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

Ladies and gentlemen, welcome to the Princess Private Equity Holding Q1 2023 Investor Conference Call and Live webcast. I am Alice, the operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Felix Haldner. Please go ahead, sir.

Thank you. Good morning to this quarterly conference call on the results of the first quarter Princess. My name is Felix Haldner. I'm a Director of Princess and I'm an advisory partner to Partners Group. Now to recap what is Princes about. We have the objective to outperform global public equity markets by about 5% on a net basis per year over the mid- to long-term period. And by now, it's really the direct investments in the portfolio that are the main driver of expected outperformance to public market. If we look through on a kind of a quasi consolidated basis, the EBITDA margins and the top line growth of the portfolio consistently displays above 20%. By now, the transition to direct portfolio is complete. And so the future performance is fully driven through operational value creation. And we invest across multiple sectors, all of them should benefit from structural changes and secular growth. And at all time, at Partners Group, we are sourcing our portfolio companies on thematic basis. And at all time, we endeavor to have about 40 to 60 specific themes that create the foundation for a strong investment pipeline and long-term portfolio performance. You will have noticed that the first dividend payment for this financial year was declared at EUR 0.365 and it's payable on the 2nd of June. And this is to kind of -- to fill the claim of the objective to pay 5% of opening net asset value semiannually, which was confirmed earlier this year. And so the prospective dividend yield for this year is in excess of 7% at the current share price. Before I dive into the portfolio and the first quarter movements, let me share with you some, let's say, market observations on the private markets versus public markets. We did so actually also with our institutional investors at our Vienna conference and with our Partner's Group Holding shareholders more recently, and that's actually also a white paper that was published by our firm written by our Chairman, and that can be downloaded on Partners Group Holding's website. But let me just summarize some of the key findings or observations. Look, the starting point is probably -- or the observation is that public and private markets are almost changing roles in financing the economy, particularly the real economy. If you look at the -- and we are really looking at the financing of the new financing, I'm not talking about, let's say, incumbent old companies that have been in the market for years and so on. So traditionally, the IPO market, the IPO was kind of a strategic corporate development as we've observed it in the last, let's say, 40 years. Where a company with a kind of a mature business, a proven business model went public. It went through. There were all industry sectors were represented, and it were typically profitable companies with a solid earnings history. Now to the bottom right, what we observe today is that IPOs are much more kind of unprofitable businesses, often kind of hyped companies, a bias towards technology. And by that, no longer the same we observed maybe 40 years ago, and I'll come to that in a bit more detail. The private markets quite to the opposite. But 40 years ago, some of you will remember, it was mainly about acquisition of undervalued consumer or industrial businesses. We put a lot of leverage into them. That was not really a financing of the real economy involved. It was more like, let's say, maybe a cleanup exercise of public markets. Today, at the top right, private markets look very differently. Today, it's about long term, driving the broader economy. It's a focus on profitable companies and assets all industries are involved, including real asset sector, longer-term oriented, lower leverage. We focus on value creation. We focus on profitable companies, and honestly, an investment by Partners Group and by that by Princess is probably more strategic for our portfolio companies than an IPO used to be. So roles in our view, have completely changed. I would like to show you this in maybe an example as we basically divide between companies that we call more foundational and others that are more kind of in the spotlight. And this picture should -- well, it resembles at least, to some extent, to an iceberg. And all of us know that the bottom of the iceberg is much larger than the top, and this should also kind of -- this is also our view on the composition in the 2 categories. Foundational companies now you are -- let's say, producing companies, they are helping to produce a product. They render a service. They provide a process. For example, in the food value chain, where you have an example here, it would be more like the -- it would start from what agriculture business, the food packaging, food processing, it goes up to restaurants, retailers and all the full supporting industries. Spotlight companies in contrast are very different. They typically take something existing through some sort of platform approach, deliver something like, for example, DoorDash or [ Uber Eats ]. They also may create new IP that has no real application in today's ecosystem. This is not a judgment, but it can become great companies at both ends. Now why is it so important? The observation is that IPOs, so initial public offerings today or in the last 20, 30 years gives much better valuations to the spotlight companies. Investors may think or hope that the winner takes it all with pay out. As an observation, we just see that IPO markets have a