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

Good morning, and welcome, everyone, to PGPE Limited results call. My name is Andreea Mateescu, and with me today are my colleagues, Cyrill Wipfli and Federica Cazzaniga. Today, we will provide an update on the NAV development and the portfolio highlights as of 30th of September 2024. Now before we dive in, I want to address some housekeeping items. If you would like to ask any questions during the webcast, please use the Q&A tool which you can find on your screen. We will answer the questions at the end of the present. In the interest of time, we will group similar questions and answer in one go. And if we run out of time or you have additional questions, please don't hesitate to send us an e-mail at [email protected] or through the contact form available on the website. Now before diving into the presentation, just a few words on PGPE Limited. PGPE Limited provides shareholders with exposure to Partners Group direct private equity investment strategy, participating in transactions alongside our institutional clients. Partners Group is a thematic investor focusing on investments in companies where growth is underpinned by long-term transformative trends. We bring extensive resources with a global team of over 200 investment professionals supported by a global network of external industry advisers and operating directors. Turning to the results. Year-to-date performance is positive with a NAV total return of 3.1% as of end of September. Share price total return for the period stands at 5.9%, reflecting an expansion in the company's discount to NAV. NAV stands at about EUR 1 billion, which translates to EUR 14.24 per share, while dividend yield is just below 7%, considering the last 12 months dividends paid to shareholders at the closing share price of September with just above EUR 24 million paid to shareholders with the first interim dividend this year. Of course, liquidity position remains healthy with the revolving credit facility of EUR 140 million fully undrawn as of the end of September, further supported by EUR 5.4 million in cash and cash equivalents. Now moving on to the next slide. It is not worthy to mention the largest contributors during the quarter. Unsurprisingly, KinderCare is among them. However, we will talk about it in more detail later in the presentation. Another positive contributor during the quarter was International School Partnership, or ISP, how I like to call it, which increased in value during the quarter, reflecting its continued robust financial performance, both organically and via acquisitions. And one can say that ISP is a testament to our platform building strategy. Actually, the company was founded in 2013 by Partners Group, and ISP looked to capitalize on the growing demand for high-quality education and is now the fifth largest K-12 schools group globally with 88 schools across 24 countries, serving over 85,000 students. Partners Group continues to work with ISP's management and Board on the transformation of the business into a world-class learning platform, achieving the best student outcomes. And ISP is progressing well on its expansion plan and recently acquired 5 schools, including Collegio Montemayor, Alphaville and Pinnacle schools alongside 2 newest greenfield schools. While Telepass, a pan-European leader in electronic tolling systems, which you may know whenever you're mainly traveling to Italy is performing overall in line with the underwritten expectations. Of course, Partners Group is working closely with the Board and management team on a range of value creation initiatives. And perhaps most recently, you've read the news that it has partnered with Atlante to make available over 1,000 electric vehicle charging points in Italy through the Telepass mobile app. And these charging stations compatible with all electric vehicle models offer power ranging from 22 kilowatts to 300 kilowatts and are powered by renewable energy. In relation to the quarterly portfolio activity, we observed that investments and distributions have been broadly balanced, although we see a clear tilt to the investment side. Noteworthy is the distribution from the sale of a portion of the stake in Galderma. The shares were sold to L'Oreal via an off-market block trade that saw the French Beauty and Cosmetics Group invest for a 10% stake in Galderma. The 2 companies have also agreed on a scientific partnership to develop advanced future-proof technologies with direct applications in the field of dermatology. Now more interesting is actually what we've done with the cash on the deployment side. We've closed a new transaction in Fairjourney, which we briefly mentioned the last webcast, if you remember. And of course, we deployed in additional investments across the portfolio. Just as a quick reminder, FairJourney Biologics is a leading European antibody discovery contract research organization based in Portugal. The company supports pharmaceutical and biotech companies and has worked with 250 clients globally to design and develop next-generation antibody-based therapies. And with this, I would be very happy to hand over to Cyrill.

