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

Ladies and gentlemen, welcome to the Partners Group AuM announcement conference call and live webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Partners Group management. Please go ahead.

Welcome to the first half of 2020 assets under management announcement call. My name is Dave Layton. I'm a Co-CEO of the firm based in the United States. Joining me on this call today will be my partner and Co-CEO, Andre Frei, who's based in Switzerland; our Head of Corporate Development, Philip Sauer; as well as Alex Soppera, a member of our Corporate Development and Shareholder Relations team. Additionally, our new CFO, Hans Ploos, recently joined us. He's in the middle of his onboarding and immersion process, but his is the face that I would expect over time to become familiar to many of you. He was most recently the CFO of the Adecco Group. He fits the Partners Group mold, I think, very well. He's blending very nicely into our Executive Committee. He'll be probably a little bit more quiet today given the newness in the role. But you can expect to see and hear more from him on future calls. Hans, actually, given that you're in the room here, maybe you want to briefly introduce yourself just a little bit.

Thanks, Dave. I'm very pleased to be here, and I'm very excited to be part of the Partners Group and continue this great journey of driving profitable growth going forward. As Dave said, I started about 10 days ago. So I'm still new. One thing which really got confirmed, great groups have great people. In the interview process, I met great people and the first few weeks have been very energizing to work with a great team. As David said, I will be silent today, but I hope to meet you going forward.

