Man Group Plc (MNGPF) Q2 2023 Earnings Call Transcript

Man Group Plc (OTCPK:MNGPF) Q2 2023 Earnings Conference Call August 1, 2023 5:00 AM ET

Company Participants

Luke Ellis - Chief Executive Officer

Antoine Forterre - Chief Financial Officer

Conference Call Participants

Michael Werner - UBS

Arnaud Giblat - BNP Paribas Exane

Hubert Lam - BofA Securities

Haley Tam - Credit Suisse

Bruce Hamilton - Morgan Stanley

Samarth Agrawal - Citigroup Inc.

Luke Ellis

Good morning, everyone. Hopefully, you can hear us clearly. Thank you for joining us today. I am Luke Ellis, the CEO of Man Group. I'm joined by our CFO, Antoine Forterre.

As you may know, earlier this year, I informed the Board of my decision to retire after nearly 40 years in the industry. It's been an enormous privilege for me to lead the firm for the last seven years, and I've loved every minute of it, well, almost every minute anyway. I'm delighted that Robyn Grew, our current President, has been appointed the next CEO of Man Group. Robyn and I have worked together very closely for over a decade, and she has been instrumental in helping Man Group achieve the growth we've seen in the recent years. She's an exceptional visionary leader with deep commercial and operational experience and more than enough energy to take the firm forward to even greater heights. Robyn will take over on the 1st of September, which makes this my last set of results.

As usual, I'll start with some highlights, then Antoine will take you through the numbers. After that, I'll talk about positioning and strategy, and we'll finish with the Q&A. As a reminder, to ask a question today, you'll need to access the presentation via the Webex link rather than the dine-in option.

So, global equity markets powered past the challenge from the higher interest rates implemented by monetary policymakers and the turmoil in the banking sector to deliver strong positive returns in the first half of 2023. It turns out that the huge injection of liquidity from monetary and fiscal policy has so far been more than impactful than the change in the price of that liquidity. We ended the first half of the year with $151.7 billion of assets under management, another record. The client-led growth in our business remains strong over the period with total net inflows of $2.6 billion during the first half. On a relative basis, total net inflows were about 2.5% ahead of the industry, reflecting the merits of our distribution model and the quality of our long-standing relationships with allocators around the world, and I'm delighted that we continue to grow our market share again in the first six months of 2023.

We also delivered positive investment performance across all product categories. March proved to be a difficult month for trend-following absolute return strategies as the collapse of the regional lenders in the U.S. led to a rapid flight to safety with a two-year yield on the U.S. Treasury note registering its biggest fall since the 1980s. This was a significant reversal of the higher for longer rates theme that have permeated market since about November and negatively affected our investment performance and therefore, performance fees in the AHL strategies.

Our clients focus, they look over the longer term, and they've been very understanding, noting that the strategies have performed as expected, and that we've delivered returns in line with or better than our peers. Investment performance has recovered since then with AHL Alpha and AHL Dimension ending the period in positive territory.

Core management fee earnings of $0.087 per share were resilient, demonstrating the diversification of our total return on long-only strategies, adding to our overall business. Total core earnings per share reflect lower revenue from performance fees in the first half of the year.

The Board has declared an interim dividend of $0.056 per share, in line with the half 1 '22 and our guidance. As we've said previously, just to repeat, although our policy is progressive, we will keep our interim dividend fixed until we reach an interim versus final dividend split in line with the market. And therefore, any progression this year in our total dividend will come through in the final.

M&A is a core part of our strategy. And last month, we were delighted to announce the acquisition of Varagon Capital Partners, a U.S.-based private credit manager, and I'll talk about more of that later.

Net inflows of $2.6 billion and positive investment performance of $5.1 billion taken together with FX and other impacts of $0.7 billion increased the AUM to $151.7 billion at 30th of June. This was 6% higher compared with the 31st of December, reflecting another good period of organic growth and a new high for the firm.

On an asset-weighted basis, relative investment performance across the firm was positive for the first half of the year. Our strong risk management and powerful central platform meant we were able to reduce positions quickly during the market volatility in March, driving relative outperformance of 0.4% from our alternative strategies, although obviously, as mentioned, the absolute performance was more muted. Our long-only strategy has performed well over the period, helped by positive momentum in equity markets, delivering overall investment performance of 9.1%. They also outperformed again by 1% in the half, with noticeably strong relative returns from our GLG Continental European growth strategy, which was 4.4% ahead and Numeric EM Core, which was 2.6% ahead.

As I've repeated regularly, we're a client-focused firm. And by that, I don't mean a distribution-focused firm. We make a conscious effort to listen and respond to our clients' needs and provide them with a single point of contact that really understands their unique requirements across the range of market environments. The breadth of what we do at Man Group and the tailored nature of what we offer is extremely compelling to clients. It allows us to appeal to a wide range of sophisticated clients around the world.

The first six months of the year highlighted the broad-based demand for our differentiated offering as we recorded net inflows into both alternatives and long-only strategies and across quant and discretionary investment styles. Our solutions offering continued to be a bright spot during the period, while only representing a part of the overall customized mandates we offer. Our Man Institutional Solutions AUM has now grown to $14.7 billion. Pleasingly, we also saw strong growth in our liquid credit strategies with AUM in discretionary long-only credit and converts up $1.8 billion compared to this time last year, and I'll talk about more of that later. Clients have confidence in our ability to manage, protect and grow their assets. We continue to be able to attract and retain assets faster than our industry peers.

