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Edited Transcript of EPEJ.J earnings conference call or presentation 26-Sep-19 8:00am GMT

Full Year 2019 EPE Capital Partners Ltd Earnings Call

EBENE Oct 3, 2019 (Thomson StreetEvents) -- Edited Transcript of EPE Capital Partners Ltd earnings conference call or presentation Thursday, September 26, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Peter Hayward-Butt

EPE Capital Partners Ltd - CEO

* Rohan R. Dyer

Ethos Private Equity - Partner and Head of IR

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to Ethos Capital's results conference call. (Operator Instructions) Please note that this conference is being recorded.

I'd now like to hand the conference over to Mr. Peter Hayward-Butt. Please go ahead, sir.

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Peter Hayward-Butt, EPE Capital Partners Ltd - CEO [2]

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Thanks very much, and good morning to all our investors. Thanks very much for taking the time. What I've -- what we propose to do today, if I just go to the -- just to give you an introduction just briefly around some of the macros that we've been seeing, et cetera. Not to focus too much on those, as I'm sure you see those all the time. To give you an overview of the portfolio and how it's being constructed and performing. Some input into the valuations and the liquidity analysis. And at the end, some sort of outlook for the portfolio.

So moving briefly on to Slide 2, let me just put that up there. Whilst I'm sure you obviously get, as investors, a huge amount of input from many sources around the economy, one of the slides that we presented to our investors, the LPs, a couple of weeks back that Stuart Mackenzie presented was one that will impact to the beginning of Fund VII. So really effectively to the beginning of 2011 on Page 2 and just look at some of the key issues that we've been facing over that period of time.

So -- and I think from a GDP growth rate perspective -- and everyone heard the story around the low GDP growth rates and the constant refining of the numbers downward. I think the biggest issue that we faced really over the last 4 or 5 years, as you can see in that chart, is actually later on where the GDP is, but more the volatility that the GDP is exhibiting. So there's quarterly declines that we're probably seeing 6 or 7 of them over the last 3 or 4 years, 4 or 5 years as opposed to the trends that we've seen in the past.

Again, on the right-hand side, you see some of the key cost drivers, including obviously wage inflation, which is somewhere between 6% and 8%, depending whether you have a unionized workforce or not. Some of the other key drivers, whether it would be the petrol price since 2011, electricity price or the imported inflation through FX, they've all been pretty difficult from an investing perspective. And the real -- the key issue for us is the ability to forecast and the uncertainty that comes with forecasting over a 7- or 8-year horizon, which we look to own those assets over. And then obviously the real focus has then been on what operating costs you can take out of the businesses.

So what we'll touch on again today is exactly what has been happening in the portfolio, what have we as Ethos been doing in those portfolio companies to arrest some of these key headwinds. But I think pretty importantly, what has come out of this, and we'll talk about it in the pipeline of each of the funds, is the opportunities that come out of these sort of environments are very significant. As I said before, we continue to see a pipeline that's probably never been as full as it has, but also with the ability to be relatively selective, whether it's about the types of assets we want to invest in, the prices we want to pay or the capital structuring we put into those deals to ensure we get some sort of downside protection.

So what -- at the face of it, the macros are tough. It makes investing relatively difficult. We don't think it's a time to put our head in the sand. We really do see a lot of opportunities coming out of it. And what we'll try and take you through over the next couple of pages is what are we seeing fund by fund, what are we seeing in the underlying assets and actually spend a bit of time talking about some of the key portfolio companies to give you an idea of how those all are performing.

Moving to Slide 3, just before we get into the assets. Just to give you an idea again, the 3 key -- 4 key strategies that we have. The first one is the Large Equity Fund, which is where it really funds VI and VII. The next is the Mid Market Fund, which is our black-owned management company that plays into the mid-market space and private equity. The next is the Mezzanine Fund, run by Phil, Walter and Ngalaah. And the last one was the most recent addition at the back end of last year was the AI Fund.

So just before we delve into the funds, it's been a pretty busy year for Ethos. Ethos invested ZAR 2.6 billion during the course of the year. It also raised ZAR 2.9 billion in the various funds across Funds VII, the Mezz Fund and the AI Fund. So a busy year, both on the investing side and the fundraising side.

If we just take each of the funds' strategies in turn, the first one is the large equity fund. Fund VII had a -- has had a decent year. Its NAV grew year-on-year largely through capital -- new capital invested in that fund. EBITDA was slightly down in that fund. We'll go into the various assets that constitute that, but what is key is the 2 exits that have happened out of those -- that fund.

The first was Kevro at the back, about 1.5 years ago. And the second was this year with Eaton. Eaton is going to be a great exit for the fund. We'll go into a bit of detail on that asset. End up -- those 2 assets together had a combined exit of more than 20% IRR, realized return, with more than 2.2x money back across those 2 deals. So again, I think there's comfort that even in a difficult environment like this, we are seeing the ability to exit good quality assets and make decent returns on those investments.

The focus really for Fund VII this year -- Fund VI this year, which is the fund that is past its investing phase and really starting to move into its harvesting phase, has really been on restructuring some of the portfolio companies, we'll touch on a couple of those, and really cost reductions across the portfolio.

To give you some idea, revenue across Fund VI grew at about 6.5% year-on-year. But EBITDA across the portfolio companies on an attributable basis was slightly down year-on-year. And that's despite the cost savings of a run rate of about ZAR 350 million being extracted from the portfolio. I think the reduction would have been an incremental 10% reduction in EBITDA if those cost reduction practices hadn't taken place. So it's been a difficult environment to operate, as we all know, but I think we have seen some decent traction. And we'll touch a bit on which assets we've seen in that restructuring phase and which are turning around.

Fund VII really is an exciting phase. That's the new fund. It's got 2 deals in that fund. The first is Channel VAS. We'll touch a bit on that later. The second is Echo, which should close probably within the next month, and it really is a strong pipeline of opportunity. So that opportunity that I referred to earlier, given the current state of affairs, really has shown itself in Fund VII.

