Patria Private Equity Trust plc (PPET) Earnings Call Transcript & Summary

And good morning, everyone. Welcome to the Patria Private Equity Trust Annual Results for the financial year of 2024-2025. We're delighted to welcome you to the call today. Shortly, Alan will be speaking and taking you through the performance of the trust. And I'd just like to remind you that there are questions and answers that will follow the presentation. [Operator Instructions] Enjoy the presentation, and we will speak to you after. Thank you.

Thanks, [ Rebecca. ] Good morning, all. Thanks for your time this morning. I'm Alan Gauld. I'm the Lead Portfolio Manager of Patria Private Equity Trust or PPET for short. So I've got the pleasure of taking you through our 2025 annual results. But just as a reminder, what PPET is, an investment company that's been listed on the London Stock Exchange for almost 25 years. Its 25th anniversary is May this year. So it's been around a long time and it's delivered strong returns throughout that time, annualized NAV total returns of around 11% since inception and over the last 10 years of around about 14%. A lot of people ask, what differentiates you from other private equity trusts. So firstly, we partner with a small group of private equity firms that we consider to be best-in-class. So 17 core manager relationships. And that -- put that into context, there's around 3,000 to 4,000 private equity firms according to Preqin in Europe alone. There's 15,000 globally. Put that into further context, there's 13,000 McDonald's restaurants in the U.S. So that's a lot of private equity firms, a lot of McDonald's restaurants as well. We -- our expertise, our knowledge built over many, many years allows us the opportunity to access these managers, but also to assess them too. Our senior team, which has been stable for a long period of time now, has an average experience in private equity of 22 years. And we have 75 professionals based in Europe and the U.S.A. So that allows us the ability to access these fantastic private equity managers. But this trust is focused not only by the managers that we partner with, but also the part of the private equity market that we focus on. So it's a mid-market strategy, and I'll come to the reasons why we remain convinced that the mid-market is the place to play in private equity. We're also European. That's slightly different to other diversified private equity trusts that have a strong U.S. tilt. Around 75% of our private companies are headquartered in Europe. And from a performance point of view, we pay a quarterly dividend. That dividend has increased every year for the last 11 years. We're an AIC Next Generation Dividend Hero. We've already talked about performance briefly, but that's 16 consecutive years of positive NAV total return that this trust has generated. And we are also cheaper. We charge a flat management fee of 95 bps. We don't charge a performance fee on top like many of our peers do. So when the times are good, and hopefully, we're entering a period of strong performance in private equity, and we'll come to the reasons why, we don't take an additional share through fees. So double-click a little bit on our investment strategy. So as mentioned, we partner with this small group of private equity firms, some of the logos here on the left-hand side. What we're looking for is sector specialist firms, mid-market oriented that can really add value to the businesses that they own. We don't look for financial engineers like a sort of more investment banking type approach. We want people to really add value to provide support to underlying portfolio company management, and that will help drive returns over the longer term. And if we turn attention to the sort of portfolio composition on the right-hand side, which is this sort of old school like cooker hob, shall we say, around about 27% of our book is direct investments into private companies and then 63% is into private equity funds alongside these managers on the left-hand side. We also undertake secondaries as well, where we buy a position from other investors part the way through an investment's life. The orange ring there, we are a mid-market focused strategy. Around 3/4 of our portfolio is mid-market oriented. What we mean by mid-market is businesses that are valued between GBP 100 million and GBP 1 billion enterprise value at entry. We want to grow this even more into the mid-market, specifically the lower mid-market, which we define as GBP 100 million to GBP 500 million enterprise value. That currently is 33% of the book. You should expect that to grow as a proportion of the book going forward. We have deprioritized large cap as an area that we invest in. We don't invest in venture capital. This is a mid-market strategy. And then the inner ring there, you can see what I mentioned earlier, we're 3/4 European, around about GBP 1.4 billion of portfolio value. Why do we concentrate on these 17 core managers? Well, simply, we think it leads to better returns. So if you look at our track record of fund selections over the last 10 years over -- well, since inception as well, over 70% are in the top or second quartile when benchmarked. That's really important. In order to take advantage of the returns that private equity can deliver in excess