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

Ladies and gentlemen, welcome to the Interim Results Announcement 2022 Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions]. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to the Partners Group management. You will now be joined into the conference room.

All right. It's great to be back in London, and it's good to see everyone. My name is Dave Layton. I'm the Chief Executive Officer of Partners Group. Hans Ploos, our CFO, is also presenting with me today; and Philip Sauer, the Head of Corporate Development, will also be here with us for Q&A. I'm going to cover the first 2 sections of the report today, which focus on business topics, and Hans will cover the financial update. Now, because we shared an extensive investment and client update for this period on our last call, I'll be more brief on this call and we'll focus more on the financials. Now, there's been a lot of noise in the market about challenging fundraising and slower investment paces. 2021 was certainly a very strong year for the market and hard to comp against. The last month or two has been slower than what we saw earlier in the year, but the reality is that industry-wide 2022 is on track to be an average-ish year for both investment volume and fundraising. Below the industry's full potential, yes, but still a reasonable year. It's a complex environment to navigate, but good firms are differentiating themselves and finding potential. The investment approach that we take is a very thoughtful one. Any good investment firm has got a process to marry up its top-down perspective with the bottom-up work that its team is pursuing, and we've been steering our team to assume lower valuations already for years. Since 2019, in fact, we've had an above-average consensus view on inflation, and we built in higher inflation and interest rates through future multiple contraction in our underwriting. Our teams have also been working with portfolio companies to build pricing strategies into their transformational plans before these market environments even arrive. Now on Slide 5, I wanted to speak a little bit about thematics. This is not a market environment where you want to eat everything that's being served up. I think you want to pick your spots very, very carefully. And our push for a more thematic approach has very much helped us to navigate this environment and to invest into niches that we believe are structurally sound. Now, I know there's a lot of firms out there talking about thematics, and so I wanted to be less conceptual and more specific and give you a few tangible examples of companies that we found through this approach that we wouldn't have otherwise seen. For example, in the U.S., we had a team that's been researching Energy as a Service, and energy will certainly be one of the big topics over this next decade. This is a specialty service provider that helps small businesses to measure, reduce and manage their energy consumption, and they keep a part of the savings. They have over 2,000 sites and projects, and there's a lot of white space. In this little niche in which this company operates, it's expected to grow by about 4x over the next number of years. And this is a sector that we absolutely would not have seen, a company that we would not have been exposed to if it hadn't been for years of research, meetings and dedicated thematic work. And this effort does indeed make a tangible difference in terms of how we invest. Now in addition to finding the right themes to invest into, we've also been dedicating meaningful resources to how we drive value in our portfolio. And our entrepreneurial governance approach, combined with the tailwinds from identifying the right thematic spots, has resulted in solid double-digit earnings growth within our direct private equity portfolio, and margins also continued to be solid at around 20%. We think that's a reflection of the strong market positions that these companies hold. This is a tough market. We won't dispute that. But for structurally growing A+ assets like we believe are found in our portfolio, they're still garnering reasonable valuations and demand in the market. And we saw that with the sale process for USIC, for example. During our July AuM announcement, I shared with you our Q1 portfolio performance figures, and I gave you an indication of where we expected them to settle at the end of June, and they did indeed materialize along those lines. On a relative basis, we've outperformed public market indices, I think, because we're long-term investors, we have a highly-diversified portfolio across industries, and we're active business builders with solid earnings growth across the portfolio, which does help to damper any macro impacts from a valuation perspective. ESG is a topic that's near and dear to our heart. It's deeply embedded into our corporate culture, and we remain committed to a strong ESG strategy that we think is integral to driving good returns and, indeed, sustainable returns. In April, we published our sustainability strategy, which you'll find on our website. And in there, we go into a lot of detail on the key targets, both at the corporate and the portfolio level, that we're looking to achieve. And evidence of our commitment to this initiative is found from the fact that my former Co-CEO, Andre Frei, is today the Chairman of Sustainability for us and leading that initiative. And so we have put CEO level talent to help to drive ESG impact across our various portfolio companies. I also am directly accountable for achieving certain ESG goals as is our Executive Chairman. This is a topic that has attention all the way throughout our organization. Now, let's move to the client side of the business. One of the key differentiators for our firm, I think, continues to be the diversity of our client base. By not having too much of a concentration in any one geography or client type, we're able to shield ourselves from some of the regional challenges, like you hear a lot about the denominator effect, for example, that may exist in any particular segment of the market. Distribution partners continues to be a key strength, and we're maintaining our leading position in our evergreen offerings. I was particularly pleased to see the U.S. in this first half, as a percent of our total fundraising mix, increased meaningfully. The U.S. is our fastest-growing fundraising region for the first half of this year. And I don't expect it to be that high in every period, but I do think it's a strong signal towards our potential. The U.S. as a mix of our overall business now increases to 20%. This diversification also carried through on our asset classes and our program structures. Our new commitments for the first half amounted to about USD 13.1 billion, and that compares with USD 12.1 billion in the first half of '21. Our innovative bespoke client solutions was the largest contributor to new assets at USD 9.3 billion. That's about 71% of the assets that we raised. And I think it's worth diving a bit deeper into bespoke client solutions segment, and we'll do that on the next 2 slides. First of all, there's a lot of talk in the market today about the high net worth segment of the market. You hear a lot of plans for products being launched, and there's a lot of hiring going on, and I think that's for good reason. It's because this segment of the market is expected to more than double over the next few years. Private markets is only beginning to ramp up, and these clients need more accessible solutions due to their specific needs. I want to just highlight that this is not a new initiative for us. In fact, we've been a pioneer. Even in the U.S. market, I think we were the first to provide a credible '40 Act registered fund for private equity, and today, it's by far the largest private equity structure in this category. Over the last 20 years of managing these unique structures, we've developed the portfolio management skills necessary to run these funds successfully. We have long-term relationships with distribution partners across Europe, Asia and the U.S., and this is a category for us that we're very proud of. Now on the other side of the market, not for the high net worth investors, but for the largest institutional investors that we have, they're also looking for more custom structures that can be specifically built to meet their needs. And we're a leader in mandate solutions also. Institutional investors are increasingly turning to private markets, and they're looking for firms that can provide not only in terms of performance but also in terms of service and governance. They want closer interaction, they want deep relationships, and they want more control over their allocations and their exposures. And we've been providing these types of custom mandates now for many, many years. We have over 140 of them in place. They're flexible. You can cover one asset class or you can mix and match between all 4 asset classes, and it's no longer just for investors that are investing well over USD 1 billion of capital, which is maybe how it used to be. You better believe that for any of our investors that are investing USD 150 million plus with us, we're pushing them towards these very sticky mandate relationships. Now, let's move to the next slide. As we continue into the second half of this year, we remain confident in our investment strategy and the demand that our clients have for our platform. We're committed to delivering strong returns, and we reaffirm our full year guidance for '22 of raising between USD 22 billion and USD 26 billion in gross client demand. And with that, I'd like to hand over to Hans for the financials.

