Eurazeo Paris Ord

and welcome to the Eurasia Financial Information Q1 2023 results presentation. Please note this call is being recorded and for the duration of the call, your lines will be in listen only. However, you will have the opportunity to ask questions. Please press star one on your telephone keypad to ask a question over the telephone. If you require assistance at any point, please press star zero and you'll be connected to an operator. I will now hand you over to William Caddo-Chazat, co-CEO. Please go ahead.

Thank you very much. Welcome to you all. Thank you for joining this call. I will now walk you through the performance and developments recorded in the quarter using a few slides that have been sent to you and posted on our website, and then we can kick off with questions. Let me start with slide one. and the AUM. In Q1, we continued to enjoy a steady increase in our assets and the management. AUM, as you can see, are up 10% year on year. Net new money was 2.7 billion over the year, representing 84% of the growth, with a balance coming from value creation. Fee-paying AUM are up 26% year-on-year and now stand at 25 billion euros. As a reminder, we do not revaluate portfolio assets in the NAV during quarters. Following the recent change in reporting we announced in March, AUM excludes the value of asset management activity and includes the commitment from our balance sheet. You will find all the details in our press release in the appendices. Turning to fundraising, which is the next slide. We raised 866 million euros from third parties in the first quarter of 2023. Excluding the fundraising of Rhone, pertaining to Rhone Capital in Q1 2022, this is equivalent to a 42% increase year on year. Let me stress that quasi 100% of this 866 million are fee-paying AUM. Private debt continues to enjoy a strong momentum with over 500 million euros raised in the quarter. As you know, the risk-reward profile of our direct lending fund is attractive to our LPEs and we are launching a new program on asset-based financing which collects wealth. Our sustainable infrastructure fund continues to prove successful with a self-closing at 420 million and has now reached 80% of its target. Fundraising is private equity amounted for the quarter to 209 million focused on venture and secondary. Wealth management continues to be a strong contributor to fundraising with 185 million raised in the quarter which represent 21% of the total amount raised in the quarter. As we indicated during our annual results presentation, we will be collecting institutional money for our three main funds during the next quarters of 2023, i.e. secondaries, growth, and mid-large buyout. And we will continue to ramp up our new products and partnerships in wealth. Turning to revenues of the asset management activity. As you can see, our recurring revenues continue to grow at a strong pace in the asset management. Management fees are up 28% over the period, with management fees from third parties going at around 20%, more precisely 19%. Performance fees in the quarter are negligible given the limited realizations. Precisely turning on to asset rotation. We continue to be very selective on investments in complex and uncertain contexts. Our deployments amounted to 900 million euros in Q1 compared to 1.7 billion in the same period of last year. Private funds have been the main contributor to deployment as a team finds attractive opportunities in secondaries. Let me stress that the lower amount of deployment is totally related to our own policy of being selective and prudent. On the contrary, we enjoy strong headrooms and firepower to grab opportunities in the future, with dry powder up at 7.3 billion from our LPs and an additional 2.4 billion of commitments from the balance sheet. Realizations were limited in the quarter and roughly in line with last year at around 300 million euros. We finalized the exit of Vita Protech, as you know, which was announced last year. This is an amount of 68 million for a multiple of 3.2 times cash on cash growth. Let me now turn to the performance of portfolio companies with a little caveat, technical caveat to begin with. As you know, we no longer consolidate portfolio companies from 2023. This is due to the IFRS 10 exemption of consolidation that we applied from the 1st January 2023. However, as we indicated during our full-year resource conference call, we consider it is appropriate to give you indications on revenues and EBITDA on a half-year basis of portfolios as the balance sheet remains invested in the portfolio. As you can see on the page, we have a very satisfactory performance of the portfolio companies across the board. Starting with mid-large buyout, which is the largest component, revenues were up 24% in Q1, which is a very broad-based growth pattern across the portfolio. And despite a high basis comparison in Q1 2022, let me remind you that revenues were up 55% already. This reflects, obviously, the quality of our choices of companies and sectors. And if not, as you would expect, the travel industry continues to rebound. In small buyouts, revenues were up 8%. Growth is strong in business services. with companies exposed to consumer categories have roughly stable revenues. As regards brands, which is our consumer growth unit, revenues were up 13%, again, broad-based across the portfolio. Growth companies, mainly attaining to tech, revenues were up 21% in Q1. On high comparables, Revenues were up 50% in Q1 2022, as a reminder. B2B and companies focused on circular economies, such as Back Market or Vestiaire Collective, as case in point, performed very well, with consumer marketplace experience slowed down. Across the portfolio, it is important to note that our companies in the tech space are focused on cost control and profitability, which may have a short-term impact on growth. To finish with the portfolio, let me turn to real assets. Revenues are up a strong 38% in real estate, reflecting notably the strength of the hospitality segments. In infrastructure, on the low base, revenues are up 18%. So as you can see overall, we have a strong quarter across the board, despite the challenging environment. I will now turn to you for possible questions.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. If you wish to withdraw your question from the queue, it's a star 2.

