CapMan Oyj

OMXH:CAPMAN

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Charlotte Wessman, executive]

Good morning, and welcome to this presentation of CapMan's Q1 2024 Financial Results. My name is Charlotte Wessman, I'm the Communications Director of CapMan. And presenting today, we have Pia Kall, CEO of CapMan. [Operator Instructions]

I now hand over to Pia.

[Pia Kåll, executive]

Thank you, Charlotte. And welcome also on my behalf to this first quartile results webcast. CapMan has had a strong start to the year with positive development on several fronts. Our assets under management at the end of the quarter were at EUR 5.7 billion, it's a record high and 12% growth compared to the year-end. A large part of the growth comes from the completion of the acquisition of Dasos Capital that was completed early March, but also good fundraising across strategies.

In addition, in April, after the quarter, we have raised an additional EUR 110 million of new capital through the final close of our flagship funds, Growth Equity III and Infrastructure II funds. Our turnover grew some 22% during the first quarter. That's driven by carried interest, EUR 3.5 million, from exits in our credit fund. We have also kept up a good transaction base across strategies with 3 investments and 4 exits, out of which 2 are the ones contributing to carry despite that the transaction market still is quite slow.

In April, we published our investment sustainability report, where we detail out the value creation, sustainability work we are doing in our investments. Our vision is to be the most responsible Nordic private asset company. It means that with every investment we do, we are today building the society we want to see in the future.

Through our investments, we have a significant impact on the Nordic economies and societies. By developing human-centric real estate, we impact over 220 properties and the conditions for almost 10,000 tenants. By building transitional portfolio companies in our infrastructure and private equity portfolios, we are participating in the green transition and we are also creating jobs to the society. At the moment, some 14,400 employees across our 44 portfolio companies.

With the expansions into Natural Capital, we are also today one of the largest investors in Europe when it comes to timberland investing and managing Natural Capital in a responsible way, with a portfolio of 240,000 hectares of land across Europe. For shareholders, we create value primarily through 3 value drivers. In our management company and service business through fee profit that grows in line with assets under management. And when we do successful exits and returns to our fund investors, also carried interest from our closed-end funds.

In addition, we have our investment business where we invest CapMan's balance sheet primarily into our own funds. And here, great shareholder value through investment returns and it's also a vehicle for us to support the growth of the management company business.

If we look at the Q1 numbers through these value drivers, we see that fee profit was EUR 2.7 million. It's some EUR 200,000 less than last year, so essentially flat. But it's worth noting that in these figures, we only have 1 month of the Dasos Capital acquisition contributing. And the final close of Infrastructure II and Growth Equity III happened in April, so they will be visible fully in the Q2 numbers onwards. So with this, we are confident that also this year we will see continued fee profit growth.

Carried interest in the first quarter at EUR 3.5 million. Carried by nature is more volatile over the quarters, but over the last 3 years, on average, we have had dome EUR 6.4 million of carry annually. In our Investment business, fair value of our investments were at EUR 163 million at the end of the quarter with a positive fair value change of EUR 2.3 million corresponding to 2% growth.

Looking at these over a longer period, the different value drivers, starting with turnover and profitability development, we can see that both fee income and fee profit has a continuous steady growth, fee profit growing on average 13% per year over the last 3 years. And with the final closings in April, the completion of Dasos Capital and ongoing fundraising, at the moment, we are confident the growth will continue also this year.

Looking at our balance sheet, it's diversely invested across both asset classes in the private market and vintage years. And especially the vintage year diversification makes us confident that over the next years, we will see significant positive cash flow from these investments. At the end of the quarter, EUR 163 million fair value for our investments and then EUR 82 million of remaining commitments to these funds. On average, you can think that 1/4 or 1/5 of those commitments are called each year, so something between EUR 15 million and EUR 20 million, which can be compared to our cash position of EUR 49 million at the end of the quarter.

Looking at the fair value changes of these investments, the return over the last 3 years has been 13% per year, and the return target is between 10% and 15% depending on the allocation. During the first quarter, we had a positive development of EUR 2.3 million or 1.5% compared to last year's negative development of a minus 1.4%. The positive development in this quarter was driven both by our own funds and external funds, in our own funds, especially the private equity funds developing positively, whereas the other investment strategies were more flat in this quarter.

The external funds contributed slightly positively in this quarter. But as we have seen over the past years, especially the venture capital investments, are quite volatile, going from strong double-digit growth in 2022 to a negative development in '23, and now a slight positive. But given the market environment, we need to be prepared for continued volatility in these investments.