Thank you, Dave. And also a warm welcome from my side. Average assets under management grew by 19% to USD 122 billion. Management fees grew in line with the underlying AuM growth. Performance fees were reduced to 8%, following this very strong and exceptional performance fees in 2021. This brought the total revenue to down 22%. Profitability remains strong. Our EBIT margin increased to 64.7%, as we had the benefit of a lower provision in the equity incentive program following the changes in the share price. Apart from this, underlying profitability remains stable as we continue to make the right investments behind our growth agenda. Let's look at the revenue in a little bit more detail. Management fees follow AuM growth, are long term and contractually occurring. They grew 18%, in line with the underlying growth in assets under management, which was supported by strong client demand across our client solutions. Performance fees were 8% of revenue. This was in line with the guidance of 5% to 10% of revenue we gave during the July AuM call. Let's go back to the AuM call for a little bit to look at what happened in the exits, because it's very important to understand the exits in view of the performance fees. We had portfolio realizations of USD 6.4 billion in the first half, with over 70% coming from portfolio assets and credit distribution. This leaves a lower level of direct exit, which impacted the performance fees. As already discussed by Dave, first, we had the impact of exits, which were planned for 2022, which we moved into 2021 as the environment was positive and we were delivering on all our criteria. Second, what we see now in view of the changing market environment, we postponed exits which were planned for the first half. The combination of those two factors, the acceleration in 2021 and the postponement now, reduced performance fees to 8% of revenue. Let's look at the outlook for performance fees. Following the lower level of exits in the first half, combined with the changed market environment, makes us see that this year we will not be in the middle -- in the guidance of 20% to 30% of revenue, which is our guidance for the medium to long-term. Therefore, we guide performance fees for this year to be below 20% of revenue. We remain confident that our performance fees will come back to 20% to 30% over time, and this is underpinned by a very strong portfolio performance, as we showed you, that we have delivered strong operating performance. And it's also built on the track record, what we have been delivering over the past years. It's important to mention that we take a prudent approach in recognizing performance fees. First, in recognizing performance fees on the realized exits, we only do that after all key closing requirements have been met. Second, we stress test the valuation for the unrealized assets by applying a 50% reduction to the net asset value, both confirming the prudent approach we take in recognizing performance fees. Let's now look at the potential of performance fees over a longer period of time. Remember, performance fees follow AuM growth with a time lag of around 6 to 9 years. We delivered CHF 2.7 billion in performance fees over the 5-year period from 2017. Those come from investments made over the period 2011-2016. If you take into account the amount of investments we made in the following 5 years, that was about double the level. You see that we continue to build a strong pipeline of performance fees, and our newer programs are more performance fee heavy, including more direct contact. It's also important to reemphasize again, our performance fees are very diversified across our client solutions as well as the investments. If we conclude on the revenue fees, management fees are stable over time at around 1.25% or 125 basis points. They can vary in any given year because of timings of fee clock, but they are stable at around that 125 basis points. In the first half, they were 1.32% or 132 basis points as we continued to benefit from higher late management fees. And that confirms that they're stable, but there is this impact of the fee clock in any given period. Performance fees brought the total revenue margin to 144 basis points. If we turn to the profitability, our EBIT margin increased by 2.6 percentage points to 64.7% as we benefited from lowering the provision in the equity incentive program following the changes of the share price. The underlying profitability remains stable as we continue to invest in the future growth of our business. We'll continue to do so in the second half as we grow our business at our target margin of 60% on new business. Let's look at the cost. 80% of our costs are personnel costs. They came down 35%. The key driver for that was lower performance fees as we allocate 40% of the performance fees to our staff, which reduced the performance-based personnel expenses. Regular personnel expenses increased 4% only as we had that benefit from lowering the provision in the equity incentive program. Apart from that, the underlying regular personnel expenses increased with the 11% increase in headcount as well as making an extra special bonus, which we will do this year because the talent market continues to be competitive. So with that, our recurring cost grew in line with the management fees. If we look at other costs, which are 14% of the total, they grew from CHF 27 million to CHF 43 million, as we saw a return to travel post-COVID as well as making investments into technology. Quickly, on exchange rates. Remember, we are a Swiss company reporting in Swiss francs, whereas most of our business is outside Switzerland as we are a very global firm. The impact on exchange rates this half year was negligible at around 1% as we had two impacts. One, the strengthening of the Swiss franc versus the euro, which was offset by the strengthening of the U.S. dollar versus the Swiss franc. Let's have a look at the items below EBIT and our balance sheet. Alongside with our clients, we invest about CHF 800 million in our products and invest with the client there. We saw a small 1% reduction in the return in the first half, following a very strong result in the first half of last year when we had a 9.5% positive return on the portfolio. This drove the financial results negative to minus CHF 20 million. If you look at our taxes, the tax rate decreased from 16.4% to 15.5% as we had the dividend repatriation last year, and we had to pay withholding tax on that. We continue to see our taxes to be within 14% to 17% as we go forward. Profit was CHF 464 million for the first half, and we continue to have strong liquidity. We have CHF 700 million in net cash, which consists of a cash of CHF 307 million and loans to products of around CHF 1.5 billion. Remember, we take a very prudent approach in what we call net cash because we also deduct our long-term debt of CHF 800 million and our short-term borrowing of CHF 270 million, all confirming we are in a very strong liquidity position. With that, we conclude the presentation. We would like to open up for questions, and we would like to start doing that here in the room in London.

