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Edited Transcript of ICP.L earnings conference call or presentation 22-May-19 8:00am GMT

Full Year 2018 Intermediate Capital Group PLC Earnings Presentation

London Jun 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Intermediate Capital Group PLC earnings conference call or presentation Wednesday, May 22, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Benoit Durteste

Intermediate Capital Group plc - CEO, CIO & Director

* Philip Henry Keller

Intermediate Capital Group plc - Chief Finance & Operating Officer and Director

* Vijay Bharadia

Intermediate Capital Group plc - Executive Director

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Conference Call Participants

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* David Leslie McCann

Numis Securities Limited, Research Division - Director & Diversified Financials Analyst

* Elizabeth Miliatis

BofA Merrill Lynch, Research Division - Research Analyst

* Gurjit Singh Kambo

JP Morgan Chase & Co, Research Division - Head of Diversified Financials Research

* Neil Thomas Welch

Macquarie Research - Analyst

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Presentation

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Benoit Durteste, Intermediate Capital Group plc - CEO, CIO & Director [1]

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This is ICG's Full Year '19 Results Presentation. It's been an exceptional year for ICG. We have achieved several meaningful milestones during the course of this year.

Starting with fundraising, EUR 10 billion raised. As a result, our AUM is up 29% to EUR 37 billion. Importantly, third-party fee earning AUM is up 41% to just under EUR 30 billion. This has positive implications both immediately and in the long term. Immediately, we benefit from an uplift in revenues and profits. Fee income is up 32%. Fund management Company profit is up 51% to just shy of GBP 144 million. And thanks to a strong performance on the Investment Company as well, group profit before tax is also up 49% to GBP 261 million. Long term, this represents a step-up in our future fee streams, and as a result, a significant increase in locked-in value.

It's also been a strong year for investments. We have deployed EUR 6 billion, crucially without compromising on investment discipline and investment quality. As a matter of fact, all of our funds, all of our portfolios are performing well without exception.

So it's all good news. And as a very clear sign of the confidence we have in the business and its prospects, we have made a structural enhancement to the dividend policy. In other words, there's a more generous dividend policy effective immediately. As a result, the final ordinary dividend is up 67%, and the full year dividend at 45p per share is up 50% on previous year.

Our strategic priorities. We are unsurprisingly well ahead of plan. We've met a number of our objectives, fundraising obviously; importantly, the Fund Management Company profit becoming the dominant profit contributor; the operating margin; and as we've just discussed, the dividend policy. Some of our objectives, of course, require constant effort. That's notably true for the optimization of the balance sheet and for the expansion of our strategies, which is going to be one of our key focus this year as we will discuss later.

But before that, Philip is going to walk you through the financial results.

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Philip Henry Keller, Intermediate Capital Group plc - Chief Finance & Operating Officer and Director [2]

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Good morning, everyone. I couldn't really be happier to report this set of numbers as my last. To say that I'm rather pleased would be a restricting British understatement.

Our main profit number, fund management profit is up 51%, which for a company of our size is really something we can be proud of. And this, of course, has been built up, this performance was built up over a number of years, a decade of diversifying the fund strategies that we can offer our clients, 3 decades of building up the European corporate franchise, which once again has been a real platform of the profit growth; and 8 years of building up our marketing and operational infrastructure.

Below the segment analysis, group profit is up 49%. Fund Management Company profit up 51%. That's built on a fee increase of 32% in third-party fees up to GBP 220 million. The operating margin as seen here has kicked upwards from 45% to 52%.

For the Investment Company, the net investment return is 12.6% which quite coincidentally, is exactly the same as last year. If you remember at the half year, we had a little bit of excitement because of Intelsat, but that excitement has now gone down somewhat in the [impact that it's safe to say] only a very small impact on the year-end numbers. I'll look at that a little bit more later. So this 12.6% is a pretty -- is a clean figure.

The balance sheet really is doing its job of supporting the fund manager. And indeed, the balance sheet is in very good shape. The investment portfolio grew from GBP 2 billion to just under GBP 2.4 billion over the year as we invested in new and existing strategies. But our current investment ratio really remains pretty consistent at 7%, so that hasn't really grown.

The gearing ratio at 0.86x is at the low end, still at the low end of the range, but more comfortably sitting within. I think that's a good place for us to be at the moment.

On the liabilities side, the company is very well funded. We issued $400 million of private placements into the U.S. market earlier on this year. That has maturity of 5, 7 and 10 years, which means the private placement program which has now been going for a very long time plus the shareholders' funds, funds the long-term current investment book. So that's very good matching between the assets and liabilities. Whereas the bank funding, which also has been refreshed this year, provides us with capital for our shorter-term assets that we hold for development, business development purposes and also an opportunistic war chest, so again, matching assets and liabilities quite closely.

If we look at the Fund Management Company, the model is working. What we've seen over the last few years is a small, a fairly small increase in the balance sheet. It's been a platform, one of the platforms for growth of the large amount of fund management activity and profit growth. And that's also been assisted by more effective leveraging of our operational and financial base. As a result, we see an increasing profitability in the fund manager. Again, very much the model as we set it out to work.