If we then combine these value drivers, we get to our EBIT. Comparable EBIT for the quarter, EUR 8.6 million, a significant growth to last year's EUR 0.5 million. And if we look at them component by component, Management Company and Service business fee profit, essentially flat from last year. Growth boosted by carried interest of EUR 3.5 million, taking us to an EBIT excluding fair value changes of EUR 6.2 million. This is more than doubling from last year's EUR 2.9 million. In addition then, the positive fair value changes of EUR 2.3 million, and we are at the comparable EBIT of EUR 8.6 billion.

Our balance sheet remains solid and with a good liquidity. We have an equity ratio of 50% and cash at bank and undrawn credit limit of close to EUR 70 million, means that we have the financial stability to continue to execute on our growth strategy.

Let's then move from the financials for the first quarter to the broader picture of our strategy implementation. And starting with a view on the market. What we've seen in the beginning of '24 is essentially the same development that we saw starting during 2023. After several strong years, the global unlisted market has become more challenging. With interest rates increasing, inflation going up and geopolitical tensions increasing during last year, transaction market slowed down significantly across asset classes.

When there are less transactions, there are less exit and it means less distribution to fund investors. Fund distributions last year on a global level went to down to levels that we to go back to the financial crisis years to be on similarly low levels. As a consequence, if you generalize a bit, when you have less returns to fund investors, they are also more cautious in making new commitments into new funds.

And what we saw during last year across the market was that the raised capital dropped significantly from the peak years. We talk about the drop from, in Private Equity, some 20% up to 65% drop in infrastructure compared to the highest years.

With less capital raised, it means that the growth rate in the market slows. But it's good to note that we're still talking about the growth market. So even with raised capital on these levels, the expectation is that private market assets under management will continue to grow some 5% to 10% per year. It is though lower than the 15% to 20% that we saw during the past years, but still on a healthy level.

In this market environment, we continue to systematically implement our growth strategy, and I believe our focus on active value creation is an asset especially in a market like this. Our strategy builds on our competitive advantages, delivering top investment returns through active value creation in our funds, integrating sustainability as a core theme in everything we do and making sure we develop CapMan as the home for top performers where the best people in the industry drive and develop.

When these are in order, we can grow, we can be the preferred Nordic partner for institutional fund investors, we can scale our existing products and we can introduce new products to the market. In addition, we are exploring strategic acquisitions to further accelerate growth. And as assets under management grow, we create shareholder value through growing fee profit and carried interest and returns from our balance sheet investments.

Some highlights from these different areas for the period. As already said, we have maintained a good transaction activity, three new investments up until April this year, 2 from the real estate side, Nordic Real Estate III investing in a school property in Finland, and Social Real Estate, the new fund that we established around year-end has made their second investment internal office and educational property in Copenhagen.

Growth Equity also made their first investment from their third fund into Tana, an environmental technology company. We have also done 4 successful exits during the period, 2 assets out of the Next Capital, our credit fund, those are the ones contributing to carried interest this quarter; and the Nordic Property Income Fund Data successful exit from a residential property. Our Buyout XI fund also exited Havator during April.

In our sustainability work in our investments, we are driving financial returns hand-in-hand with sustainability impact. In April, we published our investment sustainability report, which details the sustainability work happening across investment areas. Broadly, you can group our sustainability work under 5 themes, and giving you some of the highlights from last year.

In climate action based in science, we have, as CapMan said, our net zero year to 2040, 2035 for real estate operational emissions. This doesn't only mean CapMan's own emissions, but also the emissions of all of our investments. During last year, the greenhouse gas emission intensity decreased in our commercial real estate, with 19% and 12% in our residential real estate portfolio. And at the moment, 16% of our portfolio companies have set their own science-based target validated emission reduction targets. The target is that more than half of them will have done so by 2027.

Climate alone is not enough though on the environmental side. So we are also working on nature-positive operations that safeguard the planetary boundaries. CapMan is an early adopter of the Task Force for Nature-related Financial Disclosures, and we are currently developing a nature-positive framework for each of our investments areas.

We strive for strong and equitable businesses with meaningful work, during last year, the tenant satisfaction was at 3.5 out of 5 in our real estate portfolio, with a target to reach 4. In our portfolio companies, employee satisfaction was on average 4 out of 5, with the target to stay above 3.5. And at the moment, 87% of our majority-owned portfolio companies have implemented their diversity, equity and inclusion policies.

Human rights throughout our value chain are important. And during last year, we identified the human rights impacts for each of the investment areas, and almost 90% of our portfolio companies have human rights policies in place. When it comes to accountability, transparency and executive level diversity, 38% of our real estate has a green building certification at the moment and the target to get to 75%.

On Management Group and Board appointments, our target is to appoint a maximum of 70% of any gender. Last year, it was 75% men, 25% women appointed. So close to the target, but not there fully yet. And we have also updated and developed our sustainability onboarding and holding period guidelines for each of the investment strategies.

