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

Good morning, everyone. Welcome to the interim results for the Patria Private Equity Trust for the financial year ending the 31st of March 2026. My name is Rebecca Mats from the Investor Relations team at Patria, and I'm going to shortly hand over to Alan Gold, the Managing Director and Lead Investment Director for the Trust. We will be taking questions after his presentation. And so I will come back on the screen and be able to guide you through the process for that. So I'd like to now introduce Alan to take you through our results for today. Thank you.

Thanks, Rebecca, and good morning all. I'm Alan Gold, the Lead Manager of Patria Private Equity Trust, and I will take you through the results during the period. So to start, we'll quickly give a reminder on Patria Private Equity Trust or PPET for short. So PPET has been around for 25 years. It was formerly known as Standard Life Private Equity and Aberdeen Private Equity Opportunities Trust and has been focused on the European mid-market throughout those 25 years. It has delivered strong performance as well. So over the last 10 years, 14.9% annualized share price total return since inception over the 25 years, that's around about 9.5% to 10% annualized share price total return. The Trust is around GBP 1.3 billion of net assets and pays a quarterly dividend as well, the yield being just over 3% at the 31st of March. Also, the manager charges a flat management fee, which is unusual in private equity users as a management fee and a performance fee on top. In terms of our differentiators. So we partner with a small group of private equity managers. There are more private equity managers globally than there are McDonald's restaurants in the United States. So it's an enormous universe of private equity firms. We partner with 17 managers. And we consider those managers amongst the best of the best in the industry. Our team has been focusing on private equity in Europe and U.S. for around or close to 3 decades and we have 75 professionals based in Edinburgh, London and New York. So we've got a network of trusted relationships. We know -- we like to think that we know pretty much every private equity firm in our chosen geographies.. We're mid-market focused. I'll come to the reasons why that's important. But the key thing being that this is businesses that are profitable, cash generative and they have several ways in which they can accelerate their earnings. We'll come to that in a moment. We're also European focused. So 75% of our portfolio is -- well, our portfolio companies that are headquartered in Europe. Again, I'll reference why Europe is important to us. And then lastly, performance here. So we have a track record spanning 25 years. As mentioned, we delivered steady capital appreciation as well as a quarterly dividend. And since 2024, we have deployed a strategic buyback program as well to enhance NAV accretion for shareholders. So on our strategy, as mentioned, we're partnering with 17 core private equity managers. Some of those logos you can see here on the left-hand side. And that then creates the underlying portfolio. So we partner with these managers through their funds, but also directly alongside them into private companies. So our direct investments are around 26% of the book. We also make funds secondaries where we buy a fund position from another investor partway through the fund's life. So it's around 10% of the book. And the remainder -- and the core of the book are primary funds where we make a commitment to a private equity fund at around about day 1. So that's how we invest, and that creates that underlying portfolio of around 700 companies, largely focused on the mid-market. So around about 77% of our book is in mid-market companies when we we consider mid-market. It's basically businesses that are valued between GBP 100 million and GBP 1 billion at entry. And as mentioned earlier, we're around 75% European. So why is partnering with a small group of managers important? What we think it's about being conviction-led partnering with some of the best. And that's why when you look on the right-hand side here, our picks over the last 10 years, our picks over the last 20 years since inception, over 70% fall into the top or second quarter when benchmarked. So we're really proud of that stat. So being selective leads to stronger returns. And our team are very well positioned to select because we've been in this market for a long, long time. So I've been part in the industry for 16 years now, but you can see some of my colleagues here who are very much support me on the Trust I've been doing it for over 20 years, over 30 years in American Collins case. So we have a very experienced team that have been doing this a long time and over 75 professionals at last count. So why mid-market? Why is this an important part of the market? Why are we focused on it. Well, simply, it outperforms. So you look over the past, that basically mid-market outperforms the larger cap private equity and also produces a lower loss ratio than venture capital. So from a risk-adjusted point of view, it's the best performing segment of the private equity market. It's full of target companies, founder-led companies, family-owned