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

Ladies and gentlemen, welcome to the AuM announcement H1 2022 Conference Call and Live Webcast. I'm your 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. Welcome to Partners Group's business update and outlook call. My name is Dave Layton. I'm the CEO of the firm currently joining from the United States. Our CFO, Hans Ploos, is currently recovering from a minor surgery. He's doing well. Philip Sauer, our Head of Corporate Development, will be covering AuM development today from Switzerland. Also joining us on today's call from the U.K. will be Sarah Brewer, our Global Co-Head of Client Solutions. Let's open up with Slide 2. Halfway through 2022, the outlook for the global economy is far from rosy. The cost of living is rising. Higher interest rates will continue to weigh on the macro picture. Capital markets are likely to remain volatile. Corporate default rates are bound to rise, and valuations feel destined to remain lower as the market processes these factors. M&A activity has slowed over the first half of the year and the credit market is highly selective for new issuance. However, this continues to be a reasonably good time to be in the long-term business of private markets. Corporate cash levels are strong. Profit margins are sustaining at high levels. We have solid levels of dry powder. And as an industry, we have a multi-decade track record of being able to capitalize on dislocation. While the current backdrop may present some challenges, we are convinced that the shift from public markets towards private markets is structural, and it will persist, and we continue to see evidence of that. I'd like to share with you all some high-level observations of what we saw in the first half. On the client side, we saw solid demand across our asset classes during the period. Our clients entrusted us with $13 billion in new capital commitments. The majority of demand continued to come from bespoke client solutions. For the full year '22, we confirm our guidance of expected fundraising of between $22 billion and $26 billion. On the investment side, we were able to secure $13 billion of quality investment content during the period. Our ability to build businesses into market leaders has in turn resulted in today's portfolio continuing to exhibit strong operational performance, and we continue to get good feedback from many clients on our relative performance and on our results. In H1 '22, portfolio realizations amounted to $6.4 billion. I'll spend some time on this later in the presentation. As 1 might expect, we've postponed some exits, given the volatility in the market. Consequently, we're providing you well with our best insight at this point that H1 performance fees are likely to materialize at around 5% to 10% of total revenues. With that overview, let's move to the next slide. We've always been focused on creating long-term value for our clients, picking our spots well and driving transformational change in our investment companies. And so even with this complex macro environment and our competitive industry, the strategies we will continue to employ will be focused on driving portfolio performance. That's what our business is all about. It's about delivering relative outperformance. And we believe that it's in periods of time like this that true differentiation can be demonstrated. In decades past, private equity investing was arguably less intensive. People would buy good companies, improve a few things and generate solid returns, but that's not the environment that we're in today. Our [indiscernible] has matured and is evolving from an alternative asset class into a traditional asset class. We're increasingly taking stewardship for wider and wider swaths of the economy, it's competitive, and it's important for us to be able to drive more comprehensive value creation strategies to be differentiated. This evolution has driven our emphasis on thematic investing and on driving entrepreneurship [indiscernible] Partners Group approach with the typical Wall Street approach, which has tended to be more transactional and more leverage driven in nature. You'll see us continue to drive in this direction. Earlier this week, we announced the appointment of Wolf-Henning Scheider as partner and the leader of our private equity business department. This follows the recent hire of Ben Breier, our new Head of Health and Life in the U.S. Both have led multibillion-dollar, 100,000-plus employee conglomerates, and they're reflective of the type of leaders that we're seeking to attract. And it's not just internally. We're working hard to instill entrepreneurial cultures at scale across our assets and businesses. But almost before we do anything else at a portfolio company, we try and put an entrepreneurial Board in place, and we've actually built out a dedicated team focused on helping us to strengthen entrepreneurial governance across our global portfolio and on finding directors of our portfolio companies that can help drive specific initiatives at companies. Outperformance. That's our mission. Let's move to the next slide. In the first half of '22, we secured about $13 billion of new investments for clients, in terms of strategy, we invested the majority of capital, 62% or about $8 billion into direct transactions, while the remaining 38% or about $5 billion went into portfolio assets, such as secondaries and primaries. Secondary is obviously very topical at the moment. We invested $1.7 billion in secondaries in the first half of the year. In terms of geography of new investments, the U.S. was our most active region accounting for 53% of all investment commitments versus 43% in Europe. Many of our secular themes in these markets remain intact and inflation protection has been obviously very important to us. In H1, investment activity was a little lower in Asia Pacific, but that's not necessarily indicative of H2 or the mid- to long-term outlook. We did see market volatility impose a reduction in transaction activities in H1, particularly in the back half of the period. Valuations have been coming down in many sectors with some dislocations between buyers and sellers as to be expected. Prime assets can still be pricey, and so you need to be selective. The debt markets are very selective at the moment with only the highest quality assets able to attract scale financing solutions. For some of our investment targets, we did debt finance, other companies, particularly those with transformational business plans didn't require material debt financing to still provide attractive returns for our clients. Across the industry, I do expect the velocity of transaction activity to be slower in the May to August time period and then we'll see where the market goes from there. We continue to have robust levels of dry powder and remain confident in our ability to capitalize on dislocation and to invest under a broad array of investment strategies. Let's move to the next slide. Here, we highlight some of the investment examples from H1. In private equity, we believe that market positioning and pricing power are key, and those have been topics that we've been focused on for a long time. Companies operating at above average growth segments that are benefiting from long-term transformative trends I would expect to continue to outperform the general economy throughout the cycle. Our recent purchase of a controlling stake in Forefront Dermatology, the U.S.'s largest dermatology platform company is an example of this. This is a theme that we've been pursuing for a number of years, and this is a theme that's still very much intact and it remains very relevant. We found the ability to pass on price increases to the end client and the essential service nature of the medical dermatology segment as 2 compelling components to the company's underlying business. During our holding period, we're going to try and leverage our extensive experience, working with physician partners, and multisite healthcare practices, and executive teams to maintain forefronts quality and outcome-focused culture and to support its differentiated patient and physician-centric approach. For real assets, and that's private infrastructure and private real estate, we're focusing on inflation-linked revenues. For infra, those are platforms that have an explicit link to inflation through regulation, concession agreements or contracts. In real estate, we're trying to target properties where rent can move with or above inflationary levels. In private infrastructure, we're really proud of our recent investment in North Star. We plan to transform North Star into a leading next-generation offshore wind infrastructure services company. We'll work on the value creation plan to expand North Star's platform in Europe by growing its offshore wind fleet and broadening its offering. As a global firm, we often