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

Ladies and gentlemen, welcome to the Princess Private Equity Holding Q2 2023 Investor Conference Call and Live Webcast. I'm Alice, the Chorus Call operator. The conference is being recorded. [Operator Instructions] At this time, it's my pleasure to hand over to Sarah Page, Head of Investor Relations for Princess Private Equity. Please go ahead, madam.

Good morning, and welcome, everyone. Thank you for joining Princess' 2023 Interim Results Call. We have a few topics to cover today, and I'm joined by Fionnuala Carvill, Interim Chair of Princess; Cyrill Wipfli, who is Senior Partner at Partners Group; and Oliver O'Bryan from the Partners Group ESG team. I'll quickly cover the headline numbers and then hand over to Cyrill. So global buyout activity in private markets has remained muted in 2023 so far, and appetite for private equity investments continues to diminish against the challenging backdrop of monetary tightening, recessionary risks and geopolitical tension. Uncertainties surrounding these macro conditions as well as lingering stress in the banking system, have increased the cost of borrowing. And credit availability is more selective, ultimately making investments harder to finance. And this, of course, affected global exit activity as well. In the 6 months to June, Princess' performance developed positively with a NAV total return of 3.5%, thanks to operational transformation and healthy tuck-in activity continuing. Princess invested EUR 10 million in 5 add-on investments and one new investment, details of which we will share later. Compared to the recent past, greater emphasis is being placed on organic growth and real asset transformation. However, inorganic platform expansion is still appealing if it can be achieved through cash flow generation instead of expensive debt financing facilities. Meanwhile, EUR 14 million in distributions was received, mainly from the direct portfolio, details of which, again, we will go through later. Princess paid the first semiannual dividend of EUR 0.365, which is in line with the 5% of year-end NAV paid in 2 installments. With the share price increasing by 23% up to June, share price total return was 27.8% and the discount narrowed by 12% from 42% to 30%. So we're pleased to say that this brings Princess' discount back in line with peers. Now despite the challenging environment that I mentioned continuing into Q2, we have, at the portfolio company level, seen a good level of tuck-in activity, as I mentioned. Secondly, the operational performance continues to be enhanced with strategic initiatives tailored to each company. So you'll see that revenue and EBITDA growth has remained healthy, but the impact of inflation has slowed growth somewhat. However, inflation is coming down on goods and products as well as energy costs, but remains sticky for services through wage inflation. But despite this, EBITDA margin continues to be above 20%, and our valuation multiples are in line with growth sectors in public markets, as we have previously shown in the annual results presentation, and that is why we are feeling comfortable with the valuations. But then Partners Group active ownership and entrepreneurial governance approach is driving EBITDA and revenue growth. And that's why you see the direct private equity platform outperforming the sector-adjusted public markets. Partners Group average Private Equity Direct EV EBITDA multiple is on par with public comparable companies in those specific sectors. And the EV EBITDA multiples haven't changed in the last 2 quarters, and debt levels came down one turn in Q2. I'll now pass on to Cyrill to introduce himself.

