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

Ladies and gentlemen, welcome to the Princess Private Equity Holding Q1 2021 Investor Conference Call and live webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] At this time, it's my pleasure to hand over to George Crowe. Please go ahead, sir.

Thank you very much. Good morning, ladies and gentlemen. A warm welcome from my side. My name is George Crowe. I'm a member of management at Partners Group and our Client Solutions team in London. We'd like to thank you for joining us today for the Princess Q1 investor update. Over the next 30 to 45 minutes, we'll talk you through the performance of the funds during Q1 as well as some of the portfolio activity. At the end of the presentation there'll be an opportunity to ask questions either by the phone, and you can also submit questions via the webinar tool as we go, which I'd encourage you to do. With that, I will hand over to Felix Haldner, a partner and Director of Princess, who will talk you through the results. Felix, over to you.

Thank you, George. Good morning, and a warm welcome also from my side. We have had quite an eventful first quarter. Before I go into quarterly figures, I'll provide a short introduction to Princess and its investment strategies. So on Page 2 of the slide deck, you will have downloaded from the web page. You'll see that at Partners Group, we believe that many of the most attractive investment opportunities today are to be found in the private markets, and Princess basically provides shareholders with exposure to these opportunities, investing in a portfolio of private companies alongside Partners Groups, the institutional clients. The investment strategy focuses very much on the identification of what we call transformative trends that provide a tailwind to particular subsectors and help to drive above-market growth rates. The trends may be due to a variety of factors. For example, technological development, changing demographics or new patterns of working and living to name a few. We then search for companies that are positively exposed to these trends, but still have significant growth ahead of them and where we see clear development potential. Thereafter, we apply our entrepreneurial governance model and work with these companies and their management teams to help them achieve the full potential. We bring extensive resources to support our portfolio companies, including over 100 direct investment professionals, over 50 operational specialists and an extensive network of advisers and industry experts. All of Princess investments are subject to Partners Group's responsible investment policy, which I'll cover it in a bit more detail in a bit. ESG factors are fully integrated at all stages of the investment life cycle alongside, of course, commercial and financial sectors. And finally, the company's investment objective is to generate long-term capital growth and an attractive dividend. And you will have noted it has achieved double-digit NAV and share price performance over the last decade. This -- on the next page is your manager, Partners Group, so no changes. So hence, let's turn to Slide 4 on the responsible investment and stakeholder impact at Partners Group. One of the benefits, actually, of the private equity governance model is that as owners with a controlling equity position and Board seats we're able to drive change at portfolio companies during our period of ownership. And this extends, of course, to ESG criteria. We view this as a true active ownership, which extends beyond voting once a year at the company as is typically the case for investors in public equities. As a controlling shareholder, we set relevant ESG targets for our portfolio companies, and we require that management teams initiate, measure and report on these targets. And having control also allows us to take a more nuanced view on ESG factors when conducting due diligence on potential investments. While there are clearly certain products or services, which are a clear no-go from an ESG perspective, there are also situations in real-life where our due diligence uncovers some ESG concerns, for example, a lack of maturity in the company's ESG policies. However, if we believe we are able to address this during a period of ownership, our period of ownership, then we could still make the investment. As we are investing in the -- in medium-sized companies, the mid-market or upper mid-market sector, you would expect that not all of them have fully integrated ESG factors until such time we acquire. So -- and in doing so, we believe that we are able to create a positive impact and to improve companies, which then not only benefits our clients, but also other stakeholders. If you want to learn more about Partners Group's approach on ESG, I would like to point you to the corporate sustainability report, which you will find on Partners Group's public website, where you will find among other things, our ESG vision, strategy, objectives, emerging ESG topics. It doesn't come as a surprise. In 2020, it was a climate change and asset class deep dive. So this is on our webpage, please. Turning to Slide 6 and the NAV and share price performance. Both actually developed positively during the first quarter. So NAV performance was driven by a combination by continued recovery in trading across the portfolio where valuations increased. And by exits that were agreed, actually above carrying value, notably GlobalLogic, the second largest portfolio company for which an exit was agreed in March at a stunning 45% uplift to the previous carrying value. We'll come to that in more detail a bit later in the presentation. After a relatively quiet 2020, portfolio activity increased in the first quarter, and we expect actually a very active year ahead, as already mentioned in the last quarterly call. And I would say, both for realizations and new investments. So during the quarter, Princess received proceeds from a number of portfolio companies, including IDERA, Foncia and CSS Corp. And Princess will receive proceeds from the full exit of Cerba and GlobalLogic, which were signed at the end of March and will close in the coming months. On the investment side, Princess participated in 4 new investments and made an additional EUR 25 million commitment to Partners Group's 2019 vintage program prior to final close, bringing its total commitment to the program to EUR 75 million. And reflecting