try and export a theme that's working really well for us in 1 geography into other countries. And convenience-driven multifamily with a heavy emphasis on amenities is a trend that we've been working on in the U.S. that we're now exporting to Europe. We purchased a real estate portfolio primarily in Milan and are refurbishing those buildings to target young professionals and graduate students. These apartments will have all the bells and whistles, the young people expect today, gym, concierge, high-quality amenities, community areas. And with that, we expect the value of these units to remain relatively durable, and we expect to be able to increase rent commensurate with inflationary levels. Private debt is also not a bad place to be at the moment with higher base rates and higher yields the tightening we see in the market is leading to spreads widening, and that's further lifting return expectations, but we continue to be choosy. These higher returns can quickly be lost to higher default rates in a market like this, but our team has been picking their spots, I think, very carefully. And that brings me to the next slide. Let's talk about our portfolio and its performance. The majority of our direct investments are well positioned to cope with rising input prices. We've been talking about inflation for a while starting in Q3 '21 and into the first part of this year, we worked really closely with our portfolio companies and our management teams to build pricing strategies and to address the inflation risk as much as possible. We've told our investment leaders that we'll hold them accountable to those plans, and we've been sharing best practices on inflation management across our various teams through our committees. Our average company in the portfolio has an EBITDA margin of around 20%. That's a solid margin. In order to command a 20% margin, you need to be a company that's valuable to your respective value chain. And most of our companies have reasonable pricing power. Our inflation pass-through measures have so far not caused any major impact on volumes. And with those initiatives, we've been able to protect our margins, which have remained at around 20%. Now I've heard some people from traditional asset management speculate with the high prices paid within private equity during 2017, '18, '19, '20 and 2021, that this correction of valuations will result in a wipe out of carried interest or the returns in private equity will fall off a cliff. And I'm telling you, if you have a portfolio that looks like this, that's simply not the case. If you can grow earnings at 15%, protect your margins like this, then you may need to compound value for another year or 2 and some assets to offset the decline in valuation, but this is an equation that should continue to result in strong relative investment performance and that's because it's a strategy that's focused on transformation of assets and on platform building, it's not focused on passively going long leveraged equity. And don't forget we've been pricing in multiple contraction already for a number of years. Let's turn to the next slide. Now this is a case study of what asset transformation and platform building means in reality. Confluent is an investment that we made in 2019 and that was an environment where prices were quite elevated, as you all are aware. Now in line with our thematic investing approach, we've been tracking physical therapy for several years, we set up a team of in-house and external experts to develop our investment thesis. We visited numerous PT platforms and work closely with our strong industry contacts before finally deciding to target Confluent as our platform of choice in this space. Our plan aims to grow volumes, managing Confluent's brands and margins more effectively. This is achieved through strategic and targeted platform expansion in underserved communities. And to date, Confluent has added over 300 locations. We also saw opportunities to modernize and digitize the platform. We work closely with our operating directors, industry experts and physician owners. We've been working with the company's very capable and dynamic founder and management team to develop a digital front door, a digital service and scheduling capability, virtual therapy. The company has also invested into a digital therapeutics company that uses virtual reality to help patients remotely. Now what's the result here? Well, despite having to pay a high price for the asset, this company is positioned to deliver strong returns to our clients. We're only a few years in. EBITDA was just around $40 million of our investment in 2019 and has recently risen to over $100 million. And with investments like this, I think they are a testament to the strength of our investing approach. Let's move to the next slide. This slide gives you an overview of our net direct portfolio performance for Q1. Now I know that March seems like a long time ago, we're in the process right now of calculating Q2 performance data as we speak. We have seen more significant changes to valuation comparables in Q2 versus Q1. Based on the insight that I have to date, directionally, I expect our direct private equity positions to be down by mid-single digits as for June. In private debt, we may be down a little bit in Q2. Real estate and infrastructure valuations will likely be flattish for Q2. And so we're not immune to the public market volatility, but clearly, we see outperformance to other asset classes, driven by strong earnings growth, which helps to cushion to a certain extent, downside. We are active business builders in our direct portfolio, we're hands-on and we can pivot our approach during downturns in order to help our assets to successfully weather periods of instability. As we continue into H2, we're assured that -- the vast majority of our portfolio assets have an investment thesis that is just as compelling today as it was when we made the initial investment. The market is going to do what the market is going to do, but we're proud of our current investment portfolio, which has been built through a highly selective investment process, and we believe that this portfolio has the potential for continued relative outperformance. Now let's talk about liquidity. During the period, portfolio realizations amounted to about $6.4 billion. Now of that amount, portfolio assets and credit distributions accounted for over 70%. As you all will remember from our call in January, a year-on-year decrease in volume of direct investment realizations was already somewhat anticipated as a portion of the exit pipeline originally planned for '22 was brought forward into 2021. We and our clients are certainly glad that we made that decision and that we locked in those returns. And this is a part of what contributed to 2021 being such an exceptional year for exits. In H1, we have further decided to postpone several realizations of more mature businesses and assets in light of the current market environment. Now we don't usually talk directly about performance fees on these business update calls. We usually save those for our financial updates. But given the fact that we have reasonable transparency into performance fees deviating from our long-term guidance, we wanted to share our most up-to-date perspective. As all of you know, we don't usually give guidance on performance fees for any specific year. We do, however, give a mid- to long-term outlook on performance fees amounting to usually between 20% and 30% of our total revenue in a typical year. In 2020, during COVID, some exits were postponed and performance fees were trending lower, and so we steered you accordingly. And in 2021, we had a catch-up year and a pull-forward phenomenon that resulted in an extraordinary year and we also tried to steer you towards that result. For H1 '22, we expect H1 performance fees to materialize at around 5% to 10% of total revenues lower than the typical level of performance fees, obviously. That results from a combination of some 2022 exits that were brought forward into 2021, as mentioned and some other postponed realizations. We had lower valuations in some of our companies, and it also takes into account the method that we use to recognize performance fees. As we conclude these postponed exits in future periods, you will see the related performance fees come. You all saw this dynamic play out with postponed exits from 2020 -- calendar year 2020 that fell into 2021. Now before I hand over to Philip, I'd like to reaffirm that we're highly confident that we're well positioned to navigate the challenging macro environment, as I mentioned earlier, we've already started factoring in a lot of these elements into our underwriting 18 months ago. The trust of our clients means a lot to us and is a testimony to the positioning of our underlying business into our strategy. And with that, Philip, over to you.

