Partners Group Holding AG

Ladies and gentlemen, welcome to the Interim Financial Results 2023 Conference Call and Life Webcast. I am Sandra, the course call operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to David Layton, Chief Executive Officer. Please go ahead, sir.

Thank you very much, and welcome to our Interim Financial Results Call for 2023 Webcast. It's a pleasure to be with you all. It's great to be back in London live where we have a number of our important stakeholders and shareholders that can be with us in the room here. And welcome also to all of you who are joining us over the phone. I'm the Chief Executive Officer, David Layton. I'll be doing today's update with Philip Sauer, who is our Head of Corporate Development and our Chief Financial Officer at Interim. Maybe starting off with a couple of big picture messages. I think this is an environment where it is absolutely essential to drive alpha and to drive differentiated results. And we believe that our transformational investing strategies are key to the success that we'll be able to drive in the future. We're a business who's carved out a nice niche for ourselves within the bespoke solutions segment of the market. This has provided continued differentiated growth for us and a continued point of differentiation for our investors. And we saw 68% of total funds raised coming from these bespoke solutions strategies. We continue to confirm the guidance that we had provided of total fundraising between $17 and $22 per year and believe that we're on a solid trajectory. We've had good financial performance during the period, revenues up 19%. earnings up 13%. Performance fees were obviously an important element of that story. And this is a period of time in which I think the differentiation that you see from a truly institutionalized and diversified platform comes through. We had 80 different programs that contributed to our performance fees. This was also the period in which our infrastructure business came online from a performance fee perspective. If you go back just a couple of periods to 2021, that was obviously a big year for us from a performance fee perspective. Out of the performance fee generated in that year, a very small modicum of performance fees came from the infrastructure business, about 1%. and that's because we were at a period of stage of development within that asset class where essentially all of the realizations went to clients. As we were recouping our clients' principal investment and they were achieving their minimum returns, and this is the period in which that asset class reached a point of maturity whereby they started paying performance fees. And we effectively moved from a six-cylinder engine to an eight-cylinder engine from a performance fee generation perspective as a result of this infrastructure business coming online. And we're going to add the sustained management fee growth during the period and continue to manage our business towards a 60% margin despite some of the FX headwinds. We're a company with a meaningful cost base. Throughout this presentation, we'll focus on three main sections. I'll give an update on our investment platform and our client activities, and then Philip will cover financials. You know, the private equity industry has been around for a while, and you can go back in history and look at how returns have developed. And for your average performer within our industry, returns have been relatively consistent. We're pleased that over various economic cycles, we have been a top performer within our space and have differentiated ourselves well beyond medium performance. This top quartile performance has been generated through what we call our transformational ownership approach, which we outline on the next slide. This transformational ownership approach consists of two topics. The first is thematic investing. And the second is entrepreneurial governance. Thematic investing has to do with identifying specific themes that we believe have structural tailwinds behind them. Our teams will do two, three years of research before an investment proposal is made to our investment committee, getting deep on the space, developing convictions, meeting all the relevant executives and companies in that space. And that's a big part. of how you differentiate in the current environment. It's not buying what's for sale, it's buying what you believe in and what you have conviction in. And then once you own those assets, it's our entrepreneurial ownership approach that helps us differentiate. We build very strong boards, we have a very strong focus on strategy, driving accountability for that strategy, and that has yielded good results. Those results are seen on the next slide. And this is something that we've shared in the past, but just to reiterate, this is not an environment where a lot of people are counting on multiple expansions. So here we show returns between the public markets and using our funds as a proxy for the private markets that illustrate some of the contrast that investors are going through. This is one of the reasons why private markets continues to get meaningful allocation in the current environment, even though the rate environment has changed. It's because private markets have done a particularly good job of driving outsized performance. And it's through, I think, the active, hands-on approach to aligning interests with management teams, driving towards a fine set of strategies that has resulted in that. And so, you know, just on the right-hand side of this slide, for example, if you look at our equity business, had 133% uplift in returns when you don't account for multiple expansions, right? Factor that out because that's not a factor moving forward. And your average public market investor would have done very well in the public markets as well, but most of their gain would have come from multiple expansions. And we believe that that provides a sustained competitive advantage for us in the current environment is the track record that we have driving alpha. Just to give you one case study of this, Omega is a portfolio company that we acquired a few years ago in the industrial belting sector. And this was a part of a research project that our team had worked on in the automation space. And when you look at the automation sector, there's a number of different ways that you can play that space. You can do it with capital equipment. service, we decided to do it on the consumable side of things. So if you think about a big automation project, only about 1% of the cost of that project comes from the belt. But those belts get chewed up on a regular basis. If there's downtime associated with that belt, it creates a tremendous amount of cost for that environment. So it's mission critical, relatively low cost, and consumables. and it plays within a number of themes that have strong tailwinds behind it. So our team had researched that space and come to the conclusion that this area would provide an attractive backdrop for us to execute on the transformational business strategy. And on the next slide, you can see how after we got possession of that business and became an owner, built a board that was expert, that had a very strong sense or how to create value in this particular business. They focused on a few key value drivers. When we come together with our board meetings, we're not flipping through financials and going through, you know, working capital assumptions. We're getting into are we making progress on our big strategic initiatives. We highlight here some of the big initiatives that we outlined for this business. And by driving those initiatives, we've been able to drive 71% earnings growth in this business. We've driven revenue by 14%, strong margins that are over 20% today. We've shifted our mix of recurring revenue to over 70%. And we've expanded into some core geographies like the U.S. market. And that's the way you drive results in the current environment. It's through hands-on ownership. and I think this is something that our company continues to excel at. If you look at the investment activities in the first half of this year, we invested about $5 billion. Fifty-seven percent of that tied to direct investments, type of businesses like we just outlined with Mega, and 43 percent of our investments were portfolio investments, diversified pools of investment content. We realized $5.4 billion during the period. 