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

Ladies and gentlemen, welcome to the Princess Private Equity Holding Q4 2022 Investor Conference Call and Live Webcast. I'm Poppy, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, it's my pleasure to hand over to Felix Haldner.

Good morning, ladies and gentlemen. It's a pleasure to give you an update on Princess's Q4 and partly, of course, last year. Everything is based on unaudited figures. So please bear with us. We'll publish the annual report in about 3 weeks from now. As you have seen by the release, the RNS today will -- we have a number of news for you, but I'll walk through one-by-one. On the highlight side for Princess, certainly, we have a great portfolio that weathers the storm. Partners Group is a thematic investor and the Princess portfolio reflected. We are -- we have always the full investment level of anywhere between 95% and 100%. As you have seen, we have reviewed the hedging policy and decided to unwind the currency hedging at the end of March. Basically, this is to reduce the cash flow volatility, which, as you'll recall, was one of the key reasons why we had to cancel last year's December dividend. The Board has confirmed its objective to pay 5% of opening NAV in 2 semiannual installments. Partners Group is highly committed to Princess. To remind you, Princes is the only direct lead program of Partners Group and by that, showcasing its value creation capabilities. We have also, as a result of last quarter's dividend suspension and then we have worked on with the Board and Partners Group to provide more clarity on controls and communication. Finally, the portfolio speaks for itself. As you see in the last line, we have an extraordinary last 12-month revenue growth on a look-through basis of 23.8%, an EBITDA last 12-month growth rate of 16.1%, an EBITDA margin of 2%. And this is ultimately what is going to drive the NAV gains in the coming quarters and years. On this page, on the next page, you basically see the history of Princess that started as a bond linked to a portfolio as a fund of fund. And only in 2011, we then changed it to a direct portfolio. Now in 2023, we can certainly say that this change, this transition has been completed. And by that, this -- the portfolio as of today serves as a basis for additional outperformance versus the MSCI world. The legacy portfolio has kind of provided some drag in the performance the last couple of years. However, this is now to an end, we have got just 2% left. So by that, going forward, it's -- the NAV will develop according to the development of the underlying portfolio companies. Last year, in a very difficult environment, we observed a slight decrease of 1.6% on a total return basis, which, however, kind of stacks up very positively to the MSCI World Index, which was down 12.7%. We invested EUR 157 million in 2022. That's probably about EUR 200 million less than the year before. But still 12 major transactions, including the reinvestment in United States Infrastructure Corporation, and we received distributions of EUR 109 million. The majority of which from the direct portfolio. At the bottom of this page, you basically see the bridge from NAV at the beginning of the year to NAV at the end of the year. On the next page, just to recap, why did we employ this FX hedging policy overall this year. I mean it follows a policy of our firm. We import most of our client portfolios. It basically prioritizes NAV stability by hedging of the current non-reference currency exposure. Now, given the initial composition of the shareholder basis, which was mainly European and Swiss and the shift that over time happened towards, I mean, U.K. and other investors, the -- and also reflecting that Princess Private Equity Holding is basically the only listed private equity company in the London market that employ such an FX hedging policy. And then as a result, of course, of last year's -- of last quarter's dividend suspension we came to that decision, which we announced earlier today. At the bottom of this page, you basically see what -- that this hedging policy provided the results that were -- it was designed for. However, what this table does not show, of course, is that with the swings -- with strong swings in currencies, at the settlement base, there are -- there's cash settlement, which ultimately led to the liquidity squeeze in September last year. By that, terminating the FX hedges will then, of course, also limit the FX impact on liquidity and by that, also aligning it with the investment universe. This -- whoever -- we've got still a large investor base in the Euro RIM but also in Switzerland. So whoever wants to employ their own currency overlay can do so based on information we can provide in a timely manner. On the next page, you basically see what kind of information you can expect that is basically the currency exposure now as of December, which then -- is the basis for each investor's own decision as to whether or not to employ to an FX strategy. And just for those who won't, of course, fluctuating currencies will necessarily lead to an impact on the NAVs as expressed in the Princess currency. And at the bottom left, basically on this table, you see some of the sensibilities. So if euro, U.S. dollar moves, on a 12-month horizon, you can see that a minus 10% is in the current portfolio, probably having an impact of about 4.5% positive on the NAV or a plus 10% change on the opposite. On the next page, you'll see an additional portfolio management consideration that is basically our intention to be fully invested. That's how then our portfolio companies and their underlying growth then is basically contributing to the overall NAV of the company. We have managed to be there in the last couple of years with