Yes. Thank you, Sarah. Good morning, everyone. I had the pleasure of meeting some of you already in Switzerland and Germany, but I hope to meet the rest of you soon, and especially in the U.K. in early September to meet more shareholders. I'm a new face to Princess, but I'm an old face to Partners Group. This is actually my 22nd year at Partners Group, started in the Private Equity Direct team, was the Chief Financial Officer of the firm, was responsible for the IPO of Partners Group, was 10 years in Investor Relations of Partners Group Holding, and then since -- [ over since ] 6 years, changed to portfolio management, been the head -- co-head, together with Roberto Cagnati, of portfolio management, been responsible for all the products at Partners Group and mandates, including Princess. And now I'm happy to be the new senior face for Princess from a Partners Group point of view. If we look at the Partners Group investment platform, it's important to say that we dedicate substantial senior resource to Princess because Princess is very important to us. Princess is actually the only vehicle in the Partners Group's suite of products that gives anyone access to the Partners Group private equity platform. We believe it is the best structure for the democratization of private equity, and we want to ensure that Princess continues to provide this access and the shareholder value, as it has done since 2006 when it became listed in the Frankfurt Stock Exchange first and then later in 2007, in London. In addition, Princess leverages our world-class investment platform with over 250 private equity professionals alone. And Partners Group provides a portfolio of companies with over 150 industry experts, who act as directors in these companies, driving entrepreneurial governance and value creation through what we call asset transformation and platform building. Now looking at the top 10 largest portfolio companies, of course, the key reason for performance is always underlying growth. As a reminder, we focus on sectors that are supported by transformative trends and that are growing at above average rate -- growth rates over the next 5 to 10 years. Think about themes like energy efficiency, supply chain management, digitalization, we look for [ companies that ] sticky, resilient demand and a good amount of pricing power. And as majority shareholders, we then become owners and grow these businesses through value creation strategies such as platform build-out and asset transformation. In 2022, we grew the EBITDA of our direct private equity portfolio companies by like 16%, which is in line with the historic average of 15%, and clearly, it's above what the broader public markets have been delivering. We also managed to protect our margins of the portfolio companies at about 20% on average. So we have an incredible growth profile and stable margins, which is remarkable in a time of high inflation, rising raw materials and wage costs. So for the top 10 companies, as you see on that slide, I can confirm that they continue to perform either in line with expectations or even above expectations. Partners Group's valuation methodology is based on the fair market values, updated monthly. Hence, you will see the monthly NAV reports in between these results call and should counter investor concerns around valuation lags in private equity. Let me quickly say 1 to 2 centers on each of the portfolio companies. PCI Pharma is an outsourced pharmaceutical service provider, has reached record growth, and its recent acquisition has integrated and performed very well. Organic growth also remains strong as a result of tailwinds in commercial injectables and the realization of key operational value creation initiatives at its manufacturing facilities. SRS is a U.S.-based distributor of roofing products, so the roof on the house, such as shingles, clay and cement tile, or metal roofing of the houses. As of March 2023, the company has seen increasing year-to-date sales and remains well positioned to take share. Further, the company has implemented measures to improve operational efficiency heading into their busy season. Ammega, the conveyor belting solutions company, increased in value because of double-digit growth in revenues all over the world actually and benefited from its ongoing cost initiatives to maintain a healthy EBITDA margin. KinderCare is a U.S.-based early childhood education company, has generated value as its growth in numbers of centers, that's numbers of kindergartens opened as well as the count and retention of full-time employees, has allowed for higher occupancy, efficiency and growth in enrolled children -- students. Further modernization of digital capabilities and strengthening of higher teacher engagement are being initiated to continue KinderCare's recent success. Emeria, most of you know still on the old name Foncia, is the global leader in property management and services, is in the process of rolling out Millennium, that's its proprietary enterprise resource solution, integrating several internal resources, driving operational excellence, significant cost reductions as well as an even better understanding of customer needs. It's also accelerating its platform strategy in the U.K. Techem, the energy metering company in Germany, increased in value because of higher revenues from its digital transformation journey towards a holistic energy efficiency service provider, while maintaining the attractive EBITDA margin but also profited from a higher EBITDA multiple, reflecting higher valuations of the public peers due to the sector's resilience exhibited during the COVID-19 and the Ukraine crisis. Esentia is the new name for Fermaca, a leading provider of gas transportation infrastructure in Mexico, further increased in value due to the completion of its main natural gas pipeline construction as well as some recent acquisitions. Additionally, following implementation of new management and rebranding, further progress has been made with local regulators, and successful refinancing has been completed. These advancements are both reflected in revenue and EBITDA figures. Vishal is one of the India's largest value retailers that offers apparel, general merchandise and fast-moving consumer goods products, has seen strong growth in the first half of the year across all categories and in particular, apparel, as a result of investments in fabric quality and introduction of new fashion fits. The company's omni-channel rollout has also seen strong uptake. DiversiTech is a heating, ventilation and air conditioning parts and supplies manufacturer, has recently driven growth through the acquisition of Castel Engineering and efficiency initiatives at its plant in Buford, Georgia. The company is also benefiting from deflationary input costs as well as hot summer season, leading to increased demand of air conditioning. Civica is a leading provider of specialist cloud software for the public sector, has performed very strongly due to the favorable industry tailwinds as well as the successful cloud transformation plan executed on the PG's ownership with hundreds of customers migrated to cloud and new local wins in cloud in the last 3 years. Sarah will now talk you through the exits and pipeline.

