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

Ladies and gentlemen, welcome to the AuM Announcement H1 2023 Conference Call and Live Webcast. I am Alice, the Chorus Call operator. [Operator Instructions] And 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 David Layton. CEO. Please go ahead, sir.

Welcome to Partners Group's business update and outlook call. My name is Dave Layton. I'm the CEO of the firm. Also on today's call are Sarah Brewer, our Global Co-Head of Client Solutions; and Philip Sauer, Head of Corporate Development and Co-CFO at interim. Let's start off on Slide 2 with a big picture overview. The early months of this year started off largely as a continuation of Q4 of last year. If you joined us back in January, you may remember that I told you that our assumption was that the pace of client conversions would likely normalize throughout the year. We've seen this movie before. We have indeed felt the client pace picking back up in the last few months of the period, in particular, we raised $8 billion during the period. Pipelines remain robust, demand is intact, and we reaffirm our full year fundraising guidance of $17 billion to $22 billion of gross demand. We're pleased to be a firm that continues to have our services stand out where firm is differentiated. Mandates continue to be a strong segment for us. In uncertain times, clients want solutions that meet their needs specifically, and we're a leader in that category. Our bespoke solutions segment accounted for 68% of funds raised during the period. We remain strongly positioned in this new environment and are committed to delivering 10%-plus AuM growth on average in the years to come. In terms of investment activity, we invested $5 billion during the period. We took advantage of the slower transactional environment to allocate resources to strengthening our thematic pipelines and to driving portfolio performance. Our thematic sourcing approach gives us the expertise, know-how and confidence that we need to be able to select winners and continue building our robust pipeline in this current market cycle. We also had $5 billion of realizations during the period. We have a number of mature companies that are ready for a potential exit in the right market. Moving to Slide 4. Market-wide investment volume was down over 60% compared to the same period last year. Again, the market during this period was somewhat of a continuation of the latter parts of 2022, similar also perhaps the first half of 2020. This is a natural consequence of the bid-ask spreads that come into play during periods of volatility. Our investment committee has been very selective and have pushed our investment teams very hard on negotiating for value. Clearly, the financing markets are not what they once were, but financing limitations are a little bit less of a factor in our segment of the market. We've, in fact, completed 3 financing events in the last 2 weeks. As we have many flexible mandates, we also have the ability to play relative value across asset classes and to toggle between being a consumer of capital or a provider of capital solutions depending on the market environment. And we've been very focused on driving operational improvements across the portfolio as well. This is an opportunity for us to roll up our sleeves, work hard and show that we can achieve across our thematically-sourced portfolio. And that brings us to the next slide. Our thematic sourcing approach helps us to be systematic and disciplined in the way we invest. We spend time often across several years to go deep to identify areas of structural growth, areas where we have potential for transformation. We have resources allocated to developing thematic perspectives across over 90 sub-themes. And as our teams get deeper and deeper, they often become more discerning about where best to play. On the next page, we have an example of a recent investment where our team spent over 4 years researching the various layers of this market segment. SureWerx is a leading supplier of technical and wearable safety equipment and tools. Company's 18 well-established safety brands resonate with firefighters, with people working on construction sites and at factories. Out of all the subsegments that we evaluated as part of our safety products research, this sub-theme was one of the ones that displayed positive performance across a range of historical macro challenges. This is the type of well-positioned cycle resilient asset that we ask our teams to find and to target. Before we invest, we ask ourselves a number of questions such as, what type of Board does this company need? How do we cement and defend the company's market position? How do we drive accountability for progress? And this is what eventually drives returns, this industrial mindset. And the differentiated performance that comes with this type of a hands-on culture. Over our ownership period, we'll build on SureWerx foundation of success by using our digitization know-how to transform the company's digital capability and to improve lead generation with end users. We also plan to defend SureWerx position and to expand their customer base by expanding the current product offering to cater to a broader customer base across new sectors, specifically those where we bring added expertise. Now let's move to the next slide. One of our infrastructure teams thematic topics has been low carbon fuels. In H1, we gave our clients access to this sector with our investment into a large biogas and biomethane platform based in Germany. We plan to expand this portfolio of assets into a pan-European platform. Biomethane is one of these areas that we talk about. It's a subsegment of the market that has transformational tailwinds behind it. Production is expected to increase 12x over the 10-year period from 2020 to 2030. During our holding period, we'll take this portfolio of single plans, and we'll build it into an independent and dedicated operating platform, digitizing the operations, developing the management team, building out a consistent pipeline of actionable projects, et cetera. This is something that we've done before. We've done it at GREN. We've done it at VSB, and we're seeing the results there. Our leaders and our operating directors will also work with management to upgrade the existing waste systems to accept additional biomaterials to generate adjacent revenues and stay ahead of the innovation curve. Now let's move to the next slide. It's common knowledge in our space that while it's harder to transact on privately negotiated transactions during volatile environments, the investments that are made can produce some of the best vintage years. We remain steadfast and consistent in pursuing targets throughout the period, largely leveraging our thematic expertise. Our client mandates give us the flexibility to invest into smaller situations and into situations that require less leverage. Our teams remain very active, and we're focused on picking our positions very carefully, where we were able to transact, conditions really did line up for us, and we think we're going to generate some strong returns on those investments. We invested $5 billion on behalf of our clients during the period. In terms of strategies, we invested the majority, 57% or $2.9 billion, into direct assets, like credit and infrastructure, while the remaining $2.1 billion, we invested into portfolio assets. And that brings me to the next slide. Our portfolio companies continued to hold up well. In private equity, for Q1 '23, our portfolio companies marks were reasonably resilient, and we experienced net performance of 1.6%. Our focus on entrepreneurial governance and active value creation continues to deliver operational success across our private equity direct portfolio, we continue to see double-digit EBITDA growth and stable margins. This is important to underline. Historically, underlying asset performance has been, by far, the most important factor in driving the returns our clients experience. Private debt is generally floating rate. Performance was up 1.5%. We've got a great track record of protecting capital for our clients in that business. On the infrastructure side, something like 80% of our underlying revenues are inflation protected in some way, and we have many contracts containing CPI escalators. It's a good place to be at the moment with supporting tailwinds. Our marks were up 3.4% in Q1. Lastly, for real estate, we tend to prefer investments [Audio Gap]. We can pass on rent adjustments more regularly through Q1. Performance was down slightly by about 1.6%, which seems to be about par for that space. Now you can see on the right-hand side of that chart, our long-term track records are very robust. Investors make a long-term commitment when they invest with us. And as we've talked about on prior calls, we took advantage of the market boom in '21 to lock in a lot of realizations. And that meant locking in a lot of IRR for our clients, and that's helped to derisk our track record in many segments of these asset classes. Next slide. During the period, portfolio realizations amounted to $5.4 billion. That compares with $6.4 billion of realizations during the same period last year. Realizations were primarily driven by portfolio assets and direct infrastructure distributions. Those segments accounted for over 60% total distributions. One of our more notable realizations during the period was the exit of CWP Renewables, vertically integrated renewable energy platform, operating over 1.1 gigawatts of wind assets in Australia. This was the largest ever renewable platform that's ever been sold in that country. In the private markets, we're fortunate to almost never feel forced to sell assets. We want to make sure that we have supportive market environment in order to maximize returns for our clients. But we do believe that for particularly strong companies, there is a reasonable level of support that's been returning to the market. And as such, we do have plans to launch several divestment processes of mature businesses and assets. Sarah, over to you.