Diversifying our client offering has been a priority for the firm, and we're delighted to announce the acquisition of Varagon, a U.S.-based private credit manager with $11.8 billion of assets under management. I've always talked about the criteria that I thought were needed for us to make an acquisition. The acquisition target needed a repeatable source of alpha, a culture that believed in the same things we believe in, needed to do something we don't already do, and of course, it needed to be at a sensible price. We believe Varagon firmly ticks all of these boxes. Varagon focuses on senior secured loans with multiple covenants to cash-generative high-performing sponsor-backed companies in non-cyclical industries. It typically serves as a lead or co-lead lender with superior origination capabilities. Varagon has established itself as a leading provider of differentiated capital solutions in the core middle market since its inception in 2014, with a high-quality sophisticated client base in the insurance channel. The team based across offices in New York, Fort Worth and Chicago have a really strong track record of underwriting discipline, risk management and generating differentiated returns for their investors.

As the private credit market continues to grow in relevance for the world's largest institutions, this transaction adds a U.S.-focused direct lending strategy to provide consistent risk-adjusted outperformance at scale and a highly customizable strategy as well. We see significant growth opportunity in this space, and we're confident that our extensive distribution network and our operational expertise will support Varagon in its continued growth and delivery for clients. We very much look forward to working with such a strong team. Antoine will provide more detail on the financial considerations that I'm sure all of you are keen on.

Since I took over as CEO in 2016, we've consistently focused on adding value to our clients and so delivering growth and increasing the diversification in our business. I'm proud to say we've made real progress against our key strategic priorities in the last seven years, and these charts reflect that. I guess, when you look at it, the only metric we haven't managed to more than double in that time is our multiple. So, I guess, Robyn, one for you to work on.

We've grown by adding new sources of alpha through organic innovation, recruitment and acquisition, and by building long-term partnerships with many of the world's largest institutional investors to understand and help solve their most complex requirements. Today, we're a multidimensional active asset management with a global presence and a clear advantage in liquid alternatives. Our investment capability is powered by our advanced technology platform are designed to deliver alpha to the world's largest and most sophisticated investors.

And with that, I'll pass it on to Antoine to take you through the numbers.

Antoine Forterre

Thank you, Luke, and good morning, everyone. As usual, I will start with some financial highlights before covering our AUM, P&L and balance sheet. I will also provide some further details on the announced acquisition of Varagon.

In the first half of 2023, we reported net revenues of $513 million, a decrease compared to the same period last year, driven mainly by lower performance fee revenue. Net management fees of $460 million were 2% lower than last June, given the underlying mix of assets under management during the period, which I will go into more detail later. At $32 million, performance fees were materially lower than in June '22, reflecting a difficult first quarter for trend-following strategies, some of which AHL Evolution, for example, crystallized performance fees in June.

Our core PBT margin consequently decreased to 27% in the first half of the year. Fixed cash costs increased to $180 million in the first half, driven by planned and announced investments in the business. The compensation ratio was also at the top of our guided range, given the lower level of performance fee revenue recorded in the period. Overall, core PBT decreased to $137 million, primarily due to the decrease in core performance fees. Core performance fee PBT was also impacted by accounting charges related to deferred variable comp awards made in previous years. We continue to have a strong and liquid balance sheet with net financial assets of $618 million at the end of June and seed investments of $634 million.

As Luke said earlier, assets under management reached a new high at $151.7 billion, with net flows in investment performance and FX and other movements all contributing positively. At $2.6 billion for the period, net inflows were positive across all product categories. Alternative flows of $1.3 billion were driven by liquid alternatives and industry solutions, while the $1.3 billion inflows into long-only strategies were driven by Numeric Emerging Market strategies and GLG credit. On an asset-weighted basis, overall net flows were 2.5% ahead of the industry, which demonstrates continued strong relative demand for diversified product offering. Investment performance of $5.1 billion was primarily driven by our long-only strategies, which benefited from the rebound in global markets, as well as positive alpha generation. Finally, the weaker U.S. dollar in the first half of the year drove an increase in our reported AUM, 43% of which being non-U.S. dollar denominated.

The growth in assets under management led to an increase in run rate core net management fees from $917 million at the end of 2022 to $946 million in June. At the end of June, our run rate net management fee margin was 62 basis points, 2 basis points below the run rate as of the end of '22, although margins at the product category level have remained stable. As I've said before, we consider net management fee margin and output of the underlying mix of assets we manage. During the first 6 months of the year, our long-only AUM increased as a proportion of our overall AUM, given long-only AUM is still clear at lower margin. This effect broke the overall margin for the group down. You'll remember that we experienced the same opposite effects in the first half of last year. We do not target a specific net management fee margin and remain focused on generating profitable revenue growth in the various product categories that we run, considering the positioning, performance and capacity.

Moving on to performance fees. On the back of two strong years, our trend-following strategies are the tougher first quarter. While most strategies finished the period up, performance fee generation was weaker in the first half. Performance fees were $32 million for the period, including $30 million from alternative strategies, most notably Man 1783, which we spoke about at the full year results, as well as from GLG absolute return strategies. Separately, we generated gains on investments of $19 million, predominantly from our seed positions and credit strategies. A short, sharp reversal is always painful for trend-following strategies, and the margin was no different. What it results in softer performance generation in H1 does not change anything on our longer time horizon, which is a rise in relevant for our clients. We continue to have confidence in our strategies' ability to generate alpha and deliver valuable performance fees for shareholders as we have done in the past.

At the end of June, we had $62.1 billion of performance fee eligible AUM. And as of two days ago, had accrued roughly $75 million of performance fees due to crystallize in 2023 in our funds. This number is not a projection, but a snapshot of the position accrued in the funds at a point in time. The amount that crystallizes over the remainder of the year will, therefore, vary up or down based on the performance of the direct funds over that period.