Thanks, Hans. As a reminder, on this call, we will provide a business update focused on investments, clients and in particular, developments related to our assets under management. We will not be discussing detailed half year financials. Those will be presented on September 8. On Page 2, in terms of agenda, I'll start by providing you all with an update on the investment side of the business. Philip will cover assets under management developments in the first half of the year, and Andre will provide you with an assets under management outlook for the full year. And with this, I'd like to turn to Page 3. The first half of 2020 has obviously been complex, and it's been a taxing period for investors globally. But it's in periods of time like this that true differentiation can be demonstrated. We're in the business of delivering relative outperformance. And the way that we were able to mobilize hundreds of internal professionals and external directors to allocate resources and safeguard the assets, the assets in which we've been entrusted, I do think has the potential to accrue to our benefit in the future. This slide speaks to the many efforts that have been made. Business continuity and health and safety of our employees and portfolio companies has obviously been a key priority. We've worked intensively with each of our companies to provide support and direction in navigating the evolving pandemic. In the earlier phases of the situation, the advantages of our global platform, I think, really did come to the forefront. The visibility that we gained managing through the early days of this pandemic within our portfolio in Asia has really given us a lot of insights into how to manage things in other geographies. Throughout this crisis, we have ensured that our management teams are providing adequate leadership, protecting their people, maintaining liquidity and working with local authorities as necessary. It's been all hands on deck from our side. We've climbed into the trenches with our companies. And we have an ownership approach and a culture that seeks to genuinely align interests, and we've shown that we're willing to do that. We've also been sharing best practices across our portfolio companies. And as a multi-asset investor in private markets, we've also had informed perspectives to share on key topics during this period, such as debt capital markets and real estate on rent negotiations. Now today, things look very different. Our discussions in our global investment committee are much more centered around returning to business as normal where possible as well as making new investment decisions. We want to support our portfolio companies' employees in getting back to work in their regular work environments as soon as feasible. Of course, all while strictly adhering to local regulations and with their health and safety as a continued priority. On Page 4, as we've mentioned in the past, I do think we've been highly selective historically, and our investment approach has been a real positive here. And we have a portfolio that has been built to last. We're a long-term investor, and we do not anticipate any material or lasting negative impact from -- with regards to relative performance of our portfolio as a result of this crisis. On Page 5, we also provide you with another asset class by asset class performance update. From a high level, we have no material changes to the overarching messages about the portfolio versus those we communicated in early June. Things are holding up very nicely versus their benchmarks. And for investors and asset managers today, I know that investment performance tail risk can be a topic during times like these. But despite the volatility caused by COVID-19, we can confidently confirm that the long-term investment theses behind the vast majority of our portfolio assets are just as compelling today as they have been in months and years past. Maybe for just a little bit of commentary on our various asset classes. For private equity, overall, the firm's overweight on acquiring high-quality, resilient companies within the health care, information technology, business services sectors, I think, has provided some relative stability in this environment. And within the lead and joint lead portfolio, in particular, which is a big part of what we do today, as you all are aware, we're owners, not just interested and engaged shareholders. And it's with that mindset, the mindset of genuine owners that our professionals, our operating directors and our industry specialists have rolled up their sleeves and created a positive impact. We've been very active in managing liquidity. As is common in an economic slowdown, we've had some companies that have required additional financing or additional equity. The overall additional capital required to manage these assets -- this crisis is currently expected to be very modest as compared to the firm's asset base within this business department. Now with regards to private debt, while our debt portfolio has also experienced some COVID-19-related challenges in individual assets, its overall focus on noncyclical larger cap credits, combined with its negligible energy exposure and substantial underweight to the more challenged leisure, retail and transportation sectors, does look to be paying off. Partners Group CLOs have continued to pay distributions and have experienced no over collateralization test breaches. However, I'm sure that a limited number of credits currently on our watch list will require more substantial restructurings probably in line with the broader market, hopefully, a little better than the market. But overall, I feel like our debt business is in relatively good shape. Now with regards to private real estate, our private real estate portfolio has significantly outperformed its public market benchmarks. And I think a big part of this is due to our focus on office and industrial asset classes and relatively limited exposures to retail, hospitality, student housing and related categories. We've had very limited short-term debt maturities combined with pretty reasonable rent collection levels through this period of time. Global diversification within the portfolio gives us quite limited exposure to any 1 city or any 1 sector. And overall, with $15 billion in assets under management real estate today, I think Partners Group is not experiencing any significant challenges in its real estate portfolio. Now with regards to private infrastructure, I think the private infrastructure portfolio has really significantly outperformed its public benchmarks and is expected to continue to perform relatively well as compared to other private infrastructure portfolios, mainly due to the fact that we have minimal exposure to commodity prices, GDP or traffic volumes. We have an overweight in long-term take-or-pay arrangements with creditworthy counterparties, a broad diversification across subsectors and a concentration on essential services, such as renewable power generation, gas transportation and data transmission. I think Partners Group's $13 billion assets under management private infrastructure platform has, to date, remain resilient in the face of this market dislocation, and I think this is an asset class to watch at Partners Group. Now on Page 6. Due to the pickup in market volatility and the temporary distortion caused by shutdowns related to COVID-19 around the world, we've observed many investors adopting a more cautious approach, in particular, in the second quarter of 2020. And so did we. In the industry, we've seen some transactions closed during the COVID-19 period. However, from our vantage point, we see that a good portion of the investment volume has been signed or materially advanced before the crisis started and at quite fair and full prices. We did not see a lot of value being unlocked or extracted from a transactional perspective over the past few months, particularly within private equity. We have experienced a lot of discussions, but relatively few handshakes due to higher bid-ask spreads as compared to prior periods. But we have put some capital to work in assets that we're very excited about. On Page 7, you'll see that we invested $4.3 billion in the first half of this year across all private markets asset classes, and that compares to $6.9 billion in the first half of 2019. Part of this reduction in volume was driven by the market. The market was slower, as indicated on the prior page, and part was probably attributable to resource allocations. We allocated a meaningful part of our resources to existing portfolio positions to maintain and drive performance. We've also been very active in add-on acquisitions to existing platforms, which can help really juice performance at a time like this, but it doesn't necessarily result in exceptionally large volumes. In the first half of 2020, in terms of strategy, we invested the majority of capital, 73% or about $3 billion in direct transactions, while the remaining 27% or about $1 billion went into portfolio assets, such as secondaries and primaries. Secondaries is obviously very topical at the moment. We're glad to have that capability. The snapback in public market valuations caused a moving goalpost phenomenon over the past number of weeks. Buyers and sellers have not been coming together as often as we would have liked to have seen in every instance. But I expect for that to settle down. In terms of regions, we've invested about 2/3 or about $2.7 billion in North America. The U.S. remained an attractive region for us from an investment perspective. On the next slide, you'll see that our underlying portfolio distributions amounted to $5.7 billion for the first 6 months of the year. Now this may seem rather high considering the market and global circumstances, and maybe this warrants some explanation, in particular, to avoid some wrong conclusions around the impact on our performance fee. In private markets, in order to sell an asset, you go through a several phased process. Initially, we launched a process to make certain information available to prospective buyers. We then whittle down the list of prospective buyers based on indications of value and the seriousness that those buyers present. We then provide access to detailed due diligence requests. And we began negotiating transaction documents with a very limited number of very serious, highly interested prospects. And ultimately, we sign a binding purchase and sale agreement with the buyer that presents the most compelling offer. That's generally the phase at which transactions in our industry are made public and announced. The closing of those binding contracts typically occur 2 to 6 months after the binding agreements are signed. There is some transactional tail risk associated with the signed contract. But in almost all cases, the signed agreement leads to a closed transaction. Now performance fees are recorded when the likelihood to receive those revenues from a sale is very high, call it 90% plus probability. And that high probability receipt of revenues occurs when a binding purchase agreement is signed. One prominent example of a sale from this prior period was our stake in Action. Now in late last year, we signed the sale agreement and accordingly, booked the performance fees in the 2019 statement. And in the first half of 2020, the transaction was closed and the distributions were recognized in the underlying portfolio realizations. We want to be clear that while this has been a reasonably solid period for putting cash in our investors' pockets, even higher than the same period last year, which we've heard from many of our investors, they've appreciated during this time. We have postponed most of the new divestment discussions. We're not for sellers. These are good assets, and we don't mind waiting for a more optimal period of time to sell. For example, when debt capital markets get their feet more fully under them. Accordingly, we have not had a lot of new divestment announced since the onset of COVID-19. And that's why we provided guidance on our performance fee for the first half of the year in the range of 0% to 5% of total revenues. We did that in an interim update press release at the beginning of June, and we provided that update for a reason. I know that this is not a financials call, and so let's park it there and let us come back to you with more details in September when we announce our semiannual financials. But hopefully, this already gives you a better context for the topic of performance fees. We saw this data, and I didn't want any of you to see the cash inflows and make a nuanced or uninformed straight-line link to performance fee levels. Now looking ahead, given that this exit pipeline dynamic that I just described, I do think that as we head into H2, we do so with a somewhat lower outlook for portfolio realizations. Dialogues are picking up. I think transactions do seem to be coming together reasonably well. Just over these last couple of weeks, in particular, I would expect some really good assets to trade. This is not bottom fishing as many people think at the moment, but the assets that are likely to trade in the near term have been very resilient flight-to-quality companies that have held up very well despite the environment. And for these quality assets, I also expect that valuations have not materially changed due to COVID-19. Maybe you might see a little bit of a discount, but not materially lower than where those assets might have traded in the second half of last year, for example. There are signs of momentum returning. But for H2, it's clearly too early to call. So let us please move to Slide 9. Now researching, following and monitoring investment themes for years and years in advance of a potential transaction is a process that is, I think, becoming deeply ingrained in the culture of our firm. And that's especially important today. Transaction time lines are compressing. There's oftentimes only 2 months between the launching of a formal sale process and the signing of that investment, it used to be 5 months. And I'm telling you that 6 or 8 weeks is not enough time to do the type of rigorous due diligence work that's needed if you're starting from scratch. And so we get a head start. We pick themes that we feel could be structurally relevant for the next decade. We find the most attractive investments that stand to benefit from those structural trends, and we get out ahead of those assets. It's a resource-intensive proposition. We have to spend a great deal of speculative resources on assets that may not ever trade, but it's a market dynamic that actually suits a large platform like ours reasonably well. We have the resources to spend. We're directing our teams and allocating resources in a way that I think makes sense. Now the pandemic has shifted the way we look at certain segments of our pipeline. We see both headwinds and tailwinds. And in some cases, this pandemic will accelerate the transformation that had already started and will create opportunities for growth in the near- and longer-term future. Some of these effects are first order effects such as increased Internet traffic, cashless payments and online education. But we're also interested in second and third degree effects. For example, our industrials team right now is really pitching us on increased demand for modular flexible production systems. On Page 10, we point out that this evolving world has the potential to amplify and accelerate trends within our portfolio that we had expected to play out over much longer periods of time. While we have experienced temporary challenges with a handful of assets, as has everyone, I think our focus on subsectors such as outsourced contract manufacturing, software, product engineering, digital outsourcing solutions, renewable energy, last-mile logistics and sectors like this, we think that has the potential to really work out for us over the long run. We've been thoughtful. We've been very particular about where we invest. We bought assets that we wanted to own as opposed to what happened to be for sale at the moment. Time will tell, but in an increasingly disrupted and commoditized world, we feel like we're well positioned in many categories that are increasing in relevance as opposed to decreasing. And on Page 11, we continue to drive forward looking for new investments in these areas with strong secular growth, in particular, where there are meaningful opportunities to consolidate the market. We're digging into subsectors in these industries. We're looking for gems, looking for consolidation platforms, looking for opportunities to create category winners where perhaps one doesn't naturally exist today. Here in the shaded area of this slide, you'll see a few topics that are of particular area -- or particular interest to our research team and where they're really pushing our investment teams towards. In an industry full of lone wolves and craftsmen, I think we're well on our way within our investment departments to creating an institutionalized origination and pipeline management process that can scale with the future needs of our industry. And that's not just true within corporate assets, but also with regards to real assets, as shown on Page 12. We're going to continue the course with those assets, and we're going to continue to build our forward-looking pipelines as we previously outlined. And with that, Philip, I'll pass on to you. Philip is going to walk us through commentary for our assets under management developments for this period.