Thank you, Cyrill. In terms of investment activity, Princess invested EUR 10 million in 5 add-on investments and 1 investment so far this year up to June. In Q1, Princess announced its commitment of EUR 30 million to invest in Partners Group Direct Equity V, which added SureWerx and Cloudflight to the portfolio as well as increased the investment in Foundation Risk Partners and Breitling. Just very quickly to give you a feel for these new investments, Rovensa provides specialty crop nutrition, biocontrol and crop protection products, and it completed an acquisition of COSMOCEL, and that's a developer, manufacturer and distributor of specialty stimulant solutions in North America. So this acquisition is highly synergistic and should generate cross-selling opportunities to support ambitions and establish Rovensa as a leading independent biosolutions company globally. Cloudflight is a leading full-service provider for digital engineering and digital transformation, which is mainly focused on the DACH region, so Germany, Austria, Switzerland. And the company is helping customers to design, build and operate mission-critical and scalable platforms and applications, and it differentiates itself through its delivery model and speed of execution. Confluent Health is a U.S.-based health care company focused on physical and occupational therapy, and it completed acquisition of MOTION PT Group, and that's a physical therapy practice group in the U.S. And with this acquisition, it should help with its existing geographic footprint. And MOTION has a unique business model, and so it should help diversify revenue streams and also provides a strong fit with Confluent's growth strategy. Galderma, a leading global dermatology company, develops, manufactures and distributes a range of medical consumer skin health solutions. And some of the brands are Epiduo, Differin, Dysport, Cetaphil and Benzac. And this add-on represents an attractive investment opportunity in a leading company, which has a proven track record. And going forward, Partners Group will continue to support Galderma's growth through its continuous product innovation, geographic expansion and channel optimization, leveraging portfolio synergies. Accell Group is actually the largest producer of e-bikes and bicycle parts globally. It's based in the Netherlands. And this investment is representing an opportunity to gain exposure in this high-growth e-bike segment. Foundation Risk Partners is a specialist insurance broker in the U.S., and it generates revenues from recurring annual renewal of policies, and it's a highly predictable business with -- sorry, it's a highly -- it's a business with highly predictable cash flows because this is a nondiscretionary expense. And it also deals with risks such as cyber and social media exposure, the increase in litigation and an evolving regulatory environment. And Partners Group will work with management to expand the company across the U.S. And finally, SureWerx is a manufacturer [ of supplier and ] safety protection products in the U.S. and is a leading brand there, which has grown exponentially over the years with successful acquisition. And the plan is to enhance the supply chain, the customer experience and continue with its successful acquisitions. And in the last call, we spotlighted Ammega as a case study. And today, we would like to elucidate the value creation plans for Breitling. We have a short video to play. But before we do that, I'll just give a quick recap. And Breitling is -- that was founded in 1884 and is a leading Swiss watchmaker with a unique heritage in the industry as the inventor of the modern wrist chronograph and distinctive positioning as a casual inclusive and sustainable luxury brand. Breitling's product offering is centered around its 3 core themes of air, land and sea. And its collections offer a distinctive modern retro design style, which appeals to an increasingly broad consumer base globally. In 2021, Partners Group bought a majority stake in Breitling, and Alfred Gantner, Co-Founder and Executive Member of the Board of Directors of Partners Group, became Chairman of the Breitling Board. We have provided a QR code for you, so you can watch the video we have for you on your phone or will now play it for you via the webcast. Please play the video. [Presentation]

So now looking forward, the investment pipeline has potential acquisitions in exciting subsectors such as healthy living, self-care, personalized education and tech-driven financial services. And for new opportunities, Partners Group carries out comprehensive asset testing against adverse economic scenarios and doesn't compromise on price. The investment manager also continues to place emphasis on assets' pricing power, product differentiation and cash flow generation to ensure margin stability amid lower GDP growth, higher interest rates and elevated wages. Cyrill will now talk you through the exits and pipeline.

