Bridgepoint Group (LON:BPT) announced a strong first half of 2023 despite macro volatility with significant growth in underlying income and fee related earnings.
Key highlights include:
Financials
| • | Fee paying assets under management (FPAUM) of €24.6 billion, a 24% increase from H1 2022; |
| • | Management fees of £124.6 million (including the recognition of only £2.6 million of late fees relating to BE VII) and underlying Fee Related Earnings (FRE) of £42.9 million increased by 24% and 91% respectively compared to H1 2022. Profit before tax of £53.1 million increased by 10% compared to the same period; |
| • | Investment income of £12.7 million (H1 2022: £38.7 million) due to lower exit activity in H1 2023. Expectations for investment income in 2023 and 2024 unchanged in aggregate but weighted to H2 2023 and 2024; |
| • | Capital deployment on track at €1.7 billion invested in H1 2023 (H1 2022: €3.1 billion); and |
| • | Total assets under management (AUM) of €39.5 billion, an increase of 6% from H1 2022 and 48% since IPO (FY 2020). |
Fundraising
| • | Bridgepoint Europe VII has commitments of €6 billion of its €7 billion target and will accept new investors until Q1 2024 to allow investors to use both 2023 and 2024 allocations; |
| • | The fundraise is now well on the way to completion having received additional capital commitments of some €0.5 billion over the last quarter. It has also now exceeded its predecessor fund in size; |
| • | Bridgepoint Direct Lending III and associated separately managed accounts (“SMAs”) closed with investable capital of over €3.4 billion. Bridgepoint Credit Opportunities IV and Bridgepoint Growth II will close within the next 12 months; and |
| • | Expect to launch BDC V and BDL IV into the market in the next 12 months. |
Fund performance
| • | Continued high quality, resilient and stable fund performance with all funds remaining on or ahead of plan, benefitting from continued organic growth and cash generation; |
| • | Most recent fully invested funds, BE VI and BDC III, have posted valuation uplifts at 30 June 2023, are both ahead of plan and top quartile for their vintages; and |
| • | Continued attractive conditions for the deployment of credit funds. |
Dividend and Outlook
| • | Interim dividend of 4.4 pence per share and final dividend expected to be no less than 4.4 pence per share; |
| • | Combined with capital return of ca. 3.8 pence per share via share buyback in H1 2023, total capital return to shareholders in H1 2023 more than double that in H1 2022; and |
| • | Bridgepoint is well positioned to deliver 2023 performance in line with current expectations and confirms full year guidance recognising potential volatility in the precise timing of completing exits in process which drive investment income splits between 2023 and early 2024. |
Commenting on this performance, William Jackson, Chairman of Bridgepoint Group, said:
“Bridgepoint has delivered strong FRE growth in the first half of 2023 driven by both our equity and debt strategies combined with careful cost management. This performance comes despite market uncertainty and continued macro volatility.
“The capital raising process for BE VII is well on the way to completion and the fund has now exceeded its predecessor fund in size with €6 billion of commitments received to date. In a continued slow fund-raising market we will keep BE VII open for commitments until early 2024 to allow investors who are in process to participate in the fund using both 2023 and 2024 capital allocations.
“BE VII has attracted major new Limited Partners from Asia and EMEA significantly strengthening the firm’s investor base for the longer term.
“Fund capital deployment remains on track across the Company. BE VII has committed 18 per cent. of its primary capital, as it builds a high-quality portfolio of growth assets and BDC IV has committed 69 per cent. of its primary capital. In Credit, across the Direct Lending and Credit Opportunities strategies the team has deployed around €1.7 billion of capital over the last 12 months.
“These results reflect a period of strong FRE performance, careful management of cost growth to match progress in fundraising and the fact that performance related income is weighted heavily towards the second half. We continue to be confident in our ability to deliver investment income in line with current expectations in 2023 and 2024 in aggregate. The business remains well positioned for current times with multiple routes to delivering performance.
“We are excited by the strategic growth prospects for the Group as we continue to progress our business development plans and remain confident in Bridgepoint’s ability to deliver attractive returns for our fund investors and our shareholders alike.”
Chairman’s statement
William Jackson
I’m pleased to report that Bridgepoint has enjoyed a strong first half of 2023.
During the first six months of the financial year the Company recorded strong fund performance, enjoyed attractive credit deployment conditions, made positive progress on fundraisings and committed fund capital in line with original expectations by exploiting attractive buying conditions in the European Middle Market.
Market conditions in H1 2023 saw extended transaction timelines with exits, fundraising and new investments all taking longer to complete as parties undertake robust and detailed diligence. As we move into H2, we are already seeing activity increase in the M&A market. In this context, Bridgepoint remains on track to deliver full year results in line with financial guidance albeit performance is weighted to the second half of the year with transactions across the business taking longer to complete.