Many thanks, Dave, and also a warm welcome from my side. With that, I would like to move on the next slide. In the first half of the year, we continued to see strong client demand across all private market asset classes. Despite COVID-19, we received commitments amounting to $8.3 billion. This compares to $8.4 billion in H1 2019. Given that the fundraising cycle in private markets is longer than in public markets, much of the conversion of client demand was based on our dialogue with clients we had initiated 6 to 12 months ago. All business lines contributed to the overall stability of the business. In absolute terms, private equity, our currently largest asset class, contributed most. In relative terms, private infrastructure, our currently smallest asset class, grew the most. While our fundraising was spread over 2 dozens of programs and numerous mandates across all asset classes, it really has been the firm's next-generation closed ended programs that have contributed most over the past 6 months. As you can see, traditional programs represented 55% of total inflows. The chart on the bottom left also shows that we raised, despite market volatility and uncertainty in the first half, 25% of our total inflows from evergreen programs. Clients in these programs are predominantly high-net-worth individuals and smaller institutional investors who are able to subscribe or redeem on a monthly or quarterly basis. As of June 30, these vehicles represented 24% of our total AuM. On the chart at the top left, I would like to give you some more color on our fundraising in each asset class. Now private equity represented 35% of total inflows, amounting to $3 billion, which stem mainly from traditional close-ended programs, evergreen programs and our highly tailored mandates. We continue to expect that all 3 areas also contribute to fundraising beyond 2020. In private debt, it represented 27% of all commitments, equaling more than $2 billion. Our private debt business continues to benefit from lower yields of traditional fixed income. In particular, the floating base rate and the shorter time to ramp up a debt portfolio is seen as highly attractive by clients. In the first half, 2 main strategies contributed to our fundraising success in private debt. First, it was our CLO business. We were able to raise a couple of CLOs in the first half, which contributed more than $1 billion in new assets raised. Our entire CLO business represents today 5% of total AuM and is expected to grow strongly in the years to come. In the first half of this year, we were one of the most active CLO issuers in the market. The second strategy of private debt is our direct lending business. It contributed slightly less than $1 billion mainly stemming from mandates and several senior loan programs but also included multi-asset class credits. In private real estate, this asset class represented 12% of total new commitments amounting to approximately $1 billion, and they were equally split between programs and mandates. In private real estate, we mainly raised assets for global real estate opportunities. Now to infrastructure. Infrastructure represented 26% of all new commitments amounting to over $2 billion, and making it the strongest growing asset class on a relative basis. In infrastructure, infrastructure is in the midst of the fundraising of its next-generation direct offering, which contributed substantially in the first half of the year, and this program will continue to make a meaningful contribution to fundraising over the next 12 months, too. With that, I would like to move to the next slide. Now as I talked extensively about the $8.3 billion in new commitments, I would like to draw your attention to the so-called tail downs and redemptions and foreign exchange and other effects. On tail downs and redemptions, we have actually a good visibility. This is why we typically provide you with guidance on those 2 factors, except that we had to temporarily withhold from confirming the guidance in March due to the situation around COVID. We do not have visibility on factors such as foreign exchange and others, though, and as a result, do also not provide guidance. So with that, I would like to give you more content on our tail downs. They amounted to $2.9 billion in the first half. And as you know, the majority of our programs have a long duration. However, they will also mature at one day. As such, when they mature, our AuM declines. The decrease in AuM is typically based on a mathematical formula, which we pre-agree with the client at the time of their contract. So we will provide you with guidance about the magnitude of tail downs on an annual basis. Now let's talk about redemptions. We have over $24 billion AuM in evergreen programs, which provide some form of liquidity, typically quarterly or monthly, in exceptional cases, even daily. In these open-ended programs, we can have redemptions. In the first half of the year, we have seen $1.1 billion outflows. However, these programs have also seen $2.1 billion inflows, making them a net contributor to growth. Throughout the COVID-19 outbreak, we have been proactively communicating with investors in our evergreen programs on portfolio development and individual asset performance. We believe this transparency led to more modest redemptions in the first half of the year given the general market circumstances. Now let us quickly talk about other effects. We have seen a negative contribution of $1.5 billion that stemmed mainly from performance-related effects that link their AuM to their NAV development. So with that, I would like to move to my last slide. We provide you with an overview of assets raised by asset class and the general AuM composition. As you can see, asset classes such as private equity, private debt, private real estate all raised significant amount of capital. But tail downs and redemptions in combination with a negative AuM -- NAV development of a few investment programs in these asset classes resulted in a more stable AuM development overall. Private infrastructure, as discussed, is the only exception. This asset class showed the strongest net growth, and we continue to expect private infrastructure to be the outperformer in net AuM growth also for the full year 2020. With that, I would like to conclude my presentation and summarize that we are extremely satisfied with our fundraising efforts in H1. With the positive feedback we have received from our clients, how we have engaged with them throughout the semester and how the performance of their portfolio is holding up, we look confidently ahead of further building out our platform across all asset classes. Thank you. With that, I would like to hand over to Andre.