So AUM, assets under management, grew 30% to 40 -- EUR 34.5 billion. Fee earning AUM is up 41% to GBP 29.6 billion, so just under EUR 30 billion. Both were impacted by the raising of Fund VII, which added EUR 4 billion to both because Fund VII is charged on committed capital, so increases in AUM and fee earning AUM by the same amount. But we also saw some good increases in fundraising and AUM in other areas. The CLO program saw the issuance of EUR 1.5 billion of CLOs. And our liquid strategy, our open-ended credit funds, saw fundraising of EUR 2.2 billion, which is way ahead of where it's been for the last few years. And if you recall, this is an area we've been investing in for the last 3 years in building up that team, building up its track record. It's very scalable, and so it has a very high marginal profit. So it's very good to see that fundraising really starting to come through.

The other thing to note on this slide is realizations at the low end of the range that we've seen for the last few years at 9% of AUM.

Let's look in a little bit more detail at how the fees were generated. The bigger bar graph at the bottom shows the increase in fees by the different strategy class, strategic classes. And all of the strategies have seen growth in the fees over the last 3 years. Most notable last year was on the left-hand side, Fund VII which saw a big increase in the corporate investments. But we've got a strong fundraising year behind us, and that means we will see inherent growth and natural growth coming through in SDP and liquids and CLOs and strategic equity, so I'd expect this trend to continue.

If we turn to the fee levels, which is the subject of the smaller graph on the right, on the top right, overall, the weighted average fee rate is consistent at 86 basis points. But as is often the case, the mix effect masks the actual output fee movement amongst almost all of our strategies. For the European strategy, if you look over the last 3 funds, which is the best way to look at the same product over 3 vintages, the European strategy has gone from 132 basis points to 142 basis points of fees. And I'm talking now fees net of discounts that we yield up.

Senior Debt Partners has gone over the same 3 vintages, 73 basis points to 85. There's been a drop as you can see in real estate, but that reflects a change in the fund strategy where we reduced our target returns, and naturally and therefore the fees, in order that we could target a larger fund, which is currently being raised. So that was a decision to target a different part of the capital structure for real estate, and in fact the more senior part of the capital structure for our real estate lending.

And then senior strategic equity on the right-hand side, that's come from 104 basis points to 127 basis points. So as you can see, there's very good upward movement and very good protection in the fee levels that we're managing to achieve at the moment.

I wanted to look a little bit again, I did this at the half year, at the contractual nature, the sustainability and the protection -- how protected our fee levels are. This shows the erosion of our fees on our current AUM assuming no new fundraising. Now I showed this at the half year and I just showed 5 years. And we looked at them and saw a 6% erosion per year on the fee base of the company. We've now extended that out 10 years. And as you would expect, the erosion continues at a slightly faster rate as these funds run off and we have a lower AUM on which we're charging.

But if they're in unfavorable market, 2 points actually to draw -- to go into on this. Well the first is that in unfavorable market conditions, realizations will slow down and that erosion will also slow down. So the fee rate is more protected in unfavorable market conditions. That is very good defensive quality of the business model.

But I think more interestingly, we did some calculations to establish what amount of fundraising we would have to achieve on average every year to sustain the current level of contracted fees, how much we would have to raise so that the FY '20 level would stay flat. The answer is EUR 3 billion. So if we raise EUR 3 billion, which is half of our current target and less than 1/3 of what we achieved in FY '19, we will maintain contractual fees at their current level. That demonstrates the -- both the strength of the business model, but also the huge potential that we have for growing because every euro that we raise above EUR 3 billion increases that contracted fee base.

Let me go from the top line to the bottom line. The margin at 52% was well above the 43% target. We benefited from increasing leverage of our operational platform, but also the fact that newer strategies are now growing into their second, third and fourth funds, which means that we have increased fees with only modest increase in costs. But the biggest impact on fees -- on margins for this year was the impact of Fund VII, which came on-stream at the beginning of the year, where we saw a big increase in fees because it was on committed capital with virtually no increase in costs in that strategy.

That made this year a bumpy year. This won't happen every year, and we do need to keep investing in growth. And as the last slide illustrates, we can create huge amount of value by continuing to invest in growth. Having said that, we will be revisiting the fund management profit margin during the next 6 months and the company report on last -- with the half year results.

So looking at the cost base, we've clearly seen a very effective leverage of the platform with the cost-to-income ratio reducing from 55% to 48%. And we've looked back again over a 5-year period at what are the operational and the marketing base of the company and how these platforms become more efficient over the last 5 years. So looking at FY '14 to FY '19, the marketing team, which we brought on-stream just before that about 6, 7 years ago, has reduced in costs from 6 basis points of AUM to 3 basis points of AUM. Now a very, very rough back of the envelope calculation, if we use placement agents entirely and didn't use our own team, the cost would be about 15 to 20 basis points, which reflects the value of bringing up our team internally and of course that has many other nonfinancial benefits as well.

