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

Good day, and thank you for standing by. Welcome to the Partners Group's announcement of AUM as of the 31st of December 2024 Webcast and Conference Call. I would now like to hand the conference over to your first speaker today, David Layton. Please go ahead, sir.

Hello, everyone, and welcome to Partners Group's 2024 Business Update and Outlook Call. I'm Dave Layton, CEO of Partners Group. And today, I'll be joined by Sarah Brewer, our Global Head of Client Solutions; Roberto Cagnati, our Head of Portfolio Solutions and our Chief Risk Officer; also joining us for the first time, Stephen Otter, our Head, Royalties, which, as you know, is our latest asset class addition; Philip Sauer, our Head of Corporate Development, will join us for the Q&A portion of the call. Now on to Page 3. Before we get into the details, please allow me to helicopter out a bit and share some key takeaways from 2024 because 2024 was a year where we laid the foundations for future growth. We started our M&A engine, choosing to focus first on reinvigorating growth within real estate. We've worked on helping to solve the allocation gap. We've partnered with BlackRock to build an innovative and unique portfolio solution for the growing wealth channel. We're also working to meaningfully expand our offering to the wealth market, putting in place 7 new and attractive evergreen funds. We've introduced our fifth asset class with royalties, and we've expanded our Growth Equity business. This was a year where we made progress on a number of strategic initiatives, and let's zoom in a little on those topics. On Slide 4, our industry has entered a phase of consolidation. We informed you already in H1 of this year -- of last year of some of the inorganic opportunities we were seeing, and we announced our first acquisition in H2. Founded in 2014, Empira is one of the most respected vertically integrated real estate investment platforms in the DACH region, 270 employees, 13 offices overseeing EUR 14 billion of gross development value. The addition provides Partners Group with an expanded vertical depth and clients with new offerings such as real estate credit and core plus residential. Given its success and strong track record, Empira will continue to operate under its well-respected brand. And under the Partners Group umbrella, we anticipate adding $4 billion of initial AUM from this acquisition. Now why start with real estate? Well, if you look at our Infrastructure business, it's grown assets at an 18% compounded growth rate over the last 5 years. Private Equity, our largest and our core business has grown at a 12% compounded growth rate over the last 5 years. Debt solid growth. Real Estate has not grown. It's flat over that same time period. And Empira adds real vertical depth in some areas that we really like. We like adding -- we'll likely add a few other small vertically deep managers in the future as we get growth back on track within real estate. Importantly, though, it takes time to select the right firms to acquire. You will see more M&A from us, but you'll only see M&A when it's financially accretive from day 1, when the cultures line up well and when it offers our clients real best-in-class expertise and content. For those of you that joined us at our Capital Markets Day in March, this will be a topic that we'll discuss in more detail in that session. Now let's turn to Slide 5 and discuss what's next for wealth. Continuing on the topic of fundraising growth, the clear focus of our industry right now is on wealthy individuals. And that's because these individual investors have significant upside to further adopt privates in their allocations. Years ago, we were pretty much alone in the evergreen wealth space. We've accumulated over 20 years of Evergreen experience, and we've been pioneers in this segment of the market. Fast forward to today, and many of our listed peers have at least one semi-liquid offering. As the landscape of offerings gets built out, you'll continue to see us evolve and to innovate in a way that's consistent with our DNA. And our DNA is that of a Portfolio Solution provider. Portfolio solutions are a niche within the institutional market, call it, 3%, 4%. Now it's a big business for us. That's our segment of the market. We have $59 billion of mandates and custom portfolio solutions for institutions. It's sticky, deep relationships. We really like that segment, but it's a niche within the broader market. And that's because institutional investors are often comfortable buying raw materials and assembling their own portfolios. They often have big teams and consultants that work for them. Many are okay investing into numerous private equity infrastructure, debt, real estate, royalties products to assemble their portfolio. Only a subcomponent of the institutional market consumes a more full-service offering. Now let's think about this new group of wealthy individuals that's just starting to come into privates. We expect that as a percentage of the participants in the space, there will be fewer wealthy individuals looking to build out their own large comprehensive portfolios of private funds. They want the exposures, but not the hassle. In an effort to further democratize private markets and to address the allocation gap between institutions and individuals, in H2 of last year, we announced that we're teaming up with BlackRock to create institutional quality, comprehensive portfolio solutions for wealthy individuals and their advisers. We have the longest track record in evergreens in the private wealth space. BlackRock has an incredible scale and the technology, the distribution and the track record of making investing easy. We both have strong private investment content. We've been developing this idea together over the past few years, but in 2024, this project took some big steps forward. And we're creating model portfolios, professionally balanced, different weightings for different profiles of investors, some more yieldy and conservative, some more growthy and appreciation focused. And so individual investors can, with a single subscription document, a single login per se, they can get a portfolio built specifically for their needs and diversified across asset types. From products to portfolio solutions. That's how successful public asset management firms have evolved, and that's where we see this space moving as well. We're working hard to get ahead of that. Roberto, our Head of Portfolio Solutions, is here in the room with me. Roberto, any color that you want to add?

