Whitehelm Capital (PAT) Earnings Call Transcript & Summary

Hi. Good morning, everyone. This is Martin Praum, speaking, Head of Investor Relations. Welcome to our call regarding the transformational M&A transaction we announced today. This morning, we announced the acquisition of Whitehelm Capital, a leading infrastructure investment manager with offices in London, Sydney and Canberra. Our co-CEO, Thomas Wels; and our CFO, Karim Bohn, are with me here today. Both will guide you through the strategic rationale and the financial impact of the transaction. . We will refer to the analyst and investor presentation, which we circulated this morning and which you can find on our website in the section Shareholders and then under Most Recent Publications. As usual, this call will be recorded and will be made available on our website, and we'll also offer a call transcript for further reference. With that, I'd like to hand over to Thomas to start the presentation.

Thank you, Martin. I still have to calm down a bit after the signing last night. Hi, everybody. This is Thomas speaking. I am really excited to announce to you today that over the weekend, we've entered into a share purchase agreement for the infrastructure manager Whitehelm Capital. The strategic move into infrastructure has been our M&A focus for quite some time, as you may know. And I may have shared my ambition to do a deal already 12 months ago. And the search for the right partner has been quite challenging. We have looked at many potential candidates over the last 2 years. But now with Whitehelm, we are convinced we've found not only the perfect strategic match, but also even more importantly, the perfect cultural match. I would like to take you through some key information on Whitehelm Capital. So you will get a deeper sense of the strategic and cultural fit of the acquisition. Let's turn to Page 2 of the analyst presentation. Why do we call this a transformational acquisition for Patrizia because Whitehelm is a key enabler for us to execute on our midterm strategy to become the leading partner for global real assets. Whitehelm has the know-how and great track record in infrastructure, and we have know-how in real estate, plus a large global client base. This is a perfect strategic match because together, we really complement each other very well. Let me highlight 3 focus areas. First, our clients will benefit from a much broader product offering ranging from our -- from private infrastructure equity, private infrastructure debt to listed infrastructure. Second, the transaction significantly strengthens our global footprint, especially in the Asia Pacific region. Third, it accelerates our sustainability strategy. You know that my role is to help Patrizia deliver on our strategy and growth ambitions. With the expertise and support of Whitehelm, we want to draw our infrastructure AUM up to EUR 20 billion in the next 5 years, starting at today, consolidated around EUR 5 billion. We want to double our overall AUM of currently EUR 48 billion in the midterm. Why? Because we want to stay relevant for our global clients who are growing bigger and bigger. Whitehelm's strong footprint and network and the infrastructure equity and credit business, especially in APAC and Europe, plus its existing investments in North America, will help us to accelerate that growth together with our existing client base. Let's turn to Page 3 of the analyst presentation. Successful partnerships are all about having the right chemistry, similar values and a compatible culture to build trust. From the people I have met and from what I've heard and learned in the due diligence, I'm convinced that we have a perfect cultural fit. We both think and act like entrepreneurs. We are innovative and agile. We are independent, and we both always put the needs of our clients first, no matter what. So that's why I believe this will be a unique and very valuable fit for all of us, which is really hard to find. By the way, the cultural fit is also one of the key reasons why Whitehelm management, which owns 70% of the company Patrizia as their new partner. You know we spend shareholders equity wisely, and we've taken the time to find the right partner, exactly as we did back in 2017 and '18 with TRIUVA and Rockspring. This strategic deployment of our existing cash and treasury shares is accretive to our operating income, and at the same time, we keep our strong financial flexibility, which we will use for further investments. Besides that, with more than 80% of Whitehelm's revenues coming from recurring fees, we further increased our quality of earnings massively. To paint a better picture for you, I'd like to provide you with a snapshot of Whitehelm. Let's turn to Page 4. So what are we buying? So Whitehelm is one of the world's most experienced infrastructure managers with 20 years -- 23 years track record of successful investments. Whitehelm currently manages EUR 3.2 billion, with additional EUR 1.6 billion of commitments are not yet invested dry powder. It has over 60 investment specialists over 3 offices in London, Sydney