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

Good morning, and welcome, everyone. Thank you for joining Princess' 2023 Annual Results Call. We have a lot to cover today, and I'm joined by the recently appointed Princess Chair, Peter McKellar; and Dr. Cyrill Wipfli, Advisory Partner at Partners Group. You may have noticed the new look of the presentation, which is due to Princess' Investment Manager Partners Group going through a rebrand recently. [Operator Instructions] We will make sure to answer you at the end of the presentation. In the interest of time, we'll group questions on the same topic and answer in one go. And with that, we will go first into the macro and market environment. 2023 was one of the most challenging years for private equity over the last 15 to 20 years. Transaction activity plummeted in 2023 given weak financing markets, but also diverging buyer and seller expectations. This has resulted in the lowest level of distribution since the global financial crisis in 2009. However, it seems that the market may have bottomed out and there is light at the end of the tunnel. We see transaction activity recovering and the financing getting done more easily and with better terms. In addition, it seems that inflation is continuing to moderate on the back of monetary tightening measures employed by central banks, with inflation falling from peaks in early 2022 of up to 10% in the developed markets to more normalized levels of 3% to 4%. Hence, the markets are expecting rate cuts from H2 2024. Princess' net asset value developed positively and closed the year at EUR 14.16 per share, including the total dividend of EUR 0.73 per share, this represents a NAV total return of 1.8%. Value creation of 5.7% was the main driver of NAV growth with the 3 largest contributors in the portfolio being PCI Pharma Services, which is a U.S. integrated pharma supply chain platform; Vishal Mega Mart, an Indian wholesaler of FMCG; and DiversiTech, a U.S. manufacturer of air conditioning pads. The underlying portfolio continued its strong development with an average 13% EBITDA growth during the year. Share price total return was 32.6%, discount to NAV was 26.7% at year-end. We observed that discounts for investment companies, in general, reached their widest levels since the global financial crisis. For Princess, the discount progressively narrowed as the year continued, and we are pleased to report it was one of the narrowest while the peer average is around 30% on average. The Association of Investment Companies reported Princess as one of the best-performing investment companies, but we acknowledge the rebound in the discount was from a low base. Nonetheless, investor conviction in the portfolio allowed for the recovery back within the peer group to materialize. 5% of 2022 year-end NAV was paid out in dividends in 2023, and that produced an annualized dividend yield of 7% based on the closing share price of EUR 10.38, which was one of the highest in the industry, and the Chair has reiterated on several occasions that meeting the 5% dividend objective is of utmost importance to the Board. The balance sheet remained robust with cash kept low to minimize cash drag as any excess was used to pay the dividend, running costs all reinvested since the investment policy is to be always invested 95% or higher. Cash balance was EUR 9.7 million, EUR 19 million of the EUR 140 million revolving credit facility was drawn as at 31 December 2023. The credit facility expires in December 2026 and is used to bridge cash flow timings for short periods of time, so it's not a structural facility. Also as a reminder, the hedging of currency exposure was discontinued on the 1st of April 2023. Investment activity was modest with EUR 12.1 million, where the majority were add-ons. Monetary policies aimed at fighting inflation and the uncertainty around economic slowdown hindered global transaction volumes over the last 12 months. Investment activity remained muted for the industry as a whole, and Princess was not immune to this. However, EUR 30 million was committed to the Partners Group Direct Equity V fund, and in Q1 of this year, this was increased by EUR 20 million for a total commitment of EUR 50 million. In