Princess received distributions amounting to EUR 14 million during the first 6 months of this year, of which EUR 9 million stem from direct investments. The largest contributor from Princess' direct investment portfolio was Apex International, one of Asia's leading freight forwarders, especially in the transpacific and intra-Asia trading routes. Other notable distributions from the direct investment portfolio totaling EUR 1.7 million were received from MultiPlan, a U.S.-based provider of cost management solutions for healthcare payers; and Abzena, a leading global contract development and manufacturing organization. The remaining balance of EUR 5 million was predominantly received from the mature legacy fund portfolio, which continued to benefit from distributions. If you look now at the age of the portfolio companies in the portfolio and comparing that with a 5 to 6 years target holding period, you'll realize that actually most -- many of the companies are old enough to be exited. So the bad news is that uncertainties surrounding macro conditions and stress in the banking system have made investments harder to finance, which has slowed down the exit pipeline, and there is still a mismatch between buyer and seller expectations. But the good news is, Partners Group will not be a forced seller. And so we continue to hold on to these assets and the investments continue to create value, which in turn just increases the exit value potential when the conditions become right for a sale. So to give you a feel for the pipeline and keeping in mind there is a 5 to 6-year average holding period, about 27% of the portfolio in that -- is in that sweet spot. So these are the 2014, '15, '16, '17 vintage investments, which are maturing in the next possible exit windows. And then you have another 22%, which are the '19, '18 investments, which mature in the next 2, 3 years. So you can see there's a robust pipeline that is waiting for the right conditions to realize value. How much volume are we talking about and valuations in private equity is a big topic. So now because I wrote my PhD thesis on private equity valuations, I cannot resist to make a statement about our valuation approach. But I'm very happy to report that our valuation approach at Partners Group, which we apply for -- across our platform, including Princess as a product, is really state-of-the-art and very disciplined, systematic, mark-to-market, based on monthly financial figures of the underlying portfolio companies. And looking at the largest realizations from the last 5 years of direct lead investments in the Princess portfolio, the average uplift and the final year of ownership was about 50%. So I'm not saying that the NAV should be now not [ 15 but 22 ], that's not what I'm saying. But my message is that the market applying a discount of 30% to our disciplined NAV so that the share price is now trading at EUR 10. This is clearly too conservative from a valuation point of view. I will hand over now to Fionnuala Carvill, our Interim Chair of the Board of Princess, and present you an update on the Board developments since the AGM.

Good morning, everyone. As just confirmed, I am Fionnuala Carvill, a Non-Executive Director of Princess since 2018, and I was appointed to the role of Interim Chair as a result of the recent AGM. I'm here today to update you on the recruitment process to strengthen the Board after the departures of Richard Battey, Felix Haldner and Steve Le Page. As you'll see on the slide, immediately after the AGM, an independent external search consultant was appointed to manage the recruitment process. During this process, our focus has been on recruiting a new Chair, whilst running a parallel process to identify individuals vacancies on the Board. Once in situ, the new Chair will lead on further recruitment. Post AGM, we have actively increased shareholder engagement to further understand shareholders' views on a range of issues. And these meetings have helped inform and shape the recruitment process. After conducting long-list interviews during July and August, we have been somewhat hampered by [ diaries ] over the holiday season, and we'll be conducting short-list interviews towards the end of September with the aim of making an appointment in early October. Immediately thereafter, the Board's skills metrics will be revisited to ensure we attain the necessary blend of skills and experience to provide effective leadership in the boardroom, and recruitment for the other vacancies on the Board will progress. As a priority, the new Chair will commence extensive shareholder engagement as soon as reasonably practical, and many of you will have the opportunity to meet with them either in person or remotely. We will keep you updated with regard to the process and bringing the Board back to full complement at the next investor call.

Thank you, Fionnuala. And now I'll pass it on to Oliver O'Bryan from Partners Group ESG team to give you an update on the latest developments. Oli?

