Investcorp, the asset management firm specializing in alternative investments, today announces its interim results for the six months ended 31 December 2006.
Highlights for the period:
• $527m of fundraising across all product classes from GCC and international investors (up 66% over same period last year)
• Three new private equity acquisitions (Greatwide, Armacell and Moody) for aggregate equity deployment of $537m (up 33% over same period last year)
• Four private equity realizations (Hilding Anders, Harborside , Aspective and Helly Hansen) yielding $1.1bn in distributable proceeds
• Hedge Fund assets under management grew to $2.9bn (from $2.7bn at 30 June)
• Real Estate deployed $98m in equity across four new investments with another $120 million under contract for closing in the coming months
• GDR listing on London Stock Exchange in December
• New (our fifth) line of business, Gulf Growth Capital, announced in December
6m to 31st December 2006 6m to 31st
December 2005 Change (%)
Gross fee income ($m) 139.0 100.7 38
Gross asset based income ($m) 158.1 133.7 18
Net income for the period ($m) 79.8 51.4 55
Total assets ($bn) vs. June 2006 4.6 4.2 10
Earnings per Ordinary Share ($) 106 78 36
Nemir A. Kirdar, President and CEO said:
“We are pleased to report an increasing momentum of exciting growth and progress at Investcorp. We have reported $79.8 million in earnings for the six month period. We have announced the launch of a new line of business and listed GDRs on the London Stock Exchange. We have, at the same time, maintained our focus on the performance of the business, with meaningful year-on-year increases in acquisition, placement/fund-raising and realization activity. As a result, we are able to announce a substantial increase in earnings for the period.”
Investcorp – Announcement of Interim Results
Investcorp, the asset management firm specializing in alternative investments, today announces its interim results for the six months ended 31 December 2006.
Highlights for the period:
• $527m of fundraising across all product classes from GCC and international investors (up 66% over same period last year)
• Three new private equity acquisitions (Greatwide, Armacell and Moody) for aggregate equity deployment of $537m (up 33% over same period last year)
• Four private equity realizations (Hilding Anders, Harborside , Aspective and Helly Hansen) yielding $1.1bn in distributable proceeds
• Hedge Fund assets under management grew to $2.9bn (from $2.7bn at 30 June)
• Real Estate deployed $98m in equity across four new investments with another $120 million under contract for closing in the coming months
• GDR listing on London Stock Exchange in December
• New (our fifth) line of business, Gulf Growth Capital, announced in December
6m to 31st December 2006 6m to 31st
December 2005 Change (%)
Gross fee income ($m) 139.0 100.7 38
Gross asset based income ($m) 158.1 133.7 18
Net income for the period ($m) 79.8 51.4 55
Total assets ($bn) vs. June 2006 4.6 4.2 10
Earnings per Ordinary Share ($) 106 78 36
Nemir A. Kirdar, President and CEO said:
“We are pleased to report an increasing momentum of exciting growth and progress at Investcorp. We have reported $79.8 million in earnings for the six month period. We have announced the launch of a new line of business and listed GDRs on the London Stock Exchange. We have, at the same time, maintained our focus on the performance of the business, with meaningful year-on-year increases in acquisition, placement/fund-raising and realization activity. As a result, we are able to announce a substantial increase in earnings for the period.”
About Investcorp
Investcorp is a leading provider and manager of alternative investment products. It has offices in New York, London and Bahrain and is publicly traded on the London Stock Exchange (IVC) and Bahrain Stock Exchange (INVCORP). Investcorp has five lines of business: private equity, hedge funds, real estate, venture capital and Gulf growth capital. Founded in 1982, Investcorp has grown to become one of the largest and most diverse alternative investment managers in terms of both product offerings and geography. It currently has over $10bn in invested assets under management (AuM), equivalent to a proforma AuM of more than $12bn at the current velocity of annual investment and fundraising. Further information is available at www.investcorp.com.
