Project Herald March 2021 - AIM: DUKE - Duke Royalty
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Project Herald March 2021 AIM: DUKE
Disclaimer
These presentation slides and the accompanying verbal presentation (the “Presentation or in part, for any purposes whatsoever. In particular, they should not be distributed to or
Materials”), are confidential and have been prepared by Duke Royalty Limited (the “Company”). otherwise made available to persons with addresses in Canada, Australia, Japan, the Republic of
They do not constitute or form part of any offer for sale or subscription or any solicitation for Ireland, the Republic of South Africa or the United States, its territories or possessions or in any
any offer to buy or subscribe for any securities of the Company nor should they or any part of other country outside the United Kingdom where such distribution or availability may lead to a
them form the basis of, or be relied on in connection with, or act as an inducement to enter breach of any law or regulatory requirements. The distribution of these Presentation Materials
into any contract or commitment whatsoever. in other jurisdictions may be restricted by law, and persons into whose possession these
Presentation Materials come should inform themselves about, and observe, any such
While all reasonable care has been taken to ensure that the facts stated in these Presentation restrictions. Any failure to comply with these restrictions may constitute a violation of the laws
Materials are accurate and that any forecasts, opinions and expectations contained therein are of the relevant jurisdiction. The Company’s securities have not been and will not be registered
fair and reasonable, the Company has not verified the contents of these Presentation Materials. under the United States Securities Act of 1933, as amended (the "Securities Act"), or the
Neither Cenkos, Canaccord or the Company nor their respective subsidiaries nor any of their securities laws of any state or other jurisdiction of the United States and may not be offered
respective directors, officers, employees, agents or advisers makes any representation or and sold in the United States except pursuant to an exemption from, or in a transaction not
warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the subject to, the registration requirements of the Securities Act. There will be no public offering
Presentation Materials or opinions contained therein nor accepts any responsibility or liability of Company Securities in the United States.
whatsoever for any loss howsoever arising from any use of, or in connection with, these
Presentation Materials or otherwise arising in connection therewith. The content of the Presentation Materials has not been approved by an authorised person
within the meaning of the Financial Services and Markets Act 2000 (“FSMA”). Reliance on the
Nothing herein shall limit the liability of any person for their own fraud. In issuing these Presentation Materials for the purpose of engaging in any investment activity may expose an
Presentation Materials, the Company does not undertake any obligation to update or to correct individual to a significant risk of losing all of the property or other assets invested. Any person
any omissions or inaccuracies which may become apparent in them. Each recipient of these who is in any doubt about the subject matter to which this presentation relates should consult a
Presentation Materials must make its own investigation and assessment of the matters person duly authorised for the purposes of FSMA who specialises in the acquisition of shares
contained therein. and other securities. The Presentation Materials contain information relating to past
Provision of the Presentation Materials is made in accordance with Commission Delegated performance of the Company. Past performance is not a reliable indication of future results.
Regulation (EU) 2016/960 and as a ‘market sounding’, as defined in the EU Market Abuse This presentation is being made only in the United Kingdom and is directed only at (i) persons
Regulation. The Company does not consider that the information within the Presentation having professional experience in matters relating to investments, i.e. investment professionals
Materials is inside information, nevertheless, you are required to assess for yourself whether within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial
you are in possession of inside information. Promotion) Order 2005, as amended (the "FPO"); (ii) high net-worth companies,
The Presentation Materials contain forward-looking statements, including in relation to the unincorporated associations and other bodies within the meaning of Article 49(2) of the FPO;
Company and the Company’s proposed strategy, plans and objectives. Such statements are and (iii) persons to whom it is otherwise lawful to make the presentation. Persons who fall
generally identifiable by the terminology used, such as “may”, “will”, “could”, “should”, outside categories (i) and (ii) above must check that they fall within category (iii). If they do not,
“would”, “anticipate'', “believe'', “intend”, “expect”, “plan”, “estimate”, “budget'', “outlook'' or they may not receive these Presentation Materials. Any person who does not fall within
other similar wording. By its very nature, such forward-looking information requires the categories (i) to (iii) above may not rely on or act upon the matters communicated at this
Company to make assumptions that may not materialise or that may not be accurate. Such presentation. Any person falling outside categories (i) to (iii) who has received any document
forward-looking statements involve known and unknown risks, uncertainties and other forming part of this presentation must return it immediately.
