Petershill Partners plc (PHLL) Earnings Call Transcript & Summary

Good day, everyone, and welcome to the Petershill Partners Q3 2023 Trading Update Call. [Operator Instructions] I would like to advise all parties that today's presentations is being recorded and by remaining on the line you are representing to the company and Goldman Sachs that you are located outside of the United States and are not a U.S. person as define under regulation as of the U.S. Securities Act of 1933, or you are a qualified purchaser as defined under the U.S. Investment Company Act of 1940, and that you are not located in or resident of any jurisdiction where to attend this conference call would constitute a violation of relevant law of such jurisdiction. Now I would like to hand the conference over to Gurjit Kambo, who is responsible for Investor Relations for Petershill Partners. Please go ahead.

Good morning, everyone, and thank you for joining us today to discuss Petershill Partners' Third Quarter 2023 Trading Update. Before we begin, I'd like to remind you that during this call, we may make a number of forward-looking statements, which could differ from our actual results materially, and Petershill Partners assumes no obligation to update these statements. A replay of today's call will be available on the Investor Relations section of our website along with a copy of our trading update. With us today to discuss the company's trading update for the third quarter, we have Ali Raissi-Dehkordy, co-head of the Petershill business unit within Goldman Sachs Asset Management; and Adam Van de Berghe, who is responsible for the CFO function for Petershill Partners. With that, I'll turn the call over to Ali.

Thanks, Gurjit, and good morning, everyone. Thank you for joining our call today as we present our third quarter trading update for 2023. I will provide some high-level commentary on the business and the market backdrop, and Adam will provide more details on the key financials during the quarter. During the quarter, our partner-firms continue to experience steady fundraising growth with $6 billion of gross fee eligible AUM raise during this period, taking the year-to-date total to $20 billion. Achieving the asset raising on time highlights the strength of our partner-firms given the challenging industry backdrop where we have seen funds staying in market for longer and raise targets getting pushed out. We have now substantially completed our asset raising for 2023 and are pleased to have achieved our guidance on gross fee eligible AUM raised for the second year in a row. There are signs that inflation is moderating and an expectation for rates to stabilize, but at the same time, broader macro uncertainty persists as we head into the year-end. Against such a backdrop, we've remained highly selective and focused on the risk-adjusted outlook for new investments. We did not undertake any acquisitions during the period. However, we have a strong cash position and are well positioned to take advantage of attractive market opportunities when they arise. We have seen consolidation in the industry as companies seek to scale up or add additional strategies with a particularly strong interest for specialist mid-market firms, which is representative of the majority of our partner-firms and Petershill Partners. The company continues to demonstrate strong cash generation, supporting future growth and capital return to shareholders. And with that, I'll hand over to Adam, who will run through some financial updates.

Thanks, Ali, and good morning, everyone. Our performance in the third quarter reflects consistency during a challenging market and is in line with our expectations. The environment today is less favorable for capital deployment and realizations than it was a year ago. However, we continue to build a foundation for attractive FRE-centric earnings. As Ali highlighted, our partner-firms raised $6 billion of gross fee eligible AUM in the quarter and $20 billion year-to-date. Aggregate partner firm AUM grew 7% year-over-year to $303 billion. Aggregate fee-paying AUM was $197 billion, 4% higher year-over-year and leading to a 21% increase in partner net management and advisory fees. Partner fee-related earnings were $53 million in the third quarter, up 6% from the prior quarter and 13% year-over-year. The growth in the quarter came amidst the period in which there were no new transaction fees, which were driven by investment activity at our partner-firms, and $6 million in offsets from transaction fees previously recognized. Partner realized performance revenues were $14 million in the quarter, up 40% from the prior quarter. Partner realized performance revenues as a percentage of total partner revenue stands at 9% for the year. We expect activity to remain subdued in the near term. However, our partner-firms are positioned well for when market conditions improve with $613 million of Partner private markets accrued carried interest. Our Partner-firms did realize several assets in the quarter, resulting in partner realized investment income of $13 million. Partner distributable earnings were $80 million, 16% higher year-over-year. We continue to return capital to our shareholders and have purchased approximately $21 million of our previously announced $50 million buyback program. Moving to the outlook. The investment period from any funds has extended given the market conditions, and it has taken longer to deploy existing capital. This has led to delays in the activation of management fees on some of the capital raised over the last 12 months. Over the next few quarters, we expect deployment to increase as markets become more receptive. Our partner-firms successful fundraising has positioned them well to take advantage of an improving market. The performance of our absolute return strategies has been mixed so far this year against the backdrop of a challenging environment. While we typically see higher performance fees in the fourth quarter, partly driven by the crystallization of fees in the absolute return strategy, we expect a more muted outcome relative to the fourth quarter of last year. We maintain our guidance for 2023 that we issued with our interim results on the eighth of September. With that, we thank you for joining the call. I would like to open it up to questions.

