CapMan Oyj

OMXH:CAPMAN

Earnings Call Transcript 2023-Q1

[Pia Kåll, executive]

Good morning, and welcome to CapMan's First Quarter Results Presentation. My name is Pia Kall, and I'm CEO of CapMan.

The first months of 2023 have been characterized by a lot of uncertainty and volatility in the markets. Despite this, CapMan continues to perform well. The core of our business fee income continues to grow strongly. And if we look on a rolling 12-month basis, we are on record levels on both fee income and fee profit, so EBIT, excluding fair value changes and carried interest. We have several ongoing exit processes from which we expect to carry during the year. We have positive development in our own funds with strong value creation continuing and also during this quarter, our assets under management reached a new record level.

Let's take a deeper look into then the first quarter financials. First, some highlights. So as I said, assets under management at a record level of EUR 5.1 billion. Strong turnover growth, EUR 15 million, 6% growth. And if we exclude carried interest and just look at the turnover of the fee business, a 17% growth. EBIT excluding carry and fair values is also growing, although at a slower pace than turnover due to some exceptional items in Q1. And then our equity ratio and cash on a strong -- continued strong level [Indiscernible]. As you know, our business consists of basically 2 different parts. So we had a Management Company business and the Service business from which we get fee income and based on fund performance carried interest income. And then we have our investment business where returns from investments and fair value changes are the contributions to the business.

Starting then from the core, so on the fee income and fee profit side. If we look over the last 2 years on a rolling 12-month basis, we are on record levels in both. So fee income has been growing 16% per year for the last 2 years. And now in Q1, we had a 17% growth there. And also on the profitability side, EBIT, when you exclude fair values and carry, has been growing 44% per year average annual growth for the past 2 years. And also there we are on record levels.

Looking more specifically then at the first quarter of this year. Turnover continued to grow EUR 15.1 million. This is driven by continued management fee growth and Service business growth. On EBIT, we landed at EUR 0.5 million, so clearly below previous years. This is primarily driven by fair values and lack of carry in this specific quarter. Taking a deeper look at that one. So here, you see the split of EBIT for the first quarter and also a comparison to last year's same period. So like you see, management fee profit and service profit continues to grow. And it's grown slightly lower than the turnover growth in this quarter. We had some exceptional items related to personnel variable costs in this quarter, but the fixed personnel costs are actually growing slower than turnover. So there we see a scaling effect. And if you put this in perspective, we are currently on a lower level than we were in Q4 and for the full year expect personnel costs to actually be relatively on a lower level than they were last year. Then the large changes compared to last year's Q1 result is really coming from carried interest and the Investment business. On carried interest, by nature, this is something that's uneven and hard to predict in which quarters it realizes. This quarter, we did not have any exits that would have -- from which we would have received carried interest, but we have several processes ongoing. And therefore, are quite confident that we will see during the year carried interest from several ones. The negative result on the investment business, minus EUR 2.5 million is really driven by fair value changes. And here, if we split this one up, what we see is that our own funds, our strategies contributed positively in this quarter with plus EUR 2.2 million. And this is actually a contributing -- contribution coming from all of our strategies, so across private equity, infrastructure and real estate. And this is core because fair value development in our own strategy is what's driving fund returns and as an extension then driving fundraising success and continued growth.

If we look at the external funds, then there we have a negative fair value change and that one is actually isolated to one major driver, and that is related to the U.S. dollar exchange rate compared to the euro. So we have investments in venture capital funds and in fund of funds who have valuations that are based on on U.S. dollars. And with the change in FX rate, we this quarter got a negative EUR 4.6 million impact from that. As a whole, that means that we have a fair value change that is negative of EUR 2.4 million. Obviously, this is a large impact on our profit and loss statement, but if we put it in perspective towards our balance sheet investments, this is a decline of less than 1.5%. So taking the long-term nature of these investments into consideration, it is a fairly small change from that perspective.

Our balance sheet continues to be strong, and we have liquidity to support our business also in a continued uncertain market environment. Equity and equity ratio at EUR 114 million and 44%. These are slightly down from Q4. That's part of the nature of the business and is driven by the dividend payment that is fully taken into account in Q1.