the pickup in realization activity, the balance sheet is in a good position with ample liquidity to fund new investments and dividends and in line with its objective to distribute 5% of opening NAV, Princess declared a first interim dividend of EUR 0.335, which we paid to shareholders in the course of June. Looking at the historic NAV and share price performance, Princess NAVs and share price recovered in line with markets over the last 12 months, following the correction in March 2020 and remain ahead over the longer term. In relation to discounts in the dis development, despite actually the strong recovery in net asset value and in improved portfolio trading as well as basically improving economic outlook. The discount remains slightly wider than at pre-COVID levels. We particularly observed that the NAVs are consistently validated by exits above carrying value and yet discounts for Princess and the listed private equity sector as a whole remain in double digits. And so by that, it doesn't come as a surprise for you that we remain of the view that the sector continues to offer considerable value. Moving to the key figures and the balance sheet. Princess had cash of about EUR 20 million with EUR 55 million available on the credit line at the end of the quarter. The credit line will be fully repaid following receipt of proceeds from the agreed realizations in Q1. I'm already turning to the revaluations for the 10 largest portfolio companies in the first quarter. So the majority actually all but one of the top 10 positions made a positive contribution to performance during the quarter. And clearly, the standout performer -- outperformer was GlobalLogic, which was written up following an agreement to sell the company to the trade buyer to Hitachi at a 45% uplift to the carrying value. On the negative side, despite -- well, a small negative reevaluation for KinderCare, the outlook for the business continues to improve. The negative revaluation is mainly a timing factor, where we had to take into account the last 12 months of EBITDA. And that was used in the latest valuation and capturing then more of the period, which capture the more of the period where the business was negatively impacted by COVID. KinderCare has now reopened the vast majority of its centers due to increased demand for child care services in the U.S. as parents return to work. And also as a result of a lack of supply as some competitors have not been able to reopen. The portfolio remains to be -- remains very diversified. The largest exposures are to fairly resilient sectors such as IT, education and healthcare, which, in aggregate, account for over 50% of the portfolio. There's also limited cyclicality within the portfolio, even with sectors such as financials and the financials allocation basically include business services. And the majority of the underlying investments are fee-driven businesses with a high degree of recurring revenues. One of the examples is Foncia, France-based property management business, which actually generates about 90% of its revenues from recurring management fees. So this is included in financials. The portfolio remains, as I said, well diversified also by region and by investment years. We then show the weighted average metrics for Princess portfolio companies. So basically, as -- if we consolidated underlying or the vast majority of the underlying direct investments. And there, we can observe that the last 12-month earnings continue to recover and the portfolio generating double-digit EBITDA growth year-on-year. Of course, we remain cautious as countries relax their restrictions, but would also expect to see a further improvement in earnings as the period covering the strict restrictions actually drops out of the last 12 months figures, which we are using to -- for our valuation efforts. So valuations generally remain broadly in line with the end of 2020. And portfolio companies remain in private equity terms, at least fairly conservatively capitalized with over 60% of equity. On the realization side, as already alluded to, Partners Group's investment teams have had a busy start with a number of full or partial exits during the quarter, which generated proceeds of EUR 37 million for Princess. So Princess, for example, received EUR 14 million from actually a minority equity investment in IDERA. So we acquired this minority stake in 2019 as part of a recapitalization. Actually, we were fairly impressed by the performance of the business in the period, in the holding period. And the opportunity now has risen to participate in a second recapitalization to support IDERA's future growth. And as a consequence, Princess minority investment has been repaid. And Princess has reinvested alongside other partners group clients as a lead equity investor. We will discuss the new business in more detail later in the presentation. Then a further EUR 9.7 million dividend was received from Foncia. So basically, the business was able to refinance its debt on very attractive terms, which also reflects a bit its resilience during the pandemic, and of course, the positive outlook for trading so for example, Foncia executed over 60 small add-on or tuck-in acquisitions in 2020. So a run rate of at least one per week and continues with its consolidation of the French market. And finally, EUR 6 million was received from a partial realization of CSS Corp, an Indian-headquartered IT services provider. So CSS was sold to another sponsor-backed IT services company with Princess alongside other PG clients rolling over a fairly small, but still a minority investment. So a bit more than EUR 1 million for Princess. And importantly, the realization activity will continue in the months ahead, with 2 more transactions signed and in closing. So in March, Partners Group agreed the exits of GlobalLogic and Cerba HealthCare, both of which have been very strong performance during the pandemic. And both exits took place at uplifts to February carrying value and generated very attractive returns for U.S. Princess shareholders. So at the end of March, in a bit more detail to GlobalLogic, we agreed to sell. When we underwrote the investment in 2018, we were attracted by the long-term tailwinds of increasing digitization from GlobalLogic's corporate clients as well as the opportunity to grow the business. So both organically and via M&A. As a reminder, GlobalLogic is a software development company, providing