and Canberra, with a track record of more than 100 direct infrastructure equity and credit investments, bolstering our exposure, especially in Australia and APAC. And they have more than 20 institutional investors for which they deliver value with an IRR of 11.9% for global core infrastructure investment since inception. Let's turn to Page 5 of the analyst presentation. The great thing about Whitehelm is the broad skill set. It has a well-diversified product offering and investment expertise that will significantly broaden Patrizia's portfolio of investment solutions for our clients. With a particular focus on smart cities and digital infrastructure, decarbonization and energy transition, water and environmental services, social infrastructure, across equity, debt and publicly listed infrastructure investments. We can benefit with that from the structural growth of infrastructure investments across sectors and globally. You know we've been active in the Asian region for a while now. And we have been quite successful in fundraising. With Whitehelm, we strengthened our footprint in APAC to support our growth opportunities in the region. And for Patrizia, Australia represents a really exciting opportunity. Domestically, it's a growing market with the thriving infrastructure sector. While on the international stage, it is the gateway to APAC and a key contributor to the region's economies. Let me also use this slide to reiterate the strategic product diversification we are achieving. While Patrizia was so far primarily focused on private real estate solutions, we now diversify the product sphere to infrastructure, tripling our exposure in that area. At the same time, we diversify into infrastructure debt and into listed strategies. This is all fully in line with what we had communicated to you with our midterm strategy end of '29, repeating it for the last 2 years. Let's turn to Page 6 on the analyst presentation. In the future, Patrizia is not a mono liner real estate investment manager anymore as some described us in the past. We now become a truly real asset investment manager with a strong global positioning in the alternative sector. First, the timing couldn't be better. Infrastructure is key on delivering on our sustainability strategy targets and offering our clients more and more investment opportunities that are net zero carbon. And I need -- and I don't need to tell you that future demand in infrastructure is brighter than others. Some experts predict that infrastructure investments are expected to rise by 35% to $3.8 trillion a year by 2014. We all need private capital to realize these ambitious carbon zero targets we have in mind worldwide. And Patrizia becomes even more the gateway for private capital to fund this important transition. So we are well positioned to benefit from the tailwinds of this sustained growth. Let's turn to Page 7 of the analyst presentation. Whitehelm's clients are predominantly pension funds located in APAC and Europe. The client overlap to Patrizia is very limited, and our global client base is a springboard for Whitehelm to accelerate growth. While we have a massive overlap, and this is one we like is that all clients have something in common. We are looking for stable and growing cash flows with limited risks to manage their asset liability management and to safeguard the future of pensions. That is reflected in Whitehelm's investment focus, which like Patrizia is primarily in the Core and Core+ area. Let's turn to Page 8 of the analyst presentation. You might remember the chart on the left side, we've shown you repeatedly over the last 2 years, and you can see we fill the boxes step by step. We can now offer our clients a variety of investment solutions out of one hand, and this is what our institutional clients want, because they are growing bigger every day and look for stronger and reliable partners that offer solutions across sectors, geographies and investment styles. And then coming back to the point of this being a transformational deal. We will now become a truly global investment manager also with our AUM, which is far where we're primarily focused on Europe, which so far primarily focused on Europe. The first step was the acquisition of Kenzo 2 years ago with building up AUM in the Japanese market. And this transaction here is a significant step in diversifying our AUM and income streams. Let's turn to Page 9. Last but not least, ESG. As you may already know, Patrizia has clear ambitions to achieve net zero carbon emissions in respect of more than 70% of our AUM by 2040. And Whitehelm's infrastructure offering accelerates the execution of our strategy and so is a perfect match for us in this respect as well. Within UN PRI A+ rating for overall implementation of ESG in its strategy and governance activities and focused products like the low-carbon infrastructure fund, we believe we add extremely valuable expertise to Patrizia's platform to help achieving net zero carbon emissions. With that, let me hand over to Karim to give you a brief insight in the financial implications on Page 10.

