in exclusivity or signed. Can you give a bit more color as to where that is, what funds, what types of investments, et cetera?

[Benoît Laurent Pierre Durteste]

It's across the board, which is, I think, the interesting piece. It's not -- there is no geographic trend here or even a strategic bias. If I look through it, I mean, yes, clearly, Strategic Equity and the European Fund VII have had a really, really good run. And that is in that pipeline, it is continuing. But if I look at it, I did mention that we just closed a deal in infrastructure equity. There is another one in the pipeline. We've done extremely well in the deployment of our direct lending of SDP. We actually could be signing the largest deal in Europe so far this year in the very near future, touch wood somewhere. It's true in Asia, where we've also closed the deal for the Asia Fund, what, about 3 weeks ago. And likewise in the U.S., our mezzanine business in the U.S. is deployed quite well over the summer. And then we're deploying more and more in direct lending in the U.S. as well. So it's really across the board. I can't really pinpoint to one area to say there's disproportionate activity there and less so in other areas. It's quite well diversified.

[Ian Stanlake]

But given that your Fund VII is 53% invested in September, and we've just said that the fundraising for Fund VII is put forward, can we imply that some of that is Europe Fund-related?

[Benoît Laurent Pierre Durteste]

Yes. Some is, of course. Well, actually, I mean, as we speak now, the fund is now at 63%, I think, or 64% invested now. And you have to -- when you're targeting a fundraise in the following year, I mean, you have to be looking 6 to 9 months ago ahead in what's in the pipeline and what are the chances of a number of deals actually closing. And judging from our current pipeline in the various countries, there's never any certainty. But we have reasonably good visibility that the fund will get to well over the 75% that generally acts as a trigger to start going fundraising for the following fund and probably more. We tend to -- historically, we like to invest our funds well, so go towards 90% invested or so you always leave a buffer for add-on investments and to support the portfolio. But we'd like to invest our funds in full. And I think with the pipeline in Europe, that's what we're looking at going into next year. But it's not -- this is not -- so it's important and these transactions can be sizable. But again, it's -- as part of that EUR 4 billion, it's not all Europe VII, not at all. It's very spread out across strategies.

[Ian Stanlake]

Now flipping on to the other side, the fundraising side. We've said that there's circa EUR 3 billion that's technically committed. Where do you see that landing? And in particular, what does this mean for SDP IV? We've done EUR 4.2 billion to date. So where are we targeting?

[Benoît Laurent Pierre Durteste]

Yes. It's -- so by the time you're in documentation phase, it means that the LPs have received internal IC approval to move forward. So that gives you a high degree of visibility. It's not 100% certainty because things can happen as CIO can change or there can be changes in the policy of any one of these investors. These documentation periods can take several months. So it's not 100% certainty, but it is giving you very high visibility on outcome, which is why we're guiding to hitting the -- our long-term target of EUR 6 billion for this year. For SDP, again it's hard to say. I mean there's -- clearly, as part of this number, some of it is for SDP. But some can take quite a bit of time. I mean we have significant mandates with major investors, which could take a very long time, particularly if it's the first time that they are investing with ICG and they need to be vetting a number of things on the manager as a whole. So it may very well happen that some flip over into the next financial year.

[Ian Stanlake]

Vijay, going to your favorite subject, CLOs, the -- there's a couple of questions about what visibility we have over CLO dividends for the second half and even into the next financial year?

[Vijay Vithal Bharadia]

Yes. So I think we are very much dependent on the actions of the rating agencies. What we have seen is that the pace of the downgrades has slowed. It hasn't stopped but has slowed down. And with the second wave, it's unclear whether it will remain at that level or reduce further. We need to recognize that there is a time lag as well. So as the pandemic took place in the first half of this year, it took about 2 months before the rating agencies managed to get through the rating agency. So we were able to capture some of the dividends in the first quarter of our financial half year, which are relatively along the same levels of previous years. And that has reduced. So I would not expect the same level of dividends in the second half. But it wouldn't be materially far out.

[Ian Stanlake]

And moving on to the cost base, what do you think the FMC cost gross would be on a more normalized basis once you take out the office move, et cetera, et cetera?

