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

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

Thank you, and welcome to Partners Group's First Half 2020 Financial Results Call. My name is Dave Layton. I'm a Co-CEO of the firm based in the United States. I'll be joined on this call by my partner and Co-CEO, Andre Frei; my partner and our Chief Financial Officer, Hans Ploos; additionally, Philip Sauer, our Head of Corporate Development; and Alex Soppera, senior member of the Corporate Development team, will be present on this call, for the Q&A portion in particular. As we open up the presentation on Page 2, maybe I'll start with a few high-level thoughts. For those of you that follow us, I have hoped that several messages about our firm has come across during this period. Number one is that we have a portfolio that we're proud of. It's a strong composition of assets. It's been thoughtfully constructed, and we have been selective and choosy, investing into only the most compelling of opportunities. All of those many, many hours that we've spent debating risk return in our Investment Committee, I do believe, has been time well spent. Even with all of the structural changes that are happening in the world following COVID-19, we're seeing increased evidence that, by and large, the assets that we have within our portfolio have a level of relevance and attractiveness that's being amplified in this current environment. We feel reassured about our direction, about our approach to governance, what we call entrepreneurial governance. We feel good about our hands-on engagement with our assets and are focused on robust transformative sectors. The long-term outlook for our portfolio and our investment strategy continues to be very strong. The outperformance of our private markets portfolios against the relevant public markets benchmarks, I think, speaks to this. Number two is on the client side. Even though the first half of this year has presented macro volatility, we've continued to see sustained demand for traditional and tailored private markets programs. These programs include customized mandates and an extensive range of evergreen programs. In total, our clients entrusted us with $8.3 billion in new capital commitments during this period. We remain firm in our commitment to generating long-term value and positive outcomes for our stakeholders, and we're pleased with the continued support that our clients are showing us. Number three, we're a firm with stable management fees. In the first half of this year, we again were able to demonstrate the stability of our business. New assets raised combined with stable assets under management translated to 3% increase in management fees year-on-year. The lion's share of our revenue base is recurring and is based on long-term contracts with the firm's clients, providing high visibility on cash flows. Number four, we're a firm and a leadership team that has a culture of cost discipline. We think and we act as owners, as entrepreneurs. We're not hired guns. We continue to balance our cost discipline with investing in the growth of our business. While we've invested significantly into the growth of the platform last year, we prioritized business continuity so far this year. This temporary slowdown in our hiring efforts resulted in 3% employee growth for the first 6 months of this year. This was broadly in line with the development of our assets under management and our management fees. Total personnel expenses, the main driver of costs for our firm, decreased more than revenues, mainly because performance fee-related personnel expenses fell in line with the development of the overall performance fees. Despite everything that's happening in the world, we held the line and we stayed disciplined on cost, and we kept the EBIT margin stable at approximately 63%. And number five, we're a firm that's thoughtful and strategic about how we position ourselves for future growth. That includes the steps we continue to take on the investment side. We're pushing very hard towards thematic research, conviction assets in attractive subsectors. We're building and maintaining high-performing boards of our portfolio companies and working together with our management teams on targeted value-creation initiatives. We have a multibillion-dollar investment pipeline, which allows us to look out ahead towards investment prospects with confidence. And on the client side, we've been a global leader in managing complex private markets programs, and we continue to leverage our expertise and experience building out our platform, offering innovative, tailored structures to our clients. Now turning to a review of the investment side, starting on Page 4. We touched on many of these topics on our last call, so I won't linger too long here. But just a quick recap. Following a healthy start to 2020, COVID-19 significantly impacted investment volume and market sentiment. In February and March, public equity markets experienced a sharp correction of over 30% driven by pandemic-related panic sell-offs, followed by a steep recovery spurred on by massive central bank and government intervention. Private equity buyout volumes in Q2 declined by more than 40% as investors shifted to risk-off mode, focusing their attention on safeguarding their portfolio of companies. During that period, it was very difficult to find the market from a valuation perspective. Financing sources were also on wait-and-see mode. Now fast forward to today. Investment appetite as well as buyout volumes are clearly returning, although, as we predicted in one of our prior calls, there has been a bifurcation in the market. Most of the activity today is around prime quality assets with stable and defensible business models. Those companies are trading at premium valuations compared to, and even in some cases, above pre-COVID levels. And there's no shortage of demand for these types of assets. On the other hand, industries and business models which were severely impacted by COVID-19, such as travel, events, brick-and-mortar retail or where COVID-19 impacts are difficult to diligence, those remain challenging. While we see a stabilization in the market, uncertainty remains high. The market is still somewhat fragile, with fluctuations in equity and debt markets likely depending on the evolution of COVID-19. We expect this bifurcation in the market to persist with high-quality assets continuing to trade at elevated valuations. And so the investment implications are that because high-quality assets will remain expensive and volatility high, we need to continue to invest with a long-term perspective for which we're well equipped. Our thematic sourcing strategy is proven, helping us to identify industries, benefiting from structural tailwinds and value-creation opportunities early on. Our Investment Committee setup allows us to evaluate the best opportunities on a global basis across regions as well as across sectors. Our active approach to value creation creates downside protection because we have the resources and the capabilities to build defensive characteristics into companies rather than having to buy them upfront in every instance. Now in terms of exit implications, the good news is that the market environment is broadly positive towards our type of assets. We have a portfolio that's been hand-selected, and it's full of well-positioned, solid businesses. In our recent liquidity discussions, we see no shortage of demand for our type of companies, yet there's still an era of cautiousness overhanging transactions today, and probably rightfully so. And so whether our current exit pipeline will be completed in the second half of this year or in 2021, it depends on a variety of factors. We remain diligent our approach. Exiting companies requires a similar careful approach as buying does. The next slide shows a breakdown of Partners Group's investment activities in the period. During