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

Ladies and gentlemen, welcome to the Princess Private Equity Holding Q4 2020 Investor Conference Call. I am Haley, 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 is my pleasure to hand over to Mr. George Crowe, Investor Relations. Please go ahead.

Thank you very much. Good morning, everyone. Thanks for joining us today. I hope you're all well. 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. With me today I have Felix Haldner. Felix is a partner at Partners Group and also sits on the Board of Princess Private Equity. During the next 30 to 40 minutes, Felix will talk you through the developments of the company during Q4, and there will also be a Q&A session afterwards. For those of you who don't already have the presentation in front of you, it can be downloaded from the Princess website in the Investor Relations section under Webcast and Live Events. So without further ado, I will pass over to Felix to take you through the presentation.

Thank you, George. Good morning, everybody. A warm welcome also from my side to our fourth quarter investors update, which also coincides, of course, with kind of a review of the, in hindsight, somewhat unusual 2020. So before we discuss the recent performance, I'll provide, as usual, a brief recap on the strategy of Princess. So the company provides shareholders with exposure to a portfolio of private companies by investing in transactions alongside Partners Group's institutional clients. So -- and Partners Group's strategy focuses on companies in subsectors where we believe they benefit from long-term transformative trends such as advances in technology, demographic trends or new patterns of working and living. And the exposure to these long-term growth drivers underpins faster growth rates than the broader market and also provides resilience during periods of economic turbulence or as we have experienced last year. Princess then benefits from Partners Group's global private equity investment platform. We have over 100 investment professionals in private equity direct sector only and more than 50 operational specialists, which bring then deep experience from industry or from a consulting background within specific industry verticals. And they're working closely with the management teams of our portfolio companies to accelerate their growth during our period of ownership. All of Princess' investments are subject to Partners Group's responsible investment policy. So ESG and the ESG factors are fully integrated in the investment process alongside commercial and financial factors. So ESG 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 practices across our portfolio companies. And on Page 4, you can also see that Partners Group as a manager has again received above-average ESG ratings. And finally, the company's investment objective is to generate long-term capital growth and an attractive dividend. And it has indeed achieved double-digit NAV and share price performance over the last decade, including dividends. So with that, I go directly on Page 6 of the presentation you hopefully were able to download from our web page. So on Page 6, you see basically the NAV and share price performance, which basically demonstrates an outperformance of public markets during last year. Also NAV and price -- the share price developed positively during the fourth quarter, and we closed the year with a total return of 10% on NAV and 12.4% on share price, which both outperforms the MSCI World. We also -- it was also positive to see a resumption of portfolio activity, which we'll cover later in this presentation. So the -- just to recap, the private equity market basically closed during the second quarter, and the process is only restarted in the summer and only for sectors of companies that had demonstrated their resilience during the pandemic, whilst the other -- while sectors and companies more affected basically have not come back to market. Princess received proceeds from several realizations, including GlobalLogic, actually a dividend; and from PCI Pharma, a partial sale, which I'll discuss in more detail later in the presentation. And as a firm, we were also active on the investment side, with actually 5 new transactions signed and in closing at year-end. And finally, Princess made a EUR 50 million commitment to the latest Partners Group Direct Equity program, which will be deployed over the next 3 to 4 years. To remind you, these commitments form a key pillar of Princess' investment strategy, so it basically entitles this -- the company to co-invest alongside the institutional funds, so the other institutional funds. However, Princess then on top has the flexibility to tailor the pace of deployment via, again, co-investments in the same transactions, depending on the company's liquidity position. Having taken steps to conserve liquidity, as you remember through the reduction in the dividend during the onset of the pandemic, Princess today has a robust balance sheet with EUR 30 million of cash and the full EUR 80 million balance available on the company's credit facility. And the majority of the portfolio companies continue to operate profitably despite lockdowns and other restrictions. And Princess was able to increase the second interim dividend to the same level as in the prior year. So the company has a strong balance sheet and has already provided guidance that it will distribute 5% of the opening net asset value this year, equivalent -- which is equivalent to an attractive yield of, give or take, 6% on the share price. On Page 7, you see the historic NAV and share price performance. You see again the market correction in Q1. But then the company's net asset value basically exhibited a V-shaped recovery supported by both a positive EBITDA development of the underlying companies and a recovery also in the evaluation multiples we had to apply. And this particularly was the case in sectors such as IT and health care, where the portfolio has high weightings anyway. On Page 8, you can see the discount development. Discounts continued to tighten from the market lows of March 2020, but still remains wider than at the onset of the crisis. And just to remind you, a data point to consider in this regard is actually the realization of PCI Pharma Services. This valued, actually, the company at a 23% premium to the last net asset value. And at the same time the transaction was announced, Princess' shares were trading at a discount of approximately, give or take, 20% to NAV, which implies that the realization took place -- the realization of PCI took place at a very healthy premium of almost 50% to the share price. So that's typically what we observe, maybe not in that magnitude, but we observed that the exit values are typically higher than the last observed NAVs. So following a strong run for equity markets value -- or for equity, I can -- markets -- well, it is harder to find value in the market generally. We believe that enlisted private equity and particularly