We now turn to costs. Our guidance for '23 accommodated selective investments in certain parts of our business. In line with this guidance, the increase in fixed compensation was largely due to the planned increase in the headcount to support business growth. Other cash costs increased by 11% to $62 million, driven by an increase in utility costs and property rates. While most currencies, particularly sterling has strengthened against the dollar in the first half of 2023, they remain weaker on average than in the first half of 2022, resulting in a reduction in fixed compensation and core other costs, which partially offsets the underlying increases. Variable compensation costs decreased due to lower revenue in the first half of the year with our compensation ratio for H1 at 50%, the top of our guided range. As you will be aware, our previous fixed cash cost guidance of $355 million for 2023 assumed a dollar to sterling FX rate of $1.21, adjusting our guidance for the H1 actuals and current spot rate of $1.3 will result in abated guidance of $370 million for 2023. For the avoidance of doubt, this does not reflect any changes to underlying costs, purely the impact of FX, given roughly 60% of our fixed cash costs are incurred in sterling.

In summary, management fee revenues were resilient despite the market volatility and other headwinds facing the sector. After two very strong years, performance fee revenues were lower for the first half of 2023. But as I said earlier, it does not change our confidence in the strategies' ability to deliver for clients and shareholders over a longer-term horizon. We continue to make previously planned investments in the business to support our growth, adding talent and technology to diversify our business further and continue to build our competitive advantage.

The strength and flexibility of our balance sheet allows us to invest in the business to support our long-term growth prospects, evaluate M&A opportunities and ultimately, maximize shareholder value. At the end of June, we had $618 million of net financial assets. This is before the receipt of cash performance fees crystallizing in June, the interim dividend and the completion of the Varagon acquisition, which will be funded using existing internal resources. We continue to consider the most efficient financing available for our business, which includes financing some seed positions and using our revolving credit facility. This is why we had $65 million drawn at the end of June compared to $120 million last year. You can expect us to continue to manage our liquidity more dynamically going forward.

This slide provides more color on the terms of the Varagon acquisition, which Luke talked about earlier, and how you should think about it going forward. Under the agreement, we will acquire 73% stake in the business or $183 million, implying a total valuation of $250 million. The management team is rolling over the entire 27% equity stake, which can be liquidated via put/call arrangements at fair market value eight, nine or 10 years following completion. The acquisition of Varagon is an important and exciting strategic step for us, and all parties were pleased with the outcome, including the terms of the transaction. The selling shareholders are also large clients of the business. This testament to the autonomy will provide our teams to make investment decisions or respect for talent and the quality of our institutional franchise that after a competitive process, those shareholders decided to entrust us continuing to manage their assets for longer.

On the right of this slide, you can see some key assumptions to model the Varagon business going forward. We expect the combination to be meaningfully accretive to EPS in the first full year following completion, which we expect to happen in Q3. We are confident that our global distribution network and institutional infrastructure will support Varagon's continued growth, creating significant value for shareholders over time. Although Varagon is the first sizable acquisition we announced for some time. It fits firmly within the strategy and framework we discussed previously and importantly, does not change our capital allocation policy. When approaching shareholder returns, progressive dividend remains a primary investment of returning capital. The Board then considers potential strategic growth opportunities, both organic and inorganic. And in any event, we have capital surplus to requirements, it aims to return it to shareholders over time by way of share buybacks with advantages. As we have done in the past, we will therefore continue to return to shareholders capital that we considered to be in excess of our medium-term requirements.

In application of that policy, we announced and completed $125 million share buyback program in March of this year, having previously completed the previous $125 million program announced last December. Including the interim dividend proposed today, we will have returned roughly $190 million to shareholders in the first half of 2023, taking the total capital returned over the past 5.5 years to $2.1 billion or about 50% of our market cap.

On that point, let me hand back to Luke one last time. And in doing so, I thank him for his guidance and support over the last 12 years.

Luke Ellis

Thanks, Antoine. From speaking to clients this year, it's clear that large institutional investors continue to have an insatiable appetite for alpha to enable them to reach their target returns. Our business is designed to deliver them that alpha at scale. By trading a wide range of macro instruments, as well as traditional asset classes, our strategies have the potential to generate alpha irrespective of prevailing market conditions. Investors are also increasingly looking for differentiated investment offerings that meet their particular portfolio needs and the option to customize based on risk appetite and market exposure. They're also looking for help managing the risks from the beta and correlations exposures in their overall asset allocation.

There are a few firms with a range of high-quality solutions that we offer. It allows us to always remain relevant to our clients' CIO and investment committee throughout market cycles. Our institutional resources and infrastructure are designed to deal with the scale and complexity, which enables us to evolve and adapt as markets and clients need to do and gives us a real competitive advantage. Underpinning all of this is the combination of our talented technology, which drives a sustainable growth in our business and creates compounding value to shareholders.

The volatility we've seen in markets makes a strong case for investing in liquid alternatives, where we are a global leader with over 35 years of experience. This year, we've continued to deliver investment performance ahead of our peers, which, together with our long-term track record, reinforces our belief that our diversified range of strategies are well placed to generate alpha for clients in the future. In addition, we bring an allocators mindset, then use investment capabilities and portfolio management skills from across the firm to create a powerful combined offering, deepening the partnership and longevity of our relationships. As we've said previously, we're one of the largest liquid alternative providers in the world, 45% of our alternatives AUM has daily or weekly liquidity terms, up from 41% at the end of last year. That's truly differentiating as allocators reevaluate liquidity in their portfolios.

At the full year results, you heard us talk about the clear trend of clients doing more things with [PO] providers as their problems are becoming more complex, requiring specific tailoring. We're really well placed to benefit from that given the breadth of our strategies, the quality of our institutional resources and our cultural DNA to work with clients to build solutions. The rate of growth in our solutions business is a testament to that. We now run more customized mandates than ever before, offer solutions that can scale to many of our largest clients, and we've seen a consistently low redemption rate in this category. We will continue to expand the breadth and depth of our offering, and that presents several opportunities for growth with both new and existing clients and across differentiated distribution channels.