Yes. Good morning from my side. Some of you have sent us already questions several days before the presentation, actually. So, thank you for that. We like this. And one question was to please comment on the impact of Trump having won the U.S. elections. And this actually triggered that I included the following slides on macro-economic environment and our investment approach. And as you all know, the nominal GDP growth worldwide is impacted by inflation, thus the real growth is lower, thus less tailwind. And interest rates are higher today than the 10 years 2010 to 2020. And we also have no crystal ball at Partners Group for seeing the future. So, we map out different scenarios and test our investment cases against these scenarios and then select only those investments which are resulting in an attractive return for our clients in various scenarios. So, we don't invest in a one-trick pony, and we don't invest in a company which only strives when all stars are aligned. On Page 7, you see that we always have a base case, which we expect to become true with a chance of around, let's say, 50%. But there's always the risk that the future will be worse than the base case, for example, recession, let's say, 30% probability. There's also a chance that the future will be brighter than expected. That is currently only a lower probability of, let's say, 10%. And of course, there's always the risk of the world falling apart as always there, but it's always low. So, let's call a speculation scenario at the 5% probability. But I think what's key is that on Page 8, you see that our thematic sourcing approach is designed to identify those investment themes which perform in most scenarios. So, meaning long-term trends not impacted by which President won the U.S. elections. So, for example, the trend towards more safety at the working place, meaning construction workers wearing protective clothes, helmets, gloves, shoes of steel caps protecting tools, high visibility checking, like a company like SureWerx or pharmaceutical companies want to increase their speed to market or tech services or increasing quality and standards, for example, natural gas pipeline inspections, which Rosen is doing or companies which profit from working more from home, et cetera. So thematic sourcing is on Page 9, you see what we are looking for. We're looking for companies with established business models, meaningful margins, cash generation, experienced and strong management and positioned for growth. And then with our transformational investing approach, we then try to achieve returns which are working in a market which is not so much triggered always by interest rates, for example. Yes, I know interest rates are not 0 anymore, but they're also at 80%. And for example, in the 1980s when our private equity industry was born, the interest rates in the U.S. were 80%. But the '80s returns in private equity were actually very high. So, it's not just a single factor which is influencing this. Now I'm not the macroeconomic expert, to be honest. So, our team prepared these slides for me, but I am actually the expert on valuations. I wrote my PhD thesis on valuations of private equity companies. And this is my 23rd year with Partners Group. Thus, I believe I am qualified to make a statement that we have one of the most sophisticated valuation approaches in the industry. Our fair value valuation approach is not just in line with fair value principles and accounting standards like IFRS 13 or U.S. GAAP topic 820. Our valuations approach is bottom-up driven using the most recognized valuation methodologies and our approach is proven through various cycles in the last 20 years. Third-party valuation experts provide positive assurance on internally prepared valuations and valuations, of course, are reviewed by auditors who need to sign off on the valuation approach. Now the majority of PGPE Limited's over 70 companies are valued using the EV/EBITDA multiple approach. In theory, if you read books about valuation approach, this approach is inferior to the discounted cash flow approach. But in reality, it works best if your goal is to do mark-to-market, meaning comparing the valuations of your private companies with the valuation of your public peers. In a DCF approach, you have too many variables for a mark-to-market. In an EV/EBITDA multiple approach using the last 12-month EBITDA, everything the market expects in public markets is baked into the EV/EBITDA multiple, which makes it very easy to define for each company in our portfolio, a basket of public companies having a similar business and then we mark-to-market the EV/EBITDA multiple to these baskets of public companies. Now for a minority of companies, we do use the discounted cash flow approach, for example, for a company which is in a turnaround situation. But if you think about it, DCF in reality is actually not much different to the multiple approach. In a DCF, you model out the next 10 years in theory. But in reality, nobody is bold enough to do this because nobody has a crystal ball. So, in reality, you model the next 5 years. But if you only use 5 years, then 80% of the value is the terminal value, which is nothing else than the equivalent of a multiple approach with one divided by the weighted average cost of capital of the [indiscernible] is equivalent to the EBITDA multiple. On the next slide, you see the valuation frequencies. I mean the industry standard; I would argue is to do quarterly valuations. PGPE Limited publishes monthly valuations. But at Partners Group, we value our assets actually even on a daily basis because we have some products which require daily valuations. So, although we only report once a month an NAV, our more than 30 valuation experts worldwide are busy every single day, incorporating valuation drivers like listed exposures, foreign exchange movements, debt exposures, interest accruals or extraordinary adjustments, for example, in case of an exit like we had this year for SRS distribution or IPOs like we had this year for Galderma or KinderCare. Now on Page 15, you see that although we really try hard with probably the most sophisticated valuation approach in the industry to estimate the net asset value, if you look at the exits this year, we had been too conservative. The exits this year happened on average 21% above the previously reported NAV, 21% above. But the share price traded yesterday at a 26% discount. So, 21% above NAV and 26% below NAV is a whopping 61% difference, and this is definitely not justified. I'd like to hand over to Federica to talk about the portfolio.