Hi, good morning, everyone. It's a pleasure to be here and give a brief update on where we stand in terms of ESG. Maybe though, to start off, we just do a short recap on how we drive ESG at Partners Group as a whole. And that, for us, in terms of when it comes to ESG, obviously starts with the G, a proper, clear and dedicated governance structure. That means that at all levels across Partners Group, across Board, executive and management level, we ensure that sufficient governance is adhered to, so that our vision of building more, better and sustainable businesses across their investment life cycle are adhered to, and all the way down into the different business units and our investment life cycle, we can realize sustainability at scale. If we go on to the next slide, I want to take a couple of minutes to just dive into one of the key topics [ without ] going for 2023, which, at the end of the day, was data. As much as our ESG journeys and initiatives are incredibly important, what has become increasingly important in the market, especially with the increase of regulation in Europe, was that the ESG ambition at the end of the day is driven by data. This meant that across 2021, '22 and '23, which is for us the key phase right now, is that we collect the data across our different portfolio companies, and we're able to obtain a reference year, a measurement year and a performance year to be able to accurately understand our portfolio from a data perspective and drive the sustainability performance and considerations for future years. An important note here is obviously that given the different maturities of our investments across our portfolio, the reference and the mature -- the measurement year, a key time to look at the portfolio and assess where our different measurement and ambition opportunities lie. And when we look at the future usability of data, it's important to build not only on the data itself, but the controls, the assurance and the governance around it as well. Today, a successful ESG data collection, which is already quite difficult to obtain in private markets due to the availability of private market data when it comes to E, S and G, is that we report on our ESG approach in a pragmatic way, but that means all the way from sourcing to value creation. Partners Group integrates ESG considerations in all phases of its investment life cycle, in the sourcing phase, from a negative screening and a thematic growth opportunity perspective and the due diligence from the assessment of ESG risks across all investment value creation opportunities, once we onboard investments from establishing an accuracy and streamlined ESG governance process, and ultimately, when we own and fully manage the asset is having a lead and monitoring process and tracking and reporting these ESG initiatives across the board. If I focus on 2 of the key investments in the Princess mandate, it would be Pharmathen and Ammega. If I dive down into Pharmathen for a minute, one of the key things that we drove with Pharmathen in the 2023 period was the stakeholder benefits program, ensuring that we increase engagement for the leading development of drug delivery technologies at the firm. Our ESG journey with them focuses on identifying the most material topics of each business, which is where we have the example of where ESG data collection comes at a key point for Pharmathen's journey with Partners Group. Similar to Pharmathen, we also have Ammega, which is the leading global manufacturer for the conveyer and transmission belting where we ensure, especially from an environmental perspective and especially when we look at the carbon baselining, their emission factors are something that is incredibly material to their business. Hence, ensuring a carbon reduction road map and checking in on that on an annual basis to ensure that they are meeting their targets but also Partners Group is meeting their sustainability strategy targets from an owner perspective are incredibly important. This is just one of the examples where Partners Group's data collection and data strategy for the long term has been a pivotal point for our journey in terms of ESG. Looking ahead, we look to improve our data collection methods and especially increase data availability as we try and improve our ESG initiatives across the Princess portfolio.

This brings me to the summary and the outlook. And as the transition to the direct investments now being complete, this will drive future performance through operational value creation. So we continue to focus on overarching giga themes to benefit from structural change in secular growth. Princess can rely on Partners Group's world-class resources to thematically source across specific themes to find unique opportunities that are characterized by solid EBITDA growth, which are generated through operational value creation initiatives. Regarding dividends, we heard loud and clear how important dividend is for a majority of you, especially in the U.K., thus we target paying out 5% of NAV per annum in 2 semi-annual tranches of Q2 and Q4. And the good news is that we stopped the FX hedging as per the end of March. So since April, there will be no cash needed anymore for FX hedging. By that, I hand back to the operator who will open the round for questions. And without stealing the thunder of the operator, just let me quickly give you the 3 options you have. If you logged in via a computer, you can ask a question in writing, which is our preferred option because then, we can group the questions to similar topics and answer several of them at once. And to be honest, it also gives us a minute to look up a figure, if we don't know by heart. If you dialed in via telephone, you can ask a question orally, and we will take these questions at the very end, if there are any because we realize that very few are using that option. But I want to add, of course, you can always send an e-mail to [email protected] or [email protected], and we will write you back or call you back later today. This drive is especially useful for those shareholders who have their own views and they don't attend, for example, group meetings or conferences because they consider their questions to be proprietary information.

Great. Thank you, Cyrill. So maybe if I just go to the written questions that we've received during the webcast, the first one is from Frank Bijleveld, who is asking, could you explain somewhat more your remark, public market pressure downplaying growth potential in portfolio valuations?

Yes. I'm happy to take this one. Of course, if you buy a company for EUR 100 million and you sell it for EUR 200 million, you hope to do that because revenues have doubled, EBITDA has doubled. But of course, it's not only EBITDA, it's also EV to EBITDA, so the multiple, which is important. And we do mark-to-market our investments. And if the public market, for example, has a downturn development, a negative development of minus 5%, even if the EBITDA growth is plus 15%, then the net growth is not plus 15% anymore, but only plus 10%. So that's why in case whatever the public market is doing, that of course has an impact on the growth rate also for our private market portfolios because we do mark-to-market.

Perhaps one more for you, Cyrill, from Mark Thomas. The tone of your introductory comments on debt financing appears more cautious than many peers who generally seem to comment that pricing is a bit tighter, availability a bit less. But for reasonable deals, there is no dramatic change. Could you give some more color on this? And do you have information of how much of EBITDA is absorbed by financing costs today compared with the recent and long-term past?