experience, design and digital engineering services. For a service, an increasing number of corporates is basically outsourcing to specialized companies. We have owned the business for a relatively short period, with over 2.5 years, but we have achieved a lot in this period and certainly accelerated our business plan in the underwriting case. So as an overview on Page 16, we firstly established new sales channels, including actually one focused on private equity owned businesses, where Partners Group was able to facilitate introductions with our own portfolio companies as well as with many, many other private equity managers that were seeking or seeking to digitize the portfolio companies. We upgraded the company's service delivery and shared services to support GlobalLogic's growth and improve operational leverage. This meant that even as the GlobalLogic increased its EBITDA at close to 30% per annum, it was able to improve its margins from 20% to 23%. And this growth was supported by -- also by 4 acquisitions, which helped GlobalLogic to expand its footprint. Originally being a very U.S.-centric company, we expanded, particularly to Europe. And finally, and maybe this is, firstly, we put in place a very strong management team, and that will also continue to support the business through the next phase of growth on the new ownership in the Japanese conglomerate, Hitachi. So by that, I release my Screen Saver. So it seemed to be a bit slow. Investment activities on Q1, during -- I think during our previous call, we highlighted a number of investments that were signed and in closing. And now at year-end, 4 of which have now closed really and deployed EUR 45 million. I think we discussed Telepass at some length during previous calls, alluded to Careismatic and Ecom. And so this time, I'd like to spend a couple of minutes to introduce the new investment in IDERA. As mentioned, IDERA is a business that Partners Group knows well, having initially been lended to the business since 2015, before then taking a minority equity position in 2019. We have been a long -- long been an admirer of the business and are pleased to have had the opportunity to take a controlling equity position as part of a recent recapitalization. So IDERA is a provider of software infrastructure solutions, particularly for actually professionals in the software business. So including for databases, development operations and developer tools. We believe the business is very well positioned to benefit from the acceleration of digitization that we highlighted earlier. In the context of GlobalLogic. So by that, as we exit GlobalLogic, we have a nice addition at the same time that plays into the same theme. So IDERA, as I said, provides the tools that developers and the company actually like GlobalLogic would use on a daily basis. Our value creation plan aims to accelerate IDERA's growth in several ways. Firstly, organically, through a focus on cross selling, transitioning customers to new tools, so as converting a greater proportion of licenses from perpetual to a subscription model. And secondly, like with most of our companies through M&A to move into new markets and selectively acquire new high-growth products. This brings me to a general remarks -- some general remarks, what we are looking for. So we do have a focus on transformative growth and this guides our investment strategy. So we are, again, focused now on capital deployment as we had an active period for realizations. And I remind you at this stage that our investment strategy is that we seek to invest in businesses within subsectors that benefit from long term, as we call them, transformative growth themes. So we spend a lot of time researching these teams, which are critical in guiding our investment teams and their sourcing activities. And once we have acquired these businesses, we help them to accelerate their growth through M&A and to transform operationally, building -- ultimately building better businesses to meet the needs of the customers. You will see that we have an impressive investment pipeline. So absolutely no worries to deploy the money we receive from the exit of GlobalLogic. So in many cases, we are tracking companies for several years until we have the opportunity to invest. I think IDERA lends itself as an example, where we're not only tracked, but we're a debt investor in some early days of their development. And there are many other examples, similar examples. So in order to ensure that we are consistently generating actionable deal flow, our investment professionals have what we referred to, that's really an internal reference as 2, 3, plus. 2, 3 plus sourcing targets. And this means basically that they are actively progressing the investment case for 2 investments at any time where they expect to transact within a year, and another 3 investments within the next 2 years, and then the plus stands for, of course, with also a longer term pipeline. So if every -- of our 100 direct investment professionals alone follow this, then you can do the math that we have a number of actionable -- at any time of actionable targets at hand. So this requires us, of course, to invest a lot of time and kind of speculative resource in sourcing. But we believe this is really necessary to be a successful investor in private markets. Firstly, to ensure we are always looking ahead to back businesses early in their growth. And secondly, to ensure that we are not reliant on banks and the devices for deal flow. So as a snapshot, we are working on over life up -- over 30 life opportunities, which we expect to close in the next 6 months. And of course, we won't win all of these transactions. But having a broad pipeline allows us to be patient and maintain investment discipline. At the end of March, I'm on Page 22, we had 3 transactions in closing, across which Princess will deploy approximately EUR 25 million. And except -- and expect to announce further transactions in the months ahead. To summarize, the portfolio is very well positioned with exposure to companies in resilient sectors, supported by long-term growth drivers. So we expect market transaction volumes to remain elevated for the rest of this year. And we continue to assess potential transactions, both exits and new investments on behalf of Princess shareholders. With that, I'll conclude the presentation. And of course, George and I will be pleased to take any questions. Thank you.

