Gresham House plc, (LON:GHE) the specialist alternative asset manager, has today reported a transformational year, more than trebling assets under management to £2.3 billion through organic and acquisitive growth, achieving profitability and significant margin improvement, whilst developing a high-quality pipeline of new opportunities and expanding its distribution capabilities.
Assets under management
Cash and liquid assets1
Adjusted operating profit2
1Cash and liquid assets includes cash and investments in tangible and realisable assets
2Adjusted operating profit is defined as the net trading profit of the Group before deducting amortisation, depreciation and exceptional items relating to acquisition and restructuring costs and after adding back income received from investment in associates.
* A strong year for growth in Assets Under Management (AUM) of 250%, including 30% organic growth, with AUM increasing to £2.3 billion (2017: £649 million)
* Adjusted operating profitability increased to £3.0 million (2017: £0.7 million loss)
* The acquisitions of FIM Services Limited (FIM) and the investment management business of Livingbridge VC LLP (Livingbridge VC) have been transformative and complement both financially and strategically our alternative asset management platform
* Annualised synergies of £700k from acquisitions have been identified and are in the process of being captured
* Balance sheet remains strong with £32.8 million of tangible and realisable assets (2017: £24.4 million) and gross cash of £14.0 million (2017: £9.8 million)
* Established group relationship with Santander, borrowing £10.0 million
* Maiden dividend of 3.0p proposed
* Future visibility for organic growth across all platforms identified
Commenting on the results, Tony Dalwood, Gresham House plc Chief Executive, said:
“We have continued to maintain momentum and make excellent progress in shareholder value creation whilst investing in the platform ahead of future growth, adding scale to the business and identifying synergies.
The opportunities in the alternatives sector offer high-quality long-term investment returns for clients, and Gresham House has quality fund management teams and award winning individuals to execute within those specialist markets. The 2019/2020 pipeline for further organic AUM growth is exciting.”
As we begin the fifth year of our plan to build a market leading specialist asset management business, I am delighted to report another strong year of organic and acquisitive growth. The Group has deepened its reach into its chosen asset classes, and simultaneously further increased its alternative asset management product platforms to create a high-quality alternative investment manager, which will continue to scale in terms of Assets Under Management (AUM).
Activity in the period
Alongside the completion of two significant transactions in 2018, the Group has continued to focus on prudent financial management and sustainable long-term growth, working to identify and develop new investment opportunities for clients. As a result, 2018 has been an excellent year for shareholder value creation whether measured by AUM, up 250% to £2.3 billion (2017: £649 million), or profitability, up to an adjusted operating profit of £3.0 million (2017: £0.7 million loss), including organic growth of 30% in AUM. It was also pleasing to see the Company’s market capitalisation surpass £100 million during the year, an important milestone as our offering gains increasing relevance to a wider range of investors.
In May we announced the transformative acquisition of FIM Services Limited, (FIM) making the Group the leading commercial forestry asset manager in the UK with almost £1.0 billion of Forestry AUM. The integration plan to combine the FIM and Gresham House Forestry teams has now been largely completed. Following this, in November we acquired the fund and investment management businesses of Livingbridge VC LLP (Livingbridge VC), increasing AUM by a further £0.5 billion and adding the two Baronsmead VCTs to our range along with two open-ended vehicles with strong track records. Both acquisitions met stringent financial criteria, introduced complementary new expertise to the business, expanded our client offering and broadened our shareholder base.
Before the end of the year, the Group successfully listed the UK’s largest battery storage fund on the London Stock Exchange, called Gresham House Energy Storage Fund plc (GRID). The IPO raised £100 million, with £57.2 million immediately deployed in a seed portfolio managed by the Group’s New Energy asset management division.
Beyond these exciting developments across the Group’s investment strategies, it was also very pleasing to see top decile performance from the Strategic Public Equity team via Gresham House Strategic plc (GHS); and a substantial deployment of committed capital by the British Strategic Investment Fund (BSIF) in a variety of UK infrastructure and housing opportunities.
As part of our continued growth and development we realised the need to refine our Group broking and advisory relationships. Consequently, we were delighted to appoint Canaccord Genuity and Jefferies International after a thorough selection process.
Notwithstanding the significant developments during the year, it is important to recognise that our experienced and capable management team has ambitious plans for the business to continue building a sustainable ‘asset to covet’ – something that employees, shareholders and clients can be proud of.
The activity in the year and growth in AUM has driven income to increase by 125% to £14.5 million (2017: £6.5 million). The AUM growth has not purely been from acquisition, with the team also focusing on delivering organic growth of 30% in AUM including the successful IPO of GRID, additional fundraisings in forestry and renewables plus good investment performances across other vehicles managed by the Group.