of public markets, you've really got to be consistently selecting the best. And we do that through an experienced team, as I mentioned earlier, 22 years in private equity on average. Some of my colleagues have 3 decades of experience in private equity. You can see some of the numbers there. A team of around 75 professionals based across Europe and the U.S., around about 32 investment professionals. We've got that resource that allows us to analyze the private equity market and the depth of network as well. So why mid-market, like why concentrate on this part of private equity. So you can see the spectrum of private equity from venture capital on the left-hand side where it may -- a company may not even be a business at that point, may just be an idea or a product all the way through to the right-hand side with large cap. We like the mid-market because it's cash-generative businesses, but where there's still an opportunity to create significant value. So if you look at the attractions of mid-market, the lower half of the slide, the mid-market has outperformed over the long term. That's point number one. Even in a 0 interest rate environment where financial engineering can create quite a lot of value, the mid-market still outperforms and it has a lower loss ratio than things like venture capital and growth equity. There are literally thousands of businesses in the mid-market, but importantly, thousands of family-owned businesses, founder-owned businesses, corporate carve-out opportunities, those are the types of opportunities where private equity really thrives, less so passing an asset from private equity firm to private equity firm. It's where they can really come in and add value to the underlying businesses. Pricing tends to be lower in the mid-market than certainly the large cap and leverage is moderate. And then the value creation opportunities of the underlying businesses are really often multifold. So of the mid-market businesses, founder-owned businesses are really good at one thing, really good at one product or one service and particularly in one country, private equity can help them internationalize, can help them expand their product or services set, can help a traditional business digitize, can help a software business transition to the cloud or deal with generative AI, or simply buy and build, help them with acquiring smaller peers and build the scale of the company. Those are all the types of levers that we typically see in our portfolio. And then lastly, there's more exit optionality in the mid-market. It isn't reliant on IPO. IPO is -- like less than 5% of our exits are via IPO. Most of our exits are actually to strategic buyers, to trade players and then to larger private equity firms. So the large-cap players often are an exit route. So there's less correlation with public markets compared to large cap. And then why Europe? Well, this answer is becoming a lot easier these days, but there are fundamental things, they're through the cycle and there's some more cyclical things. There's some more point-in-time factors. But come rain or shine, Europe is what we consider to be the home of the primary buyout. There's so many family-owned businesses, founder-owned businesses, as I alluded to earlier, so many opportunities for private equity to come in and add value. Europe is a heterogeneous market. It's complex. There are many languages, cultures, regulation, legislation. Complexity is a good thing for private equity. It means opportunity to create value. It means a less intermediated market than, say, the United States. And it also creates barriers to entry for United States, private equity firms that are adopting a fly in or out -- fly in and out model. You have to have boots on the ground. You have to understand the local dynamics in a country like France versus the Nordics versus Germany. You've got to have that insight and boots on the ground. Europe tends to be cheaper, tends to have less competition. That's the middle column there that you can see. And actually, today, if we move one across, Continental European interest rates are significantly lower. And obviously, private equity is sensitive to interest rates. That's why we're seeing right now that the European activity in private equity seems to be increasing at a quicker rate than in the U.S. And then lastly, sustainability. Our European firms are really, really focused on sustainability factors compared to their U.S. equivalents. PPET's track record, as I said, we've been around for almost 25 years. We've been through the cycle. If you had invested in PPET at the start and reinvested your dividends, you'd have made over 10x your money. It has performed consistently over a long period of time. We're really proud of that. So turning to our results. So I think it's been a solid year from a share price total return perspective, 7% growth, obviously, some way behind 2024 when we saw almost 25% growth. 