certain swings. So the target investment level should be around 95% to 100%. To help us stay in that target range, we have actually extended and increased the size of the senior revolving credit facility, which you can see on the next page, which basically serves us to bridge cash flow needs on a more short-term basis. So the facility will be increased to EUR 140 million. Previously, it was at EUR 110 million. This is going to be implemented in the next couple of days or weeks. And it is going to be extended to the end of the 2026. Previously, it was to -- until '24. The key terms are basically substantially similar to the ones that are currently in place and the lender is Lloyds Bank Corporate Markets plc. By that, there were also questions over governance and control. And just to remind you, Princess Private Equity Holding has a Board of 6 and the usual committees, including an Audit and Risk Committee and a management engagement committee, the main tasks of which are described on this slide. We also announced earlier today that there is a change insofar that the Richard Betty, the current Chair, is not standing for reelection. And hence, the Board subject, of course, to reelection of its members and by the AGM is going to change insofar that Steve Le Page is going to Chair. Fionnuala is going to head the Management Engagement Committee and Merise Wheatley, the Audit and Risk Committee. Whilst myself being an advisory partner and shareholder of Partners Group remain the representative of the Investment Manager on Princess board. Many investors appear to suspect the -- as to whether the net asset values of the private equity, private markets companies really reflect what is -- what happened, for example, public markets last year. And I introduced you last quarter to a kind of a bridge chart, which we have updated for the year-end. Let me start with the left-hand side where you see public markets this time, MSCI expressed in U.S. dollars. And at the right-hand side, that is basically the Partners Group platform performance, the private equity, platform performance of plus 4%. And that's quite a gap. And that's probably what investors ask themselves as to whether this is -- whether this is sound and is a good basis. Now if you look at more closely what happened in our portfolio at least, you first see that we corrected kind of the public markets index, the MSCI and basically only showed those sectors that are really -- that basically mirror more or less what we have in the portfolio. And so by that, the gap is already smaller. The next step is basically the third bar from the left-hand side is we have a pro forma where we show the platform performance without maybe some, I would say, positive outliers. And then we have a number of positive outliers that is companies that's 6 performance drivers that account for about 50% of the positive value creation in 2022. And you will be happy to hear that most of the 6 are actually part of Princess portfolio. And so there are companies where valuation has been driven, for example, for a recent landmark transaction, such as in the case of USIC which we discussed in one of the former calls. And so by that, we believe doing the fair value calculations on a month-by-month basis, valuing profitable companies and then applying public market comparables results in very, very robust NAVs. Now I can't speak for the whole industry, however, I can certainly stand behind the devaluation approach and then the results you then can see in the Princess NAV. And it doesn't come to a surprise that I will remind you that I believe there is a lot of value buying such a portfolio at such a great discount as the stock is trading at exchange. This is actually further underpinned on the next page by just the -- some of the metrics of the portfolio of companies. And again, comparing them to some of the more -- the public market metrics. So you will see that, for example, enterprise to EBITDA multiple as of the end of the last quarter. It was -- in the sector adjusted public markets and in our portfolio, much higher than in the general -- in the MSCI world. You also see that on top of that, that the EBITDA growth, so basically the selection of the companies and how we create value has resulted in EBITDA growth in 2022 of 15.7% as opposed to the public market sector adjusted 8.3%. And this is ultimately what then drives the entity and the outperformance of the now fully invested portfolio. And you can see this in different graphs at the bottom of that page. In more detail, on the NAV weighted portfolio company metrics at the end of the last year, where we took basically about 75% to 80% of the portfolio companies that's where we had exactly the right level of information. So it's like a kind of a consolidation on a look-through basis. And you will see that the last 12 months revenue growth of 23.8% in a very difficult economic environment, with inflation, with geopolitical turmoils and so on. We've got a last 12-month EBITDA growth of 16.1% and a margin of stellar 20.5%. And again, on the valuation metrics below 16x enterprise value to EBITDA and a 6.1x, that's the net debt to EBITDA, which translates to about 40% net debt to enterprise value ratio. This is basically the result in figures of our thematic sourcing, so where we identify the most attractive growth trends, where we then employ our entrepreneurial governance playbook, our companies are governed by the Board assisted by the whole Partners Group teams and we then transform assets, enhanced business models. We typically add fundamental value through targeted add-ons to grow companies and build greater resilience. Now this basically translates then into some examples. And for the examples on our portfolio companies, I'll hand over to my colleague, Sarah.

