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

Ladies and gentlemen, welcome to the Princess Private Equity Holding Q1 2022 Investor Conference Call and Live Webcast. This is Aksha, 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 Felix Haldner. Please go ahead, sir.

Thank you. Thank you, and good morning. Thanks for attending today's investor call for Princess. I'll lead you through the presentation. With me, I've got Andreea Mateescu, so she will help me when we then come to questions at the end of the presentation. By that, and before diving into the quarterly figures, as always, some words to Princess and its investment strategy. Princess, as you all know, provides shareholders with exposure to Partners Group's direct private equity investment strategy basically alongside its institutional investors. Partners Group is a thematic investor. We identify transformative trends across sectors and then invest into attractive companies with a clear development potential. We built these companies then amongst others through platform building and business transformation and we -- on that journey, we fully integrate ESG factors in the investment process. Princess is managed by Partners Group, its manager, a leading global private markets firm. And there are about 170 direct private equity professionals that particularly take care of the portfolio. This is then supported -- or this group is supported by more than 300 industry experts and operating directors with the relevant deep industry expertise to help them work with the management teams of the companies, the portfolio companies, and transform them. The objective is to generate long-term capital growth and an attractive dividend yield. So we have achieved a net asset value total return of 11.3% per annum, which is stable compared with the last quarter, and a share price total return of 13.3% per annum over the last 10 years has come down slightly given the volatility of the share price in the last quarter. The dividend objective is 5% of opening net asset value paid by semiannual payments. This brings me then already to kind of the summary of the quarter. So the net asset value performance demonstrated resilience. Whilst this is not kind of a reason for a lot of joy, in normal circumstances, I think in this quarter, resilience is something very strong. So we performed basically flat, whilst the MSCI world, for example, was minus 3%. And of course, with the volatility, the share price total return was negative by 16.6%. We will pay the first interim dividend of EUR 0.38 in June. And we envisage a total dividend of EUR 0.76 per share, in line with the company's objective to distribute 5% of the opening NAV, which brings us at the current price to a dividend yield of way over 5%. In terms of portfolio activity, we had a reasonably active quarter with 20.9 -- EUR 22.9 million investments, including investments in Pharmathen, finally, and in HTL Biotechnology. I'll come to that a bit later in the presentation. We have actually a very broad global pipeline of near-term opportunities. As we speak, we estimate that there are about 7 or 8 transactions signed, which I then can comment on in the August call. And we've also observed realizations in the first quarter, including the exit of Voyage Care. In terms of net asset value and share price performance, in that quarter, we regained some of the outperformance over the MSCI in terms of NAV. That's an observation I've made over the years, that in terms of the times of volatility or even downward trends of public markets, that Princess holds up much better and so by that, gains outperformance. In terms of discount development, of course, fairly disappointing. We traded close to 30%, still a bit below our peers, but certainly a sharp contrast to the 5% to 6% at year-end, while discount widened due to, I would say, macroeconomic factors which are certainly beyond the control of Princess. In terms of key figures, we kept the net asset value more or less unchanged. We have increased -- we have actually repaid the credit line almost in full. Unfunded commitments stand at EUR 110 million. However, as we -- as we like to mention, that only about 2/3 of this number are really active, that these commitments that are anticipated to be called over the next, let's say, 3 years or so. And this is only about 6% of the net asset value. With that, I would like to draw your attention to the -- to the revaluations for the 10 largest portfolio companies in the first quarter. So again, the majority -- the vast majority of the companies have seen either flattish or a positive revaluation, whilst there was a minor one with Techem and actually also fairly small with KinderCare, I'm happy to comment on. SRS distribution, the distributor of roofing products in the U.S., has enjoyed -- has been written up again following another strong financial performance or period in the same -- and strong same store sales growth. It still benefits from the tailwinds from the U.S. construction market. Whilst Foncia was flattish, AMMEGA as well, PCI, all of them actually remarkably had, had growing year-on-year EBITDA and revenue. However, whilst then the multiple that was used from the sample of comparables wasn't lowered, which then results in basically -- well, in a flat development of the -- in the valuation. Maybe noteworthy, in Foncia, particularly for those who listen from the U.K., I announced various times that Foncia's goal is also to enter the U.K. market, which now happened in March '22. Foncia agreed to acquire FirstPort, FirstPort, a leading provider of residential property management services in the U.K. And this transaction is still subject to regulatory