Thank you, Philip. Please let's move to Slide 18. Okay. So I would like to conclude this presentation by giving you an update on hiring and fundraising also in relation to the defined contribution pension systems in the United States. And last but not least, I would like to provide our full year 2020 fundraising guidance. Well, we have all seen our strong team growth across the entire platform in 2019. In 2020, we now spend a considerable amount of time on onboarding those employees. We have slowed our hiring efforts, largely in line with the development of assets under management. You see that our assets under management grew by 2% in the first half and the number of employees grew by 3%. Today, we count over 1,500 employees. And we had highlighted earlier that Partners Group is not only a long-term investor, but also a long-term employer. We have communicated, and that still holds true, that Partners Group has not left our employees because of COVID-19. Now with much less traveling. I see 2020 actually as a year where we have the opportunity to consolidate our platform. For example, we are looking to streamline processes and increase efficiency, and I think that's a very healthy like exercise. And in that sense, while 2020 is a year where we might not grow as quickly as, for example, in 2019, we will certainly do our very best to build a better firm. Please allow me to say a few words about private markets and defined contribution or DC pension systems. If you look back at private markets, we saw that our industry started to grow substantially when institutional investors globally started to invest in private markets. So originally, American industry became a global industry in a first step. A second step was that also individuals started to invest like institutional investors, and we have talked about it in the past. Partners Group benefited from the second step because we do not only offer customized mandate solutions as well as the traditional private market funds, but we have been a global leader in actually managing private market programs with liquidity features since 2009. So we have a 19 years track record. As of 2020, as Philip said, we managed around $24 billion of assets under management in such liquid and semi-liquid programs. And I believe the next step is that private markets is now about to further broaden its global client base with regards to the defined contribution pension system, in particular, in the United States. So far, private markets investments were still largely incomparable with defined contribution pension systems, which need underlying offerings to provide daily liquidity and pricing as well as highly standardized purchase and redemption procedures. Now while many U.S. DC investors would have liked to invest in private markets to diversify their portfolios and strive for higher returns, they were reluctant to invest in practice. Partners Group, therefore, created an initiative to seek formal guidance that would provide clarity to U.S. pension plans seeking to add private equity and other private markets investments to their DC plans. And this initiative was really supported by a broad coalition of investor-oriented groups, including the CIEBA, which is an organization of more than 100 leading U.S. pension plan chief investment officers. In June 2020, we reached a milestone in our long-term U.S. DC efforts when the United States Department of Labor released an information letter, which actually clarified that DC pension plan fiduciaries can incorporate certain private market strategies into diversified investment options such as target-based funds. We really believe that this new guidance represents a major step. Actually, it modernizes DC plans, and it provides participants with a potentially improved retirement outcome. It also opens the door to DC pension systems becoming a substantial future investor in the growing proportion of all the American businesses that prefer to not become publicly listed. So this is an opportunity for private market managers that are part of the structural growth market. Let me be honest, however, that we believe there will be a limited short-term impact on fundraising also for Partners Group. Like we have experienced in our DC, in our other DC markets like U.K. and Australia, we know that it will take a substantial education effort, and it will take time. So I see significant potential for Partners Group. However, that potential will only be realized over the years to come. With this, I'd like to move on to the next slide, which is about the AuM outlook 2020. As Philip just said, we have chosen to withhold from confirming our guidance on full year expected gross client demand of 17th March 2020 due to the market uncertainty and the general disruption caused by COVID-19. In June, we decided to guide for a slight development of assets under management in the first half of the year. We believe we now have more visibility on expected client demand across private market asset classes. If you combine our outlook for asset rating and investment deployment, which Dave talked about, we today anticipate a gross client demand of around $12 billion to $15 billion for the full year 2020. Now while many scenarios are still possible like the potential second wave with tighter lockdown measures, but also potentially a quicker recovery of the economy, we are confident that this year will be a solid fundraising year considering all circumstances. And COVID-19, of course, is the key variable that drives this $3 billion range of gross client demand. Fundraising in the next 6 to 12 months will include all asset classes. It will span across customized mandates. It will include evergreen fund solutions as well as traditional close-ended programs. Taildowns and redemptions are estimated to be negatively affecting assets under management by about $7.5 billion to $9 billion. And these factors, as Philip said, are visible. It will not fluctuates much. And as in previous years, we do not provide guidance on other effects such as FX rates. So you see we are looking ahead confidently. And actually, we also look forward to speaking to you in person, maybe in September, when we present our H1 financials. And with this, I already would like to conclude the first half of this call, and I would like to open up for questions.