within Princess, you will find, well, portfolios that continued to trade at material discounts to the realizable value of the assets. So go to your broker and place your orders. On the key figures side, you will see that on the balance sheet we have started the year with an investment level of over 100%, 106.1% to be precise. But this included the portfolio company, Action, for which a sale had already been agreed in late 2019. And the proceeds then from Action was subsequently received in -- at the end of Q2 or beginning of Q3, and they were then used to fully repay the company's credit facility, which had been drawn on a temporary basis in kind of anticipating of the exit proceeds. The Princess closed the year with a strong balance sheet with over EUR 110 million of available liquidity, including the credit line. This compares to the total unfunded commitment of EUR 106 million. However, we caveat here that only a fraction of it, we believe, around EUR 60 million, is really expected to be called over the next couple of years as the remainder refers to funds that have basically -- that are outside of their investment period. On Page 11, we basically show that the performance of this portfolio was driven basically by focusing on the right investment pillars. And a number of factors contributed to the positive performance. The first of this is the thematic sourcing, as we call it. It's basically a research-driven approach to identify attractive long-term investment themes and to avoid cyclicality. So once investment themes are identified by our firm, by our investment committees and economists and the number of senior investment professionals, then the professionals map the market to identify companies we would like to own on behalf of our investors and clients. And so this proactive approach to sourcing allows us to be highly selective when deploying capital. And it also provides us actually with additional time to conduct due diligence as we typically start way before an asset comes to the market. The second pillar is basically the platform-building strategy. So we acquire strong anchor businesses in fragmented markets and we help them scale and grow market share through acquisitions. So in 2020, Princess portfolio companies were able to accelerate their growth through acquiring subscale competitors which had struggled through the crisis and were consequently more receptive to being acquired by a larger platform who could help them navigate a very challenging environment. And finally, we focus on asset transformation, where we support management teams to create value in portfolio companies, be that through repositioning a company to its high-growth, higher-margin business segments or digitizing business processes to reduce costs or just to -- by driving operational excellence. So our focus on these 3 pillars underpinned the positive performance of Princess' largest portfolio companies, which then are shown on the following slide. So on Page 12, you can see the revaluations observed for the full year. The only company in the top 10 which continues to face material operational challenges is KinderCare, the provider of early childhood education in the U.S. Now the majority of KinderCare centers have reopened. However, the so-called utilization has not yet fully recovered to pre-COVID levels. As discussed last year, we provided some additional capital to KinderCare during the year and, of course, also stand ready to provide further support as required. But just for context, Princess provided an additional EUR 3 million to KinderCare, which is equivalent to just 0.3% of Princess' net asset value. In general, despite the short-term challenges for this company, we remain positive on the long-term outlook and believe there is even potential to grow market share during the crisis at the expense of smaller, subscale competitors who cannot rely on the support of a financial sponsor. And the rest of the companies here on this slide, the top 10, were positively revalued over the last year. I won't cover now all individually, but just maybe on International Schools Partnership, also known as Permotio, as this is by far the largest position in Princess portfolio. So this company grew the EBITDA by around 10% year-on-year, but also continued its mergers and acquisitions program. It actually completed the acquisition of 2 schools in Canada in December. And since Partners Group's initial investment in 2013, we started this business basically from scratch. International Schools Partnership has grown to a platform of 48 schools across 13 countries, and we also remain very positive on the future prospects for the business. On the next page, 13, we look at the portfolio allocations, the diversification. So you can see that the largest exposure are to fairly resilient sectors such as IT, education, health care, with an aggregate account for over 50% of the portfolio. So there's also very little cyclicality even with sector financials, which basically should read in our terminology as services, which include business services, so the majority of the underlying investments are fee-driven businesses with a high degree of recurring revenues. We continue to underwrite new investments conservatively. We assume -- we continue actually to assume a contraction in valuation multiples during our holding period that then is supposed to provide a buffer in the case of further market volatility. You can also observe in the bottom right that the portfolio is fairly mature, with over 50% of capital invested in the years 2016 or earlier. And as such, we have companies that are ready for sale and stand to benefit from any increase from the increased transaction volumes in 2021, which we expect. On Page 14, there are just some metrics. So last 12-month earnings growth slowed slightly as the period capture an additional quarter of restrictions on the economy, but remains positive year-on-year. The quarterly earnings figures are more illustrative of recent performance with quarter-on-quarter growth of 3.6%, being actually the main driver of the company's positive NAV performance in the last quarter of 2020. The valuations ticked up slightly over the quarter, driven basically by the portfolio sector mix. And finally, the companies remain fairly conservatively capitalized with over 60% equity, and we don't foresee any imminent issues with covenants or liquidity across the portfolio. A word on the market and on transaction volumes, which brings us to Page 16. So we shared actually in the last quarter update some data on transaction volumes. And we are pleased to report that the increase in transactions was actually sustained in Q4. And looking ahead, 2021 looks very promising as it appears that many processes were postponed in 2020 and now come back to the market. To look back on the realization activity, I'm now on Page 17. While it looked a bit counterintuitive, in Q2, we had a lot of activity. However, this was just the Action payment which had been agreed in 2019 already. Realizations recommenced