[Operator Instructions] Gentlemen, so far there are no questions from the phone.

Okay. I can see we've already got a few coming on the webcast. So I'll move to those now. I would encourage anyone else with any more questions to enter them into the tool. The first one is from one of our Dutch shareholders. It's a question about portfolio concentration. And an observation, the top 10 investments represent 50% of the portfolio. Question, is this too focused? And would it be better to have greater diversification. Felix, perhaps you'd take this one.

Yes. I think it's a good question. And I think it's a good observation. As you can see and as I alluded to in the presentation, we are actively dealing with that in terms of if portfolio company has become fairly large. I mean, first of all, it's a good sign. As you know, when we buy, we are pretty disciplined in terms of what's our bite size at acquisition. I mean, typically, it's anywhere between 2% and 3%, if we get full allocation and a bit less, if the deal is such among old Partners Group clients is a bit smaller. Now if a company gets to 5%, 6%, 7%, like in the GlobalLogic case, then it's been because these companies have just developed, I mean, probably beyond the underwriting case. And this then often triggers, of course, discussions at our investment teams as to whether it's the right time whether and when it's the right time. But ultimately, Princess is a co-investor to the rest of the Partners Group institutional clients. And so for whatever reason, if the investment committee had decided that the doubling of the multiple and doubling of the EBITDA with GlobalLogic, for example, was not enough and the 2.5 or 3 years holding period was too short, then Princess would be a bit more concentrated for a while. I hope this answers your question.

