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

Ladies and gentlemen, welcome to the Princess Private Equity Holding Q3 2020 Investor Conference Call. I am Alessandro, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. George Crowe. Please go ahead, sir.

Thank you very much. Good morning, everybody. Thank you for joining us this morning. My name is George Crowe. I'm a member of management in Partners Group's Client Solutions team based in London and also responsible for Investor Relations for Princess Private Equity. With me on the call today is Felix Haldner, a Partner and Member of the Board of Princess. During the next sort of 30 to 45 minutes, we'll be running through the performance for Princess over Q3 and the development of the portfolio. You can find the presentation for today's call on the Princess website in the Investor Relations section. And with that, it gives me pleasure to hand over to Felix, who will take you through the presentation. Felix.

Thank you, George. Good morning. A warm welcome also from my side. As you have found the presentation on our website, you will also have realized that it has a new facelift up. I hope you will like it. Feedback, in any case, is welcome. Princess is an investment company managed by Partners Group, Partners Group, a leading private market investment manager. And just as a reminder of Princess' strategy, an investment in Princess Private Equity provides shareholders with access to a portfolio of leading private companies, investing in transactions alongside Partners Group's institutional clients. Our focus is on companies that benefit from long-term secular growth drivers and transformative trends, for example, advances in technology or changing demographics and so on. We have a team of over 100 private equity professionals and 50 operational specialists who work closely with the management teams of our portfolio companies to further accelerate their growth during our period of ownership. Partners Group is a responsible investor. ESG factors are fully integrated in the investment process alongside commercial and financial factors. And the initiatives are implemented in all of our lead investments. And we have actually a dedicated team of ESG professionals to track the progress of these initiatives and to facilitate sharing of best practice across our portfolio companies. Finally, Princess aims to generate long-term capital growth and an attractive dividend. Over the last decade, the company has generated double-digit compound NAV and share price performance. With that, I directly turn to Slide 6, which gives you an overview on key figures at the end of the third quarter. So performance has continued to develop positively during this quarter, supported by a recovery in portfolio trading with the majority of companies now trading back at pre-COVID levels. And the NAV performance also benefited from increases in the valuation of comparables as markets continue to recover from the lowest observed in March and also from a re-rating of resilient sectors, such as technology and health care. NAV total return stands at plus 4.4% year-to-date, and by that, a slightly outperforming quoted equity markets. The share price performance kept pace with the NAV during the third quarter but unfortunately lags year-to-date, reflecting probably a widening of the discount earlier in the year. Given the positive momentum in the portfolio, which I'll cover in more detail, we hope to see the situation reverse in the months ahead. There was a resumption of portfolio activity during the quarter, the previously announced investment in Rovensa, the provider of specialty crop nutrition, protection and biocontrol products, that it closed in September. Partners Group also agreed to acquire Telepass, that's a European provider of electronic tolling services, with the transaction expected to close in the first quarter of next year. On the exit side, Partners Group agreed a partial realization of PCI Pharma Services, that's a provider of outsourcing services to the pharmaceutical industry. Partners Group agreed to sell a majority stake but retains a meaningful minority position to participate in the company's future growth. Princess will -- as a result, will receive approximately EUR 25 million of proceeds upon closing of the transaction. Having taken steps to conserve liquidity through a reduction in the dividend during the onset of the pandemic, Princess today has a robust balance sheet with EUR 20 million of cash, excluding the PCI proceeds I just mentioned, and the full EUR 80 million balance available to draw under the credit facility. In my view, this supports both new investment activity and dividend payments. So the company will then shortly declare its second interim dividend for this year. On to Slide 7, we look at historic NAV performance. Looking at the performance, both energy and share price continued to develop positively after the market correction in March. And as we said, despite the recovery in NAV, Princess share price has lagged as discounts widened across the listed private equity sector. On Page 8, in more detail around the discount development in comparison with the broader market, so we are in line with the peers. On Page 9, some key figures on Princess