Contacts
Investcorp
Deborah Botwood Smith
+44 (0) 20 7629 6600 Hill & Knowlton
Jamil Al Sharif
+973 17533532
A conference call for investors will be held 14:00 GMT today.
Participants dial-in number is + 44 (0) 1452 586 009.
Participants will be asked for the following conference ID: 6862549.
Summary
The general environment for alternative asset managers has remained strong since June 2006. High levels of global liquidity, growth in investable wealth in the six Gulf Cooperation Council (GCC) countries and strong investor appetite for alternative asset products have been supportive to Investcorp’s performance. This is reflected in our reported net income of $79.8 million for the six months ended December 2006 (H1 FY07), a 55% increase over the $51.4 million of net income reported for the corresponding period last year (H1 FY06). Earnings per Ordinary Share for H1 FY07 were $106 compared to $78 for H1 FY06.
Investcorp’s results are somewhat seasonal in nature within a given fiscal year. In particular, the summer months of July to September are generally slow for acquisition and placement activity as (1) there is generally less activity and fewer opportunities in the global transactional markets, and (2) clients, especially those located in the GCC region, take holiday time. Consequently, fee income generation in the first half of each fiscal year (July to December) is generally slower than in the second half (January to June). Over the last three fiscal years, Investcorp has generated roughly 30-40% of overall fee income in the first half (average 36%), with the remaining 60-70% coming in the second half (average 64%).
Investcorp has two principal components of revenues: fee income and asset-based income. Fee income is earned on activities as an intermediary, including fees earned from the provision of services to, and in connection with, the acquisition, management and disposition of investments. Asset-based income is earned as a principal co-investor in the form of realized and unrealized investment gains.
Notwithstanding the above seasonality effect, gross revenues rose by 27% over last year to $297 million, reflecting strong performance in both fee income (up 38% to $139 million) and asset-based income (up 18% to $158 million).
Fee income growth of 38% was driven by the Private Equity business where activity fees were almost double that of H1 FY06 as a result of higher equity deployment across three new acquisitions and higher levels of placement. Net fee income increased by 65% to $52.4 million, from $31.7 million last year.
The 18% increase in asset-based income reflects solid returns (13% annualized) on Investcorp’s proprietary co-investment in its hedge fund business and an improving return profile on its private equity portfolio with the steady wind-down of its underperforming older legacy investments outside of its core mid-market focus. At the same time, interest expense also increased from $89.5 million to $102.1 million, as a result of higher nominal interest rates. Net asset-based income, after deducting interest expense, thus increased by 40% to $27.5 million, from $19.6 million.
Aggregate operating expenses increased by 23% due to higher accruals for incentive compensation in line with the increase in net income, with an overall cost to income ratio of 59.1% which is in line with stated targets. Headcount increased from 342 to 352, primarily reflecting additions to the Gulf and international placement teams.
Following a secondary offering of 145,000 treasury and unpurchased management shares in Global Depositary Receipts (“GDR”) format listed on the London Stock Exchange, book equity increased to $1.2 billion ($1,409 Net Book Value per ordinary share) and financial leverage (excluding transitory balances) fell from 2.8x to 2.4x. Net proceeds from the offering were approximately $398 million, of which $316 million was used to repay existing third party equity loans, the effect of which was to increase book capital by $82 million. $110 million of the equity loans repaid were previously guaranteed by Investcorp, resulting in an aggregate increase in economic capital of approximately $192 million. This will support various growth initiatives, in particular the new Gulf Growth Capital line of business announced in December.
At December 2006, the shareholder base of the Company is composed of 34.3% strategic shareholders, 17.1% management and 38.6% public shareholders (18.1% owned via GDRs and 20.5% owned directly), with the balance 10.0% held by the Group in the form of Treasury shares.
Investcorp’s regulatory capital adequacy ratio remains strong at 25% (more than twice the 12% regulatory minimum). Investcorp has been implementing an integrated framework in order to meet the requirements of the Basle II regulation, as stipulated by the Central Bank of Bahrain (“CBB”), by December 2007. Initial indications through participation in the CBB’s assessments of the impact of implementing Basle II suggest that Investcorp will continue to have a healthy regulatory capital adequacy ratio in the mid-teens, comfortably in excess of the CBB’s minimum requirement of 12%, when Basle II is implemented.
