Record — Transitional year ahead

Record is a specialist independent currency and asset manager with over $100bn in AUM. It serves the needs of over 100 institutions globally. The company has grown strongly over the last five years with AUM and revenues compounding at 12% and 13% per annum, respectively.

Following her appointment in February 2020, the previous CEO Leslie Hill took the company on a more entrepreneurial path to reinvigorate top-line growth by refreshing the leadership team and significantly widening the offering. AUM net inflows totalled over $28bn (48% of AUM at the start of FY21) from FY21 to FY24, but costs also grew significantly, partly due to post-pandemic inflation.

After this growth period, FY25 will be a transitional year as the new CEO, Dr Jan Witte, and new CFO, Richard Heading, implement a strategic refocus on the most scalable growth opportunities and look to improve efficiency through a reorganisation of the IT function.

The granularity of financial disclosure has been enhanced in the FY24 results in order to align with the strategy of growing higher-margin services. AUM and management fee revenues are now split into two main segments, Currency Management and Asset Management, across six core products (Exhibit 1).

Currency Management comprises four products: Passive FX Hedging, Hedging for Asset Managers, Active FX Hedging (including Dynamic Hedging) and FX Alpha (previously Currency for Return).

Asset Management comprises Emerging Market Debt and Custom Solutions. Custom Solutions includes private credit and infrastructure equity.

Asset Management potentially offers the highest revenue and operating margins, but new launches tend to have longer lead times. The infrastructure fund is an example, having taken longer than expected to proceed to launch. Within Asset Management, the $1bn EMSF fund now has a three-year track record and two Luxembourg funds (Protected Equities and GP Stakes), totalling $320m in AUM, were launched in FY24. Record expects the infrastructure fund to launch by the end of FY25.

Exhibit 5 later in this note illustrates the AUM and revenue contributions from the newly defined segments.

Record strongly identifies as a specialist asset manager working with large global investors. Witte and his team are renewing the focus on the six core products outlined above, where they see profitable and scalable opportunities that play to the strengths of Record.

Record’s strategy is to generate sustainable growth supported by three pillars:

We have factored these ambitions into our forecasts, as detailed in the next section.

FY24 revenues and PBT were largely in line with our estimates, however we have downgraded our FY25 PBT forecast as a result of management’s cautious revenue guidance, as the strategy review is ongoing. The impact of one client switching strategy has been factored into our forecasts, however we have pushed back sales of new higher-margin initiatives until the strategy review is complete. Our FY25 revenue estimate has been reduced by 7% (£3.1m) to £41.8m.

Our expense projections for FY25 are little changed so the impact of the revenue cut leads to a 18% downgrade to PBT to £12.1m (from £14.8m).

We also initiate FY26 estimates based on an acceleration in net inflows with some modest revenue margin expansion in line with the strategic priorities for growth.

FY24 revenues rose 2% to £45.4m on AUM up 16.5% to $102.2bn. Management fees were flattish as there was a negative £0.8m impact from one major client within Custom Solutions switching to passive in the final quarter as well as some general pricing pressure. Performance fees were maintained at the very strong level of the previous year at £5.8m.

Administrative costs grew 3% to £30.7m in FY24 including an impact of £0.5m from restructuring and professional services costs related to the R-Platform restructuring. This was a notable slowdown from the 26% cost growth registered in FY23 and was helped by a reduction in variable compensation from £7.6m in FY23 to £4.4m in FY24.

FY24 PBT of £12.9m (FY23: £14.6m) fell 12% as a result of the previously announced £1.9m impairment related to the discontinuation of the R-Platform. Excluding this charge, underlying PBT was £14.8m, up 2% y-o-y.

Exhibit 4 illustrates our average AUM (£bn) and fee margin projections. FY25e is particularly affected by margin compression, mostly due to one client switching strategy (discussed below), but also some general fee pressure. We expect the revenue margin to improve in FY26e as the higher-margin growth initiatives begin to contribute more significantly.

Exhibit 5 details our assumptions for AUM growth in the higher-margin segments, which in our view align with the company’s strategic objectives.

Our estimates project 8.5% growth in AUM in the Currency Management segment from FY24 to FY26e. This is driven by slower growth in the traditional Passive Hedging business but faster growth in the higher-margin segments. This translates into revenue growth of nearly 16% as the margin mix improves.

We forecast 13% growth in AUM in the Asset Management segment from FY24 to FY26e as we expect the launch of the infrastructure fund plus new money flows into the other segments. This fits in with the ambition to balance the product contributions over time and add higher-margin business. Asset Management revenues are projected to fall in FY25e, mostly due to the impact of a client switching from Custom Solutions into passive, which reduces fees by £2.2m in FY25e. Fee revenue growth in Asset Management is projected to pick up to 13.5% in FY26e due to inflows from existing clients as well as new mandates.

