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

Ladies and gentlemen, welcome to the Princess Private Equity Holdings Q2 2020 Investor Conference Call. I am Alessandro, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. George Crowe. Please go ahead, sir.

In the absence of George, who has just dropped out of the line, I warmly welcome the shareholders and other interested party to our today's update call. My name is Felix Haldner. I'm a partner with Partners Group, the manager of Princess, and at the same time, a Director of Princess Private Equity Holdings. You have all seen the presentation we are using today. It's on our web page. You can download it, and I intend to follow the presentation as it stands there. As a short reminder, in relation to the investment strategy as an investment in Princess Private Equity Holding provides shareholders with access to private equity companies by investing in Partners Group's global private equity deal flow. And as shareholders from previous calls, you will remember that Partners Group invests with a so-called relative value approach, which basically aims to identify the most attractive investment opportunities throughout the cycle. In recent years, in an investment environment where valuations for new investments were at fairly elevated levels, our focus has increasingly been on those companies that benefit from long-term secular growth drivers. And as a consequence, Princess portfolio has a low exposure to more cyclical sectors, which was a benefit of -- at the onset of the pandemic at least. Princess benefits from Partners Group's private equity investment platform, including over 100 direct private equity professionals who are embedded in a global private markets platform. On top of that, there are more than 50 operational specialists, as we call them, industry value-creation team, across 5 industry verticals who drive value creation jointly with the management teams at the portfolio company level. There's also a capital markets professionals team and a team that particularly cares about governance of Boards. Despite the headwinds experienced during the first half, Princess continues to outperform. So the 5-year annualized NAV total return of 10.6% per annum compared to 6.8% for the MSCI World. So that's an annualized outperformance of 3.8% versus the MSCI World. By that, I'm on the presentation on Page 5, where we basically described the recovery in valuations and trading during the second quarter. So after a very challenging start to the year, we are very pleased to be able to report the recovery in valuations and improved trading from portfolio companies actually across the board during the second quarter. Reflecting the correction in equity markets in March, Partners Group moved quickly to revalue the portfolio to reflect lower multiples, resulting in an NAV decline of almost 15% during the first quarter. However, at that stage, it was too early to have visibility over the impact of COVID-19 on company earnings. Now during the second quarter, we have observed 2 positive developments. Firstly, a recovery in equity markets, which has supported the almost 12% increase in Princess NAV during the second quarter. But secondly, an initial dip in trading as countries implemented strict lockdown measures to contain the spread of COVID-19, followed again by a quick recovery. So earnings for most portfolio companies reached a trough in April or May, depending on their location and industry. However, June financials have demonstrated a very strong recovery with the majority of portfolio companies ahead of our COVID-19 base cases and trading close to pre-COVID levels again. So in addition to supporting Princess portfolio companies during recent months, Partners Group also supported portfolio company employees during lockdown for those employees who are still are -- who were [Audio Gap] Partners Group established a fund where donations from our partners and employees to provide financial assistance. So to date, about USD 7 million have been allocated, and we continue to support portfolio company employees and their families during this challenging period. Princess balance sheet was strengthened during the second quarter, following receipt of proceeds from the sale of the stake in Action, and the proceeds were promptly used to fully repay the company's credit facility. And so at the end of the second quarter, Princess held cash of EUR 34 million and had the full EUR 80 million available to draw from the credit facility, if need be. So reflecting improved trading and measures taken to reduce costs and preserve liquidity at portfolio company level, Partners Group's assessment of additional capital requirement to support Princess portfolio companies has reduced significantly compared to my last update and to the downside case prepared at the onset of lockdowns. And so with the liquidity position improving, the company also felt confident to declare a first interim dividend of EUR 0.145 per share, which also will be paid to shareholders in August. So we also reaffirm the revised dividend guidance published in May that Princess will pay a second interim dividend in December, such that the total dividend for this year will be at least EUR 0.29 per share, which makes today's share price a dividend yield of well above 3%. I'd like to point you to Page 6 with the historic NAV performance and just repeat or point you to the fact that despite the recovery in NAV, the share price lagged the recovery and remains close to 13% down for the year. And this has also then led to widening of Princess share price discount to NAV, which is illustrated on the Page 7. So whilst we traded close to NAV at the beginning of the year, now discount has widened during 2020 and is now trading more than 10 points wider than the 5-year average. The question is a bit why. Also compared with the peer group, there may have been some uncertainty over dividend payments in 2020. However, this, as I just said, has been clarified. We are -- shareholders can expect a dividend yield of more than 3%, which is much more than most of our peers. Maybe it has to do with some of the sectors that are strong in our portfolio and which are viewed as more critical, such