Thank you, Felix. So to give you a little more color around the results that we have been presenting to you, on the next slide, we highlight the top 3 performers for the year, which also happened to be in the top 10 in the Princess portfolio in terms of the largest investments. The first one on the left-hand side is PCI Pharma, which is the second largest investment in the Princess portfolio and was the best performing holding in 2022 with a positive 24.8% uplift in valuation. This company offers a full service integrated pharmaceutical supply chain platforms. And the value creation came from increased sales and also improving operational efficiencies through lean manufacturing and digital transformation of their complex workflows which then drove the further efficiencies. SRS, you'll probably be quite familiar from our previous calls. We have covered it previously as it's our second -- it's our largest, sorry, our largest holding for Princess. And for the year, it had a 21.6% positive revaluation. And its EBITDA grew, thanks to recurring revenue streams that have been supported by the construction boom in the U.S. as well as flight to suburban areas since COVID. And there have also been some extreme weather events. And on top of that, routes typically have a replacement cycle of 15 to 20 years, which feeds into that recurring revenue stream. A company which we haven't brought to your attention before but was actually the third best performer in our portfolio for the year is Apex Logistics. And they are Asia's leading freight forwarder, especially on the transpacific and Intra-Asia trade routes. And Partners Group acquired a 24.9% stake in 2021, alongside the majority shareholder to Nagel-Group, who, in turn, are one of the world's leading logistics companies. And here, the key initiatives will include new freight forwarding routes as well as identifying new growth verticals such as health care and M&A. And Apex's performance has been driven by cross-border e-commerce. Next slide, please. So on the following slides, we have the top 10 portfolio of companies, which we usually show you. And we want to -- here to highlight the revaluation, not just for the fourth quarter but also for the year. And here, you see SRS and PCI on top, which have already been covered. Another company which -- there's 2 companies here which you'll see have had modest downward revaluations, which are Techem, the sub-metering company; and Vishal, the Indian mega Mart franchisor. And here, the revaluations for the year declined somewhat due to the multiples of observed comparables not being completely offset by the EBITDA growth. However, you'll see that in Q4, they have rebounded in particular for Techem. Next slide, please. The following 2 slides actually is the list of the notable direct investments that Princess made in 2022, and that amounts to EUR 156.7 million. We stated in the past that investments slowed since Q3, and the investments you see going through in the third and fourth quarters were mainly investments that were committed to earlier in the year. The 1 investment we haven't previously covered is USIC or at least not recently. This is a provider of utility location services in the U.S. As a matter of background, Partners Group initially invested in this company in 2017. And in 2022, Partners Group sold 50% to Kohlberg & Company to expand the shareholder base whilst retaining a 50% co-lease interest. So the partial sale resulted in a EUR 36.7 million distribution for Princess and then Princess invested EUR 20.6 million alongside Partners Group. Next slide. As Felix mentioned on Slide 5, EUR 109 million was received in distributions. Here, you see the figure of EUR 241.4 million because it includes EUR 132 million of redemptions throughout the year from a related party fund that invests in floating rate senior loans, and this position has now been completely exited. The total of EUR 241.4 million is equivalent to 22.9% of opening NAV. The largest distribution from an exit of EUR 18 million came from the sale of Voyage Care. And they are a U.K. specialist care provider. The value that was created came from building a best-in-class management team and deepening the health care experience with strategic hires as well as further developing and expanding specialisms wire developments and select acquisitions. And with that, I'll hand back to Felix.

Thank you, Sarah. Before I open for questions, let me by that summarize and give you some outlook. So the hedges will unwind end of March to give shareholders time to apply their own hedging overlay. And transition basically to a direct portfolio is now complete, and this is going to drive future performance, basically through operational value creation. So the direct private equity portfolio will be the main performance drivers. We invest in overarching as we call them giga themes that benefit from structural change and secular growth, and we call this actually a thematic sourcing. So at any time, we have 40 to 60 specific themes that then basically create the foundation for strong investment performance. And finally, once these companies are selected, we -- the boards of these companies jointly with the team of Partners Group basically is responsible for this extraordinary EBITDA growth. Now as a company, Princess continues with its objective to pay 5% of opening NAV. This was reaffirmed. This is going -- we can -- you can expect a EUR 0.36 on euro payable, the first time in June. I remind you that Princess has a track record of paying one of the highest dividend yields amongst the peers the last 10 years. And we have increased the revolving credit facility, but also extended its term to further support this -- the dividend claim. By that, I hand back for questions. We have seen some on -- that have been handed in, in writing. But first of all, I think we'll answer the questions that are asked on the phone.

[Operator Instructions] The first question comes from the line of [indiscernible] with DCI Investment Management.

I'm just wondering whether you could shed any light of is there any costs associated with unwinding the hedge.