Our confidence ahead reflects the strength of both our favourable middle market positioning and Bridgepoint’s business model which provides multiple routes to deliver targeted financial performance.
In summary:
· In the first half of 2023, Bridgepoint generated management and other fees of £124.6 million (an increase of 24 per cent. from H1 2022), which included the recognition of only £2.6 million of late fees relating to BE VII, underlying FRE of £42.9 million (an increase of 91 per cent. from H1 2022) and profit before tax of £53.1 million (an increase of 10 per cent. from H1 2022);
· As normal we currently have several funds raising, or about to raise, new capital. The Bridgepoint Europe VII (“BE VII”) fund raise is now well on the way to completion. It received capital commitments of some €0.5 billion over the last quarter and has now exceeded its predecessor fund in size with €6 billion of commitments received to date. In slower fundraising markets the fund will remain open for commitments until early 2024 to allow investors in process to participate in the fund using both 2023 and 2024 capital allocations. Importantly from a financial perspective, investors joining in Q1 2024 pay catch up fees backdated to the fund’s first closing last year;
· In more favourable credit market conditions Bridgepoint Direct Lending III (“BDL III”) and associated Separately Managed Accounts (“SMAs”) held a final close in the first half of 2023 with investable capital of over €3.4 billion. This is materially larger than the predecessor vintage, underlining strong investor appetite for the Direct Lending product in the current market;
· Bridgepoint Credit Opportunities IV (“BCO IV”) and Bridgepoint Growth II (“BG II”) are currently in the market and due to close in the next 12 months. Bridgepoint Development Capital V (“BDC V”), Bridgepoint Direct Lending IV (“BDL IV”) and Bridgepoint Credit Opportunities V (“BCO V”) are all expected to begin fundraising in the next 12 months;
· Fund capital deployment remains on track across the Group with M&A markets starting to see renewed activity in the last quarter. BE VII has now committed 18 per cent. of its primary capital, as it builds a high quality portfolio of growth assets and Bridgepoint Development Capital IV (“BDC IV”) has committed 69 per cent. of its primary capital. In credit, across the Direct Lending and Credit Opportunities strategies the team has deployed around €1.7 billion of capital over the last 12 months;
· Bridgepoint’s equity funds also agreed a range of exits during the first half of the year which will return over €600 million to fund investors. These transactions have been weighted mainly to historic funds. The pipeline of exits on more recent Funds (Bridgepoint Development Capital III (“BDC III”), Bridgepoint Europe V and VI (“BE V” and “BE VI”), where the Company has a more material direct economic interest, continues to grow and a return of some €4 billion of capital is targeted over the next 18 months. We currently expect our targeted exits for 2023 will be delivered in the second half of the year, however, some of these exits may move into the 2024 financial year in current market conditions;
· Strong value creation has also continued across our fund portfolios, with all flagship funds enjoying trading either on or ahead of plan. Both credit and equity funds’ performance continue to be strong reflecting their sector positioning, low exposure to companies dependent upon discretionary spend and the start of input price deflation which we are now seeing in certain sectors.
Company financial performance
The positive performance of our credit and equity funds during the first half of 2023 and the associated Company financial performance is testament to Bridgepoint’s depth of business and cycle experience and the resilience and professionalism of our team against a backdrop of challenges in geopolitics, financial markets, and monetary policy responses to address inflation.
In H1 2023, AUM increased by 6.5 per cent. compared to H1 2022 to reach €39.5 billion. This represents growth of 48 per cent. since IPO when AUM (at FY 2020) was €26.6 billion. Across our equity and credit funds, €3.3 billion was deployed in new and follow-on investments and €3.0 billion of capital was realised during this same period. With the extension to the BE VII fundraising period, catch up fees relating to future commitments will be charged from first close and recognised in H2 2023 or H1 2024 depending on the timing of those final commitments.
As noted above, we continue to be confident in our ability to deliver investment income in line with current expectations in 2023 and 2024 in aggregate.
Management fees and other fees and underlying FRE increased by 24 per cent. and 91 per cent. respectively compared to H1 2022 and profit before tax increased by 10 per cent. This performance was driven by income from recently raised funds in H1 2023 combined with carefully matching cost growth to progress in fundraising. We are well positioned to deliver performance in line with current expectations recognising volatility in the precise timing of completing exits in process which drives investment income splits between 2023 and early 2024.
Commentary on fundraising markets
Long term tailwinds behind private markets remain very strong, but since March 2023 macro volatility has led to increased caution with a number of investors continuing to face allocation issues. The so-called denominator effect (falling stock market valuations mathematically increasing fund allocations to other asset classes) has been exacerbated by the relative outperformance of private assets over the last two years, whilst lower returns of capital from historic fund commitments have also constrained some LP’s new commitments.