the first half of this year, we invested a total of $4.3 billion on behalf of our clients across all private market asset classes. This compares with $6.9 billion in the first half of 2019. During this period, our firm shifted a disproportionate amount of resources towards intensively guiding our portfolio of companies and assets through the COVID-19 crisis. We allocated leadership, operational and financial resources to ensure business continuity and to preserve liquidity while safeguarding the health and safety of our portfolio employees. In the first half of 2020, in terms of strategy, we invested the majority of our capital, 73% or about $3 billion into direct transactions, while the remaining 27% or about $1 billion went into portfolio assets, such as secondaries and primaries. In terms of regions, we invested almost 2/3 or about $2.7 billion in North America. The U.S. remained an attractive region from a risk-return perspective and offered as many high-quality opportunities. Now on Page 6. There's no material changes to the overarching messages that we gave about the portfolio to those from early June or July. Despite the impact of COVID-19, we can confidently say that the long-term investment thesis behind the vast majority of our portfolio assets are just as compelling today as they have been in prior years. Our greatest impact as an owner and operator within our lead and joint lead private equity investments has been the rapid mobilization of operating directors, industry specialists and investment professionals to work intensively with portfolio companies. This has provided relative stability as our focus on high-quality, resilient companies in health care, technology, business services, which we've identified by our thematic sourcing approach. We believe the longer-term outlook for our portfolio and investment strategy continues to be very strong. We also believe that the overall performance of our resilient direct private markets portfolios against the relevant benchmarks is a testimony to this. Over the last 25 years, we've deployed more than $135 billion of capital for our clients, and we're proud of the trust and the track record that we've established with our clients during these variety of time periods in which we've invested, particularly with our flagship direct programs. Within private equity, we've been able to generate realized net IRRs of over 20%. With our senior debt programs, we've generated over 5%. With private real estate, we have net returns of approximately 10%. And with private infrastructure, we have net returns of approximately 15%. So the stability and the outperformance we've shown during the first 6 months is important. We didn't give back returns generated with clients in past years. We've continued to build on the strong foundation performance that we have for future client engagement. Now on Slide 7. You can see how COVID-19 has enhanced the relevance of many of the businesses and assets in our investment portfolio. In particular, attractive sectors benefiting from these amplifications are outsourced contract manufacturing software, product engineering, digital outsourcing solutions, renewable energy, and last-mile logistics. For instance, one of our portfolio companies, GlobalLogic, has become a crucial strategic partner to many businesses driving forward their digital outsourcing efforts. And that's not only to save cost, but also to drive revenues to ensure technology leadership going forward. Now moving to the next slide, you'll see our outlook. We continue to seek attractive investment opportunities based on thematic sourcing, thorough due diligence in the subsectors benefiting from structural tailwinds. We identify and dissect transformative trends on a 10-plus year horizon based on our ability to consolidate and analyze investment themes and business models which are exposed to megatrends. We apply this thematic sourcing approach to proactively get out ahead of prime assets early. We're often developing investment ideas 1, 2, 3 years ahead of a potential investment opportunity. This gives us time to develop a differentiated perspective on value creation, leveraging industry research and industry experts. Now moving to the following slide. The fundamentals for infrastructure remain broadly unchanged. There's a continued and a substantial funding gap, and private infrastructure capital is an important part of the overall solution. Our approach to private infrastructure, I do think, has been greatly validated during this period. Our approach focuses on principal protection from underpinning contracts, tangible value creation that's not generally dependent on market dynamics. It's got manageable levels of leverage, and reversion to normalized exit levels are generally priced in. Accordingly, we continue to focus on true infrastructure assets with long-term contracted cash flows and potential for value creation. This is a strategy that served us well in recent months. We expect that valuations for these quality assets will continue to be fair. There'll be no cheap buys even in the post-COVID world, and we continue to see value in building core and platform expansion strategies in line with our strategy of creating infrastructure platforms and businesses rather than just owning single assets. A good part of our infrastructure activities has been around renewables. Decarbonization and energy transition agendas are unlikely to be pulled back. We continue to focus on assets and businesses that benefit from this energy transition. Slide 10 shows some of our meaningful recent new investment examples. As we move into H2 2020, we've been reinitiating dialogues with target companies that we've been tracking. As I speak to you, I'm visiting a target company this week which has been identified as part of our thematic research project. We've gotten to know the company over the past few years and months. We've kept in touch during the lockdown, gotten updates on performance, and we've seen our hypothesis for resiliency hold up. We're in a constructive dialogue with the owner. We have supportive financing, and we're deepening our conviction around the company. And situations like that are happening all across the global team right now. Last week, in our Investment Committee, I think we had 41 investment ideas up for debate. Now we recently announced one of those, the acquisition of Rovensa, a leading provider of specialty crop nutrition, protection, biocontrols, products, had an enterprise value of around $1 billion. Our team was working on that theme for a long time. And this individual asset, I think, was several years of dialogue before the transaction was announced. In August 2020, we announced the second stage of Murra Warra, a 209-megawatt wind farm project in Australia. Again, this has been a long time in the making. We're benefiting today from seeds that we planted in years past. Within private markets, it's not enough just to be a smart investor. It's not enough just to find the right sectors, trends and assets. You also have to win. You have to outmaneuver your competition in order to create attractive investment exposures for clients. We have what we call a synthetic portfolio. Those are assets which we're tracking, following and updating our views on. These are assets which we have a hypothesis that we should be prepared to own at a market price. And this pipeline gives us visibility on more than $100 billion of midterm pipeline opportunities that we believe may become actionable across geographies and subsectors. Now we don't win all of these, not even close. And after we dig in, oftentimes, we find we don't want to win all of these. But we do have a thoughtful and systematic plan for how to put the $15 billion-plus of dry powder that our clients have entrusted us with to use. Now with this, I'd like to conclude my portion of the presentation and hand over to my partner, Andre. Andre, over to you.