On liquidity assets and cash and bank and undrawn credit limit, a total of bit more than EUR 70 million means that we have the financial stability and the liquidity to support our business also in a situation where we would see prolonged uncertainty, maybe delayed distribution and more capital cost coming in. And to take even a more detailed look at that balance sheet. So what you see is we have a very diversified investment allocation across basically all private markets, and this gives stability in a volatile market environment. Also, as said, the cash position is good. And if you compare, for example, cash to our undrawn commitments of a total of EUR 86 million, we also see that we are in a very healthy and sound position in being able to meet our commitments. These undrawn commitments are going to be drawn over several years. And we more or less have the cash at hand now to cover all of them at once. So also in changing markets, a very solid and good positions to go forward from.

Moving then to some strategic highlights and taking a look at how our strategy implementation is progressing. Starting by reminding you of the focus areas and objectives that we have in the current strategy. It all starts with investment performance and active value creation in our funds. That's the basis for which we can then scale up our existing strategies and products and continue to grow. There's 2 fundamental pillars that we think need to be in place for this to happen. One is ESG and sustainability, where we strongly believe that this will be a core filler to really deliver strong fund performance in -- also in the future and deliver sustainable portfolio company performance.

And then, of course, as the fourth item here, but actually very much the first item in many ways, our people. So making sure that we are able to both attract and keep and develop the best people in the industry. If we then start from the growth and specifically from growing assets under management, so if we first take a slight -- a bit look on what's happening in the market overall. So at the moment, private markets continue to be attractive markets for investors, and there is more capital flowing into these markets. There's a lot of discussion currently in the general market around allocations being reduced and investors delaying processes. And this is true, but what we're talking about is really the pace of growth slowing, but that's actually a slowing market, so just growing but at a slower pace than before. And what's behind this one is very much what's happening in the broader economy and broader market at the moment. So a lot of investors are seeing cuts or squeezes to their allocations into private markets for this year. It's coming, on one hand, from the public market valuations going down in which case, relatively the private markets portfolio gets a higher share and some are hitting their max allocations and therefore, can't allocate more at the moment. Some are worried about liquidities, or how much distributions will they get, and therefore, how much new commitments can they make. But in general, what this results in is continued interest into the markets, but slower fundraising processes as investors are delaying decisions. And in some instances, we also see some investors contributing smaller commitments or smaller equity tickets because they like the strategy, but they just have less to distribute at the moment. Specifically, for CapMan in the first months of this year, we have been able to grow our assets under management. We have taken in, in total, EUR 112 million and this comes across strategies, private equity in front and real estate. And we now have asset under management of EUR 5.1 billion, which is a record level for us.

Also, if you look at what these assets under management consist of we have a very healthy balance. So we have 70% of our AUM is in either evergreen open-ended funds or in funds that have more than 5 years of lifetime. This gives stability and visibility for our fee income to come. And we also, in this portfolio have roughly 1/3 of dry powder. So undeployed capital, which means that in current market situation, we can take advantage of good investment opportunities that are arising across our strategies. And the general fundraising sentiment is, of course, also impacting us. So we are keeping our target sizes for our funds, but we see delays in the processes.

During the first quarter, we had the final close on our Special Situations fund. That's the first of its kind in Finland and a very successful fund raise. We have taken in more capital into our infrastructure II fund. It's now close to EUR 240 million, which is some 25% growth compared to the size of the previous infra fund. And here, we have also extended the fundraising to the third quarter. And also in several of the other fundraisings, we see some delays. And it's also good to note that what's not on this page yet is that towards the end of the year, we expect several of our flagship funds to come to the market.

Then moving from fundraising into then transactions and developments on that side. Also on the transaction side, markets have been slow, again, very much driven by the general market sentiment with increasing inflation, increasing interest rates and general uncertainty transactions tend to be slow because it takes longer for buyers and sellers to reach an agreement on what the future outlook is, and therefore, what the valuation of the asset should be. But also here, there continues to be movement across all segments. And during this quarter, we completed 3 new investments, Aro Systems into Special Situations, Napier into Nordic Infrastructure II, and then an undisclosed company into our credit strategy, Nest Capital. We also successfully executed 2 exits during the period, so Malte Manson in Buyout Strategy and 1 company again from Nest Capital's portfolio.

Overall, I can say that across all of our investment strategies, we see very attractive investment opportunities at the moment, and we have dry powder to deploy into new investments. And if you look historically, when the highest returns have been done in the unlisted market, it is really in these type of uncertain market environment, and they're making good investment and that's why good fund vintages. So we are actively out there looking to take advantage of this market situation.