Thank you, Dave, and also a warm welcome from my side. as Dave already mentioned, we had a good first half of the year, confirming the continuation of our growth trajectory. However, we also acknowledge that the market environment is changing as we move into the second half of the year. Investments and divestments may slow, but underlying operational performance of our portfolio confirms the strength of the business we are building. Now with that, we reached $131 billion in AuM at the end of June versus $127 billion at the end of December last year. We believe that these commitments received by our clients confirm their confidence in the strength of our investment approach and our private market platform in general. With this, I would like to move to Slide 13. This slide gives you a more detailed picture of our fundraising and AuM. Throughout the first half, we saw strong levels of client demand with over USD 13 billion in new commitments. And as of today, we have not seen that demand substantially shifts. Whilst we acknowledge that the current environment is uncertain, we do not expect the outlook on 2022 fundraising to materially change. Our clients fully understand that the best way to realize the potential of private market returns is through consistent investments across economic cycles. In H1, we saw client demand for our bespoke client solutions, which accounted for 71% of assets raised, the highest average quarter proportion. With bespoke client solutions, we subsume mandates and evergreen programs. Mandates accounted for 35% of total asset rates and are the firm's next-generation tailored programs. With mandates, we help our clients to achieve their targeted investment level and to maintain it when we reinvest their proceeds. Our portfolio management team designs optimal investment strategies, both in terms of strategy in terms of strategy as well as relative value asset allocations. And we do this most often across several asset classes. And it is often their job to not only manage the risks in such portfolios, but also to manage cash and hedge the FX exposure. At the core of these mandates, there is a dedicated portfolio manager that takes full responsibility for all these aspects. On the other hand, our evergreen programs, which accounted for 36% of assets raised, provide clients with an easy access to private market solutions. Clients in these programs are predominantly private wealth clients coming through our global distribution partner network as well as smaller institutional clients. This segment, in general, is very under-invested in private markets with existing allocations typically well below 5%, so we believe there is tremendous secular growth opportunity here. It is not a question of if the demand increases in the years to come, but much rather on how the industry handles the right structures to accommodate the demand and meet return expectations of these wealth clients. Evergreen strategies are something we have actually been offering for 20 years, and our know-how in this sector has made us an industry as well as a thought leader. For example, we are proud to have the oldest and largest U.S. Evergreen equity fund, which recently passed $12 billion in AuM. Needless to say, traditional LP structures remain an important part of our fundraising. Their inflows are less consistently spread across the year. Rather than, for instance, evergreen structures, which are more coming in regularly. But they are very meaningful in contributing to our growth. For instance, in February, we closed our third direct infrastructure program with a total commitment of $8.5 billion, of which a minor amount was accounted for the H1 fundraising figures. Looking ahead, we expect to see a steady inflow of commitments into our future flagship offerings. Across the asset classes, fundraising remained broadly in line with prior years, led by private equity at 51% of total assets raised. We closed our largest flagship fund last year. And because of this, the vast majority of fundraising in private equity in the first half of the year stem from mandates and evergreen programs. Private debt accounted for 25% of funds raised and remains an important contributor to fundraising driven by broadly syndicated loans, such as CLOs and direct lending solutions. Private debt is where investors go to hedge themselves against interest rate changes. Our private debt offering provides this protection, and we focus on senior debt, which has, in general, a floating base rate. Private infrastructure continued its solid growth trajectory and accounted for 20% of funds raised. Our performance in this asset class is a testimony to the ongoing demand for the resilient and essential platform building opportunities we can offer. However, we do not expect additional fundraising activities in infrastructure as the team needs to get the most recent fund invested. Our most recent investments in Budderfly, the fastest-growing Energy-as-a-Service provider in the U.S. shows that we are capable to deploy capital in attractive opportunities despite the current complex macroeconomic environment. Last but not least, private real estate. It accounted for 4% of total assets raised. We closed our last real estate fund in late 2020 and have invested over $4 billion in value-added real estate opportunities over the last 18 months, thereby catching up on lower investment volumes in previous years. Our team is now spending a substantial amount of time to properly onboard and position these assets to outperform in the current market environment. While we'll be launching our next infra fund -- real estate fund in 2023, Sarah and her team have already started having active conversations with clients ahead of the launch. On the right side of Slide 14, you see our AuM split as of 30th of June. I would like to highlight that our bespoke client solutions continue to make up the majority of our AuM accounting for 67%, which includes mandates with 37 and evergreen programs with 30%. Our traditional client programs make up the remaining 33% and confirm that our growth is generally well balanced. With that, I would like to move to the next slide. Now as we discussed the $13 billion of gross flows, let's go through the impact of tail-downs, redemptions, exchange rates and performance-related effects. I'm starting with tail-downs. They came in at $3.6 billion. This is slightly below the midpoint of our 2022 guidance because we expect a tilt towards H2. As a result, we continue to expect tail-downs to meet our targets as communicated for the full year. Redemptions are different. We manage today $39 billion in evergreen programs, which provide some form of liquidity. We typically 5% per quarter. Over the first half of 2022, redemptions were $1 billion or 3% of our AuM. Evergreen programs were again a net contributor to growth as the inflows substantially exceeded the redemption. In view of the current market environment, we felt important to provide more color on the process of redemptions. Most evergreen programs give clients the ability to subscribe and redeem to the programs on a quarterly basis. Redemptions have a 3-month notice period. This means that we have a fairly good visibility where they will be in 3 months from now. And because of that, I can tell you that as of today, run rates do not indicate any relevant uptick in redemptions for the second half of the year. We believe the reasons for this is that our clients see the consistent return profile of these programs as well as the conservative portfolio construction across growing sectors of the economy and in multiple asset classes. Especially in these more uncertain times, this plays to our benefit. As of 30th of June, we have dedicated liquidity within these funds and in the case, redemptions do increase yet we do not expect to hit any of the gating limits as we discussed. We do not have visibility on factors such as exchange rates and other performance-related items, and as such, do not guide on them. We don't think it will be a surprise to any of you that exchange rates have been experiencing a rather volatile period. Foreign exchange rates were contributing a negative USD 5.9 billion in AuM. This was mainly driven by the significant appreciation of the U.S. dollar spot rate as of 30th of June. And in particular, against the euro, but also against the British pound, Japanese yen and Australian dollar. With regards to other performance-related effects, there is a positive contribution, as you can see, of USD 0.6 billion from our portfolio of products that link AuM to their NAV development. In this context, I would like to take -- in this context, I would like to take up the comments from Dave about portfolio performance. He mentioned that valuations, as of 30th of June, are expected to further decrease across some asset classes in the amount of a couple of percentage points. These valuation adjustments are not yet reflected in our evergreen programs. Since we report AuM performance data on evergreen programs, we base our data on end of May numbers for H1 and end of November numbers for the second half of the year. This concretely means that we will only see the impact of June's performance in the second half of the year and its AuM numbers. We expect a small negative adjustments by a couple of percentage points, but this depends highly on the respective portfolio composition. With that, I would like to move to my last slide, which provides a more granular overview of the AuM breakdown by asset class. It shows that AuM development, fundraising and other factors, which combines the impact of tail-downs, redemptions and exchange rates. And it clearly shows that we do not that -- it clearly shows that we were growing gross on a half year basis. We do not have a crystal ball, but we have been through this crisis in 2008 and 2020. And we know how to navigate this environment to continue to deliver sustainable growth. And what we do see is our clients remain confident in our platform. Our portfolio performance also remains strong. And with that, we are assured on our growth trajectory as we move into the second half of the year. With that, I would like to conclude and pass on to Sarah.

