Jtc Plc Regulatory News (JTC)

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THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION.

6 October 2021

For immediate release

JTC PLC

(the "Company" and together with its subsidiaries "JTC" or the "Group")

Acquisition of SALI

Acquisition in a high growth segment of fund services, significantly strengthening the Group's platform in the US

JTC, the global provider of fund, corporate and private client services, is pleased to announce that it has entered into a definitive agreement to acquire SALI Fund Management, LLC and SALI GP Holdings, LLC (together "SALI"), a US-based provider of fund and structuring administration services to the Insurance Dedicated Fund ("IDF") and Separately Managed Account ("SMA") market for a maximum consideration of $236.0 million (the "Acquisition").

The initial consideration of $204.5 million will be settled by a combination of $192.2 million in cash and up to a maximum of $12.3 million in new JTC ordinary shares of 1 penny each ("Ordinary Shares"). A further consideration of up to $31.5 million is payable in cash and JTC Ordinary Shares on the achievement of performance targets for the two-year period post completion. The Acquisition is not subject to regulatory approval and is expected to complete at the end of October 2021.

The Acquisition will be funded from the Group's existing cash reserves, debt facilities and the proceeds of a proposed placing of new ordinary shares in the Company to raise up to approximately £80 million (before expenses) (the "Placing"). The Placing is being conducted through an accelerated bookbuilding process which will be launched immediately following the release of the Placing Announcement. Joh. Berenberg, Gossler & Co. KG ("Berenberg") and Numis Securities Limited ("Numis") are acting as the Company's joint bookrunners (Berenberg and Numis together, the "Joint Bookrunners") in connection with the Placing.

Acquisition highlights

· Acquisition of SALI, a pioneer of the IDF market with strong first mover advantage, for total consideration of up to $236.0 million

· SALI has an exceptional financial profile, with strong revenue growth coupled with high margins and cash conversion

· SALI's strong and sticky client relationships provide predictable and recurring revenue, with multi-decade target fund lifespans and unexpired lifetime revenue value of the book of current funds measured in the hundreds of millions of dollars

· The Acquisition provides JTC with meaningful additional scale in the attractive US fund services market and is complementary to JTC's existing footprint, with the US becoming the second largest jurisdiction with over $35 million of turnover and more than 120 staff

· SALI operates at the centre of a blue-chip client eco-system, partnering with some of the world's largest insurance companies and asset managers

· The SALI executive management are a high-quality team who are incentivised to continue growing the business with a meaningful rollover into JTC equity and were attracted to the benefits of JTC's long-term client outlook

· The Acquisition is expected to deliver mid-single digit EPS accretion in 2022 based on the proposed funding structure

· Post completion of the Acquisition and Placing, JTC anticipates leverage to be 2.2x net debt / underlying EBITDA and this will reduce significantly in 2022, providing headroom for additional M&A (medium term guidance of up to 2.0x)

Information on SALI and the IDF market

SALI was founded in 2002 by strategic investors and the current CEO, providing an efficient turn-key solution for the creation and administration of IDF's with 44 full time employees, and is headquartered in Austin, Texas. As of December 2020, SALI administered c.131 funds with c.$14 billion assets under management ("AUM") across a broad range of alternative asset managers. This is forecast to grow to more than 160 funds / accounts and c.$18 billion AUM by the end of this year.

IDFs are investment vehicles that enable a broad range of alternative investment managers to provide high net worth individuals, family offices and institutions with a tax efficient vehicle to invest the permanent capital allocated to life insurance policies into alternative assets.

SALI adds value to all IDF market participants and provides services relating to the structuring and administration of IDFs, ensuring compliance with regulations and providing oversight services by acting as General Partner (akin to a Management Company ("ManCo") in Europe). SALI has established significant entry barriers and provides its services on its own scalable, proprietary tech platform called SCOPE, which provides connectivity between insurance companies and investment managers, including Ares, Partners Group, Blackstone, and Neuberger Berman. SALI currently partners with over 20 of the world's leading insurance companies to facilitate the availability of alternative investment options within Private Placement Life Insurance Policies.

The global alternative assets market is substantial, with in excess of $12 trillion assets under management and this is expected to grow to $17.2 trillion by 2025, a CAGR of 9.8%. This specialised segment of the fund services sector is growing fast, with market volatility, low interest rates, increasing US debt, and proposed tax increases, leading to an increased focus from investment managers on alternative sources of structural alpha and client retention initiatives. This growth is structurally underpinned by likely increases in tax burden, asset growth and price inflation.

SALI was and continues to be a pioneer of the IDF market, resulting in strong first mover advantage. JTC believes the business' track record and position at the centre of the IDF ecosystem is difficult to replicate. Client relationships are both sticky and long term in nature, driving predictable and recurring revenue with multi-decade target fund lifespans, providing excellent recurring revenue visibility, and unexpired lifetime revenue value of the book of current funds is estimated to be in the hundreds of millions in dollars. SALI delivered net revenue retention in excess of 100% during 2019 and 2020, and 100% cash flow conversion.

SALI has a high quality and experienced management team, with average tenure in the executive team of more than 10 years. SALI has strong cultural alignment with JTC given executive management are all current shareholders of the business. SALI's management will become shareholders of JTC following the Acquisition. 