Thanks, Thomas. Hi. This is Karim speaking. Let's have a look at the financial implications of the deal for Patrizia. We expect to pay the initial purchase price of roughly EUR 67 million at closing at the latest in Q1 2022. The total deal consideration might increase to a low 3-digit million euro range, if ambitious business growth targets in the Infrastructure segment are reached in the next few years. We have aligned the interest of Whitehelm and Patrizia shareholders by the following deal structure. First, as mentioned before, Whitehelm management shareholders agreed on an earn-out structure, which connects the future business performance of the Infrastructure segment with a total deal consideration. Second, the initial purchase price and the total consideration is financed by a mix of existing cash and existing Patrizia shares, which we acquired through our share buyback program over the past months. Third, Whitehelm management shareholders have agreed to a lockup period for the Patrizia shares, they will receive as part of the deal. Next, to the aligned interest of the deal, we are convinced of the financial aspects. The acquisition multiple we are paying is fully in line with historic Patrizia M&A deals. And the transaction comes along with a further increase of our earnings quality. More than 80% of Whitehelm's revenues come from highly recurring management fees and asset consulting fees with long duration. To sum it up, we delivered on what we promised to you. We made use of our share buyback program and deploy Europe balance sheet cash to conduct an acquisition that will further strengthen Patrizia's quality of earnings and stability of revenues. This strategic transaction will be accretive to operating income from day 1 of closing, and we remain sufficient financial flexibility to continue to invest in people, technology and market opportunities to deliver on our midterm strategy and growth targets. With that, I'd like to hand back to Nairobi to open the Q&A session.

[Operator Instructions] The first question came from the line of Miro Zuzak from JMS Invest.

Can you hear me?

Yes, Miro, we can hear you loud and clear.

Okay. The first question is basically took 23 years to raise the EUR 3 billion or let's say, the EUR 5 billion, including the commitment. And now basically, if I look at Page 10, I see the hockey stick right now, it goes up to EUR 8 billion until 2026. So in, let's say, the quarter of the time or like 1/5 of the time that it took to raise the first EUR 3 billion. Can you please give some more granularity? And some more insights how you want to grow the assets because basically also there is like if you have EUR 3 billion in assets and EUR 2 billion in commitments, when you have EUR 8 billion in assets, you probably want to achieve like EUR 12 billion and an additional EUR 4 billion in commitments, probably if I keep the ratio stable. Maybe you can elaborate on this? And secondly, what is the key people risk in Whitehelm. So because now basically, they get a lot of money, right? You pay them, you buy the shares from them. They can, at least after the retention period, they can walk away, what are the key people there? How big is the risk that they're going to walk away? And how do you mitigate this?

Thomas speaking. I start with the pipeline. Yes, particularly in the infrastructure space, which is built entrepreneurial over the last 20 years, there was always a slow buildup phase. More recently, they added products in a higher speed, which actually led to the commitment of one very large institutional clients who committed EUR 750 million and additional funds. So the tenure of these funds, as you know, is, in some cases, in 15 years, so much longer than in real estate. And the success of raising larger funds is pretty new to them. So the growth is actually coming from funds which will raise over the last 18 to -- 18 months to 3 years. So they're building the portfolio. So for globalizing that they needed a new partner. And we are this new partner. In the business case, we paid for, we did not pay for any synergies. So they are organic business case.

And what makes you confident that this will continue the growth like do you have a clear plan there? And if you have, could you please share some details on it?