Yes. If you look at debt financing, so what we meant is to acknowledge higher borrowing costs and more limited appetite from certain lenders. We also acknowledge that there is debt available. But for example, debt funds have high levels of capital to deploy, although they remain highly selective in doing so, and committed levels per transaction are reduced meaningfully. So it's harder to get $1 billion investments to be financed, but it's not impossible, especially for high-quality companies. I think the debt market is really bifurcated into the high-quality and the not high-quality companies. Looking at the Princess portfolio, in the third quarter of 2021, expecting a significant increase in inflation, PG decided to increase hedge ratios for the large majority of our private equity portfolio companies to around 90%, which allowed us to limit the impact of rising rates on our companies. And as for refinancings, we have been proactively refinancing or extending maturities to our companies for over 18 months with a majority of our companies that are now maturing in 2025 or later. Even in an environment with more scarce debt availability, the quality of our companies and depth of our lenders network allowed us to complete 2 refinancings over EUR 1 billion in the past few months for 2 of Princess' portfolio companies, KinderCare and Civica by the way, one of the top 10 holdings of part of Princess, which gives us comfort around limited refinance risks in the portfolio.

Then we have a question about the net debt to EV and is 35% a bit high? So what I can say on that is that really the average equity cushion for portfolio companies is about 60%. The floating rate of loans is 6 to 8 years, and the holding period is 5 years. So we expect after 2 to 3 years to pay down this debt. And also don't forget that these are very high growth companies. So they can handle this level of debt, which you may consider to be high. We then have a question for Oli on ESG. Do you have an example where ESG data collection from portfolio companies helped you to identify and proactively address potential issues or opportunities?

Absolutely. So one of the benefits of the approach we've had on energy data is collecting not only more data in terms of covering frameworks, regulations and shareholder interest, but also understanding those data points better. See, it's similar to how our financial data collection evolved over an incredibly long time. We're at the start of that journey. To understanding our portfolios is incredibly important. An example of that is back to Ammega. Our data collection with them, especially when it came to carbon reporting, allowed them to achieve the EcoVadis Platinum Award, which only the top 1 of all EcoVadis contributors actually are able to attain. So our collection with Ammega and understanding their data and their availability and their improvement as such has allowed us to drive, particularly on the improvement side and on opportunity side for Ammega going forward.

A question for you, Cyrill. What are the key parts of your role day to day regarding Princess?

Yes. In a sense, I'm the successor of Felix Haldner. So on the one hand side, of course, I will work together with Sarah Page on the Investor Relations side. But I will also -- so hopefully, I meet all of you sooner or later. And on the other hand, I will be the link into the Board of Princess, so I will advise the Board members and then update the Board members on portfolio and market developments. But of course, I'm very close contact with product management, product accounting, portfolio management and be the link between Princess and Partners Group in several layers.

We now have a question for the Board. Please, could you explain how the manager and Board are comfortable with continuing to make commitments alongside the correct capital allocation decision relative to using disposal proceeds to return that capital via buybacks? Linked to this, Pantheon recently announced a very significant buyback program, which has been welcomed by the market. Is this something that Princess is also looking at?

Thank you, Sarah. Yes, we are obviously aware of the Pantheon's significant buyback program and the response from the market on that. What I will confirm is that on a regular basis, every quarter, the Board does consider buybacks. And obviously, at the point of bringing on board a new Chair and bringing the Board up to strength, this is something that the new Board will be considering. And what I can say is, that will be a focus of the Board going forward as it has been in the past.

We've also had a question around the debt environment and how it's impacting new deals. There were several questions on this. So I'm just going to group this together. If I just start off, and Cyrill, if you have anything to add. The environment at the moment is that there is still a gap between buyer and seller expectations. Neither of them want to take the first step. And while the market hasn't yet normalized, we are hoping to see a gradual adjustment in prices, and so that will affect investment pipelines and therefore, also exit activity on the other side.

I'm not sure whether I understood the question. Can you say that again, Sarah?

There were several questions about the debt environment and how it's impacting investments and exit pipelines.