Thank you, Dave, and greetings from London. I would like to talk about our fundraising activities in the first half of the year and provide you with an outlook on our client activities for the second half. Back in January, I mentioned that we would expect the length of client conversion period in Q1 to largely resemble those seen in Q4 2022. And that is what we saw for the majority of Q1. This was due to the fact that our clients standard investment decision-making processes are often disrupted and indeed lengthened in periods of market uncertainty. However, in the last 8 weeks, we have noticed a positive shift in client activity, and we're starting to see clients again having time to really focus on their private market allocation. In H1 2023, we grew our AuM to USD 142 billion, and our teams work diligently on all fronts to deliver solid growth and lay the framework for a normalization in H2 on the back of what we anticipate being a more normal investment environment. Let us now move to the next slide, and I'd like to talk about our fundraising achievements in more detail. Our differentiated approach with regards to investments and bespoke solutions allowed us to raise $8 billion in the first half of the year. Private equity led fundraising throughout H1 and represented 40% of the total inflows or $3.2 billion of assets raised. Fundraising was supported by a long-term top quartile track record as well as the breadth of platform covering multiple investment strategies. The main contributors were mandates as well as our traditional private equity flagship program. Private debt represented 32% of new commitments or $2.6 billion, and the fundraising was supported by the generally benign environment for private debt investments. Given the significant change in base rates, we have seen an increase in inbound client interest recently for our lending activities, and we believe that this trend will continue. Private infrastructure represented 15% of new commitments or $1.2 billion, the majority of which was raised by our mandate business. On the traditional side, our latest direct infrastructure offering is almost fully invested. And so today, we're getting ready to launch a fund, which will be a H2 fundraising contributor. Private real estate represents 13% of total new commitments or $1 billion. And as already indicated in January, we'll be launching a new flagship fund targeting real estate opportunities. H1 fundraising predominantly came from bespoke client solutions, representing around 68% of total fundraising. And these solutions include both open-ended evergreen fund as well as tailored mandates. We raised $3.2 billion in mandates or 40% of our total fundraising. And my interactions with clients confirm that they increasingly appreciate the customization, the dynamic features that we can offer within these mandates that are very much tailored to their specific needs. Over to you, Philip.