addition to high borrowing costs, continued geopolitical tensions and economic sluggishness limited capital flows from exits. Princess received EUR 46.7 million from distributions, of which EUR 35.4 million stemmed from direct investments. We are in an interesting phase. The last 6 months have been pretty challenging on the transaction side. But nonetheless, we have been able to close successful realizations as well as new investments. At the same time, our portfolio companies are continuing to grow strongly. Looking ahead, we expect the market environment to further improve, which should really help the transaction volumes. There is consensus that rates will come down, providing further tailwinds to private equity performance. Rate uncertainty is dissipating, which should help transaction activity pick up, and that, in turn, will have a positive impact on the portfolio and returns. In 2023, despite the challenging environment, we have at the portfolio company level seen a good level of tuck-in activity. The largest investment was an add-on to Breitling, which came via the commitment into the new Partners Group Direct Equity V Fund, which I'll cover on the next slide. This also added to the holding in Foundation Risk Partners and new companies like SureWerx and Cloudflight were added to the portfolio. The second largest investment was 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 cross-selling opportunities to support the ambition to establish Rovensa as the leading independent biosolutions company globally. The main investment in Q3 was an add-on to International Schools Partnership or ISP, a leading international kindergarten to U12 group, providing English or bilingual education to 2- to 18-year-olds. Since the extension of Partners Group majority ownership in ISP in July '21, the company has progressed well on its expansion plan and has added several schools to its platform. EUR 1.5 million of capital was injected to support the strong pipeline of acquisitions in the coming months. As noted on the previous slide, there were 4 investments relating to the commitment of EUR 30 million in the Partners Group Direct Equity V Fund, which will have approximately 25 companies in the upper mid-cap buyout space with an enterprise value anywhere between USD 500 million and USD 2.5 billion. The commitment was increased to EUR 50 million in Q1 this year. The 4 seed investments currently in the portfolio, 2 of which already had -- we already had and the 2 new ones which I already mentioned. So the 2 new ones, SureWerx is a manufacturer and supplier of safety protection products based in the U.S., and the plan is to enhance the supply chain, the customer experience and continue with its successful acquisitions and the other is Cloudflight, which is a full-service provider for digital engineering and digital transformation mainly focused on the DACH region, and the plan is to expand beyond this region as well as boost organic growth through cross-selling strengthening customer relationships and strengthening its operations. In terms of realisations, the total distributions received in 2023 were EUR 46.7 million, of which, as I mentioned, EUR 35 million was coming from the direct investments, with the single biggest distribution from the full sale in Q3 by Partners Group of the catering company Hoffmans, to the U.K. listed [indiscernible] Group? This investment was 2% of Princess NAV and we'll provide more details once the transaction has completed. The second largest contributor from Princess' direct investment portfolio was Apex International Corporation, which is one of Asia's leading freight forwarders especially on the Trans-Pacific and Intra-Asia trade routes. Acentia successfully refinanced its debt in August and Acentia was only -- has the only integrated system in Mexico capable of delivering low-cost Waha gas from the U.S. to key demand centers in Mexico. And Partners Group will continue to work closely with the Acentia's management to drive Acentia to become the largest, most interconnected gas pipeline. I'll now hand over to Peter McKellar, Chair of the Princess Board, who will give you an overview of a few positive developments and Board updates. Peter, over to you.