It's Hubert Lam from Bank of America. Three questions. Firstly, how do you think about fundraising into next year, just given your ability to deploy capital for the rest of this year, the denominator effects and other issues that you face? That's the first question. Second question is, historically, we thought about Partners as a 10% AuM growing company. Can you continue -- do you think you can continue to compound at that rate? Or is it harder to achieve now, just given you're a much bigger company? Or is 10% still the go-to rate we should think about? And lastly, I guess a question on the performance fees. On the new guidance, Hans, you viewed it below 20% for this year. That implies, I think, a range of this year between 4% to 20% potentially. Where -- how do you think about where you kind of -- how should we think about where it's going to be within that range? Also considering this USIC deal you did in August, shouldn't that help the second half in terms of performance fees? Or how should we think about that?

I'll take the first 2 questions on the client side. First, with regards to fundraising and client activity and what we're seeing, you do hear a lot of noise in the market about factors like the denominator effect, as you mentioned. And I think it's important to remember that our fundraising is a highly-diversified client base that we're pulling from. This is not just a couple of big state plans where if they get out over their skis on allocations and stop allocating that our fundraising stops, okay? We have a global effort. It's increasingly global, as you can see from the mix of geographies that we're raising capital from today. And we pull from different segments of the market, the high net worth segment of the market, in addition to the small institution and the large institution side of the market. We have custom solutions that are built specifically for the needs of particular investors. It's not like we just have our big fund, and if it's out of favor with investors that we stop fundraising. And so we think because of the institutional approach that we've taken to build out our product offering and the geographies in which we pull it from that we can generate consistent returns. Which is why even in a year like this, we have not had to adjust our guidance with regards to the capital that we think we can raise. And we're committed to raising within the USD 22 billion to USD 26 billion that we have communicated. With regards to the growth rate overall, I think it's important, if you look at the management team objectives that we've signed up for, we have a 10% growth rate right in the middle of our own incentive plan, okay, the earnings growth rate, if you look at the way that our management team is compensated. And we would not have signed up for that type of an arrangement if we didn't think it was achievable. And yes, the company grows, and the company is at a much larger base than it used to be in the past and that the capabilities of the company are growing commensurately, and I think we've proven that over the last couple of years. Hans, do you want to talk about performance fees?

Yes. Maybe a couple of words on also the growth. And I'm in the clients group every week and I see continued strong demand across clients, geographies across the products coming in. So it reassures us on that. And building on our track record, we see continuous this globalization, not only in the U.S. and Asia, to broaden that growth. And we see that coming through also into the pipeline, so that reassures us to that. As you said, performance fees could be anywhere between, nothing more, which would be 4% for the year, up to 20%. And maybe with USIC and also some of the other things we signed. Assuming they all close this year, you still need to believe more exits to come in the second half to get to the upper end of that guidance, 20%. So if you just take what we have signed, you're somewhere in the middle between the 4% and the 20%. So we do need more activity to support the upper end of it. And that's, I think, an important thing.