for this quarter. So the cash position, as mentioned, stands at approximately EUR 20 million and with a further EUR 25 million expected following the closing of the partial realization of PCI plus the undrawn credit facility of EUR 80 million. And this gives Princess available liquidity of around EUR 125 million. This compares just to commitments of EUR 118 million, which are shown pro forma. There's the EUR 50 million commitment to Partners Group Private Equity 2019 that was executed actually just after quarter end. Of all the commitments, we consider about EUR 72 million to be active and expect them to be called over the next 3 to 4 years to fund new investments and M&A by existing portfolio companies. This actually brings me to the portfolio overview on Page 11. As mentioned at the start of the presentation, Partners Group's investment strategy focuses on resilient companies that benefit from long-term secular growth drivers. This is then also reflected in Prince's largest sector exposures to technology, to health care and education, which in aggregate account for over half of the portfolio. A few words on education, which is a sector heavily -- was heavily impacted during the onset, particularly, of the pandemic and also Princess' largest exposure is to Permotio International Learning, which represents the majority of the company's education exposure. As we'll cover later in the presentation, this business is very much on track and performing really well with the majority of its school having reopened. So the combination of a focus on resilient sectors and Partners Group's conservative underwriting, which model stress scenarios and multiple contraction for all new investments, meant the portfolio was well positioned to withstand a challenging environment this year. On Page 12, in more detail, we show the weighted average metrics for the portfolio. So it has generated double-digit EBITDA growth over the last 12 months. And the rerating of certain companies, particularly in tech, health care, education, was the main driver in the increase in the enterprise value to EBITDA multiples over the quarter. We believe that the companies on average remain conservatively capitalized with over 60% equity and we don't foresee any imminent issues with covenants or liquidity. So the portfolio is in good shape, and we expect it to continue to develop positively over the coming quarters. On Page 13, in more detail, you can observe the revaluations for the 10 largest portfolio companies in the third quarter. So the rebound in valuations that, in some of the cases, have been very significant, as you can see in the column on Q3 revaluation. So it continued for the majority of Princess portfolio companies, as we said, driven by a recovery in equity markets and a rerating in those specific subsectors where Princess has a larger exposure. I won't comment on all the companies individually. But we will certainly be happy to answer questions in the Q&A later in the call. But we'll touch on Permotio International Learning in more detail on the following slide. So this is really an update on our largest portfolio holding. Now schools have started in the new academic year. And it seems timely to provide this update. Earlier this year, Permotio had all 46 schools closed in response to government lockdowns. However, it was able to continue to deliver its curriculum while distance learning, so the majority of its revenues actually remained intact. Feedback from parents and students on the Permotio in-house digital solution was positive. The solution worked well. However, as you will imagine, everyone was clearly keen to return to more normal state of affairs. We are therefore very pleased that with the start of the school year, particularly in the Northern Hemisphere, the majority of schools have reopened. Student enrollments have been broadly in line with last year and financial performance has proved to be very resilient. So the company has grown EBITDA by 40% year-on-year, mainly due to a combination of fee increases, of cost control, of M&A, with actually another 6 schools added to the platform over the last 12 years -- pardon, 12 months. While a number of countries are reentering lockdowns, it is clear that keeping schools open is a priority for governments, and we remain very positive on the outlook for this investment. This brings me to Page 15 and the recent portfolio activities. So after a slower second quarter, the portfolio activity resumed actually in the third quarter, showing both realizations and new investments. So on the realizations, we observed that about half of the EUR 14.2 million actually consists of a dividend payment by GlobalLogic, basically returning about 0.3x cost back to the shareholders to Princess. And the balance was received from smaller investments in the legacy fund portfolio. In August, Partners Group agreed to sell a majority equity stake in PCI Pharma Services. That's -- again, that's the provider of outsourced services across drug development, commercialization and supply chain to the pharmaceutical industry. As a reminder, we acquired PCI in 2016, and over the last 4 years, worked with the management team to expand into new businesses, such as clinical trial services and commercial packaging of