REG - Man Group plc - Interim results for the six months ended 30 Jun 17 <Origin Href="QuoteRef">EMG.L</Origin> - Part 3
01/08/2017 07:07
- Part 3: For the preceding part double click ID:nRSA6655Mb
extended to June 2022 for $490
million of the facility, with the remaining $10 million maturing in June 2020.
During 2014 the Group issued $150 million ten year fixed rate reset callable guaranteed subordinated notes (Tier 2 notes),
with associated issuance costs of $1 million. The Tier 2 notes were issued with a fixed coupon of 5.875% until 15 September
2019. The notes may be redeemed in whole at the Group's option in September 2019 at their principal amount, subject to FCA
approval. If the notes are not redeemed at this time then the coupon will reset to the five year mid-swap rate plus 4.076%
and the notes will be redeemed in September 2024 at their principal amount.
The net cash position, excluding cash relating to consolidated fund entities of $51 million (Note 11), at 30 June 2017 was
$121 million, compared to $240 million at 31 December 2016. The decrease of $119 million in net cash position during the
period is primarily the result of the payment of the final dividend for 2016 of $77 million and payments relating to the
share repurchase programme of $53 million.
The following table summarises the Group's available liquidity at the end of the period:
$m As at As at
30 June 2017 31 December 2016
Borrowings: 2024 fixed rate reset callable guaranteed subordinated notes 149 149
Cash and cash equivalents 1 270 389
Undrawn committed revolving credit facility 500 500
Total liquidity 770 889
Note:
1 Excludes $51 million of cash held by fund entities which have been consolidated (2016: $37 million), as outlined in
Note 11.
11. Investments in fund products and other investments
$m At 30 June At 31 December
2017 2016
Loans to fund products 18 26
Investments in fund products 229 275
Other investments 64 3
Investment in line-by-line consolidated funds 400 490
Investments in fund products and other investments 711 794
Net non-current assets held for sale 123 131
Total investments 834 925
The increase in other investments relates to a $60 million origination investment in GLG CLO III, which launched in July
2017.
Man's seeding investments are included in various Group balance sheet line items. In summary, the total seeding investments
portfolio is made up as follows:
$m At 30 June 2017 At 31 December 2016
Loans to fund products 18 26
Investments in fund products and other investments 289 275
Less those used to hedge deferred compensation awards (75) (75)
Consolidated investments in funds - held for sale 123 131
Consolidated investments in funds - line-by-line consolidation 281 285
Seeding investment portfolio 636 642
Investments in fund products, excluding those which are held against outstanding deferred compensation arrangements, relate
to seeding investments made to grow the business as we launch new products.
Income or gains/(losses) on investments and other financial instruments of $39 million primarily relate to gains on seeding
investments (H1 2016: $3 million loss). These largely relate to net gains/(losses) on line-by-line consolidated fund
entities.
Consolidation of investments in funds
Seed capital invested into funds may at times be significant, and therefore the fund may be deemed to be controlled by the
Group (Note 1).
Held for sale
Where the Group acquired the controlling stake and actively markets the products to third party investors, allowing the
Group to redeem their share, and it is considered highly probable that it will relinquish control within one year from the
date of initial investment, the investment in the controlled fund is classified as held for sale.
The seeded funds are recognised in the Group balance sheet as non-current assets and liabilities held for sale, with the
interests of any other parties included within non-current liabilities held for sale.
The non-current assets and liabilities held for sale are as follows:
$m At 30 June 2017 At 31 December 2016
Non-current assets held for sale 203 263
Non-current liabilities held for sale (80) (132)
Investments in fund products held for sale 123 131
Investments cease to be classified as held for sale when the fund is no longer controlled by the Group, at which time the
investment is classified as financial assets at fair value through profit or loss (see Note 14.1 of the 2016 Annual
Report). Loss of control may eventuate through sale of the investment or a dilution in the Group's holding.
If a held for sale fund remains under the control of the Group for more than one year, and it is unlikely that the Group
will reduce or no longer control its investment in the short-term, it will cease to be classified as held for sale and will
be consolidated on a line-by-line basis. One investment previously classified as held for sale at 31 December 2016 has been
consolidated on a line by line basis in the six months to 30 June 2017 (six months to 30 June 2016: two).