businesses, corporate carve-out, opportunity where a private equity firm can take that business to the next level. As opposed to buying from another private equity firm, it's already made all the improvements. You're buying from a phone open family you could help further institutionalize the business. Typically, in the mid-market pricing is more reasonable and leverage is more modest. So from a risk point of view, that's really interesting. And I am still a great believer that the price you pay for an asset is one of the key components of your returns and certainly one of the components you have most control over. Value creation as well. As mentioned earlier, if you're buying from families and founders, they may be great at one thing. They may be great at product and building that product up. But maybe they're not so great at internationalizing the product or buying add-on acquisitions through M&A or improving operations. Those are the types of initiatives that a private equity firm can help with. And then lastly, in terms of private equity, mid-market, you're less reliant on IPO as an exit group. IPO for us is less than 5% of our exits. Most of our exits are to trade buyers quickly followed by larger private equity firms. So you have that exit optionality in the mid-market. And why Europe? Well, that sort of appears well with this mid-market point. There are over 4,000 family-owned businesses with a revenue of over $100 million. There's a large sort of universe of family founder owned businesses and corporate carve opportunities. So real opportunity to create value but also the complexity in Europe vis-a-vis the market like the U.S., for example, which is the largest private equity market. It also creates opportunity and barriers to entry as well. So 24 different languages, different tax systems, jurisdictions, accounting codes, stock exchanges, that complexity means it's very hard for a private equity firm from the U.S. or Asia to fly in and out and win consistently. It creates barriers and it means it's about backing the best firms that are on the ground in Europe. And then in terms of value issues, they tend to be lower than the -- in the United States, and have less competition. There's less dry powder, as we call it in private equity, that's capital raised yet to be deployed. There's less in dry powder in Europe vis-a-vis the United States. And also at the moment, Continental Europe has a lower interest rate environment, and that should benefit private access and asset class. Lastly, sustainability is a much stronger component and focus area in Europe versus the United States. And we still think that's really important when it comes to value creation. And when it comes to eventually selling to a large corporate being on top of your sustainability, top of your disclosures being best-in-class in terms of that is a relevant value driver in our opinion. Lastly, before I turn to recent performance. So we've been around for 25 years and have steadily grown. So you can see from this chart, the light blue is the NAV total return. The darker blue is the share price total return and then you've got the FTSI share in orange. If you invested at the start with us in 2001 and reinvested your dividends, you have made around 10x your money, which is a track record that we're very proud of. So how about recent performance? So the share price total return grew 5.5% during the period, the 6 months and that was largely driven by NAV [indiscernible] return, growing 3.1% during the period as well as the closing of the share price discount to NAV as well. So steady returns. Basically, if we break it down by quarters, the first quarter was quite strong and drove most of this return in the second quarter with the falls in listed software with our software businesses then being remarked down and the sort of tensions and war in the Middle East, that has had a dual impact in terms of the second quarter. So the second quarter was broadly flat in terms of portfolio return. So a lot of these returns were driven by the first quarter. Our net gearing is just shy of 10%, and our over-commitment ratio is at the lower end of our long-term range. So we typically like to have our overcommitment ratio between 30% and 65% over commitment. Because we make fund commitments, we typically overcommit the amount of liquid resources that we have, and so these are both sort of tests in terms of risk, but we're comfortable with both of those. And then the ongoing charge ratio of 1.09% is broadly flat and in line with recent periods. Because we have a flat management fee and no performance fee. Our ongoing charges tend to be pretty stable at that sort of 1%, 1.1%. So what's driving performance. While primary funds remain the sort of largest part of the book. And so they were a big driver. They grew 2.2%. Our fund secondaries, we did a number of transactions, one project Captain, which is a diversified book of funds that we bought for a significant discount. So that was a key driver, but also our commitment to Patria secondary Opportunities Fund V drove this return as well. So a strong return from secondaries. Again, a reminder, that's when we're buying funds from another investor part of the way through the life, typically at a discount. And