With over 85 per cent. of the fund’s targeted capital of €7 billion now committed, the BE VII process is well on the way to completion and will round out in early 2024. Encouragingly, whilst some mature existing BE investors have faced allocation issues to date this has been compensated for by a range of investors with less mature programmes investing in BE VII including major new Limited Partners (“LPs”) from both Asia and EMEA. This significantly strengthens the firm’s investor base for the longer term.
The BE VII process will be followed shortly by the BDC V fundraising which has already received significant LP interest reflecting the outstanding performance of our BDC funds in recent years.
Investing in current market conditions
Bridgepoint has been tested through previous cycles and called the autumn of this economic cycle early. As a result, the firm has constructed credit and equity portfolios accordingly, focusing on niche sectors with significant tailwinds behind them. Our investment thesis is focused on growth middle market companies and deploys leverage prudently. This is reflected in our robust underlying fund performance with all funds on or ahead of performance plan. In particular, BE VI and BDC III remain ahead of plan and top quartile in their latest respective benchmark vintages and are well positioned to deliver meaningful investment income for the Company in the medium term.
As we look forward, it is worth noting that the PE market is witnessing a new pricing paradigm with the end of low-cost debt in volume for the time being. As a result, the middle market, which does not typically use significant leverage, is currently the most active space with returns in 2023 driven by real growth and cash generation. Portfolio construction, pricing discipline and sector selection are critical in the current market, as is a hands-on approach to value creation to driving value in portfolio companies.
Bridgepoint continues to focus on sectors and niches identified by our thematic origination strategy doubling down on areas where we have real conviction and companies benefit from high quality of earnings and strong net cash conversion. Once in the portfolio, value creation continues to be driven by international expansion, buy-and-build programmes and driving operational excellence from a balanced portfolio with low exposure to cyclical sectors and discretionary spend.
Our Private Credit investment thesis for direct lending, also designed around the middle market, features first lien, secured, uni-tranche, floating rate credits. We are typically supporting European financial sponsors to make acquisitions in their private equity strategies where we are very often the sole lender. While our most recent fund, BDL III, was targeting 7 to 9 per cent. unlevered returns when launched, thanks to the increase in base rates since the beginning of last year, it is currently realising unlevered returns in low double digits with no realised losses in the strategy since inception. Importantly the credit quality of the portfolio provides significant comfort that this trend will continue despite the volatile macro environment.
Private Equity
So far this year our Private Equity funds have committed €0.8 billion to six platform investments, and returned €0.2 billion to investors.
BE VII has made good progress with its new investment activity, acquiring Vivacy, a global personal healthcare company as well as agreeing to purchase Windar, a leading global specialist manufacturer of towers and foundations for onshore and offshore wind turbines. To date the fund has made >50 add on acquisitions of which 6 have been transformational.
BDC III has continued to perform well with multiple add-on acquisitions agreed in H1 2023 and continuing to rank as one of Europe’s highest performing private equity funds for its vintage. BDC IV has now committed 69 per cent. of its primary fund capital, providing confidence that it is positioned to complete its investment period in 2024.
The outlook for portfolio exits presents both challenges and opportunities. The macro environment is complex and buyers are more cautious but the expectation gap between buyers and sellers is narrowing. Selling assets today remains more challenging than in previous periods, but the value of growth remains at a premium in the current market. Safe strategic assets remain highly sought after. Embedded and portable leverage, where available, is also highly attractive to buyers.
Middle market sized companies are also more attractive to large corporates who don’t want to ‘bet the farm’ with large transactions in cautious times and 98 per cent. of Bridgepoint fund realisations over the last 20 years have been delivered via private transactions, so our funds are not reliant on the IPO market for returns. In that context, we have agreed two exits recently both from BE III, Diaverum, a leading operator of private kidney dialysis clinics and DMC, a leading designer and manufacturer of connector technology systems for high-voltage power infrastructure. In particular, DMC was exited at an attractive EBITDA multiple, delivering a money multiple of 21.7 times.
We expect to deliver further exits in the second half of the year with work on assets in BDC III, BE V and BE VI already underway. As a result, we have a good pipeline of potential exits in H2 2023 however in current market conditions there is the possibility of some movement in exits from 2023 into 2024.
Private Credit
Bridgepoint Credit enjoyed a strong first half of 2023. AUM reached €12.0 billion, an increase of 76 per cent. since Bridgepoint acquired EQT Credit. Bridgepoint Credit funds have now invested c. €8.6 billion in over 200 companies since the acquisition. It is worth noting that the mix of credit capital has moved towards SMAs and other bespoke vehicles over time. This reflects the strength of our origination and the sophistication of the platform enabling us to provide credit investors with vehicles to match their risk appetite and other investment criteria as an alternative to investing in our main funds.