Total assets increased by 10% to $4.6 billion, inclusive of the surplus proceeds from the equity offering described above and a transitional increase in cash balances from Private Equity realization activity in late December which was distributed to clients in early January.
Investcorp closed a new $500 million 5-year revolving facility in December with a group of relationship banks, resulting in an increase in core accessible liquidity to $1.5 billion. The average maturity of the Company’s term debt remains over five years. Investcorp’s credit ratings from Fitch (BBB, positive outlook) and Capital Intelligence (A- stable outlook) remain unchanged, while Moody’s moved its Baa2 rating to stable outlook.
Income summary – intermediary v principal
6 MONTHS CHANGE
$ MILLIONS FISCAL 2007 FISCAL 2006 % $
Gross fee income 139.0 100.7 38% 38.3
Gross asset-based income 158.1 133.7 18% 24.4
GROSS INCOME 297.0 234.4 27% 62.7
Interest expenses (102.1) (89.5) (14%) (12.6)
Operating expenses (115.1) (93.5) (23%) (21.6)
NET INCOME FOR THE PERIOD 79.8 51.4 55% 28.4
6 MONTHS CHANGE
$ MILLIONS FISCAL 2007 FISCAL 2006 % $
Fee income
Management fees 34.3 34.6 (1%) (0.3)
Activity fees 102.4 53.7 91% 48.8
Performance fees 2.2 12.4 (82%) (10.2)
GROSS FEE INCOME 139.0 100.7 38% 38.3
Expenses attributable to fee income (86.6) (69.0) (26%) (17.6)
NET FEE INCOME 52.4 31.7 65% 20.6
6 MONTHS CHANGE
$ MILLIONS FISCAL 2007 FISCAL 2006 % $
Asset-based income (ABI)
Private equity 22.8 (59.2) >100% 82.0
Hedge funds 115.0 172.2 (33%) (57.2)
Real estate 7.1 6.7 6% 0.4
Venture capital (0.8) 5.3 >(100%) (6.1)
Other asset-based income 14.0 8.7 60% 5.3
GROSS ASSET-BASED INCOME 158.1 133.7 18% 24.4
Expenses attributable to ABI (28.5) (24.5) (16%) (4.0)
Interest expense (102.1) (89.5) (14%) (12.6)
NET ASSET-BASED INCOME 27.5 19.6 40% 7.8
Product Lines
Private Equity
Investcorp has been active in private equity investing in North America and Western Europe since 1983, making us one of the earliest participants in the transatlantic private equity market. Since that time, we have acquired private equity investments totaling approximately $27 billion in a broad range of industries and markets. Investcorp is primarily focused on investments in mature, well established private companies that have a mid-sized capitalization.
In recognition of the preference of its GCC region clients to exercise discretion on individual investment decisions, private equity investments are offered to clients primarily on a deal-by-deal basis, in which no advance, long-term, blind commitment is required from the client. Private equity assets are, therefore, initially generally acquired using Investcorp’s own financial resources in the form of an underwriting. A significant portion of the economic interests in the acquired private equity investment are then placed with clients by our placement team on a deal-by-deal basis. We also have a few select international institutions that co-invest regularly in our deals.
The team made three acquisitions (Greatwide, Armacell and Moody) for an aggregate equity deployment of $537 million, up 33% from last year. Supported by a favorable realization environment, the team also exited four portfolio companies (Hilding Anders, Harborside, Aspective and Helly Hansen) yielding distributable proceeds of $1.1 billion.
During the period, a pre-packaged creditor proposal was accepted for Polestar, resulting in payments to Investcorp against its secured asset backed loans to the company, with control passing over to Polestar’s creditors. Investcorp’s current private equity portfolio, which is left with only four investments from the pre-2001 period – Welcome Break, TelePacific, Avecia and Stratus, as a result of strong exit activity and final resolution of Polestar, continues to perform strongly.
