Pollen Street to expand investment strategies in public market foray

Last month, lending-focused Honeycomb unveiled plans to acquire its longstanding investment manager through an all-share deal that values the target’s equity at circa GBP 285m and gives its shareholders 45.5% of the enlarged group, which will adopt the Pollen Street brand.

Assets under management (AUM) are tipped to grow from roughly GBP 3bn at end-2021 to some GBP 4bn to GBP 5bn over the next two to three years, aided by Honeycomb’s existing GBP 577m balance sheet.

As a listed entity, Pollen Street will continue its existing strategies and develop new ones, said Lindsey McMurray, managing partner and proposed chief executive of the new group.

The firm focuses its private equity activities in the financial services midmarket, with initial tickets between GBP 70m and GBP 150m that may be further grown via co-investment and M&A, McMurray said. “We will continue to look to steadily grow the private equity but not fundamentally shift it,” she said.

Its sweet spot for direct originated private credit deals comprises investments of GBP 25m to GBP 125m, the partner said. This includes senior secured lending to non-bank lenders and fintechs.

Last year, Pollen Street closed PSC Fund IV, its latest flagship equity fund, at GBP 700m commitments and raised an additional GBP 321m for a dedicated growth fund and co-investment vehicles. It also launched its Private Credit III fund with a fundraising target of GBP 500m to GBP 600m.

Going forward, the manager aims to develop dedicated real estate and US strategies within private credit, McMurray said. This includes plans to launch a flagship US credit fund in the next 12 to 18 months, according to an investor presentation last week.

Additionally, Pollen Street is looking to tap investment opportunities that currently fall between the return levels of its existing “high-growth” equity and senior credit strategies, McMurray said, which respectively target 25+% and up to 10+% returns.

“It’s the deals that don’t fit either… It could be, for example, a very high quality lending platform that doesn’t meet the growth profile but is a very solid returning asset to meet 15+% returns,” she said.

Deal on track
The proposed merger reflects calls by Honeycomb shareholders for greater liquidity and growth, McMurray said. It originated from Honeycomb’s board of directors, which engaged Bank of America to explore strategic options, she said.

“The Honeycomb board wanted to consider the strategic options for Honeycomb that could unlock value for its shareholders, capitalise on the growth opportunity in its sector and improve the trading in the shares,” a spokesperson for the investment trust said.

Despite delivering a consistent dividend yield of 8% quarterly from 2016, Honeycomb has traded at a discount to net asset value (NAV) for years. In 2020, it attempted to merge with PSC Credit Holdings, another listed vehicle managed by Pollen Street, but the target was ultimately snapped up by Waterfall Asset Management after a prolonged public tussle.

Now, some 56.4% of Honeycomb’s investor base has indicated support for the proposed tie-up with Pollen Street via irrevocable undertakings and letters of intent. A shareholder vote on the transaction is likely to take place towards the end of April or into May once the required documentation has been issued, McMurray said.

Asked about the impact of the war in Ukraine, McMurray said the deal is slated to go ahead in spite of market volatility, arguing that Pollen Street’s portfolio has no material exposure to the crisis, whilst Honeycomb’s performance is counter-cyclical and “strong in times of stress”. The transaction is pencilled to close in 2Q22 and is conditional on the Takeover Panel waiving a requirement to launch a mandatory offer for the existing Honeycomb shares, as per the deal announcement.

Pollen Street’s reverse merger comes at a time when several of its peers are considering going public as a way to tap new capital pools and enable generational change, following in the footsteps of EQT and Bridgepoint. Fund managers reported in recent months to be eyeing a float include CVC Capital Partners and Ardian, among others.

To McMurray, this trend reflects the ongoing “professionalisation” of the industry, as managers transition from deal houses into businesses. “In some ways… what our industry has been doing to every other industry is starting to happen [to us],” she said, adding that Pollen Street set out to build a business since its foundation in 2013.

McMurray said being listed will primarily be an enabler of growth rather than GP liquidity, noting that Pollen Street partners are “definitely not going anywhere” having agreed to partial five-year lock-ups.

The structure of the deal – a reverse merger with a listed investment trust – is arguably rare. The last time someone did something similar was probably hedge fund Polygon when it merged into Tetragon 10 years ago, a sector banker said. However, McMurray rejected extrapolating any conclusions from Polygon’s experience, arguing that the businesses are fundamentally different. Whether other fund managers will look to replicate Pollen Street’s approach in light of the tougher IPO environment is hard to say, she indicated.

Equity story
As a listed entity, Pollen Street promises public market investors a “unique” mix of growth, stable income and dividend yield, McMurray and the Honeycomb spokesperson said. It intends to share 25% of the carried interest from its most recent and future funds with stockholders and generate around 1.25% to 1.5% average management fees over the long term. It also expects to deliver a dividend yield around 6.5% for 2022 and 2023.

In terms of business model, listed comparables that feature a combination of fund management and balance sheet activities include Intermediate Capital Group, Tikahau Capital and KKR & Co, the Honeycomb spokesperson said. “But when you look at the combined group’s performance in respect of income and growth, we perform extremely favourably compared to our peer group,” he argued.

Forecast 2022 price-to-earnings (P/E) ratios for the comps are 11.1x for Intermediate Capital, 16x for Tikehau and 12.1x for KKR, according analytics by Dealreporter, an Unquote sister publication. Honeycomb’s 880 pence share price at Tuesday’s (8 February) close values the equity of the combined business at GBP 570m and implies a pro-forma PE ratio of 13.6x. This assumes AUM in the region of GBP 3bn (end-2021: GBP 3bn) and management fees at 1.25% (target: 1.25% to 1.5%). Shares in Honeycomb have declined 10% since 14 February, the day prior to the deal's announcement.

Asked about future M&A for the enlarged group, McMurray said those discussions will happen over time but there are no plans at present as the focus currently is elsewhere.

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