Turning then to the Mid Market Fund. The Mid Market Fund is now 65% invested. And the focus -- if you look at the key assets that they've invested in across Echo, Gammatek, Synerlytic and Kevro, they've all performed relatively well. EBITDA across those portfolio companies is up relatively strongly. The 3 assets that are -- remain under pressure are Autozone, Twinsaver, and Eazi Access. And we've actually highlighted those assets in the portfolio in this presentation, and we'll go through those in a bit more detail.

I think importantly, given that they are 65% invested, the fund is very selective about what it's looking at. The SA-based pipeline really is strong, but they can afford to be selective and they have been so. So there's probably 2 or 3 assets that they -- and relatively detailed due diligence on, but they can afford to be selective on which assets they end up taking.

On the Mezzanine Fund, a really strong pipeline across East Africa that really talks to structured equity growth capital. There's 2 transactions that are at the end of their negotiation phase, hopefully. And hopefully, those deals will be announced probably in the next quarter or so. Chibuku, which is the asset that's in there currently, has had a difficult year operationally. There was some significant rains in Malawi, as we knew -- as you know this year, which obviously had a big impact on the distribution of the product, but other exogenous factors including exports in from other countries without duties except into Malawi. That said, the business has recovered strongly. And certainly from our perspective, we're comfortable with where that asset is.

So I think the difference in the Mezz Fund, they're looking at assets in countries that have a very strong GDP growth. But the key issue there really revolves around political and currency volatility, which is something that we focus on intently.

The other thing I think to note is I think it does take longer pipeline conversion in that space in East Africa. It does take longer to get done. And particularly the 2 assets that hopefully are nearing completion, they've been in the mix for a long time. So they -- it just takes longer to get these assets over the line.

The final strategy is the AI Fund. It had strong traction this year on fundraising, exceeded its initial estimates and is looking to probably increase the size of that fund slightly. And we really have seen a differentiated impact that Roger and Nic working together with the Ethos team has had on particularly Channel VAS and Vertice, which are co-investments that they've entered into with Fund VII.

If you look at the new investment that they made in TymeBank, we'll touch on that later on. Again, an exciting opportunity. Probably something that as a business, Ethos wouldn't have done naturally without the inputs of Roger and Nic and the expertise that they bring to the party. And we'll touch a bit on that acquisition later on.

So there's lots of exciting opportunities in this space. Again, just to reemphasize. The target for this fund is good businesses, solid businesses, with the ability to differentiate or change a growth trajectory through AI. So this is not about VC or anything in that frame. It really is about taking good businesses and making them better, hopefully in partnership together with the Ethos funds through the application of AI.

Just to give a quick highlight on -- moving on to Slide 4 just to give -- to the highlights of the operating results. Ethos Capital now has about 19 portfolio companies. We'll give you an overview of some of the key ones just now. The NAV per share grew to ZAR 11.34, which was -- we have had 12 quarterly growth in NAV since we listed. So every quarter, there has been an increase in NAV per share. We're obviously disappointed, given that it's a -- just over a 3% growth year-on-year. We'll touch a bit on that later in the presentation, which assets contributed positively and negatively.

We have a cost of equity, we think, somewhere between 13% and 14%. And as a team, we would look to exceed the growth in NAV per share -- net NAV per share in excess of our cost of equity. So significantly below what our target would be, despite -- obviously in part due to the difficult conditions.

If you look at the EV/EBITDA, that would -- has come down since the interims, from 7.5x to 6.9x. Partly a function of some of the new assets that came into the portfolio. Partly as a result of some of the valuations that we took down during the last 6 months.

Capital invested once the Gondwana deal has completed will be about ZAR 1.6 billion, which takes us to being around 82% invested in terms of total assets. The net debt to EBITDA reduced slightly to 1.9x, which we think is probably on the low end of where we would like to see leverage in the structure.

Moving on to the portfolio overview. I won't dwell too much on Slide 6. It gives you an idea of the diversification both across the vintages that we're in and the sectors. I think one of the key messages that are coming out of the managers is that I think sector diversification in and of itself doesn't always give you -- what probably gives you first comfort around your real diversification, particularly when many of the key drivers certainly across some of our portfolio companies have had a link to SA GDP.

Over the last 2 to 3 years, we've relooked at how we look at diversification, and I think we broadly break it down into 3 buckets. The first is geography and being more geographically diversified across markets with different obviously drivers from a macro perspective. Then looking at the core drivers behind each business, both from a macro perspective and equally a micro perspective. So again, ensuring that you don't have the same correlation amongst all of your core drivers in the portfolio. And the last one is around exit time frame. So ensuring that you have a basket of assets that can be exited at different times in the cycle we think is important.

But just looking at the pie chart on the right-hand side, obviously a pretty good diversification across sectors. And equally importantly, around about a 60-40 split, if you look at the geographical split between South Africa and non-SA.

Let me just go back a slide quickly, sorry. Just talking about the assets that have been put on the books over the last 12 months. Around about ZAR 867 million has been spent by Ethos Capital out of the ZAR 2.6 billion that I referred to earlier that Ethos has invested. So around about 33% or 1/3 of Ethos' investments throughout the year has been contributed by Ethos Capital.

The large assets that were put on the books during the last 12 months really revolved on Gammatek, just under ZAR 100 million. Channel VAS, which was a significant investment on behalf of Ethos Capital. Synerlytic was the business that we bought out of Torre Industries and renamed it Synerlytic. And then TymeBank, which was the deal done, as I mentioned earlier, by the AI Fund.

A deal soon to be closed, as I mentioned, is the bolt-on transaction of Gondwana and Echo which, across the 2 funds that we're invested in, will increase our exposure to Echo by ZAR 152 million. So all in, relatively a year of decent amount of investment, just under ZAR 1 billion out of Ethos Capital.

So let me just move back to that. Just looking at the portfolio itself. If you look at the key assets in the portfolio, so this is the contribution to total NAV. The top 6 assets which really encompass Channel VAS, Kevro, Echo, Primedia, Synerlytic and Gammatek constitute around 75% of the invested NAV or about 60% of the total NAV, including cash. Those are the assets that we'll focus on in the presentation. So currently, Channel VAS is around 21% of total assets. Kevro, Echo and Primedia all around about the 10% mark. And Gammatek and Synerlytic together constitute -- each constitutes around about 5%.