As you mentioned, I think this is a revolutionary offering. It's not another product, but it is a true solution. While evergreen products open up private markets for part of the private wealth market, they're still too difficult for many segments of it. Questions such as how to allocate among private markets, how to capitalize on different relative value between private market asset classes over time, how to rebalance the portfolio back to target or account for different risk appetite different points of an individual savings journey, need for income or capital gains, all of this needs a portfolio solution to be addressed. And this is why we are building an industry-first private markets model portfolio. The financial adviser and end client have the advantage of instant and diversified exposure across different private market asset classes. We offer the model portfolio in 3 flavors, starting from a conservative income-oriented solution with the main allocation to credit, all the way to a return-focused and capital gain-oriented solution, which has a higher allocation to private equity and growth strategies. With this private market model portfolio, we bring the full suite of private markets investing akin to what we do with our mandate clients and make it available to a private individual with a single subscription document. Importantly, it is designed as an easy-to-handle simple solution to financial advisers and end clients and all the complexity around notice periods and rebalancing is something we shield the client from. Partners Group and BlackRock are bringing our platform together to deliver the best of the best to our clients. In our view, this will be the future. We already have one of ours and BlackRock's big distribution partners lined up and are looking to launch towards the end of H1, if all goes according to current plan. Now on to the next page. The third key takeaway from last year for us was the launch of our new Evergreens. Getting Evergreens off the ground is no easy feat. Building a proper seed portfolio is crucial as well as pacing in order to grow these new structures appropriately at great returns. Many of these are still small, but they did help to contribute to 2024 being our strongest year ever in fundraising for private wealth and evergreens. You should think about those funds as key ingredients, key building blocks also for building model portfolios apart from use-in-general portfolios. In 2024, we launched 7 new evergreens. Today, we have more than 20 evergreens, and we feel very good about our positioning. With the launch of our next-generation infrastructure solution, where we will have both the '40 Act fund in the U.S. and a CCAP solution for rest of world, our growth equity program and our upcoming royalties evergreen, our full platform can be accessed by Private Wealth clients. We took great care of launching this set of programs, focusing on buildup track record from day 1 on the investment side and aligning strategic distribution partners on the client side of things. As we have done over the last 24 years, we carefully design and build those Evergreen offerings with creating an industry-leading long-term track record in mind. This cements our place as a global leader in Evergreen offerings. Client demand for these solutions is high, and they will increasingly become meaningful contributors to our AUM in the coming years. And as we expand our product shelf, we are also focusing on building out our teams in the right areas. We opened our 21st office in Hong Kong last year, and this was largely driven by the private wealth opportunity in the region, which you will see us continuing investing in this space. Another key takeaway from last year on the investment side was the launch of our new asset class. We wouldn't have launched Royalties if we didn't believe that this could ultimately be as large as some of our other asset classes. And I'm happy to hand it over to Stephen Otter, our Head of Royalties, to talk about year 1.

Thanks, Dave (sic) [ Roberto ]. I'll begin briefly explaining what Royalties are and then why we have high conviction around our new asset class. So if you turn to the top left of the page, just quickly in terms of what is a royalty, 3 things to remember as a royalty investor: Number 1, we're an asset owner. Number 2, we do not fund the OpEx and CapEx; and number 3, we receive a percentage of revenue. Now why Royalties is a stand-alone asset class? Well, if you refer to the table on the top left, you will see there that we have compared the key investment attributes of Royalties to those of Private Equity and Private Credit. And on the whole, you would see that Royalties basically sits between the 2. And so we see Royalties as being deeply complementary to a traditional private markets portfolio. Now turning to our strategy. Our strategy is genuinely unique in that it is a global cross-sector royalties offering, which comes with many benefits, but 4 of which I'm going to touch upon quickly today: Number 1, we have a large opportunity set, which means we are focused on the top 5% of royalties globally; Number 2, because the opportunity set is so large, we are not chasing risk, we are focused on derisked producing [ assets ]; Number 3, it enables us to be a relative value investor, not just within a sector, but across sectors; and last but not least, it enables us to be a long-term thematic investor. Now if you refer to the top right of the page, you will see that we've actually been executing this strategy for nearly 5 years now. And 2 key observations from that period: Number 1, our strategy has low correlation to traditional asset classes over that time period; and number 2, our strategy has consistently delivered attractive and stable returns through that period. And so when you allocate Royalties into a traditional portfolio, it ends up being a portfolio diversifier and stabilizer with a focus on long-term capital preservation and growth. Now turning to what we've been doing in the last 12 months. As I'm sure you can imagine, we've been very busy on the premarketing, which I will conclude on in 1 minute's time. But we've also been busy building a pipeline and a seed portfolio. And actually, recently, we made an investment into a large-scale diversified portfolio of music from film and TV, where the portfolio is worth close to $250 million, is diversified across 500 titles from film and TV, and our investment is generating a 15% cash yield on day 1. This is representative of what we look to do in Royalties, which is provide investors lowly correlated investments focused on the downside protection with attractive and stable yield. Now turning to fundraising. In 2025, we're excited to announce that we will be launching our dedicated royalty Evergreens, both for institutional clients and Private Wealth clients. The evergreens are very important in Royalties because it enables us to match the underlying duration of our assets and importantly, underwrite on a hold for life basis. In addition, we have also made meaningful progress with the U.S. Royalties Evergreen solution to focus on the U.S. retail market. Here, we have leveraged our market leadership in bespoke solutions, marrying it with a strategic distribution partner and the risk return potential of our royalty strategy. We expect initial AUM contribution from the U.S. market to begin mid-2025 with the potential for a meaningful ramp as we progress through the calendar year and beyond. And so to conclude, in 2025, we anticipate $0.5 billion to $1 billion of new AUM as it pertains to the royalty strategy. And thereafter, we have high conviction of a longer-term AUM class of $10 billion to $20 billion in royalties. Back to you, Dave.