as education and health care. However, as I hope to demonstrate later in this presentation, these concerns are certainly not justified to the extent that the share price seems to reflect. By that, I turn to Page 8 and the key figures. I'd like to point your attention to the cash level at the end of the second quarter. We've got -- we had EUR 34 million on the bank accounts. We've got a credit line that was increased actually from EUR 50 million to EUR 80 million. It has been fully drawn but also fully paid back during the second quarter. And by that, EUR 80 million are available. To remind shareholders, this is not used for structural gearing but to bridge short-term shortcomings. The other point I would like to point you to is the unfunded commitments. So out of the EUR 68.8 million, actually, only about EUR 26.7 million are of so-called active commitments. That is commitments that are there to support M&A activities of certain portfolio companies, whilst the remainder is either from the legacy portfolio, which is very, very unlikely to be drawn, and towards the Partners Group direct programs, which actually have completed the investment period and are not expected to call other than for certain expenses. On Page 9, a recap and a reminder what was on our minds as investment managers of Princess and other of our portfolios. So the pandemic actually, as again highlighted, the importance of liquidity, both at asset and portfolio level. And on this page, you see a number of considerations and actions that have been taken -- that has been taken at asset level. Of course, it goes -- it's about liquidity sources, cash flow from operations, cash on company level. We drew open balances actually from credit facilities. While on portfolio level, it's basically the observation as to other distributions from exits, particularly in the last quarter with a very large distribution from Action that was expected. But then also what we did, we drew open balances on credit facility -- on our credit facility. Again, liquidity needs the planning for it. So what is working capital need, debt financing and interest covenant cures but also reserve cash capital for additional M&A to grab opportunities. And the output, the assessment, all of that, then at the portfolio level is basically the planning we did, and we communicated very actively to you as a shareholder in the crisis -- in the heat of the crisis. There are also some extraordinary actions to increase liquidity. For example, a portfolio company, there are a number of measures, including reducing senior team salaries. We tapped into government relief where available. We deferred rent where possible, negotiated with landlords and so on. And as you all recall, on Princess level, we revised the dividend guidance, but we also adjusted investment plan, the pipeline. We did a lot of liquidity stress testing and just the way or reassess the FX hedges and the cash flows associated with that. Now on Page 10, you find a kind of a simplified liquidity bridge as it presented itself at the end of the second quarter. So the EUR 114 million liquidity of cash plus undrawn credit facility available. There was the first interim dividend that was declared. There are some other cash flows on the positive side, and then we have new investments. That's something I'm going to cover a bit later in this presentation. We plan a second interim dividend later this year. And then, of course, the unknown right now is realizations. And maybe the extent of capital infusions in case of second, third wave, we have factored in some of it. However, the future is difficult to predict, so we just work in scenarios. Our forecast actually for this year does -- on the liquidity side does not rely on realizations. However, I can assure you that the activity has picked up. And there is at least some likelihood that in the second half, certainly in the first half next year, there are going to be realization activities. And so by that, we come to a pro forma cash and undrawn credit facility at the end of the year and also comforting to see that this covers by far the unfunded commitments -- the true unfunded commitments of this year. This leads me then to Page 12, where, in an overview, you see the portfolio as per sector, region, type and investment year. We have a very diversified portfolio with a very substantial allocation to resilient sectors and to mature portfolio companies, companies that benefit from secular growth drivers. Also, a material portion of underwritten returns is actually driven by value-creation initiatives that are basically monitored led through our IVC team in conjunction with the management teams of the portfolio companies. We have limited exposure to more cyclical sectors such as energy, tourism or banks. The direct portion is now at 87%, mostly with the lead and colead transactions of Partners Group. And you see also a diversified split over the regions and geographies. The majority of companies, and I'm now at Page 13, is now performing in line or ahead of our COVID case. And on this page, you just see a sample of Princess portfolio during the pandemic. So on the left side, there's PCI Pharma Services, where actually, where COVID-19 is not anticipated to affect the underlying business model. On the contrary, PCI has actually presented business development opportunities, and we have already seen in -- reflected in the financials in May and then later in June. That show record-high monthly EBITDA. PCI has provided to be an essential provider in the pharmaceutical supply chain kind of being very flexible, organizing supply of critical drugs to hospitals. Techem has seen very limited operational impact due to COVID-19. And again, the financials show a healthy increase in EBITDA levels. Whilst KinderCare Education, the largest for-profit provider of early childhood, has been hit by the lockdown measures in the U.S. At times, there were -- more than 1,000 centers out of the 1,500 were closed. However, by now, there are -- we reopened most of them. They're about 1,400 are actually open, and we have also seen in the financials that a partial rebound, although the utilization rates are lower than pre-COVID and will also depend on the recovery, but