Equally importantly, if you look at the portfolio construction by age, which is important, given that in the first year of ownership in many cases, we keep the assets at the cost of investment. So we don't write them up. 18% of the portfolio is held in cash and 36% of the assets are less than 1 year. So around about 54% of the portfolio is either held in cash or assets that are less than 1 year.

Moving over to -- in a bit more detail on some of the assets, I'll start with the exit of Eaton Towers. Eaton Towers will be a great exit for Fund VI. It was a business that was built on a couple of key investment themes around having a pan-African footprint. It was across 5 large sub-Saharan African countries, so not specifically in any single one. Very balanced portfolio, only had about 25%, 27% in one country. We obviously talk a lot about increasingly connected populations, be it through data and voice. It really played into that theme. And probably the most important one and we'll talk a bit about the investment themes later that we are looking to invest behind is having a scalable business model with multi-currency exposure.

So it's a business that if you look at it from when we bought it to when we exited, we grew the EBITDA threefold since 2015. We increased operating margins in that business by more than 50% from when we bought it to when we exited it. And we'll end up getting a greater turn out of that business of around 2.4x money back. So we invested around ZAR 400 million. We'll get short of ZAR 1 billion in proceeds from that business, which will generate just over a 23% return.

So I think it really just talked to businesses that have strong macro growth, good sector tailwinds, but also and very importantly, a great management team that we have here. So it's an asset that we obviously are not happy to see the back of. It's been a great business in our portfolio. But we really think it's one that delivered a great return for our investors.

And probably equally importantly from our side, it has given us a lot of comfort alongside the [Petri] transaction that you would have seen recently as well that for high-quality, great assets that have businesses that are diversified across the continent, there is a lot of international interest. This business was bought by American Tower. It's an American-based business. So for the right themes, the right businesses, particularly ones that are well managed, there still remains a lot of interest in the sector.

Moving to the next slide. This is Slide 10 talking about Channel VAS. Channel VAS is, as we've mentioned before, around about 21% of Ethos' NAV. It's had a great year. If I go through the key investment themes that we invest behind, here really were 2 or 3 key macro trends which talk to financial inclusion, increasingly connected populations and obviously a rising consumer spend across the continent.

Channel VAS is across 4 continents. It's in more than 25 countries. So again, talk to that theme of having uncorrelated currency exposure across the continent. And they've had 6 new deployments in the last year, which is a great result. New deployments being with new MNOs.

It's got an access to a customer base of 650 million people. I always have to pause when I say that number. 650 million is an extraordinary number of people that its models currently look to every single day in coming up and refining them and the pricing and the credit application scoring that it does across its AI platform.

So it's got a massive scalable platform. It continues to grow its daily advances. Last year, we're up from $566 million to nearly $800 million, so a massive increase year-on-year. Default rates are extraordinarily low in the sector compared to its peer set, less than 1% and quite a lot less than 1% in most cases. And pleasingly, EBITDA year-on-year on a like-for-like basis grew more than 20% in dollars.

So it's been a good asset. It's early days for us. We only invested in this business in October 2018. We -- at the time, we agreed on option with the vendor to increase our stake from 17.5% -- or actually from 17%, I think it is, that's a typo there, to 20%. So to buy an incremental 3%. It was done at the original offer price. So we haven't increased the price we pay. And obviously with the 20% increase in EBITDA, it's effectively a 25% reduction in your entry multiple in that business.

We've exercised that option. It will be concluded at the end of September. And actually with the dividends that we've received, we actually don't need to -- it'll be a very small drawdown on the funds. So it's actually been funded, the 3% option, through the dividends we have received.

From a valuation perspective, we've kept the valuation largely unchanged. It's still less than a year into the -- to our investments in this company. That said, the value change, it's growing value by ZAR 53 million year-on-year, which is largely a reflection of the cash yield in the business.

Channel VAS isn't geared. It's paid out dividends of around about 11% since we owned the business in October. So from that perspective, it's been very positive. We will take part of those dividends, which we've retained offshore, to exercise the option to increase our stake to 20%.

So all in all, a very exciting opportunity. It talks to the trends of playing in growth themes on the continent. Great management team. Bassim and his team have done a great job there. We look forward to growing this business in time.

I think the biggest upside for this business is if we can get mobile financial services right. They run a number of pilots in West Africa and one in Pakistan, which are early days but actually looking very promising. And again, if that comes up and comes up [trends], that will probably exceed the credit airtime services side of the business. So we remain very excited. And Roger in particular with Nic are looking at a number of insurance products that they can help Channel VAS grow.

Moving on to the next key investment is Kevro. Kevro is around about 11% of Ethos Capital's NAV. The valuation up ZAR 9 million year-on-year largely due to degearing. So we haven't changed the valuation at all. The degearing benefit of that was seen around about ZAR 9 million.

So in terms of the highlights of that business, obviously it's a weak economic environment which just had an impact on the end customers. There have been a number of challenges around services. But a lot of recent improvements, including the hiring of a new COO, really have arrested some of those issues. And there's been a pretty strong financial performance given the difficult market, to be honest. So that's revolved around new product strategy to drive growth, and we're seeing those come to fruition. So that has been good. And a real focus on working capital has seen us being able to degear and pay dividends out of this business.

There's been a recent strategy review there and refinement of the operating cost model with the new COO being brought in. And in the next 12 months, there'll be a new warehouse and IT systems that we're investing behind which we think will help grow and enhance the business. So we're going to be investing behind this business this year.

Equally importantly from a BEE perspective, it managed to enhance its rating this year from a level 8 to level 4, which is massive in the context of the customers it serves, and we think the business is well set to grow. And we look forward to seeing the benefits of the CapEx cycle start to show.

