Partners Group Private Equity Limited (PEY) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Princess Private Equity Holding Q4 2019 Investor Conference Call. I'm Alice, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, it's my pleasure to hand over to Mr. George Crowe. Please go ahead, sir.

Good morning, ladies and gentlemen. And thank you for joining us for the call today. Over the next 45 minutes, we will talk you through the financial results for Princess Private Equity Holding for 2019. You can find the presentation on the Princess website in the Investor Relations section. And there will also be an opportunity to ask questions after the presentation. So with that, I will hand over to Felix Haldner, a partner of Partners Group, the investment adviser to Princess and also Director of Princess. Felix, please.

Good morning, ladies and gentlemen. It's a pleasure to walk you through some of the results of the last year. I'll dive directly into the presentation. On Page 2, you've got some key messages on the company. So the 5-year NAV return, the share price return, dividend yield and net assets are well above EUR 800 million by now. Just to recap what is Princess about. Well, Princess' strategy, to invest in private equity. It provides shareholders with access to leading private companies by investing basically in Partners Group's global private equity deal flow. Partners Group's global platform and sector expertise supports a relative value investment approach, which aims to identify the most attractive investment opportunities throughout the cycle. We focus on what we call mid- or upper mid-market companies with value creation potential. We, as Partners Group, has been one of the first private markets investment managers to sign the United Nations Principles of Responsible Investment back in 2008, and ESG factors are fully integrated in the investment process. And as owner of the majority of -- as owner, we set ESG targets for our portfolio companies. So I believe that as well as being the responsible thing to do, it also benefits shareholders through enhanced returns and particularly risk mitigation. Princess benefits from broad resources from Partners Group's global private equity platform of over 90 dedicated private equity investment professionals, over 45 operational specialists who support the management teams of our portfolio companies, the so-called industry value creation team, IVC team. And we -- and one area where we continuously focus as a manager is governance and Board composition, an area where we believe private equity has an inherent advantage of publicly listed companies. It's a team of 4 senior professionals who focus on ensuring our portfolio companies have the right Board members with the right blend of experience and skills to drive value creation. Partners Group has also an extensive network of industry experts and operating directors to assist with sourcing and due diligence of companies and can also sit on boards, if necessary. And finally, Princess aims to provide shareholders with capital growth and an attractive dividend yield. We target around 10% to 15% net NAV returns, of which about half is paid to shareholders via dividends and about half is retained for capital growth. By that, I would like to point you to the performance in 2019, which you find on Page 6. The page numbers are at the upper right side. Princess shareholders enjoyed a very positive year with an NAV total return of 21.1%. The share price total return was even higher at 37.4%. We highlight that this is -- this includes, of course, a reversal of the negative performance of equity markets in Q4 2018, during which Princess was clearly oversold and saw its share price decline by 17%. Princess started and closed the year fully invested. The portfolio is now in a steady state, balancing new investments and realizations to maintain high investment level. It received realizations of over EUR 100 million in 2019 and invested about EUR 70 million, with the balance used to fund a dividend of around EUR 40 million to shareholders. Partners Group agreed to sell a stake in Action, generating an investment multiple of over 35x. The majority of the proceeds are expected to be received in May, following the closing of the transaction, and a good portion of it will be used to repay the credit line. Princess paid a total dividend for 2019 of EUR 0.58 per share, remaining well within the range of 5% to 8% of opening NAV as communicated to shareholders. And I'd like to point to the fact that Princess now has a 9-year track record of dividend payments, and it's the Board's clear intention to maintain this policy. On Page 7, you -- we observe some historic NAV performance. So Princess' long-term track record continues to develop favorably. As a reminder to shareholders, Partners Group started to reposition the portfolio to direct investments in 2010. And the 10-year figures still include the impact from the GFC and the impact of cash drag from the early years of the repositioning. However, over the 3 and 5 years, Princess has now achieved a clear outperformance of public markets, albeit the NAV can lag public markets during shorter time periods, such as the very strong market rally seen last year. On Page 8, you -- we observe that discounts have narrowed considerably over the last year and more recently to levels that come a bit closer now to what we would call to reasonable levels. On the key figures on Page 9, you will see that the NAV continues to increase despite of all the distributing of EUR 40 million of dividends. We would expect that as the company grows bigger, it becomes investable for a greater range of investors, all else being equal, and that greater demand should be positive for both the discount and trading liquidity. Looking at the balance sheet. Princess drew on its credit line during the second half of the year. And as I said before, it will be repaid with proceeds from amongst other things of Action. A reminder to shareholders. Princess maintains a credit facility for short-term liquidity management purposes, so there's no intention to introduce long tier term gearing to the portfolio. But also, as a reminder, Princess maintains a balance of now over EUR 30 million