that's basically a function as parents return to work. They require childcare services. On the portfolio metrics on Page 14, you will see that looking -- we have seen a bit slower growth year-on-year as a real result of COVID-19. Not surprisingly, actually. Although the last 12-month EBITDA growth remains close to double digit. EBITDA reached a trough in April, May, a bit earlier than forecast, and we have seen a recovery in June financials. And where the last 12-month EBITDAs were impacted by one-off COVID factors, EBITDA was adjusted to calculate a maintainable EBITDA figure, which was used for June valuations. So the adjustments were both positive and negative, for example, where companies benefited from COVID, but we don't feel the additional EBITDA is maintainable. We also adjust the EBITDA downwards. So the average impact on EBITDA across the portfolio was relatively small at plus 3.3%. There remains a very robust capital structure comprising, on average, over 50% of equity. On Page 15, in a bit the more granular way, you will see the revaluations we did for the 10 largest portfolio companies in the second quarter, so mostly actually upward top 10 investment revaluations of EUR 45.6 million. What you also observe is our assessment, our current assessment, either on the short-term outlook but also on long-term outlook. So comforting to see that none of the top 10 companies has been -- well, we assessed none of them to be impacted in the long term. So this may be in the 6 to 12 to 18-month or until the -- our base case, investment case. However -- and on the short term, all of the more conservative or the more critical assessments have actually improved, including on Permotio, which I'll cover in more detail a bit later, as it's our largest investment, where we have actually only minor -- very minor negative impact right now. But then also Foncia or AMMEGA, where things have considerably improved, or like in Vishal Mega Mart, where, by now, nearly all stores are open. However, as there are some restrictions, it's still in the color code. It's on the yellow-ish. On the next page, on 16, I'll give you a bit more insight on the largest portfolio company on their businesses. So starting with international school partnership. As you all recall, it's an international school of choice that focus on 2 to 18 year old. It's close to 13% of Princess NAV. So what we observe is a very good student retention with actually only 1% drop of the student base, and this is almost entirely kindergarten children. So the enrollment season has been slightly better than last year. Though the -- we can only basically report on the definitive numbers about 2 weeks before school start, which, in most countries, particularly in the Northern Hemisphere, is end of August or September. We had a very strong success of the so-called Learning Hub rollout, which has enhanced effective remote learning. Those who were present at earlier calls may remember that the Learning Hub is a sharing tool that was actually originally designed to share best practices among teachers, among the 47 schools. However, has been swiftly redesigned as the core e-learning tool during the lockdown period. The April and May financials are in line with our COVID case forecast. We actually completed an acquisition this year, and 2 acquisitions are in exclusivity. On the long term, we believe there's no negative impact on ISP given a number of factors, including the resilient market growth, the long-term revenue visibility, the high barriers to entry and our strong educational offer to drive gains in local market share. So we actually expect that the crisis opens new M&A opportunities as particularly small groups, independent players, are facing financial difficulties due to schools' closures or just the requirements for remote learning is more difficult for them to conduct. GlobalLogic is what we believe a long-term beneficiary of this crisis. GlobalLogic is a leading software development company, providing experience design and digital engineering services. Productivity remained high throughout the crisis. There was some customer ramp down calls, but they have slowed. And new business development has been positive. We realized that receivables holding strong, however a bit lower-than-expected collection rate. Utilization remained very strong, more than 92%. Expected was considerably less and that the recent acquisition of Meelogic will be -- did in April supports the strategy for further penetrating Europe. So the -- as I said, we are identifying emerging technology trends to support clients' business digitization needs. That's basically what we believe will further support the business, such as distance learning or e-commerce. And so by that, the crisis also gave the opportunity to reassess target subindustries and geographies, given the impact of COVID. On Foncia, that's on Page 17, so the -- has only suffered a little, particularly as in the brokerage and rental activities. However, this is a minor part of the business. This has not been reflected strongly in the figures. And by now, these activities performed better than expected. We're also in ramp-up phase again. We signed -- closed 37 acquisitions year-to-date, another 26 on exclusivity. So we are going ahead with our business plan. We actually also completed the coding and testing of the new software, which we are now rolling out. So we believe there's no long-term change in the business model. It's also the majority of the revenue is protected. It's generated from its stock of existing dwellings under management. And there's a significant market consolidation potential still ahead of us as the market is still very fragmented. And finally, on the PCI, the pharmaceutical services outsourcer. Here, as I said before, this was a company that benefited from the crisis. So we expect the business to meet expectations. We projected sales growth of 7% and the EBITDA growth of 10% for the fiscal year. And there are a number of new business wins above prior year. So we are very happy with the development of PCI. This leads me to the investment and realization activities in the second quarter on Page 18. We have actually injected some equity upon some capital to KinderCare