Okay. We have a question from the sell-side and valuations. How do monthly portfolio revaluations differ from quarterly? And perhaps, I'll take this one. Here, it's probably -- I think what to differentiate between our valuation approach pre during and perhaps post-COVID. So pre-COVID, we did quarterly valuations. So we revalued every portfolio company on a quarterly basis. We also revalued individual portfolio companies intra-quarter. If in the case of valuation relevant events, for example, an exit process or some material change in the company, for example, M&A. Now clearly, during COVID, we saw businesses being quite potentially quite heavily impacted. We saw significant moves in valuation multiples that we use to value our companies. And we felt that our investors simply needed more timely valuations. So starting from March 2020, we moved to monthly revaluations. So look to the whole portfolio on a monthly basis. And I think our experience of this period from speaking to investors was that actually, they found the timeliness of this valuation is very useful. Clearly, one of the questions about private equity is always valuations and are they stale? Or is the potentially something that's changed in the meantime. So we have now moved to monthly valuations. So we don't really differentiate between monthly and quarter anymore. Rather, on a monthly basis, we revalue all material portfolio exposures. So this covers over 90% of the direct investments. And then if any of that aren't revalued month, we do on a quarterly basis. So, in summary, pretty much 90% of the portfolio on a monthly basis, any material exposures, but everything gets looked at, at least once a quarter. So I think as shareholders, you can be confident the NAV is timely. It reflects all the information that we, as managers, have on portfolio companies. And I think this is probably worth thinking about in light of the discount that we continue to see and the uplifts that we also see upon exits. Okay. We also have a couple more questions. Felix, maybe one for you. What are the key sectors and themes that we're seeing in the investment pipeline for Princess?

So that's probably a bit an extension of what I discussed on Page 20. So our focus on transformative growth that guides our investment activity. So you will see more of this. So in certain sectors of health care, certain sectors, subsectors of technology and software, certain business services, we support -- so specifically investment examples you will have seen is, for example, in the healthcare sector, we agreed to sign Axia, a women's health platform. We are looking at supply chain technology provider in the Americas. We are looking at an e-commerce consulting services. We are looking actually at another K-12 education services. In Europe, we have -- these are some examples in the Americas. We have Internet of Things platform, traffic safety services operators or services in kind of subsectors of industries or businesses where we expect just tailwinds from either demographic, the way we live, we work and so on. There is sort of business service like trust fund services provider, actually in the -- in Asia, Australia, wellness products manufacturer in Asia, cancer care provider in Asia. So these are some examples, subsectors, where we're looking up. As I said, we have got about 30 active [ life ] examples that are in various advanced as well, in various advanced stages, I would say, in our investment now, either specialist or global investment committee. So I expect more of the same. Hopefully, this won't be boring for us.

Okay. And a question also on investment opportunities. The observation that the entry multiples are relatively high. How do we protect against overpaying? And do we factor in multiple changes in our investment base?

Yes. I think, again, a very good observation. I think we've been living now in an elevated valuation world for a number of years. And my answer is probably the same or similar like a year ago. What we are doing is we very consciously decide in what sectors and subsectors we want to have an exposure to. So this is a process typically on a semiannual basis where our most senior investment professionals, the IC, the management team of our firm, is looking and mapping industries and see where should we be actually. And then we drill down to subsectors and then to -- well, then we send our troops, our investment professionals with a specific mandate to search for companies. And then with the 2, 3 plus approach, we make sure that this is a very structured approach that allows us to generate deal flow, vast deal flow so that, again, allows us then to be selective. And of course, at the end, when we find the right target, the right company, it's actionable. I alluded to the IDERA case. We will pay the market price. We won't -- that there will be others -- else there will be others. I mean -- and so we need to have a very high conviction paying the market price that is historically seen a elevated -- at elevated valuations. We must be -- have a very high conviction at the time of underwriting that we can create value during our ownership period of, let's say, typically 5 years or so. So create value to double or triple in the case, depending on the industry, the value on a net basis for our investors. And so this is how I think we can reasonably approach the phenomenon. Do we overpay here and there? We pay market price. But of course, in hindsight, market price of -- historical market price might be viewed differently. So I'm sure we can't exclude. There will be cases where, in hindsight, we say probably this shouldn't have been paid. Now the mitigant, again, is to say, well, we have a business creation, a value creation plan. And as a mitigant, probably, we build in at our underwriting that multiple actually are going to contract during our holding period. I hope this answers this question.

Okay. And one more again on pipeline, particularly with reference to emerging markets, which countries are the most prominent within the emerging markets pipeline? Perhaps, like it's...

Yes, please, George, to go ahead.