approval. I hope to comment -- to make some more comments then next time. In terms of the write-downs, the corrections. KinderCare, whilst -- was basically negatively revalued due to a lower valuation multiple that had again increased financials in terms of EBITDA. However, that lower multiple then outweighed the positive tailwind from the financials. With that, I would like to mention in a bit more detail what drove devaluation of EyeCare Partners, however, will do so a bit later in the presentation. In terms of diversification of the whole portfolio, you will observe that we are broadly diversified through investments by sectors, also by vintage years. And in terms of regions, we are more or less split by U.S. and Europe. The U.S. is a bit overweight here because we allocate the senior loans fund, the 13% or so, to North America because it's predominantly or majority at least credit with obligors in the U.S. Interestingly, on next page, the portfolio metric, that's basically, if we do at least -- as if we did a partial financial consolidation, we look through the largest single lead investments and we can, well, observe that the EBITDA margins have even slightly increased to over 20% whilst valuation and debt metrics remain mostly unchanged. And so the enterprise value to EBITDA multiples basically reflect the sector mix. And in particular, of course, the exposure, as shown before in the -- in the overview, exposure to technology, education, services, including health care and particularly these ones where valuation comparables have continued to increase or at least, well, stabilized or even slightly increased. This brings me to the portfolio activity. As a reminder, we are a transformational investor. What does this mean? Well, it basically means that we -- we do a very thematic research with a very deep subsector focus to uncover high-conviction target companies. We typically look for these companies 1 to 4 years in advance of a potential transaction. And we really source these companies to 100% proactively as opposed to waiting for people who offer an asset. And then we pair it with a very entrepreneurial hands-on ownership. We run the businesses as entrepreneurs, which then leads to sustainable EBITDA growth and where we then also have a very strategic approach towards ESG to create value and mitigate risk. And this then leads to what we call transformational investing with the examples for the last couple of quarters where we have above-industry average exit TVPI multiples. And as a reminder, on the next page, at any time or any point in time, we have probably about 40 to 60 themes, sub-themes, where we search -- where we define basically and when -- where we then send our professionals to search for the right and the suitable assets, the companies. All the themes, are basically underneath, let's say, 3 bigger themes that guide our investing approach; not surprisingly, digitization, automation, where technological advances and innovation are driving the transformation of business. And basically, this happens in nearly all sectors of the global economy, in the new living, where basically consumer preferences and habits are shifting towards, let's say, a healthier, cleaner, more service-oriented world; and decarbonization, sustainability, where we observe, for example, the global energy markets are undergoing monumental change. And so within these themes and sub themes, maybe as an example on the next -- on this page, where we are navigating also through the kind of elevated valuations. But we have here -- I've got 3 examples. So select transformative trends. So for example, the future agriculture, where then we ended up in investing in Rovensa, a developer, manufacturer, supplier of crop life cycle management solutions. So it's basically specialty crop nutrition, biocontrol, crop protection products. And what does this company -- it ultimately helps farmers to enhance crop yields in a sustainable way. The example in the middle, I'll cover in a bit more detail, a bit later in the presentation. And the example on the technology side, IDERA kind of a provider of software tools to develop tests, manage applications and database systems. Interestingly, as you have observed in public markets, the collapse of the valuations of technology, IDERA, for example, has been valued upwards in view of their strong development of financials. And also because the multiples of -- the comparables of IDERA multiples are not really maybe the mainstream multiples you have seen correcting themselves in the first couple of months of this year. On -- I would like to draw your attention to what I call an investment update. It's basically a company we acquired about 2 years ago. So we closed this acquisition in February 2020. EyeCare, as a reminder, is by far, the largest vertically integrated, medically focused eye care services provider in the U.S. It showed revenues of about EUR 840 million at that time and it offers patients end-to-end services across the entire vision care value chain. It was originally actually founded in St. Louis. It's now active in 18 states, runs 647 clinics, has pro forma adjusted revenue that's doubled in the last 2 years. And you see this is also a company that employs clinical staff, corporate employees plus then the medical doctors, the optometrists and ophthalmologists, close to 5,000 people. Again, the sourcing, the thematic sourcing at that time where our teams mapped out the U.S. health care landscape and basically were driven by kind of exponential incurrence of eye diseases with the -- basically with the aging population. We observed decade-long predictable pricing and a massive shift in consolidation. EyeCare