Thanks, Stephen. And you can see how as a firm focused on building world-class private markets portfolios, how royalties content can complement the other parts of our investment engine and enhance our client solutions. The final key message for 2024 is that we're expanding our Growth Equity business. Over the last decade or so, we've invested $2.5 billion in this area, providing clients with good returns along the way. From a client's perspective, Growth Equity is an area where clients have bluntly said that they want to mix shift exposure towards. Some investors surveyed want to have 10% to 30% of their private equity portfolio in growth equity over time. And for us, it's important to serve this growing area of demand. Additionally, 1 of those 7 new evergreens that we just talked about will be focused on Growth Equity for Private Wealth. Our Private Equity teams are already going deep into different sectors and themes, particularly relevant for Growth Equity is technology and health care. We have that expertise in-house, and we're continuing to widen the aperture to identify more gems at the smaller end of the market. Those are some of the key strategic messages that we wanted to place. Now changing gears, just a brief word on the industry. I mentioned last year that we expected 2024 to be a transition year. This gradual improvement is expected to continue in 2025. Equity investments in private equity were up 17% year-on-year for the industry. Realizations for the industry are still relatively low but improving. During the period, our investment activity increased by 66% and realizations rose by 53%, both from low levels in 2023. Overall, industry dry powder could be viewed as high. However, when you look at it in the context of recovering investment activity levels over the next few years, one would expect that buyout dry powder might be invested at a pace of about 3 years, which feels more in balance than perhaps it did in some prior periods. But activity in the current environment is not equally shared across all market participants and platforms are winning more than their fair share of the recovery. And you can see that Partners Group's activity levels significantly outpaced the market recovery. Next slide. Overall, we're pleased to report solid results for 2024. We already talked to you about how our investment and realization levels are up meaningfully year-over-year. Our thematic research has led to conversion of some attractive opportunities and transaction dynamics have been improving. Investment activity was especially strong in H2 given the improved macro environment. We're also pleased with the progress we made on our exit pipeline. On the fundraising side, we raised $22 billion, largely driven by our differentiated bespoke solutions. In 2024, we continued to build out distribution behind Private Wealth, resulting in our strongest evergreen fundraising year in our 20-plus year history of being in that business. On to the next slide. Looking at the mix of investments for 2024, 59% of our investments were direct assets. The remaining was in [Audio Gap] portfolio assets, and this includes secondary investments, primary fund investments and liquid loans. As a solution provider to our clients, it's crucial that we have the ability to offer a comprehensive suite of investment options to our clients. North America continues to offer a large opportunity set for investment and remains our most relevant investment region. The firm has invested over $100 billion in the U.S. across asset classes to date, making us one of the largest [Audio Gap] private markets managers in the region. [Audio Gap] the region stands at approximately 45% of AUM. Within the Direct Equity segment, we invested $5 billion into infrastructure, and we have on the next slide, 2 infrastructure investments, which we're particularly excited about, and I'll highlight just one of those. EdgeCore is a leading developer, owner and operator of scalable data centers in the U.S. It's headquartered in Denver, just down the street from our own U.S. headquarters. Those of you who've been following us for a bit will remember that we initially acquired EdgeCore in 2022. The company developed much faster than anticipated on the back of the AI wave. Our focus on data center investments predates the broader market frenzy sparked by ChatGPT in 2022. By the time we acquired EdgeCore back then, we had established a dedicated team, conducted extensive research [Audio Gap] sector leaders [Audio Gap] 2 years of our initial investment, we achieved our initial growth objectives, necessitating additional capital [Audio Gap] increasing demand for AI-ready data centers. Our latest investment will support EdgeCore's expansion across existing and new sites. It's a great case study on how our thematic investing [Audio Gap] approach can result in continued investment opportunities and great outcomes for clients. Next slide. In 2024, we saw improvements in the M&A market. Last year, we delivered $18 billion in realizations back to our clients, up 53% from the prior year. This was largely driven by our direct assets comprised of credit and [Audio Gap]. Interestingly, our largest IPOs and exit agreements in private equity and infrastructure, which are highlighted on the next 2 slides, benefited from [Audio Gap] valuation uplift on a capital-weighted [Audio Gap] versus their mark 6 months prior, indicative of conservative valuations and signaling to investors of upside in the [Audio Gap]. Cash back to investors in the second half was in line with H1 [Audio Gap]. We are [Audio Gap] further progression of exit pipelines, specifically IPOs [Audio Gap]. On the next slide, you'll find 2 recent examples of accelerated realization activity. We invested in Techem in 2018, a large digital services energy platform in Europe. And over our ownership, EBITDA grew by 50%. In September of last year, we announced our exit, which is progressing quicker than initially anticipated to the extent that we'll book a relevant portion [Audio Gap] in 2024 results. Some realizations progressed faster than anticipated, some slower than anticipated. This is not a financials call, but we do want to reaffirm that we continue to expect performance fees to be at around 20% of revenues as we communicated on our call in September. VSB was another solid exit. This was also a 2018 vintage asset. VSB is a full-service renewable energy platform in Europe. And over the course of our ownership, we transformed VSB from a midsized developer into a leading pan-European platform. With the sale to TotalEnergies, we anticipate performance fees to materialize in 2025 and closing to occur by end of year. Next page. We're also starting the IPO markets, starting to look at the IPO markets more significantly as they open up. In 2024, we had 2 meaningful listings, Vishal and KinderCare. And Vishal's listing price [Audio Gap] 7x cost for our clients. This has the potential to lead to one of the largest ever capital gains in Indian private equity history. And KinderCare was the third largest IPO in the U.S. in Q4 of last year. With IPOs, you'll typically see a sell-down of a portion of those stakes over the coming years. And so we expect performance fee to realization to come gradually over the coming periods. Next page. We're also starting to see some signs of life in the real estate markets. At an industry level, we're seeing a rebound in activity from a low base. Aggregate transaction value is up 40% over 2023 levels. One asset of note within real estate partnerships was Annington. We anticipate material proceeds from the sale of these 36,000 properties. It's expected to close in the first half and is estimated to result in a blended multiple for our clients of over 3x. This is one of the largest positions in the real estate portfolio. That's it for the investment side. Now let's get into the developments on the client side. And for that, I'll hand it over to Sarah.