preference for these businesses, whilst private markets firms focus on foundational business, foundational businesses can be valued at maybe EUR 2 billion, EUR 3 billion, EUR 4 billion, maybe EUR 5 billion. And by that, as a size, that can be financed by private markets and private equity. They don't get the valuations of spotlight businesses that probably get about the same valuation -- would get the same at an IPO, certainly not less. These businesses for just being financed, they have no reason to IPO, certainly not for valuation reasons. And there are a number of reasons why these businesses don't want to go public. So it's easy to give some evidence to this observation. On the next page, you will see kind of the number of IPOs. And you will observe from the blue bars, whilst there have been some volatility, the numbers of IPOs has come down massively from 1990 to today. And if you drill down a bit further, IPOs in this period were either very large, let's say, EUR 30 billion, EUR 40 billion plus. And by that, certainly too large for private equity to finance and -- or they were just more spotlight companies. And another way to distill is on the right-hand side. So when we look at the profitability,of the companies that were IPO-ed at their time of IPO. And what you can observe is that profitability came down from 1990 to today to about 20%. So hence, another piece of evidence for why the IPO, the private markets world has developed like that and why spotlight companies have been in the focus of the financing through public markets in more than just the recent years. Now we make the claim that the new -- the real -- the new economy as far as new businesses are concerned is increasingly financed by private market. And we see on this page, basically a number of the themes, the costs, [ the ecosystem costs ], the transformational topics or as we referred to as themes in our 4 industry verticals, good products, technology, health and life, and services. So again, for example, for the food value chain at the top right, most of the activities in this theme are actually fairly foundational. And that's why also the little iceberg, you can see is colored at the bottom So this would say the majority of this. The companies we see in this sector in the scene are foundational by that, ultimately, targets of private equity. You see some other themes where actually also the -- where also that the bottom is colored. And by that, more foundational businesses can be spotted. Some of the themes there, you will see both more spotlight and foundational activities. Now some might ask as to whether this is just an observation that is kind of temporary maybe driven by kind of central banks interest rates or whatever. Now if you look at the next chart on the left-hand side, what you will see is that's kind of a trend line, a trend line in terms of financing. So private markets, for example, have grown independent of a low-rate environment. Fundraising in recent years has exceeded by far the global equity issuance. So that's the gray bars. Then IPOs -- IPO-ed firms have decreased in profitability over time. The reddish bar, of course, with some volatility around the Internet bubble and around global financial crisis. Interestingly, also, buyouts have increasingly utilized less leverage. So from the '90, '80, where we had 80% to 95% leverage to today where it is often less than 40%. And rates, finally, well, in all this period, there were only a couple of years where there was a 0 rate environment. Now a potential explanation is on the right-hand side where you see what basically created the value in public markets versus private markets, what you can observe is that, for example, the last -- while in the 10 years of observation, the public market benefited disproportionately from valuation changes. So about 60% -- about 59% of the value was valuation changes whilst and counterintuitively, in private markets, this was only 25%. And the bulk of value creation was by EBITDA growth. And as investors -- Princess investors will know, this is basically where Partners Group is focusing when it comes to working with portfolio companies. Now where does it bring us to -- we believe actually that private markets is, to some extent, the new traditional asset class. So if you want to be invested in core companies, this is no longer what is being IPO-ed, but it may be much more what is sourced on a thematic way. So the thematic investing approach, private market firms like Partners Group employees and where Princess is a carrier, which then is executed by an entrepreneurial ship at scale. And by that, all of this looks then much more like an industrial type of activity as opposed to a kind of a corporate finance or financial engineering activity private markets firm used probably in the '90s and 2000s of the lot. And so by that, we probably behave much more like the successful industrial conglomerates where kind of transformational investing was based on, let's say, the 5 key ingredients such as kind of a strategic rigor, entrepreneurial governance, strong focus on operational value creation instead of a major M&A, best-in-class systems, processes and of course, the talent -- leadership and talent development. So this observation of the industry is quite important to understand and to basically confirm investors in Princess that to be invested and to finance the real economy, the new real economy, the private markets is probably the space to be in, and Princess is one of the great examples how to do it. Now back from the more industry overview and kind of the Partners Group assessment, now back to the portfolio, I hand over this part to Sarah. Sarah Page, the Head of Investor Relations. Please, Sarah?