For the operational infrastructure teams, so everything that isn't marketing and investing, what we generically call infrastructure, from FY '14 to FY '19, the cost of that team has gone from 19 basis points of AUM to 9 basis points, so again showing a quite considerable scalability and operating leverage.

Moving on to the Investment Company. The investment book is larger. Net investment return has been constant at 12.6%. Intelsat, which had an impact of GBP 41 million unrealized gain in the first half, had a GBP 27 million unrealized reduction in the second half. So at the end of the day, Intelsat came and went and left us a little bit better off, but not much.

One of the -- the net investment return is made up of contractual interest, be it rolled up or cash, and also the change in -- the fair value change in valuation of our equity portfolio. So one of the metrics we look at is trying to bifurcate what is the impact on the equity portfolio between the performance of the underlying businesses and the markets because obviously we're using multiples that are driven by the various stock markets. The multiple that we used at the end of FY '18 was 10.4x earnings. And the multiple at the end of the current -- of the year we're looking at, FY '19, was 10.3x. So virtually no impact in net interest. Net investment returns has come from market uplift. Almost all of it -- well all of it has come from either contractual interest or from the performances of the underlying businesses, which is the best sort of income.

We're sticking with the guidance of 11.5% even though we've been a little high for the last 2 years for net investment returns. And that's because as we diversify, we use the balance sheet to invest in a number of product areas, which tend to be dilutive of the net investment return, so that suppresses it slightly.

And you can see that when we look at where the performance of the balance sheet and where the net investment returns have come from. The bottom line there, the other category, which includes all of the business development-type investments, includes the liquids, includes real estate are generally below 11.5%. And that contributed just under GBP 60 million of net investment return as opposed to GBP 90 million -- GBP 19 million a year ago, so we'll continue to see a little bit of dilution.

But the main drivers of the returns still come from the European funds at the top there, strategic equity and from North American private debt. And you can see the returns if you look at the third column, the third column from the left, FY '19 net investment returns, these returns are very impressive between 15% and 30% during the year. That's very good for the balance sheet, but more importantly it's very good for our clients.

In fact, what our clients really look at is the right-hand column. They look at the fund return to date. And you can see there also some very impressive returns, 25%, 19%, 40%, 17%. That's what our clients see. It's what they care about most, and they're well above the fund targets.

With the diversification comes a slightly dilutive net investment return, but the positive of that is we have a more diversified balance sheet. Say, we've got some information here around the geographic and the sectoral diversification. From a sectoral point of view, from a sector point of view, there's a bias towards health care and services. Cyclicals, by which I'm looking at media and manufacturing, leisure and logistics, account for 17% of our balance sheet portfolio, corporate portfolio. The market is at 36%, so we're underweight cyclicals.

The geographic split in the pie chart shows good geographical diversity -- geographic diversity. You'll notice in gray, the U.K. as a continent by itself is 25%. But of that, only 80 -- 87% of the -- of the 25%, 87% of these are businesses which are intra-U. K. So they're U.K. businesses sourcing from the U.K., selling to the U.K. So it's things like holiday parks in the U.K., debt collecting in the U.K., providing -- supply teachers in the U.K. So these are not companies that are doing a lot of international trade. They're very much sealed within the U.K. And that has been our focus on the U.K. corporate portfolio for some time now. So it's not surprising that it's so weighted towards that kind of asset.

As you know, we use the balance sheet to access larger deals for some of our existing funds, and over the last couple of years, 2 deals at 2 companies in particular where we've managed to access very large deals by using the balance sheet as well as our third-party funds. The largest of these are Domus and Minimax, and both have done extremely well. And as a result of revaluing the equity that we own in those businesses, both of them have broken through the GBP 100 million mark in terms of their balance sheet position. I mention this only because it's unusual. We haven't had assets on the balance sheet of that size for some while. We're actively managing those positions through syndication. I just expect them to reduce over the next 6 to 12 months. Both incidentally are excellent companies.

So finally, on the Investment Company, we've seen overall a reduction in IC costs. This principally is due to the business development costs that we charge to the balance sheet. That's -- we show them separately down at the bottom, GBP 5.6 million to GBP 2 million. Business development costs represents the cost of teams that we bring onboard and we initially invest on the balance sheet alone. And then they transfer to the Fund Management Company as soon as they raise third-party income, third-party fees. In this case, you'll recall last year, we were exploring an energy fund. The costs of that were in the FY '18 numbers. And they are not obviously in the FY '19 numbers, so there's been a reduction on those costs. There's also reclassification in our staff costs of national insurance that have moved from the staff costs line to the deferred award line, which is why there's a change there.

So looking at guidance for the coming financial year, I'll just point out a few of these items. At this stage and in the current market, we expect fundraising to be consistent with our GBP 6 billion average that we've spoken about before and therefore to stay comfortably above the rolling average, which is the formal target.

The operating margin, we need to recognize that we need to get a balance between benefiting from the improved leveraging of the operational base and the marketing base and the investing base for the company, but also making sure that we got the potential to keep growing the business through the OpEx line. But we will be revisiting the target of 43% in the second half.