Thank you, Sarah. Now that we discussed the $8 billion in gross flows, let us go through the other factors. We have good visibility on both tail-downs and redemptions and reconfirm our market guidance of USD 10.5 billion to USD 12.5 billion for the full year. Let me start with tail-downs. The majority of our programs have a long duration, yet when they mature, our AuM declines. This reduction in AuM typically follows a predefined mathematical formula. Hence, the impact is known to us and for H1, they amounted to $2.9 billion. We expect this number to increase for the second half because we expect some older vintage funds to fully tail off. In total, we continue to expect around $7.5 billion to $8.5 billion in tail-downs for the full year. Redemptions are different. We managed $42 billion in evergreen programs, which provides some sort of liquidity. Given the targeted client type, which, to a large extent are wealth clients, liquidity is a key differentiator, and it will remain a standard feature of these solutions. A part of the success formula in private markets is having capital available to invest throughout market cycles. Some of the best vintages are created by investing through these cycles, and our evergreen solutions aim to provide wealth clients, the same experience we would give to institutional investors in our traditional funds or mandate programs. This means we do not want to be put into a position where liquidity management becomes the main focus of fund, while we should rather focus on investing into attractive opportunities. In order to give our evergreen solutions the ability to do that, liquidity limits are introduced in downturns when redemptions tend to increase. These are very welcomed by our investors who fully expect us to make use of them whenever market circumstances make it advisable to do so. Next to managing redemptions, we also must balance inflows. Over the last 5 years, we have restricted inflows of evergreen so that we can deploy capital in an optimal way and achieve a healthy vintage year diversification. All of this together is why our evergreen business has materially grown since we started it 20 years ago. The market today sees us as a clear leader in this space, and our clients confirm this. Let me give you a proof point of the trust clients put in us. Of all investors of our largest U.S. evergreen program, who invested with us 10 years ago, 2/3 of them are still in the program today. So back to the H1 activity. So during H1, redemptions matched subscriptions and amounted to $2.4 billion, or 5.9% of the average evergreen AuM. As expected, they were higher in Q1 than they were in Q2, and we see an improved outlook. This means we do not change our outlook and continue to expect $3 billion to $4 billion for the full year. None of our evergreen programs are gated at this point in time. Let me continue with foreign exchange rates. They had a positive impact of $1.9 billion. This was mainly driven by a 2% higher euro against the dollar at the end of June. With regards to the performance-related effects, the solid performance across our private market portfolios led to a positive contribution of $1.8 billion, and that mainly from programs that linked their AuM to the NAV development. With that, I would like to go to the next page. Slide 15 provides a more detailed summary on the AuM breakdown and fundraising. Over the last 5 years, we have seen a consistent growth across our platform of 13% per annum with select outliers. On the one hand, we have seen infrastructure growing above our platform at 17% per annum, and this is based mainly on the strong track record and the significant demand from our clients for investment supporting the next-generation infrastructure. On the other hand, we see our real estate business growing at the lower rate. Given its capital intensity and sensitivity to financing costs, it is fair to say that real estate is more negatively affected by the new rate environment than other asset classes. In most part of the industry, this has resulted in extended fundraising and investment cycles and also impacted our growth. In this environment, we continue to focus on 3 investment pillars: thematic investing, value creation and sustainability. We believe these pillars are crucial in delivering sustainable real estate for the future. And with that, I would like to hand back to Sarah.

Thank you, Philip. And let's now move to the next slide. And as I outlined at the beginning, clients increasingly want exposure to the growing portion of the real economy that can be accessed through private market. As a private market investor, these individuals will be able to access profitable companies in sectors that provide outsized growth potential. And as such, we continue to see the structural tailwinds for the private market industry as really intact, and its outlook for long-term sustainable growth very much remains in place. One starting point of this growth will be the democratization of private markets. Today, the private wealth segment has an estimated size of USD 140 trillion to USD 150 trillion. And this is actually on par with what we see in the institutional space. And it currently only very selectively invests in private markets programs. And as a matter of fact, actually, in many cases, these investors lack the necessary solutions to actually access and invest in private markets. It's therefore important for us to continue on developing products to cater to these segments. If we turn the page, and we look into the future and assume that these wealth affluent clients start increasing their allocations, say, from 0.5%, 1%, 2% to more like 5% to 10%, they're expected to move significant amounts. This shift over the next decade will add USD 10 trillion to USD 20 trillion in AuM to our industry, and this is twice the size of our industry today. One thing is clear, it will not be the traditional closed-ended structure that will capture this growth. The market requires a differentiated solution. And one of the best ways to capture this growth is with evergreen solutions, which offer a number of features, which make them appealing to these clients, such as liquidity, direct access, fully paid in structures and dynamic portfolio management. We, therefore, expect to evergreen also grow as a result of increasing allocations from private wealth clients. And with that, I would like to go to the next slide. So we set a range of $17 billion to $22 billion in January, and I'm pleased to reconfirm that range today. This confirmation is supported by the increased client activity and conversions that we've seen over the last 2 months, as well as our bottom-up demand pipeline. Looking past this year and at our differentiated positioning, I'm very confident that we have laid the framework to grow 10% to 15% per annum on average going forward. And with that, I would like to thank you all for joining us, and I will hand it over for Q&A.

[Operator Instructions] Our first question comes from the line of Nicholas Herman with Citi.