then direct investments probably a bit more modest performance from direct investments as you're looking at the right-hand side here, a sort of 1.9% growth during the period. There were a number of software businesses that we made direct investments in that have been marked down during the last quarter. So that was a bit of a headwind in terms of the overall performance. But generally still growing. And in terms of investment activity, we're still great believers in investing through the cycle in private equity. Private equity has good vintage years where pricing is lower, where competitive tension is lower. We think the last 3 or 4 years have been like that. And so committing through these periods, you tend to get better entry pricing, and that tends to lead to better returns overall on average. So we've kept investing. We had a strong investment period during the 6 months. So we committed $175.9 million million. I think that's sort of for the year anyway for the financial year, a lot of our investment activity has been front-loaded. Second half of the year probably be a bit -- the more quiet relatively speaking. But generally speaking, we're trying to have this consistent deployment through the cycle, which will drive longer-term returns. And our investment activity has been GBP 85 million in primary funds. So those fund commitments -- for funds with HG, their mercury fund; Expedition, their Fund III, One Peak Partners, there Fund IV and Triton smaller mid-cap Fund III. Now you may notice that 3 of those are tech-focused strategies in terms of sector. Don't read too much into that. It was something that we see some sort of big opportunity in software right now. It's just by virtue of the fact that these are our core technology private equity managers that we partner with, and they were all raising around the same time. The second half of the year will be more focused on strategies that are outside of the technology sector. We made a GBP 33 million transaction in Project Captain. That was buying, I think, 13 fund interest and one direct investment from another investor, a good discount, so we're really happy with that one. And then we've got 3 direct investments during the period. So Omilia is a conversational AI business. So it uses its technology in a customer care setting. So a good example, lifeline fascinating anyways the Taco Bell drive-thrus in the United States. Omili's technology is replacing human interaction with customers, and that helps the customers move through the drive-thru more quickly and allows the Taco Bell restaurants to redeploy humans into more value-add activities such as perhaps cooking the food. So that is a business growing really well that's really playing into this theme around AI. Another business that's playing into the theme of AI in a slightly different way is blue units, which we made a direct investment in during the period. It is a business, a blue collar sort of man in a van or person in a van business focused on ventilation on cooling systems. So fixing and installing cooling systems, and it's benefiting a lot from the sort of rollout in data centers right now. Obviously, data centers need to be cooled. And so this business has got a real strong tailwind behind it. So it's one that we're really excited about making an additional direct investment. And then AlphaPet is a German 1 platform. And so not on a business that would be obviously disruptible by AI. So the 3 direct investments that we're very excited about. And then as we look ahead in terms of our portfolio construction, you can see on the right-hand side what we're aiming for here. So just over half of our book in primary funds, which you can see on the left-hand side here, primary funds used to be 100% of our book. And over time, we've introduced secondaries and direct investments as well. We want to increase our direct investments to like 30%, 35% of the book, direct investments fell slightly during the period because we sold a couple of businesses. So we sold Uvesco, which is a northern Spanish premium grocer. We sold to consortium of Spanish investors alongside the lead investor PAI Partners, which is one of our core manager relationships. And we made over 2x our money in a business that we've held for sort of 3.5 years. So we're quite happy with that return. We also sold half of our position in Action, which is one of our first direct investments in a business that we've held for over 15 years. Business has done very well for us, but it's a very large business now. So we've been slowly taking our money off the table in that business for a number of years now. So the right investments fell slightly during the period as a proportion of the portfolio, but we expect to increase over time. And in terms of our underlying portfolio, there's over 700 companies. They are diversified by geography and manager, sector as well and maturity too. As I mentioned, around 3/4 of our book is in Europe, and that's concentrated in Northwestern Europe. So you can see the Nordics being our largest exposure. And then on the right-hand side, you can see the manager exposure. So this is a sort of selling point that we have around giving that sort of diversification by private equity manager. Our top 5 private equity manager exposure