The balance sheet is getting -- is a little bit larger as we grow and diversify. So it's gone up to GBP 2.4 billion from GBP 2 billion during the year. But we don't expect the current investment ratio to increase, but to continue to either stabilize around 7%, or still to continue to go down but just more slowly.

I think probably most interestingly in this guidance is and most significantly is the refinement of the dividend policy, to distribute more of the spoils of the success of the Fund Management Company to the shareholders. And we're doing that by using -- and the refinement is to use the group's effective tax rate to get the after-tax profit for the fund manager, rather than the notional tax rate applicable to the FMC. So that naturally enhances the pool from which we can draw our dividends, which is that 80% to 100% pool. We have a low tax rate at group level, so that, we expect this pool to be larger and to fund larger -- fund the dividends for the foreseeable future. And we're applying that for the year just gone. This refinement reinforces the confidence that we have and results in a more generous dividend policy.

So my 26th and final set of results and some 600 slides later, and some of you sat through all of them, for which many thanks and apologies. Forgive me for ending with this slide. It's possibly my favorite. Our 43% (sic) [33%] compound annual growth rate since FY '14, I think, perfectly illustrates our strategic journey not just over the last 5 years, but after -- over the last 10 years since we focused on fund management. So it's a great pleasure to end with this slide.

It's also been a great pleasure to work with you. I've enjoyed many hours of discussing ICG, and with some of you, a range of other topics nothing to do with ICG. I'd like to thank you for covering us and helping your clients to get a better understanding of a very special company, a company that's a little bit unusual, but a company with huge growth potential. So thank you very much.

And with that, I will hand back to Benoit.

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Benoit Durteste, Intermediate Capital Group plc - CEO, CIO & Director [3]

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Thank you, Philip.

As usual, we are going to take a look in turn at each of the 3 pillars of our strategy: investing, managing the portfolio that's driving track record quality, and growing assets under management through fundraising.

Some observations on our markets. Broadly, the markets remain favorable. Deal flow is strong across geographies. In some countries, it's actually reaching new highs, particularly in Germany and France. There was one exception unsurprisingly in the U.K. where we've seen a marked slowdown in activity, to which we are contributing because we're also being a lot more cautious about investing in the U.K. in the current environment. But by and large, the deal flow across geographies remains quite strong. And it's helped by the performance of underlying companies. This is -- this database broadly comprises mid-market private firms, and you can see they're still enjoying a healthy levels of top line and EBITDA growth.

The market is very competitive though. It has been for a few years now. But there's clearly a lot of dry powder, a lot of capital that looks to be -- that's seeking to be deployed. And we see that this is putting pressure on valuations. It's putting pressure generally on terms, notably on leverage. As you could see on this slide, leverage levels are creeping up.

A few observations here. This is ICG's proprietary database. We have about 1,400 private companies in that database. But as we enrich the database, we've introduced a bit of a skew because there is an increasing proportion of larger syndicated deals in the database and they tend to have a higher leverage. So there is a mix effect that is exaggerating the upward trend in leverage. But nevertheless, even if you strip that out, leverage is going up.

On the other hand, and we have pointed to that before and it remains true, and I'm glad to see that the FT has written on it today, the net interest coverage is at a historical high. And what that seems to indicate is that even though leverage is going up, it's going up on companies that are very healthy, that have strong cash flow generation. They are certainly not under stress. Very different picture from '08, '09.

The other important element is that the private markets are not uniform at all. There are significant differences by country, by type of transaction, by size of transaction. And the fact that we've been investing in our origination platform and our teams locally for decades now makes all the difference. As you could see on the top part of this slide, leverage on our own portfolio remains at a relatively conservative level. It's actually been trending down. It's certainly significantly lower than the market average. So it is possible in this competitive environment and provided you have the origination capability, it is possible to invest in opportunities that have an attractive risk/return profile.

Which is important to bear in mind as we look at the next slide because we've been deploying very well. It's possible to deploy well without compromising on investment quality and investment discipline. We've invested around EUR 6 billion during the year, which is 23% up on previous year. And if you look on the right-hand side of the bubble chart, all of our strategies are investing on schedule. Some are ahead.

Worth pointing out here, Europe Fund VII is off to a very strong start. Actually, as we close -- in the next few weeks as we close our latest transaction, we will be close to 50% invested in that fund. That's in the first year of the life of the fund. That's a very strong performance. Of course, the question can be, are you sure you're not compromising on investment quality? And without going into too much detail, just one metric on Fund VII, the senior leverage, the average senior level on the portfolio for Fund VII as of end of March was 3.7x EBITDA. That's way, way below the market average.

So you can deploy very well without compromising on investment quality. And that's exactly what our LPs are looking for us to do, is to be able to deploy their money in interesting opportunities.

