Partners Group Holding AG (PGHN) Earnings Call Transcript & Summary

Okay. Let's get started. Good afternoon, and thank you for joining this session with Partners Group, an alternative asset manager from Europe, but we -- but a much more global reach. We will discuss that in much more detail with $20 billion market cap. Today, we have with us, Philip Sauer. He's the Co-Head, Group Finance and Corporate Development. So thank you for joining us, and good evening, Philip.

Thank you, Benjamin. Thank you.

For the audience, this will be a fireside chat format which you might know by now. So in case if any question, please ask them via the webcast, and we also get to those. But I would kick off with some questions from my side first.

And maybe, Philip, you can start with your current portfolio, in particular, the private equity investments. So what's the current state of the portfolio? And maybe can you kind of give us some insights how you have supported your investments? And how active as an owner Partners Group really is in such an extraordinary environment?

Thank you for that question. I think the answer is a bit straightforward. If you're not owning your portfolio right, then you shouldn't run the private market assets, right? So at this point in time, we have actually dedicated on at this point, literally 2 months ago, we have dedicated basically full resources to portfolios to understand the liquidity situation on our portfolio companies in absolute great detail. Typically, as a private equity owner, we are hands on. We have projects in place where we help the management teams to actually succeed. Now in a situation like COVID, you basically need to be as close as daily to at least weekly interactions in cash management into your portfolio companies. Now how did we do it? Like we currently still focus entirely on our portfolio, not because there are so many problems, it's because we have now for basically all our holdings a perfect understanding where and how they will react, what their liquidity needs are. And we're feeling after now 2 months down the crisis, much more comfortable than we did 2 months ago, not because of problem cases. But literally, if you are suddenly confronted with the liquidity situation as we did in mid-February or end February, in March, where portfolio companies like literally required every single cent and secured liquidity, that was very, very intense. But overall, I have to say after this time now, we're feeling comfortable. We have seen what kind of companies in which sectors do need additional capital. And what kind of companies can be run by themselves again because they are hardly affected by COVID-19. And that is across the entire portfolio from infrastructure, which is the least infected, also private equity. There are some assets or largest ones, which are not really affected versus some of our mid-cap assets, which are in sectors which are affected and which were perceived to be, let's say, rather safe sectors before COVID-19, such as for instance, education. And now post COVID, you see that there are some issues, suddenly kids cannot go to kindergarten anymore because the government has shut down the kindergartens. And that is a bit of a hurdle, which we have not anticipated. And these companies, they need especially a larger focus.

Understood. You already touched on private infrastructure, but coming maybe to the other 2, private debt and private real estate, maybe the same here. How does COVID-19 affect your portfolio and your actions you're taking?

Yes. In infrastructure, let's start with debt maybe because it's very closely related to private equity. So a private equity problem is also a private debt problem, right? So now the question is in a normal economic downturn, you would argue, yes, I'm the lender. I have rights. And if you, as an equity owner, do not fulfill these rights, I can trigger certain actions. Now in a situation, always in mind as a debt owner, for instance a debt provider, you have in mind, you are somewhat protecting your face value and you want to get interest rates. And if the management team is not capable to steer the business correctly, and then you want to take over the reins, right? You want to take over control and saying, "Hey, not capable management, I will run the show." That is kind of a debt for equity swap, if you have seen for many distressed investors such as Apollo, Oaktree, they do it that way. Now the issue with COVID-19 is as a debt provider, suddenly, you realize that you could not do a better job than management because suddenly your entire market is gone or revenue suddenly decreased by whatever, 80% and so on as we had a tea -- restaurant tea chain in Asia, where so many people did not visit anymore. Now suddenly, you ask yourself, "Oh, then, what do I do?" Now in that situation, you start bringing the lenders and the borrowers quite quickly on 1 table and negotiate certain postponements of payments such as interest, right? You would, as an equity owner, you would approach the debt guys and saying, "Hey, would you mind instead of running that company into now bankruptcy because then you would lose your face value and you can -- can you consider a case where we postpone the interest payments by, I think, a quarter or so? And don't you worry, you want to have something for it, we understand, you maybe get interest on interest for that." And most of the time, this is what we have experienced, especially over the last 2 months, when you sit on the table and negotiate you get these extensions done. Also as a lender, I'm much more willing, I'm much more willing to do that instead of going into huge default cases in my portfolio. So what you can do is you find a solution with the equity guys. So it's basically just limiting the cash needs of the company, try to push everything out as much as possible and then secure your rights on potential future cash flows, right? You say, "Hey, the first revenues the company is generating, I want to get my interest paid back first and so on." And these kind of negotiations are currently happening. Now from -- that is what we see. That's why we have some issues, some companies which are affected by COVID more severely. And there, we are currently restructuring. But considering the entire private debt portfolio, considering the private equity portfolio we run, it is a very minor part. Now it's even less so on the infrastructure and on the real estate side. Both of these asset classes are probably the least affected right now, simply because in real estate, we have a high exposure to office and residential. This is kind of the largest exposure we run. We do not have retail exposure and any kind of troublesome assets, which we wouldn't have bought also pre COVID. So for instance, there, we are feeling very comfortable with the entire portfolio. And on the infrastructure side, Partners Group has built up over the recent years an infrastructure portfolio, which is a bit more tilted towards the renewable energy side. So -- and there, we have probably the least impact of the entire asset classes of all of them. The most impacted from a return perspective, you could argue, is private equity for now on a mark-to-market basis versus real estate infrastructure is probably the least.