Thanks so much, Philip. I would like to share with you some of the exciting trends we're seeing right now, both directly in my day-to-day conversations with clients, but also demonstrated on the Slide 17. Overall, we continue to expect that the long-term secular growth trajectory of broader private markets industry and specifically of Partners Group will continue to be driven by 3 key trends: firstly, the growth of institutional assets under management, and this is very much supported by the structural trend of rising allocations of institutional investors to private markets. And look, the majority of client conversations that I'm having right now often start with -- we're looking to increase our allocation to private equity or to private markets in general. And if they just have 1 or 2 of the private market asset classes, they're looking to gain exposure to the ones that they are yet to have. In the market, there are also estimates that the largest 25 institutional investors will approximately double their allocations over the next 10 years. And so to implement these allocations, investors are really seeking firms that have proven not only in terms of historic performance, that's no longer good enough but also in terms of service and governance as well. And many of the clients that we speak to today really demand that closer interaction, that deeper relationship and the ability to provide bespoke private market solutions that are very much tailored to their increasingly complex requirements. And I've seen a steady increase as Philip discussed in demand for mandates from our institutional investors. Recently, we actually won a mandate for a leading global insurance group based in the U.S. amounting to approximately $0.5 billion. We were competing here against very well-established global competitors, and the client ultimately selected us because of our extensive experience with fully paid in structures, higher allocations to direct content robust performance and liquidity modeling as well as a willingness for true partnership. And this is a very much emblematic of the discussions we're having now with clients globally where they come to us with their specific requirements and look to us as a solution provider. Secondly, there are new pockets of capital, and we continue to see the DC markets increasingly open up. Started in Australia, we see it happening in the U.K. and the U.S. is on the same track. And these markets will also get the benefits of private market returns in the future. Based on different research reports, it truly is reasonable to expect target date fund allocations of DC assets to open up over $400 billion to private equity opportunities in the next 10 years. And for us, this is clearly a strategic opportunity, and we're ready to provide our proven top quality solutions for this particular market segment. And thirdly, the growth of the private wealth sector, Private markets are a huge untapped opportunity for the private wealth sector. The growth in this segment is an opportunity that Partners Group is particularly well prepared for. We started in 1999. We're already developing our private wealth offerings. And today, we continue to be an innovator in response to localized client requirements, for example, with the likes of LTIs and have long-standing relationships with distribution partners across the globe. We remain committed to making private markets more accessible to the private wealth client segment. We were instrumental in developing the market, and today, we remain at the forefront of this. In sum, the private markets industry as a whole will experience extensive growth in the coming years, and we remain confident that Partners Group is well positioned to capture the coming opportunities. With that, let's move on to the final slide of today's presentation, that's Slide 18, and this slide will look familiar to you and highlight the consistency of our private markets platform fundraising. In January, we provided guidance of $22 billion to $26 billion gross client demand for the full year. And based on robust client demand in H1 and our bottom-up analysis for H2, we are confirming our guidance for the full year. This analysis takes into account our various open offerings, our mandates as well as demand from our distribution partners. Whilst private markets will not be able to fully escape the heightened volatility that we've been seeing in public markets. History had shown that private markets provide robust diversification benefits and improve the overall risk/return profile of the portfolio due to their structural advantages. Our bottom-up analysis indicates that fundraising will continue to be diversified across asset classes with private equity, the largest overall contributor to inflows in 2022. However, investors are increasingly focusing on other asset classes to protect against inflation and interest rates such as private debt and private infrastructure, which is widely CPI linked. Let me provide some overview on the negative factors. Our full year estimates for tail-down effects from the more mature close-ended investment programs have not changed from previous guidance. And as Philip mentioned, we expect redemptions to remain fairly equal over H1 and H2 with the potential for limited increase in redemptions from evergreen programs. That said, tail-downs are estimated to have a negative impact of $8 billion to $9 billion and redemptions are estimated to have a negative impact of $2 billion to $3 billion. This brings the total number of negative effects to $10 billion to $12 billion. Let me conclude today's presentation by saying that while many variables will drive the actual outcome, we're confident that the structural growth drivers for private markets in general and for Partners Group, in particular, are very much intact. So we'd like to conclude by thanking you for listening in on our call today. We look forward to speaking to you again soon. That will be on the 30th of August when we will present our H1 2022 interim results here in London. And with that, we'd now like to open up for questions.