Thank you. There are absolute minor cost, so absolutely negligible.

Okay. Good. And then if I can ask a second question. So the underlying company performance, that's pretty robust with margins about 20% earnings growth pretty strong. But clearly, the share price is still on a 34% discount to the last NAV, and that simply reflects the fact that the damaged sentiment from the cancellation of the dividend. What are you planning to do to kind of close that discount? Because clearly, there's value in the portfolio. And how you're going to kind of realize that value for shareholders?

I think by this call and by the announcement of today, we have made -- hopefully made a big step by reassuring that we priority in paying a dividend. By showing that the underlying portfolio is developing in a very difficult economic environment, in a very satisfactory way. And so by that, that growing NAV over time will then hopefully also convince shareholders that they really buy a lot of value for a depressed price.

[Operator Instructions] The next question comes from the line of Brown, Chris with JPMorgan.

Just a quick question. I just wonder whether you could sort of quickly run through what the cash position is and how you expect that to change over the coming months.

I mean you could see the cash position as of December that was positive. And as we last looked at it, the last week, it's still positive.

Are there any sort of proceeds you're expecting or any sort of big investments sort of yet to complete that would change that number? I'm just thinking, obviously, in terms of the dividend and where we are there.

This goes well in some other questions in relation to maybe exits or client investments. Activities in the leverage buyout market for the time being are very slow, I would say. This also applies for the princess portfolio. So we don't expect immediate large exits nor acquisitions. So the main reason for it is still the -- as I see the debt markets are still depressed, I would say. So buyers find it difficult to get financing -- bank financing and the like. The other thing is that in the current situation, sellers' dream of the prices of the past and buyers look at -- look forward at prices they want to pay in the future. And so the matching process takes longer. This has been seen in similar situations in the past. And it can unwind quickly. However, for the time being, we don't see it.

[Operator Instructions] At this time, there are no further audio questions. We may now proceed with the written web questions from the live feedback.

Thank you. So the -- one of the questions is, are you still invested in global blue? The quick answer to that is yes, we are, and we have seen the performance of that company rebound, especially with the opening of the Asian markets and China. Another question that we have is in relation to -- sorry, just seeing here from Matt Hose at Jefferies saying just noting the difference between the Partners Group valuation multiple of 14.5% versus 16x as a result, what are the main differences in the composition of the 2 portfolios? From what I -- I think that's Q3 to -- well, I'm not sure actually what you're comparing there. Matt, if you're on the line, if you wouldn't mind just elaborating on that question.

Sarah, maybe I can just skip in. But the major difference is probably just the weighting, the weighting of the portfolio in the Partners Group kind of overall portfolio versus the weighting within Princess.

Great. Thank you, Felix. Another question we have is, are there still commitments from the legacy portfolio? The answer is yes. We do provide in the appendix of the presentation, which you will have online. And in the appendix, we say that's about EUR 14.8 trillion in unfunded commitments is to third-party funds, of which EUR 22.1 million is completed -- have completed their investment period, and we don't expect investments to call any more capital. Another question that we have is from Frank Bijleveld. The current market conditions for financing are not optimal to what extent does this impact the acquisition initiatives by the portfolio companies who already have reasonable debt decisions?

Maybe I can answer this one. It's correct, yes. It's not optimal, however, our portfolio companies, well, we have, on average, a secured financing for the next 2 to 2.5 years. And by that, they rely on contracts we renewed on time. That's the one part. And the other part is that, I mean, they not only rely on debt. They also produce a lot of own cash flow for the investment activities. And last but not least, in many investment cases, Partners Group, where its investors have committed some additional equity to these portfolio companies.

Thank you, Felix. Another question is would you feel comfortable drawing down on the credit facility to pursue new investments at this stage?

I think this is not the priority for what we have the credit line. So unless it will be for kind of a very short-term bridging of an expected cash flow that would offset it again. So the answer is we don't want to use the credit facility for gearing.

Thank you, Felix. Another question is will the removal of the dollar hedging and the costs associated now make investing in the U.S. that bit more attractive and lead to greater U.S. exposure?

That's not really a consideration we make. We look at regions, I mean, according to the opportunity set and certainly not because of the currency moves.

Thank you. And a question around do you have an approximate estimate of the number of shareholders in the Swiss Euro area in percentage terms? Have you discussed the hedging strategy with the largest shareholders in this area and their thoughts?