66% of those realizations were tied to direct positions and 34% tied to portfolio assets. These realizations combined with the unrealized performance that we also generated has resulted in strong investment results for our clients. Here we highlight the results achieved. over the first half of this year. 5.4% uplift in our private equity business, 3.9% uplift in our debt business, 6.9% uplift in infrastructure, and real estate, negative 2.4, about par for the course for that asset class. You can also see that we've been able to drive strong returns over a long period of time, and we're very proud of where each of these asset classes lie. This is also an environment where we have a lot of confidence in the underwriting that's taking place today. This is an environment where the debt positions that we're able to underwrite today have particularly strong returns. There isn't a tremendous amount of investment activity occurring, but the stuff that is occurring we're really, really pleased with and believe that we're going to have a very strong vintage year coming out of 2023. On the client side, you know, bespoke solutions has been a theme for us for a very long period of time. You know, if you go back in time to the start of this last cycle, we had a small, relatively small bespoke solutions business, about $3 billion in size, and we have scaled that to be 67% of our total asset base over the last number of years. We've seen disproportionate growth in that segment of the market, and this bespoke business strategy is also led to a platform that is highly diversified. We are not an institution that has a few flagship funds that determine the fate of our investment business and determine the fate of our performance. We have hundreds and hundreds and hundreds of programs, some of which are custom built for individual investors, some of which are built around the needs of a group of like investors. And that diversification provides a lot of stability to our platform. We are truly an institution and have a platform that's reflective of that. Now the mandate side of the business is maybe more of a niche. If you look at the total mandate market, it's only about a $250 billion segment of the market. But this is our segment. And this is really where the strength of our platform comes into focus. and where we differentiate ourselves I think most strongly. And here we have an example of a mandate client that's been investing with us for over a decade. You can see how we've scaled their portfolio. There are certain periods of time in which secondaries make a lot of sense. There are other periods of time that secondaries don't make sense. If you're an investor from the outside, who's trying to steer your portfolio and get some secondary exposure, you might say in 2023, that's something that we want to do. You'll launch a search. Your firm will make a few commitments. And three years down the line, you'll start to get secondary exposure after the window has likely passed. And so our ability to steer our clients' allocations on a dynamic, real-time basis is a strong point of differentiation for us in the current environment, where people are getting fed up with these limited partnerships, Don't allow them to steer their exposure. Don't allow them to be as dynamic as they would like to be. And even though this is a niche in the market, this is our niche. And I think we're extremely strong in this particular segment. We're able to do line-by-line allocations for our mandate clients in a way that I don't think anybody else can do. This is not, you know... make a commitment to this fund, make a commitment to this fund, make a commitment to this fund, and I'll give you a discount for making a group purchase with us. But this is line-by-line allocations with a dedicated portfolio manager on your account that will help you to meet your objectives. I think this is a very strong point of differentiation that our firm has. In addition to that, as the institutional market has become more crowded and has slowed this year, there's been a tremendous amount of attention that has shifted to wealth. And within the wealth segment, evergreens will be the predominant investment type, okay? An individual investor is not going to hassle with the drawdowns and distributions that have been so typical with limited partners in our space. They want products that have some structure to them, that solve some of their problems, that provide for a reasonable amount of liquidity during good times. And we have... uh been an innovator within this space an early mover and we have a suite of evergreen products that i think are second to none these products give investors the ability to get day one diversification into a pool of capital we have not fallen into the trap of growing too quickly in this space let's remember that the liquidity that's generated this year okay The redemptions that are met this year will come from investments that were made six, seven, eight years ago. You have to be really smart how you scale these products and do so for the long term so you don't miss client expectations. And I think we're a firm that's played the long game here, and today we have, I think, a suite of evergreens that have performed that we have client trust around, and we're launching a suite of new evergreen solutions six new evergreen solutions that should launch within the next six to 12 months that we're very, very excited about that meet the specific needs of distribution partners in this space. Our AUM growth was supported by a highly diversified offering. We are not a one-dimensional firm. You will not see all of our growth in one asset type. We have had diversified client growth across asset classes. seen it across private equity debt, infrastructure, and real estate, focus on bespoke solutions, but balance across asset types, and I think that's a real strength of our firm. On the next page, you see that our fundraising has also been diversified by region. This is not a one-dimensional story. Yes, we have strongholds in certain parts of Europe in particular, Those have continued to perform well for us, but the U.S. has also had disproportionately strong growth for us. You see contributions from the Middle East and Asia with increasing frequency from our business as we continue to grow our various efforts around the world. We confirm our full-year guidance for asset raising for this year. We're going to be on track, I think, to perform within the range that we previously outlined. And with that, Philip, I'll hand it over to you to walk us through the next.