[Operator Instructions] The first question is from Nicholas Herman from Citigroup.

Three for me, if I may. First question, just in terms of LP preferences and demand, could you update us please on what your clients are telling you and what they're looking for. And I guess that's also in the context, not taking anything away from your well diversified sources of new money, but there was, I guess, a notable drop off in traditional in money from traditional programs. Secondly, could you just talk about what the pipeline of activity, I guess, in terms of deployment and realizations looks like into the second half. And I guess on the realization side, that's in the context of your guidance for tail-downs of 8 to 9 and redemptions of 2 to 3 versus less than 5 in the first half. And then finally, would you mind -- could you kindly please talk about your current assumptions on default rates on the private debt side and how those might have changed. We saw JPMorgan take, for example, some decent chunk of provisions today, particularly on the leverage finance side, but I know that you did talk about your you guys also on the senior debt, too. Those are my three questions.

Yes. Thank you very much for your questions. So I'll address your first one where you asked about LPs and what they're looking at, at the moment. And I think as I mentioned, there is demand across the board for increased allocations to private markets. At this particular moment in time, it will come no surprise to you that they are concerned about inflation and interest rates. And with that, there a little bit more than usual into real assets. So those are very much the conversations. And it relates -- the second part of the answer to that question relates also to your second question, which is they actually have more interest in the bespoke solutions with us and mandates, precisely because of the market volatility. And in many cases, we're having discussions with clients where they come to us and they want to have a manager that can actually be a bit more nimble to take advantage of the opportunities that we see and the current setup, often due to governance reasons, doesn't allow them to do that. So they can come to us and say, "Look, these are the requirements I have. These are the concerns within my portfolio right now, can you create a mandate for us that takes that into account." And that's I think partly why we have seen this considerable growth in mandates overall. So hopefully, that answers that part. And you also then said about the traditional programs and the importance of those. And they're clearly absolutely important. And I think it's more a reflection of timing rather than anything else. So if we look across the board, we're about to have the first close for our private equity fund. So that will obviously fall into the second half of this year. So I think it's not that one area is more important than the other. They all have their place. It's just a timing thing as we see it right now.

You asked about the pipeline of activity for the second half of the year relate both new investments as well as realizations. So we are still very active on the investment side. We are -- in our investment committee every week, debating and wrestling with our teams over the right approach for various investment opportunities. We are actively submitting proposals and submitting bids and pursuing targets that we have had in our sites for quite some time. I do expect a little bit of a lull in transaction activity here, as mentioned, from this kind of May to August time period. We have seen a little bit more of a disconnect between buyers and sellers on valuations, and I think that needs a little bit of time to get processed. On the realization side, we do have a number of mature companies that have potential to be exited in the second half of this year. But we want, I think, to sell into a reasonably benign market environment. And so we're currently waiting to see how a couple of processes that we're watching kind of play out and then we'll make a decision on whether or not to pull the trigger on some of our more mature exit opportunities. And on the private debt side, so we do have some liquid debt that gets mark-to-market. And on the private debt side, we are anticipating, as I think I mentioned in the prepared remarks, a little bit of uptick in defaults. But within the private markets, within the middle market where we play primarily, we haven't seen that come through materially. And so I don't have any specific guidance for you with regards to where we anticipate defaults coming in within middle market lending. But I do anticipate it being certainly above where it's been over the last 2 or 3 years, we're at very low levels.

Sorry to -- Well I just -- if I could just then -- if I could just paraphrase you, can slightly. It sounds like given that you don't want to be exiting in a volatile market, which is obviously understandable. The market environment would have to materially change, I guess, therefore, for your performance fee guidance to change for the full year?