The next key asset in the portfolio on Page 12 is Primedia. Primedia was a business we invested in really at the end of 2017, so beginning of 2018. A lot has happened in the last probably 12 to 18 months. Firstly, we sold off the Ster Kinekor Entertainment business. We then unbundled Ster Kinekor Theatres, a movie theater business, outside of the broadcasting and outdoor business, outside of Primedia to the same shareholders and really put a spotlight on that business that had been massively underperforming in the broader Primedia portfolio. We brought in a new CEO, CFO and Chairman in the form of Andrew Marshall. The 3 of them have done a great job of turning Ster Kinekor around.

I think if you look at the EBITDA growth year-on-year in that business, it's around about 60%. And it's not because the slate has been any better this year than it was last year, to be honest. It's been driven by just running a business better and having some good operational efficiencies. We then restructured the balance sheet, refinanced the debt package on better terms.

And then if you look at the underlying businesses, really what Primedia now remains is a broadcasting and outdoor business. It's been a very weak advertising market, I'm sure as many of you know, particularly around radio. I think year-on-year, radio spend was down around [67%].

Importantly, one of our key drivers for getting into this asset was to arrest the decline in the market share in radio broadcasting that Primedia suffered over the last number of years. And pleasingly, that has happened this year for the first year in a number of years, increased their market share and helped arrest the decline. So they were pretty much less down than the rest of the market year-on-year.

That said, most corporate advertising budgets have been cut. And we're seeing lower occupancy on static billboards. Some of that's being offset. We spent a huge amount of capital and continue to do so around digitizing the billboards. And obviously, the yields you get and the prices that you can charge on those businesses is significantly higher than static. But static has been a problem in the outdoor business.

So given those operating conditions, it really has been a pretty decent financial performance. A decent amount of degearing in the portfolio. We've kept the valuations largely flat. And if you look at the cash yield in Primedia now, it's probably in the order of 7.5% to 8% year-on-year. So we kept the valuations. I think the valuation is slightly down. The degearing impact kept the valuation of Primedia flat, and Ster Kinekor was slightly up.

Going forward, we've actually brought in a new digital expert. He runs a business, a radio and outdoor business in Turkey. And Ali brings with him a whole lot of digital expertise. And I think the next generation of things that we need to look to do in Primedia need to be around that. So it's been great to have his insights on the Board. And we look forward to his contribution there as well.

Moving on to Echo. Echo is the corporate ISP business that we invested into back in February 2018. The current ownership of that is 31%. As you know, we've been looking for a number of -- for probably the last 12 months. We agreed a deal to buy a business called Gondwana, which gives Echo presence in 9 sub-Saharan African countries, which are all benefiting from massive growth in connectivity, the market opportunity. And the growth rates are huge. But to be -- you have to have presence on the ground. You need to be able to build customers in country and have your own systems in country to be able to really offer something to certainly some of the larger customers in the Echo portfolio.

We've seen a lot of very strong market share and market share growth in Echo's local business outside of the Gondwana business, a very, very significant revenue growth. You'll see one of the things in the highlights there that has continued this year. We invested in the sales force. And that really has created a lot of momentum. We've seen in the -- 87% of the 2020 target has already been achieved in the first 6 months. So that investment in the sales force is starting to pay off. And we really are starting to see good growth share -- good growth in market share in this business.

There've been also appointments. A new CFO was brought in and a head of product innovation to help drive our strategic position with some of our key customers. And key to that has been the ability to have its first rating and it's a level 4 rating. So from not being rated at all, we worked with the company to get them to a level 4 rating, which is key particularly in the South African context.

We're very hopeful that the Gondwana transaction will close. It's just awaiting regulatory approval in Uganda out of the 9 countries. That should hopefully close in the next month or so. We've been working closely with the Gondwana team. And hopefully, the integration of that really will be a game changer with respect to the client offering for this business.

But in addition to Gondwana, there are a number of other acquisition opportunities we're looking at: one that we're relatively close to in Zambia; and even -- and there's also one in Kenya, which we're looking to close out on. So again, a very exciting business. Really, it's growing well. And the themes that we invested behind are starting to come to fruition.

Moving on to Synerlytic. Synerlytic was the business we bought out of Torre Industries. The deal closed in April. So we really only owned the company for a quarter. It's had a great start. It's trading above budget for its financial year for 2020. Its EBITDA grew by about 6% last year. But in addition to that -- that's on a like-for-like basis. In addition, we took out a significant number of head office costs. So the business that we've got, we think, is much more lean and mean.

We made an acquisition of Anglo Field Services. Had a multiple significantly below what we bought the business for. Really good adjacency. Managed to integrate the team relatively well and in relatively short order. And we're starting to see growth about -- around the complementarity of the customer bases.

So again, we're pretty excited about this business. Jon Hillary and his team, who we brought in there, are doing a great job to reposition some of the underperforming -- 2 or 3 underperforming portfolios in the greater Synerlytic Group. But we remain pretty confident that having exposure to 13 countries around the Middle East and sub-Saharan Africa just makes it a very, very difficult business to get into. The barriers to entry remain high. And we're starting to see the AI capability set that the company has come to fruition.

So as it says there on Page 14, they already do a significant number of their samples just through an AI process. And they can see that and the efficiencies coming from that growing going forward. So pleasingly, despite only owning it for a relatively short period of time, the valuation on this business was up ZAR 13 million, so circa 14% growth. And that really reflects the head office savings that we've managed to extract from the business over the course of the last quarter.

Gammatek, so turning to Page 15. Gammatek has obviously seen the weak consumer environment. And really, the postpaid up-trade cycle is getting longer. So people taking longer and longer to replace their phones on the (inaudible) side of things has impacted the business. The Huawei issue with the U.S.-China trade war has obviously impacted sales of those phones as well.

That said, there's been a pretty good performance from the business. Both sales and EBITDA growth in mid-single digits, which is pleasing given the market conditions out there. The launch of the new iPhone should be positive for that business. We're hoping to see the upside of that during the next couple of quarters.

We finalized -- we're just in the process of finalizing a new CFO for the business, who I think would be great to bring in some new professionalization to the firm. And we appointed an independent non-exec chairman, who is already starting to help us reposition and grow the business. Again, successfully delivered on its BEE charter and obtained a level 4 rating.