Strategic rationale

Adds strength to JTC's US platform

The acquisition of SALI advances the Group's Galaxy Era objective to strengthen JTC's presence in mainland USA. Combined with the recent acquisitions of NES Financial ("NESF") and Segue Partners, the acquisitions have significantly strengthened the Group's scale and infrastructure in a core growth area. Following the Acquisition, the US becomes JTC's second largest jurisdiction, with over $35 million in revenue and more than 120 staff. In addition, SALI fits directly into the Group's ICS division and provides ICS with access to a large new market, insurance, where there will be significant incremental opportunities in the medium to long term, including operational due diligence revenue opportunities. SALI will also provide the Group's PCS division with additional product and expertise to leverage with high net worth clients. The Acquisition is very complementary with the greenfield investment that the Group is currently making in the US domestic trust market.

Enhances Group and ICS organic growth

The US is an important growth market for fund services, including alternative asset classes such as private equity, venture capital, real estate, debt and hedge funds. The prevalence of outsourcing for fund services is lower than levels seen in Europe, offering further opportunities for strong growth. SALI, with its established reputation as a market leader, is well positioned to capture new business with the backing of JTC's global scale and platform.

Improves client base longevity

Target fund lifespans are long term in nature (multi-decade client contracts) which drives exceptional recurring revenue visibility, with unexpired lifetime revenue value of the book of current funds estimated to be in the hundreds of millions of dollars. This brings long-term capital, creating a resilient asset base with a high AUM retention rate. IDF options are available through daily, monthly and quarterly valued vehicles across a wide spectrum of asset classes including private equity, quant trading, real estate, fixed income and hedge fund of funds.

Strong cultural fit

In line with the Group's acquisition strategy, SALI represents a strong cultural fit with an exceptionally high-quality management team that is incentivised to continue growing the business. The average executive team tenure of SALI is in excess of 10 years, which drives a strong internal culture and long-term client relationships. The SALI executive management team are taking a meaningful stake in JTC equity and were attracted to the benefits of JTC's long-term client outlook. In addition to this, SALI provides further value-added expertise to the division, especially in structuring, oversight and administration

Springboard to accelerate fund services growth

As general partner to the IDFs, SALI has the ability to appoint the fund administrator for their IDFs which provides an attractive opportunity to generate incremental revenue by transferring existing fund administration work and potentially new IDF fund administration work to JTC. SALI's blue chip client base also provides references that can be leveraged across the Group to drive new business. The Group also has the opportunity to leverage SALI's expertise in creating and administering tax-efficient structured products into other JTC jurisdictions.

SALI financial performance

SALI has an exceptional financial profile. For the year ending 31 December 2020, SALI delivered revenue of £7.9m1 ($10.8m) and adjusted EBITDA of £4.0m ($5.4m), with SALI management expectations for the year ending 31 December 2021 of £11.0m ($15.0m) annualised net revenue, translating to £6.6m ($9.0m) EBITDA on a run rate basis. The business continues to grow strongly and there are opportunities for further growth to the strong revenues and high margins of SALI as a result of leveraging JTC's scale, both in the US and internationally. JTC expects that SALI will continue to deliver strong double digit growth in EBITDA in the year ending 31 December 2022. The gross assets the subject of the transaction are £3.1m ($4.2m) as at 31 December 2020. Based on delivering the earn out at existing margins, the consideration payable represents 18.5x proforma on run rate EBITDA.

1. GBP:USD exchange rate of 1.3629; Source: Bloomberg (5 October 2021)

Financial benefits of the transaction

The Acquisition is expected to enhance the Group's growth profile and the margin in the Group's ICS division (c.2.8ppts based on H1 2021), and is expected to deliver mid-single digit EPS accretion in 2022 based on the proposed funding structure.

New debt facilities and further M&A

Within the funding of the acquisition of SALI, the Group has also completed a refinancing of its underlying debt facilities to provide capacity for further M&A. Specifically, the Group has entered into a £225 million revolving credit and term loan facilities agreement with an initial 3 year maturity together with two, 1-year extension options, to replace its prior £150 million debt facilities. Post completion of the Acquisition and Placing, JTC anticipates leverage to be 2.2x net debt / underlying EBITDA and this will reduce significantly in 2022, providing headroom for additional M&A (medium term guidance of up to 2.0x).

Nigel Le Quesne, CEO of JTC, said:

"SALI is a business of exceptional quality and a clear leader in the growing IDF market. Their operations are highly complementary to our existing US footprint and their deep expertise will be a fantastic addition to our Group capabilities. As always, cultural alignment is vitally important to us and like JTC, they are committed to developing successful long-term relationships that span decades. We are excited to welcome the SALI team, their clients and partners to the JTC family."

Thomas Nieman, Chief Executive Officer of SALI, said:

"SALI couldn't be more excited to join the JTC family, whose history of cultivating client relationships over multiple decades aligns strongly with SALI's core mission and values. SALI's customers include many of the largest and most innovative insurance companies and alternative investment managers around the globe. We look forward to continuing to enhance our service offering for these clients through JTC's global reach and commitment to customer service." 

For further information please contact:

ABOUT JTC

JTC is a publicly listed, global professional services business with deep expertise in fund, corporate and private client services. Every JTC person is an owner of the business and this fundamental part of our culture aligns us with the best interests of all our stakeholders. Our purpose is to maximize potential and our success is built on service excellence, long-term relationships and technology capabilities that drive efficiency and add value.

www.jtcgroup.com

Important Notice

The person arranging release of this announcement on behalf of JTC is Miranda Lansdowne, Joint Company Secretary.

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