The positive aspect of the early performance of Fund VII, actually there are several. One, as with any fund with fees on committed, early strong deployment has a very significant positive impact on returns, so that bodes well for the performance of that fund. The second aspect is it's highly likely that we will be back in the market with Fund VIII earlier than we had anticipated. Typically, you start thinking about a successor fund when you're 75% invested in any fund. We're going to be close to 50% invested in Fund VII. And finally, our ability to deploy in this fashion could help justify a further increase in the size of this strategy through Fund VIII when it comes to market.

This is a familiar slide. That's our track record, or most valuable asset. The message hasn't changed. We haven't had a failed fund in our entire history, which in our world is an exceptional outcome. And this should be further improved by the performance of our exits or realizations during the course of this year. We have taken advantage of very favorable market conditions to exit 24 transactions. And as I was pointing to, the performance that we've crystallized through these exits will push the performance of all the respective funds up for every single one of them. So it's a very good outcome.

At the same time, this is a snapshot. This is performance over 1 year. That doesn't make a track record or a reputation. A single fund doesn't even do that. You need to show consistency through cycles. And for that as an illustration, I've included a slide that we've been using recently in marketing and particularly as we were fundraising our European mid-market fund, and I'll come back to that. The -- if you look at that orange distribution curve, that shows the performance of all of ICG's realized European funds. And the blue line shows the private equity, the private equity funds, buyout funds. What this shows is our strategy, even though it's at a lower risk point than traditional private equity, is delivering similar returns. Actually slightly higher because the private equity curve is somewhat skewed to the left.

But let's just say it's delivering comparable returns with importantly a much lower standard deviation. Our standard deviation here is 0.11. So what this says is not only are we delivering the performance, but we are delivering that performance consistently. It's predictable, which is exactly what LPs are looking for particularly at this point in the cycle. Compare that to the buyout, the pure-play buyouts, you could see that it's a much more spread out distribution. And it's actually you have quite a significant tail to the left. A very powerful slide with our LPs.

Fundraising, an outstanding year obviously, we've reached the EUR 10 billion mark. We obviously benefited from the success of Fund VII. It alone accounts for EUR 4 billion, but that's not the whole story. As you could see on the bar chart, it was this year a very diversified fundraising exercise. We were successful in many areas. Philip has mentioned a few. In corporate credit at over 2.2 billion, that's more than double the previous year. Even U.K. real estate despite the Brexit environment, we still raised over EUR 700 million. I could also mention the first close of strategic equity, but I will come back to that.

Overall, during the year, we fundraised for 13 different products. And that's a very promising outcome for 2 reasons. One, because it shows that we can. And in the alternative asset space, most managers fundraise sequentially. Very few managers are able to fundraise as many strategies simultaneously concurrently. That is testimony to the strength of the platform and the strength of our marketing team.

The other point is that while flagship funds will always have a significant impact in the year they are fundraised, we're no longer solely dependent on the timing, the fundraising cycle of these flagship funds. We're diversified enough that we can rely on a constant inflow of capital.

So a very strong year, a personal best. But as with every personal best, it's only meaningful if you put it into context. So we've tried to do that by borrowing a slide from PDI, Private Debt Investor. That is their 2018 fundraising report, which shows fundraising performance over the past 5 years. As you could see, ICG features rather well in that slide.

Two developments or aspects of the fundraising this year that I'd like to draw your attention to. One is strategic equity, and the other one is on the European strategy, corporate strategy. The strategic equity, the good news is at this point as of today, we -- the fund is over $1.2 billion. So that's -- it's looking like a very promising fundraise. This is larger than the full size of the previous vintage.

The other important thing to note with this fundraise is, as we have been pointing out and as Philip reminded you earlier, we have been able to increase effective fee rate on many of our strategies by reducing discount. And at the interims, I mentioned that for the first time, we would try with this strategy, strategic equity, to not only reduce discount but actually increase the headline fee rate. Well we have and it's been successful. So if anything, it shows that for the right strategies that are in high demand, you can not only increase the size of the strategy, you can only reduce discount, but you can actually increase the headline fee rate for that strategy. And that's the strategy with fees on committed, so it has a material impact.

On the European corporate strategy, I'm not going to go back over Fund VII. The relevant information here for the purpose of this slide is you'll remember, we've increased the size of Fund VII compared to Fund VI by 60%. And as you can see, this strategy has been constantly growing. And we've been as a result, increasing the size of the investments we were making.

So much so that we've created the space to launch a sister mid-market fund, which for us has a number of benefits. Strategically, this is a segment of the market where we've always been very strong and we wanted to maintain our presence there. Two, we know from experience that the relationships you build with management teams and with companies when they're smaller in size are extremely valuable because you can accompany them through their growth. In our portfolio, we have a number of companies that we've been financing for 10, 20 or more years. So it's important to remain present in that part of the market.

And finally, importantly, it's financially very attractive. Because even though we've taken the opportunity of the growth of this strategy to strengthen the team, fundamentally we are leveraging an existing team, an existing investment committee. And because it's fees on committed, it's quite profitable. It's actually profitable from the get go.