Yes, I think that's what I tried to cover with the earlier questions. Of course, to have an attractive exit market, you need the debt to be readily available for the buyer and to actually get the package together. That's why we see now also the net debt to equity ratios at the moment is more like 35% debt. In a bull market, this can be 50% debt. And so that's already showing that the debt market is not so attractive at the moment. But our team experienced what I tried to say with quality and non-quality that there is a bifurcation in the market that the banks actually want to provide financing only to the best companies, stable companies, companies with stable EBITDA margin growth even in crisis. That's why I mentioned also one company which had an increase in valuation this year because the public markets also went up because people realized that their EBITDA margin were very stable and still growing in a COVID-19 and the Ukrainian crisis environment. And so that's why we do believe that the good companies, there will always be financing opportunities that may be not 45% debt, but 35% debt or so. That's my view on the debt impact on the exit environment.

We also had a question about what percentage of your portfolio companies have hedged rates and for how long. What I can say on that is that we did restart refinancing around the first half of 2021 by renewing finance packages and this is secured financing at least until mid-2024. And at the portfolio company level, it's about 80%, 90% that is hedged against increases. And don't forget that also we are looking to pay down -- or the companies are looking to pay down that debt during the holding period. And as mentioned also before, the equity cushion is 60% on average in these companies. So yes, majority of interest rates are floating, but the interest payment isn't huge. And also, if I can add that the new transactions, it's where the debt funding is an issue, but it's not an issue for the existing companies. We then have a question about the -- sorry, just looking here at the dividend, perhaps one for you, Fionnuala. Why fix it at 5% of NAV rather than, say, at many points above base rate?

Thanks, Sarah. The fixing of the dividend at NAV is obviously constantly under consideration. And when we look at that on a half yearly basis, we do ask the Board, whether that is at the right level and whether there should be another point to fix it by. So for the moment, that's where we are with the 5% of opening NAV. But clearly, as you'll see in the interim report and in our statements, it's the intention to have that as the objective. And that's not to say that that's where it's set for the future.

I believe we have answered pretty much the questions on the webcast. Sorry, one more question here has popped up. What proportion of companies within the portfolio are you concerned about or have on our watch list, given the impact from the mounting debt costs? So what I would say to that is, as mentioned a moment ago, is that the debt costs are not an issue for our portfolio companies. We have refinanced. We have secured refinancing. And also, if you look at the top 10, they are all good performance, they are on track or even outperforming expectations. Another one on the dividend, a follow-up. Is 5% of opening NAV appropriate in the muted exit environment? And is there a chance that it could be canceled again?

Thank you, Sarah. I think my earlier response answers perhaps the first part of that question. And we are clearly very aware of the cancellation of the dividend causing issues for shareholders, and we have thoroughly reviewed the reason for that. What I can say is that we are comfortable with our liquidity position, and we have regular reports from the investment manager that allows us to scrutinize that and stress test that. And certainly, for the moment, we are absolutely comfortable with the level that we have been paying, and we'll continue to keep a very close oversight of that.

I believe this is last question here is, do you consider investing more in the P/E mid-market or even lower mid-market with debt financing availability seems better at present?

Yes, that depends on the definition of mid-market. I think in private equity, we have growth capital, small-cap buyout, mid-cap buyout, large-cap buyout, mega-cap buyout. I think we actually, in fact, consider us to be more of a mid-cap player, but more on the upper end of mid-cap or at the lower end of large-cap. And I don't think that we will actually change our investment strategy going forward because we also -- we really like market-leading companies, which are the leaders in their field. Maybe they come only with 15% growth of EBITDA instead of 20% or 25% for smaller companies, but they go with significantly less risk. And we really like that approach. Especially in this environment, we like to invest in companies which are the leaders in their industry, being #1, #2, #3 and not #10 in the field. So that's why we have a little bias to more larger. But the way that this is now defined as a larger end of mid-cap, but I think we will not go down from a size point of view going forward.

And then just a question about why we did hedge. As you know, we did discontinue this on the 31st of March. And the reason why we did have a hedging strategy is because, one, most of our shareholder base is European. It's over 50%. And there had been a preference historically to have this strategy. However, now that it has been discontinued, this, I guess, more unpredictable element of cash forecasting has been removed. So it plays into the commitment of the 5% dividend, where we are now very focused and always have been to pay this dividend, but this, I guess, unpredictable element due to currency movements has been removed, which should provide investors with added security. I think that's the -- all the questions. Operator, over to you.

[Operator Instructions] There are no questions over the telephone. Back to you for any closing remarks.

Well, thank you very much, everyone, for joining and for your questions. And if you have any follow-ups, please e-mail with Cyrill or myself. Thank you, and have a great day.