And whilst these things don't sound like -- there's a lot of work that goes into getting these ratings, improving that, obviously part of that is the B-BBEE rating that the Mid Market Fund brings. But if you can get that right, it really does change the nature of your interaction with your customers. And we're seeing that in the increasing proportion of exclusive customers that we have compared to our total customer base, which is obviously a great result.

And there's a lot of innovation going around. For example, they've got a new app for non-Gammatek staff. So these are people working in a Cell C or an MTN store and getting commissions working on this asset, as they can get commissions from selling Gammatek's products.

So lots of good things going on there. Lots of new channels that have been targeted, relatively exciting. It's still -- we've owned it for less than a year. It's still held at cost. As I said, most of our investments in the first year are held at cost. And we'd like to see obviously, now that we're getting to that space, where we can start to hopefully see a benefit in the upside of the valuation.

Moving on to Slide 16, Vertice. Vertice is the MedTech business and the platform that we set up. Our first acquisition was in May 2018. Since then, we've grown the EBITDA just under threefold, 2.5x since the first platform acquisition. That's a function of obviously organic growth but also new products and acquisitions. So it's not all organic growth, unfortunately. And it's a really strong M&A pipeline. There's 2 deals that we are hopefully looking to close out probably in the next quarter.

And really, it's proving out the thesis that if you can get a scalable platform, you can invest behind the AI and the technology, which we've done. We spent a huge amount of time investing in the IT systems. You can then scale this business up to something that can become real critical mass and market leadership in the game that it plays.

And the AI opportunity is huge. Roger has been working very closely with the team. We brought in a new CEO who had a very strong technology background, which has helped. And we really are seeing -- starting to see the benefit of AI in twofold: one is in growing the business, understanding where we can grow this business and what we can do; but equally excitingly, actually, in the product side of things as well. So for example, monitoring -- heart rate monitors and the like in hospitals, et cetera. So lots of good opportunities here. It's a scalable business. 2 or 3 acquisitions that are lined up for the next quarter. And so we remain pretty excited about the prospects of growing this business.

So touching on the last 2 companies quickly. First one is MTN. I won't spend a huge amount of time on it other than when we said at the interims. The share price at the time was around ZAR 80 a share. And we've written the asset down by ZAR 45 million, I think the number was. Pleasingly, the share price has performed stronger in the last 6 months. It's come back pretty much to our end price. So we're now marketing at just under 1x money. So a significant revaluation in the 6 months. Unfortunately, year-on-year, it ends up being flat.

We've had a number of engagements with management. We do believe some of their strategies are starting to bear fruit. And we look forward to hopefully an upward trajectory in this asset going forward as well.

Touching on the last asset, which is the most recent acquisition by the AI fund in TymeBank. We talked about playing the disruption thesis, doing things differently in sectors that have been around for a long time, clearly financial services. And banking in particular has been around for ages. We do believe that TymeBank has a role to play in that space. Its business model has started to prove itself. It's already had 770,000 customers since November, which according to Roger is the second-highest of any start-up fintech business globally. So clearly, they've got something right that they model.

They've got a very large distribution footprint through the Pick n Pay relationship. So access to 700 stores, 14,000 tellers effectively through the till points. And a cost-to-income ratio target of pretty much just under half that of the incumbent bank.

So clearly, there's lots of water just under the bridge here. But it really does talk to the themes that we've talked about: financial inclusion, smartphone technology, disruptive technology and particularly around AI. And working with Roger and Nic is how you do your -- the lending side of your business really is going to be driven by some of the learnings we've actually had from Channel VAS as well. It is how can you lend profitably into this -- the low end of the market space.

Then just talking about its -- I'm going to talk about the companies that have done well. So thankfully, most of the companies have performed well. But the 3 companies, in particular, that have had a very tough last 12 months and particularly probably the last 6 months. So I thought it's worth just touching on those. The 3 assets are Autozone, Twinsaver and Eazi.

If you look at all of those, I mean together, they contribute 8% of NAV. So it's obviously -- it's not great that, that they've underperformed, but they're relatively insignificant part of the total NAV. But the write-down across these 3 assets has been around ZAR 67 million over the last 12 months, so which is around about, call it 40-odd cents a share.

If you look at one thing that's common to all of them, obviously we can talk here about some of the industry factors and those are there. And we need to counteract them. I think there have been a number of own goals as well, to be honest. So we put those down under the controllables there. Some of the -- whether the operational efficiencies, over-capacitation, investment in stock in the form of Eazi Access or just poor category planning and inventory management, there have been a number of own goals.

We brought in -- if you look across all of these 3 under the -- what has Ethos done over the last 12 months, common to all of them are: One, new management. So we brought in new management across the lot. Secondly, a strategic reset. So sitting down with the new management team to say, "How do we turn this around? What are we going to do differently?" Third, operating cost reductions across the 3 of those businesses. We've reduced costs of ZAR 160 million in total. And the last one is the date reset. So putting enough capital behind these businesses to enable them to reach their potential. Those have happened over the last 12 months.

We are starting to see green shoots of recovery. So the recovery plan in Autozone budget year-on-year is for a pretty significant increase in EBITDA. Twinsaver has started to see significant improvements in operating efficiencies and sales volumes and for the first time in a long time, even some positivity around pricing with the retailers. So from a run rate perspective, it's looking a lot more positive. And Eazi has really turned relatively quickly, to be honest. It successfully diversified away from construction. So that's moved from like 54% of revenue to 46%. It's focused on reducing its investment in new stock and utilizing the capacity of the stock that it's currently got. So whilst over the last 12 months these 3 have been a drag on the valuations, we're relatively hopeful that we've seen the bottom end of that going forward.

Just turning to -- looking forward, what are the investment strategies or trends that we as a firm are looking to back, and I won't go through them all in detail. I've sort of set up on the page what they are and on the right-hand side, which portfolio can be talked to those themes. But clearly, an important one is LSM migration and what that leads to from a consumer goods perspective. I think Bevco really talks to that team in the lower LSM space, as does Gammatek.