Thank you, Cyrill, and good morning, everyone. I'll take it from here and provide an update on portfolio development over the third quarter. But first, on Slide 17, let's take a quick look at the portfolio composition as it stands at the end of September. The key takeaway here is that the portfolio has remained broadly unchanged in its key dimensions over the quarter, continuing to offer access to a very diversified private equity portfolio invested across global developed markets in resilient and foundational industries. The most notable change is in our top 10, where Galderma, previously top 9, leaves space to Clario. Galderma's weight in the portfolio marginally reduced to 2.5% after we commenced the gradual sell-down of our position in Q3, as Andreea mentioned earlier. A few words on our new entrant, Clario. This is a company where PGP first invested in 2020 when the company was known as eResearch Technologies, a provider of integrated online software application services that enable the pharmaceutical, biotechnology and medical device industries to collect, interpret and distribute clinical data more efficiently during clinical trials. In 2021, we provided follow-on capital to fund the company's merger with Bioclinica, a provider of clinical trial imaging technology solutions. And Clario is the result of this merger, a company with the expertise to address the most complex clinical trial that aims to cement its market-leading position in a growing segment with high barriers to entry. Since our first equity investment, Clario has recorded resilient EBITDA growth and stable strong margins, supported by merger synergies, cost control initiatives and operational improvement and now stands at #10 holding in PGP portfolio. At the risk of sounding like a broken record, I'll conclude this overview reiterating the meaningful degree of diversification we've built over time, which results in a portfolio that does not rely on a single or a few industries, regions or companies to generate returns. The same applies to vintage year exposure, as I've already covered in previous calls. The portfolio is today almost perfectly split across the vintage year buckets we have identified here on Slide 18 with just about 50% off NAV invested pre-2020. The pie chart here is one that you'd be familiar with. This time around, however, I've graded out the previous company update to allow us to fully focus on the most meaningful development that took place over the quarter, which largely involved pre-2020 assets. These mature vintages are expected to be the main contributors to portfolio return. These very assets, however, have seen their positive earnings growth in recent years been largely offset by the impact of rising rates, which weighed on valuation multiples that were applied effectively to those earnings growth. Looking backwards, this effect has limited their contribution to the overall portfolio return, which has arguably been subdued in the past 2 years since 2022. Looking forward, however, we maintain high conviction in the pre-2020 assets and in their ability to support future performance. Return potential besides EBITDA growth also comes from realization, which are gradually materializing. This quarter, I will, therefore, not highlight companies that are being prepared for exit, but companies where we have made tangible progress towards realization, providing encouraging signs of performance potential that is being unlocked within the portfolio. I'll start on the bottom left with Galderma, whose IPO obviously was announced earlier this year and the stock price has seen a positive trend since listing, and therefore, we have commenced a gradual sell-down that has generated approximately EUR 6 million proceeds for PGPE through September. I'll use the next slide instead to cover Techem and KinderCare, 2 of our top 10 holdings for which we've recently announced exit. While these were technically announced after the end of the quarter, both exit processes took place over months as our investment teams have worked hard to identify the most suitable exit path that maximize value for our investors. In the case of Techem, for example, we started working with the company's Board to assess exit readiness already in mid-2022, formally commencing a sale process in May 2023, contemplating both an IPO and an M&A transaction. The dual track exit process run in parallel for close to 10 months until we agreed to sell Techem to a consortium of TPGE and GIC on 30th September 2024, realizing a 2x gross money multiple for our investors. During our ownership, Techem transformed from a B2B submetering service provider, largely active in Germany into a leading provider of a wide range of digital solutions that enable energy efficiency in the entire building ecosystem, serving over 400,000 clients across 18 countries. We've achieved this through a combination of business excellence as well as digital transformation initiatives that have improved the operational model and the customer experience alike. Techem is an excellent example where PG's thematic sourcing, hands-on value creation and the tailwinds provided by secular trends of digitization and decarbonization, all came together to transform the company into a scale player with an enterprise value of approximately EUR 6.7 billion. As the sale is anticipated to close in Q1 2025, Techem remains today in PGPE's portfolio, representing approximately 4% of NAV. Turning to KinderCare. Here, we have a company operating in a different region, a different sector, yet again, a recognized market leader that provides core services to hundreds of thousands of customers and an exemplary case of PG's investment approach. The company's IPO in early October is the first public listing of a lead portfolio company on a U.S. exchange for Partners Group. KinderCare, you're probably familiar with, is the largest provider of high-quality early childhood education in the U.S. that offers flexible child care solution to over 200,000 children across 2,400 centers and sites across the entire country. During the 9-year investment journey, we worked hand-in-hand with the company's Board, successfully driving value creation initiatives, but also navigating periods of unprecedented stress like the COVID pandemic when the company had to close over 1,000 centers and lost a significant share of its revenues overnight. Not only have we overcome the challenging period, but over our ownership of KinderCare, the company has also added additional brands, grown capacity for quality education services, introduced leading technologies capabilities and partnered with hundreds of employers to provide shell care benefits, including Partner Group. And the company also presented a great opportunity for over 40,000 teachers to deliver quality care and a curriculum each day. This all translated in significant value for our investors and also in a company that appeal to the broader market. Positive price action on the first day of trading resulted in an approximately 50% uplift to PGPE's August carrying value of the company. Similar to Techem, KinderCare remains in PGPE's portfolio, representing approximately 5% of NAV at the end of September as no liquidity was generated for PGPE at IPO with a lockup period of 180 days applied to the listing. On the following page, we have a snapshot of current portfolio NAV broken down by TDPI marks as well as key operational metrics for the portfolio. There have been no material changes here as our companies continue to generate double-digit EBITDA growth on an LTM basis and maintain strong capital structures, resulting in approximately 90% of NAV marked above 1. PG's value creation initiatives continue to unfold, over 60% of portfolio is outperforming our base case underwriting plan and a further 30% are considered to be on plan with less than 10% NAV in companies that fall below our expectation. Compounding operational performance also continues to be the key driver of portfolio returns overall. And on Slide 21, we dissect this year-to-date gross portfolio return to show our EBITDA growth really remains the largest contributor of the 5.6% year-to-date portfolio performance. A marginal increase in multiples and also portfolio changes contributed positively overall, and this was mainly thanks to the successful realizations of SRS and the listing of KinderCare as well as the early positive performance of our 2024 investment, Velvet care. These positive effects were only partially offset by a small increase in net debt as we took the opportunity to refinance some debt packages at lower spreads, strengthen capital structures to sustain growth and platform building plans for our companies, although this happened largely during the first part of the year. I'll conclude my portfolio and performance overview by reiterating conviction in the quality of our portfolio, which has navigated a challenging market environment demonstrating resilience. Companies like Techem and KinderCare are not cherry-picked case studies here, but tangible examples from a portfolio that is well positioned to deliver on its performance potential. I'll now hand it over back to Andreea to summarize our discussion today before opening it up to questions.