One recent example of this is the strategic partnership with Fideuram-Intesa Sanpaolo Private Banking we announced earlier, last month, I think. Fideuram is the leading private bank with Pan European reach and one of Man Group's key clients in that country. The new venture will focus on building a range of tailored investment strategies and solutions combining our own capabilities with their private banking expertise, their extensive financial advisor network and their client base in Europe. We have grown successfully in the last few years in the intermediated retail channel through offerings offering customized content through our partnerships in the U.S. and Japan. And we hope that this venture will further help grow our presence in the Italian market.

There's a lot of economic uncertainty, and trying to predict where markets will be a year from now is not a straightforward task. But what we do know is that, we're in a period of heightened inflation that is unlikely to disappear entirely any time soon, even the Fed agrees with that. Heightened inflation creates economic uncertainty and volatility, and that creates market volatility, which is a great environment for active management. The more dispersion there is in markets, top-down macro dispersion or bottom-up company dispersion, the more opportunity there is to generate alpha over time. But as I've said before, you need skill. Not all active managers will outperform. Alternative managers with excellent risk management skills with a track record of delivering returns for clients will, we think, see strong demand. And that's an area in which we are very well placed. We can help clients achieve their aims in the current environment, whether that's managing the beta in their portfolios or providing access to discretionary credit capabilities.

And with that, one of the key features of our strategy in the last few years has been to move into new market segments, where we can differentiate ourselves with talented specialized teams, and we've made very good progress building our credit platform in the past few years. As you can see from the chart, today, we have both alternative and long-only credit strategies run on a quantitative and discretionary basis across liquid and now private markets. Our discretionary long-only credit strategies in high-yield and investment-grade have grown strongly since launch. And as I mentioned earlier, continue to see strong client demand during the first six months of the year. And interestingly, our quant credit strategy was [short] both in Silicon Valley Bank and First Reserve in early March, showing quant really can work very well to identify issues in single [main] credit. Here at Man Group, we have no house view, which allows each investment team to retain their independence and focus on the alpha opportunities they identified through their bottom-up research. We do, however, use the scale of our -- use our scale to our advantage with teams utilizing the firm's relationship, central platform and quantitative tools to aid their investment processes.

In March, we announced that Bloomberg will integrate ArcticDB, a tool we developed in-house into BQuant, Bloomberg's analytics platform for quantitative analysts and data scientists. That was a huge validation of the quality of the technology we've built at the firm. I want to spend a few minutes talking about the tool itself, how it was developed over time. 10 years ago, when we first started work on ArcticDB, general problem solving in the data industry was more focused on time series data. In practical terms, this meant that data frame solutions available in the market were focused on very long and very narrow time set. Within Man Group, we're often dealing with asset classes that encompass an enormous universe of individual instruments, as well as long indeed [time series]. We had a growing need for something that could scale horizontally, as well as deeply in a way that was a challenge for any of the third-party vendor solutions we were seeing at the time. So at that point, we decided to build the technology in-house. The first public work-facing version of Arctic was launched on GitHub in 2015. And so far, it has had over 1 million downloads because, guess what, the challenge of extracting value from ever-increasing data sets is one shared by the entire investment management industry and beyond. Several years of investment and development later, we have ArcticDB, a Python-native DataFrame database and our response to the ever-increasing amount of data and complexity used in front office research. The ability to represent such a large universe and its evolution over time in a single prime data set and to do that quickly is invaluable. This technology is now driving investment decisions across Man Group's front office, including product innovation. And hopefully, in the future, many other organizations, either directly or via BQuant.

As you'll be aware, it was the technology giants putting wind in the sales of the equity rally this year as investors flock to companies that they expect will benefit from the growth of AI. AI is a story everywhere. Hopefully, you'll also be aware that we've been heavily investing in technology over $100 million annually for many years now, ensuring a strong technology-driven infrastructure is in place, and we've been exploring how to deploy and integrate new technologies across all areas of our business for years. We've considered AI to be a core competence pervading all aspects of our investment process for a long time with a steady adoption of machine learning throughout the last decade, both internally and via our unique partnership with Oxford University, which is focused on machine learning and finance. AI can automate, innovate and increase productivity if used well. We use it in our data management models, portfolio construction to APMs in our discretionary business and for our trading processes. Examples of its use cases include trade order routing and natural language processing for sentiment analysis, both of which have featured in our previous Investor Days, if you attended them, the first time back in 2018. This isn't new news at Man. We've been doing it for years.

Generative AI has taken many by storm. We actually think ChatGPT itself has major potential, specifically to increase research efficiency and help humans upskill and execute. But it's still early to speak of its investment market impact, and we must also address the risks. Generative AI always thinks there's an answer to any question. But what we all know is that, in markets, some questions just don't have answers. We've implemented our own version, ManGPT, which you can see on the right of the slide and are researching several other use cases for generative AI across our business. The largest areas of focus include exploring copilot type tools [gene] to our technology and [code-based] productivity aids, improving accessibility and search within our document database and auto generating charts with accompanying macro description. We've always looked to align the latest technology with our underlying investment philosophies and processes, and this is no exception. Its applications will only complement and enhance our existing efforts.

The first half of '23 was a period of sustained organic growth for Man Group, while turmoil in the banking sector in March affected short-term investment performance in our trend-following absolute return strategies. Our results highlight the benefit of our diversified model and the continued demand for our strategies and solutions and our relationships with our clients. We're in great shape, and our focus is on delivering further in the second half of the year.