So we, on the back of the successful Fund VII fundraise in November, we went out to launch this European mid-market fund. I'm happy to report that in quite a short period of time, we've been able to have a first close. So 2 weeks ago, we had a first close for this European mid-market fund at over EUR 600 million. So it's -- that was our initial target, so this has done well. But putting things into perspective, if you look at this strategy, this is our oldest strategy. But from Fund VI to Fund VII, the size of the strategy has doubled, which with fees on committed has quite a material impact for us. So even mature strategies can still create significant growth opportunities.

Our fundraising outlook. We're not going to benefit this year from having a flagship Fund II market, but it's still looking like a very active fundraising year. As I mentioned earlier, this year, we will have a particular focus on new strategies. We intend to launch 3 new strategies during the course of the year. The first one is the European mid-market fund, so we're well advanced on this one. We have reasonable visibility. The second one is sale and leaseback, which we have recently launched, so it is in market. And the last one is our infrastructure equity strategy, which we intend to launch later this year.

First-time funds require a disproportionate amount of effort and time, but they are very valuable. If successful, they are very valuable because they represent a brand new fee stream for the firm. So it's quite important for us to be introducing new strategies regularly.

These are particularly attractive because all 3 of them aim to charge fees on committed. Actually on that note, you'll note this year, we've color-coded the blue bars. We will have 5 strategies in our fundraising program that have fees on committed. The 3 new strategies in addition to the strategic equity Fund III, and our fourth Asia Pac vintage, which we're going to be launching probably this side of the summer. Five strategies with fees on committed, that's a new high for us in a single year, and that is obviously quite good news.

The other point that I would like to make here is both sale and leaseback and infrastructure equity are likely to benefit from a sustainable fund qualification on the back of significant efforts we've made in our ESG approach.

On that topic, ESG is not new for ICG. We were one of the early signatories of the UNPRI. But we've put in significantly more effort, notably by appointing a Responsible Investing Officer this year. I mean today in our industry, we are in the top-performing group for ESG, which is exactly where we want to be.

We've also put in a lot of effort recently these past few years, but particularly this year, on D&I. I'm not going to go into detail. There are many really interesting initiatives and programs that we have launched. I'll just highlight one. We have signed up to the HMT's Women in Finance Charter. And as such, we have committed to 30% of senior female executives by 2023. I'm actually delighted to report that this year, 50% of our senior hires in the U.K. were women. So plenty to do, but we're on the right track.

By way of conclusion, it's an outstanding year on all fronts, fundraising, investment, deployment, quality of the portfolios, performance, profits, and as a result, dividends. And looking forward with some of the exciting new products that we're bringing to market and a few more that are on the wings, we're very positive about the growth prospects of the company.

And on that note, Philip and I will be happy to take your questions.

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Questions and Answers

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Gurjit Singh Kambo, JP Morgan Chase & Co, Research Division - Head of Diversified Financials Research [1]

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It's Gurjit Kambo from JPMorgan. A few questions. Firstly, in terms of clients, what are they doing in terms of allocations? We're seeing more and more consolidation in terms of the managers that clients are using. Are you seeing that trend as well? That's the first question.

Just in terms of the European mid-market fund, how does that differ from the main fund? Because in my view, it's always that you had a mid-market bias anyway in your European fund. But just what the key differentiator there is?

And as you launch 3 new strategies this year, are you still confident you can keep the balance at sheet at around sort of 7% or so of the AUM?

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Benoit Durteste, Intermediate Capital Group plc - CEO, CIO & Director [2]

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Okay. I'll take the first 2, or you'll go? And so the -- I'll start with the mid-market fund. The definition of mid-market is quite broad. I mean by U.S. standards, pretty much everything we do in Europe is mid-market. So for us, the question was not -- it's not a question of shifting strategy, it was more of question of loss of opportunity. As we grow, it was becoming more difficult to do transactions where we were investing less than say EUR 75 million just because of opportunity cost. But at the same time, we know that there are transactions where you're investing 50 million that could be quite attractive. They could be quite attractive in the near term, and they can represent potentially new deals in the future. So we really wanted to keep the focus on that part of the market.

Up until Fund VI, we just put in the effort. So up until Fund VI, we were still doing those smaller deals even though we knew they weren't really moving the needle for the fund, but we did it for strategic reasons. With Fund VII, we had an opportunity to actually -- we can actually create a dedicated bucket targeting these companies. It has a number of other advantages is one because we had capped a number of our LPs in Fund VII. That enabled them to invest a bit more with us in the same strategy, and it also enabled us to bring in new investors. Because of the size of Fund VII, some investors were just too small for us to bring in. But they were perfectly suited for this strategy, and it was a good way to bring them into the ICG family.

First question, I'll have to remember.

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Gurjit Singh Kambo, JP Morgan Chase & Co, Research Division - Head of Diversified Financials Research [3]

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Just on the consolidation of the industry.

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Benoit Durteste, Intermediate Capital Group plc - CEO, CIO & Director [4]

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Yes. Yes, there have been some prominent consolidation news. But your analysis is right. I mean there is clearly a move from LPs, particularly the large LPs, to consolidate their GP relationships, which is why it's strategically important and so beneficial for us to keep growing.