Thank you, Federica. With this slide, I just want to highlight a few things. The company's investment objective is focused on delivering long-term capital growth and an attractive dividend yield. Over the last 10 years, we've achieved double-digit annual returns for both share price total return and NAV total return, showcasing our commitment to creating long-term value. And the dividend paid out over the last 12 months have yielded around 7% based on September's closing price, aligning with the objective of providing an attractive dividend yield for our investors. And this brings us to a brief overview of the key takeaways. Now PGPE Limited provides shareholders with exposure to Partners Group direct private equity investment strategy, participating in transactions alongside some of the world's largest institutional investors. The strength of PGPE Limited lies in its diversified portfolio, which provides investors exposure to companies operating in a variety of industries and geographic regions. The portfolio was built over time, achieving a very good vintage diversification. The mix includes both mature assets as well as newer investments still in the value creation phase, and that gives a consistent performance over cycles. From an investment perspective, we continue to focus on the disciplined deployment of capital and the identification of companies where we believe we can support management to create value. And so, we believe that the current discount to NAV offers value, providing exposure to a well-diversified global private equity portfolio that continues to generate positive NAV performance. And finally, the company's investment objective is to generate long-term capital growth and an attractive dividend yield. And once again, we are happy to highlight that we have achieved double-digit NAV and share price return over the last decade. With this, we conclude the update. And at this point, we are very happy to open for the Q&A.