Yes. 3 from me, if I may, please. One on fundraising, one on performance fees or exits and lastly on client preferences. So on fundraising, first question, it sounds like you had reasonably good visibility on the second half fundraising. Are both ends of the range still realistic for you? And what kind of scenarios would drive fundraising any at either end of the guided range? And I guess as part of that, how are you thinking for client demand for 2024? Second question on exits. You said that you've launched several divestment processes. Presumably, these are for your several category winners that you've talked about in the past. I mean how do you see the probability of an exit in the second half of this year? And then finally, have you seen any interesting changes or noteworthy changes to client preferences for assets? And I guess out of interest following issues in [ terms of water ] driven by excessive leverage, and has that changed the debate on infrastructure tools for the LPs?

Perfect. Nicholas, maybe I take 1 and 3 together on the fundraising topics to start with. So you asked about the range and the full range. And I think, as I mentioned on the call, based on the increased client activity we've seen over the past 8 weeks and the demand pipeline, we can reconfirm that range. Obviously, that is still a range of $5 billion, which I believe is probably still needed in this ever-evolving and slightly uncertain market. For instance, if there is again increased volatility in the public market, and the normal process of clients making commitments and decisions to private market, if that slows down again, then this may push some of the demand we have outlined and the visibility on that demand, it may be pushed into 2024. If, however, we continue at the pace that we've had over the past 8 weeks or so, and perhaps a stronger recovery in financing and transactional markets, it could be more at the middle or upper end. So I'm sure you appreciate that with these factors and the market conditions, I mean it's kind of harder for me to provide a narrow range at this point, but perhaps some scenarios around those -- the range that we have in place. And then you also said, looking into 2024, what do we see there? And as I ended, I think -- we believe our platform really has the ability to grow 10% to 15% AuM on average in the years to come. And assuming that the market conditions continue -- normalize, we should be able to raise significantly more capital. We'll clearly give more detailed guidance in our update in January on that. So that was question 1. And maybe I address question 3 at the same time before I hand it to Dave. You said about preferences for assets and [indiscernible] water. Clearly, there's been a lot of coverage on that. I actually think, as I mentioned, private debt has had clear interest from our clients at the moment. I think interestingly, that debate hasn't meant that clients have stayed away from infrastructure. In fact, that's one of the asset classes that we're having the most interest in right now from our client base. So yes, I've seen those stories. We've seen the press. I think the real structural trend to clients really wanting access to the real economy and growth has meant that they are not shying away from private markets in any respect, in fact, the opposite.

And with regards to potential divestitures or the types of assets that can be divested today. I mean clearly, there's a bifurcation in the market and the types of assets that are either in the market today or could be in the market in the second half of this year would be a -- assets, assets that have category leadership, that have pricing power within their respective market segments. And the private markets kind of volume tends to be underpinned by kind of precedent transactions. You get a transaction here that gives people confidence that they can launch theirs, and we see enough evidence that there's a reasonable amount of stability to make us believe that we could come to some successful outcomes here, either in the second half of this year or the first half of next year on some of these target assets. But those of you who follow the market know that there's a number of kind of first round processes that have fizzled out as well in the second quarter of this year because price expectations weren't able to be met. Most of the assets that we're targeting are ones where we have a very robust number of inbound parties that are interested in the asset, specifically that we believe that we've got enough demand to launch something around. But it's a little too early to tell. Clearly, exit activity is going to be tilted towards the second half of this year, and we'll give you an update as that period evolves.

The next question comes from the line of Arnaud Giblat with BNP Paribas Exane.

I've got 3 questions, please. My first question is on the evergreens. So you've controlled well the outflows, but if we look at it on a net basis, it seems like you've had small net outflows for the first half. So I'm wondering what needs to happen for that to turn and turn around in the short term. Also, thinking about the long-term opportunity you outlined, I agree there. But how fast do you think that this can come into play? What sort of products need to be launched, if any? And specifically, are there any new products you're thinking about launching in that channel? And my other question was around deployment. So you experienced a low level of deployment this half. I mean that's I suppose something that's broadly observed in the industry. Could you perhaps discuss a bit more what the outlook is there? Are the bid-ask spreads tightening enough? Have you seen enough reduction in purchase price multiples to offset the cost of funding to be able to deploy more?

It's Philip. Let me quickly give you a shorter answer on the evergreens. Yes, there are some -- as you know, we have 3 large evergreen programs, representing 80% of our evergreen AuM in total, yes, and one had slightly net outflows, but this is more a red 0. But in total, if you look at our entire platform on evergreen, it's a net 0, a black 0 in that sense. And we have seen Q1 has been more redemptions, mostly driven because you have a 3-month redemption notice. So investors in Q4 last year, actually -- who actually handed in their redemption notice, we have seen the full effect in Q1. Now Q2 looked already much better. Now how the outlook looks like? Yes, this is almost a crystal ball question. We think the market normalizes. And we are -- and still expect that we are in our $3 billion to $4 billion redemption guidance, which we have given for the full year.