Overall, during 2023 credit strategies benefitted from more volatile lending markets and higher base rates. Bridgepoint Credit is using its disciplined process to build well diversified funds that deliver attractive returns to investors whilst mitigating risks. Since inception our flagship Direct Lending funds have yet to record a loss on any lending exposure.
Across the Direct Lending and Credit Opportunities strategies the team deployed around €1.7 billion of capital over the last year compared to realisations of €0.6 billion. BDL III has now invested over €1.9 billion in 27 companies and with the fund 68 per cent. invested we have commenced preparations for BDL IV. BCO IV is now 67 per cent. deployed and fundraising for BCO V will commence within the next 12 months. CLO 4 closed in January 2023 and we expect to close CLO 5 in Q3 2023.
Business Development
As set out at the time of our IPO in July 2021 Bridgepoint remains committed to continuing to deepen and broaden its middle market investment platform to accelerate current organic growth through selective acquisition activity. As noted in March, falling sector valuations have broadened the potential horizon for potential M&A opportunities and we are engaged in active discussions which we would expect to finalise positively or negatively by the year end.
Bridgepoint’s day job is making good acquisitions. Not surprisingly, therefore, any acquisition for the platform will have to meet the rigorous gatekeeping metrics which have been discussed in detail in prior company announcements. These include strong industrial logic, the ability to diversify the Group’s income base, the need for a strong cultural fit and the ability for an acquisition to be accretive to short and medium term shareholder returns.
Turning to our current platform, alongside a rigorous focus on efficiency and prudent cost control, the Company continues to invest in its operating resources in a controlled and focused manner. During the first half of the year we have strengthened further our operating resource which drives portfolio value creation. We have also continued to expand our investor relations and solutions presence on the ground globally. In this regard we have recently made senior Investor Relations hires in the United States (replacing retirees) and we will be opening new Singapore and Seoul offices dedicated to investor services in Asia.
By deepening our resource in the key area of Investor Relations and developing deeper regional coverage while deploying a number of software solutions to enable efficiency, the Company is well placed to support new products and further business development.
Dividend
I am pleased to confirm that the Company will be maintaining its progressive dividend policy this year and will pay an interim dividend of 4.4p per share in September. We expect our final dividend to be not less than 4.4p per share. When combined with the capital return of ca. 3.8 pence per share via share buyback in H1 2023, total capital return to shareholders in H1 2023 was more than double that in H1 2022, reflecting the Board’s strong confidence in the prospects of the Company.
Outlook
Bridgepoint is encouraged by the outlook for the full year and confirms full year guidance. Whilst some revenue recognition may be delayed by the revised BE VII timetable we expect this to be mitigated by careful cost control in the full year to December 2023. We also remain confident in completing our targeted exits for H2 2023 which drive part of the Company’s investment income. However, we recognise that the precise timing of exit processes are not directly within our own control and inevitably have some unpredictability in current markets. As a result, both fundraising and exits will be subject to external market conditions not materially deteriorating from today.
Looking ahead, Bridgepoint benefits from having multiple avenues for both organic and M&A growth. The Company remains asset light, with less than 1 per cent. of AUM as investments, excluding consolidated CLOs, and together with over £300 million of cash and discounted carried interest receivable represents around 38 per cent. of our current market capitalisation also providing material strength to reinforce our business growth strategy.
More widely the alternative investment market continues to enjoy the prospect of significant future tailwinds with portfolio rebalancing driving increased long-term allocations as new investors continue to enter the asset class. As a result, medium term market growth potential remains unchanged, offering a significant runway of future growth for our business.
BE VII is now already larger than its predecessor and has attracted strong support from both new and existing investors. In particular, we have seen a significant acceleration of our strategy for geographic expansion of the investor base which creates a strong foundation for future fund cycles.
With this market background driving organic growth and with our long duration capital, strong balance sheet, asset light model, high and stable margins, strong cash generation and attractive dividend yield, Bridgepoint’s outlook remains attractive. This resilience was central to the Board’s decision to commence a tactical share buyback programme earlier in the year which is now more than 65 per cent. complete.
Looking forward, we expect market volatility and inflation pressures to continue in the near term and have positioned our investment activity accordingly. Bridgepoint will obviously not be immune to macroeconomic events, but we are excited by the strategic growth prospects for the Group and the long term prospects for our sector as we continue to progress our business development plans and remain confident in the Company’s ability to deliver attractive returns for both our fund investors and our shareholders alike.
William Jackson
Chairman