It's been a great privilege leading Man during a period of major evolution and progression, through our unwavering focus on investment performance, client service on our culture, alongside investing strategically in our talented technology, the business has grown and diversified significantly since my appointment. I'm proud of what we've delivered. I'm excited about what the firm can do from here. I'm a long-term shareholder after all. I could not be leaving this firm in better hands. Robyn is truly great, and I have no doubt that the firm will continue to go from strength to strength under her leadership and the highly talented team around her, building on our position at the forefront of the industry and continuing to deliver for our clients, our people and our shareholders.

On that point, I'd like to thank our shareholders and analysts for your interest and attention over the last seven years and your mostly polite questions during my tenure. Most of all, I'd like to thank the team here at Man for making my 13 years at Man and especially the last seven years, such a great ride.

With that, over to you, Robyn and the team to take the firm to ever greater heights. I'm looking forward to a life of leisure come September and watching a lot of rugby.

And so, with that, we'll open up for questions. As a reminder, to ask a question, you need to have joined the presentation via the Webex link. I can see we have a number of questions already on that, on your screen, and this may vary by device. Press the Raise Hand button to notify us that you’re glad to ask a question. And you will automatically join the queue. Please note you will need to unmute yourself once we call out your name.

And with that, Antoine, who is first?

Question-and-Answer Session

A - Antoine Forterre

Haley, you should be able to unmute yourself.

Luke Ellis

Haley, are you there? You have to unmute yourself? Maybe we answered your question or maybe we move on to next one.

Antoine Forterre

We will get to Mike, Mike Werner.

Luke Ellis

Mike Werner, if you unmute yourself, and you can ask the question.

Michael Werner

Okay. Excellent. I've got two questions actually. I have one for Antoine and then want to Luke. Luke, first of all, it's been a pleasure. I just want to wish you all the best in the next stage of your life. It's been a lot of fun watching you manage this business over the past seven, six years, I guess. I guess, Luke, I guess, looking at Man Group right now, just from a high-level perspective, what do you see is the biggest challenge or risk facing Man Group? And then potentially what's the biggest opportunity?

And then also, just looking back at the financials, we saw quite a high comp ratio within the performance fee earnings. I was just wondering what was going on there? Was there any one-offs? I think the comp ratio there was around 80%, 85% or so. And how should we think about that going forward?

Antoine Forterre

So comp ratio, we give a range of 40% to 50%, which is over the entire P&L plus management fee and performance fee. And we said in the past when you have softer performance fee periods that we've seen, we'll be at the higher end of that range and 50%, which we've been at, I think, in H1 '20 as well as in 2015. So we've been there in the past.

When it comes to then the performance fee-specific comp ratio, the other thing that you have to overlay is previous year's compensation deferrals that fits with the P&L. And on the back of 2 very strong years, performance fee where the compensation was fairly high, but deferrals feed through in the performance fee line. So it's in relation to last year, particularly in the previous years and deferred awards that fit [well] and that drives the higher comp ratio within the performance fee line, in particular. But the key point, though, is the 40%, 50% overall comp ratio that we manage the business through.

Luke Ellis

And so, I guess, you asked me a very big picture thoughtful question as I finish about the biggest challenge and opportunity. Look, I consciously wanted to hand over the business at a point where the business had really good momentum. And I think that creates both the biggest opportunity and also the biggest challenge. The opportunity is to keep delivering for clients, the demand out there from clients for the sorts of things that Man does is tremendous. But you do have to keep very focused on executing and not getting caught up in the short-term noise. Clearly, this morning, the world's got a bit caught up in the short-term noise about performance in a month in a quarter. The clients, I was talking yesterday to one of our large sovereign wealth clients, he was asking about succession process, how we think about it, how we thought about getting here. He was talking about the fact that they have a 100-year expected tenure for the money at that sovereign wealth fund. And he's not thinking about performance in a quarter or in a month and whatever. And I think the opportunity is to deliver for those people, the challenges to make sure you focus on the long-term and not get caught up in the short-term noise. That, I guess, is the thing maybe the -- if I was being [tried], I'd say the biggest opportunity is to get the multiple up to the same as, I think, your equivalent and the challenges well, I didn't succeed in seven years. So maybe that's the biggest challenge.

Arnaud?

Arnaud Giblat

Congratulations, Luke, on your turnaround of Man Group. It's been great working with you over the past few years. And it's been quite a few quarters since we've last talked about guaranteed products. So well done there. Actually, I'd like to bounce on that point. With interest rates being so high, I wonder if there's not an opportunity to actually have a come back in the retail space.

Secondly, on Varagon, I was wondering if you could give us a bit more on the terms of the earn-out of the acquisition, at what level of AUM is that you're not paid at all in 9 years' time? What -- on distribution as well, distribution synergies, among your clients, is there a lot of overlap between those buying liquid alternatives and private assets? I suppose what's the key learning here from GPM? I think there was little cross-selling that actually happened there. So how is it going to be better with Varagon?

Luke Ellis

Sure. Okay. Let me do with the first and the last one, and then Antoine can come back on the details on the earn-out. The -- I guess, you conflated 2 questions with the question on higher rates and structured products, I guess, yes, if rates are higher, the maths of doing a structured product start to work again. I would say, what's very clear is the fees on structured products today look like the fees in a normal fund investment. They don't look anything like the fees that Man used to earn pre-financial crisis. That massively high fee load that they used to charge, that's gone and not coming back. And you've seen -- I talked about we have this partnership with American Beacon in the U.S., a product in Japan, particularly with SMBC, which have -- those have both been very successful things at raising assets on a continuous basis over the last 3 or 4 years. I think the Fideuram opportunity is also very interesting. So I think the firm is in a place where we can do more with retail, but I don't think it will be at net different fees to the firm than the other things we do.