Thank you, Felix. And now let's dive into the detail of the portfolio companies before we cover the overall results for Q1. Next slide. So just on the left-hand side of this slide, a very quick recap. So Partners Group transformational investing approach is made up of the 2 pillars. The first pillar being the thematic sourcing that is finding the right opportunities in the 3 core giga themes of automation and digitization, decarbonization and sustainability, and new living, and this is further broken down into 4 key sectors of goods and products, services, health and life, and technology. And within these 4 main sectors, there are about 40 to 60 subsectors that are researched for opportunities by the investment teams. And the second pillar of entrepreneurial governance is a very agile approach to the actual execution of a particular business strategy. So it's a very hands-on type of governance, which we think, like Felix just mentioned, many Asian conglomerates are a great example of. It's also about value creation through strategic rigor. So from the inside, transforming the asset by improving margins and cash flows, et cetera, and then also adding to it with strategic add-ons, not big M&A. Now despite the challenging environment continuing into Q1, we have, however, observed at the Partners Group portfolio company level, a good level of tuck-in activity. And secondly, the operational performance continues to be enhanced with strategic initiatives tailored to each company. And so this is why you'll see that the companies in the Princess portfolio are consistently delivering EBITDA margins and top line growth above 20%. Now although EBITDA growth has remained healthy, it has been impacted by inflation, and we've observed in the portfolio of companies that inflation is coming down on, say, goods and products as well as energy costs but remains sticky for services. Our in-house economist also believes that inflation has plateaued and is expected to come down in the next 12 to 24 months, but when exactly that will be is still hard to predict. Next slide, please. So for the top 10 companies, I can confirm that they continue to perform in line or above expectations. Partners Group valuation methodology, as you may know, is based on fair market values updated monthly, Hence, you'll see the monthly not reports in between these results calls, and this should counter investor concerns about valuation lags. The 2 companies which weren't top 10 by NAV in the last results call are DiversiTech and Civica. So I thought I'd quickly introduce them to you. Firstly, DiversiTech, is a manufacturer of components and supplies for the U.S. residential heating, ventilation and air conditioning market, and it was written up over the first quarter on the back of strong financial performance. And a few of its priorities for 2023 will center around delivering best-in-class customer experience through the customer journey, supply chain excellence, and it also remains focused on its disciplined pursuit of add-ons. And the other one is Civica, who is a global leader in public sector software, serving over 2,000 major customers in 10 countries. It was positively revalued over the first quarter of 2023 on the back of continued positive revenue and EBITDA growth, and this was driven by strong organic developments in its core software business supported by growing demand and a healthy customer base. And looking forward, it will also focus on enhancing its customer journey as well as enhancing their cloud software offering and international expansion to cement its global GovTech leadership. Now instead of going through all the top 10 companies today, we'd like to spotlight AMMEGA for you. So we have a short video to play. But before we do that, just a quick recap. AMMEGA is the global leader in mission-critical industrial power transmission solutions, conveyor belting and fluid power solutions. It's been a portfolio company since 2018 and was created from the consolidation of 2 companies and is an excellent example of one of our sub-teams called Industrial Automation. The video discusses how value creation was created by being customer-led and how that transformed the business. Please play the video. [Presentation]