Thank you, Sarah. Good morning, everyone. My name is Peter McKellar. I was appointed Chair of Princess in November of last year. I'd like to present the next 4 pages and various Board updates. When I became Chair in November, I laid out 3 key short-term priorities. The strengthening of the Board, increasing shareholder engagement and adopting a clear and robust capital allocation policy. I would like to thank my Board colleagues and also the manager for the substantial progress I believe we have made in the last 4 months. If we look firstly at strengthening the Board, in February of this year, we announced the appointment of Axel Holtrup. Axel has 20 years of direct private equity experience at gas managers such as AEA Investors, Silver Lake Partners and Investcorp. He is also on the Board of DBAG, a publicly listed private equity firm focused on mid-market buyouts in Germany. Last week, we announced the appointment of Gerhard Roggemann as a Non-Executive Director. Having started his career in investment banking and risen to significant positions within the investment banks he operated in, Gerhard has gone on to be on the Board of a number of prominent companies as a non-exec director including Deutsche Boerse, Fresenius, Friends Life, F&C Asset Management and Resolution. Importantly, in terms of his private equity experience, he was Chair and NED of DBAG from 2009 to 2020, and Gerhard brings significant connections to the investor community, both in the DACH region and in the U.K. Finally, there's myself. I was appointed at the end of November, and my background for almost all of my working career has been in private markets and in particular, in private equity. I was the Global Head of Private Markets at Abrdn running GBP 55 billion of AUM. And very importantly, when we consider Princess, I was involved in the listing and then ran for 14 years Standard Life Private Equity Trust, now called Abrdn Private Equity Opportunities. The second key priority that I laid out was enhancing shareholder engagement. Princess is managed by Partners Group. Partners Group is one of the largest private equity and private markets investment managers in the world. It is an enviable track record and won numerous industry awards for its investment performance and industry research. The Board believes that Princess needs to be more identifiable as a Partners Group managed vehicle and that this should be reflected in its name. Equally, Partners Group recognizes the company is very important both as a large client and also as a shop window. Princess has Partners Group only listed managed vehicle. And that shop window will allow Partners Group to present its skills and thought leadership. Accordingly, at the forthcoming Annual General Meeting, a resolution we proposed to change the name of the company to Partners Group Private Equity Limited. I'm also delighted that Dr. Cyrill Wipfli, advisory partner and former CFO of Partners Group and a former member of the Global Executive Committee has now been appointed to lead Princess team on a day-to-day basis. This means that we have senior executives within the Partners Group team with direct responsibility for managing the vehicle. We've also embarked on a process of continuous improvement in terms of shareholder communications. Shareholders should already started to see some of the improvements in terms of the monthly NAV announcements. And when they see the reporting accounts this year, they will see a significant step up from the traditional report and account format. But we are not finishing here. This is an evolving process and over the course of the next 12 months, further improvements to our reporting will be seen as we try to bring ourselves up to best-in-class and ensure transparency and clarity. The company's website is currently undertaking an overhaul at this moment in time and shareholders should already have seen some improvements in terms of the access to and from the Partners Group website. Going forward, the website will also become a medium to read and see the broader research, thematic and asset class reviews written by Partners Group. Finally, the Partners Group team is engaging more with existing and potential shareholders. The team and importantly the Board are working with the company's brokers, Deutsche Numis and JPMorgan to identify new and existing pockets of demand. And I personally am very keen to meet as many shareholders who would like to see me, either formally or informally. Turning now to capital allocation policy. We are announcing today a clear, robust capital allocation policy. Sadly, listed private equity sector has not always been as clear and disciplined in the allocation of new capital. The critical decision is around the reinvestment opportunity. Is it better to actually invest in your own portfolio or to undertake new investment? When the shares are trading at a significant discount, there's a substantial incremental return from share buybacks and reducing the share count. Accordingly, if one buys the shares at a 20% discount, basically EUR 0.80 in the euro, there is an immediate 25% uplift in terms of return. There is also further return from the ongoing return involved in investing in the portfolio itself. Private equity returns are not linear in the final couple of years of an investment's life. It is not unusual to see returns exceed 20% per annum. Given that Princess is over 50% of its portfolio in the vintages 2019 and before, that means that by undertaking share buybacks, we're improving the overall return. So we believe it is important to the Board to manage actively the share price, both in an absolute and also on a relative basis. And in terms of taking those decisions, we support the liquidity position in waterfall so that first and foremost the regular and consistent payment of dividends is made. So what are we announcing? We're announcing that where the share price discount is above 30% to the last reported NAV, 75% of free cash flow, and I'll come on to define that in a second, will be used to acquire issued shares. Where the share price discount is between 20% and 30%, 50% of free cash will be used to acquire issued shares. Very importantly, the Board continues to have the right and flexibility to undertake share buybacks, if it's so desired, particularly at discounts of less than 20%. And this percentage share price discounts chosen -- have been chosen with care and this should be seen in the context of the company's average share price discount over the last 10 years and since listing of 18% and 24%, respectively. So how do we define free cash flow? We define free cash flow as gross cash plus distributions in secondary sales contracted, less a provision. That provision is over the next 6 months and basically ensures the payments of the dividend first and foremost. Secondly, the payment of fees and expenses, the repayment of any drawn debt facilities because, as Sarah alluded to, the debt facility is for working capital purposes. And our reserve for new investment to cover anticipated cash drawdowns in respect of existing fund commitments, bolt-on acquisitions and new direct investments in advanced stage. And I've set out some worked examples on Page 12 of the presentation. Three examples shown firstly, where were we at 31 December 2023 and shareholders can see that total free cash flow was negative, so we would not have been undertaking buybacks under this new capital allocation policy. But as we anticipate the uptick in terms of realizations, we move into a position where we start to accumulate significant cash balances and contracted distributions. So under scenarios 2 and 3, shareholders can see that we generate positive free cash flow and assuming the share price discount is higher than 20% and then 30%, a percentage of that is used for buybacks. We believe this is the right time to put a capital allocation policy in place as we look to an improving exit and liquidity environment. And shareholders can have confidence that the Board will focus on what is right for them and will assure the optimal use of capital resources going forward. Now I will turn now to Cyrill Wipfli.