It's Nicholas Herman from Citigroup here. Just 3 questions as well, please, mostly just follow-ups on the prior questions. So you've talked at the AuM update about a few mature companies that had the potential to be exited. In the near term, you want to be selective on exits, given difficult market. That all makes sense. Since then, you've announced the past exit of USIC and the minority acquisition. I mean, has the market balance greased the wheels a bit and made it a little bit easier to crystallize the deal pipeline? That, that will be...

Yes. So with USIC, we had a lot of debate on whether or not to launch that process, but we've had very strong inbound requests and inbound demand from potential buyers. And so we did launch a process there, and had a significant transaction event. We will have a new shareholder that comes in to acquire 50% of that business. Our old funds will sell, and we'll have new capital that's going to come in for the remaining 50%. So that will be a full exit for the existing investors in USIC, and then we'll have new shareholders that come in. And I do think it was helpful for us to realize that for good quality A+ assets, I mean, that's a USD 4.1 billion transactions, no joke, there's real prices that are being paid for prime assets in the market today. At the same time, the debt markets need to stabilize. And I think we're very hopeful that post Labor Day, that we'll be able to establish a little bit more supportive debt market than what we've seen here over the last couple of weeks, in particular, with not a lot of new activity -- actually, not a lot of new underwriting activity getting done.

And just 2 more questions, if I may. Just a follow-up on USIC. Presumably, the deal -- that sale is expected to close this year. I mean, how do you see the phasing of performance fees across this year and next year? And then my second, the -- my third question, just on the outlook for other operating expenses, which increased a decent step up due to tech investments. Is that -- I mean, just how to think about the outlook for the growth on tech investments?

Maybe I'll take the first bit, and then you can add on to it, Hans. If you think about our performance fee that we generated in the first half of this year, for example. I think it's important to remember that it came from 70 or so different investment vehicles, all of which contributed to that result. And we've made the point a number of times on these calls that you can't draw a straight line between realizations and performance fees because of how diversified we are. It's not like we manage from one big fund, and you know am I in-carry mode or am I not in-carry mode. We have hundreds of funds that go in to invest into those vehicles. In USIC, for example, that's an investment with infrastructure characteristics. We had some of our infrastructure capital there. We had private equity capital. We had mandate money. We had ever evergreen money in there. Dozens of different investment vehicles in that one investment opportunity. Some of them are generating performance fees today. Some of them are building still, and we have oftentimes European waterfalls in some of those older funds that require us to return all of the capital to our investors plus a preferred return before we start generating performance fees. And so it's not as easy as, okay, the performance fees coming from that are going to come this year, next year, and we build a schedule for you. We even have an element to performance fees that could fall this year that we won't know until the final tally is done, and to see if some of those vehicles switch over into carry mode or not by the end of this year. And so that's one of the reasons why we take such effort to give good guidance with regards to where our performance fees are headed, because it's very hard outside-in to draw a straight line between a liquidity event and performance fees falling into a particular period. Hans, do you want to add to that?

Yes. No, I think that's important. So it's, as you said, it's very diversified. And let's also not forget some of it because of high-water mark funds is already reflected. Therefore, it's very important to note that what we discussed before between the 4% and the 20%, you do need more exits here to get at the upper end of that. I think that's why we said what we said. Quickly on other operating expenses, which increased. You have to remember they increased following a period where we were in COVID, where there was no travel, where we actually had almost artificial benefits. If you look, we see this as a more normalized level because we're back to travel. We made the right investments also in technology. And if you look per FTE, it's about the level of 2019.

It's Tom Mills at Jefferies. Just on Slide 4, it's helpful to have the kind of base case and asset testing scenarios there. Just as we think about the kind of target returns that you might think about within those 2 different scenarios, and I guess we are looking slightly more at the asset testing scenario at the moment. Is base case, in say, direct private equity, you're thinking kind of 25% to 30% IRRs and the asset testing scenario there, that will be more like 15% to 20%? Is that kind of like a reasonable way to think about it in the private equity asset class, for instance?

Yes. I do think so. In some of the more recent transactions we've underwent, this is a period of uncertainty. It used to be that we put a tremendous amount of weight into a base-case scenario, okay? And we would assume a relatively benign macro backdrop, and our underwriting would -- this is 10 years ago, and we come up with a base case that we felt really good about. We hold our team accountable to it. We hold our management team accountable to it, and that base case was kind of everything. Today, that is not the way you underwrite. Today, we're underwriting with scenarios and a variety of scenarios. And we want to know, is this an asset that can hold up in a range of different economic circumstances? And so you will have certain cases that are in there that if everything goes well, you're up in the 20s. If everything goes really, really bad, you're generating single-digit returns, and probably it triangulates to a midpoint of a high-teens type of return. That's probably the return profile that gets done in a market environment like this. This is a market where we're having to build transformational business plan in order to generate those type of returns as well. The game of going long leveraged equity in generating 20-plus percent returns is over. And so the business plans that we're implementing in order to generate those high teens, low 20s returns are quite extraordinary, actually. It requires a very, very heavy lift.