Growing connectivity and data access. So Eaton Towers was a classic case of that portfolio -- in that portfolio company. Echo as well. Lowest cost to serve scalable businesses. We think Synerlytic is one of those high differentiated services. Vertice is very difficult to get into once you build a scalable platform. And then technology-driven disruption to business as usual. So Channel VAS and TymeBank really are classic examples of taking existing businesses, doing something differently, whether it be using AI or something similar to create a moat around your business.

And the last one is businesses that we can scale across countries. So very importantly, we don't want to be seen as a -- in a single country, having single-country exposure. So Echo with its 9 countries across Africa, Channel VAS in 25 countries and Synerlytic across 13 really gives you great access to some high-growth sub-Saharan African countries without taking single-country currency or political risk.

That said, across all of these, the one that we would add to that would be deep value opportunities that have cyclical upside. And we're probably in our portfolio, if you look at the pipeline, I'll say at least 40% of the deals that we're looking at really do have that thesis hanging over them. So in addition to those 6 or 7 key themes, the deep value thesis at this point in the cycle is one we're focused on.

Moving quickly on to the valuation page to Page 22. You will have seen some of these charts before. So again, I won't dwell on them. The current NAV being ZAR 11.34. Of that, invested capital is currently ZAR 9.06. But once the Gondwana deal is done, it's around ZAR 10, which will leave cash of about ZAR 1.31. That makes us 88% invested. That's on an NAV per share basis. It's 82% on a total assets basis.

And the discount, this is as at June when the share price is ZAR 7.80, is around 31%. The key valuation metrics, we've reduced the valuation multiple across the portfolio. It's now 6.9x EBITDA, and we'll go into a bit more detail on that later. The net debt-to-EBITDA is pretty low, which we think is pretty good for this point in the cycle but probably at the bottom end of what we would look to have at 1.9x. And the discount to the peer group, so where we value against the peer group of companies, is also -- and it's a coincidence also at 31%.

Moving just to Page 23. So to highlight what that means from a value perspective. On the left-hand side, we show, for example, the valuation of the portfolio -- the peer group companies that we value our portfolio companies against was 100. We apply a series of discounts to that to move you to -- this 31% would move -- our valuation would be at 69. The current market value of that portfolio is currently at 48. That's a 31% mark -- discount to NAV. So effectively, the implied market valuation of our companies is around 50% less than the peer groups they're valued against.

On the right-hand side, at the top, we look at NAV. So if you start with ZAR 11.34, you've got ZAR 2.28 of cash and ZAR 9.06 of invested NAV. And the current portfolio has a valuation of 6.9x. You're effectively valuing the equity at 5x. What it does if you take this current share price of ZAR 7.80 as of June, you take the same ZAR 2.28. You've got invested NAV effective valuation of ZAR 5.52, which implies that the market-implied valuation on the portfolio is not 6.9x but actually 4.8x, which is a PE of just under 7x across the portfolio.

What we thought -- averages are massively distorting. So on Page 24, we thought we'd just highlight, despite the difficult growth environment, how the portfolio companies performed. There's 19 portfolio companies. We showed both by number of companies, which is the number you see there, but also by value to give you an idea of where we've invested most of our capital.

So starting at the top left, what you can see is 75% of the companies actually grew revenue year-on-year, which despite the difficult conditions, we think is pleasing from a portfolio perspective. There were 4 companies that went backwards year-on-year. But predominantly, 75% of the companies grew.

If you look on an EBITDA basis, that talks to the theme that we talked about earlier of costs going up higher than revenues. Only 50% of the portfolio companies grew EBITDA year-on-year. But probably quite pleasingly from our perspective is if you look at the Chart #6, more than 15% growth in EBITDA, 40% by value of our companies are growing by more than 15% a year. So despite difficult conditions, I think it talks to the diversity of the portfolio both by country and also by sector. So 50% of the companies grew by EBITDA, and 40% of those grew by more than 15% year-on-year.

The net debt-to-EBITDA. We only have about 20-odd percent of our companies that have more than 3x gearing, which at this point in the cycle, we think is right. That means circa 80% of our companies have gearing less than 3x and 33% have no gearing. So a very high free cash flow conversion in some of those businesses. And we'd hope to see dividend flow coming back from those portfolios.

Bottom right, what it shows is we split up the assets by EV/EBITDA. This is the market-implied EV/EBITDA. So effectively, 75% of the portfolio is valued at less than 5.5x EBITDA if you take the first 2 charts. So we think that's low. We're looking at ways we can reduce the discount. But that's the effective price at the moment. It would suggest that there's a very significant derating of the portfolio by the market.

And then just quickly on the portfolio. If we turn to Page 25, if you look at the portfolio company returns, so these are returns since we own the assets. And what you can see, those companies on the left that have a number of more than 1x effectively shows value accretion, so positive value contribution. Around about 60% of our portfolio companies on that bucket. 10% of our portfolio companies are held at cost just because we've only just acquired those businesses within the last year. So effectively 70% of our companies have either -- have value accretive to the portfolio. But there are still 30% of the companies that have been -- had a negative value impact. The ones that I pointed out to you are Autozone, Eazi and Twinsaver. They have a pretty significant impact over the last 12 months.

Turning briefly then to liquidity analysis. We get a lot of questions from investors talking about, "How does the Board manage its liquidity? How do they think about it?" On Page 27, we just set out for you what is the current exposure in terms of commitments to the underlying funds. You will see there, for example, in Fund VI, it's nearly fully invested. There's very little uncommitted or undrawn commitments in that. With -- for example, in the Mid Market Fund, we've got ZAR 360 million of undrawn commitments to that fund. Or take Fund VII as an example, ZAR 887 million. So if you took -- on the right-hand side, we currently have commitments of ZAR 3,161 million. So just over ZAR 3 billion. We've currently drawn just about half of that. And so we have outstanding commitments of about ZAR 1.5 billion.

What I'll do over the next couple of pages, as I explained to you, how do we look at the liquidity? And what does it mean from the perspective of being able to manage our commitments going forward?