in first lien senior loans, which can be sold to generate further liquidity if needed. And finally, the number you see in relation to unfunded commitments continues to decline both to the legacy fund portfolio and to Partners Group direct programs. We do actually not expect the majority of these commitments to be called. We've provided a more detailed breakdown of commitments by fund in the appendix. If you turn to Page 11, you will see the largest direct value drivers in the fourth quarter. And we are pleased to see that some of our largest companies are also within the fourth quarter value drivers. And on the next page, you can see on Page 12 that the largest direct value drivers over the year, with Permotio, Action, GlobalLogic, Kinder, Foncia, all of them also being on -- among the top 10 companies in the portfolio. We'll dive deeper into the one or the other company a bit later in the presentation. On Page 13, you will see the realization activity in the fourth quarter of last year. Princess received EUR 18 million from the sale of Vermaat, which we'll discuss in a bit more detail a bit later. And the Legacy fund portfolio continues to throw off cash with EUR 13 million received alone in the fourth quarter. We also sold down some of Princess' first lien senior loan portfolio, generating liquidity of EUR 5 million or so. And we received -- or will receive -- we will receive more than EUR 100 million in the coming months from Action and actually Global Blue. In November, as you read or probably read in the -- from 3i or our press release, Partners Group agreed to sell its equity stake in Action to Hellman & Friedman, a U.S.-headquartered private equity firm. And by that, alongside other funds managed or advised by Partners Group, Princess will fully realize this very, very successful investment. As of year-end, Action's carrying value reflects the agreed exit valuation and represents a return of over 35x the invested capital and an IRR of staggering 76%. Post period, the portfolio company Global Blue announced it will merge with Far Point Acquisition Corporation. The combined entity will be listed on the New York Stock Exchange and Princess, alongside other funds managed or advised by Partners Group, will participate in the transaction. The transaction values the company at an enterprise value of about USD 2.6 billion, which represents a modest uplift to the carrying value as of end of December. So assuming no major changes, Princess will receive estimated proceeds of about EUR 8 million and will also retain a small stake in the combined entity. This transaction is expected to close during the second quarter of this year. On the next page, 14, we have an overview of the major realizations in the whole year. And I would like to point you now to the exit of Vermaat on Page 15. Following the full realization of Vermaat, we just wanted to share with shareholders what we -- what was achieved during our 4 years of ownership. To remind you, we acquired the business in a primary buyout from the founding Vermaat family, 2015. We were attracted by its market-leading position in the Dutch catering hospitality market. If we turn to Slide 16. During our ownership period, we implemented a number of value-creation initiatives to increase earnings by over 70% and to create an attractive business for the next owner. It was a primary buyout. There was a lot we could do to institutionalize the business, including the introduction of new processes, strengthening the management team and improving operational efficiencies. And then through a combination of organic growth and M&A, we almost doubled the number of locations from 188 when we entered the business to 360 at exit. And we also expanded into the German market, establishing a clear path to future growth for the new owner. Ultimately, the investment generated a return of 2.75x invested capital and an IRR of over 30% for Princess shareholders. On Slide 17, you will see the investment activities in the fourth quarter of 2019. So the EUR 18.9 million was invested in 2 direct equity investments, namely in Nestlé Skin Health and Axel Springer. Nestlé Skin Health is a carve-out from food and beverage company, Nestlé, and Princess invested EUR 9.7 million together with a consortium of investors led by private equity firm, EQT Partners. It was rebranded to Galderma, and it's the world's largest independent global dermatology company operating 3 business divisions: aesthetics, prescription and consumer. Partners Group considers Galderma as very well positioned for long-term growth in the highly attractive dermatology sector, which is driven by an aging population and the rising middle class in emerging markets. And Axel Springer, again, a co-investment alongside KKR. So founded in 1946, Axel Springer is a publishing house based in Berlin, Germany. The company operates a portfolio of online classified portals as well as print and digital content properties across more than 40 countries. Princess has also one transaction in closing as of quarter end, a lead investment called EyeCare Partners, the largest vertically integrated medical vision services provider in the U.S. And it's planned that Princess will deploy around EUR 10 million when the transaction closes. I'll cover EyeCare Partners probably in more detail in the next quarterly call. On the next page, 18, there's an overview of the investment activity in 2019. As you can see, it's broadly diversified over geographically in the U.S., in Europe, in China and over industries. On Page 19, some more details on Galderma. So it was basically a noncore business for Nestlé, it appears. After a strategic review following pressure from activists, shareholders decided to spin it off. We believe there is considerable growth potential. There is a sizable market. Again, demographics plays an important role but also the expansion into emerging markets. And we will also have some optionality and downtime protection from sale of noncore segments within the business. This leads me into the overall view on the portfolio on the Pages 20 and 21. Not surprisingly, funds continue to reduce. It's basically a runoff. In runoff, directs increase accordingly. Princess is very well diversified with more than 70% by