Thank you, Dave. So I would like to talk about client activities and achievements and how these did and will translate into assets under management for our firm. Well, over the last 10 to 15 years, we have seen a sustained growth in assets under management, which we illustrate on this chart on Slide 12. Those of you who follow us closely know these charts very well by now. You also recall that we have seen strong team growth across the entire platform in '18 and '19, a time period during which our full-time employees grew by more than 20%. In the first half of 2020, as Dave said, we prioritized business continuity at Partners Group and across our portfolio. We focused on onboarding of recent joiners, and we did consciously slow down the hiring efforts in the past 2 quarters, which resulted in a 3% full-time employee growth, which compares to a 2% assets under management development over the same time horizon. And today, Partners Group counts about 1,500 employees. Now with much less traveling, which is still at reduced levels also today, 2020 is a year with an opportunity to consolidate our platform. We make great effort to streamline processes, increase efficiency. And while we do not grow our team as quickly for example in '18 or '19, we are developing our firm in many aspects. Let's move to Slide 13. In short, I would like to reconfirm the guidance we had given in July. For the full year 2020, we anticipate a gross client demand of around $12 billion to $15 billion. This demand takes into account that investment volumes in 2020 are most likely lower than what we have invested in 2019, although conversion period for new commitment are longer due to the market uncertainty and due to COVID-19 not going away quickly. Bond raising is actually expected to be spread across a variety of solutions, spanning all private markets asset classes and featuring both customized mandates, an extensive range of evergreen fund solutions and then traditional closed-end programs. Our full year estimate for tail-down effects from more mature investment programs and potential redemptions from evergreen programs amounts to 5 -- $7.5 billion to $9 billion. These factors are highly visible and do not fluctuate much, and that in previous years, we do not provide guidance on other effects such as FX rates. While uncertainty remains, we are confident about 2020, that it will be a solid fundraising year for our firm in this current market environment. Based on our strong track record of investment performance which Dave alluded to, we believe we are well positioned to continue to be a partner of choice for global investors. Slide 14 shows that our client base is broadly diversified across a range of regions and type of clients. We came close to 1,000 institutional clients around the world, and these 2 charts here show the split of our assets under management as of June 30, 2020. So let me give you some color on the drivers of demand by country and type of clients in 2020. The U.K., for example, continues to perform strongly, represented almost 20% of client demand and saw strong demand for investment solutions that offer a recurring yield, such as real assets and private debt. In North America, which accounted for more than 15% of gross client demand in the first half of 2020, demand was driven by CLO offerings and evergreen offerings. We expect continued demand in that area. And you do recall from our July call that we have developed investment solutions that allow American defined contribution investors to allocate to private markets. Switzerland also represented more than 15% of client demand. Switzerland, Germany -- actually various clients in Europe invested with PG in the form of mandates, not just in private equity, but also featuring multiple asset classes and investment styles. And variable countries and regions such as Australia or Asia contributed strongly in 2020. In terms of client types, which we illustrate on the right-hand side, they are largely unchanged compared to what we have shown in the past. About 80% of assets raised stem from institutional investors such as pension funds, insurance companies, foreign wealth funds and asset managers as well as family offices. About 20% of asset inflows are raised by our distribution partners, which provides access to our products, to private individuals and smaller institutional investors. Also, these investors increasingly recognize the benefits of private markets, and many of those mirror the allocations of institutional investors by using our semi-liquid evergreen program. Slide 15 shows our assets under management, well diversified across a number of programs and mandates. In total, we count around 300 diverse private markets portfolios at different stages of their life cycle and across all private markets asset classes. The strength of our platform, I believe, is that it can create bespoke mandates or restructure advanced investment solutions like evergreen programs or launch traditional private markets program. This essentially allows us to cater to very different types of clients, both very sizable as well as relatively small. Now being in the market with different solutions allows our clients to build diversified and significant allocation to private markets. And as a firm, we are committed to providing superior services to our clients in all aspects such as portfolio and risk management. The 2 largest programs account for 11% of our assets under management. While the largest program focuses on private equity and caters to private investors in the United States, the second-largest program offers investors exposure to all private equity investment strategy. The pie on the right-hand side -- the pie chart on the right-hand side illustrates our client diversification. Our largest clients accounts for 3%, top 20 clients account for 23% of our assets under management. These figures have remained stable over the past few years. So let me switch to Slide 16. As Dave said, we are actual leaders in constructing highly customized private markets portfolios. Our investment solutions include tailored private markets programs which account for about 63% of assets under management, as well as traditional programs, which account for about 37% of assets under management. We call evergreens, mandates and programs the 3 pillars of Partners Group, and we're are really excited, especially about our positioning for tailored private markets programs. Mandates are the largest pillar. We put them at the center of this slide. Mandates have shown a favorable growth, growing 17% per annum over the last 5 years. With mandates, Partners Group differentiates from many of our peers. We -- while it might seem intuitive, offering a mandate solution in private markets is actually very difficult and it does require a different organizational setup and mindset than what is typical in our industry. I'll go deeper on that on my next slide. On the left-hand side, you see our pillar evergreen programs, which grew at 24% over the past 5 years, although from a lower base. We are the clear leader for these offerings based on an almost 20-year track record. These offerings include our solutions for the defined contribution space. Evergreen programs have many advantages, including like the diversification of underlying portfolios, the fact that investors get immediate exposure to private markets through [ fund ] solutions, the long-term compounding potential and then also like the client-friendly structure. And traditional programs on the right-hand side are the third pillar. They have grown at 10% over the past 5 years, and they continue to represent important building blocks for investors that focus on diversifying their private markets exposure across a broad set of investment managers. With traditional programs, it is a bit more difficult to differentiate from peers. And this explains why this segment grew less quickly at Partners Group than solutions like evergreens and mandates, which cater to very specific client needs. On Slide 17, let me quickly go deep, actually. I did mention the differentiation from our peers through portfolio management and mandates. As a firm, we're really convinced that private markets can not only create value bottom-up in the underlying assets, which Dave described, but also top-down in our portfolios through portfolio management. So what do we do? Actually, we often start by steering the investment levels on behalf of our clients. That means that when a client decides to put, let's say, $500 million to work, we manage the portfolio not only to achieve the target investment level but to maintain it over many years, potentially decades. In those relationships, we have a mandate to reinvest proceeds by our clients, not just to invest an originally set amount once. So we determine the optimal investment strategy also in terms of asset allocation, and we build portfolios across different asset classes. As a matter of fact, clients very often give us flexibility to invest in different asset classes. Finally, we measure and manage various risk factors like liquidity, market, credit risk, asset-specific risks. And many of these clients mandate Partners Group to manage cash and fix exposure on behalf of them. At the core of all of this is typically a portfolio manager that takes the full responsibility of a mandate in all aspects. And I hope you feel how excited we are at the firm and how excited I am personally about the steps and the breadth of services that we provide as a company. The longest-standing mandates client of Partners Group is now investing their private markets allocation with us for the last 20 years, and this is a big privilege and a responsibility for our firm. My final slide is Slide 18, which shows the Partners Group efforts and achievements in the ESG or responsible investment area. This is an important topic for both our investors as well as our shareholders. Partners Group has been consistently recognized as a leader in ESG and sustainability. We have integrated ESG throughout the entire investment process, and our responsible investment framework applies to all of our investment decisions. We do this because it's important to clients, but actually, we do it also because it's an essential part of investment making. Through ESG, we make our businesses stronger. We make them more resilient. We make them more valuable. In that sense, ESG efforts are focused on upside creation as much as downside mitigation at the same time. Our efforts and dedication to ESG across our investment process are not only appreciated by our clients, but also recognized by third parties. And I'm really happy that in late July 2020, we have received the results of our 2020 UN PRI benchmarking assessment, which has resulted in an A+ rating, which is the highest possible score for the overall strategy and governance of our ESG approach for 6 consecutive years against the median score of A for the broader industry. And with this, Hans, I would like to hand over to you as our CFO.