Good morning from my side. Great to have you in Board, Peter. My ask is to talk about the outlook. And of course, I have no crystal ball, but history is always a good teacher. And there's always bull markets followed by bear markets, followed by bull markets, high interest rate periods followed by low interest periods followed by high interest periods, high inflation, low inflation, high inflation, you know what I mean. In other words, it's good to have experience, and Princess will celebrate its 25th birthday in June this year and funny often to same month, I will celebrate my 23rd year at Partners Group. While quickly looking back, let me also explain just for a second, the new corporate design, which Board groups rolled out 2 weeks ago at our Global Annual Client Event this having taken place in Miami. So Partners Group was founded in 1996, and back then, each product had one color. Princess, for example, in 1999 was yellow, P3 was green and other product was blue. But then in 2011, we did the rebranding. We have chosen one color, blue, because this color represented most of the financial industry back then, people in elegant suits with ties and polished shoes going to work in skyscrapers with blue glass windows. But today, we do a rebranding. We realize we are different. Our investment professionals are not spending the whole day in front of an excel file in an office. We build our companies. We create value. We roll up our sleeves. We go out to make our hands dirty. And we help our portfolio companies creating value in the field, on the construction side, in factory. So where we don't wear a suit and the tie. And so that is why we wanted to use colors, which reflect more of this industrial look with gray for steel and red for bricks and mortars, brown for wood, so we wanted to know that PT is built differently to build our portfolio companies differently. But now back to this slide. So private equity is basically a business where you try to buy a company with a 10% to 20% EBITDA growth for the next 5 years because the EBITDA has doubled, you can also sell the asset for twice the purchase price, call that a 2x multiple. You buy it for 100, you sell it for 200. And sometimes, you can buy cheaper. You can buy it for 75. Sometimes you have to pay more 150. But most likely, when you can buy a 75, maybe you're in a bear market and the growth of the company is less strong in the next years. So maybe you can only sell it for 150. And when you buy it for 150, but probably in the bull market and the growth of the company is stronger because everybody is bullish and the economy is growing, but you can sell it for 300. But 150 exits through 75 entry is 2x, the 300 exit divided by 150 entry is also 2x. So there's private equity is not about buy low sell high, but it's about creating value. And if you look at this chart showing 7 different periods since 1997, what was found in 1996, but the first product was launched in 1997. And you see that the multiples were always around 2x, regardless of the environment. And on the next slide, a big topic at the Annual Global [indiscernible] Event in Miami was the high interest rate environment. So our clients are worried about this. On the left side on this chart, you see the brown top curve as the private equity net returns, they have been very stable around 15% plus/minus 5% since 1990 regardless of whether the interest rates have been high or low or the inflation had been high or low. For instance, at the 8% hurdle rate for performance fees, do you know why? Is the 8% because this is the average public equity returns the last 100 years and private equity needs to outperform public equity because of the typical private equity structures or illiquid limited partnership structures. No. Our industry was founded in the 80s in the U.S.A. And back then, the U.S. government bond yields had been 8%. So it was -- the risk-free rate was 8%. That's why the hurdle is 8%, but this 8% hurdle has never changed regardless of the interest rate environment. But the 1980s, despite these high interest rates in the early '90s, they have been one of the best interests ever. So on the right-hand side of the chart, let us look at a little as a typical private equity buyout model on the right side. So let's take a private equity company, growing EBITDA by 15% per annum over a typical holding period of 5 years with 50% equity, 50% debt, cost of the debt of 5%, then you have a return of 20%. Now the interest rates rise and the 5% cost of debt increased to 10%. So they double and you only get 40% debt, not 50% debt in such an environment, so less leverage effect. This lowers the return from 20% to 17%, 3% lower at first sight, but this is Ceteris paribus, meaning all else equal. But in reality, valuations have come down. And when we can buy a company today cheaper by 1 EBITDA turn, meaning, for example, 11x instead of 12x and this increases the return again by 3% from 17% back to 20%. So just the private equity model works in both low and high interest rate environments. If you look on the next page, on public markets versus private markets, it's interesting to see that comparing public markets or private markets, it is almost a 180-degree change since the 90s. In the 90s, private equity companies were more venture capital companies, mostly technology companies, which were a lot of times loss-making. So not profitable yet. And the public companies were established companies. They were in existence since decades with an established client base, steady revenues, healthy profit margins. But today, most [ IPRs ] are done by companies who are