important factors beyond the control of the Company that could cause the actual performance The Presentation Materials are provided on the basis that the recipients keep confidential any
or achievements of the Company to be materially different from any future results, information contained herein or otherwise made available, whether orally or in writing, in
performance or achievements expressed or implied by such forward-looking statements. Such connection with the Company. The Presentation Materials are confidential and must not be
factors include, but are not limited to: general economic, market and business conditions; copied, reproduced, published, distributed, disclosed or passed to any other person at any time
industry capacity; competitive action by other companies; production and marketing margins; without the prior written consent of Cenkos or Canaccord, as agents for the Company.
the ability to market and sell products; fluctuations in interest rates and foreign currency
exchange rates; the ability of partners and suppliers to meet commitments; changes in Cenkos and Canaccord are acting only for the Company in connection with the proposed
applicable laws and regulations; contingent liabilities; international political events; and other transaction and is not acting for or advising any other person, or treating any other person as its
factors, many of which are beyond the control of the Company. client, in relation thereto and will not be responsible for providing the regulatory protection
afforded to clients of Cenkos and Canaccord or advice to any other person in relation to the
The Presentation Materials are being supplied to you for your own information and may not be proposed transaction. Any other person in receipt of the Presentation Materials should seek
distributed, published, reproduced or otherwise made available to any other person, in whole their own independent legal, investment and tax advice as they see fit.
2
Presentation team
The management and investment committee have 70+ years of
combined direct royalty experience
Neil Johnson Charlie Cannon-Brookes Peter Madouros
Executive Director and CEO Executive Director Chief Investment Officer
Early player of UK listings for London-based Executive Director Extensive experience investing in
Canadian and UK dual-listed public and private markets at
Extensive onshore and offshore
companies between 2000 and leading private equity and credit
fund management experience
2010. Led the first Canadian AIM fund managers, including Pollen
since 1998
Nomad and UKLA sponsor Street Capital and Moore Capital
Management
A total of £3 billion was raised
for dual-listed companies
3
Investor highlights
We provide minimally-dilutive capital with no re-financing risk
for private, owner-managed companies with strong cashflows
Established portfolio ~6%
10 Royalty Partners and £115+ million annualised dividend yield1 paid in cash
deployed since inception quarterly
Established market presence High operational leverage
first mover in UK and Europe and embedded long-term growth
Covid-19 resilience Growing market
post-Covid, providing opportunities in
demonstrated by cash flow preservation
alternative financing to SME’s
1 Duke share price as of 18 March 2021, and annualizing Q4 declared dividend
4
How are corporate royalties different?