Thanks, Andre. Good morning. This is my first earnings call at Partners Group. I'm now 9 weeks here and enjoying it more day by day. Needless to say that it is a privilege to serve as CFO of such a remarkable group. As already mentioned by our Co-CEOs, Andre and Dave, the group navigated well through the COVID-19 crisis with a strong people focus and solidifying the portfolio of resilience. Combined with a thematic investment approach and our differentiated client offerings, this positions us well to continue our growth journey. Let's turn to the financial results for the first half of 2020 on Slide 20. Overall, we delivered solid operating performance. Management fees grew about in line with assets under management at plus 3%, confirming the stability of our management fees. Total revenues were down by 9%, which is mostly driven by a lower level of performance fees. The subdued exit environment following COVID-19 meant a lower level of exits. Remember, when the markets come back, these postponed exits will come back, so will the performance fees. EBIT margin remained stable at 63% supported by our strong cost discipline, which we will discuss later. EBIT was down to CHF 319 million in line with the lower revenues. We will now provide some more details on the first half performance and will give some further visibility on the full year 2020, starting with the revenue breakdown on Page 21. Remember, our revenue has 2 components, first, management fees which are contractually recurring. These are based on long-term contracts and follow the development of our assets under management growth. We split them essentially in 2 types: long-term, close-ended structures, often on an initial term of 10 to 12 years for equity and 5 to 7 years for debt. Hence, the visibility of this revenue streams is high and represents over 75% of our management fees and are paid quarterly. Second, we have the evergreen programs, which represents around 25% of our management fees. As Andre already mentioned, these programs allow for subscription and redemption options. The fees are paid on the net asset value development. It is worth to mention that the nature of these products is less volatile than traditional public market funds. Management fees were CHF 567 million over the first half of 2020 and increased 3% year-over-year. Other revenues from management services and other operating income decreased by CHF 9 million, from CHF 51 million to CHF 42 million, due to the lower income earned from short-term financing activities. Turning to the performance fees. We recognized CHF 56 million in the first half of 2020, which represents a 57% decrease versus the same period last year. This is the result of postponed exits of certain portfolio businesses and assets. Clearly, the COVID-related lockdowns did not provide the right market conditions for exit. Turning to the next page, we will provide more information on the performance fees for 2020 and our mid- to long-term view. It is important to remember that we follow a prudent conservative approach in recognizing performance fees. For the close-ended funds, we recognize performance fees when investments are realized and the return hurdles are met to earn the performance fees. We only recognize performance fees on realized investments after adjusting for stress-tested unrealized investments, i.e., after we apply a 50% discount to the net asset value. This approach makes it highly unlikely that we would need to reverse recognized performance fees. In other words, it significantly reduces the risk of a potential clawback. For the full year 2020, we would like to highlight: First, the good news is that a market environment is turning more positive as we enter the second half. Exit markets are improving, which allows us to plan for divestitures, which were postponed during the COVID lockdown period. Needless to say, exits take time. We remain diligent in our approach to optimize the value. We also should not forget that while the markets are improving, we need to see how the economy evolves. There is still uncertainty. Therefore, we provide a lower range in the performance fee, between 5% to 15% of total revenue. Looking at longer term, performance fees remain an integral part of our business. Therefore, performance fees will continue to range between 20% to 30% of revenue in the medium to longer term. This means that over time, management fees will be between 70% to 80% of our revenue. Slide 23 provides further perspective on the embedded performance fee potential. Performance fees follow assets under management growth with a time lag of around 6 to 9 years. To illustrate this further, let's look at the period from 2010 to 2015. We invested $28 billion and this generated the majority of the $1.5 billion performance fees for the period 2016, 2019. Looking at the period from 2016 to the first half of this year, we invested $54 billion or about double what we invested over the period 2010 to 2015. And have not yet recognized the performance fees on these investments. It is not only double the amount, it is also skewed towards more performance fee having investments such as direct. Both will support our future performance fee