was equate to 36% of portfolio NAV, the top 10 59%. So we think that provides good diversification and manages risk. In terms of sectors, health care and IT, our largest sectors at 23%, closely followed by industrials and then consumer discretionary staples and financials make up the bulk of the remainder of the book. But obviously, developments around GenAI and its impact on software valuations has been a really -- well, one of the topics of the day, so we thought it would be helpful just to sort of break down our IT exposure. So you can see around 19.5% of our book is in software. And you can see some of the key names in terms of portfolio companies on the right-hand side. The thing I would draw your attention to is that only 4 companies equate to more than 1% of net assets. So from a risk point of view, we're not -- we don't have a large exposure to one single software business. It's pretty well diversified. Second thing I would call out is the vast majority of our exposure is to businesses that are business to business in nature, that are vertical software, not horizontal software and typically have a strong moat be it data, maybe they have the data, they house the data, the data has sensitivity around it. It's not something that's open based on data on the Internet that basically a large language model can access. So we think that our software businesses have the opportunity to lean into AI to make their products best-in-class through AI developments and capture more market share. We absolutely don't subscribe to the fact that all software is equal and all software is dead, that's absolutely not the case. There'll be some software that's disrupted for sure. But we think assessing our portfolio, our portfolio is pretty well positioned. One last thing I would say and continues to grow. We've seen no real slowdown in terms of our software book in terms of revenue growth and earnings growth. And just linking to that point here, you can see our top 10 underlying portfolio companies here continue to grow very well. So 15% revenue growth on average and 21% EBITDA growth, earnings growth. As we sold down half of our position in action during the period, we have a new top portfolio companies, so that's Wundex. That's a German specialist healthcare services business. So it treats chronic wounds outside of the hospital environment, which is a win-win for patients because they can be at home or go to a local clinic, and it's a win for hospital because they can free up beds for people that need to be in the hospital. So our business is going very well. We invested in this business when it was around about GBP 100 million enterprise value, and now is approaching GBP 500 million enterprise value. So it's growing incredibly well and is a direct investment of ours. So we're excited about that one. Visma was on the previous page, but that is business business, vertical ERP software business, SaaS business and it's been in our portfolio for 2 decades now and has been steadily growing. I don't think it's ever missed a quarter in terms of growth. So there was a lot of talk about that one potentially IPO-ing in the year. I think with the noise around software valuations that will likely be delayed. But -- but yes, I mean there might be an opportunity to take some money off the table in that business going forward. Action, as I mentioned, discount retailer, you'll be familiar through PC this business continues to grow nicely. But just again, we've held this business for over 15 years now. We've done really well. It's very much a large business now, we've been slowly taking money off the table there for portfolio construction reasons really for the past 6 or 7 years. Vitruvian is another health care services business. We made a direct investment in Vitruvian last year and has started incredibly well. So we're excited about that one. it basically is a sort of rehabilitation specialist. And then number 5 is the NAMSA contract research organization. So basically does the testing of medical devices on behalf of large OEMs. And that's done really well for us. We invested in 2021 in that business through a direct investment -- and yet, it's grown very nicely on plan and one that might -- we might see an exit of in the next 12 months or so. So rather than going through all the remainder of the portfolio company maybe I'll turn the page and we can talk about the sort of underlying portfolio more generally. So if you look at the top 100, continue to see good growth. So the top 100 is around 60% of our portfolio now. So that's the drivers we're talking about 700 companies that we have, the top 100 are really the portfolio drivers. And the sales growth on average is around 13.7%. The earnings growth is 13.4%. So still growing nicely on an LTM basis. So we're happy with that performance. The valuation multiples come down a little bit during the period, so it's 13.4%. It was 13.7% at 30th of September. That is principally due to sort of the remark down of some of the software businesses. And our leverage is around about 4x, which we think is quite modest relative to the market average, which is typically north of 5x. Our portfolio, from a maturity point of view, it becomes more mature. Private equity has been well documented as -- in