then in Q3, and Princess received a dividend from GlobalLogic, which basically returned 30% of initial cost of the investment. And in Q4, Princess received also proceeds from MultiPlan, which basically merged with a SPAC. And from PCI, following an agreement to sell the majority to our financial sponsor. And PCI actually provides an interesting case study of Partners Group's focus on asset transformation and value creation, which I would like to share with you over the next couple of slides. So you remember, we sold the majority of PCI. PCI is a provider of outsourced services across drug development, drug commercialization and supply chain to the pharmaceutical industry. We were initially attracted to the investment because of PCI's very strong market position in a subsector that was supported by a growing shift from biopharma clients to outsourced services in order to reduce cost. Okay. And then during our 4-year holding period, as you can see on Page 19 -- 18 and 19, we then worked with the management team on a range of value-creation initiatives, including expansion into new business areas such as clinical trial services, commercial packaging of complex molecules and biologics. And what we did as well is we executed a number of bolt-on investments to expand into new markets. So including presences that were established in Ireland, in Germany, in Canada, Australia, Asia Pacific. And as always, with our portfolio companies, there's a strong focus on operational excellence and digital innovation. So this company also played a role and had tailwinds actually in the pandemic as it proved to be an essential provider of vaccine or logistics behind the vaccine development. And as said, we retained a portion and, actually, Princess was able to roll 40% of its equity into the new transaction to participate in the further growth of PCI. If we look at the market environment more generally, valuations remain elevated. I think I repeat myself now. I've been repeating myself for many, many quarters. They remain elevated, particularly for growth assets, which have demonstrated resilience during the pandemic. Now in response to this environment, we remain selective. We focus our resources on companies in subsectors which are supported by growth drivers. We then work intensively to create value at the asset level, applying our playbook across areas such as digitalization, pricing, platform expansion, as I alluded to a couple of minutes ago. And this approach actually also reflected in Princess' recent -- most recent investment activities, which you see on Page 21. So again, a slower investment pace during the second and the third quarter. We then ramped up in the fourth quarter with 5 transactions signed and in closing as of year-end: EyeCare Partners at the beginning of the year; Rovensa in the third quarter, which basically also closed an add-on acquisition of Oro Agri, a provider of environmentally friendly biocontrol solutions; finally, AMMEGA closed the acquisition of Midwest Industrial Rubber, which is considerably helping them to accelerate their expansion into the U.S. market. And the capital injections that were COVID-related actually, finally, were a total just EUR 4.2 million, way below what we -- well, what we factored in, in some of our scenarios we had to develop in April, May last year. And the EUR 4.2 million is just less than 0.5% of Princess' NAV. This brings me to the new transactions that are signed and in closing on Page 22. So Careismatic Brands, the designer, marketer, the distributor of branded medical scrubs. Some of you will remember it under the name of Strategic Partners. I'll then cover it probably in the next investor update call as we hopefully will have closed the transaction. Ecom Express, India's leading express delivery business that focuses on e-commerce segments. IDERA, a company -- a software company engaged in application server management software. Telepass, which I alluded to in the last quarter and which I'm happy to cover in a bit more detail in a minute. And Wedgewood Pharmacy, a provider of custom compounded animal medications. That follows an investment made last year into the veterinary clinics market where we have a high conviction. Now on the Telepass, this is on the next Page 23, actually. This is the pan-European leader in electronic toll collection. I guess most of you who have traveled Europe, and particularly Italy, will remember the yellow signs and the blueprint on the motorways. Telepass has basically a monopoly in Italy and is a very strong player in a number of other European countries where there are toll roads. So -- and this has a market share of about 30% of the toll collection market in Europe. It operates across 3 main business areas, so electronic tolling services, mobility services and, surprisingly, insurance services. And by that, that's probably more like a mobility company, a modern mobility company. It manages an asset base of 12 million payment devices, has a customer base of over 7 million across 14 countries in Europe. Now look, we were very attracted to this business based on its stability of its core business, but still with a significant upside from additional services. Right now, 85% of the business is recurring. It's generated actually through subscription fees that have a minimal correlation to traffic or the GDP. And under our ownership, we plan to expand Telepass' core tolling business to grow market share in Europe, both organically and we expect also through M&A. But then we see potential to grow other business areas such as fleet services, mobility insurance, just by the sheer amount of data they collect through their devices, which are highly interesting for insurance providers, car insurance providers, for example. And mobility payments benefit actually from a growing trend towards electronic payments. Now this brings me to the outlook for 2021 on Page 25. Well, we believe it's clear that many of the investment trends the portfolio companies of Princess are exposed to have actually amplified, and we believe this will only continue. There is an uncertain economic outlook. However, we believe that private markets with the long-term horizon are actually well positioned to withstand future volatility. We continue to focus on value creation and building rather than buying cash flows, and we continue to focus on platform-building strategies to generate growth. So in summary, we are pleased that after a bumpy year how the portfolio has performed after all, and we also remain optimistic about the outlook for the year ahead. The balance sheet of Princess is robust. We have sufficient liquidity to resume investment activity and to make dividend payments. And the company has already provided dividend guidance for this year. And finally, with the transaction volumes increasing, shareholders can expect further portfolio activity in the next quarters ahead. So thank you for your attention. With that, I conclude the presentation. And as always, we'll be happy to take any questions. Thank you.