Partners at that time at just 1% of the national market. So by that, a very, very fragmented market that is basically ready for consolidation. So when we then -- now going into the ownership, as I said, it's a vertically integrated offering and EyeCare product differentiates as a one-stop shop service provider, whilst most competitors have a single focus on either optometry or ophthalmology. And this leads basically to improved customer satisfaction, improved retention, increased volumes and better utilization of providers' time for high-end services. And so by that, we have an above-market same-store sales growth, both in the optometry and ophthalmology. And as you can also see from the geography chart, we also employ our typical M&A playbook and added a number of clinics through tuck-on acquisitions. So a very positive example and illustrative example of an asset that is very well underway on the journey, on the value creation journey. This brings me to the realization and investment activities in the first quarter. We already announced at an earlier call the exit of Voyage Care, which is now -- has happened and we paid EUR 18 million. Voyage Care is a U.K. specialist care provider. They support over 3,500 people with more than 10,000 staff. The company has industry-leading quality ratings from the Care Quality Commission. And what we did during our ownership, we invested in increasing basically the scale and the quality of care. And we sold a pharmaceutical developer and some -- we received some cash from the legacy fund and some debt investments. In terms of investments, Pharmathen and HTL. HTL is a biotech and industrial player in the development and production of pharmaceutical-grade biopolymers that are used in pharmaceutical applications. This is a co-investment alongside another fund manager, a general partner. And then we finally, finally deployed some money in Pharmathen. You may remember, this was probably first announced as being a signed deal in the third quarter last year. Now as you expect with pharmaceutical companies or at least -- or related service providers, there is -- there are regulatory approvals and this took its time. So by now, we own Pharmathen. That's headquartered basically in the Netherlands, however, 2 operating facilities in Greece. So we were very much attracted by the differentiated B2B business model that outperforms and outperforming underlying contract development and manufacturing organizations market, best-in-class R&D capabilities with track record in this respect, and also a derisked pipeline addressing large generic market opportunities with more than 80 products sold to 215 pharmaceutical companies in very broad spread across -- diversified across the globe. So what do we want to do with the management team of Pharmathen? Well, we want to maintain the growth, the existing portfolio and, of course, grow with existing customers, but then also gain new customers and expand geographically. Here specifically, we want to -- we would like to strengthen the U.S. foothold through M&A and through organic growth. So I'm sure we'll then hear more from Pharmathen over the next quarters as we implement the growth projects. Now this is just -- these were the investments in the first quarter, in the second quarter and the quarter to come. As I said, we have signed a number of transactions. Not yet ready to announce as still in confidentiality. However, as you can see from the near-term pipeline, that's basically the next, let's say, 6 months, we have -- in all of our industry verticals, we've got very, very specific transactions that, where maybe not all, but some of them will then end up in the portfolio of Princess. So including a thermoplastics profile designer, a packaging machinery solutions provider, an asset management software -- software provider for SMEs, consultancy services or, again, specialty pharma players. So the pipeline is very active. Maybe a word to valuations. The valuations fortunately have not yet come down significantly despite the corrections in public markets. This is a pattern that we can observe basically quite frequently in some situations. It takes some time until buyers' and sellers' expectations have -- are meeting again and transactions are then effected in the new valuation levels. We are seeing a movement towards kind of adjustment in some sectors. However, in other sectors, there is actually not such a -- despite of the public market corrections, we don't see the same corrections in some of the sectors we are invested. There are always 2 sides of the medal, of the coin. This helps valuations of existing companies, but it doesn't help kind of lower valuations to buy new ones. I guess we'll discuss this in a bit more detail in the Q&A session. This brings me basically to the summary and -- which is on this page. So Princess with its manager and a very established strategy, with the thematic investment approach, with building companies through platform building, through business transformation. We've got very deep resources with our team, but then also with our industry, external industry experts and operating directors, which then leads actually to a very, very diversified global private equity portfolio that also withstands a bit stormy weather, as we could see in the first quarter where the NAV held up actually exactly at the same level as demonstrated -- as shown at the end of the year. And we've got a very attractive near-term investment pipeline across regions, sectors that then support the redeployment of the capital which then ultimately will drive the future net asset value growth. And by that, I basically hand over to the investors in the call for questions.