terms of exits, they slowed down and that has meant that we've held more businesses for longer. We typically like to have around 50% of our book in businesses that have been held for less than 4 years and 50% businesses have been held for more than 4 years. Typically, the businesses that have been held for less than 4 years are in value creation mode where a lot of changes have been made. We're improving the business and then technically businesses that have been held for more than 4 years are in the exit lines that are being prepared for sale. So we like to see that sort of mix. And as I mentioned earlier, we like to sort of consistently deploy through the cycle. But we're seeing a higher proportion in these more mature businesses that have been held for more than 4 years due to the market slowdown in terms of exits. When exits do come back, we have a lot of portfolio value there, theoretically, right for [indiscernible] 21 direct investments that have been held for over the 4 years, and we've got almost GBP 850 million of portfolio value that are in that sort of more mature category. So that should underpin good cash flows and realizations going forward. And talking about cash flows, we had a net cash positive period, so we had realizations of GBP 125.6 million during the 6 months versus drawdowns of GBP 95.6 million. There were 2 big contributors to the realizations, the partial sale of Action, which returned around about GBP 19 million sterling. And then the full exit of Vesco that I mentioned earlier, the premium Spanish grocer that contributed GBP 15 million. So 2 big exits that really helped us there from a realization point of view. Generally speaking, though, you can see that in terms of cash flow activity, that percentage portfolio realizations as a percentage of opening NAV has been falling just generally with the sort of more difficult exit environment. The good thing is that we can obviously make secondary sales as well to accelerate some liquidity. And that's something we're alive to right now. We may opportunistically make 1 or 2 secondary sales just to further bolster our realizations. Exit activity during the period, we've seen a bit of a bifurcation in our exits with a number of them being around the current valuation and then still seeing a handful that are a big pop sort of valuation pop when exited. But on average, our exits were made on a 5% uplift during the period, which is slightly behind what we've seen more longer term, which is around about a 20% uplift. And that's just a consequence of the sort of more muted environment for exits right now with a lot of uncertainty around software and the Middle East, meaning that there's a bit of a lack of competitive tension right now. But when the market comes back, I expect to see this average uplift in valuation at exit come back more to the long-term levels. Our balance sheet is in a good place. So we've got GBP 276.7 million sterling of cash and undrawn revolving credit facility. So whilst it's a tougher market there and realizations are tougher, we have a good amount of buffer there from a balance sheet point of view. And in our outstanding commitments, as mentioned earlier, we overcommit to private equity funds more than the liquid resources that we have. But our overcommitment ratio remains at the lower end of our target range and from a percentage point of view, in line with sort of longer-term average. So we're very comfortable from a risk perspective and a balance sheet perspective. Capital allocation, this is now 12 consecutive years of annual dividend growth. Our dividends paid quarterly. The Board announced an annual dividend for the year of 18.4p per share, and that's an increase of around 5%. And really, what we're going to do is increase the dividend every year ahead of inflation, and we've done that for 12 years. So another benefit for shareholders there. And then in terms of buybacks, we bought just shy of 2 million shares during the period and -- sorry, I'll just move that forward and invested around GBP 11 million sterling during the period. So that means since 2024, we've invested or bought back 7.5 million shares at a cost of around about GBP 42.2 million. So just as a reminder, the Board sees the buyback more as a way to enhance the NAV growth or the NAV accretion for existing shareholders, but it has the dual impact of sort of managing the share price discount as well. So that's all I was going to cover during the period. So look, it's been a tougher period with the challenging market backdrop around the Middle East, around software and AI, but we've continued to grow both in terms of share price and in terms of NAV total return. But our strategy remains the same, very focused on European mid-market, increasing exposure to lower mid-market and direct investments in delivering that strong and consistent NAV growth alongside a growing quarterly dividend. So maybe with that, Rebecca, we can move on to questions.

[Operator Instructions] And I will ask Alan these questions. While that's happening, Alan, I've got one for you around software sector that you went into in some detail. software sector and GenAi, how long do you think it will take for the market to work out the winners and losers with AI and SaaS businesses?