[Operator Instructions] And the first question is from the line of Ewan Lovett-Turner of Numis.

So a couple of questions on the exit environment, so who are the key buyers? We hear a lot about the PE money on the sidelines, sort of how significant are PE buyers? And perhaps, expand on the SPACs that you mentioned sort of being one purchased, will that increase? And just how you look at a couple of cases where you sort of roll over or take a cash exit and how you assess that?

Thank you. Yes. I think we see basically buying activities from all usual suspects, including strategic, well, investors. But certainly, there is a very active, basically, secondary buyout activity. So not just on our -- on the exit side, I mean you will have seen also when we acquire assets, that there is a good portion of the assets we buy, actually, we buy from financial sponsors, typically from kind of local general partners. Where we take a business and bring it to the next level, expand it in other -- to other geographies. So help them in some other ways maybe the local GP was not perfectly positioned to. And so the same price, in our case, often our mid-market -- upper mid-market companies after our holding period of 4, 5, 6 years, where we transform them to a large business, is basically then acquired by a large-cap buyout fund. And as you rightly mentioned, the SPACs have taken a more prominent role in recent years and the recent quarters. So it's basically a new buyer in this environment. So hopefully, this answers your question. On the rollover, there are -- typically, the assets we buy, we envisage a transformational change within the 4, 5, 6 years of holding and then pass it on. However, there are some assets that, let's say, that after this transformational change have just such a dominant market position in their niche, for example, that we believe that it is in the best interest of our investors to keep holding them. And then the exit process we have observed is selling a majority or a strong minority also to find the right price for existing investors. But then investors like Princess, who have the ability to -- if the balance sheet is there, the liquidity is there, have the ability to roll over and further benefit from a growth trajectory of such a dominant business. So typically, whenever we acquire an asset, we have a plan as to whether it is a long-hold asset or whether it's a transformational change only asset. Now things can change and the long-hold becomes transformational and the transformation can become a long-hold. But typically, we actually -- well, we envisage as to whether this is a long-hold asset. Hopefully, this answers your question.

And just on the thematics and -- so maybe -- I think you touched on them a number of times, but expand on that. Or just to what degree do you think they've changed or not changed over this challenging year?

Thank you. Interesting question. We have actually -- of course, now every business and business model is -- has been tested against kind of a COVID pandemic scenario since, well, April last year. And hopefully, we -- I mean, our teams have learned some lessons. However, in terms of themes, we haven't seen big changes actually. So I think the themes we were emphasizing before are, for the time being, still the themes we are focusing on.