For a number of our clients, we're too small. For a number of our clients, we cannot absorb enough of their capital. Think about a large sovereign wealth fund, right, interested in our strategies. Comes one of our flagship strategy, Fund VII, and we tell them you're capped at 2 50. Their reaction is, "If I can't put 1 billion with you in your various strategies, you barely register on my radar." And so yes, you're right, the market is consolidating that way, but this is why it's so important to be one, if not the largest manager in Europe because you're going to disproportionately benefit from that book.

On the 7% now?

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Philip Henry Keller, Intermediate Capital Group plc - Chief Finance & Operating Officer and Director [5]

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The biggest point of investment in a strategy tends to be at the very beginning. Because we hold net on the balance sheet, and then we roll our investment into the fund. You tend to have to put a larger amount into a newer fund. And -- well one of a few things could happen. Either we -- the fund gets larger, and yet our investment stays roughly the same in absolute terms. Or we start reducing investments as we've done with North American Fund II, that we've done with SDP. So inevitably therefore as we grow, we need to invest in new strategies, but the amount we invest in individual strategies reduces as the strategy gets larger. So that's why I think that we can stay at 7%. Maybe I think we'll keep reducing further because the AUM is getting larger. And actually, we've been pretty static at GBP 2 billion for a few years. It's gone to 2.4 which is quite a big increase. But I suspect that, that will plateau again for a little bit. But there's a natural reduction compared to the AUM growth.

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Elizabeth Miliatis, BofA Merrill Lynch, Research Division - Research Analyst [6]

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Thank you, Philip, for all your help over the last few years. And congratulations, and all the best in your musical endeavors.

Two questions from me for both of you. Firstly, given how much you raised this year and last year, you've pretty much got to your AUM growth target for the 3 years, last year, this year and next year. Just wondering why you didn't perhaps increase it?

And secondly, you've talked about management fee discussions, and you're able to increase the target fee and decrease the discount. Are you getting any pushback on management fees in any strategies even initially in discussions with your clients?

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Benoit Durteste, Intermediate Capital Group plc - CEO, CIO & Director [7]

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So on fees, you're always getting some pushback. I mean nobody likes to pay fees. But if I were to compare to a few years ago, I'd say the tension is much, much lower. And the reason for that, we've pointed to that before, it's supply and demand. There is so much demand for alternative asset managers, particularly the well-established ones, that the fee actually very quickly doesn't feature really in the discussion. And you have to remember that these are high-return strategies. When you are returning, and Philip has mentioned a few of them, 17%, 25%, 35%, the fee is neither here nor there. That's not the biggest component in the discussion.

What they are going to be focusing on is, for instance, how quickly we grow. Because they're going to be mindful that we don't grow too quickly, that we don't start changing the nature of the strategy, for instance, because that would be changing their risk profile. So they're going -- the discussion is going to focus much more on these aspects.

Would you like to take the first one or...

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Philip Henry Keller, Intermediate Capital Group plc - Chief Finance & Operating Officer and Director [8]

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I think they're both for you actually. Apart from the comment about me moving on, anything else?

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Benoit Durteste, Intermediate Capital Group plc - CEO, CIO & Director [9]

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I'm sorry. You sidetracked me with the music. I cannot answer the music.

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Elizabeth Miliatis, BofA Merrill Lynch, Research Division - Research Analyst [10]

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Just wondering why there wasn't a revision to the...

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Benoit Durteste, Intermediate Capital Group plc - CEO, CIO & Director [11]

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Yes. Yes. Well I mean we -- there was just a revision just over a year ago where we uplifted it by 50% from 4 to 6. It's true, we've had 2 very strong fundraising years. At some point, we may consider that. You do have to remember that fundraising tends to be a bit spiky depending on the fundraising of large flagship transactions. So we'll have to see. But you're -- what's undeniable is that we're on a structural upward trend in fundraising.

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Neil Thomas Welch, Macquarie Research - Analyst [12]

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Neil Welch from Macquarie. Can I ask you what the scale of your business is doing firstly in your ability to deploy? Because whilst you're raising funds, and that's a demonstration of your scale and the demand you've got, it also means that you need to deploy those assets effectively.

And just going back to the chart about the returns that you've achieved, does that deployment, the scale of that deployment that you're making does that affect the overall returns that you can achieve? I.e., do those come down because the investments you're making are more developed opportunities?

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Benoit Durteste, Intermediate Capital Group plc - CEO, CIO & Director [13]

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Yes, that's a good question. I think you have to remember that our strategies are not -- they're not volume strategies, okay? So take Fund VII because it's -- we pointed to it, it's invested 50% in 1 year, which we've never done. But then when you break it down, actually what's happened is that each one of our country team has done one deal. It just so happens they've all done a deal in that year. But all it means is the French team has done one deal. The German team has done one deal. The Spanish team has done. That's it, but we're not talking volume. And as a result, because these are so ad hoc-type transactions, the increase in size of the fund doesn't necessarily have -- mean that there's a repercussion on the returns, provided, that's provided you can grow the size of the transactions that you do, okay.