Okay. I see we actually have received a number of questions. As mentioned at the beginning of the webcast, in the interest of time, we will group similar questions and answer in one go. Now I see a first question already. That one is actually regarding the dividend. This one, I think Federica would be for you. So how will you fund the second dividend? And if you plan to use the revolving credit facility, when will it be repaid?

Sure. Thanks, Andreea. Happy to take this one. At present, as we speak today, PGPE has enough liquidity in cash in the portfolio to cover the vast majority of the dividend payment proceeds. We might need to resort to the credit facility to cover for a few million euros. So, the balance of what is outstanding. However, we see a positive liquidity action. So, we expect for the facility to be fully repaid by the end of the year, restating the net positive liquidity position in the coming months.

Now looking also at the questions, we actually have a couple around the capital allocation policy and also with the current realization and expansion of the discount, when would we expect to see any share buyback. Now let's just remind to all of you or the ones who don't remember that well, beginning of this year, we have announced a clear and robust capital allocation policy, which addresses the fundamental point of liquidity and also has the dividend payout at its heart. Now this lays a very disciplined approach depending on the discount to NAV, availability, cash flow and certain percentages being allocated to do such acquisitions. Specifically, I can give you examples. If the company would -- or the discount would be between 20% and 30% and 50% of the cash flow would be used to do share buybacks, respectively, if the discount is wider than 30% and 75% of the free cash flow would be used. Now of course, at the moment and considering the outlook, we do not have enough free cash flow to do share buybacks. However, as we start to see more realizations in the portfolio, the situation may change. Continuing with the questions. There is actually another question I see regarding KinderCare, Federica, is actually PG still under a lockup rule?

Yes. As I mentioned, the IPO did not result in any liquidity proceeds issuance for PGPE and a 180 days customary lockup period applies to the IPO.

Now one question for you, Cyrill. Your base case policy rate looks aggressive. Do you want to comment on the underwriting on that basis?

Yes. So, I tried to explain that our approach is not that there is an Excel file spitting out one figure. And if it's above 20% gross IRR expected over the holding period, then we do the investment. If it's below, we don't do the investment. What I tried to explain is that when we identify assets, it can be ideally 1 or 2 years before we do the investments. And then we think hard about the growth in this industry. And then when we do due diligence for 6 months, we really stress test the case. So yes, you have a base case. But you also want to know how does this asset perform in a recession, how does it perform if we're wrong and the future is actually much more bright, what upside are we giving up by being too conservative? And how is the asset performing if the world falls apart. And ideally, you find an asset who is performing well in all 4 scenarios, so that's why, no, it's not just that we are only looking at the base case. If it looks at the base case, then it's good. The asset really needs to be very solid in more scenarios.

Now I see another question coming through. Actually, this is quite a broad discussion, to be honest. It's regarding the kit and EMT topic. And as we've seen in the market, right, some have already started to zero to reflect the updated guidelines from the FCA. Now I have to tell you, interestingly enough, just yesterday, we had quite a long meeting, and we have discussed about this topic. We are still looking into it. And rest assured, once we will have the decision considering all the aspects of it, we will also reflect the kits and the EMTs accordingly. So yes, we are still looking into this, and we are happy to come back once we have updates to share. Now further questions looking through the Q&A. I have another question this time for you, Cyrill, regarding the EBITDA growth at around 11%. Can you comment how much would be M&A bolt-ons?