Just turning to Page 28 quickly. We do a huge amount of benchmarking on liquidity based on what we consider the top 5 European competitors in the listed private equity space. Those are HarbourVest, HgCapital, Apax, Princess and Pantheon. There's 2 ways that they all manage their liquidity.

So they run a very similar model to us. The first is a total commitment ratio. That's your invested capital plus your undrawn commitments divided by your net asset value. Obviously, you want that number to be as low as possible. Again, we're at about 163%. Again, if you look across the peer set, it's not out of line but probably slightly higher than the peer set.

The second ratio is what they call a commitment coverage ratio, which takes your debt facilities into account. So you take your cash plus your unutilized debt facilities over your undrawn commitments. And obviously, you want that number to be as low as possible. Again, I think -- again, on an average, we're slightly below average in this space. So not out of line with the market and our comparative peer set.

Turning to Page 29. However, what we've tried to show here is how the Board looks from a liquidity perspective. We've got a very detailed model, which looks asset by asset, fund by fund. When are we putting assets on? When are we likely to exit? What's the likely exit multiple on those businesses? What are the returns likely to be? So it's a pretty convoluted model.

But to try and take you through it at a high level, our total commitments from the previous page that I mentioned was ZAR 3,161 million. In all of those funds, you will always never be drawn at 100% because obviously fees are drawn within the fund as well. So we pay our fees separately through the model. So we need to adjust for that. So the fees adjustment is around about ZAR 300 million -- ZAR 308 million. So effectively, net commitments to those funds is about ZAR 2.85 billion. We currently invested capital of ZAR 1,452 million. We have cash of ZAR 493 million, a debt facility of ZAR 500 million and treasury shares to the extent that we were allowed to issue them to the market of around ZAR 69 million, which will give you a commitment gap of around ZAR 339 million.

What does that mean? That means, if today, all of the funds we invested on call their capital, we would need to -- we'd be short for ZAR 339 million. The reality, as you can see by the pie charts at the top of the page, is the outflows over the next 5 years that we modeled. It's not all going to happen in year 1. So we've tried to model. And what we set out above is 32% of the outflows will happen in 2020, 19% in '21, 19% in 2022. That's the basis of the model.

And as you can see on the right-hand side of the page, the important numbers to focus on are those red charts, which talk to available liquidity. So that's -- even in 2022, the available liquidity at that point would be around ZAR 293 million.

So that's pretty much how the Board looks at it. They are very focused on liquidity. They're continuously looking at ways to enhance liquidity. This is based on current commitments only. So to the extent we add additional commitments to the book, that would change. Or if there are new transactions that come our way, that may precipitate a different engagement with shareholders. But based on what we know today and our current commitments, there's no need for further capital outside of our equity and our debt facilities.

Just moving on to one of the last charts that we were asked to do by shareholders as well is to look at the discount that we trade at to NAV, so the share price discount. And most importantly, a lot of questions asked to me, "What is the Board's view on the discount?" The Board -- we had a Board meeting last week. Of the 6 hours of board meeting, I would say at least 2.5 were spent around how do we sort out the discount, all the things that we can be doing from a strategic perspective, a structural perspective, from a capital allocation perspective.

I think the points to take away from this chart, just the 3 land points is if you take the European peer set that we showed there, from Hg all the way to Private Equity Holdings there, the average discount in Europe is around 18%, 1-8. If you look at the average discount around -- in South Africa, that number is nearly double, so 36%. Currently, we trade at 33% discount. And what we also show in this chart, the red dots there, are the NAV growth.

So I think the most important point, there's a really good correlation between NAV growth and your discount. So the focus of management certainly from an Ethos perspective is to grow NAV on a net basis above your cost of equity. And if you're able to do that, you should trade at a premium to your NAV. But certainly -- if not, certainly narrow the discount.

So the focus from the management -- the management's perspective is to grow NAV. From a Board perspective, it's really around capital allocation, including buybacks. How do we allocate capital? If you got the opportunity to buy back shares compared to putting it into a new fund, really looking at what incremental return do you need not to buy back shares. So that's a huge focus of the Board. The strategic options to increase size and liquidity is important, and the Board continues to look at that.

And then lastly, increasing transparency with investors. And I hope you would have seen over the last 12 months, we spent a huge amount of time trying to increase the transparency, whether it be around liquidity, valuations, unpacking the portfolio companies with the investors to help bring some transparency to enable investors to make better choices.

So just in conclusion, just moving to the outlook slide. Unfortunately, I'd like to be able to sit here and say that the South African macros are likely to change anytime soon. I think we're realistic. I think we don't see any short-term improvement. That said, the portfolio companies have really, in many cases, borne the brunt of the last probably 18 months, 2 years of tough environments that have started to turn the corner. And we're starting to see real benefits coming out of some of the actions that have been taken over the last 18 months.

So we haven't got our head in the sand. We're not banking on operational performance. If it comes, that would be fantastic. But I still think it really lends itself in this environment, looking for great, high-quality businesses to buy at very reasonable multiples.

Outside of South Africa, it's obviously a very different thesis. Significant growth rates across the continent. The key issue we remain focused on, particularly as a manager, is around how do you manage the currency and political risks, which we think remain elevated, been very strong devaluations in most countries across the continent. So being able to manage those issues and hopefully price in dollars is a key risk mitigant that we look at.

We do think there'll likely be NAV growth over the next 12 months. Just the fact that the portfolio is now 80% invested, has moved through that 1-year cycle. And we will start to see benefits in NAV growth despite the difficult environment.

And as we said, the pipeline remains very strong. But we can remain very selective on deals. And I think that's the key issue that makes a good investment. If you can buy good investments at the right -- good deals -- good businesses at the right price, over time, you will make decent returns.

Liquidity management remains a key focus of the Board, as I've mentioned, and looking at ways to enhance shareholder value. Buybacks do form a part of that. It performs part of the overall liquidity assessment. And then the Board continues to also focus on other strategic options that could unlock value for shareholders. So the Board has a very wide-ranging view on how we can try and narrow the discount. And hopefully, some of those will come to fruition over the next 12 months.