Hedge Funds
Investcorp offers clients a range of hedge fund products using carefully selected hedge fund managers with a proven pedigree whose performance is closely monitored. The Company focuses on hedge fund products that offer clients attractive risk-adjusted, rather than absolute, returns. Though hedge fund products have historically been marketed primarily to GCC region clients, the Company recently established a distribution team to make its hedge fund product offerings available to institutional investors in North America and Europe. Investcorp currently offers several funds of hedge funds and acts as a distributor and incubator for emerging manager seeded funds.
Client assets under management in Hedge Funds grew from $2.7 billion at the end of June 2006 to $2.9 billion (annualized increase of 17%). Proprietary co-investments remained stable at an average of circa $1.7 billion and earned a return of 7.5% in excess of LIBOR, above the targeted return spread levels of 5-6%. The yield on hedge fund co-investments, while very strong, was lower compared to the comparative period last year due to a generally more normalized return environment during H1FY07 compared to the exceptionally strong returns in H1FY06.
Real Estate
Since 1995, Investcorp has completed real estate acquisitions totaling more than approximately $6 billion in acquisition value. It invests in properties throughout the United States in all sectors, including residential, commercial and industrial properties. The real estate team focuses on acquiring controlling interests in properties to guarantee unimpeded decision-making on leasing, capital investment and realization.
Individual properties are typically aggregated in a series of multi-property portfolios to create an appropriate critical mass for placement with clients. Portfolios are categorized by level of risk and offered to clients primarily on a deal by deal basis, in which no advance, long-term, blind commitment from the client is required. Instead, real estate assets are initially acquired using Investcorp’s own financial resources and underwritten on the balance sheet. A significant portion of the economic interests in the real estate assets are then placed with clients.
The business deployed $98 million in equity across four new investments. Several additional acquisitions, totaling $120 million in equity, are under contract for closing in H2 FY07. There were seven property exits, and $107 million in cash returns and realization proceeds were distributed to Investcorp and its clients.
Venture Capital
The venture capital product line offers clients the opportunity to invest in dedicated venture capital investment funds that make investments in North America and Western Europe in a broad range of technology related companies. The funds seek to invest in technology related companies with established products, a growing revenue base and near-term profitability. The funds focus particularly on venture buyout, corporate spinout and expansion financing and generally invest between $10 million and $25 million of equity per investment. Two venture capital funds, offered to investors on a traditional, committed capital basis, have been launched by Investcorp since 2001.
The venture capital business continues to focus on deploying committed capital for Fund II, making one new acquisition and one further add-on investment for a total of $27.5 million. Fund I made two exits, one through an outright sale and another through a merger, resulting in distributions of $14 million.
Placement and Fundraising
The GCC region continues to experience an unprecedented accumulation of wealth from oil and gas revenues, with the investable wealth in the region currently estimated at over $2.5 trillion. Most forecasts indicate that economic growth is expected to remain high in the GCC region for the foreseeable future, resulting in continuing strong accumulation of investable wealth.
The wider Middle East region recorded the highest growth in the financial wealth of high net worth individuals in 2005 (estimated at 19.7%) and is expected to demonstrate one of the highest growth rates globally in private wealth over the five year period to 2010 of approximately 8.0%.
This combination of wealth creation in the GCC and a growing trend towards increasing allocations to alternative asset classes continue to support placement capacity for Investcorp’s existing and new products, with no discernable impact from the recent fall in oil prices or local equity markets on investor appetite. Total fundraising across all product lines totaled $527 million for H1 FY07, a 66% increase over H1 FY06.
Initiatives to leverage Investcorp’s strong brand name internationally progressed well in H1 FY07, with active marketing of Investcorp’s alternative investment management services to institutions internationally. Over $200 million of new funds were raised from international investors outside the GCC region, primarily for hedge fund products. There was no new fundraising activity for Venture Capital in H1FY07 as all fundraising commitments for Fund II were closed in FY06.