generation. This confirms that we continue to build a future stream of performance fees. While they're more difficult to forecast in the short term, they will come over time. Performance fees are also highly diversified. During the first half of 2020, the performance fee come from over 75 programs and mandates. Despite the lower exit activities, the performance fees came from a dozen of underlying assets, which are part of multiple programs and mandates. The largest contributing investment program only amounted to 30% of the performance fees. With that, I would like to move to Slide #25. As said, it is also important to look at the fees over a longer period. Management fees have been a fundamental part of the revenue stream since the IPO. The management fees range between 1.18% and 1.33%, and we expect a stable development to continue in the future. For the first half, the management fee margin was slightly down due to the lower operating income from short-term financing services, as we have already discussed. Let's turn to our cost development on Slide 26, starting with the key highlights. We continued to invest in the future growth of our business yet adjusted our headcount growth over the first half, following COVID-19. This enabled us to keep the EBIT margin stable at 63%, confirming our continued cost discipline. Total EBIT was CHF 390 million or down 10%, in line with the revenue decline. We now go a little bit more into the cost details. Personnel cost represent around 80% of our total cost. They decreased by 11% in the first half of 2020. Headcount, as measured in FTEs, was up 19% behind an intensified hiring throughout 2019, following the strong growth trajectory of assets under management. We did slow down the hiring over the first half of this year. As a result, headcount grew 3% in the first 6 months of the year in line with the assets under management growth. So why are the total personnel cost down 11%? Our regular personnel cost increased behind the headcount growth. They increased at a lower rate due to the base effect. Last year was a highly successful financial semester. This year, there is simply less variable compensation due to the impact by COVID-19. Second, our performance fee-related personnel cost adjust with the performance fees as we allocate 40% of our recognized performance fees to our teams. Hence, the decrease in performance fees directly translates into lower cost. For the full year, we'll continue to apply a more careful approach to hiring as we did in the first half of the year, this to balance our cost discipline to deliver the margin while continuing to prepare our business for future growth. Other operating expenses were flat over the first half of 2020. We had the benefit of lower travel following the COVID-19 measures. We offset this benefit to fund part of our portfolio employee support fund of CHF 10 million for the year. It is worthwhile to mention that both the partners and employees contributed to the Fund too. The fund supports financially vulnerable people following the COVID-19 crisis. Depreciation and amortization increased to CHF 19 million or plus 24%, mainly driven by the depreciation of our newly built Denver campus. On Slide 27, we see the EBIT margin development over time. We delivered a 63% margin over the first half, which is stable to 2019. We continue to target an EBIT margin of around 60%. It is important to mention that this guidance assumes stable exchange rates. On the next slide, you see that our core revenue stream are management fees. The majority comes from U.S. dollar and euro-dominated (sic) [ euro-denominated ] programs. 47% are in euro and 38% are in U.S. dollars. On the other hand, 38% of our costs are in Swiss francs. Looking at the exchange rate movements in the first half of this year, we have seen a strengthening of the Swiss franc versus the euro and the U.S. dollar. This had a negative 3 percentage points impact on the EBIT margin. We managed to keep our EBIT margin stable because this negative impact was offset by lower cost. Assuming exchange rates remain stable for the full year, we would expect a slightly lower EBIT margin. Let's look at the items below EBIT and our balance sheet on Slide 29. Alongside with our clients, Partners Group invest around 1% of the balance sheet into its investment programs. This amounts to CHF 650 million. Over the first half of 2020, we saw a modest negative valuation impact of around 3%, which had a negative impact on the financial result line. This is a noncash impact from revaluations. The tax rate was 14.6%. Profit was down 21% because of the lower EBIT, in combination with the revaluation mentioned above. Our balance sheet remains strong. We have a net liquidity of CHF 609 million. This is after paying CHF 668 million of 2019 dividend in May. Net liquidity consists of a strong cash position of CHF 819 million and short-term loans to products of CHF 589 million. In our calculation of net liquidity, we reduced our outstanding long-term debt of CHF 800 million. Moreover, we also have a revolving credit facility for a total of CHF 865 million. This concludes our H1 presentation, and we would now like to open the line for questions.