And then I guess within the kind of thematic portfolio, it's quite important that you've got platform businesses there, and we've seen that there's been quite a few add-on deals across the market this year, year-to-date. Would you be expecting to deliver more value to the portfolio by that mechanism this time around than perhaps...

It's a great question. Oftentimes, a market dislocation is a great time to approach smaller businesses and to accelerate acquisition activity. I was on the Board of one of our companies, it was an active platform buyer. And after a financial crisis, all of the mom-and-pops who had held out for years, who had gone through this disruption kind of just threw their hands up and said, okay, I need to align with a larger, more sophisticated platform. And we are seeing an acceleration of acquisition activity at the smaller end and at the add-on end of the segment. And so yes, we are actively building, actively pursuing add-on acquisitions in just about all of our large platform companies right now.

And sorry, just maybe one final question on -- I guess, on LPs and where there's kind of tremendous capacity at the moment, it feels like the oil-rich sovereign wealth funds must be good places to tap. How well established are you in kind of -- in relations with those LPs, and how much do you feel like that could grow?

Yes. I was in the Middle East just not that long ago meeting with some of our large clients there, where we think we have the potential to double with existing clients as well as looking to add some new clients. I do think that that's an area of certainly potential for us. It's not been a huge part of our fundraising mix historically. They are important clients to us, and we've done well for them. But I do think that, that amongst other regions continues to have strong potential for us. I also think it's important to note, as you look at the fundraising that we are doing right now, we're not taking the easy money and just raising debt money, which is what a lot of people are doing. Our mix of private equity -- high-margin private equity business actually went up in this period, where many of our peers were just raising debt capital because that's what they could easily raise. We're holding our teams to a very high standard with regard to fundraising mix in addition to absolute numbers of AuM because that's important to us, that we maintain our fees and maintain our margins despite some volatility.

Angeliki from Autonomous Research. Two questions on my side, please. First of all, on the non-performance fee-related costs, we saw a bit of growth if we exclude these reversal of the provisions. How should we think about FTE growth? I think last time, you had guided for around 1,800 FTE. We're now close to 1,700. How should we think about FTE growth into the second half of the year, and how should we think about the cost line related to that? And second question with regards to secondaries. We have seen in the press recently some data points about LPs selling stakes in funds at the highest pace on record. How are you positioned to potentially benefit from that? And what is the outlook with regards to the secondary business? I think when you presented an update in the beginning of this year, you had mentioned that you lost a little bit of market share there in the previous years. Could that reverse now going forward?

You want to take the first one, Hans?

Yes, let's start with the FTE growth. So if you look, we had this one-time benefit in the first half, our recurring cost grew about in line with the management fees, which were up strong at 18%. As we continue to invest in headcounts, we have some acceleration of that because we have a little bit of catch-up this year, and we will continue to do so in the second half so that we continue to prepare for future growth. Because as Dave said, we see the growth to continue, and it's very important to develop continuous strong pipeline, that we onboard the talent and we keep investing in the talent base. We will continue to do so at an EBIT margin target of 60% on new business, so that's what we'll continue to do so, we constantly prepare for future growth.

And on the secondary market, first of all, I don't think that that's true, what you read that investors are selling at the highest pace in history. There is some activity -- traditional secondary activity that is going on, but it's very hit and miss. Discussions are happening and then they pull it because they're not happy with prices, et cetera. There's not huge volumes coming through on actually transacted activity in the traditional secondary market, the -- what we call the extension market. So GP is looking to extend the existing portfolio companies pulling from secondary players to fund those transactions. That is something that we're seeing consistently within the market. Having said that, as we talk to our team, as we talk to intermediaries, I think the pipelines of potential are as high today as we've ever seen. So there's a lot of people who are talking about selling, need to sell, want to get liquidity, aren't happy with where prices are right now but are on the sidelines putting their plans together and evaluate. So I do think the secondary market is going to maintain a lot of relevance for our industry over this next couple of years. Yes, we did go through a period of time where we didn't emphasize secondaries quite as much. I was the head of our private equity business for a long time, and for a solid decade, I beat the drum of direct, direct, direct, as we shifted our mix of business from around 10% direct investments to today around 55% direct investments. And that's been good for the business, that's been good for our clients, and that's been good for the organization by and large. But one of the casualties was we didn't put as much emphasis on secondaries, and that was a business development opportunity that we didn't spend as much time on. We have shifted our focus. We're putting a lot of attention on the secondary side of our business, what we call integrated investments. Putting a lot of resources behind that, a lot of new team members behind that, and very much believe that we can keep pace with that market moving forward.

Charles Bendit from Redburn. Just one quick follow-up on your answer about the secondaries. I think at the full year, you made the point that you would try and reinvigorate the growth in portfolio investments versus directs, and including primaries as well. And maybe, we'd expect to see the mix between portfolio and direct investments be more stable going forward. How is that progressing? How is the outlook for that? And should we expect any implications on the revenue line from that evolution? For example, would there be an implication for the management fee margin and for the performance fee potential?