Okay. No, that's already touched a bit on then, but maybe you can speak a bit coming to the P&L, so how the whole crisis and -- are affecting your management fees? And is there also any mark-to-market impact we should be aware of at the moment?

Yes. Very fair. Before we talk about management fees, let us talk about AuM because AuM and management fees go hand in hand at Partners Group. So when you know our AuM, you know our management fees. I think that is a simple rule. That's why focusing of AuM is the first right step to do. Now our AuM can be split in 2 categories. One category makes up 75% of our AuM is based on committed capital. They are not subject to market valuations. Literally contracts our clients sign with us for management services, which we conduct over the next 10 years. In private debt, it's a bit shorter, it's 5 to 7 years. Now that's 75%. There is no variable to it, whether you mark down an NAV or you mark it up, it doesn't matter. The contract you signed with clients, that counts. So there is no variable to it, which is good news. The other 25% of our AuM is in so-called evergreen structures. Why evergreen? Because they run forever. It's basically similar to what you know in your public market side, right? You have a fund and that fund would run forever as long as the stocks exist in the portfolio. This is now very rare in our industry because the 75% I just mentioned earlier, they have a predefined life, 5 to 7 years, 10 to 12 years. The other ones run forever. But if something runs forever, they can have a certain redemption possibility. And these funds, which run forever, is the 25% evergreens, they are typically marketed by distribution partners to our high-net-worth individuals globally. So we have a product suited for the U.S. with private equity content. We have a product here in Europe. And then depending on the legislation and country, you can either market them by distribution partners or you cannot market them at all. Now they -- you can -- these programs offer redemptions. So different than in your world where you can redeem suddenly everything a day or whatever, you need to have full liquidity, these programs are set up in a way that they provide 5% liquidity per quarter. So in February, for instance, you need to fill in the redemption form that you want to redeem in March. You do the same in May for June, and you do that as well as in August for September and in November for December. Now that means they have redemptions and subscription queues, right? Now when we look at -- that was a big fear of public shareholders saying, "Hey, you have 25% of your AuM, $24 billion in programs, which have some sort of subscriptions. Everybody wants to get out because we are used to this public market mutual funds, everyone -- everybody wants to get out. Here, we did not sell that these products are able to offer daily redemption possibilities. Our programs were always sold as quarterly. Now that said, the clients couldn't get out in Q1 because in February, the crisis was not that severe, right? And that's why nobody redeemed. In Q2 now, we don't see a massive ramp-up of redemptions coming towards us. Why? You need to put the programs we run into perspectives of the entire market space. If you look at how many private market programs with a semi-liquidity, a quarterly liquidity are out there in the world, you would come to the conclusion saying, "Hey, Partners Group is managing the largest fund of semi-liquidity private equity programs in the U.S., for instance, and we run a $5 billion program, which is the largest program with private equity content, which you can get in America. That is nothing compared to the high-net-worth market in America. So that's why the investors are quite sticky, which are in these programs. And we have just -- we were ready that more redemptions were coming, these programs were set up like that, but they were not coming. But that is a point. You offer them these redemptions, and that is one point -- one negative on it. But right now, we are still comfortable with the redemptions we see. Don't forget, lastly, these programs have redemption possibilities, but they have also a subscription queue. Because we just don't open them and everybody can get in all the time because we need to manage these cash flows carefully that do not have too much inflows because you always need to find content, which you need to fill in with the cash you actually raise. So we need to be in a nice balance between raising and investing. So now coming to the mark-to-market, right? 75% don't have that, yes. The 25% evergreens, they mark-to-market. So if we would, for instance, mark down the portfolio by 5%, then you would see $24 billion AuM marked down by 5% with $1.2 billion negative impact on our AuM. If you mark them down by 10%, it's $2.4 billion negative on our AuM. And we will provide an update to the market where we stand as of H1 in the 14th of June -- July. So that said, yes, they all have a mark-to-market, but the good thing is you will have these AuM forever because they are simply net growing these investments -- these funds, sorry.