[Operator Instructions] The first question comes from Kambo Gurjit from JPMorgan.

It's Gurjit Kambo here, JPMorgan. Just a couple of questions. Firstly, in terms of the full year expectations for client demand of $12 billion to $15 billion, clearly, that's a bit lower than what you said in January. I'm just trying to get a sense of -- is that sort of slightly lower number reflecting the difficulties, I guess, in deploying assets in this environment over the next, let's say, 6 months or sort of more genuine sort of reduction in demand from clients? That's sort of the first question. And then secondly, just in terms of sort of geographical exposure. Given Asia's probably 3 months ahead of Europe and U.S. in terms of COVID-19, are you seeing more opportunities to either raise or invest in Asia? So those are the 2 questions.

Okay. So maybe I'll take the first part, Dave, and you take the second one. So like the $12 billion to $15 billion is lower than the $15 billion to $20 million that we had -- $15 billion to $19 billion, sorry, that we had communicated at the beginning of '20. And the largest driver or variable really is COVID-19, right? So in private markets, this is a long-term sales cycle. You talk to clients for, let's say, 6 to 12 months. It does take 3 to 9 months to really convert the ticket. And COVID-19 just basically prolongs that cycle. So it's not like -- it's not like a changing demand in private markets. We see the long-term potential unaffected. But it's true that in the short term, COVID-19 makes it more difficult to raise assets, right? So kind of like you can still talk to clients, but it's more difficult to see prospects. And it's just a fact that during COVID-19, let's say, or Q2, investors, not all, but many decide to pause. Maybe they're slightly hesitant to underwrite a 10 years investment program. But we see that this demand is not lost. It's rather postponed to 2020 like second half or maybe 2021. In that sense, yes, we had to reduce our guidance because of COVID largely, to some extent, also to a slower investment pace, but the key driver was COVID-19. Thanks. Dave?