Yes. So you will see a slight mix shift towards integrated investments, as we mentioned, that secondaries and fund investments. We realize that as we have built our direct investment engine, we pushed it actually a little bit further than our clients even needed. And we have many clients that are quite happy with a little bit more diversification. It's also more scalable for us as an asset manager, and much of that is pretty good margin business also, not all of it. The primary side is certainly commoditized, but there are segments of the integrated business that continue to provide good fee margins. So we will not push it to the point of eroding our management fee margin. We're talking about, I think it's a mix shift of like 3 or 4 points out of our overall pie that's our target for the next year or two, to shift from direct investments towards integrated investments in our business plan. And so I would not expect any dramatic evolution in the management fee margin resulting from a nominal shift to that order of magnitude.

The question comes from Bruce Hamilton from Morgan Stanley.

Two follow-ups. Firstly, on the opportunity for investments and dislocation, I was interested in your comments. I mean, is the way to read this then that you're seeing kind of selective opportunity with -- to acquire kind of smaller firms in terms of platform deals? Because I think the past comments have been, look, you need a period of stability in markets, buyers and sellers matching of minds and so forth, before you see the pickup in investments. So I've been anticipating that's more a 2023 event, but I'll be interested in if you think that's going to come through a bit faster. And then in terms of the EBIT margins, I guess if I was to sort of normalize costs, that would take your EBIT down to sort of 63-ish percent. And then perhaps assuming slightly lower late management fees, you'd be in the kind of 62% to 63%, so similar to first half last year. Given some of the currency headwinds and given continued growth, should we assume that it's -- you're still going to continue running above 60% and you gradually trend towards 60%? Or could that come through a bit quicker in terms of getting to that 60%? Just to understand, because I think consensus expects above 60% for the next 2, 3 years.

Why don't I cover the investments and then, Hans, you can cover the margin question. So in the current environment, we have scaled down our average investment size slightly over the last couple of months. In fact, a couple of businesses that we have invested into, we're probably below or at a level that we would not have entertained in a 2021 type of environment, but we are actively in the process of building out those platforms. So we're investing a little bit smaller and going to roll up our sleeves and actively build that business. And we think that they have the potential to be interesting vehicles for us to be able to invest more equity over time through add-on acquisitions and through other means. So yes, we have invested in some slightly smaller businesses in this period of time. And I do continue to think that it's probably going to be until the latter half of this year, maybe 2023, until you start to see stability in the much larger end of the market. Now, USIC is an interesting data point. It's a $4.1 billion transaction, but we were able to leverage an existing financing facility in place that had some structure -- some portable characteristics to that structure that allowed us to maintain that existing facility in order to facilitate that transaction. I think in order for transactions of that size and magnitude to be consistent, you're going to need some stability in the debt markets. And it's probably second half of this year, beginning of next year before you start to see that. Hans, do you want to talk a little bit about EBIT margin?

Yes. I think if you look at what you called a normalized margin, I would say it's closer to 62% because you also need to not forget that we had a normalization of things like travel cost next to adjusting for that benefit in the provision. We will continue to make the right investments with that 60% EBIT margin on the new business, which means you would have a gradual reduction here from 62% closer to 60%. But gradually, as you say, we don't see -- we made big changes. Now what you also need to know that in any given year, indeed, if exchange rates move in a different direction, you could be a percentage point of that. But that's just, I would say, more like what it is in that given year. So that's why we were safely above the 60% because you could have periods where exchange rates, all those things that take you a little bit closer to that line.

That is, in fact, the reason why we're at 62% as opposed to 60%, it's to build in a little bit of a cushion for events like that. Because we are committed to being above 60%, and want to be conservative with regard to that.

The next question comes from Arnaud Giblat from BNP Paribas.

I've got a few questions, please. Firstly, just to come back to a question asked earlier, the AuM update, it's about unpicking the 5% decline in peer performance. If you could unpick that for us in terms of what are the reduction in multiples we saw over H1 versus the EBITDA growth, which I think you indicated in the mid-teens? And perhaps some exits, which are -- where you see uplift? So I'm particularly interested in reduction in multiple. And secondly, just to come back to Bruce's question, he was particularly asking around the platform deals. I'm just wondering whether the activity you're expecting, the investments you're expecting to make in future are thematic deals, whether the -- you're seeing enough stability in the bid-ask spread for new investments? Or if we're going to have to wait out again for latter part of H2 2023?