And I think it's interesting topic kind of talking about you've got the long-term outlook for evergreen and everybody agrees it's very robust. And then you have the short-term volatility, and at what point does it start to move? We have new geographies that are coming online for our evergreen programs. A new distribution partner in Canada that told us that they did due diligence on 11 different managers for over a year before selecting Partners Group as their preferred provider to move into that market. And we are indeed in active dialogue with our partners, distribution partners about suite of new evergreen programs that we'll be launching to specifically meet the needs that they have to be building blocks for their model portfolios and target portfolios that they're looking to establish in the future. And you'll see those ramping up for us. They're already ramping up today, but you'll see them launching at various phases over the next year. We're a big believer in this segment of the market. It's a relatively small niche today, about -- we estimate about a $400 billion market, but we're a 10% market share player in that market. And we're going to continue to defend our turf amongst some stiff competition there by being aggressive on new product launches. In addition to that, you asked a question about purchase price multiples, and if they've contracted enough to create a stable investing environment. I'd say it's hit and miss. We have spent a lot of resources on opportunities that turned out not to come to fruition in the first half of this year, and we'll see if that improves. We see evidence that there are more and more people that are approaching the market to try and generate liquidity for assets that we're targeting, and we've been targeting for a long period of time, and we believe that there's the potential for there to be an uplift in investing activity, but it's a little bit too early in the period to know exactly how that plays out.

Can I follow up very quickly? So you have planned new distribution channels as a way of growing wealth. I mean you signed up UBS last year. How is that channel growing for you?

Arnaud, it's me. So we have signed up. It's actually going well. So we have received probably last year in the second half, one of the largest contribution or inflows to our evergreens from UBS. And so we continue to build it out. You know that the long-term target is $1 billion to $3 billion per annum. Of course, this market environment is a bit more challenging, so -- but we continue to be on track to hitting our targets, which was a midterm target with UBS.

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

I've got 3 questions. Firstly, on the wealth channel, as you described the wealth channel is very attractive. And now we're seeing a lot more players in both the U.S. and Europe trying to enter the wealth market to compete against you. Just wondering if you can talk a little bit about the competition there and whether or not you think that the new players coming in will probably offer something a little bit different or lower fees to kind of attract a greater share? That's the first question. The second question is also on the wealth or on margins. Can you tell us what the difference -- margin differences between mandates, the funds and the evergreen funds? Is there a big difference amongst the 3 different products? And lastly, I know that this is an AuM call, but just wondering if you're still reiterating your guidance for performance fees being 20% to 30% of revenues. I don't think I see it in the presentation or the press release, so I'm just wondering if that's still the guidance for this year.

Thanks, Hubert. So if you think about the wealth channel, it's becoming increasingly important after decades of expansion of the institutional investors within the asset class. 2023 will likely be the first year in a long time that you haven't seen notable growth from institutional investors. And so as a result of that, you see a lot of attention shifting from the traditional fundraising channel with traditional products into evergreens. Now evergreens is actually a very different product category. It requires much more sophisticated portfolio management. It requires access to a number of different asset classes, we think, in order to balance portfolios out to ramp them up appropriately and to manage liquidity appropriately. And so there's a lot of people who are coming into the space with, I'll call it, more of a product-driven mindset saying, okay, I need to distribute my funds through this additional channel, but don't necessarily have the infrastructure and capability set that we feel we bring to the table. And so there's no question that, that's going to become more competitive. But we think we've got one of the most compelling offerings out there, and we're continuing to evolve, continuing to develop our capability set there. Philip, why don't you talk a little bit about the margin differences between the different investments again.

I'm pleased to. I have to say, it's actually quite simple. We have a very fair pricing mechanism, so Partners Group prices in general, according to content, right? And so our evergreen programs do not have a materially different pricing mechanism. Not mechanism, yes, but not a pricing margin than other products, right? You have a benefit of mandates, which we -- which are rather large from $200 million onwards. You can do a mandate at Partners Group. And most of our clients look for direct exposure. Direct exposure is a higher fee exposure comes with significant work. And our programs more and more are tilted, as you also know, towards direct investing. So evergreens are pretty much in line with our overall margin as a firm.

And with regards to performance fees. Indeed, we've set a range of performance fees that we target of between 20% and 30% of total revenues. We communicated at the beginning of this year in order for us to achieve that range. We would be tilted towards the second half of this year. We do indeed have a pipeline of mature assets that are able to be divested today, that gets us to that range, but we'll have to wait and see how the period plays out to know if those realizations materialize or not. And so -- and so we'll give you color on H2 as that period develops.

The next question comes from the line of Isobel Hettrick with Autonomous Research.

I have 2, please. So the first is on portfolio company performance. Could you give us a bit more color here? So you're saying your EBITDA margins are remaining stable, but how your company is coping with the increase in interest rates? And then secondly, on secondary interest, so it seems to have picked up across the industry. So could you just provide a bit more color on where you're seeing client demand here, and if it features heavily in your pipeline for the second half?

Maybe I'll take the first one, Philip, if that's okay. So the increase in rates clearly has the potential to impact companies. We've got a very sophisticated capital markets team that's actually hedged approximately 90% of the rate exposure for our portfolio companies at the time that we acquired those businesses. And so we feel more protected than most in the current environment. And in an asset class that you're evaluated on an outperformance basis, we feel relatively good about those decisions. So we haven't seen any material impact from this rate cycle on the current portfolio. Clearly, it impacts your ability to underwrite new transactions. But on the current portfolio, we haven't felt it until this point. Sarah, maybe do you want to take the next question?