FY25e PBT is also affected by our assumption of a normalisation in performance fees to £2m from the elevated levels seen in FY23 and FY24 of £5.8m in both years. This £3.8m drop in performance fees is double the £1.9m impairment charge recorded in FY24, leading to a 6% decline in PBT to £12.1m. Performance fees are notoriously difficult to predict but our £2m assumption is in line with historical averages (see Exhibit 6). After costs our forecast operating margin in FY25e falls to 28% from 32% in FY24 (adjusting for the £1.9m impairment).

In FY26e we assume 6% growth in AUM to £111bn (£87bn) including higher-margin new initiatives. This equates to average AUM of £85bn, which drives total revenues up 8% to £45m, including flat performance fees of £2m. We forecast costs up over 4% with variable compensation rising to £5.8m assuming 30% of pre-bonus profit (company stated range is 25–35%). We expect efficiencies from the IT reorganisation as well as double occupancy costs of £0.5m in FY25e to fall out of total expenses. Thus our PBT margin recovers to 30% in FY26e, a little below the 10-year average of 31%.

Record is a highly cash-generative business. We compare reported and adjusted net profit with net cash flow (including working capital, net interest and tax paid) less capex and lease amortisation payments in Exhibit 7 below. Core net cash generation has exceeded reported and underlying net profit on average over the last five years and reached £12.3m in FY24.

Record’s strong cash flow generation and low capex requirements result in a strong balance sheet and a high degree of financial flexibility. At end FY24 Record had gross cash and equivalents of £17.5m, no financial debt and a small lease obligation of £0.2m, giving a net cash position of £17.3m or 8.8p per share (using 199.05m shares before deducting Employee Benefit Trust shares).

The cash conversion rate and conservative balance sheet has enabled Record to implement a shareholder-friendly distribution policy including an attractive ordinary dividend, special dividends and share buybacks over time.

Senior executive management at Record has changed over the last year but the transition has been well-prepared for by former CEO Leslie Hill under her succession planning objectives. Leslie announced her retirement after 31 years with the company in November 2023. She was officially succeeded on 1 April 2024 by Dr Jan Witte and remains a consultant to the board. Jan joined Record in 2012 and previously held the roles of head of quantitative research, head of Switzerland, global head of sales and CEO of Record Currency Management Limited (RCML). He was promoted to the executive board on 1 January 2024 as CEO-elect.

Steve Cullen, former CFO, officially retired at the end of June 2024 after 20 years with the company and has been succeeded by Richard Heading. Richard was previously group finance director for IG Group and has experience in financial planning, investor relations, treasury and international operations.

David Morrison was appointed chairman in July 2023 following founder Neil Record’s announcement he would retire in March 2023. David is chairman of CPP Group and senior partner at Palladian Investment Partners. David has a background in venture capital and served previously as a non-executive director at Record from 2009, including as senior independent director from 2016 to 2018.

Management fees are based on average AUM and have averaged 91% of revenues since 2019 (Exhibit 8).

AUM are driven by a combination of market performance (including exchange rate moves) and net inflows of AUM from new and existing clients. The gross management fee margins vary considerably across the product suite: Passive Hedging generates a fee margin of c 2bp while the EMSF fund generates a fee margin in excess of 50bp. We detail the estimated gross management fee margins below (Exhibit 9):

Revenues will change proportionately with changes in average AUM if average fees are unchanged. We estimate the average management fee to be 5.3bp in FY24, so a 0.1bp change in fee margin would add almost 2% to revenues.

Revenues and PBT will also be sensitive to winning higher-margin mandates in the strategic growth areas. As a hypothetical example, an additional asset management mandate of $1bn at a 25bp fee margin would generate $2.5m (c £2m) in additional management fee revenues and increase PBT by c 6.5% assuming a 40% pre-tax profit margin (Exhibit 10).

Performance fees have averaged around 7% of total revenues (Exhibit 8), but both FY23 and FY24 fees were nearly double that level. Performance fees tend to carry a higher margin as variable staff costs are charged against these in a range of 25–35% so any significant change has a leveraged impact on PBT. A £1bn reduction in performance fee would reduce revenues by c 2% and PBT by 5–6% depending on the variable payout in the year (Exhibit 11).

Record has a different business model to most asset managers, but it is an annuity fee-driven business model based on AUM. We compare the company’s valuation with its peers in Exhibit 12. Record trades at premiums of 29% and 42% to its peers on calendarised P/E and EV/EBITDA multiples, respectively. We believe this reflects Record’s strong net AUM inflow performance compared to a mixed sector in which some companies have had material persistent outflows of AUM. We also note that excluding Jupiter (which trades at a distressed valuation), the EV/EBITDA premium would be 22%. FY25 will be more of a transitional year for Record, including the technology reorganisation and a normalisation of performance fees, before growth returns in FY26 based on our estimates. The dividend yield is competitive with the peer group at 6.9%.