There's actually a plan. There are 2 sets of products. They started with infrastructure debt only recently. My experience out of my former career is that large institutional investors start with trying a new strategy with this partner. It's -- they raised EUR 500 million in their first fund. But typically, if they are able to deliver on the investment performance, which they currently do, the probability that they are able, with the next fund to raise EUR 2 billion or EUR 1 billion to start with or EUR 2 billion with the third fund is pretty obvious. And the demand for infrastructure debt is significant specifically in the European insurance company space, which is basically Solvency II-driven where actually long-term liabilities are in very high demand these days. On the traditional infrastructure equity space, they built a couple of funds along niches. The most recent one is called smart cities and smart cities is all related to modernization of the cities. It's a combination of renewables availability of and transmission of data. So if everything modern city governments can't default anymore and where privatization is going to happen. This is great timing. And thirdly, since they are focusing on not the very large transactions, this organization is competing in a sweet spot somewhere between, let's say, EUR 30 million and EUR 100 million per transaction. So the competition is a little bit less than direct competition with the large Macquaries or EQTs and the infrastructure buyout sovereign wealth funds. So we feel very comfortable with the business case they provided to us, while we with our residential footprint, our logistics footprint, we are convinced that we can support them with further growth example, rooftop solar in the logistics space in Europe where we are one of the biggest owners and managers of logistics real estate in Europe where we can provide rooftops on a contractual basis, for instance, to infrastructure funds going forward. This is a quite unique opportunity.

The second question was regarding the key people.

The key people are somewhat all locked in either by cherry schemes in existing or new -- in the new funds or all or most of the investors, the fund managers are also investors and locked in with shares and with the earn-out.

And you mentioned -- you don't mention the time horizon for the earn-out, 5 years together with the plan that you present on Page 10?

Karim?

Yes, the earn-out runs until end of 2024.

Okay. And I would have one additional one, if I may, or if that is okay? I ask another one?

Sure. Go ahead.

Okay. Can you give us some ideas about the financials data like cost/income ratio? Is it like in line with euros or higher or lower? Or also in terms of revenues and profitability, what we can expect that you will consolidate as of next year.

Yes, that's a good way. Obviously, that's the obvious financial question, Miro. Now first of all, the contribution to EBITDA for -- initially over next year, the expansion is a low or lower single-digit euro amount initially, which we expect to grow quickly with the deployments of the EUR 1.6 billion of dry powder that Whitehelm has already. The run rate revenue and EBITDA, we just talked about the earn-out, Miro. Now end of 2024, we expect a mid double-digit euro contribution to revenues. And that should support in EBITDA in the region of EUR 15 million to EUR 20 million. So that would translate into a target EBITDA margin, that was one of the questions which you asked, between 30% and 35%. At the moment, the EBITDA margin of the business is just above 20%. So economies, I don't know what to tell you, Miro. I think we talked about this. Infrastructure has a significant economies of scale potential or potential for economies of scale. And that's obviously behind the financial targets I just explained to you.

[Operator Instructions] The next question is from the line of Lars Vom-Cleff from Deutsche Bank.

Some were already answered, but I have some additional ones and preconditions you agree, would ask them one by one. You said that by the acquisition, your assets under management will now exceed EUR 50 billion. Will the additional EUR 3 billion of assets under management you just acquired already be included in your financial year '21 AUM target of EUR 50 billion to EUR 53 billion or only from next year onwards? I'm only asking in order to get a better feeling of the organic growth we should expect for the remainder of the year '21?

Yes, Lars. This is Karim. Organic growth is always planned and forecasted on a -- sorry, growth AUM was only progressed on an organic base because at the beginning of the year, when we gave out the guidance, we actually don't know how much M&A is going to happen. So the organic growth target remains unchanged. The EUR 3.5 billion of additional AUM -- the addition to our AUM depends on the closing. If we close the acquisition, this side of customers, it will obviously be added to AUM, if we close the deal sometime next year, it will be added next year as the AUM base -- are based on closed transactions organically as well as on the M&A side.

So for our models, we should -- if we already want to pencil in the acquisition, we should rather expect a consolidation from Q1 next year onwards and not necessarily Q4 this year?