Look, we have spent quite some time in the last couple of months discussing with a number of shareholders or a large number actually, including in Germany, Switzerland and other countries. Where I'm well aware that most, for example, of the Swiss institutional investor employee currency overlay anyway. So for them, it's basically just getting the right -- kind of receiving the right information. In Germany, this applies for many as well, but there will be some that have relied on princess hedging and certainly do not well, would have appreciated if we had continued. Now having said the 2 main drivers, which led us to kind of discontinuing that is basically the change of underlying shareholders and the composition. But then also the fact that many, many of the shareholders in the Euro RIM by now have kind of established procedures to employ in their own currency hedging.

Another question is, are you obliged to invest in ESG companies? Where do you find information regarding equity debt capital?

There's maybe 2. We are not obliged. However, we -- as part of our due diligence, ESG considerations are at the forefront of our considerations. And not only at the investment due diligence stage, but then we specifically measure defined goals to improve companies in terms of ESG metrics. And the second is the -- if I understand correctly, the equity to debt in underlying companies, we don't disclose this information on a company-by-company basis. However, we disclosed it on the Princess level, in the metrics section where you said the 6.1x debt to EBITDA or the 40% debt to enterprise value, which is basically on a look-through basis, a 60% equity cushion.

Another question we have is PE-wise portfolio EV/EBITDA multiple spiked up to 18.7x at 30 September '22, up from 15.6x in June, and now it's back at 16x at 31 December. What were the drivers for this? I can probably give a little more color on that. Basically in the past, the calculation was based on assessment and manual adjustments, and we wanted the method going forward to be more mechanical and mathematical, so less dependent on judgment. So we only include companies that are valued on EV EBITDA, whereas in the past, we included companies that use DCF sum of parts, and we are no longer doing that. So the spike in Q3 is due to us including all valuation methodologies and the small debt holdings that we had. And so there were no exclusions made at all whereas now, there will be. Another question we have is around the growth in EBITDA relative to revenue for the portfolio implies that there is margin compression. Now is this something that you are seeing continuing into Q1 '23? Also were the levels of growth in revenue and EBITDA in the last 12 months representative of the trends in Q4 and the first quarter of this year.

That's a bit difficult to answer. I don't see -- I wouldn't read too much to trends something will observe over the next quarters.

Another question we have is, does the current -- what does the current USD hedging look like? Does the falling USD mean that liquidity improves overall? And the first half dividend for 2023 can be paid out? And do you consider any buybacks given the big discount to NAV?

We reconfirmed our objective for the dividend payment. And so that's an objective. But again, we reconfirmed it. So you can expect -- we even, I mean, calculate that. And so we'll -- that's what we intend to do. In terms of buybacks, this is a topic the Board discusses at every meeting. For the time being, our objective is to pay the dividend.

And a related question is, in an environment where realizations are depressed, how comfortable are you in maintaining a dividend target of 5% of opening NAV? Does the RCF allow you to use it to pay a dividend, if required?

Yes, it allows us, yes. And the other answer is probably we don't expect this environment to take for years and years. There are -- there have been times where exit activities have been reduced, but in other times, it revert sooner or later.

Another question is you note that sellers dream of prices in the past, implying valuations remain excessive in some quarters. Why would you say this does not apply to Princess?

The valuation is -- the last couple of quarters, we observed contraction in multiples. And we reflected this in our valuations. However, at the same time, again, our companies demonstrate on average, a very strong growth. And so basically, strong revenue and EBITDA performance can still lead to higher valuations despite of lower multiples, and that's exactly what we are observing. And what our path is as a manager of these companies to help them keep that growth rate.

And the final question is why do you think that Princess' returns have lagged a until listed PE names.

Until -- let's put it that way -- until, let's say, the pandemic outbreak, we basically outperformed the relevant indexes. With the pandemic and then the extraordinary expansion of multiples in certain sectors, Princess was less exposed to. We probably lagged a bit. Particularly, Princess is not invested in nonprofitable technology or health care. And these are exactly sectors that have seen unprecedented multiple expansions and also on the reversion as we have observed since. And the other observation is that until about 5 years ago, about 35% of the portfolio was still legacy and the legacy portfolio clearly underperformed our direct investment portfolio. Now as we have said and to reiterate -- happy to reiterate, this is gone -- this legacy portfolio is close to nil. And the performance going forward and also the expected outperformance over the indices is stemming from the direct portfolio.

So thank you. I believe that's all the questions.

Ladies and gentlemen, I would now like to turn the conference back over to Felix Haldner for any closing remarks.

Thank you. Thank you very much for your interest. And as I said, there's great value at this price. We can observe this from the broader secondary market where discounts are much smaller than what you now see in the stock price. I hope that I'll see you all on the buyer's list. Thank you.

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