not making any profit yet. 1990 on this chart shows 85% of companies going public had positive earnings versus 2022, as an example, only 22% of companies going public had positive earnings. And today, private equity companies are established companies, which are in existence since decades with an established client base and steady revenues and healthy profit margins. Now on the next slide, I would like to highlight past performance is no indicator for future performance. We all know the sentence from media friends from the legal compliance side, which also always adds this on our presentations when we present our track record, but for instance, I have to say this is true because the future is expected to be better. Princess performed the last 10 years, 11% per annum on both NAV and on the share price. But in 2011, Princess was only 20% direct and 80% funder funds. Today, Princess is 99% direct and 1% funds. So on average the last 10 years, Princess was 40% funder funds, which suffered from a double fee layer. This will not be the case in the future. The future will be 100% direct. And the future will be a focus on Partners Group Private equity leads direct, which are hopefully outperforming the industry average. Princess is roughly 1% of Partners Group private equity assets under management. That's a bit simplified. Princess participates with 1% pro rata in all private equity direct investments from Partners Group. Princess has the same companies in the portfolio, like our private equity direct flagship funds or our private equity direct mandates. I see no reason why 100% Partners Group Private Equity Direct portfolio in Princess going forward should not perform in line with the performance of our Partners Group Private Equity Direct Flagship Funds. For example, we just closed our latest private equity direct fund 2 weeks ago, and we communicated to our clients a target return of 15% net. Now on the next slide, looking at the portfolio. I mean as former co-head of Partners Group portfolio management team, I'm happy to say that portfolio management is very important at Partners Group, and we are happy with the diversification. Princess today has invested in 17 direct private equity companies across many sectors across the world, with the largest segment being U.S. and Western European industrial companies. Looking at the vintage years gives you an outlook of the expected exit activity. With a typical holding period of 5 years already exceeded by almost half of the portfolio, this shows that we are willing to sell and only when the exit environment is offering attractive enough valuations. The beauty of the Princess is that is not a typical 10-year limited partnership structure with a 5-year investment period and 5-year harvesting period. It's an evergreen structure, allowing us to hold to our winners longer, which we call internally riding the winners like serving on an exceptionally good wave in the ocean. Now if you look at Princess' portfolio revenue growth and EBITDA growth, then the only 1.8% NAV performance of Princess last year makes insofar a wrong impression that the portfolio companies have experienced a strong year last year with the average revenue and EBITDA growth having been 13% in the Princess' portfolio compared to only 5% and 4% in public markets. Now on the next slide, looking at public markets, public markets are often referred to as MSCI World. But of course, the reality is more complex. And MSCI World nowadays is significantly pushed by the famous Magnificent 7, meaning Apple, Microsoft, Alphabet, Amazon, you know, but these are very large companies worth EUR 3,000 billion. Our private equity company is over EUR 250 million or EUR 2 billion. So these Magnificent 7 companies are more than 1,000 times bigger than our companies. So hence, it makes more sense to compare as to something like an MSCI World small caps or something like that, which have more of a similar size. But I leave this to the academics to judge, but what adds to me is that Princess portfolio companies on average with 13% EBITDA growth and a 25% EBITDA margin outperformed both indices from both an EBITDA growth and EBITDA margin point of view. But why is it high EBITDA margin important, of course, because the high EBITDA margin business can digest, for example, a negative impact from inflation, raw materials and labor costs better than a lower margin business. So if you look at the next page on the left side, the Princess portfolio companies have been growing mid double-digit revenues in EBITDA, healthy EBITDA margins, moderate debt levels. But I added the chart on the right to get 2 messages across. First, where there is sun, there is shades, thus I wanted to anticipate a question from you. Thank you for talking about the winners in the portfolio, but how many companies develop behind plan. So the answer is 9% of NAV are held below cost, but 60% are performing as planned and are in their value creation phase from 1x to 2x as explained earlier, 15% are performing ahead of plan with 2x to 3x and 16% or clear outperformance with 3x to 4x or even more than 4x. Now second, I want -- I put this slide in the deck because I wanted to talk about valuation. Have we valued the companies too high, justifying a 25% discount to NAV on the share price? No. Let's look at, for example, the 12%, which are larger than 4x. 2 out of these companies are in the top 10, by the way. And both companies have quadrupled their EBITDA during our holding period. Thus, yes, we do mark-to-market with public comparables and public benchmarks based on monthly last 12 months EBITDA data of