So again, thank you very much. We -- it's been a tough year. It's good to see that the portfolio has gone up. We're not happy that it's not gone up in line with our cost of equity. That is our target for the next 12 months. But we really do remain very appreciative of the support we've had from shareholders. And we remain very open to having any discussions with shareholders around any of the issues either today or on a one-on-one basis. We remain significantly open for that.

With that, I'll turn it over and -- if there are any questions to be answered.

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Questions and Answers

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Operator [1]

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(Operator Instructions) There are no questions on the conference line at this stage. I would like to hand over to the questions on the webcast.

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Rohan R. Dyer, Ethos Private Equity - Partner and Head of IR [2]

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Judith, thank you. It's Rohan speaking. I'm going to ask the questions that came through on the webcast in written form, and then Peter will respond.

First question is from Omri Thomas of ABAX. Could you please expand on your comments that Ster Kinekor is unbundled to shareholders? Does it mean that Ethos now owns Ster Kinekor directly rather than through Primedia?

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Peter Hayward-Butt, EPE Capital Partners Ltd - CEO [3]

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Yes. So Omri, that's exactly right. So we unbundled it. When we first came in, we did a strategic analysis of the key drivers behind the various businesses. We recognize that this business didn't have any of the same key drivers. It was an unloved business within that space. And what we effectively undertook to do is to just unbundle the shares all to the same shareholders.

So we own it now exactly at our same proportions as we do with Primedia. But we brought in a new CEO, CFO and Chairman. And I've entered on that Board. And we actually focus on that company and how we can drive value in that company separate from Primedia. So it was effectively unbundled to shareholders. We own it in our same proportion that we did previously, but it's got a microscope on it. And it really has seen great growth as a result.

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Rohan R. Dyer, Ethos Private Equity - Partner and Head of IR [4]

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Second question. There are 2 from Neil Brown of Electus. The first one is that the 3 companies that were bought by Ethos Capital and written down being Autozone, Twinsaver and Eazi were already owned by Ethos Funds. Did you overpay for them?

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Peter Hayward-Butt, EPE Capital Partners Ltd - CEO [5]

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Neil, it's a great question, and there's many facets to that. The first question is actually, well, we didn't -- did Ethos overpay for those assets? I think not Ethos Capital or the Mid Market Fund coming in. I think at the time when we -- when we paid -- when we -- the Mid Market Fund, which we are invested through, paid exactly the same price that Fund VII had paid. So there wasn't an arbitrage in the pricing that we came in at -- from an Ethos Capital perspective.

The first year of ownership of those assets, even after we were in, we're very positive on those business. You will remember, I think Autozone was probably up 15-odd percent in that first year; Twinsaver, probably 8% or 9% and maybe Eazi was flat, I can't remember. But -- so the first 12 months was a pretty positive outlook and lends itself to why we had invested into those businesses. All 3 of them have been hit by different factors. And some of them have been own goals, to be honest.

So if you say that you overpay, if some of those mistakes are our own mistakes, you can't blame in what you paid. I think in retrospect, yes, we probably did overpay for those assets. But importantly, from an Ethos Capital perspective, we didn't overpay relative to where Fund VII had got in.

I think we made some mistakes in those assets. If we were honest with ourselves, I think we've invested behind a lot of capacity in Twinsaver to make it the lowest-cost provider there. But at the end of the day, if the market is tough, maybe it was the wrong time to make that investment call.

So I think we look at ourselves and we take it very personally. So I don't think it's necessarily only about overpaying. I think we did know those assets. It transpired 12 months into our investment that we got the thesis wrong, and we're working very hard to resolve it. But it's not something we're particularly happy about.

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Rohan R. Dyer, Ethos Private Equity - Partner and Head of IR [6]

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Second question from Neil of Electus is the key AI work that Roger and Nic are doing in many of the investee companies, how are they locked in by Ethos and incentivized?

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Peter Hayward-Butt, EPE Capital Partners Ltd - CEO [7]

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It has been great to work with Roger and Nic. I mean they're great guys. They bring a different perspective to us as investors but also to the firm. In the AI Fund, they are the 2 key partners. And so as with all of our funds, the partners are locked in by the fact that they have all the -- effectively carry. Most of the carry in the fund would go to them.

Secondly, the 2 of them have put a huge amount of their own capital, around about ZAR 80 million, I think the number is, into the fund. So they're significantly invested in that as well. So it's really around that. No different to any of our other funds there like in '20 it would be in Fund VII. They're locked in through being partners in that fund with -- effectively where they get the carry. And they've invested very significantly behind it as well.

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Rohan R. Dyer, Ethos Private Equity - Partner and Head of IR [8]

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Another question from Charles of Titanium. On Page 29, can you please clarify the fee adjustment?

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Peter Hayward-Butt, EPE Capital Partners Ltd - CEO [9]

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Yes, Charles. Relatively simply put, in each of the funds, let's say you invest ZAR 100 into a fund. You would only ever draw down ZAR 90 for actual commitments into the underlying assets, and 10% would always be withdrawn for fees or any down provisions.

In our modeling, we value -- we do the fees separately. So we would never be -- as our commitment to, let's say, Fund VII, we'd only ever be hit on 90% of our commitment in effect. So our net commitment is our real exposure to that. So that fees adjustment really just takes account of the fact that in each of the funds that we've invested in, we won't be drawn down for fees because we do fees separately. And therefore, our real commitment is, call it, 90% of the commitment to that fund.

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Rohan R. Dyer, Ethos Private Equity - Partner and Head of IR [10]

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Thanks. There are no further questions on the webcast. Judith, back to you.

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Operator [11]

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Thank you. (Operator Instructions) We have no questions from the lines. Has anything come up on the webcast?

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Rohan R. Dyer, Ethos Private Equity - Partner and Head of IR [12]

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No.

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Operator [13]

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Sir, we have no questions on the line or the webcast. Do you have any closing comments?

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Peter Hayward-Butt, EPE Capital Partners Ltd - CEO [14]

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No. Thank you very much for your time, guys.

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Operator [15]

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Thank you. Ladies and gentlemen, on behalf of Ethos Capital, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.