A long-term participating loan with similar characteristics to traditional royalties
• Duke provides a lump sum of capital to a company with a term of 25-40 years
• Initial yield is 12.0-14.0% of capital, adjusted once per year with a collar of +/-6% in currency terms
(0.7-0.8% of initial capital)
• Duke’s total obligation can be serviced out of current cash flow, without need for exit event
• No bullet repayment at end of term
• Company can Buyback royalty: after ~3 years, initial principal plus ~20% redemption premium. However,
buyback granted at any time upon change of control (not a poison pill)
Illustrative Company Example 2020 2021 2022 2023 2024 2025
Duke payment to company £10.00
Company revenue (% change) £20.00 £23.00 +15% £21.16 -8% £22.22 +5% £24.44 +10% £28.11
EBITDA £3.00 £3.45 £3.17 £3.33 £3.67 £4.50
Duke distribution (% change) - £1.35 +6% £1.43 -6% £1.35 +5% £1.41 +6% £1.50
Cash flow - post Duke distribution £3.00 £2.10 £1.74 £1.99 £2.25 £3.00
% of economic interest retained
100% 61% 55% 60% 61% 67%
by owners/management
5
An established alternative financing solution
Royalties appeal to owners who have a need for capital but want to
retain control. Royalties compete more against debt than equity, but
have characteristics of both
Debt Royalty Private Equity
Term 3-7 years 25-40 years Permanent dilution
Refinancing
risk
Significant None Pressure to exit
Control Passive Passive Loss of control
Covenants Significant Covenant-light Covenant-light
Security Typically senior Typically senior None
FCF impact
(years 1-5)
Significant Light Light
6Benefits for investors
Royalty company shareholders benefit from attractive returns and
increasing valuation as they diversify their investment portfolios
Security for downside
protection
Compounding
opportunity High level of Senior secured
Annuity-like operational
revenue streams through participation
in growth by annual gearing Inter-creditor agreements
adjustments
Events of default
Payment remedies
Board rights
Diversification
Yield of risk Commitment Seize security
compression through addition of to growing
as portfolio grows revenue streams and quarterly dividends Information rights
liquidity of shares
Restructure/call
7Our Royalty partners
Duke has proven experience investing across range of sectors, geographies and
transaction types
October 2017 February 2019 April 2018 November 2020 August 2018 March 2018
Carmen, Verdi &
Rigoletto
BUSINESS SERVICES LEISURE INDUSTRIALS RIVER BOAT VESSELS HEALTHCARE INDUSTRIALS
Fair value: Fair value: Fair value: Fair value: Fair value: Fair value:
£12,093,000 £12,051,000 £10,903,000 £10,360,000 £9,425,000 £8,985,000
Acquisition Capital MBI Acquisition Capital & Acquisition of Assets Growth Capital Shareholder
Debt Refinancing Buyout
September 2018 June 2018 February 2021 August 2018
Step
BIL Investments
BUSINESS SERVICES EDUCATION & MEDIA INDUSTRIALS BUSINESS SERVICES EXIT EXIT
Fair value: Fair value: Fair value: Fair value
IRR: 27% IRR: 22%
£8,501,000 £6,308,000 £6,197,000 £5,873,000
MBO / MBI Growth Capital MBO MBO Acquisition Capital & Acquisition
Debt Refinancing Capital
1 Fair value refers to the unaudited pro-forma fair value, which reflects the fair value at 31-Mar-20 adjusted for the cost of follow-on investments made in FY21
8Duke’s financials – cashflow business
FY2020 FY2019 FY2021 Trading Outlook
Cashflow highlights £000 £000
Cash revenue 1 10,245 5,354
• Quarterly cash revenue trending upwards
Core operating expenses 2 (2,273) (1,392) • Total cash revenue for FY2021 expected to
be £11.0 million, an increase year-on-year
Other cash (expenses) / receipts 3 (1,189) 148
despite Covid downturn
Net cash inflow from operating activities 6,783 4,110
• Cash revenue forgone has been captured as
Interest costs (1,425) (172) equity or deferred
Free cash flow 5,358 3,930
• Using proceeds from proposed equity raise
Other highlights and full draw down on RCF to £55m, we
expect a significant increase to pro forma
Operating cashflow per share (p) 3.17 2.52
cash revenue
Dividend per share (p) 2.95 2.80
Dividend yield 4 11.6% 6.4%
1 Cash revenue is cash distributions from royalty partners and net cash gains from sale of
Free cashflow (FCF) per share (p) 2.51 2.41 investments