If we then move over to the growth drivers. So CapMan's investor base continues to grow and internationalize. When we look at the EUR 5.7 billion assets under management, half of that comes from outside of the Nordics. It consists of some 440 institutional investors, primarily pension funds and other institutional investors, asset managers and fund of funds. During the 4 first months of year, we have raised a bit more than EUR 200 million on new capital. That capital comes -- 1/3 of it from Finland, a bit more than 50% from the rest of Europe and some 10% from North America.

We have also, during the period, successfully closed 2 our flagship funds in Infrastructure and in Private Equity. CapMan Nordic Infrastructure II held their final close at EUR 375 million. It's a doubling of the size of the Infrastructure I fund in a very challenging fundraising market. That's an excellent result. The investment strategy has proved especially interesting for international investors, and 70% of the capital came from outside of the Nordics.

Our Growth Equity III fund also held the final close in April at the hard cap of EUR 130 million, a very fast fundraising process that shows the strong track record of the team in this strategy. They have also made the first investment during this first part of the year with their investment into Tana. Additionally, as of 1st of March, we have established Natural Capital as a new investment area as we completed the acquisition of Dasos Capital.

Natural Capital supports our sustainability ambition and our growth ambition towards EUR 10 billion assets under management. Natural Capital and timberland is also in itself a very attractive growing investment area. At the end of the quarter, this investment area had some EUR 714 million assets under management and with a very strong team with a strong track on an average net IRR of about 10% in their funds across years.

With the good fundraisings, the closing of Dasos Capital and the ongoing fundraisings, we have a strong foundation to reach our growth target in assets under management. So currently at EUR 5.7 million, targeting EUR 10 billion assets under management. Dasos Capital added some EUR 670 million at the transaction. They have also continued successful fundraisings into their open fund, Dasos III. We have raised some EUR 200 million of new capital during January to April, EUR 110 million of this happening in April, so after the quarter end.

And we have several ongoing fundraisings that support further AUM growth. To mention a few, Nordic Real Estate IV, the flagship value-add fund in real estate, has started their fundraising. We target the first close during this year and a target size at final closing of EUR 750 million. In addition, we have several open-ended funds that are continuously fundraising, Social Real Estate, established at the beginning of the year, targeting EUR 500 million of equity over the next coming years; and also residential growing nicely.

Our long-term financial objectives remain unchanged. We target a growth of the Management Company and Service business above 15% per year over the past 3 years, a 13% growth. Return on equity at 20% and equity ratio above 50%, roughly where we were now during the first quarter. And a distribution policy, where the ambition is to pay sustainable distributions that grow over time. At the beginning of the year, CapMan's Annual General Meeting approved the proposal from the Board of a dividend distribution of EUR 0.10 per share for this year.

We keep our outlook estimate for the year unchanged. Due to the nature of the business, we are not giving numeric estimates for the year, but we are estimating that assets under management will grow during 2024 and also that our fee profit will continue to grow during this year.

Thank you.

[Charlotte Wessman, executive]

Thanks, Pia. And for the Q&A session, I also welcome the Atte Rissanen, CFO of CapMan, and you are welcome to send in questions using the chat in the web. First, we have a question here. Price of wood keeps increasing and your competitor made a major transaction in forest funds. Does this raise your outlook even higher for the -- of the purchase of Dasos Capital?

[Pia Kåll, executive]

I think, definitely, there's been a couple of larger exits now in the timberland market in different funds, in Dasos funds, but also in one of the competitors. And I think what it proves is that the valuations in this investment strategy are really solid. They can be realized, and there are our buyers out there. So it definitely strengthens our confidence is that this is a really attractive and growing investment area.

[Charlotte Wessman, executive]

Do we have questions from the audience?

[Jukka-Pekka Pesonen, analyst]

So it's Jukka-Pekka from Nordea. So could you give us overall color on the Natural Capital offering and how it's been received. We saw the AUM has grown significantly above the 6 30 you mentioned in the press release, and how do you see it developing this year, later this year?

[Pia Kåll, executive]

So we see continued demand for the strategy. And now when we've also been able to, during the past month or so, discuss this with our existing investors, I think we see an interest both from those in Infrastructure and Real Estate, strategy is to take a look at Natural Capital. And I think in general, the demand is growing, driven by both. It's a very stable return investment strategy, and at the same time, more and more especially other institutional investors are putting a value also that it's actually a carbon sync, so supporting the overall. So in that sense, I would expect continued good development there, keeping in mind that it's still a very small investment area globally. So in that sense, limited amount of investors, but with a good growing demand.