But again, please press star 1 to ask a question over the phone. We will take the first question from Nicholas from BNP Power by Exxon.

Please go ahead.

Hi, good morning. Thank you very much for taking my questions. Maybe I'll start with two questions on my side. The first one, so we've seen a slowdown in exits across the industry, so I was curious to know how you think about your realization pipeline for this year versus the typical 15-20% that you could usually achieve, and what are the strategies that are that you are expecting to contribute to this mainly. And my second question would be on M&A in third-party asset management. So you saw yesterday TPG in the US announced a deal with a significant portion being funded through equity. It seems like it's necessary in that space to align the interest of the target and of the buyer. So with your shares trading at a high discount to its NAV, market might be a bit skeptical or measured to the reception to the M&A. So I was wondering what is your thinking around this? Do you think that the discount needs to be addressed first, maybe through buyback by using the net proceeds from your balance sheet rotation before thinking about M&A, which could come in a second time? Thank you very much.

Hello, thank you for your questions. Let me start with the questions pertaining to exits. As we said, we expect in the year to be consistent through the cycle average of asset rotation, you said 15-20%. For 2023, it is to be expected that we should be rather at the low end of the 15-20% as hinted already during the full year results presentation. Now, with regards to our exit plan, we have no indication that we should not be able to implement it for 2023. It is to be said, though, that the largest amount of exits we expect rather in the second half of 2023. So it's a bit too early for me to say whether there will be challenges or not. What we see is a lot of interest, incoming calls for assets we have on the portfolio, which obviously reflects the quality, interesting quality of the portfolio. We see that many corporates are back at looking at assets, generally speaking, because they have sound balance sheet positions and are a bit more competitive or feel they are a little more competitive relative to funds. And we also see that for small mid-market businesses in the buyout space, as case in point, there is still liquidity. particularly funding to be found on direct lending. So as, and this is part of your question, I'll finish on that, the bulk for exits pertain to buyouts. We consider the market continues to be open. Now, it is to be said that if Euraseo, despite the fact that we have increasing room of manoeuvre with dry power being up, is selective, It is to be expected that other people are selective, so you have really to have good assets in the good sectors and of decent size, of financial size to be able to complete your program. M&A, that's a broad question that goes much beyond the consideration. Our stance is to say that part of the development of Eurazeo as the leading diversified European platform in mid-market growth and impact, M&A could be a valuable route on top of our organic developments. But we have no rush to do anything on the M&A side. We agree with some of the things you on the analyst community are writing, which is it could be part of the asset rotation, it should be part of the ambition in a consolidating industry. There could be opportunities for us, but we are not in a rush to do anything. So it's difficult for me to answer to your question as to what could be the form of consideration we would use for an M&A. We have the capacity to generate excess capital over the years. As you know, you've done the math in your recent initiation research piece. I don't challenge the approach. And on top of that, we are listed companies. So we have, in other words, two currencies we could use. We will do that, of course, very mindful of value creation. That's all what I can say. Not having a An immediate obligation to deal with the question will be cautious there as well.

All right. Thank you very much.

The next question comes from Patrick from Societe Generale. Please go ahead.

Good morning. Can you hear me?

Very well, Patrick.