[Vijay Vithal Bharadia]

Yes. I think -- so I think the key to bear in mind here is that we have continued to invest in our infrastructure as well as in our teams in the past. And as I mentioned earlier, some of that is beginning to come through, although we've been very cautious in hiring this year, of course. I expect that cost base to remain sort of relatively at the same level for this year and then start growing into next year. However, I think the key to bear in mind is that we are very confident in maintaining our long-term guidance of achieving our operating leverage and our operating margin of above 50%.

[Ian Stanlake]

And while I've got you, before I've got some more questions for Benoît, is given the low interest rate environment, is this giving you any further thoughts about lengthening the average debt maturity profile that we have?

[Vijay Vithal Bharadia]

Yes. No, it's a good question. So at the moment, we have a fairly good position, as you can see from the results. We have a revolver that is coming up for expiry in April, about EUR 215 million. We are actually reassessing on whether we can actually take advantage of actually renewing that for the entire facility of about EUR 0.5 billion. Our treasury team are working actively with some of our banks on that to see if we can take advantage of the current economic climate for that.

[Ian Stanlake]

Benoît, coming back to you on a couple more fundraising questions, the -- are you able to give any guidance about what you mean about meaningfully upsize the funds that we're launching in the next 12 months? And also linked to that is we're talking about reviewing the rolling average EUR 6 billion target, is the deployment opportunities there to warrant an increase in that number?

[Benoît Laurent Pierre Durteste]

So on the first question, no, I am not in a position to provide more detail on that. You might look to the past to look at the pace of growth in -- for strategies of this size or even for these strategies in previous vintages as a possible indication. But otherwise, it's too early to call. And yes, very good question on deployment because obviously that's -- it's the other side of that coin. Clearly, there's appetite for alternatives. But there's a question is can you deploy? I mean this is the point that we've been making for some time is the choosing supply and demand, therefore, seem to have been growing in tandem. And so yes, we are seeing more opportunities to deploy. And actually, what we've experienced, if you look at what we've experienced over the past, whatever, call it, 5 years, what you're seeing is, as we've increased the size of funds, we've actually deployed faster. Because what seems to be happening is not only is there generally more deal flow, but as I guess the market is becoming more sophisticated and there is clearly a pronounced shift towards private markets, there are also -- the deals are getting much larger as well. So it's that combination. It's both greater deal flow but also deal flow in larger deals, which means that we end up deploying faster than we did in the past. And that is the point I was making in this presentation is it's not just the fact that we're coming towards the end of the investment period for a couple of strategies, which is giving us an indication that we're going to be fundraising for them in the near term or have even started in the case of Strategic Equity, but it's also how quickly we were able to deploy these vintages. Because that's giving -- that's -- it's supporting a case to significantly increase the size of these funds. If you look at Strategic Equity, we invested the fund in less than 18 months. And so it's very clear that the fund is too small for the market opportunity. And that gives us a -- that gives us a case to meaningfully upsize the fund. We've never gone -- we've never gone extreme in this. We've always done this progressively because we think that drastically changing the size of a fund from one vintage to the next has risks. So we've never done that. But we have increased vintages meaningfully in the past, if you look back in our history. And so it would not be impossible to consider that we could do the same again this time around.

[Ian Stanlake]

And as the funds get bigger and deal size increases, does that mean there's more competition for assets? And linked to that, given our focus on the health care and software and education, et cetera, is there more sector concentration than there would have been historically?

