Arrow Global Group: Q3 Results

Strong balance sheet cash collections and return to profitability in Q3; new five-year targets announced aligning to Arrow’s capital light fund management strategy

Strong Q3 performance

  • Q3 discrete profit after tax up 15.8% at £9.1 million (Q3 2019: £7.9 million)
  • Balance sheet cash collections of £260.9 million (Q3 2019: £312.5 million)
  • Continued improving trend in balance sheet cash collections performance following the impact of COVID-19 lockdowns – Q3 2020 discrete collections of £85.1 million represents 141% of revised 84-month ERC
  • Remain cautious of economic outlook upon the winding down of government support schemes; no change to balance sheet write-down taken at the half year 2020 following Q3 review
  • Asset Management and Servicing (AMS) business cashflows remained resilient
    • AMS revenues improved 2.1% to £70.2 million (Q3 2019: £68.7 million)
    • Record 16 new third-party contract wins in 2020 – currently equating to £4.8 billion of gross book value, evidencing increased demand for Arrow’s services
  • Increased capital deployment in line with increasing investment opportunities – total investments of £64.2 million, including pro-rata fund co-investments
  • Q3 discrete total operating expenses of £56.0 million represents a 12.8% reduction on 2019 on a cash basis (2019: £55.4 million including benefits of £8.9 million of non-cash deferred consideration release)
  • £10 million cost reduction programme on track

Balance sheet and liquidity remain robust

  • The Group maintained a strong liquidity position – latest available cash headroom of £225.5 million (FY 2019: £153.0 million)
  • Free cash flow (FCF) generation of £120.4 million (Q3 2019: £174.4 million)
  • LTM leverage of 4.2x (Q3 2019: 3.7x)
  • Expect leverage to be circa 4.0x by end 2021 and within target 3.0x-3.5x range by 2023 – well in advance of first bond refinancing requirement in 2024

Further fundraising success – Arrow Credit Opportunities (ACO) fund closed

  • Total ACO capital commitments at close €1.7 billion, with €1.3 billion from third party investors
  • Total Funds Under Management (FUM) at close of €4.2 billion – new target of €10 billion by 2025
  • Analyst seminar teach-in and Q&A scheduled for 14:00 today (12 November 2020)

Attractive medium-term outlook and updated targets

  • Economic dislocation expected to present increased investment and asset servicing opportunities
  • New targets reflect an acceleration of our capital-light strategy in an increasingly attractive operating environment:
    • Greater than €10.0 billion of FUM by end 2025
    • Greater than 50% of EBITDA from capital light businesses (Fund and Investment Management Business (FIM) and Asset Management and Servicing Business (AMS)) by FY 2025
    • 40% EBITDA margin from FIM and at least 25% EBITDA margin in AMS by end 2025
    • Return on equity of greater than 25% through-the-cycle between FY 2021 – FY 2025
    • Greater than £500 million of cash generation after fund investments between FY 2021 – 2025
    • Leverage of circa 4.0x by end 2021 and within target range of 3.0-3.5x by 2023

Commenting on today’s results, Lee Rochford, Group chief executive officer, said: “Arrow performed well in Q3 2020, registering a clear return to profitability and strong balance sheet cash collections. It is encouraging to see a notable increase in investment returns available in the market as the economic dislocation generates new opportunities. This has also led to increased demand for Arrow’s third-party asset servicing capabilities, driving new, long-term contract wins for our Asset Management & Servicing Business.

“Today we have also announced the final close of the fundraising for Arrow Credit Opportunities, our first discretionary closed-end fund, with total capital commitments of €1.7 billion. This marks an exciting new chapter for the business as it continues its pivot towards an increasingly capital-light model. Raising such a significant pool of third-party capital means that we are well positioned to be a leading investor into a large and fast-growing market with an improving returns trend, underpinning our target to manage €10 billion of FUM by 2025.

“The close of our flagship fund has led us to outline a new set of 5-year targets for the Group which reflects our confidence in the business’s ability to grow earnings, increase the contribution from capital-light fund management and servicing operations and significantly reduce leverage.”