Absolutely. So thanks, Isobel, you asked about the secondary market there. We are indeed launching a secondary fund this year, and we've already seen considerable interest and demand from clients on the strategy. I think the other area, which is throughout different times, it is our mandate, an evergreen part of the business. In our mandate, we are able to provide client access to those kind of opportunities that are interesting at different points in the cycle. And that's something that particularly makes them very attractive for our clients because we can act very -- in a very agile way, in a very nimble way to take advantage of the most attractive areas from an investment point of view. So from that side, it's -- there is a fund, but there's also been -- we've been able to take advantage of the secondary opportunity in mandates.

The next question comes from the line of Daniel Regli with Credit Suisse.

Quickly from my side. Just one quick follow-up remaining on the performance fees. And so if did I get you right and also based on the number of realizations you had in H1, we can assume that performance fees in H1 have been substantially below the 20% to 30% guidance. And the hope basically is that H2 will be in the upper half or even above this 20% to 30% range to kind of compensate for the lack of performance fees in H1. Can you just give us some additional color on this?

Daniel, this is Philip. Yes, of course, a little reminder how we ended last year, we sold one of the largest renewable platforms in Australia, CWP, that was in December. So the distribution actually arrived now in H1. Distributions are relevant to generate performance fees. So there will be performance fees in H1. Now you rightly pointed out there was not a lot of announced exit activity in the first half, which could suggest that performance fees is lower. Now we don't guide on performance fees in a half year's basis, right? We guide for a longer -- long to midterm 20% to 30%, not for half year, it's very difficult to do that. But as Dave said, we have a number of portfolio companies in the pipeline, which are multibillion-dollar firms in value. When we can sell these companies and the market is right for it, we get our price, we want for it. Then these performance fees will be tilted towards the second half because simply distribution activity will pick up. So you are in basically right, but I cannot give you guidance now on the first half.

The next question comes from the line of Angeliki Bairaktari with JPMorgan. All right, I will take the next question, which is coming from Bruce Hamilton with Morgan Stanley.

I guess just going back to the point around how well hedged your rate exposure at the moment. And therefore, the current portfolio hasn't really suffered any major ill-effect. I guess what does it look like if rates stay at 5% for a prolonged period? I guess maturities and refinancing builds through 2025. So if you were to run 5% into the next 2, 3 years, what does it look like? Presumably, IRRs and the current funds wouldn't look great and the whole sort of growth trajectory looks quite a lot worse back -- how should I think about that in terms of how much damage you'd expect that could do, I guess, you have run some of more bearish scenarios on the current portfolio?

Yes. Good question. So we hedged the exposure at the time that we underwrite investments for an average hold period, let's call it. So if hold periods end up getting extended materially beyond what our experience has been in the past, then you will have years where that starts to hit you. We don't have maturity walls that hit us for a few years. 90% of our debt matures in 2025 or later. But if you start to extend out 2 years, 3 years, 4 years beyond the typical hold period, then yes, those companies will feel the effect. We build -- we have less leverage, generally speaking, in our portfolio versus what the market data would suggest is in our competitors' portfolios. Competitors' portfolios often -- the market data would suggest they're 6.5x in our portfolio. I think the last time we looked at was about 5x debt. And so I think it will impact many players in the space. It should impact us a little disproportionately at worse. We don't have many situations where we believe we can't work through the increased cost and continue to work through those situations. But who knows if the environment deteriorates materially and you end up with high interest costs hitting you at the same time, we're a firm that prides ourselves on doing everything that we can to help those companies have all weather strategies and get through any environment. We believe that we'll be able to manage through that. But yes, if we get out several years into the future, then that will be a topic, and we'll be managing that.

We now have a question again from Ms. Bairaktari with JPMorgan.

Yes, I'm really sorry, I dropped out earlier. First of all, on fundraising, with regards to the guidance that you gave, the long-term guidance of 10% to 15% AuM growth. And if I look at sort of the historical fundraising, between 2017 and 2020, the fundraising, the gross inflows, they were relatively stable at around $16 billion every year. And then we had a big step up, obviously, in 2021, which was an exceptional year. And then we had a reversion back to sort of some lower numbers in 2022 and potentially even lower based on the guidance that you have given for this year. The 10% to 15% AuM growth does imply a very big step-up in 2024, '25 relative to this year. What do you expect to drive that growth? Is that going to be sort of the wealth channel picking up materially from here onwards? Or do you expect a structural increase, significant increase in LP allocations over the coming few years? That's my first question. Then second question, with regards to the fundraising for the second half of the year, you do reference in the press release that you expect several closed-ended flagship and new evergreen strategies to come to market. With regards to the flagship funds, could you provide some details on the targeted size perhaps that those closed-end strategies are going to have? And then last question with regards to the new evergreen products that you have in the pipeline over the next 12 months. Can I ask how scalable is the development in that space? Meaning, do you -- shall we expect much more investment in FTEs? Or can you effectively launch new products with the existing resources that you have today?