[Operator Instructions] The first question comes from the line of Arnaud Giblat with Exane.

I've got 3 questions, please. Firstly, can I ask about the investment activity? Obviously, it's been a bit lower because of the difficult environment. What's surprising me is it's been particularly low in the secondaries activity. We've seen about $300 million of investments. I would expect that in this kind of market, you should be seeing more secondary opportunities, not less. I'm wondering if we should be thinking this is just a timing impact, that essentially, LPs will be thinking and rejigging their portfolios later on and further secondaries opportunities might crop up. So that's my first question. And secondly, on the investment pipeline, you sounded quite positive in terms of the opportunities out there. You've got less than a year's worth of dry powder. What's holding back your fundraising? Are you trying to safeguard your performance? Or what are the limiting factors? Is it investment capacity? Is it the ability for the demand from LPs? I'll just leave it with those 2 questions.

Thank you for the questions. I'll kick off with the first one. With regards to the secondary activities, our secondary team has been extremely busy during this first half of the year engaged in a number of conversations. But during a good portion of H1, we saw the dialogues that we were having with sellers disrupted by very rapid appreciation an public market valuations. And it was difficult to walk a straight line with regards to negotiations on some of these portfolios. And so I think we've been we've been staying disciplined. We've been continuing to be very selective, and we're buying assets that we know. And I -- my expectation is that we'll see more activity there as the stability in valuations is sustained over the second half of this year. So yes, I would expect more opportunities there to manifest themselves. With regards to the pipeline of opportunities, we've got about 1 or 2 years of dry powder for most of our strategies. We are quite positive on some of the opportunities that we're seeing in the marketplace. And we invest about as much as we raise in any given year. So we're not a firm that stockpile years and years of dry powder like some of our competitors. I think one of the areas of feedback that we hear from our clients most frequently, one of the areas of frustration that they have with our asset class is that they commit large sums of capital and that it sits around for a very long period of time before it's put to work. Today, they're much more focused on compounding value than they are having their commitments sit around for those long periods of time. And so we try and match up the opportunities that we see with the capital that we raise. And I think we're trying to be very thoughtful about that. Andre, I don't know if there's any other color that you'd provide on that. But that's my perspective on it.

Well handed, Dave. We have about $15 billion dry powder. We feel comfortable with that level. Clients are interested, remain interested in private markets. And as Dave said, kind of like it's a continuous flow of accepting new client money and investing new client money. At this point, I believe that these 2, asset raising and investment deployment, in my book is nicely in balance.

Next question comes from the line of Gurjit Kambo with JPMorgan.

Just a couple of questions. So firstly, on the underlying management fee margin, so we know the management fee margin came down. And it feels like that's to do with the other income line, the treasury financing. So excluding that, is it fair to say that the management fees were relatively stable and you're not seeing any pressure from your investors to reduce fees? That's the first question. And then on the performance fee guidance of 5% to 15%, you -- given you did 9% in the first half. At the lower end, does 5% effectively imply very little performance fees in the second half. Is that just conservatism? Or is there anything else just driving that range of 5% to 15%? And then just on the U.S., the DC market. What sort of discussions are you starting to have with some of the clients around that product offering?

Yes. Hans here. On the management fee, it's important to mention that over time, the management fees grow in line with the growth of the assets under management. This period, we had less income from the bridge financing to products because of the lower level of activity with the COVID period. So that's a short-term thing. With some of the asset rates into the first half, the fee clock starts in H2. So you have a little bit of disruption in the quarter. But overall, the trend between assets under management and management fee will grow in line. On your second question on the performance fees, which came in at 9%, which -- the good news there is that's in the middle of the range of the 5% to 15%. What we said in the call is that the good news is that the market environment is turning more positive as we enter the second half. That's the good news. Where we need to make the disclaimer, we should also not forget that while markets are improving, we need to see how the economy evolves because there is still uncertainty out there. Therefore, we provide a lower range in the performance fees between 5% to 15% of revenue.

In terms of defined contribution, yes, we have talked about this in like the July call. We clearly noticed a very significant interest by like American investors in the defined contribution space. I mean it's not surprising actually, this guidance that we thought early this year. It was actually driven by many in the retirement industry advocating for great parity between the investment options available to defined benefit and defined contribution. So it's not surprising that now, indeed, defined contribution investors are looking at this investment options in great detail. At this point, however, and in line with what I said in July, this is an education effort. We believe it will take a few years before this fully kicks in. But we see a very strategic and sizable potential in this defined contribution offerings, but also it will take a number of years for this to materialize, which is not different to how Partners Group's evergreen program started like 19 years ago. Initial pickup was low. Ultimately, it became really big. And I believe the same is going to happen for defined contribution offerings, such as in the United States, but also U.K. and Australia.

Next question comes from the line of Bruce Hamilton with Morgan Stanley.

Maybe just a couple of follow-up questions. I mean as you think about the shape of client demand from here, do you see any risk around some of the more established investor types, say, from the sovereign wealth funds impacted by the oil price or corporate pension schemes with cash flow needs maybe moderating their demand. Is there any risk on the sort of retail side that people -- I guess, given the recovery it's less likely, but there's sort of redemptions coming down the pipe in the second half because of changing views. And I guess, longer term, when I look geographically, I guess, Asia and U.S. still look like the main opportunities. I mean is there -- should we expect that over time, there'll be a bigger push in Asia and U.S. in terms of the fundraising mix, and it's going to be DC and private clients that drive the growth? Is that the way to think about it? Or is that too simplistic?

Bruce, thanks for the question. We believe this client demand for private markets is really structural in nature, and it's not going to go away. Institutional assets grow. Allocations to private markets are on the rise, of course, at different levels across the globe, like highest in the United States, lower in Europe. But also Europe by now is really used and experienced about private markets. So I believe these trends towards private markets is really long term and is not going to reverse in contrast. Private markets is an important asset class to gain access to the real economy, and it's on the rise. Having said that, of course, there's always particular situations, like commodity price might affect sovereign wealth fund and it will not affect another. So it's very idiosyncratic. In terms of like regional split for Partners Group, we have the strongest presence or recognition, let's say, in Europe. But you're right that the Americas is a very deep market that we'd like to build out in the years to come. And defined contributions is one of the entry doors. But equally, also in the United States, I believe Partners Group will excel and want to ultimately deliver to clients not only traditional programs, but also these mandates that we have elaborated on. So I believe you will see Partners Group on these 3 pillars, not only in Europe but also in the United States. And with mandates and evergreen programs, I'm very confident that we have a differentiated offering that will not only cater today's clients but also to the clients that are in reach.

Got it. And maybe just a follow-up one on the lower sort of bridge financing. I guess that's just a function of the lower investment activity. So you haven't sort of structurally reduced your appetite for that activity. So we should not expect that, that would recover as investment activity recovers rather than there being any sort of longer-term change.

That's true. So that will gradually come back with the investment level coming back. So it's just related to the activity in COVID, and that will gradually come back. But no structural change.

Next question comes from the line of Jens Ehrenberg with Citi Group.