each online portfolio companies. But in the end, the key driver is raw EBITDA growth. And if you have a 4x higher EBITDA level than it also probably justifies a 4x higher valuation. Furthermore, if you look at the Princess' realized exit multiples. So if you look at all the realized private equity direct exits ever, then these multiples have been much higher. So for example, 30% of private equity direct has been done at 2x to 3x. So that's 30% compared to the 15% on that chart. Then 25% have been exited at 3 to 4x, which compares to the 4% on this chart, and 35% have been exited more than 4x, which compared to the 12% on that chart. So these companies still have a lot of potential to grow. And finally, what I don't understand is that Princess is EUR 1 billion and trades at a 25% discount to NAV but Partners Group manages EUR 40 billion in semi-liquid programs where -- which have the same companies in their portfolios like Princess has. And in these EUR 40 billion, clients can subscribe and redeem at NAV every month. Thus, our NAV is not just a theoretical accounting figure, but it's validated by hundreds of Partners Group clients every month and these volumes are much larger than the monthly traded volumes of Princess. So in fact, on average the last 2 years, EUR 700 million per month went in and out of NAV in such programs. That's almost a whole Princess going in and out every month at NAV. Now looking at my watch, I realize I'm already behind schedule. Does -- let me not go through the largest 10 investments line by line because we have already done this in Q2 and Q3 last call, the last 2 calls, but let me focus on 2 younger companies. And because my watch is a Breitling watch, let's start with Breitling on the next page. To call Breitling a young investment is insofar funny as Breitling is one of the oldest Swiss watchmakers established in 1884. Many of you know Breitling maybe because they sponsored Breitling Jet Team 2003 to 2019, the largest civilian aerobatics airshow display team and with John Travolta as face of the brand being not just a famous Hollywood actor, but also passionate pilot himself. But during that time, Breitling positioned itself as mainly as the watch for male pilots. As we can realize, this represents only a small segment of the population. And Breitling in the meantime has launched watches for women, being smaller, more elegant, with more colors and diamonds, for example, the Victoria Beckham Chronomat, Charlize Theron as female brand ambassador. And Breitling today wants to be a brand not just for men and women in the air, but also on the ground and in the water, as Breitling today, for example, sponsors on land, the U.S. open winning golfer, Gary Woodland, or a U.S. professional basketball player. In Breitling for example, sponsoring in the water, professional wave surfers like legendary Kelly Slater or Stephanie Gilmore with 8 world title Championships, the greatest female surfer of all time. So this strategy resulted already in a significant decrease in revenues and EBITDA. There is still a lot of potential for future growth. I ask Breitling whether all Princess' shareholders can get a 25% discount on a new Breitling watch because Partners Group trades at a 25% discount, but the answer was no, I'm sorry, but I tried. Now DiversiTech is North America's largest manufacturer of HVAC equipment. HVAC sense for heating, ventilation and air conditioning with a product portfolio of 30,000 stock keeping units and 1,250 employees. Sounds like a boring business, but we like industrial companies with stable revenues because in the U.S., you always need heating in winter and cooling in summer. And most of the infrastructure in the U.S. is old and brakes, needs to be repaired or replaced. The market is fragmented and can we consolidate. So our value creation initiatives for DiversiTech, are, for example, accelerating new product development, expanding through M&A to increase the company's geographic footprint, for example, coming to Europe and transforming processes to facilitate best-in-class performance customer experience. Now to conclude my part of the presentation. My key messages have been that the private equity industry is capable of delivering attractive returns to clients in both high and low interest rate environments. Princess has performed the last 10 years on average 11% per annum on both NAV and share price and the next 10 years are expected to be better with 100% power direct. And the portfolio companies have been growing revenues and EBITDA by 13% last year with a 25% EBITDA margin, but this has not translated into Princess NAV growth last year in line with the underlying portfolio companies because the valuations are more complex than just looking at EBITDA. I have to say I've written my PhD thesis on private equity valuations. And I'm happy to confirm that Partners Group valuation approach is one of the best in the industry based on monthly EBITDA figures of underlying companies, benchmark with public peers and the respective industry sectors, taking into account also private comparable transactions and even indicative fits for companies closer to the sales process and they validate each month by the EUR 40 billion of priority equity evergreen structures, Partners Group also manages, which EUR 700 million per month on average the last 2 years I mentioned. Thus in my view, Adam Smith famous invisible hand in the free market economy, balancing magically supply and demand perfectly is not doing its job well with Princess trading at a 25% discount to NAV. But now it's your turn. Thank you for your questions.