[Jukka-Pekka Pesonen, analyst]

And if I can drop in a second one. Your personnel costs decreased year-on-year despite increased headcount. So what are the main drivers behind this? And looking forward, do you maybe need to scale up your costs in personnel or other costs to accommodate for the new funds? And what is like the run rate we should be looking for in the personnel cost side, maybe?

[Atte Rissanen, executive]

I can take that one. I think quarter-on-quarter or comparing with the previous Q1 in '23, personnel costs were down some 5% on the group level. Majority of that decrease was due to variable remuneration, which was slightly lower than last year. But overall, the fixed expense level has remained quite stable. And I think that that's actually quite a good representative sort of level also in terms of the run rate going forward. Of course, once the business grows, there's going to need for new recruitments. But I wouldn't say -- I think it's at a fair level at this point in terms of the resourcing. There's no sort of gaps in terms of new recruitments that would be pending or whatnot.

[Jukka-Pekka Pesonen, analyst]

And then final for me. About the property income in your management company business. How much did that affect the fee base in Q1?

[Atte Rissanen, executive]

What -- property income fund in total?

[Jukka-Pekka Pesonen, analyst]

Yes.

[Atte Rissanen, executive]

Quite small decrease. The NAV went down, I think, some EUR 10 million, so the management fee income related to that EUR 10 million, so not significant related to the property income fund.

[Jerker Salokivi, analyst]

Jerker here from Evli. I'd just like to ask a question about the kind of demand situation. Looking at growth, new growth and -- Growth Fund and the Infra Fund, our understanding is that these 2 came at least close to targets or at target, so around what you want it to be. Is this kind of -- looking now at the near term, is this kind of more of a demand picking up or CapMan's excellence? And then just a comparative question about kind of the open and closed end funds, how are the open-end funds doing in terms of fundraising?

[Pia Kåll, executive]

Yes, if I take that one. So first of all, I have to say that both with the Infrastructure II Fund that doubled compared to the first fund, and then Growth Equity that actually hit the hard cap, so the maximum that was allowed for the fund. We are extremely happy with those fund raisings, and I think there were very good work done there in those. I think what we say there is not so much that the market overall would be picking up yet, but more that investors are very selective.

And for example, for the Infrastructure fund, it was very diligent, long-term work that had been done with certain investors who are now in the final close committed. And in the growth, again, very fast fundraise with a very strong track record. So I think also there, a very strong fund, but not necessarily showing that the whole market would yet be picking up. I think we need to see the transaction market start to easen up first and distributions get back to kind of a normal level for the for the fundraising market to really come back.

That said, I mean, with good track record and strategies that are differentiated, there is demand. So there are still -- investors are, in general, allocating money to this asset class. So if you have a good track record, you will be able to fund raise also in this market. When it comes to the open-ended funds, I would say that, there, still we are still in the position that we've been. We have very little redemptions for any other funds. Most of our funds are institutional investors also on the open-ended funds, and they are investing over the cycles. So not pulling out because of some volatility in 1 quarter. And we see good demand in those as well.

Real estate at the moment, I think out of the asset classes, probably the most challenging one. But also there, we have positive indications from the LP discussions that we've started in the fundraising.

[Charlotte Wessman, executive]

We have a question here regarding fees. Do you see any pressure on fee levels? Or are fees expected to grow in line with OEM growth or even faster?

[Pia Kåll, executive]

In the type of funds where we have where we're directly investing in the assets, we see less pressure on the fee, management fee levels. They are more determined by, let's say, global kind of benchmark on what that type of strategies have for management fees and size -- to the size of the fund and the size of them team you need to actually execute on the strategy. So no significant pressure on management fees that we see at the moment.

[Atte Rissanen, executive]

So in terms of AUM growth, I'd say that fees should continue to grow at the same pace.

[Charlotte Wessman, executive]

And how do you see carrier potential in your flagship real estate funds after the market turmoil?

[Pia Kåll, executive]

So the carry potential is there. We did fewer exits during last year. Because the market was very slow and valuation is down, so no point in exiting good assets at lower valuations. But the carry potential is there, but moved forward in those funds.

[Charlotte Wessman, executive]

And CapMan's results have fluctuated some time significantly during external funds investments. Why does CapMan invest in external VC funds? And will investment in these funds increase going forward?

[Atte Rissanen, executive]

Yes, I can take that. First of all, I think right now, we are not actively looking at new venture capital fund investments, so that exposure will decrease over time as these funds are exited. But in terms of why they were made, some of them have been made a long time ago, even legacy from basically the Norvestia transaction completed in 2017, so going way back. And in all of the fund investments that have been made, there's some sort of a strategic link with other CapMan operations.

[Charlotte Wessman, executive]

Thank you. Any more questions? Then thank you very much, and wish you all a nice day.

[Pia Kåll, executive]

Thank you.

[Atte Rissanen, executive]

Thank you.