complex molecules and biologics as well as executing several bolt-on investments to expand into new markets. The investment is held at over 4x cost. And we actually see further growth potential for the business. And that's for -- that's why Princess, and alongside other Partners Group investment programs, will retain a fairly meaningful stake in PCI to participate in its future growth. In terms of investment activity, Princess invested another EUR 4.5 million in Rovensa, a provider of special crop nutrition, protection, biocontrol products. This is to support an add-on -- a bolt-on acquisition. As we discussed it actually in the last call, conference call, I won't go into detail on Rovensa, other than that we are very excited about the growth potential of this company, which is underpinned by long-term trends, including a growing global population and increased global food consumption. Partners Group, in this quarter, also agreed to acquire a significant equity stake in Telepass, the leading European provider of electronic tolling services to approximately 7 million clients across 14 countries. So Partners Group will become joint owner with Atlantia, that's the current owner of Telepass, and will work with Telepass management team to accelerate the business' existing growth trajectory but also to establish a leading pan-European platform for customer-centric mobility services. I'm looking forward to discussing this investment in more detail after it has closed, which is expected to take place in the first quarter of next year. And finally, post quarter end, Princess made a EUR 50 million commitment to Partners Group Direct Equity 2019 program consistently with -- consistent with similar commitments to previous programs. So this fund will continue to -- the strategy of predecessor programs, that's basically constructing a global portfolio of approximately 20 companies in the extended mid-market. The commitments are expected to be called over the next 3 to 4 years and then Princess funded actually a first capital call of EUR 8 million in October. This brings me to the overview on the market and some macro trends. So on Page 17, when we look at the market, the buyout volumes have made a strong recovery, up 76% over the third quarter. That's basically that because managers have addressed existing portfolio issues, as Partners Group did, and we expect them to return to doing deals over the coming quarters. Still, we expect the activity to be a bit bifurcated with more transactions for businesses that have proven their resilience during the pandemic and while owners of more cyclical assets may not want to test the market while the economic outlook remains uncertain. So this is then also reflected in the enterprise value to EBITDA multiples for companies in more resilient sectors, again like health care, software, education, where buyers are willing to pay a higher valuation for cash-generative business versus other businesses. In relation to our core macro views, lower interest rates continue to prevail and they provide a supportive environment for private equity. We only expect modest economic growth. And so we continue to focus on identifying companies which benefit from long-term transformative trends. And we work with those companies to accelerate their growth trajectory, both through organic growth and M&A. And in doing so, we aim to build clear market leaders that will command a high valuation when we eventually come to exit, so not a big change actually to previous quarters. This brings me to the summary and the outlook actually. So we are pleased with how the portfolio has performed during what has been a fairly challenging year for markets year-to-date. And we are optimistic about the outlook. Princess has a resilient portfolio of companies, which we believe will continue to perform well even in the event of further lockdowns over the winter months. And finally, the balance sheet position is robust with sufficient liquidity to resume investment activity but also to make dividend payments. On the investment side, Partners Group's investment teams have a full pipeline of opportunities, both in terms of new investments and bolt-on acquisitions by existing portfolio companies. And finally, with the exit environment now more supportive again, we also continue to consider opportunities to realize investments on behalf of shareholders. With that actually, I conclude the presentation and would be happy to take any questions.

[Operator Instructions] The first question comes from [ Catherine DeStaiger ] from JPM SA.

And our clients are quite keen to know if there will be the second dividend this year, if you could let us know a little bit about this situation regarding the second dividend.

Thank you. Yes, the company intends to pay. I mean, look, this is deferred to the Board. So the manager basically, as we said today, will advise that the company's liquidity position is as described in the call. And it's deferred to the Board then to decide on the dividend. And I expect the announcement to be made in the next 2 weeks.

[Operator Instructions] Ladies and gentlemen, we don't have any other questions at this time. We have a last-minute registration from [ Michel Clemit ] from [ Opus ].

Can you hear me?

Perfect.