Line-by-line consolidation
Seed investments which are controlled and where it is not expected that control will be relinquished within one year from
the date of initial investment relate to five funds at 30 June 2017 (31 December 2016: six), which have therefore been
consolidated on a line-by-line basis as follows:
$m At 30 June 2017 At 31 December 2016
Balance Sheet
Cash and cash equivalents 51 37
Fees and other receivables 1 -
Transferrable securities 1 400 490
Trade and other payables (2) (2)
Net assets of line-by-line consolidated fund entities 450 525
Third party interest in consolidated funds (169) (240)
Net investment held by Man 281 285
Note:
1 Included within Investments in fund products and other investments.
Six months Six months
to 30 June to 30 June
$m 2017 2016
Income statement
Net gains/(losses) on investments 1 32 (3)
Management fee expenses 2 (3) (4)
Other costs (1) (1)
Net gains/(losses) of line-by-line consolidated fund entities 28 (8)
Third party share of (profits)/losses relating to interests in consolidated funds (15) 5
Gains/(losses) attributable to net investment held by Man 13 (3)
Notes:
1 Included within Income or gains/(losses) on investments and other financial instruments.
2 Relates to management fees paid by the funds to Man during the year, and is eliminated within Gross management and
other fees in the Group income statement. The management fees elimination includes $1 million in relation to third-party
share of these investments and therefore represents externally generated management fees (H1 2016: $2 million).
12. Provisions
$m Onerous property lease contracts Litigation Restructuring Total
As 1 January 2017 27 24 - 51
Charged to the income statement:
Charge in the period - - 4 4
Exchange differences 2 - - 2
Used during the period/settlements (1) - (2) (3)
At 30 June 2017 28 24 2 54
The onerous property lease contracts largely relate to the Riverbank House office premises.
13. Fair value of financial assets/liabilities
The fair value of financial assets and liabilities can be analysed as follows:
30 June 2017
$m Level 1 Level 2 Level 3 Total
Financial assets held at fair value:
Investments in fund products and other investments 4 159 130 293
Investment in line-by-line consolidated funds - 400 - 400
Derivative financial instruments - 8 - 8
4 567 130 701
Financial liabilities held at fair value:
Derivative financial instruments - 7 - 7
Contingent consideration - - 230 230
- 7 230 237
31 December 2016
$m Level 1 Level 2 Level 3 Total
Financial assets held at fair value:
Investments in fund products and other investments 3 207 68 278
Investment in funds relating to consolidated fund entities - 490 - 490
Derivative financial instruments - 2 - 2
3 699 68 770
Financial liabilities held at fair value:
Derivative financial instruments - 22 - 22
Contingent consideration - - 161 161
- 22 161 183
Level 1, 2 and 3 financial assets and liabilities are defined in Note 26 to the financial statements in the 2016 Annual
Report.
During the period, there were no significant changes in the business or economic circumstances that affected the fair value
of Man's financial assets and no significant transfers of financial assets or liabilities held at fair value between
categories.
The basis of measuring the fair value of investments in fund products is outlined in Note 14 in the 2016 Annual Report.
The movements in Level 3 financial assets and financial liabilities measured at fair value are as follows:
Six months to 30 June 2017
$m Financial assets at fair value through profit or loss Financial liabilities at fair value through profit or loss Total
Level 3 financial assets/liabilities held at fair value
At beginning of the period 68 (161) (93)
Purchases 57 (52) 5
Total gains/(losses) in Group statement of comprehensive income 7 (23) (16)
Profit/(loss) included in income statement 7 (23) (16)
Included in other comprehensive income - - -
Sales or settlements (2) 6 4
At period end 130 (230) (100)
Total gains/(losses) for the period included in the Group statement of comprehensive income for assets/liabilities held at period end 7 (23) (16)
The fair value of level 3 financial liabilities can be analysed as follows:
Six months to 30 June 2017
$m Numeric Aalto Other Total
Contingent consideration payable
At the beginning of the period: 150 - 11 161
Purchases - 52 - 52
Revaluation of contingent consideration 12 - (1) 11
Unwind of contingent consideration 8 4 - 12
Sales or settlements (5) - (1) (6)
At 30 June 2017 165 56 9 230
The Numeric contingent consideration relates to an ongoing 18.3% equity interest in Numeric held by management in the
business and profit interests of 15.5%, pursuant to a call and put option arrangement. The call and put options structure
means that it is virtually certain that Man will elect to, or be obliged to, purchase the interests held by Numeric
management at five (September 2019: call option) or five and a half (March 2020: put option) years post-closing. The
maximum aggregate amount payable by Man in respect of the option consideration is capped at $275 million.