Well, I don't think it's materially changed. What I would say is we want to have comfort that some sizable exits are happening in the marketplace. We're actually getting our door knock down still from large buyers with significant amounts of dry powder that are interested in acquiring target companies. For us, it's about transaction certainty. It's not like -- there's no interest to put money to work in the market right now. It's just that we've had now a couple of months with lighter transaction volumes, and we want to make sure that there's a reasonably benign market that we're falling into. But I do anticipate that we're going to need a couple of months here to be able to give you good guidance on the second half of the year. I think the guidance on the first half of the year is going to be spot on guidance. I don't have any guidance for you in the second half of the year because it depends on how a couple of these larger exit process you play out.

The next question is from Bruce Hamilton from Morgan Stanley.

So just picking up on the performance fee point. I mean I think you've been relatively clear. But to understand, I mean, I guess, your expectation, even if say we go into recession in Q4 into Q1 of next year in Europe, which is what our economists assume. You would still expect that 2023 should be back to kind of normal performance for a year. I know it's slightly crystal ball gazing. But if there's a downdraft on performance fees, it's really just this year, you would think? Or is there a scenario where actually the recovery could be pretty gradual through '23 as well and so you could come in below for next year as well? Is that kind of low odds just to check?

Maybe Bruce, if I may, to ask -- to answer your question, is performance fees may fluctuate from year-to-year. We give a mid- to long-term guidance of 20% to 30%. But most importantly, this performance fees, whether they come now in 2022, come in 2023, these are postponed. So as Dave said in his presentation earlier, right, when it doesn't not come at the end of this year, it moves into 2023. And then we see situations, as you have seen in 2021, where performance fees spike. Then we would definitely also inform you and provide guidance. But what is more important is that there is just a lower amount of volatility in the market. right? It's whether a recession or not, it is much more important that the market somewhat stabilizes. And what we have seen in the latter of Q2 that wasn't a fact, and that's why we have postponed.

Got it. And maybe just on deployment. Clearly, the deployment is really impressive in the first half. And I guess, obviously, that could slow a little as you indicated. But I mean it feels as though versus perhaps some of your peers, your better able to finance deals? Is that -- do you think a function of being in the mid-market is -- allows you to get more done than perhaps people in the large cap space? Or is it a range of factors that have allowed you to keep as active as you have?

Yes. I think the middle market provides more financing options because you can get financing solutions done with private lenders and aren't completely at the way most syndicated markets. And so I do think that, that does play into the equation to a certain extent.

Your next question is from Hubert Lam from Bank of America.

I've got a few questions. Firstly, on fundraising. You had $13 billion in the first half. You're still targeting 22% to 26%. Should we expect it now to be at the top end of the range? Or is there any seasonal effect that may cause a slowdown in the second half or just smaller new product pipeline in the second half that may make second half a lower number? Second question is, I know we just talked about '22, but given your optimistic outlook for 2023, should we -- in terms of fundraising, in terms of increasing asset allocation on the wealth side as well as institutional side towards private assets, should we expect '23 to be at least as good as '22? I know you also mentioned real estate fund launching in '23. So just wondering how we should think about beyond this year? And how do you consider also increasing competition possibly a crowding effect as well as the denominator effect affecting fundraising into next year? And lastly, in terms of valuations, I guess you gave 1 element of it, which is the earnings growth in percent. But can you also give us what multiple contraction you've also assumed in the portfolio for the first half.

Thanks so much for your question. So yes, to your first one, look, we -- as I mentioned, we reiterate our guidance of $22 billion to $26 billion. And this is supported from our bottom-up analysis that we've done. Now where we fall within that range will clearly depend on a number of factors. And I obviously don't have the crystal ball either. But what I can say is, if the market worsens from where it is now, there could be a chance that clients' commitments do roll over into 2023, and that would mean that we end up at the lower end of the range. So that's sort of to the kind of where we might end up in that, if that worsens that's sort of where we would look at that. If markets don't worsen, then we envisage being in the upper half of that range. I think you also asked about the market and fundraising and the crowding and then the outlook overall and what we look to see going forward as well as the 2023 outlook. I think, firstly, to talk about the crowding of the market. I think from our perspective and hopefully that's been articulated, I think we have some key differentiators that will be helpful for us to take advantage of those structural trends that we have seen overall. And that's especially within, say, the private wealth space, as we mentioned, as well as other areas and the bespoke solutions. And I think that really gives us a differentiator compared to our peers to take advantage of that. As well as that, we're having multiple discussions with clients really to meet their specific needs, as I mentioned. And I think that's, again, a differentiated versus just having flagship offerings out there in the market. I think at this stage, it's difficult to say, okay, what is the trajectory going forward? We will obviously give you guidance of that as and when we come to that point. But I think, overall, we feel very, very confident that there are structural factors that will be helpful for both us and the market in general, which will increase private market allocations overall in clients' portfolios. And that's very much what we're here -- supported by the data and what we're hearing with our client interactions as well.

And on the crowding effect, I mean, it is a very real phenomenon. I don't think maybe outside observers realize how real that dynamic is. It used to be that your average private equity fund had about a 4-year life to it. More recently, our industry has had about $2 trillion, $2.5 trillion of dry powder and about $1.1 trillion of transaction activity. And that means your average fund life has shrunk to about 2 years. And so with all of these funds coming back into the market in a concentrated period of time, it's initiated what I think will be a period of natural selection within the private markets industry where the strong gets stronger and the week become obviously much less relevant. And where we're starting to see market share concentrate is in the larger platforms that can be more comprehensive solution providers and in niche top players who do 1 thing really, really well. That tends to be where the market share is gravitating towards. And monoline funds that are a little bit less differentiated, I think you're going to find it challenging over the next couple of years. You asked about valuations and about multiple contraction, maybe just to helicopter out a little bit, our industry over the last 15 years has gone from buying companies at about 8x on average to today, buying companies at about on average across the board. Now the largest players, the most successful are buying some of the best assets and have been buying in the teens. But if you just look at the industry overall, transactions have been getting done at about 12x. Now the industry used to be a lot smaller, and there was a lot of inefficiency that was found 15 years ago that is not found today. Part of the uplift in valuations has come from just the maturation and the growth of the sector, and that is here to stay. And so on average, I do think, though, that you're going to see companies that were trading at 12x, trading at 11x, trading at 10.5x. But I don't anticipate a scenario in which we're back to the 8x valuation multiples that we saw 15 years ago as maybe some would suggest because a lot of the increase in valuation is structural. And our industry is going to, I think, price much closer to where public markets have been pricing, which is around 12.5x over the long run -- 12x, 12.5xs in the long run as opposed to where it priced 15 years ago. And within each of our individual underwriting cases that we bring to our investment committee, our teams will look at the [ long-term ] trends, they look at how elevated is that particular subsector trading versus what the long-term trends have been. And I've seen as high as 2.5x of multiple contraction recently, 2x, 1.5x. It just depends on the individual sector, but we do try and be thoughtful about it.