And with regards to Asia, I would not say that because Asia was kind of first into the crisis and showed the earliest recovery that we have a structural change in either the relative value that we're finding in those geographies from an investment perspective or a structural increase in client demand from those regions. It's above and beyond what we had anticipated or what we've seen in prior quarters. I guess anecdotally, we do see quite a bit of activity there, particularly on the client side. And the investment side has actually been quite active as well with regards to some of the new pipeline developments. But I don't think it's anything out of the ordinary. I don't think it's driven by COVID-19.

The next question comes from Young-Sim Song from awp Finanznachrichten.

I would like to know, is it also possible to give a guidance on the amount of investments for the full year? Will you be able to catch up in the second half here of the year? Or will the investments be definitely lower than last year?

Yes, we do have certain metrics that we give guidance on and other metrics that we don't give guidance on. We do not give guidance on forward-looking views on investment volumes.

The next question comes from Giblat Arnaud from Exane.

If I could -- it's Arnaud Giblat here from Exane. If I could follow-up on Gurjit's question. You clearly expressed well what was going on the demand side. I'm wondering what's happening on the supply side. I mean previously, you used to say about fundraising that your limiting factor was rather the ability to deploy the capital. With COVID-19 and ability to source deal, is that today more of a constraint as well or not? And my second question is, I know this is not a financials update but -- and you don't disclose credit performance fees. But if I think about vintages and how they're positioned versus their high watermarks, which vintages would be above the high watermark, i.e., has the dip in performance affected some entitlement performance fees? Where I'm trying to get to is some reassurance to the fact that the outperformance fees we're going to see in 2020 is just a timing issue. It's just a matter of crystallizing those assets and the performance fees will resume as normal when exits do resume.

Maybe I can take like the first part of the question. Like it's right that for many years, like the investment capacity has been a key constraint for the growth of Partners Group. And I believe it has been a healthy constraint, right? It forced us to really diversify our investments across many vintages across many calendar years to invest prudently over time and this is going to continue, right? Also in the year 2020 and in 2021, we will invest over time. We'll not try to time the market, but we're probably a bit more cautious than we have been, even more cautious than we have been in, let's say, 2019. Now the -- I believe we're approaching a balance between like client demand and investment capacity. So kind of they're now -- they closer linked, of course, right? But at least as a company, we have a good balance between investments and clients. Now the COVID-19 is slowing us down. And I think I'm okay to accept that, right? Why would we force a client or push a client to invest more quickly if the decision can be made a quarter later? It does not matter. What I find encouraging is that basically investors are not negatively or reducing strategic allocations, strategic long-term allocations to private markets. They might pause and maybe a decision will be made later. But I do not see that investors really change the strategic long-term asset allocation to private markets. In that sense, COVID-19 is like a hit in 2020. But as COVID will go away, I believe this short-term break on asset rating will also go away.

With that, I would like to maybe take over some of the performance fee-related question, although we want to talk about that in September. But as Andre said, this is a timing issue. Now you mentioned programs with a high watermark. Partners Group run 300 different programs. We have high watermarks, we have European waterfalls, American waterfalls. We have deal-by-deal carriers. We have relative outperformance of those, like mandates. So the numerous amount of different performance fee calculations is now quite tricky to say whether now a revaluation of the market triggers immediately high watermark programs. But that bit depends on the outlook of the second half on the investment and divestment side, right? And that's why we need to look into H2 and see how the market evolves in order to give you guidance on that. And that is -- that's why we would suggest even if the market is more choppy, that means as long as we bring our assets through that crisis, the performance fees which are attached to these individual assets. They will actually bring these performance fees into 2021 or 2022. So they are not lost. They are just postponed.

The next question comes from Jens Ehrenberg from Citigroup.

Just a quick question on capital deployment. And I appreciate you don't provide guidance, which is obviously fine. I'm just looking at the numbers, so I think you've invested about $4.3 billion in the first half. And I think $3.6 billion of that were in the first 4 months, which were very much skewed to the first 2 months. If I now look at the May and June capital deployment of about $700 million, how would you say that compares to what you've seen in March and April? Is there a little bit of a pickup? Or is it still very subdued sentiment that's comparable to the 2 months before?