as basically commented in the May update call. Notably, we realized investments. So the Action money has been collected. There's been some more distributions from the sale down of Ceridian shares, but also the legacy fund portfolio has provided liquidity. And notably, we signed in early July, a transaction that is called Rovensa, which I'm going to cover in a bit more detail in a minute or so. So all in all, new investments and realization activity have slowed during the second quarter, but we expect the recovery in the second half and certainly towards the beginning of next year. Now in relation to Rovensa, as I said, signed and now in closing. This is a developer, manufacturer, supplier of crop life cycle management products. So it's based in Portugal and in Madrid, Spain. So what were the investment criteria for this transaction? Well, it is in the agriculture sector, which is very resilient, of course. It's also uncorrelated with economic activity, given global stable demand for food. We believe there are favorable market tailwinds, given the long-term demand drivers of population growth, increasing caloric intake and the need for increasing yield. There's also a focus on specialty crops. So the business focuses on fruits and vegetables, which are the fastest-growing segments in the sector, have lower volatility than, for example, cereal or grains and have, all in all, a very robust business model. They focus on 3 products. That's BioNutrition that basically provides agricultural crops with nutrients for growth and development, then Crop Protection that -- which eliminates or prevents biological threats in crops and BioControl which offers products based on biological inputs, such as plant extracts and microorganisms. Now what do we want to do? What are our value creation plans for this company? While we have a continued focus on products, on biological products, we drive the further development, the research and development of bioproducts and cross-sell across divisions. Then we deepened technology-driven client collaboration through data collection, analytics. We certainly want to support Rovensa in the market entry to new markets or underserved markets, such as the U.S.A. And there's certainly a plan like with many other of our portfolio companies to develop the platform through M&A. So we want to accelerate market share gains and expansion of the portfolio. This leads me actually to other offense activities in the portfolio on Page 20. So whilst there are not -- or there are less, let's say, new transactions on the horizon in the next maybe couple of weeks and months, there's certainly a very systematic approach to M&A within our portfolio to build market leaders, so systematic in terms of sourcing but then also execution, but more importantly, then to the integration of newly acquired businesses. And some of the examples include Foncia, which we mentioned before, but also EyeCare Partners where there are 8 acquisitions completed since signing in last December. And there's a pipeline of almost EUR 30 million of acquired EBITDA. Blue River, the vet clinic, we signed 8 LOIs for 10 hospitals with about EUR 4 million EBITDA, and we're also on track to achieve EUR 10 million of acquired EBITDA for the whole year. Also Confluent Health, we signed 17 LOIs for 101 clinics and EUR 18.5 million EBITDA. So there's a lot going on, also benefiting from the market dislocations as presented or caused by the pandemic. Below, you also see the industry consolidation example of Cerba, where we illustrate as to how the French routine pathology laboratory testing market evolves. So we expect the small size, independent operators will be increasingly under pressure because of tariffs, because of investments that are required to automate testing equipment and just due to the lack of leverage. So Cerba is one of the key players, the key consolidators and has identified about 25 strategic targets representing over EUR 400 million of revenues in response actually to COVID-19. This leads me to the summary and outlook. So we are actually very encouraged by the recovery in trading. In the majority of the company earnings, close to pre-COVID levels in June and remain positive on the long-term outlook for the portfolio. Of course, we are cognizant that the infection rates in various countries are still high, some even on the rise. However, the majority of portfolio companies have demonstrated that they are able to continue to operate despite lockdown measures. Now Princess has sufficient liquidity to support portfolio companies in case of second, third wave and to resume investment activity. And having supported portfolio companies through the onset of the crisis, we now shift focus to capitalizing on opportunities arising from the crisis. With that, I conclude the presentation, and we'll be happy to answer any questions. Thank you.

We will now begin the question-and-answer question. [Operator Instructions] The first question comes from Milosz Papst from Edison.

You have mentioned that the liquidity position of your portfolio companies has improved significantly in recent months. But just wanted to understand if at this stage, you see any further need for equity injections to your existing portfolio companies also to support offensive M&A? Excluding any impact from the potential second wave or lockdown, do you feel that the liquidity runway is secured across your portfolio at this stage?

Thank you. The current liquidity outlook provides for minor equity injections. There are 2 or 3 I'm aware of that are planned. However, they're so minor so that I wouldn't mention them individually. So generally, to answer your question, we feel now very comfortable with the liquidity outlook for both on asset level and on portfolio level.

[Operator Instructions] There are no more questions at this time.

Okay. Well, in that case, I think it remains to thank everyone for their time this morning. Thank you for listening to the results. We will be back in 3 months' time to provide an update on how the portfolio has developed both in performance and trading perspective and look forward to speaking with you again then. Thank you very much.

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