Just a few questions from my side. Just briefly coming back on your policy guidance of 5% to 15%. Just how are we sort of thinking about the lower end of that, I suppose? I mean how -- what exactly would have to happen for you to get to 5% of total revenue? So would that mean U.S. basically virtually 0 performance fee from the second half? That's the first question. And the second question is on the -- I think you have about CHF 25 million of negative valuation adjustments for your co-investments in your own investment programs. I was just wondering, so if we see your performance fee do relatively well or better by across, I think, 75 products over the period, does your negative valuation change? Is that related to a more concentrated number of products? Or how can we think about that?

So let me start with your question on the performance fees. I think, first and foremost, over time, performance fees will be between 20% and 30% of our revenue. Because of what we said, the first half actuals and while the markets will open up there's still uncertainty, we give this wider range on the short term between 5% to 15%. My first point is that performance fees on the short term and in an environment like that, you cannot be that precise. It will come over time, but then given point in time, given where we're at, they're harder. The 5%, you would have to think the market really goes down because we delivered 9% in the first half. So I think we all can do that calculation. That's why we're giving the range. As we said, the good news is that the market environment is turning more positive, but we remain cautious on the outlook and the visibility as the economic evolves. That's why we give the range. But over time, they will refer back to that 20% to 30% of revenue. The value of the investments where we have co-invest with the client, that is unrealized because that's the market outlook, and it's highly diversified over many programs. So it's relatively modest in percentage, but it has an impact on the financial results.

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

I've got 3 questions from my side. Firstly, on fundraising so far in the second half of the year. I'm just wondering if you can get a sense in terms of how -- what client risk appetite has been. Is it improving? Or are they still cautious around the macro? And also where -- which asset classes are you seeing the most investor interest? That's the first question. Second question, sorry to go back on the other revenues from management services and other operating income. How should we think about the normalized revenues for that going forward? Is that closer to the 50 CHF million for half a year? Or should we look at it more as in -- on manager fee margin? I know it fell to 1.33%. Or what should be the long-term outlook for that margin going forward? And last question is on dividend. I know your earnings fell 20% year-on-year in the first half. Second half will probably be low as well just because of the lower performance fees compared to last year. Could you just still maintain the full year dividend similar to last year on the current run rate of earnings?

Thanks for the fundraising-related question. Let me answer from a short-term and long-term perspective. Like Q2, at the top of like public markets and financial market volatility spiking, of course, like short term, like there was like a pause, right? The investors felt reluctant to sign 10-year contracts like in Q2. That's pretty natural. So short term, there has been some postponement. That's also why we have provided this new guidance of $12 billion to $15 billion. But that's really like a short-term reaction, which I think is prudent on behalf of clients. At the same time, kind of like -- I'm really not surprised but happy about the long-term perspective that the clients have taken. Actually, clients have not, to my best knowledge, amended like long-term allocations. These private markets allocations are strategic in nature. Many or most clients are actually maintaining or building up allocations in private markets. And in that sense, like this COVID does lead to postponements. There has been a certain pause in Q2, let's say, but it does not affect the asset rating potential or [ as I mentioned, ] potential for Partners Group. So short term, yes, impacted. Long term, midterm, I'm very confident that the private market allocations are going to remain intact and are still on the rise.

Coming back to your other 2 questions. So management fees will be stable and growing in line with assets over -- under management over time. As we said, because of COVID, we have on the short an impact because of this lower income we had from bridge financing. So this will come back to what I call the trend line. Now in any given year, you could be above or below that. But I would take -- if you take the average of the last 3 years, then you have a good indication what that would be. On the dividend, we have a strong track record on providing a stable and growing dividend. We are not providing an outlook or guidance on it. But if you look at our balance sheet, which continues to be strong and healthy, we're in a good position with a healthy balance sheet.

Just a follow-up to Andre in terms of the fundraising question. In terms of asset classes, where are you seeing the most interest in and the least, I guess?

Sorry, I unintentionally forgot to answer that question. I didn't want to evade it. I don't believe I have a hugely differentiated answer. Demand remains intact across asset classes. Now as we have highlighted, there's different avenues to get exposure like for evergreens or mandates or traditional programs. But we are in the market. We see client demand for all asset classes. What is -- what plays to our strength is that in this -- at this point, like 2020, with institutional assets on the rise, I believe there's still a large number of investors that is expanding like their portfolio in private market. So what we see is, for example, continuous interest by private equity investors to invest in private equity. At the same time, there's a trend that investors look at more than 1 asset class. Dave commented like an infrastructure investor also considers private equity or a real estate investor starts to look at infrastructure, et cetera. So there's a widening in terms of allocation on top of the continued allocations in the asset classes that they already know.

The next question comes from the line of Thomas Beevers with Stockviews.

I had a question on long-term accrued revenue, which is up to CHF 330 million now. I just wanted to understand why that's increased so much. And as I understand from the disclosure in the financial statement, there's a delayed settlement there. But I'm trying to understand why the settlement is delayed for 1 year plus and for such a high amount of the performance fees that you've recognized. If you could explain that, that would be great.

Thanks. First, to reassure you, we will receive the performance fee we recognized. So they will show up in cash. However, if you look at the period with COVID-19, then we have to look at timing of the collection, and it's just this line less than 12 months and more than 12 months. And again, the COVID period, right, pushes you a little bit from this last to more than 12 months. I just want to reassure you that we will collect the performance fees we recognized. So it's related to COVID, nothing more, nothing less.

Sorry, if I could just ask a follow-up. I'm not sure I understand. Why does COVID-19 delay the settlement of those fees?

That is because of the distributions.

Okay. So it's -- the performance fees are going to be tied to the distributions from the funds to the clients? Okay.

That's correct. It's just a delay because of that.

The next question comes from the line of Máté Nemes with UBS.