Yes. It was a little bit more subdued. I say, if we look more realtime at what we're seeing today, I do see some promising signs. I spent this past weekend on new acquisition negotiations as opposed to the past number of weekends on portfolio matters, right? Just to give you a sense, like it is starting to pick up more real time. But I would say that the lull in activity due to COVID-19, I mean, was certainly felt. And you do see our cost -- our investment volumes concentrated in the first couple of months of that year for that reason. But it does feel like buyers and sellers are coming together in a little bit easier fashion here over the last couple of weeks, in particular.

The next question comes from Lam Hubert from Bank of America.

I just got 3 questions. Firstly, on your underlying portfolio, can you discuss the financial strength of the companies there? Any big changes and any problematic investments that we should be aware of? The second question is on investments. You reported $4.3 billion. How much of that relates to rescue financing of the existing portfolio? And lastly, on your -- the DC opportunity in the U.S., it may be too early to say, but in terms of investment products there, what do you expect in terms of fee margins for those type of products? Are they -- should it be relatively in line with your -- with the average today? Or it would be lower?

So with regards to the -- I'll take the first 2 questions. With regards to the underlying portfolio, no major negative developments to report on the underlying portfolio. I think we continue to work very hard, but be -- but we're quite pleased with the relative performance that we've seen there. And those companies are performing in line with the ramp-up plans that we've established during the heat of the crisis, a little bit ahead of plan actually. With regards to the new investment levels, a relatively modest amount was related -- of that $4.3 billion was related to new capital injections, a couple of hundred million out of that $4.3 billion related to capital injections.

And Hubert, maybe quickly to the fee margin, no different fee margin. Just to quick -- to summarize quickly.

The next question comes from Máté Nemes from UBS.

I have a couple of questions. Firstly, a follow-up on the DC pension plans and deal guidance. I'm just wondering, based on your discussions with the plant managers, can you share your view on when this decision could actually translate into plant managers, larger plant managers incorporating your solutions or generally private equity into investment options? Is this a matter of quarters, months, years? Anything you can share on that? And secondly, on hiring, increased now number of employees by 3%. There seems to be a market slowdown versus the previous years. I think Andre mentioned that this is perhaps time for consolidation of platform. But I'm just wondering what we should expect in terms of hiring in the second half and maybe next year, also being mindful of the EBIT margin target you're guiding the business on? And thirdly, the $3 billion shift downward of the gross client demand range for the full year. Is there a single or a few investment programs or perhaps asset class that really accounts for the bulk of this shift? Or this is really across all asset classes.

Okay. So 3 questions. I start and my colleagues will chime in. So the defined contribution effort is led by the Department of Labor. I believe it will translate into demand for such offerings rather over years than months or quarters. And like there has to be -- investors need to become familiar with like the asset class and the offerings. This will involve a lot of education, and we're really spearheading that effort. So we're talking to hundreds of plan sponsors and DC consultants, and that will take time. I believe that also will require a bit of a marketplace, right? There has to be a number of offerings in the market. Investors have to become familiar with these offerings, and then it will kick in. And I believe it's not -- this defined contribution effort is not too dissimilar from a Partners Group perspective now to how we saw asset rating in liquid structures back in 2001, right? 19 years ago, we started. Initially, this was a real investment, creating this structure, educating the investor base. And after a number of years, there was some real traction. And today, it's like the $24 billion of asset under the management. And I see the same happening for the defined contribution market for Partners Group. It's going to be slow initially. But over, let's say, the next decade, the years to come, we expect this to have a significant potential for Partners Group. In terms of hiring, yes, we had slowed down in the first half. There will also be people joining Partners Group in the second half, but growth will be much lower than we have seen in 2019. So it's a conscious decision, right? We say we want to onboard people. We want to have an opportunity to meet candidates in person ideally. So we are constantly holding back on hiring people that we have not even seen where we have not been able to engage in a true profound conversation and verify like the cultural match also with Partners Group. So there's going to be slowdown. And this slowdown will also have a positive impact, Philip, right, on the margin?

Exactly. The way how we then budget is we try to safeguard our 60% EBIT margin on of course, performance fee and management fee, which serves as a build-out of our platform and hiring.

I think the last question is the $3 billion shift. So the $3 billion shift is really in relation to COVID. It's not asset class-specific or product-specific. I believe it's just a general phenomenon of us seeing fewer clients, fewer prospects. So this is a timing element, and it's not driven by 1 asset class or a specific offering.

The next question comes from Chris Turner from Berenberg.

It's Chris Turner from Berenberg. Three questions, if I may. Firstly, can you give us some color on where we are with debt markets. We read a lot about ratings migration causing pressure for CLOs, some of the pressures in leverage loan markets. And given how -- I guess that plays quite an important role with your equity business. I think 28% of your companies are more than 6x levered from memory. Can you talk about how that impacts that business, particularly, I guess in respect of deploying capital and maybe facilitating exits to private equity groups? Related to that, I guess if the exit environment is a bit more difficult at the moment, that means over the next 6, 12 months, you might be returning -- sorry, less capital to your fund investors -- so you'll be returning less capital to our fund investors. Do you see that slowdown in the return of capital to investors having indications for their ability to subscribe to more funds? And then finally, your previous guidance, I believe, is that the performance fees will be slightly weighted to the second half this year. Is that guidance still intact?