So on the first, does our expectation for 10% plus fundraising rely on some structural shift within LP allocations? No. We're a firm that has a very balanced set of channels that we raise capital through not only the traditional channel, which is a smaller segment for us versus many of our peers, but also evergreens and custom mandates. And the mandates business is sometimes underappreciated, I think, in our space. If I go back to the start of this last cycle, our mandate business was about a $3 billion business. And we decided to focus on that area of the market, in particular, our peers were very product focused, and we decided to be solution-oriented in the way that we approach the market. And that's been a really successful segment for us. We've increased that business by 15x over the last cycle. It's a $50 billion business for us today, even though it's still somewhat of a niche within the market, but it's our niche. And we've carved it out, I think, relatively well. And so no, we're not just reliant on one channel improving in order for us to meet our fundraising objectives. We have multiple channels, and we're pleased to be in that position. Sarah, maybe you want to talk a little bit about the evergreens?

Yes, sure. And you also asked about -- I mean just to add on to that part, yes, that is very true. I think the additional part, and you will have seen the recent announcement this week in the U.K. where 5 of the largest providers actually with the government combined to have a target within DC to unlisted of 5% by 2030. So there are these kind of things actually very much helping our industry, to add to Dave's point, of our diversified client base. Then on the flagship and the target sizes. So obviously, we include those fundraising targets within the individual flagship fundraising targets, we include that within our guidance that we provide anyway. And then I think on the evergreen side, obviously, we scale -- those things are scalable.

Yes. Let me add to this, Sarah. They are much more scalable than if you raise one limited partnership structure after the other. So you have one structure, which grows. We started our LLC in the U.S. with $25 million. It's now $13 billion. So it's still the same structure. So there you gain some scalability. But on the other hand, you cannot forget that these funds need to reinvest their proceeds all the time. So while we gained some scalability on the client side, we probably would lose that on the investment side because the bigger the funds get, the more the recycling needs to be deployed and therefore, you would probably hire and net-net, we are remaining in our 60% margin.

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

Two questions, please. The first one is on your comment regarding the divestment pipeline of mature assets. I just wanted to double check, please. These are predominantly direct assets, if I understand correctly. And then if you could give us a sense of the magnitude here, at least ballpark-wise. Second one is just referring back to the comments from -- earlier on from David, that financing availability is a little less of a concern, where you play presumably the mid-market buyout segment. Could you give us a sense of what sort of improvement, nevertheless, would be sufficient for you to transact on that divestment pipeline and hit the 20%, I guess, low end of the performance fee guidance range? That would be super helpful.

Yes, I'll take those. So we do indeed have a number of mature assets. You're right. When we talk about divestitures, we tend to be talking about direct investment portfolios. You are oftentimes going to see portfolio assets generating distributions for us and somewhat performance fees tied to that coming in from those. But -- it is not -- it's something that we steer less. So we have the ability to steer less and something that we participate in when it happens, and that's a little bit more tied to market activity. And so, yes, we do have a number of mature assets that we'll be coming to market with, but we don't steer with regards to our realization, or we don't guide towards our target realization levels. With financing, I think within the mid-market, many of the companies that we both go after are looking to sell, can be financed with private lenders potentially, not all of them. Some of them are large enough to where you need to have syndication partners. But that's what I mean by we're a little bit less dependent. We can get those solutions done with financing partners. We've had cases though where our capital markets team have had to call one of these financings we just got and they told me they called 60 different lenders in order to put the package together. And we're a firm that has in-house capital markets resources, and we'll go through that work and do it. Others maybe wait for the banks to come back to organize their financing for them. But we believe that there's enough support for a reasonable level of investment activity in the second half of this year. We think we've got a number of assets that can be amongst those prime assets that get sold in this environment.

The next question comes from the line of Charles Bendit with Redburn.

Yes. Full year 2022, you provided the bridge of your 3% PE portfolio performance versus the 18% decline in the MSCI World. And I guess in H1 2023, we've seen a strong rally in public market indices. So I was just wondering if you could bridge that to the 3% to 5% performance in NAV-link strategies that contributed the $1.8 billion of growth in AuM during H1? And maybe as part of that, you could comment on any valuation changes that you may have made that have potentially offset the otherwise strong EBITDA growth you've seen in the direct PE portfolio.

So I'll take that. We gave some special disclosure in 2022, given the fact that performance was such a topic in that year. We don't anticipate doing that on an ongoing basis. But I will tell you that the private markets tends to be somewhat more stable versus the public markets. Just to give a sense, yes, the public markets have made somewhat of a rally, but a lot of that is actually multiple expansion of technology companies that we're obviously not going to factor into our valuation approach for each of our underlying assets. If you look at many of the services companies that we invest into, the industrial business that we invest into, the development that we've seen with regards to those businesses, very different multiples versus what you're seeing in the tech sector. And so we continue to, I think, value those companies in a consistent way, but sometimes there's a little bit of a disconnect between what you're seeing in the public markets and what you see in a private portfolio is because of the specific exposures that exists there.