Thank you. So we also announced this morning that Princess has committed EUR 30 million to invest in Partners Group Direct Equity Fund which will have approximately 25 companies in the upper mid-cap buyout space, which usually have an enterprise value anywhere between $500 million and $2.5 billion. There are currently 4 seed investments in the portfolio, 2 of which Princess already has in its portfolio, and that's Breitling and Foundation Risk Partners, and the other 2 are new investments for Princess, which are SureWerx and Cloudflight. And as the last who are less familiar, I'll quickly introduce them to you. Cloudflight is a leading full-service provider for digital engineering and digital transformation, mainly focused on the DACH region, so that's Germany, Austria, Switzerland. The company helps customers to design, build and operate mission-critical and scalable platforms and applications with a strong foundation in digital engineering services and software development. Cloudflight focuses on complex projects they can serve as an innovation partner to its customers for their digital transformation of processes, products or business models. The plan is to expand beyond the DACH region as well as boost organic growth through cross-selling, strengthening customer relationships and strengthening its operations. And the other company, SureWerx, was founded in 1957 and is a manufacturer and supplier of safety protection products based in the U.S. It has an industry-leading brand and has grown exponentially over the years with successful acquisitions. And here, the plan is to enhance the supply chain, the customer experience and continue with its successful acquisitions as well. The investment and realization activity has been muted in the first quarter of this year, with the largest investment made in February where Princess added to its investment in Rovensa, and Rovensa provides specialty crop nutrition, biocontrol and crop protection products. Rovensa completed its acquisition of COSMOCEL, which is a developer, manufacturer and distributor of specialty biostimulant solutions in North America. So this acquisition is highly synergistic and should generate good cross-selling opportunities to support the ambitions to establish Rovensa as the leading independent biosolutions company globally. And on the distribution side, this quarter, there was EUR 8.1 million received mainly from Apex Logistics. And now I'll hand back to Felix.

Thank you. On the next page, you'll basically just see the development, the performance development of Princess versus public market as expressed through the MSCI World total return in Europe. As you can see from the various donuts graphs, that's the development of the portfolio in terms of composition exposure to indirect, that's the early days, to direct to reemphasize that the journey has basically completed or -- more or less completed and future performance is fully driven through the operational value creation in the direct portfolio. If you drill down a bit more in detail, you can observe as to what was the performance attribution of the 3 sectors of the 3 different segments. We distinguish the dark blue is basically the Princess Lead investments, is basically where Partners Group is in full control of the Board where it executes the strategy versus the Princess Joint investments where we are a co-investor alongside another GP and typically retain a seat on the board and have some say versus then the kind of the greenish that is basically the legacy investments. And you clearly observe that the direct portfolio is driving the performance whilst the indirect portfolio has basically provided a substantial drag in the last couple of years. Why is the 3 years gross IRR much better than the 5 years. This is just kind of the timing. I mean, we are talking about Q1. So the data is from Q1 2020 to today, and as you can imagine, as we had the major market corrections due to COVID, the starting basis to calculate the IRR was just very low, and hence, a bit higher IRR. So 5-year growth IRRs are probably more reflective of what we expect going forward. On the next page, you also see this was a question by a number of investors since the last call, as to how Princess compares to the broader Partners Group platform and what this picture basically tells you that the Princess is fully aligned. So the platform performance and Princess performance is actually about the same. Of course, there are some timing issues in Princess as a closed-ended companies, when their exit is cash, when do we reinvest and so on. So by that, there is a slight deviation. However, this is basically neglectable. And finally, we come to this portfolio attribution analysis where you have the bridge between NAV in December to the NAV at 31st of March, where you can see that the revaluations were the main driver, some income received some FX movements. I remind you that we stopped, we discontinued FX hedging at the 31st of March and operating expenses. This brings me to the summary and the outlook. So again, transition to the direct investments is complete. This is going to drive future performance through operational value creation. And the portfolio investments, we continue to focus on overarching giga themes, and we should benefit from structural change and secular growth. Princess can rely on Partners Group's thematic sourcing across specific themes that basically creates the foundation for a strong investment pipeline and portfolio performance. And by that, a solid EBITDA growth like we showed in the metrics earlier in this call that are basically generated through operational value creation initiatives should result in below average multiple contraction. And finally, we reconfirmed the dividend objective, and we have the first payment announced -- declared that is payable on the 2nd of June. By that, I hand back to the operator and then to investors, shareholders for Q&A. Thank you very much for your attention.