Yes. No, it's a good question. So I think at the moment, all software is being treated equally in the public markets because people don't know what the terminal value of these businesses are. There's not enough metrics around AI development and traction around new products that are built on AI. And so people are just taking a risk of and just getting out, and come back in when things are a bit more certain. I think it's going to take a good few months until we start to see proper traction and understand who the winners are, we are capturing market share and those that are not. So I mean if you were to really say, going to my head like what sort of time frame, I mean, sort of 12 to 24 months, it's going to take some time to really understand that. But as I said, we've not seen any slowdown in terms of growth, in terms of our software exposure, and we think a number of them have the opportunity to be winners in this environment and strong winners. I mean, Omilia was an example that I gave there. I mean we invested in that with our eyes open in terms of AI, and we think that's very much playing into this whole trend. And that will take share from the services industry, ultimately and human capital. But yes, I think it's going to take some time until there's a bit more confidence around software and the terminal values and who are going to be the winners, who are going to be the losers. But as I said, going back to what I said earlier, I think software businesses that are vertical, business to business that have a strong moat around data, sensitive data, for example, strong moat around distribution around domain for example, it's going to be very hard to disrupt those businesses. Unless these businesses are doing nothing around AI and improving their product and incorporating the AI, unless they're being lazy and complacent. I think if they're leaning into it and improving their products, with AI features and building a product that's GenAI native, I think it's a real opportunity for those types of software businesses to capture more share. But yes, I don't think we'll not with a lot of certainty for another good few months yet.

So I've got one question about liquidating holdings that are now in excess of 4 years old. And what are you going to need to see to be able to make those disposals or those exits?

Yes. So the disposals typically coming in 2 ways. So as mentioned, we invest alongside private equity firms that are typically taking the majority control in these businesses. So we're a little bit beholden to what the private equity firm wants to do in terms of natural realization shall we see. So because we're a minority investor, we kind of were in the back seat a little bit there. So that's point number one. Now obviously, we can influence the manager. We speak to them very often. We can say, look, we need to start seeing liquidity. But ultimately, they have majority control the earnings drivers. The second lever is that we can use the private equity secondary market, so we can sell positions to another investor part the way through their life. And that's something that we've been doing. So back in 2024, for example, we did a secondary sale of, I think it was around about GBP 180 million that we sold to another investor at a 5% discount to NAV. So that was a good way for us to accelerate liquidity and allow us to redeploy into newer opportunities, and that's what we did and buy back stock as well. So that's something that we do have full control over, and that's something that we're really looking at closely in terms of is there any other parts of the book that are noncore. They're no longer core. They were at the time we made the investment, perhaps we've lost conviction. -- but where we can sell those in the secondary market. And so we're monitoring the secondary market in private equity very closely right now. and we may take advantage of that like we did in 2024, like we did with the recent action, partial sale. So that will allow us to pay down the revolving credit facility and give us more more capital to deploy into new opportunities. But that's one way that we could perhaps reduce that sort of proportion of the book that's been held for 4 years or more.

Great. Next question is around the buybacks. And one investor has noted that we are buying back to reduce the discount, but the discount has isn't being shown, and it's not coming through and it's and whether you might put that cash to better use?

Yes. I think that we see it as a sort of 1 2, 1 lever really in terms of a number of levers. Obviously, there's new investments, which is longer term. This dividend that we've paid for a long time. that shareholders value. In terms of buybacks, I think it's a good message to the market as well. I don't think given where the share price discount is sort of 28%, 29%. At the moment, I'd like to move that in more. I think if we can sensibly buyback as one tool in our sort of armory, I think that's a sensible thing to do, and that's what the Board has done in a measured way. So that's how we think about it and as a way to just sort of accelerate NAV accretion, because when we started buying back, the discount was much wider than it was now. It was actually around about 40%. So it has moved in a little bit, but we're not really -- the principal reason for the buyback program is NAV accretion. And if it helps the discount come in as well, that's the added bonus. But I would agree for sort of longer term buybacks aren't a [indiscernible] year for moving in the discount. I don't know if that answers the question or not, but that's how we see it.

Thank you. There are no further questions. I will just pass on one note from an investor who sends their regards and the congratulations for the discipline of sticking to the European strategy.

Yes. No. It's been 25 years. Now we're delighted with it and we'll keep investing in the European mid-markets. So thank you, and thank you all for attending. I think just to sum up, it's been a tougher period with the developments geopolitically and in terms of AI, but we're still growing 5.5% share price total return, 3.1% NAV total return. And yes, we'll keep investing, keep building us a good vintage or diversification, and we may look to -- for ways to accelerate liquidity in the coming 6 months. Thanks again for attending. And if you have any further questions, please don't hesitate to e-mail Rebecca or myself, and I look forward to hearing from you soon.