Thank you, Dave. So today, I'd like to provide [Audio Gap] on the $22 billion of funds raised. You'll notice that in terms of the asset classes we raised, it looks similar to what we raised in the first half. Private Equity was our strongest asset class and was supported by record inflows we saw in Private Wealth, along from demand from our mandate clients. Private Credit also experienced the strongest ever fundraising year on record. Both direct lending and liquid debt contributed to this success, and we very much expect this momentum to continue. Infrastructure fundraising was predominantly driven by our mandates, along with our direct infrastructure strategy. And as I mentioned in July, we will continue raising for this strategy into this year. In real estate, while there are attractive secondary opportunities, overall demand was actually lower due to the perceived continued challenges within the asset class. And last but not least, our new private markets royalties asset class [Audio Gap] inflows. We have built out our seed portfolio, and we expect, as Stephen mentioned, that this to translate into more meaningful inflows into 2025. Challenges in traditional fundraising did persist in the second half of 2024, in our view, very much reflective of a large industry trend where we see clients opting for more tailored solutions. And therefore, mandates remain a core focus for us as a firm. Our clients clearly agree that mandates make investing easier and simpler, and I'm happy to say that we continue to see the momentum that we saw in 2023 continue in 2024. And as you see, Evergreens were also a meaningful contributor last year. I know you've all heard it from us and from others, the private market allocations in individual investors' portfolios remain low. They continue to stand sub-1% on average. We strongly believe that allocation of individual investors will mirror those of institutions over the next decade. And therefore, we continue to develop new products and solutions such as the initiative with BlackRock that Dave and Roberto walked you through earlier. Roberto will now give us some more color on AUM development.

Let's take a closer look at our AUM bridge for the year. As you know, our guidance specifically covers fundraising and tail-downs. Sarah has covered the $22 billion of gross inflows, so I will discuss the impact of tail-downs, redemptions, exchange rates and performance-related effects. Starting with tail-downs, which are largely formula-based, they amounted to $9 billion. Our full year guidance was between $8 billion and $9 billion. They were mainly driven by higher credit distributions. This leads us to a net new money total of $12 billion or an 8% AUM growth if we only consider the factors we guide for. Moving to redemptions. They came in at $4.7 billion. This corresponds to a redemption rate of about 10% of average Evergreen AUM. Moving forward, we believe 8% to 10%, corresponding to an average holding period of around 8 to 10 years is a reasonable run rate for these programs as they are expected to get larger, both in terms of size and investor base over time. Performance-related effects amounted to $2.2 billion. They include contribution from a select group of products where AUM tracks their NAV development. We continue to believe that redemptions from evergreen programs are often netted out by performance effects in a normalized environment. And as a matter of fact, with strong performance in H2 and in December specifically, I estimate this to be the case for H2 2024 already. Last but not least, foreign exchange effects had a negative impact of $4.4 billion, mainly due to the strengthening of the U.S. dollars against the euro. As a reminder, 43% of our AUM is in euro-denominated programs and mandates. And with that, back to you, Sarah.

Thanks, Roberto. So let's move to the 2025 outlook. Our fundraising pipeline is globally diversified and supported by the strong presence we have and reach across various markets. And our platform really thrives on the principle of diversification, reflected not only in the solutions we offer and our investment track record, but also through the diversity of our client base. For 2025, we expect total new assets of $26 billion to $31 billion. In terms [Audio Gap] demand, that means we expect $22 billion to $27 billion coming from our existing business activities and an additional $4 billion expected from the acquisition of Empira Group. For 2025, we have a tail-down guidance of $9 billion to $10 billion for the full year. What I can tell you is the discussions myself and my colleagues are having this year and in the last month or so feel meaningfully different from the ones we were even having, say, 12 months ago. And we're really very hopeful that this shift in momentum that we're observing right now is really sustained over the coming year. Back to you, Dave.

All right. Before wrapping up and kicking off Q&A session, I just want to quickly mention our upcoming Capital Markets Day. Invitations were sent out in December for March 12. We're very excited to host our first Capital Markets Day since our IPO all the way back in 2006. And we hope you'll be able to join us and look forward to giving you a behind-the-scenes view of our platform. The meeting will be held at our new campus in Zug, Switzerland. And thanks, everybody, for joining us here on the call today. And with that, I'll pass it over to Philip, who will open up the floor for Q&A.

Yes. A warm welcome from my side. How we handle the Q&A, we will handle 5 questions from the call and then move to 5 questions from the webcast and back until all questions are answered. So with that, I would like to hand over to the operator to introduce us to the first phone call questions, the first 5, and I will read down the webcast.

Thank you. [Operator Instructions] and your first question today comes from the line of Nicholas Herman from Citi.

Yes, three from me, if I may, please. One on guidance, one on the new BlackRock partnership and one on mandates. So I guess this first one would be for Sarah. How should we think about the mix of fundraising in 2025, I guess, both between asset classes, but also across your 3 broad product types? And I guess, which of those product types you would expect to see kind of the greatest swing factor kind of which is driving this range? So that's the first one. In terms of the BlackRock partnership, I think you said that you will launch that offering with the large distributor in the first half -- end of the first half. How are you thinking about the contribution from an asset perspective this year, but also, I guess, 2026? And if you could help us understand, please, the economics here, I guess, the revenue and cost splits? And then finally, just on mandates, it looks like asset mandate growth was mid-single digit last year. And if I look at the last 3 years, like a simple average, also mid-single digits. So I hear you that this is an attractive niche, but what is it that's giving you confidence that you will see that push up to, I guess, what 10% to 15% that you will typically talk to?