Profitability has also benefited as a result of scale and growth, with an adjusted operating profit of £3.0 million being delivered in the year (2017: £0.7 million loss), along with adjusted diluted EPS of 14.7 pence (2017: (5.9) pence). Total comprehensive net income improved to a loss of £0.6 million (2017: £3.5 million loss). The management team continues to operate a cost-focused model, while recognising the need to invest in the critical areas of the business, such as distribution and a high-quality investment team.
I indicated in the 2018 interim results, that the Board has considered the Company’s long-term dividend policy as an important part of the Company’s development. We are therefore particularly delighted to announce the intention to pay a maiden dividend of 3.0 pence.
The broadening of our shareholder base is further testament to the executive management team’s strategy, vision, communication and execution to date. In addition to new institutional shareholders, we have welcomed other significant long-term shareholders, including FIM’s Richard Crosbie Dawson and Colin Lees Millais and the Livingbridge partners who joined as part of the Livingbridge VC acquisition. I would also like to thank our existing shareholder base, who have loyally continued to support the growth of the Company in the year and have proved to be valuable long-term investors in the Company.
As noted at the time of our interim results, growth companies must have access to the right expertise and experience at Board level in order to provide the necessary governance, capability and support to management teams. The addition of Rachel Beagles to the Board in March 2018 has, together with Simon Stilwell in December 2017, proved invaluable in this regard and they have become highly valued colleagues.
We have started 2019 positively with successful fundraising efforts for both the Baronsmead VCTs, which closed within two weeks raising £25 million of new capacity, alongside a number of other fundraising initiatives which have progressed in the early part of the year.
The macro environment’s ten year ‘bull’ cycle is showing clear signs of slowing, with concerns around corporate margins and high valuations, as noted by our management team in recent years. The Group’s balance sheet has been managed accordingly and we enter 2019 in a strong position with the support of a new banking relationship with Santander. The continued uncertainties around Brexit do little to help, but with a predominantly UK-faced business we remain cautiously optimistic.
The increasing allocation to alternatives by long-term investors bodes well for the future and it is important that such an investment approach looks through short-term issues. This executive management team has proven its ability to source and execute value enhancing acquisitions in areas of relevance to the Gresham House strategy within alternative asset management alongside organic growth. Additional shareholder value is then created through clear integration and growth plans. We continue to further develop an exciting pipeline of opportunities to grow organically and significantly scale the Group, which gives us real confidence in its long-term prospects and shareholder value creation potential.
6 March 2019
Chief Executive’s report
2018 marked a transformational fourth year for the Group under this management team. Through organic growth and complementary acquisitions, Gresham House is a specialist alternative asset manager with breadth and depth, alongside high-quality investment professionals. This has resulted in a business across four office locations, 74 people with £2.3 billion AUM and with KPIs moving in an attractive direction. Commensurately, our sales and distribution capability has been enhanced to help us make the most of the opportunities before us. Underpinning all of this is a disciplined approach to return on capital employed, management and operations – bringing us closer to our profitability and operating margin targets, and hence our shareholder value creation objectives. This is now a scalable platform for long-term growth.
Growing shareholder value
At the heart of our strategy for the Group is the creation of shareholder value with the aim of making Gresham House an ‘asset to covet’. As the scale of the business has increased over the last year, Assets Under Management, (AUM) have reached £2.3 billion. We have nonetheless maintained our focus on operational efficiency through integration, and optimising resources to serve the business we have whilst supporting the next stage of the Group’s growth. It is therefore pleasing to have generated 30% organic growth in AUM in 2018, alongside the value from integrating the forestry and private equity acquisitions.
Our ability to achieve sustainable long-term growth focuses on a highly disciplined approach to managing risk and controls within the business. Gresham House’s Investment Committee challenges capital allocation decisions for the Group’s balance sheet for recommendation to the Board. With acquisitions, for example, we only deploy capital where there is a clear path to a 15% Return on Invested Capital (ROIC) over the medium-term and hence we believe in placing a significant focus on valuation and due diligence when appraising an acquisition. To date, it is pleasing to report that historic organic and acquisition investments are meeting this target, supporting our objective of generating high-quality recurring income streams for the Group from a diversified range of alternative investments. The long-term nature of a substantial proportion of our management contracts is significant.
Providing excellent service, including investment performance and communication, is central to maintaining the engagement of our clients. Underpinning traditional channels of client communications, our upgraded online client portal completed its first full year of operation. Through this mechanism, clients are able to see the full range of new investment opportunities we offer. Taken together with our co-investment platform, our improved fundraising capabilities mean that we can move quickly to support a range of exciting opportunities that expand AUM across the Group’s investment strategies, particularly in our top-performing Strategic Public Equity activities, notably Gresham House Strategic plc (GHS), and the LF Gresham House UK Micro Cap and LF Gresham House UK Multi Cap Income unit trust funds.