[Operator Instructions] We'll take our first question. Luke Mason from BNP Paribas.

Three quick questions. On fundraising, how should we think about the fundraising outlook into 2024 and beyond, is the $20 billion to $25 billion this year more of a trough level? And do you have any visibility on fundraising for 2024? I mean I think there was Clearlake on Bloomberg talks have been back in the market with fundraising. Secondly, just on deployment, you made a comment there just around expecting increases in deployment as markets become more receptive. What have you seen so far in Q3 across Partner-firms and do you have visibility on pipelines that you're talking to Partner-firms about? And then thirdly, just on FRE margins, there's been a downward trend in recent years. I mean how should we think about that longer-term trend and then specifically into Q4, should we expect any elevated levels of costs in Q4 with bonuses and things coming through?

So I'll do the first question on fundraising, and then Adam will pick up the next 2 on deployment and FRE margins. On fundraising, clearly, there's an element of cyclicality to years of fundraising. You've seen some of the news in the press that speaks to anticipated fundraising, we won't comment on any individual partner-firms at this stage. I think generally speaking, our cadence has been in the new year, we give AUM guidance and we'll look to give you our expectations for 2024 at that time. Maybe I'll hand over to Adam to talk about deployment.

Thanks, Ali. So on your second question on deployment, in my remarks, what we saw in this quarter was approximately $20 billion of assets previously raised that have now been activated in underlying funds. And so that will flow through as we report fee-paying AUM going into the end of the year. And that has partly what has contributed to our FRE revenue in the quarter. In terms of FRE margins, we've seen margins broadly stable over the last 3 quarters, so in the last year and even over the trailing last 12 months. If we think about the fourth quarter, expenses at Partner-firms tend to be slightly higher in the fourth quarter than they do throughout the rest of the year. With that being said, we're comfortable with our guidance on our FRE for the full year of 2023 between the $190 million and $210 million, which incorporates our expectations for margins.

Our next question, David McCann from Numis.

Three from me as well, please. So firstly, just on that investment income, obviously, they're higher than most people were looking for in the third quarter. Can you just talk through what that was really coming from and then the outlook for that would be useful. That's the first one. Secondly, I think, Adam, you may have partly just answered this just now in that last question, but it does look like the underlying fee yield went up in Q3 compared to the first half of the year. Just to confirm, so we always know you've got this lag in the AUM by 3 months, something like that. But just to confirm, are the fees not lagged in the same way? So I think you were saying that some of the fees in the period obviously helped. So can you confirm that was the case? Indeed, any other drivers why it looks like the sort of underlying excluding the transactional stuff, looks like the fee margin did go up a bit in that quarter from what we can see. And then finally, just on that fee, switch on, yes, you said obviously $20 billion to come on -- come in line, obviously I can't see it in the numbers yet because of the lag, which we know about there's still another $8 billion fees to be switched on in the numbers you've given. So when does that other $8 billion, I mean to see earning at AUM?

Thanks, David. It's Adam. I'll take those. So on your first question on investment income in the quarter, we saw contributions by approximately half a dozen partner-firms. I would say that I would say that as we know, investment income similar to PRE is broadly driven by market activity, which has been lower this year than, call it, relative to last year. I would -- as we look forward, it really depends on those activity levels in the market if those continue to be subdued, we would continue to expect to see a bit of lumpiness in investment income. On your second question, the $20 billion, yes, just to confirm, we had -- we're reporting at this quarter, $28 billion of AUM raise that is not yet activated, a $20 billion of which has been activated in this quarter. So with the AUM reported on a lag, we expect that to flow through. The P&L or the revenue is current. And so what you're seeing there is just the revenue coming through on the P&L and the AUM will flow through in the next quarter. In terms of the remaining $8 billion on your third question, it really is driven again by opportunities in the market that the partner-firms see. We would expect that $8 billion to be deployed over the next several quarters which would, of course, then, in turn, contribute to management fee revenues in those quarters as well.

We'll take our next question. Angeliki Bairaktari from JPMorgan.

First of all, you mentioned $6 billion fundraising in Q3, and -- which brings the 9-month fundraising to $20 billion, which is sort of -- you have already hit your target of $20 billion to $25 billion. Can you give us perhaps some color with regards to expectations for the fourth quarter? Do you think you will be able to reach the upper end of that fundraising range? Then in Q3, you had $5 billion of fee-paying AUM inflows. Are those $5 billion effectively reflecting the activation of those $6 billion raised in the same quarter? Or are they -- are they perhaps coming from the previously not yet fee-paying AUM, so from the $28 billion. And then one last question on M&A. With the -- at the H2 stage, you guided -- you said that you expect to be below the $100 million to $300 million investment range. Is it fair to assume that you may not do any deals or that you will not do any deals this year? From the looks of it, I mean you haven't announced anything so far. So -- and then we are in November. So I guess it is very well possible that we don't see any M&A from you this year.