[Benoît Laurent Pierre Durteste]

So greater competition, I mean, the markets are very competitive. Are they more now than they were before? No, probably not. Actually, in the wake of COVID, probably less so because clearly not all GPs have gone through the crisis or their portfolios as well as ours thus far, which means that some are busy working on their portfolio. So at this point in time, actually, if I were to gauge it that there's probably less competitive tension. And then it very much depends on it's very much strategy-by-strategy and it ebbs and flows. I mean in senior debt, there was a point where everybody was trying to pile into direct lending and it was extremely competitive, particularly actually at the mid-market or lower end of the market. As you grow into larger size, actually, there was less competitive tension because fewer players there. That remains the case. If you look at Strategic Equity, it's very clear that with size, the competitive tension drops because there are very, very few players that can actually play in size in that space of GP-led transaction. Actually, we are the largest specialized player worldwide in that strategy and we intend to remain in that position because it does give you -- size itself gives you a competitive advantage. And then there was a question about diversification. There is no change. We're just taking stock as we go through this crisis and looking at our portfolios. It so happens that our portfolios have had for a very long time, a greater focus on industries that happen to be doing quite well. We're doing well in any event but happen to be doing quite well through this crisis. So this is not a change. There is not -- we're not altering the diversification of our funds. It's just an observation that the -- our historical preferences for some industries, happen to be fortunate in the current crisis. But this will not change. And by the way, these things can go in cycles. There were periods where we slightly moved away from health care, at least in some geographies, because we thought that the general trends, they could be budget trends, for instance, were less favorable and period where we had greater exposure. So that's -- we also take macro views when looking at our portfolio composition. And so this can change. But it's true that historically we've always been quite strong on healthcare. And as far as tech and digital, this is something that has been growing but throughout the buyout industry. This is not absolutely specific to ICG. This is something that's been growing generally in the buyout industry for obvious reasons. And as far as education, that is more of a specialization that we have built over time, mostly in Europe and Asia, so far, less so in the U.S. because the valuations in the U.S. have been quite high for the sector.

[Ian Stanlake]

A couple more fundraising questions, if we can. CLOs, there's some of the -- there have been some CLOs issued recently. And the question is, are we planning to do -- print any more CLOs or recommence this activity? And also an update on the Recovery Fund?

[Benoît Laurent Pierre Durteste]

So yes, it's true that the arbitrage that is necessary for CLOs to work has started to become favorable again. So it is possible to launch new CLOs. It does mean, however, in the current environment that you need to ramp up the CLO quite a bit, which, in our case, would mean warehousing quite a bit of risk for a period of time, which we may decide to do. But I think we will likely wait for greater visibility on the success of a vaccine or certainly going through the other side of this crisis before taking on meaningful risk. So is it possible? Yes. Will be -- will we be looking to issue new CLOs? Yes. There is a question mark on timing and very unlikely this financial year or certainly the overall economic situation and pandemic situation would have to improve drastically between now and end of December for that to be feasible in that time frame. So that was the first part of the question. The second part of the question was on the Recovery Fund. The Recovery Fund for us has always been more of a strategic play than an economic play because it's never going to be of huge size. And it features, for obvious reasons because it's very difficult to time investments in a what is an optimistic strategy, it's fees on investment. So for us, it's very important because it's a -- we're meeting the demand of some of our investors who are quite keen to have the ability to invest in a successor Recovery Fund, Recovery II. So it's very good news that we've had a first close. We're going to be continuing to fundraise well into the next financial year. And that's giving us additional firepower to be able to take advantage of some unique opportunities in the market. But I would reiterate for us, it's much more of a strategic play. It's important for us to be able to be positioned in the market this way for market participants to see that we are making those investments. We are taking part in some of these special situations. And for our investors to know that we are able to deploy for them in that space. But I wouldn't consider this as a potential huge new fee stream for the future.

[Ian Stanlake]

Thank you. I think that's all the questions that we've had today. So Benoît, do you want to give any final thoughts before we say thank you very much to everyone?

[Benoît Laurent Pierre Durteste]

Well, I don't want to repeat my wrap-up. I think it -- we need to remain cautious because, of course, there's still limited visibility on the economic fallout from the current crisis. But having said that, when we're looking at our portfolio companies, when we're looking at the performance of our funds, things are looking quite strong. And when we're looking at the market opportunity to invest and deploy into quite attractive assets, we can be optimistic about the prospects for our funds and therefore for the firm.

[Ian Stanlake]

Now I wish to thank everybody very much for your time today. I hope you all stay safe and healthy. And wish you well. Thank you.

[Benoît Laurent Pierre Durteste]

Thank you all.

[Vijay Vithal Bharadia]

Thank you all.