So with regard to the valuation in our private equity portfolio where you saw about a 5% correction in valuations in the first half of this year, the question is kind of what are the factors that play into that. Now, there's a couple of things to take note. The public markets made a pretty extraordinary run there between 2018 and 2021, and the public markets went from about a 12x average EBITDA multiple to around an 18x average EBITDA multiple, may come back down to around 13x in 2022. In private equity, over that period of time, between 2018 and 2021, your average acquisition price went from about 11x to about 12x, okay? So we're talking about a different order of magnitude completely from the drawdowns that we saw in public markets. Now, most of the portfolios of the firms that you all cover, the largest, most sophisticated buyers out there, are not buying average companies, right? They're buying some of the best companies that are being acquired in the teens. And so there is a correction, I think, it's commensurate with the valuation pullback that you're seeing in public markets. But I think a lot of people have exaggerated greatly the valuation correction that's going to occur broadly within private equity because the valuation multiples, except for a couple of sectors, some of the software private equity investments that were being made, et cetera, they really ran away for a period of time. But by and large, you're talking about an asset class. It's been acquiring in the 11x, 12x range, and could it fall to 10.5x, 11x. Yes, I think it could. Is it going to fall back to 8x, which is where people were buying assets in private markets 20 years ago? No, I don't think you're going to see that level of correction. And so with regards to what factored into that 5% correction, it was 100% a result of the valuation multiples. We had good growth. Again, I think we saw 15% growth within the -- your average portfolio company within our direct equity portfolio, and so the balance came from a correction and multiples. And I don't have the exact. It went from an average of this multiple to that multiple, but you can assume that all of that downward thrust came from public market comparables. And with regards to the bid-ask spread, are we seeing stability in that, not really. So there was a phenomenon that was -- that occurred over the course of this year when the public market started to correct, public market buyers corrected essentially instantaneously. And we've done a little bit of work to triangulate what's been happening in the market, talking to advisers, our own sale processes, kind of seeing what's happening. And for a period of time, it was like a dislocation between where private equity was bidding and where public markets were bidding, because the public buyers corrected instantaneously. And then over time, you had a large segment of the private equity buyers that started to correct their valuation expectations. But transactions, we're still clearing with a small cluster. And today, you, in fact, still have processes that are clearing at quite high valuations. But what's interesting is the market seems to have clustered at lower valuation expectations, but the market is still clearing with outlier bids that are still pricing not too far off of where they would have been pricing in maybe Q1 of this year or even Q4 of last year. And so it's going to take a little bit of time for that to work its way out. And so no, I wouldn't say that there is a robust market of buyers and sellers that are kind of on the same page. I think we're still at the tail end of buyers being able to sell at yesterday's prices, because there are still some aggressive -- or sellers being able to sell at yesterday's prices because there are still some aggressive buyers. But I don't think we're far off either. I think we're maybe a quarter or two away from having some more reasonable eye-to-eye discussions.

That's very helpful. If I can also follow up on your comment earlier about having to roll up your sleeves to do some small-sized platform add-ons, et cetera. Is there a scenario where your FTE growth plans remain robust into the double digits over the next few years?

So -- say that one more time. Did our what plans remain robust?

I'm sorry, your employee -- your full-time employee growth plan, whether you have to retain a high level of growth to be able to roll up your sleeves and do more work on portfolio companies.

Shall I take that one?

Yes, sure.

No, I think it comes back to an earlier question of the growth, which we see always as this, call it, 10% plus. I don't think the growth will accelerate because of that, because our growth -- because our indirect needs to pipeline is very disciplined. So we continue to grow at around that level, and we make sure our -- and that's in line with our strategic plan, is that we keep growing our business to make sure -- because what's important for us is 2 things. A, the right teams that will build the businesses and we do that with discipline because just adding more FTEs, we need to make sure we keep the discipline to keep the outperformance for our clients. As well as we have a great business, which is very diversified across a multiple of client solutions. Just making sure to our portfolio capability that we grow with discipline. So might be more opportunities, but we stay very strategically focused in our growth trajectory and plan for that.

And yes, we do have areas of the business that are becoming more resource-intensive. That's clear. That's the direct insight of our business. But we still are scaling up, to the prior question, other segments of our business that are much more scalable. And we're trying to get that mix right to allow us to operate our business at the growth rates that we're focused on achieving, but still efficiency coming through the system.

The next question comes from Mate Nemes from UBS.

I have a couple of questions, please. The first one is on EBITDA growth. You mentioned this 15% growth in the direct part of the PE portfolio year-on-year. I'm just wondering to what extent you're confident you can maintain a healthy double digits or mid-teens type of growth in these assets in an inflationary environment, also factoring in under the current energy crisis, there's still risk around that. To what extent do you have confidence that this could go on? Secondly, a question on late management fees. In the first half, I think due to the infrastructure fund, you had somewhat higher late management fees. If I recall your earlier comments, you were guiding for a more normalized level of late management fees this year. What could you tell us about the second half of the year? And last question, just to understand your earlier comments perhaps more clearly. I think you've been referencing debt markets or the availability of debt financing is one of the crucial issues for transaction activity to pick up. And secondly, a more, let's say, reasonable level for transaction negotiations in terms of valuation. Are these the 2 prerequisites of a higher transaction activity and for your realizations to pick up? Or are there other elements we have to keep in mind here?