2 Core operating expenses excludes variable STIP payments
3 Includes other operating income, royalty participation payments, tax and variable STIP
FCF yield 4 9.9% 5.5% payments
4 Based on share price of 25.40p @ 31.03.20 and 43.5p @ 31.03.19
9Project Herald
Transaction summary
• Proposed equity placing to raise up to £20m
• Net proceeds to provide royalty financing in two new royalty partners under signed, exclusive heads of terms
and one near term follow-on into current partner
• Further pipeline funded by revolving line of credit which post-placing is an LTV of ~35% when fully drawn at
£55 million
Proposed amount Annual adjustment
Deal (in GBP) Initial cash yield collar (+/-) Term
New: IT Managed Services £11.0 million 13.5% 6% 30 years
New: Engineering & Construction £7.5 million 13.2% 6% 30 years
Follow-on: New Acquisition £3.8 million 13.5% 6% 30 years
Total / Weighted Average £22.3 million 13.4% 6% 30 years
Placing proceeds will increase market cap to £110m+ and provide sufficient
liquidity to execute near-term deal opportunities
11Pipeline of opportunities
The role of alternative financing has been on the rise since 2010 and we believe
Covid-19 will increase the size of the alternative financing industry
Secular tailwinds Robust pipeline
• Higher capital costs for banks is creating growing demand for private • Record number of opportunities reviewed in Q1 2021 up 3x from
credit instruments Q1 2019
• We are the long-term alternative capital solution • Live opportunities under consideration include 21 deals representing
£153m
• 45% of UK SME’s took new capital in 2020 and we stand to benefit as
borrowers seek to reduce refinancing risk1 • Focus on our successful situations, and an adherence to our
investment criteria
Aggregate private debt (in US$ bn)2 Pipeline by deal type Pipeline by geography
$900 MBO Buy & Build UK Ireland
> $800
$800 Growth M&A Germany Canada
Buyout Denmark Netherlands
$700
$600 $550
14% 5% 5%
24% 10%
$500
$400 $320
19% 9%
$300
62%
$200 9%
24%
$100 19%
$0
2010 2015 2019
1 Source: According to British Business Bank
2 Source: Association for Financial Markets in Europe, PWC (Private debt worldwide, all sectors)
12New Royalty partner: IT Managed Solutions
Company overview
• UK buy & build platform for IT managed service businesses with six
operating businesses already acquired
• Recurring revenue generated via growing managed services offering and
the reselling of hardware and software
• Cost synergies from centralization of overheads
• Products cross-sold to grow top-line organically
• Duke facility supporting management’s proven acquisition and
onboarding program
• Targeted acquisition multiples are accretive to Duke’s coverage ratio
(even prior to synergies being realized)
Annual adjustment
Investment
(based on revenue)
Why Duke
£11m +/-6%
• Founders maintain larger equity shareholding
• Duke’s Royalty product needs no re-financing Term
Initial obligation
(incl. principal)
• Duke offers a long-term partner that has appetite to provide further
acquisition capital in the future
30 years 13.5%
13New Royalty partner: Engineering and Construction
Company overview
• Canadian buy & build platform for engineering, procurement and
construction (“EPC”) solutions in commercial and industrial settings
• Three acquisition targets as part of the initial Group, the business units
being in business since 1986, 1997 and 2003 and have completed projects
in North and South America, Europe and Middle East
• Upon closing, the Group will have expertise in designing, engineering, and
manufacturing of specialized construction projects, enclosures, and
automation solutions for a variety of industries
• Experienced management team expects to realize economies of scale and
cross-selling to grow EBITDA as well as through strategic acquisitions
• Group revenues 2020 c.£20 million and all business units profitable
Why Duke Annual adjustment
Investment
(based on revenue)
• Actual and targeted acquisition multiples of less than 4.0x are accretive to
Duke’s coverage ratio without loss of management’s equity control
£7.5m +/-6%
• At Duke’s discretion, agreed a facility of up to £11.5m to support
additional acquisitions
Initial obligation