Thanks, Chris. So with regard to where we are in debt markets, I think we're at the relatively -- probably the middle innings of a recovery from the lows that we saw in kind of the heat of the crisis here. We see a lot of the backlogs being lightened from the bank's balance sheets. And we see new transactions starting to be underwritten again. We have been in process negotiating a few new transactions, and have actually been pretty pleasantly surprised with the number of lenders that are risk on again after a period of being risk off. And so I think we're in the middle innings of that recovery. With regards to the exit environment and could the reduction in return on capital lead to fewer funds raised, I don't see a link really between those 2 areas. The reality is maybe in decades past, investors were very focused on a return of capital. And that was a big metric that fund managers were evaluated based on. But the reality is today, people have more cash than they know what to do with, by and large. And the focus of institutional investors is on compounding value over the long run. And we have much less -- I mean, if you compare it to a decade past, much less dialogue around the return of capital versus overall compounding of value in terms of the dialogue with our investors and then managing their investment commitments. Andre, I'm curious if you see it any differently?

No, Dave, I see it the same way, right? So clients have long-term asset allocation. They want to build up exposure in private markets. So like the distributions are not going to be a limiting factor to allocation. It is true, Chris, that like in the early phases, Dave, you said like investors look at realizations as a proof of strategy, but I believe we have proven our strategies in all of our asset class efficiently. So if there's a slowdown in realization, that is not going to negatively affect like the commitment for subscriptions that we expect from clients. Philip?

Chris, yes, with regards to performance fee, look, this call is not about performance fee. I think we have our statements out there, which we -- like we have communicated, let us come back to you on -- with our H1 financials and be specific about this. But so far, you know what the statements of us are.

The next question comes from Thomas Beevers from Stockviews.

Two questions from me. Firstly, on the $5.7 billion realization. So I just wondered if you could give us a sense for what proportion of those were signed in 2019 and what element were signed in the half? And then secondly, just a little bit more color on the real estate outperformance there. Was that primarily due to the sectors that you're operating in? I think you mentioned a couple on the call there or is that also due to your geographical mix?

Yes. So on the $5.7 billion of realizations, we do not provide a breakdown or a split of when exactly those transactions were signed. That's not something that we've provided historically. And with regards to real estate, I think a big part of it relates to the sectors in which we have exposure. So we have a big focus on office and industrial assets and pretty limited exposure to retail hospitality and some of the other hard-hit sectors. And I think that drives a very big part of the outperformance there. I mean just to give you a sense, the difference in rent collections for the majority of our portfolio in office and industrial is in the 90s versus a lot of retail-related, hospitality-related in 50s and 60s and 70s. And so I think a big part of the outperformance there has been sector exposure, not necessarily geographical exposure.

The next question comes from Pascal Boll from MainFirst.

Yes. I was reading some comments from your company after the financial crisis in 2008. There, you were talking about great opportunities of distressed sellers and which you were able to translate into good investment opportunities. How does that compare to today's environment? And if there -- if you see clear differences here, what are the reasons for these differences?

Well, actually, this is a very good question. Like 2010, so like 1 year or 2 after the global financial crisis, you see like markets stabilize. You see there's an equilibrium kind of like that materializes. And then transactions start to happen at the right price. And if there is distressed sellers, for example, in the secondary market, indeed, there's substantial opportunity. Now actually, COVID is still on. Let's not forget there was COVID and there is still COVID, and it's least too early for like distressed sellers really starting to transact on the portfolios or distressed sellers generating liquidity. There have been one or the other secondary transaction. But these are then truly distressed sellers, which is like a very small group of investors that need to dispose of portfolios or assets during the worst of all time. In other words, I believe there will be opportunities. I really believe there will be opportunities, but I believe you need to give it more than a month or a quarter. It's probably only going to happen like second half or 2021. So similar to global financial crisis, it will take a year or so, let's say, 0.5 year to around 1.5 years before secondary testing. Dave, do you see it the same way?

Yes. I think I actually wrote that analysis that you're referencing, Pascal, back in the 2009 time period analyzing the types of transactions that we're seeing getting done in that period of time. And this is a different crisis than that crisis. I just want to be clear. I mean the market -- public market snapped back very quickly. And you had a very different sentiment amongst investors today versus those that existed for a long period of time after the last financial crisis. And so my expectation is that the opportunities within private markets over -- in the quarters that follow this crisis will be fundamentally different than those that came after the last financial crisis. It will probably follow a similar pattern, but I think you're going to see many more flight to quality assets trading in the next couple of quarters and many fewer bottom fisher type of assets that are trading in the next couple of quarters, and that is a contrast that I would expect.

[Operator Instructions] Gentlemen, so far, there are no more questions.

Okay. Well, with that, we'd like to thank everyone for your participation on the call today. It's always a pleasure to be able to engage with you all, and we look forward to connecting on our next call on September 8. Thank you very much.

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