So within emerging markets, we have teams on the ground in India, China, in Singapore and São Paulo. So our deal sourcing really reflects where our teams are based. We think it's very important to be in those markets with local teams if we're going to invest. Particularly, I would say, at the moment, India, we do see a lot of opportunity and also China. So those are really the -- I think the 2 where we're seeing the most activity deal [indiscernible] for the time being.

Yes. I think the other thing to mention is we actually like the exposure to emerging market, particularly through companies headquartered in the Americas or Europe. So there are a number of companies that are very prominent in the portfolio of Princess, including international school partnership, with headquarters in London, but the activity schools in Central America, Latin America, in Southeast Asia and other parts of the world and other firms like AMMEGA, or that have large operations in emerging markets, including China.

Okay. We got a question on supply chain and portfolio companies. Are we seeing any supply chain disruptions in portfolio companies? I would say that was probably more of a concern last year in the early stages of the pandemic. By now really everything has settled down. We actually don't have a huge number of companies that are exposed to supply chain risk, with a lot of our companies being more service based, probably the largest company that we might sort of think about in context of supply chain would be AMMEGA, which is an industrials business headquartered in Europe, but also with operations in America and Asia. And actually, pre-COVID, one of the value-creation initiatives that we undertook for AMMEGA was to move a lot of its manufacturing from Europe out to Asia to be nearer to some of its customers in those end markets. So actually, even pre-COVID, we were already positioning that business to reduce supply chain risk, albeit, we clearly didn't know what was happening with COVID last year. But I would say, no, we're not concerned about supply chains for our comps. And then I think the final question I can see on the tool now. Felix, maybe I'll pass this one to you. Is a pickup in inflation, a concern for portfolio companies or valuations?

A pickup in inflation, it probably depends a bit how much the pickup is -- I mean, we -- if it's a moderate pickup, we probably are not concerned for most businesses with higher pickups and inflation that goes really clearly beyond what the market expects. Then I think then that there will be a major review and see as to where we are affected. So I probably -- I'm not an economist. So I can't now -- and certainly, I don't have a crystal ball. We are not -- this is not very high on our, let's say, concerns agenda by being, we, of course, observe and try to kind of address some of, let's say, more kind of obvious issues. But we -- that's not a scenario where we have particular concerns.

Okay. And perhaps, also to add, the types of businesses we're seeking to invest in are really very resilient businesses. So characteristics that we would look for, particularly in this environment, would be those businesses with strong pricing power, so they can pass on that impact of inflation and also margin stability. So those are clearly 2 areas of focus for us as they have been for all the portfolio companies in Princess' portfolio when we underwrote those investments. Okay. So I don't see any more questions on the webcast. I think there might be one on the phone. Is that right, operator?

Yes, we have a question from the phone coming from [ Catherine DeStaiger from GPM ].

Yes. I just wanted to ask you a follow-up regarding your share buyback program for Princess? Because we have seen sometimes when the volumes are slow, and we have huge drop like those we have seen in March. What is the policy in Princess to mitigate a little bit these sharp drops?

George, do you want to take that?

Yes. Thanks, firstly, for the question, [ Catherine ]. So the way that the management and the Board think about buybacks is it's really in the context of Princess' discounts relative to the peer group. So if Princess was to trade at a materially wider discount than the peer group for a sustained period of time, then that's the point at which the company would look to step in and repurchase shares. I think our view is that, look, if the market is pricing the entire sector discounts to NAV, then we'd probably rather spend our liquidity on new investments and focusing on NAV performance rather than providing liquidity to the market. Looking at the discount chart that my colleague has just turned to on Slide 8. You can see that the last period where Princess' discount was below the market was back in 2014. And at that period, we were buying back shares. So look, we do continue to monitor the relative discounts and would step in if needs be. But yes, it's -- I think we consider it a sector-specific issue rather than company-specific. We'd probably rather conserve liquidity. I hope that helps.

[Operator Instructions] There are no more questions coming from the phone.

Okay. It seems we have no more questions. So it just remains to thank for your time. We'll be back normally in around 3 months' time to update you on the development in Q2. So yes, thank you very much from my side and wish you a good day.

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