The Group’s organic growth in 2018 was headlined by the New Energy team’s listing and launch of the UK’s largest battery storage investment fund, called Gresham House Energy Storage Fund, (GRID). It aims to provide investors with an attractive and sustainable dividend by investing in a portfolio of utility-scale Energy Storage Systems (ESS) located in Great Britain, which use battery technology to import and export power, accessing multiple revenue sources within the power market.
Across the Group’s other investment strategies, we have a range of organic growth opportunities as new and existing investors from both public and private sectors look to deploy capital with us. The British Strategic Investment Fund, (BSIF), continues to attract interest as it deploys capital, including from public sector pension schemes seeking to invest in sub-£50 million UK housing and infrastructure opportunities, and is targeting a final close later in 2019.
The FIM Sustainable Timber and Energy LP had a further close at the end of January 2019 at £35 million having raised an additional £6.0 million post year-end, and we are also delighted that in the same month fundraising for the two Baronsmead VCTs, which came over as part of the Livingbridge VC acquisition, was fully subscribed within ten days of opening. Each of these serves to emphasise and evidence the Group’s future organic growth potential.
Acquisition, integration and optimisation
During the year we completed two significant acquisitions, FIM Services Limited (FIM) and the fund and investment management business of Livingbridge VC LLP (Livingbridge VC).
FIM significantly developed the Group’s AUM within the real assets sector, increasing it by circa £1.0 billion, expanding fee income, adding a strong team and bringing a complementary investor base into the Group and widening its distribution capabilities for new product launches. As a result of the transaction, the Group is now the market-leading forestry asset manager in the UK with enhanced expertise in renewables asset management.
Livingbridge VC added £0.5 billion to the Group’s AUM, comprising quoted and unquoted equities via the two Baronsmead VCTs and two top-performing open-ended investment companies (OEICs), LF Livingbridge (now LF Gresham House) UK Micro Cap Fund and LF Livingbridge (now LF Gresham House) UK Multi Cap Income Fund.
In both cases these additions to the Group met our acquisition criteria on expected ROIC, scope for operational cost savings and business development. Additionally, both brought strong investment management teams that share Gresham House’s ethos and culture, meaning that their integration into the Group has been swift and we have made excellent progress achieving identified earnings-enhancing synergies.
Gresham House Strategic plc (GHS) celebrated its third anniversary under Gresham House management in the year. NAV per share growth from inception to 31 December 2018 was 24.5%, growing 11.2% ahead of its benchmark. GHS was also the top-performing fund in its segment in the year. We continued to review opportunities to scale GHS and promote this top-performing fund on a larger platform.
Strategic Public Equity LP (SPE LP) performed strongly in the year and was significantly ahead of its target returns, returning cash to investors following the partial sale of IMI Mobile at an attractive price, which has accelerated the discussions for the next fund launch. With SPE LP reporting a 1.4x money multiple to the end of 2018, Gresham House has continued to build on the team’s successful 15-year track record. Planning for SPE Fund IV is now well developed in order to allow a scalable version of this differentiated quoted equity strategy.
The addition of the two OEICs and the two Baronsmead VCTs with the Livingbridge VC acquisition has enhanced the offering that Gresham House has in this specialist area of investment.
The Baronsmead VCTs offer a high-quality and successful investment track record to investors and will continue to be managed by the same team to maintain this important brand. We are very pleased to welcome the Baronsmead VCTs under Gresham House management and look forward to investing further in the team and its resources to benefit investors. The strength of the Baronsmead VCTs has already been demonstrated in January, with the top up fundraise of £25 million completing within ten days.
The LF Gresham House UK Micro Cap Fund is top quartile performing under the leadership of Ken Wotton over one, three and five-year periods and alongside the LF Gresham House UK Multi Cap Income Fund brings new open-ended vehicle capacity into Gresham House. These vehicles have capacity to substantially scale on the back of strong investment performance. Importantly, the UK Micro Cap Fund has top decile performance over five years versus peers.
The private equity opportunity has significantly increased following the Livingbridge VC transaction. Gresham House has now added to its private equity capability with a strong team and track record. The opportunity for LMS Capital plc (LMS) to benefit from this strong private equity combined investment team is clear. Having positioned LMS successfully under Gresham House management, a number of opportunities for its future direction and scale are apparent.
The forestry division has grown well in the year, with organic growth in AUM of circa £120 million in 2018. This is the result of the long-term sustainable growth in the value of the underlying forest portfolio, clear focus on the acquisition of forests for clients and targeted fundraising in our existing long-term LP structures.
The integration of the Gresham House Forestry and FIM operations has enabled us to combine two highly skilled teams for the benefit of clients and shareholders alike. The combined team continues to provide a high-quality service to existing clients and also has the ability to grow the forestry business in the UK as well as review international opportunities. I am very pleased that Olly Hughes has recently joined us as the Managing Director of Forestry from Oxford Capital after the period end. Under his stewardship of the division we are expecting to see this area of the business develop further.