Thanks so much, Nicholas. So maybe I can take your first question on guidance. The split may well vary as we go into 2025. But as a rough estimate, you can use the following. By structure, around 30% traditional, 30%, 40% evergreen, 30% mandates. And by asset class, if I look bottom up, it's pretty similar to what we saw in 2024. And then maybe I can also take your question on mandates as well. And maybe, Roberto, you can talk a little bit about distributions too, that changed over time. So I think we see -- we obviously look up from a bottom-up perspective, very much our pipeline, some large clients that [Audio Gap] on mandates, especially within the insurance space. And I think that gives us very much confidence in the continued momentum. Maybe to you, Roberto, for the...

Maybe adding from a portfolio perspective, many of these bespoke mandate solutions work on an investment and reinvestment perspective based on capacity that is freed up by distribution. So I think you observed rightly that in the private market, private equity world, we observed in the last 2-odd years with reduced distributions that also means that the reinvestment capacity of those mandates was somewhat subdued and has been only opening up more recently as we have seen exits pick up again.

And Nicholas, on the BlackRock partnership, let me step in. We did not provide guidance on how much we will raise. The idea is that these portfolios are both actively managed by BlackRock and Partners Group. And therefore, there will be a revenue split, the cost split attached to this. You will see more once we go live towards the end of H1.

Okay. Fair enough. If I can just have one quick follow-up on the mandates. You talked about the low distribution and less capacity. Just is there much difference in change in capacity between your mandate clients and your traditional clients? Or is this for clients that invest in traditional products? Or is it pretty much the same thing?

I think it's pretty similar.

And your next question comes from the line of Hubert Lam from Bank of America.

I've got 3 of them. Firstly, on fundraising. Can you please give us the assumptions behind the bottom and top end of that $22 billion to $27 billion range? What are the conditions you're assuming for the both ends? That's the first question. The second question is on Evergreen flows. So for Evergreens, you saw a slowdown half-on-half from $4.6 billion in the first half to $3.8 billion in the second. What do you think is driving that? Is it because of increased competition, weaker performance or just a general slower fundraising environment? That's the second one. And the last question is, can you just talk about how recently -- recent interest rate moves and the lower likelihood of rate cuts impacts your outlook for exits and fundraising this year? Has anything changed just given what we've seen over the last week to 1.5 weeks?

Thanks so much for the question. So on the range, clearly, we do this based on our bottom-up pipeline analysis that we work on. But if I'm to look at the higher end of the range, that would be an environment where transaction volumes, exits are increasing significantly to Roberto's point on distributions to our clients are coming back, freeing up capital, et cetera. This would lead us very much to the upper end of the range. And then conversely, the lower end would be a slowing down of transaction volumes, any more market volatility, for instance, which could then lead as we've seen in previous years to postponing of decision-making by clients. So that's how we look at the range.

Maybe -- this is Roberto. For the Evergreen question, we actually are coming from a record year in Evergreen fundraising in 2024. We don't attribute the difference between H1 and H2 to more than a blip in the sense it might be a single campaign that we launched that moves from a June to July that drives these type of differences.

And with regards to rates, look, as a firm that does have a significant amount of equity investing activities, I think the interest rate moves are one of several factors that from a macro perspective are driving a little bit more risk on behavior within the market right now. And I do think that it feels like that's meant to continue. And so we're quite optimistic about the overall outlook for improving activity levels.

Maybe just a follow-up question on the Evergreen flows. Are you seeing any pressure from competition or maybe just your fund performance has been, I think, a bit mediocre last year for the Evergreens. Is that impacting either the redemptions or the flow side?

Look, I think -- this is Roberto. If you look at the Evergreen fundraising, it's probably worthwhile to zoom a bit under the bonnet. [Audio Gap] the areas where the strongest growth is coming from is new offerings, where we basically went from $0 to $1.3 billion, and we believe this will also be growing strongly in '25. That's like existing distributors cross-selling new products that we bring online with them. And then new distribution partners that we have been adding across the globe. We've been adding 20 in 2024. You rightly point out, the areas where we grow less than average has been some of the large funds with existing distribution partners, and that has to do with the channel having gotten somewhat more competitive with the new launches of some of the competitor offerings. And in many of those distribution partner relationships, we're already quite sizable with them as we speak. So that certainly has been playing a role in Q2 and Q3. But if we look into 2025, I think the fact that we're growing and reaching a record year in a market that has becoming more competitive, I think, is a testament that this is a big and growing space.

And your next question comes from the line of Daniel Regli from Zürcher Kantonalbank.

I have one on the guidance for gross client assets raised in 2025 and one on the whole Evergreen or maybe 2 on the whole Evergreen funds topic. And just can you put this $22 billion to $27 billion gross client assets expectations, put a little bit into perspective, how far are we from a kind of normalized level of assets or fund raising? And what could we eventually expect in a year 2026? Obviously, it's still quite a time ahead, but still, what is kind of your normalized gross client assets raising expectation? And then secondly, on the Evergreen funds, you said today, the allocations are below 1% in typical wealthy individuals portfolios. Where could you see this allocation to go in the next 5 or 10 years? And then where do you eventually see challenges for the industry to absorb this demand?