2024 was aided by a considerable narrowing of the share price discount during that year. And that's a reason for its strength. But our NAV total return, we've seen the best results since interest rates rose in 2022. We're back above 10% NAV total return, which we're really pleased about. The FX headwind that we've seen in '24 and '23 with pound sterling appreciating against the euro, which is our -- the principal currency of our underlying portfolio, that has dissipated and actually euro appreciated slightly. So we started to see that sort of moderate, which is great. Our portfolio in constant currency returned 8% in the year. Since interest rate rises, the portfolio return has been between 8% and 10% in constant currency. So it's been pretty steady, and we'll show that just shortly. Gearing is at 18%. Important to note that we received a large payment on the day of the results year-end -- sorry, the year-end of the company of around about GBP 95 million. We paid down the RCF with that. Our gearing today is around about 11%. Overcommitment ratio is at the lower end of our range. So what we're targeting generally in terms of overcommitment is between 30% and 65%. So you can see we're at the lower end of our range. And what we mean by overcommitment is the fact that we commit to private equity funds that have yet to be drawn. So that's what that relates to. And then our charges, just above 1%. That's typical because we have a flat management fee of 95 bps plus direct expenses. And there's the sort of picture just to put into context how our returns have evolved. It's been a more challenging time for private equity, as I'm sure you all know. And really, we're starting to see that NAV coming back. Important thing to note here is the second half of the year was particularly strong. So we saw a NAV total return of just shy of 8% in the last 6 months of the year. So hopefully, that's a sign of things to come. Hopefully, that's a sign of greater momentum. And this year, there might be a bit more broader certainty in the market, which allows greater deal-making to occur. So some complexity in this slide, just trying to bring it to life. The left-hand side is showing the portfolio return, what the constitute parts are of that return. You can see primary funds contributed 4.5%, secondaries 1% and directs 2.5% to make up that 8%. And then there was an FX tailwind, which is sort of the opposite of what we've seen in the last couple of years. But that obviously takes into kind of weight of the different parts of our book. So primary funds are still the largest part of our book. They are still 63% of our book. And when we look on the right-hand side, how the primary fund book performed compared to last year, it grew 6.8% in the year. Fund secondaries did very well indeed. So 12.6% their growth, but they're only 9% of the book. Direct investments continue to perform strongly at 9.6% growth. They're 27% of the book. Cash flows were severely disrupted by the uncertainty of the sort of U.S. tariffs in the first half of the year. So that slowed down exits in the year. If we strip out the new secondaries and directs that we made, just look at the funds, the exits actually slightly outpaced the drawdowns, which is a good sign. And we returned around 15% of opening NAV through distributions during the year. It was disrupted by the U.S. tariff conversation. We'll come to that in a bit more detail how it was disrupted. But if we look first at the uplifts upon exit, this is a feature of our portfolio over a long period of time. We did see the uplifts when something exits sort of moderate somewhat. So just as a reminder, how we calculate this is we take the exit value at date of exit when we receive the cash proceeds, and we compare that to the valuation 2 quarters prior. So on average, our exits were at 12% premium. Some people measure that from the date that an exit is signed compared to 2 quarters prior, some measure it sort of the date that is signed compared to the last undisturbed valuation, i.e., the valuation before a sales process kicked off. Generally, our long-term average is around about 25%. I've long been saying that, that 25% is likely to moderate, but I still expect there to be an uplift upon exit when we sell something in our book on average. And you can see on the right-hand side, there's a bit of a bifurcation. You're still seeing these huge exit pops in some companies, note Gritec there, an infrastructure services business or Sunbelt modular in the United States, a big uplift. We also seeing on the flip side, some exits around about valuation. But if we look at just the quarter just passed, the sort of the start of financial year 2026, we've seen really good signs that exit momentum is picking up. So on the left-hand side, you can see some of the logos of our portfolio companies that have had a sale agreement signed, including Uvesco, which is one of our direct investments, and that will be around about GBP 20 million back to the trust. So we're really excited about that one. And on the right-hand side, you can see the impact of U.S. tariffs in the middle of the year. But this first quarter of 2026 has come back strongly. So hopefully, that's a sign of things to come. Hopefully, there's a more stable backdrop for M&A activity and exits to occur over 2026. An important thing about private equity investment is to stay invested through the cycle. What we tend to see in private equity is people invest at the wrong time at the height of the market because money is flowing, they're seeking yield and then immediately come out of the market when there's a dislocation or a downturn. We think that's exactly the