Term
• Desire to have one capital provider and no refinancing risk (incl. principal)
30 years 13.2%
14Follow-on investment to existing partner
BIL: existing (resourcing) platform Bolt-on opportunity
BIL to date New opportunity
• BIL is a buy & build resourcing platform which has deployed a total of £9.4m to date • 3.8m of new capital from Duke to
• This includes bring the total investment exposure
to £13.2m
• Permanent recruitment-focused Brightwater in September 2018, and
• PharmEng Ltd in January 2020, providing the group with a strong profile of Temporary • Target company is a well-
Resourcing income, which has performed resiliently during the pandemic established business focused on
the information technology sector,
• The two businesses operate predominantly in the Finance, Engineering servicing a number of large clients
and Healthcare sectors in the UK and Ireland with long standing relationships
• Both revenue and profitability
Annual adjustment Initial obligation
Investment Term have grown in the last 12 months to
(based on revenue) (incl. principal)
March 2021, showcasing the quality
£9.4m +/-6% 30 years 13.5% of earnings and management’s
ability to expand revenue with key
customers and win further contracts
as the business develops
• The company is being acquired
at a multiple that is forecasted to
be accretive to Duke’s key credit
metrics
Brightwater wins
Large Agency of
the Year 2019
15Increasing portfolio diversification
Pre-transaction Illustrative full deployment
Lynx
Lynx Miriad
6% 5% 9% UGG
6% 14% Miriad 5%
UGG Duke Switzerland
5% 9% InterHealth
7% Duke Switzerland
InterHealth Trimite
6%
13% BIL
Trimite 8%
10% 2% Step
BIL
~£95m 5% £150m+ Fabrikat
Step
BHP
deployed Fabrikat deployed1 7%
New deal - IT
BHP 7% New deal - E&C
11% 12%
7% Follow-on deal
4%
4% Debt funded deal (i)
10% 11% 7%
4% 6% Debt funded deal (ii)
Debt funded deal (iii)
Debt funded deal (iv)
Through full deployment of debt and equity, Duke will seek to increase its portfolio diversification with
no investment representing more than 10% of total capital deployed
1 Includes investment based off proposed £20m equity raise and utilisation of leverage under Honeycomb credit facility including assumed accordion upsize
16Duke’s investors: top global funds
Strong base of blue-chip institutional investors with significant
management ownership
9.81% 9.18% 7.95% 6.64%
ownership ownership ownership ownership
Directors,
Management,
Insiders
5.09% 4.29% 3.69% ~5.00%
ownership ownership ownership ownership
High level of liquidity with Duke in the top quartile of AIM traded stocks by value
1 Data as at 15 March 2021
17Summary
• Use of proceeds are for two new deals already under exclusive Letters of Intent and
one follow-on deal
• Total cash revenue for FY2021 expected to see an increase year-on-year despite Covid
downturn
• Further potential for growth as trading environment normalises, buyouts materialize
and positive annual adjustment resets
• Non-dilutive capital of £55 million revolving credit facility to execute growing pipeline
of opportunities
• Pro forma £150+ million of invested capital will result in expected increase in Cash
Flow per Share
18Appendix
An experienced team, including Royalty pioneers
Management and investment committee have direct royalty experience of 70+ years
Neil Johnson – Executive Director and CEO Jim Webster – Chairman of Investment Committee
• Pioneered UK listings for Canadian and UK dual- • Pioneered world’s first drug royalty public
listed companies between 2000 and 2010 company on TSX (from 1993-2002), and has
• £3 billion raised for dual-listed companies and led 25 years of royalty expertise Nigel Birrell
the first Canadian AIM Nomad and UKLAsponsor • Previous royalty companies have a total of Non-Exec Chairman
£4 billion under management • Group CEO of Lottoland Limited
• Former director of two FTSE 250
companies, including HIT
Charlie Cannon-Brookes – Executive Director Steven Russo – VP, Investments Entertainment
• London-based Executive Director • Six years of experience in mezzanine debt and
• Co-owner of FCA-regulated Arlington Group select equity growth capital transactions at
Asset Management Difference Capital Financial Inc.