So I'll maybe first talk about the guidance. So we are in a recovering environment. I wouldn't say that we're back to normal, but I think we're in an improving environment and it's a gradually improving environment. And it's in that context that we set that range. I do believe that there's upside in the coming years as the environment continues to improve. With regards to Evergreen funds, if you think about individual allocations, right? It will probably follow a pattern that's somewhat similar to the pattern that institutional investors followed in decades prior, right? When Partners Group got its start in the '90s, institutional investors also had an allocation to private [Audio Gap] less than 1%. And over that next couple of decades, we saw that move to north of 10% for investors around the globe. And there are many institutional investors that have portfolios representing -- where privates represent over 30% of their exposure. Maybe it doesn't go quite that high for individual investors, but from 1% to 6%, 7%, 8% in the coming years, we think that, that's very reasonable and very achievable. And in fact, it's necessary because this is where you get exposure to the middle market today, right? The companies that we have been acquiring and our peers have been acquiring over the past decade, these are companies that, in many cases, would have been public companies in a prior decade. And in order to build a balanced portfolio, privates play a big role. And so I think it's inevitable that we see those allocations up in that at least high single-digit level over time. And in terms of capacity and ability to absorb that, you are starting to see more scale being built within the most sophisticated players within our space because indeed, you do see a concentration in new assets raised within our space today with the larger platforms. Not everyone is growing within our space. And so that capacity needs to be absorbed by fewer and fewer players on an ongoing basis. And that's what's driving much of the consolidation that we've been talking about in our industry.

Your next question comes from the line of Oliver Carruthers from Goldman Sachs.

Oliver Carruthers from Goldman Sachs. Three questions on the Evergreen side. So the first one, what capacity can your Evergreens absorb if there's really strong demand in the next kind of 2, 3 years for these model portfolios? Are there practical limits -- practical size limits on how big the individual evergreen buckets could become the individual funds? So that's the first question. The second question, on the alternative sleeves within the model portfolios with you and BlackRock. On Slide 4, you show private equity, infrastructure, private credit and listed alternatives. Should we expect Partners Group to be providing the Evergreen building blocks for all 4 of these asset classes into the model portfolios? Or will it just be in private equity given that BlackRock has credit and infra? Or is that not the right way to think about it? And then the final question, can you let us know how you're thinking now about the 401(k) opportunity in the U.S. and whether or not this could become addressable for you?

Maybe I'll start, this is Roberto. With regards to capacity, I think you make a very -- you asked a very interesting question here. Our $50 billion existing Evergreen fund range is actually one of our key advantages about being able to take on capacity without unduly diluting the return profile of those funds. So I believe on a forward-looking basis, what you need to serve capacity in the right way is, on one hand, big existing portfolios and on the other hand, obviously, a sizable investment platform [Audio Gap] able to master the annual deployment needed to invest the respective funds. We believe this will be one of the key distinguishing features over the next 5 to 10 years.

On the JV that we've put in place and splits between us and our partner, you should think about that investment content being split in a reasonably balanced way. Indeed, with the different relative strengths of our firm, you might see one category with a little bit of higher weight here, another category with a little higher weight there. But if you zoom out and think about that program, that joint venture in total, you should think about those -- that investment content being split up in a reasonably balanced way. And with regards to 401(k), indeed, we do see momentum building on that topic. And many of the 401(k) providers that we've been having conversations with for a long period of time and doing missionary work with for a long period of time, it does feel like they came into 2025 with this finally on their agenda, and it feels like the stars are finally starting to line up there. And we talked a little bit about like how we're positioning ourselves for that opportunity, right? Our positioning as a portfolio solution provider has allowed us to service an attractive but small niche within the Institutional Investment segment, right? Let's call it, 3%, 4% of that universe that needs a more comprehensive solution, right? If you look at the private wealth opportunity that's coming online, we think that, that's a meaningful step up. We don't know quite how big it is, but can that be 10%, 20% of that market, right? That is looking for a more comprehensive portfolio solution? Absolutely. And for 401(k), that, by and large, is going to be a portfolio solution. You're not going to see a lot of product -- individual products that end up in those programs. And so as we think about our positioning as the preeminent portfolio solution provider within the private market, a lot of that is playing the long game for the 401(k) market. And look, we've been waiting on that market to come online for a long period of time. You guys know we've been pushing hard there. It might not be imminent, right? But it feels like progress continues to be made.

And if I could ask a follow-up on that. So what's the next step in this 401(k) chapter based on your conversations with 401(k) providers? Is it litigation reform? Or should we be looking out for something else?

Well, I think that we expect and many people expect a more supportive environment in general, right? Whether that's litigation, whether that's regulation, it feels like people are past the easy excuses on why not to do it. And they're recognizing the fact that just about every other investment segment of the investment universe is consuming private content on an increasing basis, right? And this is a key component of any balanced portfolio today. And unless you want to concentrate your clients in a technology index effectively, which is what the public markets are becoming, you need private content to be in there. And so I don't think it's any one thing. I think it's an overall though environment that is becoming what feels like a little bit more supportive for this and people chipping away at the opportunity. We did share on our last call that we had our first kind of DC win in the U.S. last year, still small potatoes, but right starting to come online, and we hope for some bigger wins this year.

Your next question comes from the line of Gregory Simpson from BNP Paribas.

Three questions from my end. Firstly, can you remind us what traditional programs you're currently in the market for or expect to be in the market for in 2025? Second question is, can you share the contribution of the largest distributor within your $48 billion evergreen AUM? I'm guessing it's a large Swiss wealth manager who's probably getting a lot of inbounds about their being on their shelves right now. And thirdly, on M&A, was the [ messaging ] you're very actively looking for more deals in real estate to try and reposition that asset class?