The Aalto contingent consideration is dependent on levels of run rate management fees measured following one, four, six and
eight year from completion. The maximum aggregate amount payable by Man in respect of the consideration is capped at $207
million.
The fair values are based on discounted cash flow calculations, which represent the expected future profits of each
business as per the earn-out arrangements. The fair values are determined using a combination of inputs, such as weighted
average cost of capital, net management fee margins, performance, operating margins and the growth in FUM, as applicable.
The discount rates applied are 11% for management fees and 17% for performance fees for Numeric and Other and 15% for
Aalto.
The most significant inputs into the valuations at 30 June 2017 are as follows:
Numeric Aalto
Weighted average net management fee margin 0.4% 0.6%
Compound growth in average FUM 8% 20%
Changes in inputs would result in the following increase/(decrease) of the contingent consideration creditor at 30 June
2017:
Weighted average net management fee margin
0.1% increase 30 3
0.1% decrease (30) (7)1
Compound growth in average FUM
1% increase 4 3
1% decrease (4) (3)
Note:
1. The initial calculations for the earn out for Aalto show the first earn out payment close to the threshold amount
($30 million). Therefore, any increase in margins, increasing management fees, would have less of an impact on increasing
the contingent consideration, whereas a decrease in margins would impact the contingent consideration to a greater amount.
The effect of this situation will have less of an impact for future earn out payments.
14. Related party transactions
The related party transactions during the period are consistent with the categories disclosed in the 2016 Annual Report.
Related parties comprise key management personnel, associates and fund entities which we are deemed to control. All
transactions with related parties were carried out on an arm's length basis.
Commission income relating to sales of Nephila Capital Ltd (an associate) products totalled $4 million for the six months
ended 30 June 2017 (H1 2016: $6 million), and is included within gross management and other fees in the Group income
statement. This arrangement between Man and Nephila Capital ceased at the end of April 2017.
Management fees earned from fund entities in which Man holds a controlling interest are detailed in Note 11. Contingent
consideration paid and payable to Numeric management and the previous owners of Aalto is detailed in Note 13.
15. Other matters
Man Group is subject to various other claims, assessments, regulatory enquiries and investigations in the normal course of
its business. The directors do not expect such matters to have a material adverse effect on the financial position of the
Group.
Alternative performance measures
We assess the performance of the group using a variety of alternative performance measures. We discuss the Group's results
on an 'adjusted' basis as well as a statutory basis. The rationale for using adjusted measures is explained below.
We also explain financial performance using measures that are not defined under IFRS and are therefore termed 'non-GAAP'
measures. These non-GAAP measures are explained below. The alternative performance measures we use may not be directly
comparable with similarly titled measures by other companies.
Funds under management (FUM)
FUM is the assets that the Group manages for investors in fund entities. FUM is a key indicator of our performance as an
investment manager and our ability to remain competitive and build a sustainable business. FUM is measured based on
management fee earning capacity. Average FUM multiplied by our net management fee margin (see below) equates to our
management fee earning capacity. Funds under management are shown by product groupings that have similar margin and
investor characteristics (as shown on page 10). Management focus on the movements in FUM split between the following
categories:
- Net inflows/outflows
Net inflows/outflows are a measure of our ability to attract and retain investor capital. Net flows are calculated as sales
less redemptions. Further details are included on page 10.
- Investment movement
Investment movement is a measure of our ability to manage the performance of our funds for our investors. It is calculated
as the fund performance of each strategy multiplied by the FUM in that strategy. Further details are included on page 10.
- FX and other movements
Some of the Group's FUM is denominated in currencies other than USD. FX movements represent the impact of translating
non-USD denominated FUM into USD. Other movements principally relate to maturities and leverage movements.