Okay. Very clear. Maybe moving on to a topic that might be a bit more difficult at the moment. But maybe you can elaborate on the realizations and divestment strategy and how this could impact performance fees in the short and midterm?

Yes. That is a bit more difficult because there is not a lot to say. Think about you having a fund of 10 years. You are somewhere in the middle of your holding period. Why would you sell now if you don't have to? And that is a question every private market managers will ask themselves, do I need to sell now? And the answer is for 95% of the entire market, no. Except for those people who definitely need to sell because either overly depressed or liquidity needs, left and right obligations somewhere else, then you would do it. So that means when you don't have to sell, you don't do it. And this is the one thing. That's why the market is not really active. The second one is what would be even if you have a seller, even if you would find a good asset, which you will buy, we as Partners Group are not turnaround investors, right? We are investors in quality assets. We try to work our assets hard to grow them. We're not so well in just buying distressed assets, turning them around and then have them growing again. So we buy already like quality assets. So even if you find a quality asset and you find a seller, the question is, what is the reference EBITDA you want to value this company? So because there is a COVID impact, there is massive COVID impact for some companies, and then you need to make adjustments to inhibit. You also can argue you make no adjustments, but then the price will be so low that the seller would say, "No, I'm not going to sell." And if you still find an adjustment, which is somewhat right, that you can both agree, the seller and the buyer to an adjusted EBITDA, the question is, how large is the multiple you pay? And that is pretty much a function of the debt markets, how much you can finance. The financing market is currently a bit nervous because the outlook is uncertain, and you have quite substantial spreads on the -- on our senior and subordinated loans, meaning immediately that you cannot offer similar multiples to these assets as you were 6 months ago, which is all logic to you, right? I'm stating here, but the obvious. But the question is, when did the buyer -- the owner, when did this person, this organization bought the asset? If you bought the asset 2 years ago, you are not yet prepared to sell it at a substantially lower price. And that's why you will probably cancel the transaction. That is what you see. The only transactions we see in the market, they have been set up already, let's say, late 2019, early 2020, and they are just now finalized. But that is it. There are hardly any new transactions. Because -- and this is the main driver because the buyers and sellers' expectations are just too far away right now. We believe that the market will come back somewhat in Q3 where -- via the secondary market, right? This is probably the first market where buyers coming in and buying portfolios of private market assets. And there, we see how sound the market is. But we, therefore, also need a public market, which is somewhat stable. Right now, what you see in a public market space, public market goes up and down and up and down quite with a significant volatility. And for us as private market players, where we lean toward the public market valuation, if you have that volatility, it makes it very difficult for us to properly price assets because there is just too much uncertainty, and that's why we ask for higher discounts. And then you sometimes move away from the seller's pricing expectations. And that's why the volumes are low. So right now, Q2 is basically a lost quarter. Q3, if possible, if we have a good environment and lucky, we see certain small turnaround. Transactions coming back to the market and then hopefully, are back on track in Q4. But what we definitely will not see and irrespective of what the public market is doing, is we will see a V-shaped transaction market coming back kind of like nothing happened, everything is okay. And in Q4 -- Q3, Q4, we are back on track as we were maybe a year ago. That is certainly not the case. It will start much, much smaller in smaller volumes.

Okay. Understood. Maybe just to come back to state the obvious then for performance fees. So I guess this year, then we're quite a bit below your long-term guidance of 20% to 30% of revenues. But given you have the luxury to defer divestments, yes, still something that should hold in the mid to long-term then?

Yes, exactly. So think about it and the performance is now yes, if there are no exits because you don't have to sell, there is little room for generating performance fees, very simple. So no distributions, no realizations, little room for performance fees. Now what you also need to know and that is very different to the public market space. While in our world, the performance fee is somewhat attached to an asset, not on a deal-by-deal carry now. I'm not talking about that. But if you lose an asset, you lose your future performance and potential. If a bank asset goes bankrupt, which you invested in, you lose that potential. If you manage your portfolio well and you bring it well through the crisis, the embedded performance fees in these assets still persist. So what I want to say is the performance fees we don't show you this year will be carried over with the assets into 2021, 2022. And that is important. So they are not just canceled, vanished, that doesn't exist anymore. Whereas in your world, you can generate performance fees on the same fund every year, right? That is very possible, right? If you have a good performance, the same fund generates performance fee. In our world, it is an asset which is sold in a fund. And once the asset is sold, you cannot sell it again. So it's very much a one-off kind of from a fund perspective, a one-off scenario where you typically after 6, 7, 8 years, you sell enough assets to collect performance fees on that fund level. And then the next fund needs to pay performance fee. So why do I tell you this is don't you worry so much? I know there is performance fee probably low this year because there is -- and we also communicated that. We are below -- we were likely falling below the 20% to 30% guidance. And especially very much skewed to the second half because Q2 is -- or H1 is basically -- is very much lost in terms of realizations. So that doesn't mean the performance fees are completely canceled. That is just an important message I want to give. But 2020 is definitely not a year for performance fee. But I think the market has anticipated that. And I think we were also in the past, very outspoken about the fact that we only can generate performance fees when we have realizations.