Thank you, Cyrill, and we'll start with the first question being on the dividend. Is 5% advisable? And if so, how will you avoid suspending it in the future?

Well, maybe I should take that question. The dividend objective is 5% of the closing years NAV. Interestingly, given the share price discount that Sarah has alluded to, that works out to be about a 6.6% prospective dividend yield at this moment in time. As I said earlier, the Board is acutely aware of the need to pay on a consistent basis the dividend, is acutely aware of the disappointment that shareholders felt when the dividend was suspended and then canceled at the end of 2022. And it's for that reason, when you come to look at the definition of free cash flow. First and foremost, the payment of the dividend objective of 5% is absolutely there. It's absolutely at the top of the list.

Thank you, Peter. The next question, are you going to make an investment stop to preserve capital for buybacks?

I'll take that question as well. Last year was a very constrained environment in terms of new investment. The company only saw EUR 12 million invested. And as we've moved into the early part of 2024, a constrained environment has continued. But it's important to remember, we have an investment objective of 95% to 100% of NAV being invested, and that remains and notwithstanding the capital allocation policy. Capital allocation policy does not apply to all free cash flow. It is only 50% where the discount is between 20% and 30%, and it's 75% above that. So there will always be an element of free cash flow being maintained. We recognize the importance of vintage year diversification and that's also achieved with a very fact we commit to the Partners Group funds that invest across all of the Partners Group direct deals over a 3- to 4-year investment period.