now invested in Partners Group lead or co-lead transaction. And the balance invested in either the equity or debt of transactions alongside other leading investment partners. We -- Princess has a flexible investment mandate and to ability -- the ability then to accelerate or slow down the pace of investment through co-investments and debt, depending on availability of cash to invest. The portfolio also remains very well diversified by vintage. Part of the portfolio is represented by 2015 vintages or earlier. From a sector perspective, on Page 21. We have a large consumer discretionary. However, it should be noted that over 1/3 of the portfolio, and this includes actually top 10 exposures to education businesses such as Permotio and KinderCare and also the investment in Action. There's a clear focus on the mid and extended or upper mid-market where we find companies where we are able to add value and support growth. On Page 22, they are the key metrics for direct equity companies. We continue to see double-digit EBITDA growth across the portfolio and capital structures that include over 60% of equity. There's a slight change in kind of the average weighted enterprise value because of Action no longer being counted. On the Page 23 and 24, you have the overview of the largest 10 direct investments. They demonstrate the diversification of the portfolio and also an observation following the positive performance of a number of some of the largest investments. The top 10 now account for a bit more than 50% of the net asset value. We have discussed a number of these investments in earlier presentations. And later in this presentation, I would like to discuss in a bit more detail our largest investment, International School Partnership or Permotio. Before that, I'd like to highlight some aspects on the market on the Pages 26 and 27. Given the stage of the cycle, where we stand, valuations that are observable in the market, we invest a lot and put a lot of emphasis on so-called thematic sourcing. So we want to invest in high-growth subsectors. We identified the assets we want to own. We spent significant time on due diligence before. An asset is in the market, so we do not buy the market. Frequently, it is not possible for investors to get exposure to these themes by investing in quoted equity markets. And investment activity this year reflects this focused approach with examples like Blue River Pet and Confluent Health, Schleich or most recently, the EyeCare Partners. On the Page 28, you have kind of a snapshot on our approach and what we particularly like. And you will observe that it is not just generally, let's say, education or health care, but it's very specific sectors within a theme. And once identified, we screen the market for private companies across the globe to identify potential targets. But then it's often a process of many quarters, not years, to then identify transactionable assets, to negotiate and then include in our portfolio. Value creation is the other key point in the current market circumstances, so it's a driver of return. We continue to grow our industry value creation team, to Page 30, grow them even faster than the investment teams. We believe that we have the largest team actually operating in the mid-market globally and believe this is a key differentiator for a successful private equity manager in the future. As an example, you will see on Page 31 and 32, International School Partnerships, Permotio. This has been, as we all noted, a highly successful investment to date from 0 EBITDA in 2013 to the actually the fifth largest education company globally within just 5 to 6 years. Now Princess' largest portfolio company, representing over 12% of the NAV. What we do, it's a buy-and-build strategy. And there is a very healthy multiple arbitrage as a key driver enhanced by selective new builds in established regional clusters and by capacity expansion at existing schools. As we grow the top line via M&A and improve efficiency through shared services and support and marketing and operations. And we continue to work on a strong pipeline of M&A targets and remain very positive on the prospects for the business. With that, I would like to summarize on Page 34. From an investment perspective, we continue to focus on the disciplined deployment of capital and on the identification of companies where we believe we can support management to create value. Meanwhile, we work with our existing portfolio companies to help them grow earnings. And while we receive inbound interest in a number of portfolio companies, but also continue to weigh potential realizations against the opportunity for further value creation in this environment. With that, I hand over to George.

Thanks, Felix. And we'd just like to invite any questions in the Q&A, should there be any.

[Operator Instructions] First question comes from the line of [ Myrtle Haramis ] from Numis.

I just wanted to ask you if you could give us a little bit more color on the realization of Action. Is it related to what you expect on the performance going forward? And also if you could give us a short update on Form Technologies.

Sure. So look, on the realization of Action, we still think it's a good business. It has had good prospects and a very strong management team. The concern for us was more by this time, it's quite a sizable company across Partners Group's platform, which includes not only Princess, it was a very sizable equity check. And we just felt that potentially our exit horizons weren't aligned with the lead GP. Obviously, it's material. And I don't want to say too much about this is there. I know a listed company, but it's a material part of their balance sheet. And I guess, we had questions over the exit horizon there. So that, as I say, was more governance and future exit considerations that led to the exit of Action, not concerns over the business. With Form, there is some exposure to certain end markets, particularly automotive in the U.S. We've seen quite a lot of softness there that's been reflected and a fall in earnings. So we've obviously moved to take that valuation down. We're working with the management team and it's on the turnaround situation. And look, we hope to stabilize this business soon.