Good morning, folks. Well, my first question is about the revenue of the company in the portfolio. Could you remind us the way this 24% plus 8% and so on are calculated, especially pure organic growth? How do you make it, please? And my second question, especially because you do not change the value of the portfolio at the end of March, If your feeling on the value of this portfolio was, let's say, negative versus the value at the end of December, would you have reintroduced the buffer that you had some quarters ago?

Hi, Patrick. On the revenues, it's a very simple methodology. We take the revenues of the on-portfolio companies, obviously pertaining to those, times our percentage of interest in the companies. So the 24% for MLBO results from that calculation line by line. To your question, it is adjusted for perimeter and exchange rate for as a group it could be though that in the revenues that we show here there is a bit of change of perimeter marginally though at the company level so to give you a hint this has no impact on the 24 some build-ups in other words can be included in these numbers, because it's difficult for us to adjust. But this has no impact on most of the lines, MLBO, real assets, brands, et cetera. The only area where there is some impact is SMBO, because typically this strategy implies a growing with buildup. So you shave off a few percentage. So fundamentally, you see like for like, and adjusted for our percentage of interest. On the portfolio valuation, as you know, in a quarter, we don't re-evaluate the portfolio. We will no longer have a net asset value in 2023. As you know, we will just make an accounting value of the portfolio. directly translated on the asset side of the balance sheet, which means, it being an accounting item, that any change we do in the computation of the value of the portfolio will go mechanically through the P&L. So there will be no searching as a provision we do at the bottom of the NAV. If we want to have a margin of caution uh on a given valuation this will flow through the pnl so that's the way uh you can see that now uh putting things in context given the strong revenues i've just mentioned and looking at the multiples in the market even though we just we take average multiples you know we we look still at spot multiples as an indication of how the market goes where the market goes. If you look at the multiples for most sectors between December and March, and you factor in this revenue growth, I'd say the case for at least stability is pretty much there.

Thank you.

As a reminder, to ask a question over the phone, please press star one. We'll take the next question from Alexandra from CIC. Please go ahead.

Yes, good morning William. Four quick questions on my side. First question, there seems to be a new hype for private debt or investors are rediscovering the interest of that asset class. Can you tell us a few words about it and how do you see that strategy in your mix in the long term? Would it be higher than what you had in mind a few months ago? Second question, you didn't talk much about fundraising from international investors. What did they represent in the first quarter? Can you remind us what they represent in the third-party AUMs as of today? Third question, risk of default, KKR announced yesterday or two days ago defaulting on the one of their larger investments. Can you see a rising risk of default in one of your 70 plus companies? And fourth question, what about the pro forma earnings base for IFRS 10? Would it be possible to have the numbers before the publication of the first half results?