Yes. I admire actually some of our competitors who publish such a figure. Unfortunately, we actually don't split out organic growth and M&A growth in these statistics just because it's not like if BMW buys MINI cars, for example, then even 3 years later, you can clearly distinguish how much growth was came from BMW and how much is coming from MINI. But this is not how our companies work. We always have a platform and then you have, for example, KinderCare is 2,400 centers, kindergartens. So, if you add 1 or 2 to them, it's not that they have their own P&L. They are totally absorbed by the P&L of the platform. And so, we're not in a position of then find out, okay, how many centers were acquired this year and how much was their contribution to the overall growth. So unfortunately, that's a mix of organic and M&A. And of course, we always like to have companies which have a strong organic growth, but we also like them to have even more growth through M&A. And as Federica alluded to, on average, the companies actually increased the net debt, which is an indication that they also had to do M&A acquisitions, which they financed by net debt.

Now I think we have another question for you, Federica. Are you able to comment on the expected pace of selling down the stake in Galderma?

Not really able to provide a clear guidance here. We're obviously part of a consortium of owners here. So, we do expect to continue a gradual sell-down, especially if the stock price obviously remains at levels that we've seen in past months. We expect some liquidity to come through in the next few months and throughout 2025, but we expect to exit the position again gradually over the next couple of years, in line with other shareholders.

Now I see another question actually on Techem. This one is for you, Cyrill. Could you comment on the uplift to the carrying value? Or Federica, 1 of the 2?

Yes, I can take this one. Yes, so there was no uplift in the case of Techem sale. As I mentioned, this was a relatively long exit process exit discussion where we considered dual track dual option for a significantly large company. So, we had sort of adjusted our carrying value as this discussion progressed and the approximately 2x multiple was what we had marked the company in our previous sale announcement.

Fantastic. Now there is another question coming through. I will allocate this time the question to Cyrill. So, can you comment and perhaps provide backdate on the pricing of secondary market transactions in Partners Group funds?

Yes. I like your thinking. So, I think what you're trying to say is it will be very attractive to buy actually Partners Group funds at a discount to NAV. Yes, I like your thinking. Unfortunately, reality is that most of our clients are actually not selling. So, we would love to buy our own funds in the secondary market, but that's not reality. Reality is that actually very, very rarely somebody is actually selling a fund of Partners Group. So, our Partners Group funds, they buy other assets from other managers. But unfortunately, we don't have a lot of transactions of our own funds. So, we don't have here a data point of funds which have a similar content that you could say, okay, we sell something at a 10% discount or a 5% discount. Unfortunately, that figure is not available because our clients are just holding on to their investments in the limited partnership structures, for example. But maybe to add, I mean, we have semi-liquid products like the parts from the Global Sika, which every month go in and out at NAV.

Now one question for you, Federica. Have there been any changes to your company watch list?

No, I'm pleased to report that there were no assets added to our watch list since 2022. So really no changes to this part of the portfolio remains contained to a handful of assets that now represent less than 10% of NAV, well-known cases. So, no update to this part of the portfolio.

Now one very interesting question. I'll assign this one to you, Cyrill. How do you see FX moves impacting performance?

Yes. So, I don't know the future, but I cannot tell the past. And so, the exposure is 50%-euro, 38% dollar, 5% Swiss francs. So, the big exposure is really U.S. dollar. And if you look at what the U.S. dollar did this year, then it was basically flattish in the first half of the year against the euro. And then the U.S. dollar became weak against the euro in the third quarter. And that's why we have year-to-date a negative impact on FX on the euro portfolio. But as you all know; the U.S. dollar has strongly recovered in October. So, it probably will be no surprise that in October, again, the performance will be positive from a stronger U.S. dollar against the euro.

Thank you. With this, we would like to thank you all for your attendance. And as mentioned at the beginning of the call, if you feel that we did not provide enough background or in case there were any questions which are left unanswered, please don't hesitate to reach out to us, both directly right or through the contact form. We thank you very much for joining us this time, and we're looking forward to hear from you, meet you and also give you another update next time. Thank you.