Thanks so much, Gregory. So maybe I can talk about the traditional programs and those that are open. So we have, as I mentioned, our direct infra strategy open this year. We also have private equity infrastructure and real estate secondary programs open for clients. We have our real estate fund. We have our life strategy, and we have a number of credit programs that we have as well.

When it's regarding the largest evergreen distributors, the top 3 represent roughly 20% of our Evergreen AUM combined.

With that, we would go to the webcast.

I will now hand over to Philip for the webcast questions.

And on the webcast, we have one question to Stephen Otter about the long-term return potential of royalties. Maybe, Stephen, you can shed some light on that. The second question then goes to Dave on what do you think the new Trump administration could benefit or where could private markets benefit from a potential deregulation activity? And last but not least, one more to you, which is why aren't we doing GP stake investments?

Sure. So happy to go first on the royalties question. The target net returns that we target in our funds for royalties are net 10% to 12% but if you think about on a gross basis, it's typically around 12% to 14%. But what I would add, which I think is very important, that returns target actually assumes that we hold the investments on a self-liquidating basis. It doesn't actually take into account that sometimes we may actually look to exit the royalties into the secondary market. And we actually executed one of those at the end of Q4, where we ended up exiting a royalty investment for close to 40% IRR. So that isn't baked into our returns target, but we actually see that as upside potential above and beyond the net 10% to 12%.

And with regards to the Trump administration and potential tailwinds coming out of that, look, I think we found a reasonably supportive first administration for private markets. And of particular interest to us is the democratization of our asset class is access to private markets within 401(k), et cetera. And the Trump-era Department of Labor was reasonably supportive of that. You guys might know we were part of the efforts to lobby the Department of Labor and to get that initial letter from the Trump-era Department of Labor that private markets does -- clarify that private markets does indeed belong in 401(k) programs and defined contribution programs. And so we're hopeful that, that's going to continue in the second administration. With regard to GP stake investments, look, it depends on how you view the world. Over the last 2 decades, our industry has grown in a highly fragmented way. I estimate that over 11,000 private markets firms have successfully raised limited partnerships from institutional investors. And they did this during an era where institutional investors were meaningfully expanding year after year their allocation to private markets. Those allocations are sticky, but those exposures today are already very sizable. And institutional investors are no longer expanding allocations to privates at the same rate. And new assets are concentrating with firms that can be multidimensional partners, partners that are destined to still be relevant a decade from now because this is a long-term asset class and people need to underwrite GP longevity. Assets from the growing wealth sector almost certainly are concentrating with platforms and solution providers given the nature of what it takes to manage evergreen programs. Many monoline managers that I talk to that have only raised limited partnerships, they're having big existential thoughts at the moment. And I'm just not sure I'm along a portfolio of independent monoline GPs right now. I think assets are concentrating with the larger platforms. And so we're probably less interested in the GP stake opportunity than maybe some of our peers.

And a follow-up question on that is Empira as an M&A target, which we acquired, how do you think about integration of Empira into our platform?

Yes. So as we think about Empira, but maybe using Empira as a proxy for other potential investment engines that we may bring in, in the future, I think Partners Group has a very distinct investment culture, very distinct investment approach. And Empira has a very distinct investment culture and a very distinct investment approach, talents that complement each other. At the same time, different processes, different ways of going about doing things. We will not be changing the Empira way of doing things entirely, the Empira way of developing their assets and finding those opportunities, but they're going to continue to develop their business under their own banner and under their own brand, under the leadership of Partners Group. That's the way to think about integration of not just Empira, but also of other potential platforms in the future. This is a people business. This is a culture business. And when people have a successful culture in the investment space, you do not try and change that and have a set of corporate standards that get rolled out over an entire platform. That's at least our view.

And Empira content will be made available for all Partners Group clients.

Absolutely. Where you do integrate is distribution, right? That's where the synergy is. But the investment engine will remain independent.

With that, I would like to hand over back to the phones before we go back to the webcast.

Thank you. Your next phone question is from the line of Angeliki Bairaktari from JPMorgan.

Do you see any risks to the improvement in transaction activity that you mentioned from the recent increase in the U.S. 10-year sovereign yields? And secondly, on M&A, are you thinking about bolt-ons similar to Empira? Or could you also do something more transformational that would increase your AUM by a more meaningful amount than something in the range of $4 billion to $10 billion?

I think with regards to the transaction environment and things that could derail the gradual improvement that we see there, I'm sure there's a number of things. But we feel reasonably good about the pickup in activity and the trajectory of the pickup in activity that we see. So I won't comment on any one specific element. But just from the range of inputs that we have, we feel reasonably good about the increase -- continued increase in activity there. With regards to M&A targets, look, there's a couple of relevant topics for us on the M&A side, probably with some overlap, right? We could buy brand, which could enhance our solutions in certain regions, in particular, and we could buy vertical depth, right? Bringing on board specialized talent with an investment process, deep knowledge in their space, operating capabilities and unique cultures to generate consistent and repeatable outperformance. And both are of interest for us, I'll just say that.

Sorry, if I may just follow up on the transaction activity. We are having a lot of discussions at the moment, and I think you pointed out as well the opportunity improving in the U.S. post elections, given the deregulation discussion, et cetera. Do you see a divergence based on sort of the assets that you manage at the moment within your portfolio? Do you see a divergence between the European market and the U.S. market for exits in 2025? Or do you expect Europe to follow the U.S.?

Look, some of our biggest exits from a transaction size perspective actually happened in Europe more recently, right? Techem is a EUR 6.7 billion transaction, for example, one of the largest exits that we've seen in quite some time. And so I wouldn't say it's a U.S.-only phenomenon. Now post election, is the U.S. have some fire under it and some momentum building within it? Certainly so. Are they probably feeling their oats more than European investors today? Probably so. But I don't know that, that leads to a long-term divergence necessarily. Time will tell.