In terms of Varagon and the distribution and what have we learned from the real estate private markets business we brought in. We -- so the existing overlap between their clients and our existing client base is low, that they have a significant insurance presence in the U.S., which isn't somewhere we've historically had a big presence. It's very clear that clients in recently any area you'd like to talk about are interested in private credit. You've written about a lot, everybody has written about it. So the client demand we're seeing for the strategy should be very interesting. I would say the thing that we learned was that Man's distribution works in big lumps. And so, our -- we have a lot of things where we write $100 million ticket is a small ticket for us often. We have a lot of things where we were at a $500 million ticket or $1 billion ticket, and that -- our distribution works best when you have a strategy, which is capable of taking in those large-scale investments.

The great thing of Varagon is by working with the original shareholder partners, they have several multibillion-dollar investors. And so, they understand how to do that, they can scale in a way which meets with our distribution capabilities. So I think we are excited about the ability to do that. And the really good thing is, they don't need to change anything they're doing, and they have no interest in changing what they're doing, just by taking larger proportions of the loans where they lead or co-lead, actually, you couldn't significantly scale the asset. So it's really a distribution opportunity, which is where we're very good.

Antoine Forterre

And on the earn-outs, beyond the upfront cash outlay, you have two additional payments. The first one will go to the shareholders that are rolling their stake, and that's a 27% stake that we talked about. This is not really an earn-out in the sense that it's earned equity. So the value of that stake will go up or down depending on how valuable the business grows and our ownership over the next 10 years, hence, the sort of alignment of interest that we have with the team managing the assets.

The second set of payment is specifically one intended for some of the largest shareholders and clients, and its additional incentives that they will get in year three and year six, collective of up to $93 million if they maintain or even extend the AUM with us of up to nine years. Those will be reflected in accounts possibly not actually like earn-outs, possibly more like kind of client relationship type payments. But those are the two payments. The main one you referred to is really earned equity.

Luke Ellis

And I think it's a really important thing that none of the existing employees is taking cash off the table. They've all rolled 100% of their investment, keeping it in the business for a very significant long term because of their belief in the growth opportunity in the firm. So that's a real alignment of interest, which they were keen on. It wasn't something we had to force in the negotiation. So that, for us, makes it feel a very good match of people with our culture.

Antoine Forterre

We'll go to Hubert.

Hubert Lam

And first of all, I'd like to thank Luke for everything over the last years. I wish you all the best, and we'll definitely miss your opinions of the markets in the world. So thanks for everything.

A couple of questions. Firstly, on flows. I know it's only a quarter, but alternative flows were a bit soft in the quarter in Q2. Just wondering, is this a reaction to the weakness they saw in March and clients waiting to see how you react to it in terms of how your performance responds to the weakness in March? Or just wondering, is there anything specific in the quarter? And how should we think about the pipeline as well going forward in [alt]?

Second question is on your reported JV with SBI Holdings in Japan. I was wondering if you could just talk a bit about the rationale behind the joint venture. Any targets you may have for flows or assets in that venture?

Luke Ellis

Sure. So on the flows -- look, flows within a quarter between different product times is just noise. Honestly, there is really nothing interesting one can read into it. And sort of some of it is -- when it's 45 degrees, you probably get less people wanting to go to the office than otherwise. But I really wouldn't read anything into within quarter relative flows -- with -- by product type. As you know, we have an extensive process for looking at the pipeline of flows. We're always in communication with these large clients about significant opportunities over time and which ones happen to hit in which quarter is not something we target or spend much time and energy on, where -- it's about delivering for the clients. The ongoing demand is significant. The timing will be whatever it will be, will be my answer.

On SBI, this is a really interesting potential opportunity. It's obviously new. SBI, for those who don't know, has a dominant position in the online retail market in Japan. Through the things we've done with SMBC and Mitsubishi Morgan Stanley and others in Japan, we've got a good presence in the high net worth market. But as you get to the more retail market, it's a different market. And so, an SBI is the #1 dominant player in there. And so, really delighted that they wanted to partnership -- partner with us on distributing liquid alternatives to that market. I've long believed, and I know Robyn agrees with me on the democratizing of access to liquid alternatives that the sort of generic regulation that's existed in the world that says alternatives are okay for rich people, but not for smaller savers because they're too risky is just the wrong way around, right? That good liquid alternatives, good alternatives are less risky than just buying long-only equities. SBI believes in that. And we're really hopeful that together, we can deliver some interesting product into that market and use the power of their platform to raise assets over time. We'll see how much it is, but I -- it's quite exciting, I would say.

Haley Tam

Fantastic. And if I can just add my thanks to Luke for the last seven, 13 years, take your pick, I guess, and wish you all the very best of luck for your future watching rugby, that would be great.

If I can ask a few questions, and I apologize if these were answered already. I did had some technical issues at the beginning. So a quick one on Varagon. Thank you for the additional information you gave us. In terms of the mix of earnings, the $31 million of PBT in '22, which I think was just $2 million performance fees. Is that a reasonable mix for us to think about going forward? And then in terms of AUM growth and future timings perhaps of fundraisings, should we just think about 13% AUM CAGR in the past 2 years as a reasonable guideline, smooth? Or is there something to be even higher perhaps given the distribution network and the feedback you've had from your existing clients?

And then the second question, if I can, in terms of compensation costs. Obviously, as you say, at the top end of your guided comp to rev range given the lower performance fee revenues in H1. Could you tell us exactly how much of the $257 million is actually deferred compensation? So you can think about what level perhaps might just stay in place whatever performance fees are for the rest of this year. And those are the two key questions.

Antoine Forterre

Sure. Mix of earnings is vastly management fee and origination fees and for the sort of forecast period, we expect it to be the same that Varagon has built structures that enable them to charge carry and performance fees and a little of time would expect that line to increase, but for the kind of next year or two years, the mix will be permanently management fee focused.