Yes. Thank you, Felix for the presentation, and I can now read some of the questions which we already received. And to start with, within private equity, there is a time lag in valuations. Could you provide us how you look at the coming quarters vis-a-vis valuation of your holdings?

Thank you. I'm very grateful for this question because Princess benefits extremely from a very, I mean, established but also a very fast valuation process within Partners Group. As we do monthly valuations, we are basically -- I mean, very, very accurately reflecting the current market environment. And this is probably a bit different to some of our peers who tend to lag 3 to 6 months with their valuations. This is not the case, partly also while we provide monthly valuations within 30 to 40 days. And we have actually a number of, let's say, parallel funds that invest in parallel to Princess that have, in some instances, even biweekly or weekly valuations.

Thank you. We have another question now. Could you comment about Princess' exposure to Russia or Ukrainian companies?

That's still the same. We don't have any direct exposure. And just through the legacy portfolio, there is a very, very minor portion of the NAV is affected through the -- well, it's basically in that region. It's less than 0.1% of the net asset value.

And also in the same direction, right, I see another question. If you can comment on the pricing power across our portfolio companies and the ability to pass on cost inflation?

That's certainly an observation. I mean we have even now heard in the first quarter that some of the companies have significantly increased revenues and EBITDA. Maybe in the valuation has still been flat because of lowered comparables, multiples. However, this is probably one of the -- well, I would expect that most of our companies are in the camp where they have the necessary pricing power to increase prices, to adjust them, to factor in inflation. So I think our portfolio really stacks up to, let's say, a sample of the broader economy in this respect.

Okay. And I think we could also get -- take another question from one of our investors. Could you comment on the current market condition? And what would you expect to be the implication on Princess?

That's a difficult one. Well, we all know we are in probably one of the most demanding, well, macroeconomic condition as we could -- with a number of factors that come in, in parallel, so we have got a maximum instability. We've got near-term uncertainty that this exceptionally high -- actually as growth is slowing, inflation is high and monetary policies are tightening. Now the future is certainly, to some extent, a little bit in the crystal ball. However, Princess just positions itself and continues to position itself with a portfolio of resilience. And with selecting companies, again, that are in sectors that benefit from tailwinds, from structural growth and are companies with capable and ambitious management teams that are able to kind of grow also in circumstances like this. So whilst we don't have tailwind from the macroeconomic environment, I expect the portfolio to hold up actually fairly well in this storm and certainly outperform the broader economy.

Understood. Thank you. Now of course, I think you've covered, there are other questions regarding the senior loans, right, and the impact of higher rates on the underlying companies and ability to service their debt in an inflationary environment.

Of course, we will see -- with rates rising, we will see the financing and refining cost of some of our companies will go up. However, as you could see from the portfolio metrics, we are not relying on leverage to generate long-term returns. Leverage is, of course, used to some extent. In our portfolio metrics, we demonstrate that we underpinned -- we've got an equity cushion of around 60% in our companies. So a rate increase is not really a concern for us and for our companies. The value is created through operational measures and not through leverage. So this is really not a concern for us.

Okay. Thank you very much, Felix. I think with this, we can conclude today's webinar. Thank you for participation.

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.