We will now take the next question and the question comes from the line of Máté Nemes from UBS. Máté, is your line on mute? I will check one more time, Máté, is your line on mute? Due to no response, I will move to the next question. And your next question comes from the line of Charles Bendit from Redburn Atlantic.

Three follow-ups on the Empira acquisition, if I can, focusing on its impact on the financials. So firstly, is the management fee margin on fee-paying AUM comparable to the 1.2% to 1.3% average for Partners Group? Secondly, is the performance fee potential comparable? And does it not affect the 25% to 40% guidance that you've given previously for years beyond 2025? And then thirdly, just wondering how the acquisition fits with the 60% EBIT margin that Partners Group has and whether there are any plans to consolidate office space or do anything else?

The financial impact from Empira is Empira's management fee margin is slightly higher than Partners Group's average margin. The overall impact -- potential impact for 2025 is around about 1% to 2% of EBIT increase. And obviously, there are not many businesses in the world who operate at 60% margin. So you can assume that the EBIT margin contribution for Empira is less than our margin, but the impact of -- compared to Partners Group financials to our financials is minimal from a margin perspective.

And the next question comes from the line of Bruce Hamilton from Morgan Stanley.

Just a couple of follow-ups. So on the sort of M&A answer, if I heard right, I think you said brand would be one reason. I assume anything brand related, we should think U.S. And then obviously, quite a few of the comments on the back of Empira were that there might be other real estate verticals. But is private credit still a focus area or valuations just -- is it too competitive there to do something? And then secondly, on the Evergreen growth, I guess just to understand what you're saying is obviously the new product launches, I think you said gone from $0 to $1.3 billion. So the way we should think about your '25 guidance is those will still grow and offset a sort of lack of growth in the products, the larger products that don't have particularly good performance. Is that the way you think about it? So don't expect too much from the established U.S. '40 Act fund is going to come from elsewhere?

Yes. Bruce, so if we think about the comment around brand, yes, you can assume that, that is primarily targeted at the U.S. market, where that is amongst our fastest-growing markets from a client perspective, but where we are still way underrepresented versus many of our peers. And so yes, I do think that, that's a fair reflection. With regards to M&A and other spaces that could be interesting. Indeed, you can expect for us to continue to look for additional vertical depth within real estate, relatively small tuck-in acquisitions that can bring that expertise as we take our Real Estate business to the next level. Debt is a topic that we highlighted in the past. I think you're alluding to the reality, though, that valuations are pretty high there and management fees are coming down fast, right? And so trying to figure out the right transaction dynamics within debt, I don't think it's the easiest, right market to transact in, but it could still be interesting for us over the long run. But whatever we do, we're focused on it being financially accretive day 1.

With regards to your question on Evergreen flows, yes, we do expect to further increase. We think 20% to 25% of next year's Evergreen fundraising comes from the new offering. I will qualify your statement with regards to the existing funds. I think, one, we have seen a pickup in performance in H2. So we believe this performance is a short-term effect. And then second, the new distributors that we have added channel to a good degree also into existing funds. We believe for the existing funds, a 10% net flow plus a 10% performance target is still adding up to a 20% growth overall.

And the final question comes from the line of Máté Nemes from UBS.

Thank you, and apologies for the technical issue earlier. Two questions, please. The first one would be on fundraising. So if I summarize what you mentioned earlier today is that your investment activity is ramping up. It's accelerating. The engine is on. You had a record year in terms of evergreen fundraising, and you are launching the partnership with BlackRock in the summer. Yet it seems like the midpoint of your guidance range would roughly equate to around 10% organic AUM growth this year. And I'm just wondering what makes you, let's say, a bit more cautious still. I understand it's a challenging environment. But do you expect, let's say, such meaningful challenges, particularly in some of the larger mandates due to capacity reasons? Or is that really the closed-end fundraising that is the issue? That's the first question. The second question would be on performance fees. So you highlighted those larger exits from the second half of last year. How do you feel about performance fee contribution in 2025, given the current transaction activity? Do you see perhaps the upper end of the 20% to 30% range a lot more realistic this time around? Any color on that would be helpful.

Thanks so much for your question. I mean just on the midpoint, as you say, roughly gets us to around 10%. I think as we look at the range that we have, and I mentioned earlier what kind of would impact the higher and the lower end of the range, [Audio Gap] things that we're working on larger strategic mandates, big projects and so on. The exact timing of those can sometimes be more difficult for us to actually tell exactly where that falls. But obviously, as we talked about, there are many, many factors, whether it be on the wealth side, the new funds that we have launched in the evergreen space, the insurance space, royalties and so on, allow us to have that kind of positive outlook going forward. The exact timing of that to this specific year and when that falls is why we kind of have the range that we have. And it is really based on our bottom-up analysis that we do in depth of the pipeline where we really look client by client, line by line on where we see the overall demand landing for this specific year.

And the performance fee point, we'll talk more about performance fees in our next financials call. But I do think it's safe to say that this pipeline of exits, right? That we've been talking about, having that start to mature and start to move closer to crystallization is something that bodes well for performance fees. And so I would say that we reaffirm the guidance that we've given for this year of performance fees falling between 20% and 30% of revenue. And we continue to feel good about the guidance that we've provided over time. And in subsequent years, that moving to 25% to 40% of revenue as you continue to see that large pipeline of embedded value move further towards crystallization. And with that, we'll wrap up the call today. Thank you all for your participation, for your interest in our company and for your partnership. And we look forward to hopefully seeing many of you at our Capital Markets Day in March. Thank you very much.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.