Yes, that is fair point because Lars, I mean, obviously, if we -- assuming if we close, for example, in December, obviously, it would have a financial -- would only have an impact on the AUM, but no financial impact on the P&L. So I think it's fair to assume that the closing will probably happen at the beginning of the year.

Okay. And I read on Bloomberg that the former 30% holder challenger limited would only get cash. Is this correct? And does it mean that the Whitehelm employees only get shares?

No, it's actually -- first of all, yes, it's correct. The 30% for challenger is -- will be paid fully in cash. And then there's the remainder, which goes to the management, and this will be paid 50-50, 50% in cash and 50% in share. Obviously, a selling party is interested in shares. They want a full cash buyout. But for the management pillars, it's 50-50.

And when would the lockup then end?

The lockup is between 2 and 4 years.

The next question is from the line of Thomas Neuhold from Kepler Cheuvreux.

I only have 2 actually left. The first one would be, if you can elaborate, please, more detail on potential cross-selling opportunities. And the second one would be on the earn-out agreement. Can you elaborate a little bit in more detail what KPIs you look at which never need to be reached to trigger earn-out payment and what the total maximum earn-out payments could be, if all KPIs are reached.

I'll start with the -- I think your first question, where a little part of the first question was with regard to cross-selling.

Cross-selling opportunities.

Yes, perfect.

Perhaps I can elaborate on cross-selling. Our experience with the acquisition of our Japanese platform was that actually we attracted more money to invest from Japanese investors than investing in European funds and less European funds into Japan. So that -- the presence of your platform in a certain country builds a significant credibility. So the combination of having an infrastructure business in Australia with a client base of approximately 20 or 25 institutional Australian blue-chipped pension funds is not helping us only to get access to those clients, which until recently did not invest with Patrizia that's our hope and there's a high probability. Secondly, there are product combinations, which we believe in. So our European clients have less exposure to infrastructure than others. So the combination of our product shelf, which we already provide to the European pension funds and life insurance plus the infrastructure offering, we believe helps us to raise our share with a large infrastructure and with the large pension fund schemes in Europe. And we plan to have combined products or products which are on the back of our residential shelf. Rooftop logistics would be the most obvious one. Data net and data centers in working together with our logistics business is another. This is all in the idea stage where we are convinced that in the near future, we can provide customer access or deliver products to these customers. The last one, life insurance companies are hungry for infrastructure debt. We have client access. We know or I know out of my former life that the demand is actually exploding in that space and we have access and we tested the demand with our clients, whether there's future demand also working with us, which was confirmed.

Your second question, Thomas, this is Karim again. The second question was with regard to...

The earn-out, what the KPIs are and what kind of maximum earn-out level could be achieved over the relevant KPI's improvement?

Yes. Okay. Now first of all, the KPI, that's actually a single KPI, which is revenue. So the earn-out is based on revenues. And the total consideration can go up to EUR 150 million to EUR 200 million. That includes, by the way, the EUR 67 million initial payment. But as Thomas referred to, when we are through the presentation, one of the key disposal criteria for the management team was not only with regard to the earn-out, obviously, when you sell a business, it's part of the negotiation. But what was important to them -- most important to them, it's pretty similar to our acquisition criteria in the culture, the cultural fit, in particular, because the Whitehelm team is fairly young. So they want to -- they were looking for a team that is like mind us and has the same culture. Plus also, what is important to them is that Patrizia is an independent firm. We don't belong to a bank or an insurance company. We are an entrepreneurial and dynamic investment manager. And this was the second criteria that we're looking for.

There are no more questions at this time. I hand back to Mr. Karim Bohn for closing comments. Please go ahead.

Thank you, Nairobi. Now thanks, everyone for joining us on short notice for the call. As you've heard, we're pretty excited about the acquisition. And if you have any further questions, please reach out to us or to IR, and we'll give you an update on the financials in November on Q3. Looking forward to seeing you or hear you then or in between in one of the road show meetings or conferences we're going to attend over the next weeks. Thanks a lot. Thanks for joining.