time you need to invest. And so we've stayed invested through the cycle. Good examples, you get amazing vintages, great vintages like in the post dot-com environment in the early 2000s or in, say, 2013, 2014, 2015 with interest rates 0. You -- also on the flip side, you get less impressive vintage years, maybe like 2007, just immediately before the global financial crisis or 2021, in fact, I think, the euphoric conditions in the market at that point, that isn't looking like that's going to be a great vintage year for private equity. You need to stay invested in all the different vintage years in order to diversify that. And that's what we've been doing. So we're committing strongly. And we're committing strongly mainly to lower mid-market strategies that I alluded to earlier. So we deployed GBP 300 million during the year, the bulk of that to primary investments, a good amount in secondaries and a consistent amount in direct. On the right-hand side, some of our new investments, there will be logos there that you recognize, people like perhaps Hg who have their own trust. But you're doing very well if you know who Impilo are, if you know who Gilde Equity Management are, they are lower mid-market managers. Impilo, a health care specialist in the Nordics, Gilde a long-standing investor in the Benelux, both excellent managers that we brought into the PPET portfolio for the first time this year and lower mid-market focused. On secondaries, we made a commitment to Patria's Secondary Opportunity Fund. That was to broaden our exposure to secondaries. Our secondary exposure has been declining over the last few years. That was done with strong governance, obviously, a Patria-managed product, strong involvement of the Board, our independent Board. That will be excluded from the management fee. And I can say that the terms relating to the fund are significantly better than market standard. We're really excited about that one. It's made a really strong start. It's been marked up to 1.3x already. So really excited there. Project Agila, the middle one there is a package of two software companies in France. One is called Ivalua, which is a software business in the procurement space and the other one is Adikteev, which is a business that is focused on marketing software, both were started very, very strongly. Adikteev, for example, has almost doubled EBITDA in the last year. So we think that's off to a flying start. And then Project Captain was a secondary transaction where we bought 13 fund interests and direct investment interest from another LP at a significant discount. So we're really happy to get that done. And then we've continued to make direct investments, 5 during the year, alongside our core managers, really excited about those businesses. We've got a street lighting business in Agora. We've got a health care services business in Vitrea. We've got a health care business, specialist health care business that deals with infusions to patients outside of the hospital environment in Soleo. Rollakin is a French business that's kind of like a Screwfix of France, like an online portal that allows tradespeople to source their equipment. And then we've got Project Vamos as well, which is a business we can't disclose at this point, but it is based in the education technology space. And in terms of our portfolio, you'll remember that we introduced directs back in 2019. Before that, this was a pure fund-to-fund strategy. And directs, which is the light blue box here, have continued to grow. They're 27% of the book. Why do we want to do more direct? Because they have low cost attached to them. Most of our directs have no cost at all. So PPET shareholders only pay the 95 bps management fee, which -- a single layer of cost, which is obviously advantageous to returns. Secondaries, as I mentioned, have been declining over the last few years. We've taken steps to rectify that. We want secondaries to be around that sort of 10% of the book. We want directs to be, in the short run, around about 30% and the primary to make up the remainder. People sometimes are less convinced on primaries, so the fund-to-fund, but the great thing about primaries is they provide diversification, not just by company, but directs can be procyclical. When M&A activity is really strong out there in the market, lots of directs coming to you. And when it's less strong, i.e., as I mentioned, the time you want to be investing, there's fewer directs out there. Primaries allow that smoothing, allow that access to some of those vintage years, and they'll continue to be an important feature of our portfolio going forward. But yes, I would say a rough guide over the short run, 60% primaries, 10% secondaries and 30% directs. The underlying portfolio continues to perform well. So if we look at the top 100 companies, which is around 60% of the portfolio value. The top line growth was 12.4%. The earnings growth was 13.1%, slightly moderated from -- compared to prior year when the EBITDA growth was around 18%. There are a couple of assets that fell quite considerably during the year and have since stabilized. But generally, what we're seeing is a slight moderation across the book in terms of growth, but still more than acceptable. And then our top 10 companies, important thing to note that you'll