The next question is from Arnaud Giblat from BNP Paribas.

I've got three questions, please. Firstly, I was wondering about the green flows. There's quite a bit -- that there is some retail kind of money in there, which can -- I mean, in some sectors, space and the asset management industry be affected by volatility. Is this an expectation that we have for you? Is that something you'd expect to see as well? I mean you did say that redemptions haven't picked up, but I'm just wondering about what it's looking like on the gross flows side. Secondly, on secondaries, CalPERS just announced is still a big tranche of their private equity portfolio. I'm just wondering if you're seeing a lot more activity in the secondaries market and what pricing is looking at, is it attractive? Is there a big opportunity to deploy capital there? What's the expectations in secondary. And finally, could we just go back to -- perhaps I'd like to follow up on Hubert's question. In terms of the -- how the mid-single-digit breakout -- sorry, drop in valuations in Q2 that you talked about, how that breaks out between growth EBITDA of the company's multiple contraction and any other moving parts if there is any.

So with regards to the first question on evergreen flow, there's retail and then there's retail, retail, okay? So these are high net worth clients, by and large. These are RIA advisers and we have found these vehicles to actually be much more stable than even we would have predicted. If you look at how -- again, we've been doing this for 20 years now. If you look at how they performed over the financial crisis, how they performed over COVID, how they performed over the last period of time. It's clear that investors view private markets as a place to gravitate towards during periods of volatility, not a place to run away from during periods of volatility. And so these high net worth clients that we're targeting have, I think, showed a lot of stability in the way that they have behaved. They're not just this last 6-month period of time, but through every market blip that we have observed over recent history. With regards to secondaries, I do think that this is going to be a big opportunity. Now a lot of people talk about the denominator effect and how that impacts the secondary market. We've been hearing a lot of talk about that, but not a lot of transaction activity, but I do expect a resurgence in traditional secondary activity. Over the last couple of years, you've seen most of the growth in that segment of the market come from GP-led portfolio restructurings and extension assets. But I do think we're going to see a resurgence in traditional secondaries as people look to balance out the public and private elements of their portfolio following the most recent correction. And I think the CalPERS move could be one in that direction, but there's others that we've been having conversations with, but you're yet to see a lot of that transaction volume come through. And even in the GP-led segment of the market, we've had several examples of transactions that we've passed on, I guess, other people pass on as well, and we're starting to see those come back at lower valuations. And so I do think you could see some lower valuation levels, some of those transactions that have maybe been pursued, but not announced, start to come back to the table and you might see some traction there as well. But this has the potential if this market environment sustains in this way to be a very, very good market for secondaries. And our team is prime, they're ready to go. And many of our clients are actually asking for us to add flexibility within their mandates, to add more secondary content right now because there is a sense that this is going to be one of the key themes over this next period of time. Now with regards to mid-single digit, we don't have a huge growth element to our portfolio. We have a pretty boring, frankly, middle market portfolio that we're really trying to transform strategically. We have some growth assets, but not -- you won't find a ton of the big tech type of exposures that earnings-generating technology investments, et cetera. And so that drop is spread across sectors or health portfolio is pretty stable. Our services portfolio is pretty stable. The technology exposure we do have will be at the larger end and we have what's called our goods and products portfolio that we'll experience probably the most significant correction of that group. But we don't have a lot of growth stuff that you need to sweat or worry about.

If I may add, Dave, you talked about a 15% quarter-on-quarter EBITDA growth. If we look at the last 12 months from Q1 this year, the EBITDA growth is north of 20%. And that mitigates a substantial part of the valuation decrease we will experience in our portfolio despite the public market decrease and also despite we use public peers as a reference for value in these portfolios. Now we have in our portfolios, and I think that is what Sarah talked about, quite a diversified approach. So you not necessarily have in that if the asset classes Dave talked about is pretty much direct lines. So our portfolio company -- our portfolios are most often multi-asset class, multi-strategies. And therefore, the diversification minders the impact of a direct revaluation. So while they said we could be in the mid-teens of a direct portfolio in private equity, this depends heavily on the different sectors, right? but that is mitigated by diversification factors in the portfolio.

Your next question is from Daniel Regli from Credit Suisse.

I mean it's largely a bit of a follow-up question. One on the performance fee and exit environment and maybe can you just put the guidance obviously 5% to 10% into context with the H1 2020 where you achieved when I remember it right, 9% performance fees, do you see this is a similar environment or even a more difficult environment, just looking at this percentage performance fee contribution numbers. And maybe also regarding this, can you maybe talk a bit about what -- I mean, you talked a bit -- you talked already about that this preponing and postponing of deals have contributed to this, is this the full story? Or was it also that you achieved lower valuations than expected when exited -- you're exiting your assets? And can you maybe quantify a bit how much contributed these 2 factors to the current situation? And then my third and last question would be can you talk a bit about how you measure returns, I think, in the beginning of your presentation, you talked about your clients being happy with returns, how often are traditional private equity portfolio is revalued and valuations reported to your clients?