The next question is from Milosz Papst of Edison.

I wonder where do you currently see more investment opportunities with respect to potential sellers? I mean you've already mentioned the sponsor-to-sponsor deals of acquiring companies from local GPs and bringing them to the next level. But do you expect more buyout candidates from founders and families or maybe corporate carve-outs, which I think were rather muted last year, but could potentially pick up this year?

Look, we look at all sorts of opportunities. We are actually not really focusing too much on who is the seller. We are much more focusing on what's the right theme and then we send our troops to search for assets. And assets can be a part of a conglomerate, and so it would be a carve-out. Actually, Telepass is a carve-out of Italian stock-listed Atlantia. We -- well, if it's a family-owned business, we try hard to get close to the owners and see as though if the time is right for them to -- for succession. Now looking at the activities in the market, you will observe that in a segment where we are in the mid-market, upper mid-market, there is probably a very prominent activity around financial sponsor secondary buyout activities, as I mentioned and as I think you also did. So there is activity around kind of local GP that brings a small company to a mid-market level company where we take over and then maybe go for a globalization exercise or similar. Hopefully, this answers your question.

That's true. That's helpful.

The next question is from [ Nicolas Yen ], a private investor.

I've got a couple of questions, if I may. Firstly, why is it that Princess is at a discount to sector average given its commendable record and sound strategy? And also, what have been the sort of average premia to book value on realizations over the last year or so? Say, 2 years, what's the sort of typical premia to book value on realizations?

Now when questions become tricky, I hand over to George. So...

That's very kind of you, Felix. Thank you. And so maybe to tackle the discount question first. So look, I would say -- although, look, we're [ in lunch ] outside where the peer group is, it's, I mean, really broadly in line. We're looking at 12.8% versus 11.5% on the discount slide that we showed. If we were to drop materially off where the peer group is, then the Board and the investment management would discuss the potential to buy back shares. But while we're broadly in line, I think we take the view that, look, this is where the market is pricing in the sector and we'd probably rather conserve our liquidity for new investment opportunities. Yes. I mean, maybe one word. I think this is really repeating what Felix said earlier. We do think there is value in the sector, particularly given how discounts and other types of investment company have move back in the trading closer to NAV. As regards to the other question...

Yes. I was just wondering -- I take the point about opportunities for buying in shares and all that. But what I was really asking, why is it that the market is ascribing a lower value to you than to other private equity companies? I know there's not much of a difference, but you thought with a company of your quality that you -- if anything, you'd be at a premium relative to your peer group.

I would say, if you look back at the slide, on Slide 8 that shows the discount development, that's pretty much been the case. We tended to be on the tighter side of the peer group. It just so happens at the time of this call we dipped below the peer group. But in general, over the last few years, we've actually been inside, and this is really -- it's a matter of 1% either way. So as I said, if we drop materially off where the peer group is, I think we really do need to look more closely at that but -- yes. With the relative discounts now, I think, yes, I think we'd be okay, albeit we think the sector looks cheap. So coming on from the uplift. So Felix mentioned PCI, the 23% uplift. That's -- I'd probably say the 20% range is -- yes, is the average. We see things that we realize much higher premiums and we also see some that we realize broadly in line where our valuations team have already got an idea of where that asset would trade in the market throughout the exit process and have written it up in anticipation. But it's -- I can't remember for the time in recent years where we sold any assets materially below book value. That's extremely rare. Yes, on average, probably 20% is a good level to bear in mind.

The next question is from [ Gerard Borgeman ], private investor.

Actually, it's following up on the previous questions. You have an authorization to buy back shares if it's in the interest of the company or its shareholders. And if you have a discount of the size you presently have, why wouldn't you consider to do this? It would enhance the shareholder value of the remaining shareholders. And I think, looking at your liquidity position, which you might find more difficult now given today's multiples to invest, probably you -- it's better to put the money back into the hands of your shareholders. And you would actually reduce the amount of dividends you have to pay in the end.

Yes. I suppose -- go ahead, Felix.

No -- fine. You have a good point. I think one observation is that, I mean, on the dividend, we have a good number of investors who appreciate the dividend as opposed to any other way to get proceeds. So we certainly take this on Board. Another point is just an observation that buying back shares when you are basically within the peer group, you have a discount, I mean, substantially similar to the peer group, doesn't really help because you will be arbitraged. The market is very efficient in this. So it's basically money blown out, which we think we can spend better by making investments. However, had we -- were we to trade at a discount that is higher than the peer group maybe for sustained periods, I think this is something the Board would very seriously consider.