Net management fee revenue and margins
Margins are an indication of the revenue margins negotiated with our institutional and retail investors net of any
distribution costs paid to intermediaries and are a primary indicator of future revenues. The net management fee margin is
calculated as net management fee revenue (gross management fee revenue and income from associates less distribution costs)
divided by average FUM.
$m Six months to 30 June 2017 Six months to30
June 2016
$m Net margin $m Net margin
Quant alternatives 138 1.4% 126 1.4%
Discretionary alternatives 57 0.9% 73 1.0%
Fund of fund alternatives 42 0.6% 41 0.7%
Quant long only 41 0.4% 32 0.4%
Discretionary long only 56 0.8% 49 0.8%
Global Private Markets 6 %0.7 - -
Net management fee revenues from core activities 340 321
Guaranteed 8 %4.6 21 %4.2
Other income 3 5
Net management fee revenues before share of after tax profit of associates 351 0.8% 347 0.9%
Share of post-tax profit of associates 4 -
Net management fee revenues1,2 355 347
Notes:
1 Net management fee revenue also includes $1 million (H1 2016: nil) of management fee revenue relating to
line-by-line consolidated fund entities for the third-party share.
2 The amount includes $28 million (H1 2016: $34 million) of distribution costs which have been deducted from gross
management and other fees of $378 million (H1 2016: $381 million).
- Run rate net management fee revenue and margins
In addition to the net management fee revenue and margins for the period, as detailed above, we also use run rate net
management fee revenue and run rate margins as at the end of the period (page 10). These measures give the most up to date
indication of our revenue streams at the period end date. The run rate net management fee margin is calculated as net
management fee revenue for the last quarter divided by the average FUM for the last quarter. Run rate net management fee
revenue is calculated as the run rate net management fee margin applied to the closing FUM as at the period end, plus our
share of profits from associates for the previous 12 months.
Adjusted profit before tax and adjusted earnings per share
Adjusted profit before tax is a measure of the Group's underlying profitability. The directors consider that in order to
assess underlying operating performance, the Group's profit period on period is most meaningful when considered on a basis
which excludes acquisition and disposal related items, impairment of assets, restructuring costs and certain non-recurring
gains or losses (which are included in the statutory profit before tax). This therefore reflects the recurring revenues and
costs that drive the Group's cash flows and inform the base on which the Group's variable compensation is assessed. The
directors are consistent in their approach to the classification of adjusting items period to period, maintaining an
appropriate symmetry between losses and gains and the reversal of any accruals previously classified as adjusting items.
The reconciliation of statutory profit before tax to adjusted profit before tax, and the reconciliation of diluted
statutory EPS to the adjusted EPS measures is shown below.
Six months to 30 June Six months to 30 June
$m Note 2017 2016
Statutory profit before tax 76 55
Adjusting items:
Acquisition and disposal related:
Amortisation of acquired intangible assets 9 42 47
Revaluation of contingent consideration 11 (14)
Unwind of contingent consideration discount 6 12 9
Recycling of FX revaluation on liquidation of subsidiaries - 1
Restructuring - compensation costs 4 -
Adjusted profit before tax 145 98
Tax on adjusted profit (20) (15)
Adjusted profit after tax 125 83
Amortisation of acquired intangibles primarily relates to investment management contracts and brands recognised on the
acquisition of GLG, Numeric, FRM, as well as Aalto which was acquired in January 2017. This has decreased from H1 2016
primarily due to the impairment of FRM and GLG at 31 December 2016.
The revaluation of contingent consideration of $11 million during the period primarily relates to higher than expected
funds under management position of Numeric.
The unwind of the contingent consideration has increased from H1 2016 due to the unwind on the contingent consideration for
the acquisition of Aalto.
The restructuring costs relate to the restructuring plan costs of $21 million announced at the time of the prior year-end
results on 1 March 2017, $17 million of which was recognised in 2016 with the remaining $4 million recognised in H1 2017.