Indeed. And you mentioned secondaries probably as one of the first to pick up again in H2. But also when you think about your 4 segments, anything you would highlight? Are you in particular excited about, call it, a bit more shorter-term outlook?

Yes. Look, right now, we have -- I think now is the time where we stabilize the portfolio. We know exactly what's going on, we're feeling very comfortable. So now after having allocated what I said at the beginning, the resources very much to the portfolio, we can reallocate back to the investment opportunities. Now there, we need to bridge the buyers and sellers pricing expectations. And so what are opportunities? Partners Group is not an investor, which invests in distressed assets. We like to buy from distressed sellers, but not in distressed assets. So we are not going to go down the route and buying/selling to the aviation industry or hotelery and hotels and think about that. That's just now so cheap, it just is a good deal. We wouldn't have done that before the COVID-19. So what we're looking for is basically, and that sounds a bit strange for you, basically, the same kind of assets as we looked at a quarter or 2 quarters ago. Assets which are in structural growth markets where -- which are operating in highly fragmented markets, in structured growth markets and which are often fragmented. And that is a strategy, for instance, which we have a list of assets, and we have that list already 3 months ago, 6 months ago, where we literally focus on assets we would love to own. And most of these assets have not dropped off the list due to COVID-19. Because the fundamental trend has not changed. There are some trends which some areas and sectors where we might rethink how we will work together going forward, but none of them are on this list. And we have also published on our Investor Relations presentation, a lot of these kind of growth areas where we look into. And behind every area, you have typically 2, 3 market-leading private companies, which we would love to own. And this is where we make our due diligence on already ways and years before they are actually coming to the market. And that is very, very important. So for us now, it's a stage of focus and realignment of targeting the right companies and go after them, much more than opportunistic buying into some credits here and there. Why that? Because in March, just an interesting observation, in March, right, we were ready. We have a target list of credits we would love to buy in the secondary market, right? Assets we know in and out, we love, and I would say, good if they trade at a discount, we can buy them cheap. Now what happened is you were lacking the volumes of those assets you really wanted to buy. We want to buy quality credit was not -- we were not capable of accessing enough volume in the secondary market. Only a bit here and there for some discounts. But the big volumes were traded at substantial discounts. These credits were in areas where you don't want to buy into. And that was oil and gas, that was retail, that was aviation. And all of that is just something what was not interested to us, but there, you had the big volumes. There, we just need to be careful that you separate a bit quality from just from quantity.

That makes sense. And then maybe moving to clients, and you already touched a bit on those in -- with redemptions or, to some extent, the lag of redemptions in your semi-liquid business. But maybe you can give us a bit of a feel of the sentiment of clients. And what's the outlook for fundraising? Even so, there might not be the very significant opportunities in the very short term. But yes, maybe which asset classes you could see first to pick up and where you would expect the first inflows again?