And that's been what's behind the main European fund. What's behind the growth is exactly that. If you had asked us 10 years ago, how much can you grow that strategy, we would never have guessed. Because our view was because what we do was so ad hoc, there's a limit in the size of deals that you could do. Because it's easier to do it on smaller deals than on larger deals. Actually, that's proven to be incorrect. And as we've grown, we've been able to access larger and larger deals. If that's the case, you're not really changing your model at all, and there's no reason why the returns should change.

What you have to be mindful of as you build up each strategy and as they grow in size is the key is always people. It's the origination. And what you have to be mindful of is how do you progressively increase your origination firepower because it's this is you're picking one person here and there. This is not, again this is not a volume play. And that's quite -- this is something that requires a lot of thinking well ahead of time. And you may have seen in Europe but it's true in the U.S. as well, we've made some hires. Some of them have made it in the press. That's because not because we think we're under-fueled today. We're thinking about the future and what do we need in terms of resources to be able to maintain that performance as we grow in future vintages. Does that answer your question, yes?

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Neil Thomas Welch, Macquarie Research - Analyst [14]

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Yes, it does.

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Philip Henry Keller, Intermediate Capital Group plc - Chief Finance & Operating Officer and Director [15]

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Happy birthday tomorrow, by the way.

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David Leslie McCann, Numis Securities Limited, Research Division - Director & Diversified Financials Analyst [16]

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It's David McCann from Numis. And you're obviously well aware that many traditional asset managers particularly in the last couple of years have really talked about moving into your space. And whilst not much of them have your track record, which I'm sure you'll point to here, they do have powerful distribution and client relationships. So has there been any significant impact on your business so far? And where -- and do you expect that to change in the future? I appreciate the comment earlier about the demand being so strong for these products, it probably hasn't registered. Is there a slight risk of complacency here that as these traditional managers continue with their endeavors here, that eventually something changes?

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Benoit Durteste, Intermediate Capital Group plc - CEO, CIO & Director [17]

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Well there's always risk of complacency, so that's one you always must avoid. We're not observing any of that today. I think what's fair to say is these traditional asset managers have struggled to come into this space because it's a lot harder than it looks. Because it takes a really long time. And because for these managers, in order for the AUM to start moving the needle, either they need to make very, very large acquisitions, or it's going to take them decades because it takes a while. You don't go out and you start raising a whatever, 15 billion new infrastructure fund. It doesn't work that way. You start by raising a 500 and 600. And then the next vintage might be a billion, and then the next. And pretty soon you're 10 years in, okay. So it's proven to be more difficult than I think they had anticipated.

Also culturally, it's vastly different. These are 2 completely different worlds. I mean the only thing that's in common is it's called asset management, okay. Otherwise, they are completely different worlds, and that's been a difficulty for all of them.

Having said that, you're right, they have a lot of firepower. Over time, you never know what could happen. But we've had similar discussions. You may remember in the past about the pension funds going direct or the Canadian sovereign wealth fund going direct. And this ebbs and flow because it is more difficult than you might think to build a platform like this.

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Philip Henry Keller, Intermediate Capital Group plc - Chief Finance & Operating Officer and Director [18]

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If you look over a long period of time, there are many more examples of the private teams coming out of big institutions, be it the asset managers, insurance companies or pension funds than successfully building one within -- or even acquiring one and retaining it. It's always gone the other way.

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Benoit Durteste, Intermediate Capital Group plc - CEO, CIO & Director [19]

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It's a very slow -- from a competitive landscape point of view, it's a very slow moving market. If you look at the competitive playing field, the players, you look 10 years ago, weren't that different. Not that many have disappeared. It's very resilient. And not that many have appeared for that reason. It's quite a long process to establish a track record of teams. And incidentally as we have discussed a number of times, you have a J curve. It's not profitable for several years when you're establishing just one of these new strategies.

Any other question? If not, before -- one minute before we close the session. First of all, I would like to thank Philip personally and on behalf of all of ICG and the Board, for an exceptional contribution to the success of the firm over the fast -- over the past 13 years. So thank you very much. Well done.

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Philip Henry Keller, Intermediate Capital Group plc - Chief Finance & Operating Officer and Director [20]

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Thank you.

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Benoit Durteste, Intermediate Capital Group plc - CEO, CIO & Director [21]

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And I would also like to introduce Vijay Bharadia, who has joined us this week and will be formally taking over from Philip as CFO at -- from the next AGM.

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Vijay Bharadia, Intermediate Capital Group plc - Executive Director [22]

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Thank you. Thank you, Benoit. I just started on Monday, so I come in at the right time. I am very, very delighted to join such a high-caliber firm with exceptional growth prospects, and clearly working with Benoit and the Board to continue to build this franchise, given where it's at today. I look forward to meeting you in due course as well.

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Benoit Durteste, Intermediate Capital Group plc - CEO, CIO & Director [23]

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Thank you very much. Thank you for attending.