Thanks very much for the questions. This is Adam. I'll take the first 2 and Ali -- I'll pass it to Ali for the third. So on the first question with respect to the $6 billion in the third quarter and $20 billion for the full year. Our guidance that we set out at the beginning of the year was $20 billion to $25 billion. We think where we are now we're -- I think the partner-firms have broadly raised on their targets. And so while there's possibility for incremental AUM to be raised before in the last quarter, we do think they're broadly there where they were aiming for their targets. In terms of the $5 billion raised in the previous quarter, and how that makes up for the -- what was activated. It's a bit of a mix. So there are some assets that were raised and activated in the quarter. There are some assets that were raised and are not yet activated. And so what we tend to see every quarter is a bit of a mix of new AUM that is raised and activated and then some AUM previously raised is activated. And then, of course, the third leg of that is AUM that's raised which is not yet activated. I think it happens to be a bit of a coincidence that the numbers are broadly similar to this particular quarter from last quarter, but it's been a broad mix across those 3.

And for the third question, Angeliki, we don't expect any new partner firm M&A this year. Clearly, we're still sitting in November and in our history, we have done deals in around a month's time. So we're not sort of calling the whole year at this point, but my expectation is at this stage that we won't have any new partner firm M&A.

Next question from Hubert Lam from Bank of America.

Most of my questions have been asked. Just one just general question. Just wondering what your thoughts are into -- as we head into 2024, are you optimistic that things could start to improve as rates inflation start to stabilize? I'm just wondering. And what do you think it's -- we're still in a pretty difficult market environment and it could be more geared towards prudential improvement in second half of next year? Just wondering what your thoughts are as we head into 2024 in terms of deployment of investments, et cetera?

I think if I reflect on '23 as part of answering your question on '24, clearly, it was a muted year, we had less M&A hit this year. I think some of that is just going to be driven by M&A activity. And so if we expect the same levels, we'll have sort of a similar, call it, muted PRE realizations, new deal activity. If I take stock of where we stand today, clearly, there's a, let's say, a macro risk or geopolitical risk that has continued to be present in various different forms. We have some more stabilized views on rates. Clearly, some positive news on inflation. Both of those seem to indicate some increase in the M&A back book deal activity that the banks look at across the street. That's all positive news. But clearly, we had a little bit of that as a preview in September, but things went the other way. So really depending on how that M&A back book and deal activity looks in '24 is going to drive the rest of this year. Some elements of it, as you've noted, are sort of do look a little bit better than they did earlier in the year, just in terms of the outlook for interest rates, the outlook for inflation and clearly, some of the M&A activity that's being sort of considered on the advisory side. So we see those as positives. But again, having made similar positive observations coming out of the summer, it's really going to depend on how that activity starts looking early in the year for the new partner-firms, and it's probably a little too early to say just given we've had some relatively, I'd say, a bigger macro uncertainty introduced recently as well.

Great. Sorry, I just got one more follow-up question. How should we think about the dividend for the full year just because, I guess, there's not going to be much activity in terms of M&A side. So should we think -- is there potential for like a higher dividend for this year? Just any thoughts around that?

Yes. Thanks, Hubert. It's Adam. So our policy is a progressive dividend policy. And so at this point, we continue to maintain that policy. And when we deliver our full year results in March, we'll announce what we've done for the full year.

We'll take our next question. Mike Werner from UBS.

I got 2 questions. One, a little bit of a follow-up the FRE margin side. I'm just wondering about the impact on some of the recent regulations put in place in the U.S. for private fund advisers and whether that's going to have a -- act as a little bit of headwinds for your partner-firms? Or is it going to have no effect, and therefore, no impact on the FRE margin? Second question, with regards to the $20 billion of fee -- of AUMs at [ between ] fee-paying in the calendar Q3, can we get a little of a breakdown in terms of the mix of those AUMs across your different segments?

Yes. This is Adam. I'm happy to take both of those questions. So in terms of the discrete FRE margins across some of the different firms within the U.S. And we've had conversations with them on and off about some of the pending regulations and at just -- the initial indication there is that it's not likely to have a material impact to the margins of their particular businesses. We'll continue to monitor that with them. But as of now, they seem to be -- they seem to all indicate that it's while there's some incremental work and effort for them on the reporting on some of their funds that they don't see that as necessarily a headwind in their individual margins. As for the $20 billion of fee-paying AUM that's been activated in the quarter, it's across a couple of different firms. In terms of asset classes, those are in the private equity asset class for this quarter.

So all $20 billion was in private equity?

Yes, that's correct.

We'll take our next question. Andrew Shepherd-Barron from Peel Hunt.