probably recognize company 1 and 3, Action and Visma. We have been investors in those companies for well over a decade. Action has been 15 years. We came in, it's done incredibly well for us. We invested into it when it was a small -- well, a mid-market Benelux retailer. It's now across 10 countries. It's very much large cap now. So over the -- in due course, we will look at slowly liquidating -- or not liquidating, but taking some realizations, taking some money off the table with that asset. Visma, again, we've been alongside Hg in that in different ways since around about 2006. There's an expected IPO this year. It's been well publicized. Again, we may look to take some money off the table and bring down our position over time. But both of those businesses are wonderful businesses, we know incredibly well, have great insight and have been invested in for a long, long time. Neither mid-market, but it's important to note that a lot of these are exactly what we're looking to do going forward. So Wundex, #2 there. When we invested in that, it's a health care services business that treats complex wounds outside of the hospital environment. And it was about GBP 100 million EV at entry. So right at the lower end of what we do, but since growing incredibly well. The great thing about this business is a density-driven business. So the more nurses you get, the more patients you treat per nurse on the same route, the more profitable it becomes. And it's just very well-managed business, and we're valuing that around about 5x cost at the moment and hopeful that, that may have an exit event over the next 18 months. Uvesco, #4, another lower mid-market business, a premium grocer in the Basque Country in Spain. A sale agreement has just been struck with that business, a consortium of Basque investors have agreed to buy that business. It's around about our current valuation that we'll be selling it at. But when that closes later this quarter, it will be proceeds of around about GBP 20 million for PPET. So that one will come off our register shortly. CDL is another lower mid-market business focused on imaging technology in the health care system in the United States, and it's growing incredibly well, above 40% EBITDA growth. So again, another one that over the next couple of years may be sold, but it's going very well. Very happy to hold that. Number six is NAMSA. It's another health care business in the contract research organization space. It tests new medical devices for the manufacturers. We think there might be an exit event on that this year. We made this investment back in, I think, 2020, and we think that the sponsor may be close to preparing this for sale. Vitrea is another health care services business in the rehabilitation space. We've just made this investment. It's a case study in our annual report, if you're interested in learning more. But we're really happy to come in there. We feel like the entry price is attractive. We're coming in alongside PAI partners that have success and a strong track record in health care. We think there's a lot of ways for this business to grow. It's based in, again, Northern Europe, in DACH and parts of Eastern Europe. CFC is a cyber insurance managing general agent. Obviously, cyberattacks are becoming more and more prevalent unfortunately. Corporates need to take steps to insure themselves against that, and CFC allows that to happen. And hence, the growth in this business has been very strong, north of 20% top line and EBITDA growth. So a really good case study there. And then Trioworld is a business that we've held for a long time. It is an industrial business focused on kind of plastic films, but using recycled products to produce them. So we're talking about films that will be used to wrap up a corporate's product if it's shipping it abroad or across country. But it's that sustainability, that use of recycled materials that makes this quite interesting. And then lastly, Access is a SaaS business, HgCapital-owned, U.K.-focused ERP, but increasingly international and is performing solidly. In terms of the broader portfolio, as I mentioned earlier, we remain 3/4 European. Most of our European exposure is to Northwestern Europe. The Nordics is the region that has the highest weighting. We really like the Nordic market just with its sort of resilience and generally the fact that it grows quite consistently. We have minimal exposure to Southern Europe and to Eastern Europe. So -- and then North America is around 24% of our book. A great deal of that exposure is through European private equity managers that have expanded into the United States. And then from a sector point of view, we like health care, we like IT. They are 45% of our book, but we also like to be pretty well diversified across sectors. So you can see consumer combined discretionary and staples are a similar amount to health care and tech. Industrial, 17%. There are some heavy industrial players in there like Trioworld, I mentioned earlier. There's also some business-to-business services companies that are more kind of asset-light, shall we say. And in terms of financials, very few balance sheet heavy financials businesses. It's kind of more fintech asset-light. In terms of our book, you'll recall that we like to manage our book to sort of 