The reconciliation from EPS to adjusted EPS is given below:
Six months to 30 June 2017
Basic and Basic Diluted
diluted earnings earnings earnings
per share per share
$m cents cents
Earnings per share 62 3.8 3.8
Items for which EPS has been adjusted 69 4.2 4.1
Tax adjusting items (6) (0.4) (0.4)
Adjusted EPS 125 7.6 7.5
Less: adjusted net performance fee profit before tax (51) (3.1) (3.0)
Tax on adjusted net performance fee profits 8 0.5 0.5
Adjusted net management fee EPS 82 5.0 5.0
Six months to 30 June 2016
Basic and Basic Diluted
diluted earnings earnings
earnings per share per share
$m cents cents
Earnings per share 49 2.9 2.9
Items for which EPS has been adjusted 43 2.6 2.6
Tax adjusting items (9) (0.6) (0.6)
Adjusted EPS 83 4.9 4.9
Less: adjusted net performance fee profit before tax (8) (0.5) (0.5)
Tax on adjusted net performance fee profits 1 0.1 0.1
Adjusted net management fee EPS 76 4.5 4.5
- Adjusted net management fee profit before tax and net adjusted management fee EPS
Adjusted profit before tax is split between adjusted net management fee profit before tax and adjusted net performance fee
profit before tax to separate out the variable performance fee related earnings of the business from the underlying
management fee earnings of the business. Adjusted net management fee profit before tax is calculated as adjusted profit
before tax excluding net performance fee profit before tax. The detailed calculation of adjusted net management fee profit
before tax is shown below.
Man's dividend policy is disclosed on page 35 in the 2016 Annual Report. Dividends paid to shareholder (or adjusted net
management fee EPS) are determined based on the adjusted net management fee profit before tax.
Adjusted net management fee EPS is calculated using post-tax profits excluding net performance fees and adjusting items,
divided by the weighted average diluted number of shares.
- Adjusted net performance fee profit before tax
The detailed calculation of adjusted net performance fee profit before tax is shown below.
Adjusted net management and performance fee profit before tax
$m Six months to Six months to
30 June 2017 30 June 2016
Gross management and other fees 378 381
Third party share of management fees1 1 -
Share of post-tax profit of associates 4 -
Less:
Distribution costs (28) (34)
Asset servicing (17) (17)
Compensation (161) (156)
Other costs (82) (83)
Net finance expense (1) (1)
Adjusted net management fee profit before tax 94 90
Performance fees 83 40
Income or gains on investments and other financial instruments 24 2
Adjustment to gains on investments relating to third party share of management fees1 (1) -
Less Compensation (51) (30)
Finance expense (Note 6) (4) (4)
Adjusted net performance fee profit before tax 51 8
Adjusting items (69) (43)
Statutory profit before tax 76 55
Note:
1 This is the third-party share of management fee revenues relating to the line-by-line consolidated fund entities
which reduces the gains/(losses) on investments upon consolidation.
Adjusted EBITDA
As the Group has a number of non-cash items in the income statement, we believe that cash earnings assist in measuring the
earnings generated by the Group. Adjusted EBITDA represents our profitability excluding non-cash items. The table below
gives a reconciliation of adjusted profit before tax to adjusted EBITDA. The main differences are net finance expense,
depreciation and amortisation, and deferred compensation charges relating to deferred awards.
- Reconciliation of adjusted PBT to adjusted EBITDA
$m Six months to 30 June 2017 Six months to 30 June 2016
Adjusted PBT (refer to page 35) 145 98
Add back:
Net finance expense 5 5
Depreciation 6 6
Amortisation of capitalised computer software and placement fees 4 3
Current year amortisation of deferred compensation 28 29
Less:
Deferred compensation awards relating to the current year (38) (27)
Adjusted EBITDA 150 114
- Adjusted management fee EBITDA margin
The adjusted management fee EBITDA margin is a measure of the underlying profitability of the Group. It is calculated as a
percentage of net management fee revenues (gross management fee revenue and income from associates less cash distribution
costs). Further details on this measure are included on page 9.
Compensation ratio
The compensation ratio measures our compensation costs relative to our revenues. The Group's compensation ratio is
generally between 40% and 50% of net revenues, depending on the mix and level of revenue. It is calculated as total
compensation divided by net revenues (gross management fee revenue and income from associates less cash distribution
costs). Details of the current year compensation ratio are included on page 33 of the 2016 Annual Report.
This information is provided by RNS
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