The New Energy division remains an area of huge potential for Gresham House. Our existing product offering includes the Hazel Renewable Energy VCTs (to be renamed Gresham House Renewable Energy VCTs) and the newly launched Gresham House Energy Storage Fund plc (GRID). These are exciting and scalable products which emphasise the potential opportunity from operating in sustainable areas of the renewable energy market. We have also supported the development of battery storage projects that are part of the pipeline for GRID, which we expect to be operational in 2019 and will lead to GRID seeking to issue additional shares supported by demand for this income-yielding investment. The scale of the opportunity for utility-scale batteries in the UK is considerable and bodes well for increasing AUM in this sector.
Infrastructure and housing in the sub £50 million enterprise value space remains attractive and have the potential for considerable investment. BSIF has worked hard with its initial capital and was circa 50% invested at the end of 2018. The opportunities to form long-term partnerships through relationships with local government pension schemes (LGPS) are considerable and long-term growth is very positive. With Brexit impacting inward UK investment, the opportunity exists for LGPS to invest in assets and platforms of strategic interest locally, regionally and nationally, such as vertical farming and affordable housing. We are aiming to have a final close for BSIF in 2019 and based on the current rate of investment, we expect to be raising a new fund for this strategy within the next year.
At the heart of our business is a talented, driven team of management and investment professionals who have established a strong culture of excellence. I was therefore delighted that we were named Best Alternative Investment Manager at the 2018 European Wealth Briefing Awards. Such external recognition demonstrated to everyone working in the business that we are building something special and that their efforts are being recognised in the wider market.
With our recent acquisitions, the Group’s headcount has grown, and we have used the momentum gained during the year to enhance our distribution and sales capabilities alongside revenue growth, in addition to building our investment teams to deploy capital for investors in an efficient and profitable manner.
As noted at the time of the interim results, Heather Fleming’s arrival as Head of Institutional Business brings considerable experience and expertise to our fundraising strategy. Her growing team forms a critical element of our fundraising and distribution power as we focus on organically expanding the Group’s investment product portfolio.
I am also delighted to welcome the Livingbridge VC team who joined Gresham House at the end of the year, including high-quality investment managers Ken Wotton, Steve Cordiner and Bevan Duncan. Like the FIM team, their integration into the business will help us to develop exciting new investment opportunities for current and new clients, as well as enhancing the Gresham House brand.
We could not implement our ambitious strategy for the Group without the dedication, energy and expertise of everyone working in the business. I, and the rest of the management team, thank everyone that is part of the Gresham House ‘family’ for their hard work as we continue to grow the business and achieve our shareholder value objectives.
The achievements of 2018 are substantial. Our disciplined approach to managing the business means that we benefit from synergy potential and are well-positioned to take advantage of the growing proportion of asset allocations to alternatives. The combination of sustainable fund management income and performance fees creates a solid foundation upon which to develop new opportunities and co-investments that will increase the Group’s scale and its relevance to a wider constituency of investors based on top quality investment talent.
The management team are focused on key areas to generate further shareholder value including organic growth in areas of competitive advantage (like forestry and new energy) whilst generating attractive returns on balance sheet capital and targeting 40-plus margins as we scale AUM.
Setting aside our conviction in the assets where we deploy capital, we also stand to benefit from the increased focus investors place on environmental, social and governance (ESG) criteria as the Group offers investors superior performance within an ESG-compliant framework, alongside sustainable real asset sectors including forestry, renewables and critical UK strategic infrastructure.
We will continue to be selective in our acquisition strategy, focusing on the most effective way to create value for shareholders, however the clear emphasis for 2019 is on organically increasing AUM. The opportunity to increase each of the five investment units to a multiple of their current size and the operational gearing upon the existing Gresham House platform should drive margins toward the 40% target, even before the benefits of performance fees.
The geopolitical outlook for the UK and Europe has remained challenging, creating uncertainty in markets and necessitating a pragmatic approach to risk and compliance management. Analysis of valuations and return on capital employed remain a concern. That said, the current macroeconomic environment also creates dislocations and opportunities for us as we seek to deliver the kind of high-quality, long-term sustainable income offered by alternative assets. The increasing focus on income yield, inflation linkage and sustainable asset investment should support long-term AUM growth and consequently Gresham House shareholder value despite market and valuation concerns.
Gresham House has repeatedly demonstrated that it offers innovative opportunities for public and private investor clients. Taken together with the added attractions of our partnership approach to investor relationships, the Gresham House platform and brand is growing. The value generated by a dynamic and capable team is now clearly showing through in shareholder value creation. We look to the future with confidence and optimism.
6 March 2019