I have 2 brief questions, please. Firstly, on hiring. Obviously, in the first half, you commented that you held back or slowed down hiring given the environment. And I'm just wondering, with the environment now normalizing and then perhaps having a bit better visibility into 2021 and your comments that fundraising in the long-term outlook is perhaps intact, are you committed to ramping up again hiring next year to high single-digit or double-digit areas? That's my first question. Secondly, the medium-term outlook on performance fees accounting for 20% to 30% of total revenues. Based on your current views, your assessment of the environment, how long would it take to get back to that level or to that range? Is it realistic already in H1 '21? Or could this actually take a bit longer?

Maybe I'll take the first question on hiring pace. I think what you've seen in the first half of this year, and really from our firm over time, is that we have a very disciplined approach and we hire in line with assets under management and management fee growth. And so with the normalizing environment, yes, I do think that you'll see our hiring pace revert to its long-term trends. Hans, do you want to take the second question?

Yes, for sure. That is a good question. First, I would say, that they will come back to the 20% to 30% because they're an integral part of our business. And if you look at the statistics we have been providing in the presentation, you've seen it in the past and this will continue. Now the harder question is at a point in time to give you a specific estimate, that is more complex because you have a combination of 2 things. Yes, the markets are opening up. And with some postponed exits which could happen, which we will look at diligently, it could be possible that it comes back earlier, like 2021, which is what you're saying. But it could also be -- that it would come a little later. So the point in time estimate, given the environment, is just very hard to make. But the markets, it is, at the moment, good. But there is the visibility which we have.

[Operator Instructions]

We have a few questions coming through the webcast. So I'll start with the first one from [ Nayumi Hirono ]. He asked, when we released the private markets navigator for -- outlook for 2020, PG did not find a COVID crisis. Now he's wondering if there is any change to our 2020 relative views given COVID. And I guess, Dave, do you want to take a stab at it?

Yes. Sure, I'll take that. And it's timely. We just spent 7.5 hours last week in our relative value committee meeting going through the bottom-up inputs from each of our teams that they have observed over the past period of time. I'd say, by and large, what we're seeing is an acceleration of many of the trends that we had previously identified. We do have a couple of new topics, a couple of new areas that are of particular interest to us. And we've assigned teams to develop those themes and to come back and report. And so we do have a couple of new topics coming out of COVID. But I'd say, by and large, it's an increased conviction and it's acceleration of many of the trends that we have been discussing for the past period of time. And so you'll see the updated report that comes out here in a couple of weeks that will provide some incremental commentary to that.

Then we have another question from Peter Michaelis from Liontrust. This is for you, Andre. If you -- can you give us an example of where your new ESG approach has affected your investment, i.e., investments that you didn't make? And how many people have you hired for your ESG research or your ESG team?

Yes. Thanks for that question. Probably -- let me start off by saying it's not a new approach, but it's a highly proven approach that we have at Partners Group, right? So it's processes, tools and mindset that has been in place for the last 10 to 20 years. What is true is that we have identified -- intensified like communication with our stakeholders, including clients and shareholders, but not like we do something totally new. This is highly proven. There's a dedicated team of maybe half a dozen members in the ESG team. But in reality, this team acts a multiplier, right? It's not about us sending in 6 ESG experts into dozens of portfolio companies. It's the ESG team really enforcing this mindset and the rigor as part of the due diligence and during the holding period. So in reality, you don't have half a thousand ESG members. You have actually dozens of ESG people on the investment side, under the oversight of Dave that will make sure that ESG initiatives have the appropriate weight in each of the assets that we do own. And there's really many examples, right? During the holding period -- or during the due diligence period, you know that Partners Group, for example, would not invest in coal-related investments. And the additional topics that are on our mind is not only climate change, but for example, materials. If an investment opportunity heavily relies on plastics, that's probably not an investment we will do. We would rather decline it. During the holding period, it's really about creating value with initiatives in E, in S, in G. On the environmental side, you have heard us talking about energy management or energy reduction initiatives across sectors. On the social side, you will not be surprised to hear about our focus on the health and safety. Not only during COVID, but also already like in 2019, that was a focused topic. And on the governance side, we systematically get involved, for example, in cyber risks, not only in PC, but actually apply the lessons learned or the convictions of Partners Group to the underlying portfolio companies. So it's a proven approach. It's the sixth time we get an A+ rating. We do intensify communication, but it's very much intact and the conviction by Partners Group to create upside and to mitigate downside.

And then we have the last question who in came from Carmela Mendoza from PEI. She asked if you could tell her more about our portfolio employee support fund, how much are total contributions thus far? And how has this been used exactly? Dave?

Yes. Sure. I'm happy to cover that. So we have about a CHF 10 million pool that we've put together to support our portfolio company stakeholders that are experiencing hardship through the COVID crisis CHF 7.8 million, CHF 7.9 million of that has been allocated to specific companies. Just over 70% of those funds were allocated to stakeholders in the United States where there's perhaps fewer safety nets from a social perspective than in some of our other investment geographies. And those funds have been used in a variety of ways. And it's been actually very touching and motivating to read the accounts of how those funds have been used. A good portion of it goes to supplement income loss from furloughed or quarantined employees. Additionally, those funds have been used to support housing costs, medical expenses, child and family care. We've paid for -- unfortunately had to pay for a couple of funerals from COVID-related losses and a variety of other topics related to hardship that has been incurred during this COVID period of time. But it's been a great source of motivation for our employees to be able to participate. I think it's been a real blessing for us to be able to align ourselves with the stakeholders and employees through the tough times. And yes, I think it's been a very beneficial exercise.

Okay. Thank you, Dave, for that answer. I would like to conclude today's call, right? This has been an intense past 6 months. We're confidently looking at the second half of 2020, and we look forward to talking again to you guys in January 2021, and of course, with many of the in-betweens. We wish you a successful week, and a great day ahead. Thank you.