Private Equity placements in H1 FY07 include the residual placement of FleetPride and Time Partner (which were acquired in FY06) and the partial placement of Greatwide which was acquired in H1 FY07. Similarly, Real Estate placement includes the residual placement of Opportunity III and Retail IV (carryover from FY06) and initial commitments for a new RE Mezzanine Fund.
Fundraising activity early in H2 FY07 will focus on completing the placement of recent Private Equity acquisitions (Greatwide, Armacell and Moody) as well as recent and contracted Real Estate acquisitions, including the new RE Diversified VI portfolio which was acquired in H1 FY07. This provides a good pipeline of product available for placement through the second half of fiscal 2007.
Other Initiatives
Investcorp will shortly launch a new private equity fund with an initial size target of $1 billion.
Other plans to grow client AUM have also progressed well during the period with a number of announced initiatives underway.
A new $100 million Real Estate Mezzanine Fund has already been launched with fundraising underway. The Hedge Funds business has launched new structured products (e.g., the recently launched Crescendo Structured Note) and further expanded its emerging manager seeding platform with the addition one new manager, Silverback, and a strategic partnership with WMG.
In November, Investcorp announced the launch of a new line of business, Gulf Growth Capital, which will provide investment opportunities primarily in the GCC region through a fund, the Investcorp Gulf Opportunity Fund. The new business will make investments in greenfield “build” projects, as well as making buyout and growth capital investments. The fund will source and create unique investment opportunities with the aim of bridging the needs of the region with businesses, technologies and know-how from around the world. Investcorp will use its private equity expertise and long standing network of relationships within the GCC to help achieve the fund’s return objectives.
The timing of this initiative exploits the current favorable economic outlook for the region as well as a maturing investment climate. Governments are channeling a large proportion of their oil surpluses to long-term development of their economies in order to create jobs for their fast growing populations, diversify their economies and generate more value for their hydrocarbon resources. The private sector is also very active in responding to government efforts to create a more attractive investment climate. This has led to enormous investment opportunities and strong deal flow. In addition, it is now both feasible and attractive to deploy private equity in this region as a result of the availability of acquisition financing, the ability to exercise control and influence to add value to investments and the growth in exit options.
It is anticipated that the fund size will be at least $500 million. As with other lines of business, Investcorp will co-invest alongside its clients to ensure a strong alignment of interest. Fundraising will begin in the second half of fiscal 2007.
Outlook
Investcorp agrees with the emerging consensus amongst economists and market participants that the global economy is headed for a soft-landing in 2007 underpinned by widespread expectation that the US is nearing the end of a tightening monetary cycle. Expectations are that volatility and default rates will remain relatively low and credit spreads will likely remain thin.
Notwithstanding the recent increase in capital raising and deployment volumes and valuation multiples, the Company believes that the private equity market is structurally well positioned for continued long-term growth. In Europe, this will be driven by the further restructuring of mid-sized companies and the subsequent expansion of that market into new countries. Investcorp’s outlook for hedge funds in 2007 is generally optimistic for directional and relative value hedge fund strategies but also vigilant of challenging global political issues. With long-term mortgage rates still below 6%, the US real estate sector is expected to be supported by healthy GDP growth, gains in employment and steady business confidence. Strong liquidity from the high levels of fund raising activity in 2006 and further M&A activity are likely to support Venture Capital for promising companies in 2007.
Forecasts for the wider Middle East region show continued high growth rates and a trend towards increased alternative asset allocations. Investcorp sees no discernable impact from the recent fall in oil prices or local equity markets on investor appetite. Middle East governments, supported by the private sector, are expected to channel a large proportion of oil surpluses into the long-term development of their economies.
Investcorp, therefore, believes that a combination of factors: the global economic outlook, ongoing wealth creation in the GCC, high levels of investable liquidity and growing investment allocations are generally supportive for its Gulf-focused alternative asset management franchise.