If I may add on the $1.8 billion performance you have seen, they stem predominantly obviously from evergreen programs. Now we provided across our platform, Q1 year-to-date performances. These evergreens have year-to-date. So the last 6 months where they show, and there -- you have $42 billion in evergreen, roughly 4% plus performance that brings you to this $1.8 billion.

The next question comes from the line of Tom Mills with Jefferies.

Just a couple of quick questions, please. You've talked about the pipeline of mature multibillion dollar exits for 2H. Just wondered, is there a bias as to which channels you'd be expecting to exit those in? Obviously, I wouldn't expect you to comment on any assets in particular, but I guess you've -- what we've all seen [indiscernible] speculating on a potential exit of Techem in the last day or so at a pretty substantial multibillion-dollar EV with a suggestion that would be in the IPO market. I was just wondering would many of these assets be exiting through that market? And then in terms of your fundraising pipeline, we've seen some of your European peers extend the fundraising period for their flagships into the early part of 2024, presumably to tap into next year's budget. Should we assume that you're not anticipating constraints like that for the flagships that you intend to raise? Or is that captured within the sort of $5 billion fundraising range that you provided?

So I'll take the first one. So with regards to our divestitures historically, we have had a relatively small number of IPOs, historically. We're not opposed to it. But it's not a focus for us unless we have just the right type of asset. You have strategic M&A activity, which has declined less than private equity activity, a little bit less dependent on the financing markets. And you still have quite a bit of strategic activity going on with strategic buyers. And then I can just tell you from the inbounds and the outreach that has come into us for various assets that we hold, a lot of that is still private equity. There is still quite a bit of dry powder that exists within the space, a lot of sponsors that are active, a lot of sponsors that also have capital markets capability, they're able to bring their own financing solutions to the table. And so no, I don't expect a big dependence on IPOs in order to meet our divestment objectives. Sarah?

Yes. So on extensions, you're right with what you observed in the market. Any potential need to extend is fully captured within the range that we have provided. But I would say it's important to note that we are not as dependent on closed-ended fundraising in terms of our AuM as some of the peers that you referenced deem that it's only about 1/3, and then we have mandates and so -- and evergreens as well. So yes, it's fully captured within the range.

Today's last question comes from the line of Oliver Carruthers with Goldman Sachs.

Oliver Carruthers from Goldman Sachs. I realize we're going to the Q&A now, but I've got 3 questions. I guess, for the whole industry, this lower deal [ volatile ] environment that we've now been in over the last 12 months, means that distribution is back to institutional LPs, [indiscernible] oriented strategies have slowed. And I guess clients will now be thinking more holistically about future cash flow dynamic, both from a distribution, but also from a future commitment perspective across their private market allocation. So the first question is, has this changed the way that you think about the opportunity set for your bespoke mandates business given that it aims to tackle these dynamics? And then the second question, if we look at where a lot of the incremental institutional capital has come into private markets over the last 12 months, a lot of that's been coming from the large Gulf base of [ Muslims ]. Do your mandates resonate well with them? Or do they have enough scale to apply the mandate like thinking across their portfolios in-house? And then as a final question, I'm thinking kind of more medium term about the private wealth opportunity that you talked to. Are you happy to let the evergreen business grow faster than the overall group over the next 5 to 10 years? Or would there be an upper limit in terms of the proportion of your AuM that you'd be happy to let the evergreens?

I'll take the first one. So with regards to how the current environment of lower distributions changes the way institutional investors are thinking about their portfolio and how they might invest moving forward, we do indeed see a meaningful increase in strategic dialogue with CIO level people who are steering these portfolios, they want to migrate towards mandates where we're steering towards their NAV targets, and they're not necessarily being subject to the distributions and capital call, volatility that perhaps they've experienced in the past. They want the ability to steer more. And our experience managing open-ended vehicles for a very long period of time, managing evergreen vehicles for a very long period of time, I think positions us particularly well to provide solutions to those institutions that allow them to steer their portfolios more strategically. And that's one of the reasons why I think you see disproportionate interest and growth in the mandate side of our business. It's a good question. Sarah, do you want to take the next one?

Yes, absolutely. You mentioned, obviously, the Middle East, as you might be aware, we have a permanent presence there. We continue to invest in senior hires actually to cover the region. And that's because we have seen, historically and currently, real interest from those funds in our kind of mandate solutions. And in some cases, into our closed-ended programs as well. In fact, just recently, we can confirm a commitment from one of these funds of $500 million. So that is very much on our radar, and they work with us in a variety of different ways, and we continue to see growth from that area.

In terms of how big should evergreens grow in proportion to the overall AuM, Oliver, as you asked, this is a relative question and not so easy to answer because our mandates business does grow also very strongly, right? So we would not envisage probably that they're one leg of the stool of our 3, which we have will suddenly have a strong overweight. I think we will remain in this roughly 1/3, 1/3, 1/3 going forward, and you will not see a material shift.

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to David Layton for closing remarks, David.

Thank you very much. We appreciate your interest in our company and your participation in the session. We look forward to seeing you all on the 5th of September for our financial call. And we'd like to invite. You have a nice day. Thank you very much.