Timing of fundraising, in line with our current approach, we're not going to comment specifically on future floors for Varagon. There's obviously great [indiscernible] existing client sets and insurance and over time with our plans, and we wouldn't be doing the acquisition if we're very excited. But we'll see what it gives us next year.

On the [fund] costs, so the previous years, I get the numbers here. Previous years -- apologies. I'll come back later on that with the answer. I don't have it in front of me, sorry. I apologies. The deferred comp, $257 million, you had it on Page 20 is around $60 million, and that's up from around $47 million last year to give you a sense of the increase that you've seen. As of the end of June, we had $184 million of unamortized deferred comp with around 2.1 -- 2.3 years to amortize. So you'll see the ramp-up is quite frontloaded. The sort of normal cycle for a three-year deferred award is 2/3 gets amortized in the first year and then it sort of tails off in the second and third year.

We'll go to Bruce.

Bruce Hamilton

Firstly just congratulations to Luke. I've enjoyed our interactions over the last few years, and you're always strong views on many topics, but all the best in the future.

In terms of questions then, firstly, and you partly answered this, but I think in terms of pipeline, you're saying the flow mix looks pretty good. So Q2 is not representative. And so, demand for the absolute return and higher areas remains good with my take from that.

And then secondly, on the Varagon deal. So we should think kind of mid-single-digit accretion, I think? Or are you saying that -- is that $31 million PBT, a good number? Because I had run rate at about $112 million revenues and I think $50 million comp. So I don't know what the other costs are. But is that sort of that $30 million is a pretty good guide?

Antoine Forterre

Yes, that's correct. So on the run rate it's around $11.8 billion of AUM, 90 basis point management and variation fee margin, 50% to 48% comp, and then fixed cost gets you to around sort of $30-ish million profit before tax.

Luke Ellis

And just if it's not obvious to people, the $11.8 billion is fee earning AUM as opposed to commitments, which is a higher number. But to make it consistent with the rest of what we do, we'd rather talk about it in terms of where the fees are getting earned.

And look, yes, I think your comment was right in terms of -- we -- what do I think? I think that the demand for alpha remains incredibly high. I think that the clients are always looking for things they can get with alpha and they'll take that in the liquid alternatives, they'll take it in the less liquid alternatives. They'll take it in the long-only. That will depend on that particular demand at any one time when everybody feels super bullish on equities, maybe they get more into the long-only equities when -- but that's sort of noise in the balance of what we do. We've always talked about the fact we don't target a particular mix. We let the clients -- this is what being client-driven is all about, right? You have to let the clients needs drive what they invested from you. But I'm very sure that that will continue to meet a blend of all the different things we do.

Antoine Forterre

Samarth, we'll go to you.

Samarth Agrawal

Awesome. Great. First, thank you Luke for all the support over the past few years and wish you all the best for your future.

I had three questions. First on our Varagon acquisition. So I just wanted to confirm if Varagon will be run as a separate entity for the near term? And how should we think about collaboration and revenue synergies over the medium term in terms of cross-selling Man's alternative products to their insurance client base or developing new products? So, yes, anything around that would be quite useful.

Secondly, on retail investors, there were a few partnerships over the past few months. So I just wanted to understand how have been the intermediary flow trends over the past several quarters? Are you seeing increased retail interest in liquid alternatives and your long-only products as well over the past few quarters? And more broadly, what do you think is the growth potential for Man Group from intermediary assets? And if more such partnerships are in the pipeline?

Luke Ellis

So, I guess, on the Varagon question, the structure is very similar to Numeric when we bought Numeric six, seven years ago -- eight, nine years ago now, sorry. It will be another investment engine within the firm, but it won't be a separate entity. There are, obviously, some elements that need to be done in order to respect the shareholders in the ongoing basis. But from a distribution point of view, from an integration point of view, it will be an integrated part of Man. So it's -- we've never been a multi-boutique structure. It's a single firm with a single point of contact and Varagon will fit into that with some nuance around accounting in order to make sure that we respect these shareholders. I think that's a fair way of describing it.

On the retail partnerships and distribution, I think, that the -- look, we are predominantly a sort of large-scale institutional business, that is roughly 80% of our business. But I think we recognize that a number of the things we do, do work in the retail distribution market. Certainly, under my tenure, and I don't think it will change. We've never tried to sell directly to individuals because that requires a whole different infrastructure, a lot of costs, a lot of compliance infrastructure, so on and so forth. So we found partnerships the best way of accessing those client segments.

Now, as you know, each country, the client segment is actually really separate both in the sort of products they want to buy, and in the dynamics in the local market and who are the best players. And so, whether it's in SMBC and now SBI in Japan, whether it's been American Beacon in the U.S., Fideuram in Italy, finding good partners who understand the value of quality product in their underlying clients' portfolios is something that we like doing when we find the right partner. So there's no target on the number of it, but it has definitely been a good source of flows in particularly the total return space for us in the last three, four years, I guess. And I think we would see that continue to be true in a mixture of liquid alternatives and total return, as well as sometimes in some of the more high alpha long-only strategies.

Arnaud Giblat

Yes. Sorry, I forgot to drop my hand, but since you have me back on, I do have a couple of questions. Your net financial assets pro forma is $395 million. I'm just wondering what level of headroom you feel comfortable with there?

Antoine Forterre

So we don't need a headroom and certainly we don't have a capital -- formal capital requirements. And so, we said we'll manage the balance sheet dynamically and think of the best and most efficient way to fund ourselves, which could include financing some the seed position that support our net financial assets. We don't have a specific target in mind here.

Luke Ellis

I think it's a very important -- it's easy for people to think of us as a UK asset manager in the classic sense. And they're very driven by the need for the sort of capital requirement from the regulator. Because of the Jersey headquarters, we no longer have that constraint. So we run the balance sheet, how we want to run it. And there is no starting point on this is the number of assets, financial assets we need or not.