50-50 between businesses that are in value creation phase and held for less than 4 years and businesses that are mature and should be ready for exit that have been held for more than 4 years. However, with the slowdown in private equity exits over the last couple of years, that cohort, that latter cohort above 4 years has grown. So that's around 62% of the portfolio value. And if we look at the direct investments, 13 of the 37 direct investments have been held for 4 years or more. So what we think is that when private equity activity really comes back strongly, we've got an GBP 850 million of inventory that should be ready for sale. So that should underpin good distributions. And hopefully, 2026 is the year that we start to see that activity come back. And then if we look at the balance sheet here, we continue to feel like we're in a good place. We extended the RCF by GBP 100 million. So it's a GBP 400 million RCF now. We've got almost GBP 300 million of resources between cash and undrawn RCF and our resources are around about 23% of NAV. So again, I feel like we're in a really good place despite the strong new investment activity that we've undertaken this year. And then our outstanding commitments, as I alluded to at the start of the presentation, are at the lower end of our long-term range. So we're very comfortable where we are from a commitment standpoint, too. Lastly, I should mention our capital allocation policy. We do pay a quarterly dividend, it has increased ahead of inflation every year. It has increased every year for the last 11 years consecutively. So we are an AIC Next Generation Dividend Hero, which we're proud about. And the Board is committed to maintaining the value of the dividend in real terms moving forward. And then share buybacks, even we have been undertaking those over the last couple of years in response to the fact that the share price discount has been or was historically wide and has been coming in. We've been able to create an additional NAV accretion to existing shareholders. So it's just another string to our bow in terms of accelerating the NAV. The share price discount has come into around about 24%, 25% last time I looked. We want to continue to drive that further in. At the moment, private equity investment trusts are still trading considerably wider than how the secondary market in private equity is trading, and I see no reason for that to be the case. So to summarize before we turn to Q&A, it's been a good year, a solid year in a more difficult market, a good NAV total return, 10.6%, which we're pleased about, and that's 16 years of NAV total return growth now consecutive. And yes, thank you all again for attending. And [ Rebecca, ] we can turn over to questions.

Of course. Thank you, Alan. I've got two questions from [ Investec ] to start. One is around broad outlook in 2026 and what you see around activity for private equity and also exit activity in European markets and more so in the mid-market? And then the second question is around exposure to -- is your exposure to directs likely to increase from 27%? And where would you like to see it?

Yes. So deal with the outlook first, and I've alluded to some of this during the presentation. I'm slightly cautious when I give the outlook because I'm probably seeing the same stuff I saw, like I said, 12 months prior. And then the U.S. tariffs occurred, and there was a lot of uncertainty and that caused a lot of M&A activity and private equity exits to, well, be postponed, frankly. Now as I showed you earlier that we're starting to see the signs that it's coming back nicely. If we get a decent playing field, I would expect to see exits increase over 2026. That has a dual effect of accelerating NAV growth because exits tend to happen at an uplift on average, valuation-wise. So it has that impact. It also means that the trust gets more cash back, which means it can delever, it can invest more. It increases the velocity of investment, frankly, which is a good thing again for NAV. So for me, I'm very cautious that -- don't hold me to any of this, but I would like to think, subject to the broader macro, that 2026 will see more activity throughout the year, and that would be a good thing for private equity trusts. And then remind me of the second question, [ Rebecca, ] if you don't mind.

The exposure to directs...

Yes. So we amended our investment objective or the company's investment objective with shareholders' consent about 12 months ago to make it more focused on mid-market, but also to be a bit clearer or update the exposure around direct. We've updated that to 30% to 35% of the book. We're currently at 27%. We want to increase it a little bit more. What we're going to come up against frankly, and again, I alluded to it earlier, is the fact that some of these directs will exit soon. So that will naturally, if we do nothing, the exposure to directs will come down as things successfully exit or IPO in business case. But we've got to keep our foot on the pedal in terms of investment, find good opportunities. But yes, we want to get it slightly higher than it is at the moment, maybe that 30-plus percent mark.

Super. I've got an anonymous question here around valuations on exit of the 12% this year versus 26% last year and what you might attribute that to?