• Holds a J.D./MBA Degree from Queen’s
University (2011)with expertise in corporate law
and governance Matthew Wrigley
Non-Exec Director
• Former Partner at MJ Hudson and
Peter Madouros – Chief Investment Officer Ajay Shivdasani – VP, Investments resident of Guernsey
• Extensive experience investing in public and • Four years of private-equity LBO transaction • Former General Counsel of a fund
private markets at leading private equity and experience and deal origination at DW management company with > £650m
credit fund managers, including Pollen Street Healthcare Partners and four years of global AUM
Capital and Moore Capital Management management consulting experience at Oliver
• BA from Cornell University, Magna cum Laude, Wyman
and MBA from Columbia Business School • Holds an MBA from INSEAD University (2014)
Hugo Evans – Finance Director Alex Hibbard – VP, Investments Mark Le Tissier
• Extensive experience in senior finance roles within • 3 years at London-based PE firm Terra Firma, Non-Exec Director
financial services where he focused on investment opportunities • European Regional Director of
• 11 years of UK plc reporting experience and managing portfolio companies Trident Trust, leading global
• Chartered Accountant (Grant Thornton) • Chartered Financial Analyst corporate services provider and a
resident of Guernsey
20Duke Royalty’s Covid-19 response
Preservation of value Long term approach
F21 cash revenue - Q1: £2.0m Q2: £2.4m Q3: £4.2m Forbearance agreements with hardest-hit royalty partners
Cash revenue forgone has been captured as equity or deferred But deployed further capital into strong partners enabling growth
Future value acquired Return of cash dividends
Equity stakes up to 30% in some royalty partners Scrip dividend was paid during the crisis phase of the pandemic
Most held at or near nil value currently on Duke’s balance sheet Cash dividend reinstated after two quarters of scrip dividends
21Duke’s typical investment criteria
• c.£5m - £20m Preferred sectors
Investment fit within • Western Europe and North America
Duke Portfolio • Appropriate Environmental, Social and Governance (ESG) standards
Industrials
Alignment of management goals • 10+ years of operating history
with Duke’s objectives • Back management with a track record of delivery
Business services
Collateral/capital backing Duke’s • Senior security sought on available assets
investment • If other debt exists, we seek inter-creditor agreements
Healthcare
• Competitive sustainable advantage
Capacity to pay and grow royalty • Royalty coverage greater than 2.0x
payments • Payback period of 6-7 years Technology
No start-ups
• Approval required by independent investment committee and No oil & gas
Overall risk/reward evaluation board of directors No mining
No biotech
22Strong origination and due diligence
Origination process
Origination through relationships Relationship driven,
675+ investment opportunities since 2016 management and financial
strength more important
than industry sector
Indication of interest submitted
105+ investment opportunities
Preliminary evaluation
Greenlight approval from Investment Committee
In-depth due diligence Approval process
In-house + global experts via partnerships Production of due diligence
report and 2x approval
Independent Investment
Committee recommendation
Board approval
23What is Royalty financing?
Royalties are deployed in multiple sectors and are part of the growing market in
alternative financing
Year listed Year listed Year listed Year listed Year listed
1983 2005 & 2020 2018 2020 2020
Exchange Exchange Exchange Exchange Exchange
TSX & NYSE TSX & LSE LSE NYSE LSE
Sector Sector Sector Sector Sector
Mining Mining Songs Pharmaceuticals Songs
Market cap.1 Market cap.1 Market cap.1 Market cap.1 Market cap.1
£17.0b £12.9b £1.3b £20.9b £246m
Royalties in all forms emerged 40 years ago, but have gained traction in the UK
with several IPOs on the London Stock Exchange over the last three years
1 FX conversion rates as of 15.03.2021: (i) GBP:US$ = US$1.3862 (ii) GBP:CAD = C$1.7358
24Benefits for owner-operators
Private business owners receive immediate capital without selling part of their
equity stake in the company, allowing them to retain full control of the business
No refinancing risk Retain control of timing
for owners of any refinancing event
A long term approach Unique structure
to the business relationship creates alignment to succeed
Retain control of the board Retain equity upside
and strategic direction as participation is capped
25Funding solutions
Debt or Acquisition
equity MBOs capital
restructuring
Allows experienced
Debt refinancing or management teams to Flexible financing model
shareholders exiting become majority owners enables cash drawdowns
in multiple tranches
We support owners We back people who
without creating another created equity value to Used for bolt-on
future exit event keep strategic control acquisitions
26You can also read