So we have held our teams quite accountable to their growth plans straight through this year. And so through all of the different events that have occurred over this year, whether it's the war in Ukraine or whether it's inflation, we had opportunities to certainly adjust our team's expectations downward and that might have been justified, but we continue to hold our portfolio managers and our teams and our management teams accountable for the assumptions that we bought into their portfolio companies at. And we're going to continue to do that in this next year. I have no doubt that they'll be able to navigate the environment and I have an expectation for them to continue to grow commensurate with the opportunity that exists. And in some cases, that requires you to go out and buy and to acquire other businesses. In some cases, that can be done organically, but we are committed to healthy growth rate. With regard to late management fees, Hans, do you want to speak to that?

Yes. We had indeed the benefit in the first half from the infra fund. Last year, we had it on the direct fund. We will not have the late management fee benefit in the second half. The only thing we continue to do, have the income from the bridge loans which will continue, but we will not have that benefit in the second half.

And then with regards to kind of what are the prerequisites in order for investment volume to return, I think a support of capital markets would -- debt markets would obviously be helpful, but they're not completely necessary. In the first half of this year, we actually invested into a couple of companies with much lower levels of debt than it would otherwise be utilized because we had a particularly transformational plan in mind for that asset. But certainly, you need buyers and sellers to be able to come together and shake hands, that's a prerequisite. But there's nothing else. I mean, I think, in general, people have been working, if you talk about private equity buyers, very hard over a long period of time to create value in these companies, and they don't want to sell them inefficiently into a bad market. And so you need just kind of a general level of a feeling of the market is fairly pricing the assets that they've been building. But there's no one-to-one trigger. If this happens, then the markets return. I mean, you've got a confluence of things, I'm sure.

We can take one more question.

The last question for today comes from Daniel Regli from Credit Suisse.

Maybe one question on management fees. I mean, you -- I heard you talk about this 125 basis points. And historically, I think you had about 120 to 130 basis points. Now recently, it was more like 130 basis points, obviously. Can I assume that this gap is mainly driven by this late management fees? And going forward, in normal circumstances, I should pencil in the 125? Or are there any kind of underlying trends in your asset categories which would determine the future management fees on top of it? Then secondly, quickly on performance fee guidance. Maybe a little bit the relationship between 2022 and 2023? Again, I know it's uncertain times, but under normal circumstances, is it fair to assume that if we have kind of a below average year 2022, we should see then a, let's say, more above average year 2023 in terms of performance fees? And then thirdly and lastly, just a bit more color on the EBITDA margin again, and I know you already talked about it a bit. But I don't know whether I missed it, but have you specified how much was the impact of this pro forma share-based compensation plan on the EBIT margin? And what are the other moving parts we should consider into H2?

Yes. Why don't I...

Why don't you take 1 and 3, and then I'll take 2, Hans?

Yes. I'll give a little bit on that, but then if you -- because that we're no -- so we see continued management fee stability, which is somewhat pinned by our price discipline as well as the value we create in our solutions to our clients. So -- and that is at that 125 basis points. In any given year, like we get in the first half, you can have the benefit of late management fees. It comes from the closing of these funds, which increased to 132 basis points. You can also have the benefit sometimes of the [ dry clause ] that you should model underlying around that 125 basis points. And any year, you can be a little bit above that or below that because of how the fee clocks work. It's always pins up price stability. I'll start with the EBIT margin. So if you just do it at its simplest level and you take away that benefit from the provision in the -- ex the incentive program, our regular personnel cost grew a little bit higher than the increase in the management fees of 18%. So because we continue to add headcount at around 11% and as we also have competitive market for talent, and those drove a little bit ahead of. Therefore, the underlying EBIT margin is 62%, and we continue to invest in future growth with that 60% EBIT margin on new business. So that's this what we call the 60% plus, so that explains it. So underlying, it all grew about in line with the management fees. On the performance fees guidance, before Dave -- what's important, I think, to mention is that the underlying portfolio performance continues to be strong, so we keep building future track record of performance fees when the markets come back. Now, we have seen that relatively fast from COVID to 2021. I remember, this year, we also have a little bit that we accelerated things into 2021. So I would say, over time, they will come back to 20% to 30%. You just need to be careful that you want to be too precise on the when. Because the when is not the target, the target is to get the 20% to 30% over time because it's about delivering the outperformance for our clients in the portfolio and how we exit them. Yes.

And I think if you go back to Page 19 of the presentation, from the time that we first gave the guidance of that 20% to 30%, which was in 2016 until 2020, we are in exactly the middle of the range that we provided. And obviously, 2021 was an exceptional year, 2020 will be below that. But I have no doubt that when you pool together the next 5-year period of time, that will also be in the middle of that range. Now when you slice up that overall result into any given period of time, half year period of time or full year period of time, it may vary a little bit. But we're very, very confident that if we do what we should be doing with regards to helping our investment programs reform, that that is the amount of performance fees that should be contributed to the business over time. And we have a lot of confidence. I don't have a view on 2023 specifically right now, but I have a lot of confidence that over the long run, that guidance is very, very strong. And with that, we'd like to thank everyone for your participation. Thank you for your engagement and questions. It's always a pleasure to be with you, and we look forward to the next call. Thank you very much.

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