Arnaud Giblat

That's well understood. Maybe I'll just go directly to my question then. I mean, how should I interpret the fact that there's no buyback reloaded here? Is this going to remain a function of -- or is the fact that there's a little performance fees related to then being no buyback? Or how should we look for buybacks in the future?

Antoine Forterre

So, look, the capital policy has not changed, and that's why we repeated it. Buybacks have been historically sort of discrete time within the year than necessarily happen with results. And so, the way to think about it is the sort of capital policy and philosophy that we've apply really that for five, six years, will continue to be the same. Well, first, return dividend progressively now look at organic and inorganic activity. And then in addition, at the end of the surplus, we might look at it over the medium term a potential buyback. And it's a sort of recurring cycle that the Board goes through a few times a year. So there isn't really anything to read about the lack of buyback announced at this point.

Luke Ellis

Cool. And then so Angeliki has sent in a message with her questions. So first question -- I'll read them because, I guess, most of them will be for you. First question from Angeliki, how should we think about the potential for buybacks in the second half of the year in 2024? Does the acquisition of Varagon put any constraints on buybacks? I guess, it's a similar answer to Arnaud, but…

Antoine Forterre

Yes, it's same answer. And remember, we've just announced some M&A as well. So, again, it fits in the policy that we described.

Luke Ellis

The second one is with regards to Varagon, more than half to $15 billion of commitments are given by the 3 insurers that are the selling shareholders. Can you please explain how you think about long-term growth in Varagon and whether you expect those insurers to remain invested in private debt over the long term?

Antoine Forterre

So firmly yes. And as part of the transaction agreed to extend for several years, their investment management agreements that are made and they have an additional incentive if they extend up to nine years. Private credit is a core allocation for large insurance companies, but not just as you described also for most of our institutional clients. And so, we expect that to drive the growth for our business and kind of strategy going forward.

Luke Ellis

Yes, exactly. I think sort of the way to think about it is, the selling shareholders remain very committed to the business, in large part in that in a long term and they have reasons to need those assets over the very long term. The opportunity for Man is to take Varagon to all of the other clients worldwide, whether that's insurance, pension, sovereign wealth, all of whom are interested in the return stream that you get off that, especially with a very, very high-quality credit process they've had with those very low defaults in time. And I think that's our opportunity is to really drive asset flows from other clients while maintaining the existing ones.

And then the last of Angeliki's question is the good thing when you send them by e-mail, you get more questions. Can you please explain to us what drove the strength in systematic long-only and discretionary long-only in Q2? Do we see this as sustainable going forward?

I assume similar flows. And look, I think the good thing when you look across a bunch of different things we do that we've got in the long-only side, some very good performance numbers in both quant and discretionary. And so, as you all know, when you've got good performance numbers that drives flows, at the -- in the discretionary, it was particularly in the credit side, which I think we all know credit has been popular with clients of late. And the good news is the credit numbers in our discretionary, both high-yield and investment-grade are very, very, very good. So that should all go well and the quant long-only equity strategies have some very nice numbers, which also appeals to people. So hopefully, it's sustainable. But as always, it's about what clients are looking for and making sure you've got something performing at the right time when they're looking for it.

Antoine Forterre

And then we've got a couple of questions from Oliver also on the Varagon acquisition. First one is either the leg of the put/call arrangement with the management team of Varagon Capital linked to the Man Group share price or is it all cash-based?

So the payments would be all in cash, but that's eight, nine, 10 years from now. And, I guess, at that time, nothing prevent us from replacing if we think that's the best way to fund the acquisition or probably the payments are cash-based and not linked in any way to our share price.

And then you mentioned the same shareholders [indiscernible] account for half of client commitments. So how should we think about this $55 million, which I guess is half the management fees versus the $93 million extension payments we took in the press release? That's the first part of that question.

The $93 million is payments that will be made over the next six years in two separate installments, assuming that the insurers remain invested for up to nine years. That's how you should think about it.

When will the clients make up the majority of Varagon and Man AUM versus minority today?

I think he speaks to the sort of flow outlook.

Luke Ellis

Yes. I think the process -- look, it's obviously -- while it's the same people we'll be talking to that we've always been talking to. It's a new product we'll be taking to our clients. So we don't expect a huge jump in flows in the very immediate term. But once the clients are up to speed on how good Varagon is, we've got the story out there. We think that the medium-term flow picture should be very good for the strategy.

And with that, and if there's anybody you got on there...

Antoine Forterre

Haley has reoccurred. Haley, we'll go back to you just in case.

Haley Tam

One last question, please, if I can. Thank you for the slide about ArcticDB and AI at the end of the presentation. I think it really reminded us your leadership and technology. Could you confirm for us if $100 million per annum is still a reasonable guideline for tech costs going forward? And if it's appropriate, is there any comment you can make on the progress with your HUB partnership, which I think was launched a couple of years ago now?

Antoine Forterre

Yes, on the first part of your question.

Luke Ellis

And on the -- yes, that was on the $100 million. And -- on the HUB partnership, development has been going very well. They have the first paying clients today, which is good. And I was on a board meeting with them last week, and it is running reasonably exactly on track to the original business plan, which sort of has some ways to go but continues to be a well-developing thing.

Luke Ellis

With that, I -- well, I was going to say, I -- you've all been incredibly nice. So thank you for the kind words. Maybe I should have said I was retiring before and the kind words that have come earlier or maybe it's just because the share price is down so much that secretly why you're being nice to me, you are going on the other side, saying something horrible. But either way, thank you, everybody, for your time and attention, and here is to the long-term success of Man. Keep well, everybody.