Moving the -- staying on transactions, but moving one step further then into carried interest. So as noted, we had no carried interest realizing during the first quarter, but we have several exit processes ongoing across funds from which we expect the carried interest during the year. And there's currently 2 funds in carry, but there are several that we -- that are approaching and some that we expect to reach carry also during this year.

Then an update on sustainability, and this is closely linked to our vision to be the most sustainable Nordic private assets company. During April this year, I'm very proud to say that we got validation for our greenhouse gas emission reduction targets. So a science-based target initiative validated target base, which means we are aligned with the 1.5-degree scenario and aligned with the Paris Agreement. What this means in practice is that what we have committed to is that for Scope 1 and 2, greenhouse gas emissions, we will reduce them by 51% by 2032. And we are also during this year working on setting the year to reach NetZero. We have also committed to increase the amount of renewable energy so that we would be up to 100% by 2030. Scope 3 emissions in our business, what that means is the emissions that are generated in our portfolio companies across private equity, infrastructure and then our buildings in real estate. And here, the targets are set so that by 2027, more than half of our eligible private equity and infra assets should have set and validated their science-based target emission reduction targets. And by 2032, this number should be 100%. On the real estate side, again, the target is for residential buildings to reduce emissions by square meter with 50% by 2032. And in service buildings, the same target, but their reduction up to 72% by 2032.

Sustainability is not only something that is driving value in our investments, it's actually also having a financial positive impact for us. So with us now having the science-based target validated, emission reduction targets in place, we have fulfilled the sustainability performance indicators for our sustainability-linked bond. So there were 2 targets, one was the emission reduction targets validated, and the other one was to integrate sustainability into the variable remuneration of CapMan's Management Group, and we have actually implemented sustainability objectives into the majority of all CapMan employees variable remuneration, the number is somewhere north of 80% of all our employees. With this one, we can secure attractive long-term financing. So the annual interest on our bond stays at 4.5%, and we avoid a margin step up there.

Then some positive people news and some great changes in the team where we have both key recruitments and appointments. So I'll start with the appointment that also has an impact on our management group that we also announced earlier this morning. So we have appointed Mika Koskinen as Managing Partner for CapMan Wealth Services. And with that, he will also join the management group. He joins us from SEB, where he is currently Head of Private Wealth Management & Family Offices in Finland. And I think a very key recruitment for us. And I really look forward to working together with Mika, and he brings extremely strong market understanding and long experience in this market to really take CapMan Wealth Services to the next growth journey.

Christian Borgstrom, who's currently the Managing Partner for CapMan Wealth Services has been the one who's been advancing this recruitment. Christian is one of the co-founders originally of this company and a true entrepreneur as he is. He will now take on the challenge of scaling CWS in Sweden. And with this combination of Mika and Christian, I really see that we have the fundamentals in place to continue the successful journey of CapMan Wealth Services.

Then I also want to highlight 2 other key promotions or appointments in the investment teams. So in our Private Equity Strategies, we have 2 partner nominations. And I think they very well show our ability to both attract and recruit external talent, but then also grow and develop internally people into more senior roles. So we have Maija Joutsenkoski, who's been appointed partner in the Buyout team. She joined us early 2021 as an investment director and has now stepped into the partner role. And then we have Tomi Alen, who has been recruited into the role as a Partner in CapMan Growth. Tomi comes now from RELEX, where he has some concrete experience from growth companies, and he is also actually returning to CapMan because before RELEX he spent several years with CapMan Buyout. And I really look forward to to see both Maija and Tomi driving their new roles. And congratulations to all of these individuals.

Then rounding off with our long-term financial objectives, unchanged. So growth of Management Company and Service businesses. Target is to achieve above 15% growth per year, return on equity about 20%, equity ratio above 50% and then an annually increasing dividend payment to our shareholders. And with the decision in the AGM in March, we are this year distributing EUR 0.70 per share for last year's result, and that's the 10th year in a row that we have been able to distribute an annually increasing dividend.

Our outlook for the year, we keep unchanged. And like I started, despite the uncertain market, the fundamentals of our business are strong and attractiveness remains in place. So we have fee income and fee profit continuing to grow. We have strong value creation in our funds. We expect carried interest from several funds during the year and continuing to grow assets under management, which also now during this quarter were at a record level of EUR 5.1 billion.

And with this, I thank you for your attention and conclude this presentation. Thank you.