Just 1 question from me really linked to M&A. And more to point M&A in your industry. Obviously, you've made no acquisitions this year. But can you make any comment on how much other acquisitions have actually been going on in the private capital management space in the U.S.? What sort of valuations have you seen? Presumably, you've got pretty good insight into that? And how active some of your competitors or peers who raised money earlier this year back in last year, whatever, what they're up to?

It's continued to be an active year, and that's really driven by 3 different types of, I'd say, participant. And generally speaking, they're always -- if we look over the last half a decade, that these participants have always been around in 1 form or another. We've seen more recent activity on the part of, let's say, large to mid-market players who are looking to build out their capability set, and they're really, really focused on mid-market sector specialists, which has been our area of focus. We think that, that's really because those firms have toolkits to create value that there is a lot of LP comfort about their ability to drive revenues and EBITDA growth in the underlying assets that they buy and having sector specialism has allowed those firms to grow well. If you look at the last year, 60% of AUM growth in private alts was in the mid-market specialists, and you've seen how that's actually manifested itself and Petershill Partners with 2 successive years of relatively strong and on-time fundraising. So an attractive area for consolidation. You've seen some of that consolidation both from listed players and players who have aspirations to list. And we've seen another sort of source of deal activity be GP Stakes players. I think we've seen that group be relatively active. There are some players who are earlier in their life cycle who've been looking to build up their deal flow and demonstrate that. And then the third group is other strategic or institutional buyers who like the asset class, and those have included sovereigns and insurance players over the years. And they've continued to be active. I kind of reflect on 2023 so far and maybe even if we look back as far as '22 has been a relatively active year. We probably, I'd say, increased our threshold for M&A at Petershill Partners, and that's kind of reflective of some of the challenges we see applicable to the whole industry. We've talked about these at length, this fundraising and realization challenges. What it has meant that the firms that we've been selective with have been firms that are mid-market specialists who are in growth areas like health care and real assets and credit. Clearly, we benefited from some of that as the company has seen continued relatively strong growth. I've seen maybe a little bit less of that active targeting across the group. And there are some areas where we've shied away from where other participants in the stake space have more recently have sort of gone into. But I would say that it continues to be quite robust. Valuations have been quite robust, and they haven't seen the same movement that we've seen in the public markets across the whole alt space, let alone the European alt space, which has seen even greater movement, but the private markets have not really written up in the same ways that we saw the write-up in '21, and they haven't written down in the same way that we've seen since '22. They've been a lot more stable. Maybe the 1 change has been -- there's a bit of a bid-ask spread narrowing in terms of firms being more realistic about fundraising and time lines and realizations and time lines. But beyond that, we continue to see robust activity in that market.

[Operator Instructions] Our next question. Alexander Bowers from Berenberg.

Just 2 for me. Just the first one on the $6 billion raised during the quarter. Could you provide some color as to which firms or how many firms this came from? And then the second one, I think some of this has already been answered, but I'll ask it anyway. Just around -- sort of has there been any change in the focus of the types of funds you are looking to invest in, in terms of investment strategy asset costs?

This is Adam. I'll take the first question, and then I'll pass it over to Ali for the second one. So as it relates to the quarter, the $6 billion raise was across approximately half a dozen firms. And on the $6 billion, a little bit under half of that was in the private credit strategy. The majority of the remainder was in private equity. Overall, this -- for the year, we've seen $20 billion raised, and that's over close to a dozen or so firms that have raised assets across the full year so far to date.

And look, as for strategy, at the time of the IPO, we gave some guidance about the sectors we've been focused on. We spoke about a focus on mid-market. I just talked a little bit about why we think that, that continues to be an attractive space, both in terms of growth prospects, in terms of realization prospects. We've focused on areas such as health care, private credit, real assets, all of which have, I'd say we've been able to deliver in terms of acquisitions and follow-on deals over the course of the period since the IPO. Our focus today remains in that group. I think the 1 key area of nuance that has been fleshed out by LPs, which is an area that we've always focused on is investors really want to understand firms that have a right to win in the market. Some lots of different tool sets to create value, being able to disaggregate what amount of value came from. Financing over the last decade and isolate that and think about what value was created by revenue and EBITDA increases in value creation and sector knowledge, but all of that really plays into the sector specialist narrative that we have. And we think we've got some of the best sector specialists globally in each of their spaces. What that's meant is these are also firms that aren't the #1 in their space in terms of size, but they might be the #1 in their spaces in terms of performance, and that actually allows us to grow in both growing market environments and growing in terms of flat market environments.

This concludes today's question-and-answer session, Gurjit Kambo, at this time, I would like to turn the call back to you for any additional or closing remarks.

Yes. I just like to thank everybody for joining the call today. And if you have any sort of further follow-up questions, and please feel free to reach out to me. So thank you from the team. Have a good day.

That concludes today's call. Thank you for your participation. You may now disconnect.