Thank you. The next question is how sensitive has Partners Group been to economic environments in the past and currently, especially in Europe and U.S.

Yes. Maybe when you look at U.S.A. versus Europe, then I have to say, whilst the European macro environment has been somewhat challenging, it also presents opportunities to acquire strong businesses at attractive valuations. Our most recently acquired assets are indeed headquartered in this region, for example, ROSEN, Velvet CARE, but more in general, rather than overweighting any specific geographical region, we evaluate investment opportunities as when they arise, focusing more on strong business fundamentals, market positioning, earnings growth and value creation strategies. So meaning in private equity, there is less of a top-down kind of allocation between reaches like probably in public markets will be where we see I want to have 40% U.S.A., 40% Europe, 20% Asia or something like that, and then you execute on that. But we, in private equity, always also have to look bottom up on actually the pipeline of investment opportunities, which are there. So that's why we are, in that sense, a little bit more opportunistic in select investments when they arise.

Thank you. The next question is what do you expect in terms of bolt-on activity across your portfolio in 2024?

So if that question means the existing portfolio companies adding more than we always -- when we do an investment on the private equity direct side, we always believe that there has to be some additional money being invested for organic growth or M&A growth. So that's why we put aside some investment capacity for the future for that. But it's not like that we have a certain formal like 10% or something like that will be reserved for add-ons, but there have been add-ons last year, and there will be add-ons this year, I'm sure.

And perhaps also to add to that, although last year was somewhat suppressed in market activity. Our investment teams have actually been very busy. And our current pipeline is a reflection of really the work on their themes and sub themes that we focus on, and there are a number of companies that are being evaluated in the global investment committee. So you'll see some leaders in specialty pharma and care delivery technologies and also companies focusing on supply chain transformation and business efficiencies coming through. The next question has the challenging market environment halted your exit processes? So as I mentioned at the beginning of the presentation, last year was challenging. However, because of the interest rates now normalizing, we believe that there will be a pickup in activity, both on the investment and the realizations. The next question is, for how long do your shares have to trade at a discount above 30% -- apologies. For how long do your shares have to trade at a discount above 30% to trigger the use of 75% of free cash flow for buybacks?

Thank you, Sarah. As we laid out today in the capital allocation policy, and it's -- I'm afraid it's in the smaller notes on Page 12, but it's laid out fully in the text. The calculation is done at the beginning of each quarter. So -- and it will look at the discount on the prevailing date. So it's done on a sort of date basis, but it's a calculation that's done for the following quarter. The policy is also subject to the limits in terms of the shareholder authority approved at each AGM, which is currently to buy back up to 14.99% of the company's shares.

And the next question, I see Princess Private equity is listed in London but quoted in euros. I've heard that European clients do not buy London-listed trust. However, I guess that could be different to Princess, is Cyrill looking to target European investors with Princess?

Yes, definitely. And actually, the majority of Princess shareholders are outside of the U.K., in Switzerland and in Germany. But this is also a little bit to do with 4 historic reasons. Some of the shareholders are actually invested in Switzerland and Germany since 1999. Back then when Princess was a convertible bond for a 0% coupon. So yes, as Peter alluded and improved shareholder communication is a topic. So I would say it is new that we're looking for new shareholders in Switzerland and in Germany going forward.

The next question is, could you please provide a few words on Galderma, which was IPO-ed very recently?

Yes. I mean Galderma was IPO-ed last Friday, actually, it's the 11th largest position at -- in the portfolio. But this is -- this has been valued basically close to NAV. So this is a testament to our valuation approach. And so we will talk about this in March actually because it's a March transaction. So let's focus on March on Galderma, but it was a successful IPO, but not like a 20% uplift or something, but it was that any.

Thank you, Cyrill, and thank you, everyone, for joining us. This concludes our annual results presentation for today. If you have any further questions, please contact [email protected]. Thank you, and have a great day.