Maybe -- thank you, Daniel. I'll start with maybe the first and let last -- so we do have for our semi-liquid exposure and monthly reporting rhythm, right? For our LP clients, close-ended structures, mandates, we run a quarterly reporting wort. Based on valuations, we also actually see in our evergreen structures. So from that end, we are -- given these semi-liquid structures actually quite close to the market. Now that said, is -- you mentioned about the 9%, which we actually reported during COVID. Is it similar? Yes, COVID is not similar to what we experienced today. But what we see is that there is just a fall falling short of liquidity events. You need in our industry, especially at Partners Group, realizations to show performance fees. And if you are just putting yourself back into the March 2020 situation, there is no reason to actually pursue a liquidity event. And we have seen in Q2 now a similar, not event, but a tendency that liquidity is just -- it just makes no sense exiting companies at this stage. So no exiting companies means also no cash flows. No cash flows in turn means also low performance fee. And that's why we actually provide that guidance. So it's somehow similar, also not similar.

Okay. I see.

And on -- you referenced the guidance that we gave in 2020 being less than 5% performance fees, we ended up coming in at 9% in the first half of last year. That was as a result of a lot of distributions that came from the portfolio side of our business as well as the debt side of our business. and that was just more significant than we had anticipated when we gave that guidance in 2020. You'll also see from the presentation, the vast majority of liquidity that was generated in the first half of this year also came from similar places, the lower expectation in terms of performance fees this year has almost nothing to do with selling our companies at less than we had anticipated. That's almost 0 factor and it has 100% to do with postponing the direct investments to make sure that we're selling into a decent market.

Okay. Very clear. May I just follow-up on the first thing, Philip has said. Just can you quickly confirm that on the last majority of your assets, these revaluations do not have any impact on management fees charged, right?

The -- if I may. So the valuation changes are typically not relevant for performance fee calculations. Nonetheless, nonetheless, if, for instance, for evergreen products, which link their fees or management fees to NAV development, yes, that might have an impact on management fees. But given that they were, as you see flat in the first half of the year, there is also, in that sense, a flat management fee development for evergreens at least to be expected.

Next question is from Gurjit Kambo from JPMorgan.

Just a couple of questions. Firstly, in terms of clients, given public markets have dropped quite significantly and probably equities have come down probably 20%, 30%, 40%. Allocation -- I guess, the allocations for private markets have sort of mathematically gone up. Are you seeing some clients sort of pushing back on allocations given they're already probably increased their weighting because of that shift? That's the first question. And secondly, just in terms of asset raising in the first half, was it more skewed towards existing clients and it would be perhaps in a more normalized environment? And then thirdly, just on the fee margin, I think I know the answer, but can you just confirm that the margins, the management fee margin, on the bespoke mandates are broadly similar to the margins on the traditional client programs.

Thanks for the questions. Yes. So you referred to the denominator effect. And look, for some of the more technical allocators and that's very much like insurance companies that can play a bigger role because they actually have to technically allocate and therefore, it can change pretty quickly. That's about 10% of our client base. But in general, what we're seeing with most of our clients is that their target allocations or the long-term target allocations are still well above their current exposures in most cases. So you totally referred to something which is happening and is correct and I think will have an impact. But in general, what we're seeing is that their target allocations are still -- they still have room within that. So I think that's asking or answering your first question. And then you referred to between new and existing. It's actually been about 50-50. So the only nuance was during COVID times. It was a little bit more skewed to existing clients. But this year, we see it split pretty equally.

And in terms of margin, they come in with the same margin.

[Operator Instructions] The next question is from Angeliki Bairaktari from Autonomous Research.

Just one for me with regards to the institutional investor allocations that you touched upon earlier. And totally, we do hear some insurers saying that are considering pausing or even reducing their allocations. And that's not so much shorter term because their public market allocations have declined due to the drop, but also because the traditional fixed income asset class which has a much lower capital consumption for insurance businesses, in particular in Europe, is becoming now more attractive. Is that something that you're hearing from your insurance LPs as well. Is that -- could that be a concern longer term?

As Sarah mentioned, I think the trends that we've been observing over the past 2 decades of private markets continue to take share from private markets we think is a structural trend. And for every anecdote that you have to the contrary, I can [indiscernible] that support that case. I met with one of our large sovereign clients a little while ago, and they were just emphatic. They're going to be taking their private allocation from, I think it was 17% to 25% to take advantage of kind of the dislocations that they're seeing in support of business. So in the insurance world, as I mentioned, they do tend to be technical allocators in some cases, and you could have some people that are going to be more high yield focused in the near term, but I think the private markets and I think the private debt solutions that we provide within private markets versus even what you can find in public markets, I think, do provide compelling value over the balance. So we don't see any large scale anecdote or large-scale data that would suggest that we're going to come off of that trend towards structural growth within private markets at the expense of public markets.

With that, we have actually one last question to Sarah by the web.

Perfect. So someone has asked about DP offerings in the U.K. and -- this is absolutely something we thought of. They've asked if we've thought of it and considered it. So we have a DP offering, and we were one of the pioneers within the space. That DP UK offering is about $1 billion now. It's a really interesting marketplace right now. You mentioned the government is further supporting this initiative right now with performance fees coming out of the charge cap. So I think this is a very interesting time for growth within this area. So we are already there and in the space.

Thank you. Thank you, Sarah. With that, I think there are no further questions.

Okay. With that, we'd like to thank all of you for your interest in our company and your participation on today's call, and we look forward to chatting with you on our next update. Thank you very much.

Thank you. All the best.

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