Thank you. Thank you very much, Alexandra. I'll start with the last question, which maybe you can precise a bit what you allude to, because we provided you with a pro forma calculation in Appendix 4, pertaining to the qualification of IFRS 10 and its implementation as of 1st Jan. So we did it obviously for the full year 2022. So we'll see if it is appropriate to show you H1, but at this stage, as you know, this is not an obligation. We only did it because we wanted to be very pedagogical on the matter. So if there is a a strong need for that in the analyst community, please refer to us. That's not a difficult calculation to make. But now, assuming that we are now fully moving into the implementation, and so the reference to the old world, in a sense, will be less and less relevant. If your question pertains to the fact that we could do a proforma for H1, I take the point and we'll see that's not too difficult to do. But please, again, let me refer you to Appendix 4, Appendix 4 in our press release where you'll find all the differences resulting from the proforma calculation, 22%. Now, you have some fundamental questions on private debt, fundraising, and the risk of default in the portfolio. Let me handle them. They are important questions. is effectively a very popular asset class. It is a popular asset class for Eurazeo. It is a popular asset class for other players in the space, and there is a reason for that. First of all, the performance in terms of yield has increased. Let me remind you that this is a variable rate environment, and there is And they are up, of course, or they have been increasing in the past year. And on top of it, there's been a bit of widening on the spread. So if you take a 750, 800 spread on top of Euribor as a case in point, we operate in the Euro-denominated world, you'll find easily that the yield that you can offer today is stronger than the yield you were able to offer a year ago or two years ago. But on top of this, the default rate remains very low, which means that the stability of the performance of this asset class continues to be very strong. To give you a hint, as we commented already in the previous quarters, the default rate is less than 30 basis points. When you look at the typical NPL ratio of well-run core euros and back, you'll find that between 200 and 400 basis points will be customary. So we're talking here about very low default rates. So that makes the category attractive. And on top of it, for some institutional investors, facing the so-called denominator effect or more difficulty to collect money from clients in the insurance world, private debt is attractive because it has liquidity features through the coupons. So I do expect that it will continue to be a popular asset class in the next quarter. And this ties somewhat to your first question. So we don't publish the split in fundraising across geographies in Q1. So we'll think about it for H1. As you know, we will gradually provide you with more and more information pertaining to the asset manager. What I can tell you is to shed some color. If I look to private debt, as a case in point, or ventures or secondaries, which were areas where we collected on top infrastructure, the share of internationally based LPs tends to be higher than in the previous year. The reason being that these strategies are really, truly internationalized. They are not really pan-European. and also we invested more forcefully into our fundraising machine outside of our home country, which is not to say that we are where we want to be. As you know, we continue to think that we have a potential to win market shares in some areas, namely the U.S., uh and to some other countries in europe but to some end to some extent uh starting with a decent base in middle east and asia but this fundraising is more international uh we have some big names um from the uk from the middle east from asia particularly south korea and our debt fund as a kingdom risk of default listen today um We are not confronted with the situation you described. This is all what I can say. Now, there are some companies which obviously are a bit tight on their covenants in the context, very limited though. Remember that we tend to be a bit less levered in our buyout activities and peers. Our companies do not suffer or investments from significantly from the increase in interest rates as for the inventory reason being that we are very hedged in aggregate 65 to 70 percent in biotech activities and more than 90 percent in real estate which means that you know the raising the rate increase has not translated into a material cash flow destruction so there are some areas obviously where Not talking about default, obviously the performance is not exactly what was expected because of input prices or consumer demand, but it does not necessarily translate into a problem of governance and certainly not in a default risk. The pro forma I think we addressed, so I'll stop there.

Thank you very much, William.

As a final reminder, to ask a question over the phone, please press star one.

We'll now take our next question over the phone from Oliver from Goldman Sachs. Please go ahead.

Hi, there. It's Oliver Brothers from Goldman Sachs. Can you hear me OK?

Very well.

Hello, Oliver. Great. Thanks, William, and thanks for the presentation. If I look at your annual report published a few weeks ago, and I have a look at some of the revenue numbers that you disclose in there for the portfolio companies, it looks like some of the bigger assets in your mid to large cap buyout portfolio had very, very strong revenue growth last year. Looking at world strides, I'm planning, for example, although this may not be on a truly life-to-life basis, we don't have to change the scope. But are you able to talk to the monetization strategy for these much bigger assets and 2016, 2017 investments, or perhaps talk to the monetization strategy on your exit pipeline more broadly? I think that'd be very helpful. Thank you.

Well listen, it's a bit too early to speak about monetization, which I think is your question. What is sure is that the fact that companies have such growth in spite of the fact that they had already a strong performance in the past year, means that they are well-positioned companies in very good sectors. Specifically, as you mentioned, we have a bit of a recovery here. Clearly, we are now at a stage where for companies such as the one you mentioned, we converge with more and more with the initial business plan. As you know, unfortunately, the company has suffered quite significantly in 2020 in the context of COVID. 2021 was the first rebound. So then we'll see what we do with that from a monetization standpoint. But clearly, this is satisfactory to see that for companies that have been very affected by the COVID. We are now back to where we wanted them to be. And then for the rest, it's a question of tactics. You don't want to sell too early either because you want to make sure, of course, that you reach the acceptable multiple that is consistent with your target performance in the portfolio, quoting the obvious, of course.

Okay, understood. Thank you very much.

There are currently no further questions on the phone at this time.

In which case, we would like to thank you very much for attending this call. With Pierre and Agathe, we remain at your disposal for further questions or clarifications. And we wish you a very good day. Thank you. Bye-bye.

Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.