Yes. If we can -- this is not so easy in our world because we need to have a vehicle open, which allows you for having inflows. So that's why inflows are no luck by Partners Group, where you suddenly see something coming in from somewhere. It is a typical due diligence phase of 3 to 9 months, which works -- which we need to work through our clients, move together with clients in order that the client decides to join a Partners Group vehicle. You make 3- to 9-month due diligence on the fund, on a manager, then you, first of all, get approved as a manager, then you get approving and you hopefully get the fund approved. And that is a large -- long process. But therefore, you have client commitments then for 10 years. So meaning the interaction with clients, what we have is pretty much predefined for certain vehicles we have currently open. Right now, we have about 25% -- not 25%, 25 vehicles, which are currently allow us for fundraising. And we have been in discussions with clients much more than we were on the investment side because investments are tough right now. You cannot buy corporates when you don't meet management teams. This is a bit more difficult. But with clients, you know you have built a trust relationships, you can actually move the entire DD process of a fund into the virtual space. And this is what we did, right, data rooms, virtual data rooms, Zoom calls, video conference calls all the time. And our client interaction was quite significant. And that's why we believe that clients and just from a sentiment perspective, clients are not negative towards the private market industries. If you compare how private market portfolios have kept up, and I'm moving back to your first question a bit, they were quite well on track compared to public markets. Now you could say, yes, this is stable pricing, you don't revalue so quickly, and that's why you outperform. Ultimately, the outperformance is not measured between a quarter. A client will not decide whether now private equity outperformed the quarter or not. But in general, our industry is now 10x bigger than it was 10 years ago. I'm telling you this is because a $7 trillion industry needs to lean itself very closely in terms of mark-to-market towards the public market. Very important. Versus 10 years ago, in the last financial crisis, you could argue, yes, it's a $500 billion or $700 billion industry, super small. Yes, they have stable pricing and whatsoever, you could -- many reasons on the things what I heard in the market already, but you cannot hold that up with a $7 trillion industry, which has its equivalent pricing or its pricing is very much benchmarked towards the public market or determined by the public market. So if the public market corrects by 20%, like in the Q1, as we have seen, yes, private portfolios, I tell you, they coming down quite substantially. Now whether this is now 2015 or '10, but you will see a big move within a short time period for private market portfolio because we have no interest whatsoever to be kind of the -- having a pricing in place, where you suddenly need to slowly but truly downgrade, while the public market moves up again. That's why you try to make these valuation adjustments as close as possible and as fast as possible, in line with the public market. And as you have seen now in Q -- in April, for instance, the market rebounded, and that had an impact certainly for the Q2 valuations. So already there is a certain mitigation of the drawdown, you can see that. But what I want to say is clients understand this industry and clients see that when you don't invest now, you will lose opportunity for the next 2 years. Why is that? If you commit today in a private equity fund, let's say, in the Partners Group fund, the drawdown mechanism is not immediately. We will not draw down your capital and invest it in 2020 or 2021. It will be slowly but surely, you will see that we deploy money. And this is like every other private market player, too. Interesting enough is if you hold back now, you might go into the next fund in 3 years from now. But the next fund in 3 years from now will only invest in year 3, 4, 5 and 6. So you basically see a COVID-19 opportunity, but you invest actually in 4, 5, 6 years from now, and that cannot be the case. And clients understand that. And that's why clients are significantly more open to commitments although knowing that the drawdowns might not be as severe right now, but they could actually accelerate in 2021. And that's why -- and this is where they want to be on the invested. And that's why we see actually a good client traction in general on our programs and at least interest, we have discussions.

That sounds good. And then maybe just one last one from my side. And that's around profitability. You have your around about 60% EBIT margin target. Of course, there are now some top line headwinds in the short term, as you elaborated too. But maybe in that context, can you speak about cost management, hiring plans and the like?

Yes, we do. I can keep that simple. First of all, we have a 60% EBIT margin target, and we stick to that target, full stop. There is no bigger discussion. That means we need to manage our costs accordingly. For you as investors, you need to -- if you look at Partners Group, one thing you need to believe us or trust us, and that's the cost management. And it is actually not so difficult because we have 2 revenue streams. We have performance fees and we have management fees. In performance, we have always 40% cost-income ratio on both. So a 40% cost-income ratio on 0 performance fee, as an example, is 0. So we don't have any costs. 40% cost-income ratio on management fees, which is recurring and quite sticky, means we can pay the salaries, which we could for the people we hire. But if we don't grow our AuM, we don't grow our management fees, that means we are not spending more money, right? We only spent incrementally 40% cost-income ratio if we don't raise, if our AuM doesn't grow, we don't hire. So that means we quite -- we're quite, as I say, comfortable and comfortable with our 60% margin target because we know AuM is sticky. So no problem to stick to our 40% cost-income ratio. We could just have the -- our base salaries and a bit of bonus incorporated and a bit of OpEx, this is all covered by management fees. And if there is no performance fee or fewer performance fee, then people get paid less bonus. But obviously, this is part of the industry. Everybody understands that. So there is not a big moaning around, oh, why don't I get a big bonus in 2020. And I think the answer is quite a simple one. And that's why we can manage our costs well.

Managing well, I think, a nice way to end this session. So thank you very much for joining us, Philip. We are pretty much on time. And I hope we can welcome you next in person again. Thank you.

Yes. No, absolutely. And whenever, as you all investors, thank you for listening in, and we are very approachable if there are any follow-up questions. And so either approach Benjamin or us directly and we will definitely take time to answer your question. Thank you very much.

Thank you very much.