[Operator Instructions] We have no questions over the phone at the moment. Sarah back to you to read questions coming from webcast.

Certainly. So the first question that has come through is, do you plan to make new investments exclusively by making new commitments to Partners Group direct programs or also through co-investments alongside Partners Group managed private funds? The answer really is that we will be doing both and as we have been doing historically as well. The second question is, can you please talk about your view in NAV-based lending and the risk? What is your view on continuation vehicles? What is your view on GP's selling stakes of the GP to external investors? And the first thing to point out is really that the NAV base -- about the NAV-based lending is that Princess focuses on PE direct equity investing. And in terms of continuation vehicles, it's really that there's been a bifurcation in the market. And in some instances, this has contained a mixed bag of some good and not so good companies, which are harder to solve. And in other processes, GPs were looking for liquidity for some other strongest assets. But in all the processes, you would see additional fee component, but as a Princess investor, you are not subject as we go direct. Then there has been a question about -- I'm just quickly going through. How comfortable are you with the balance sheet? What made you happy making new investments given recent issues with the dividend? Felix, if I pass that one over to you.

Well, what gives us the confidence is basically the -- that the liquidity situation and particularly the liquidity outlook. We have fully repaid the credit line at quarter end. And we basically have a liquidity outlook that allows us to cautiously restart investment activity. We have done so as a starting point by this relatively small commitment to the last Partners Group -- most recent Partners Group flagship fund by that basically could up to some extent, certainly gotten exposure to Cloudflight and to SureWerx for example.

I have received a few questions about the outlook for realizations and when do you think exits will start to pick up?

Maybe I can continue. I mean there has been some press coverage on both Civica in the U.K., the public sector software services provider and on KinderCare Education, in the U.S., the early childhood chain. And so this comes probably as no secret to shareholders here as we discuss this in another investment -- in investor calls. Also, if you look at the investment years, 2013, you can expect actually that this is -- these are more mature businesses. So by that, there are some processes underway, and we expect liquidity events later this year, maybe tilted towards the end of the year.

Great. And also related to that is, do you think that investment -- how do you think investments will compare to distributions for Princess in the next 12 months?

Well, the liquidity planning on a rolling basis basically twice as much as possible to match distribution activity with investment activity, of course, and include the dividend payment and other costs. And so by that, this should be a very balanced approach. We are doing this on the planning side on a monthly basis, on a rolling basis. And by that, this is a process that the Partners Group is reporting to the Board and does so. There's also -- of course, the credit facility that is basically serves as a buffer and there's a liquidity bridge credit facility of EUR 140 million where we just extended the term to 2026. And so by that, this is basically then the buffer.

And also do you see an IRR performance uplift since Q4 2022??

I'm not sure whether I can see that, we'll have to tick down a bit more in detail, more generally in the -- in this environment, the observed across the portfolio revaluations because of public multiple contractions that are then counted to some or all extent through positive earnings. A number of our companies suffer or need to cope with the inflationary pressure and the consequences, for example, on the labor market, but generally on the import input side, not all of the businesses can pass on higher prices as they go as they have maybe contracts that have a longer tenure. For example, health care services, whilst in other businesses, they can adjust prices maybe on a quarterly basis. So this is very different from business to business.

And what do you see as the biggest threats to continued earnings and revenue growth.