Thank you, Dave. It's a pleasure for me being here together with you in London, and I will walk you through the financials. So let me start with assets under management. In U.S. dollars, they grew 8% year over year. However, in the average AUM in Swiss francs, this growth translated only into 3%. This was mainly driven because of the strengthening of the Swiss francs against the U.S. dollar and euro, our main currencies in which we generate revenues. Management fees decreased 3 percent. This was primarily driven due to the late management fees, which were lower because we did not help any material closings in the first half of the year. Total revenues increased 19 percent. Performance fees contributed meaningfully and represented 25 percent of revenues, up from 8 percent last year. EBIT margins stood at 61% and it is in line with our long-term target. So overall, I can say that this outcome shows our ability to navigate to a changing foreign exchange environment and inflation. With that, I would like to move to the next page. Let's look at our revenues in greater detail. We have two sources of revenues, management fees and performance fees. This slide will talk about management fees, which represent most of the revenues. After a very strong 2022, the growth in H1 was impacted by two factors. One was an unfavorable FX development and the lower late management fees because of limited closings of closed-ended funds. We would not expect H2 to be materially different than H1. However, we will be launching a number of new programs in the second half of this year But we expect these new programs to only pay late management fees in 2024. With that, I would like to touch base on performance fees on the next slide. Performance fees amount to $265 million or 25% of revenues and were generated on the back of over 80 highly diversified programs and mandates. Across the investment programs, infrastructure strategies were the overall largest contributor, making up 53% of all performance fees generated. In H1 alone, six new programs reached their hurdle rates and paid performance fees for the first time. This is a so-called catch-up effect. Reaching the hurdle of a closed-ended program is not a result of a single transaction, but accumulation of successful exits over a longer time period. Earlier this year, we expected performance fee to be more strongly tilted towards the second half of the year. At that time, we expected that we would require more exits and distributions in order to reach the hurdle rates of some of these funds. While it was apparent to us that performance fees were building up in these programs, we expected the release of performance fees only in the second half. H1 performance fees therefore resulted, were based on a strong performance of the underlying portfolio and further distributions from exits in infrastructure. I would like to give you some examples now why these infrastructure reached at hurdles. They have been built up over many years. For instance, in 2022, we sold Blauwind, an offshore wind project off the Dutch coast, powering 200,000 homes. We partially exited USIC, you might remember, a leading provider of outsourced utility locate services, and at that time of that exit, most exclusively private equity programs benefited from performance fees of this asset. Infrastructure typically did not benefit that much because all the proceeds, as Dave said, were distributed directly back to clients because the programs did not meet the hurdle yet at that time. The asset sale that ultimately pushed the infrastructure programs over the hurdle was then the sale of CWP renewables. We developed CWP from ground up and exited the asset as one of the largest renewable energy platforms in Australia. The closing and therefore the cash flows associated with that transaction happened in the first half of this year. With that, I would like to move to the 2023 outlook. For the full year, 2023, we expect performance fees to fall in our mid- to long-term range of 20% to 30% of revenues. While the performance fees in the first half of the year were driven by performance, diversification, and the catch-up effect, the second half of the year will be mainly dependent on exits on individual assets and businesses in private equity and infrastructure. As now most of our mature private equity and infrastructure programs are in performance fee mode, 2023 will likely be a good year if we successfully exit those assets. And that will also depend on the financial stability of the financing markets. However, if you look a bit longer term out, we are also confident to reach our mid to long-term goals on performance fees. With that, I would like to move on the next slide. Performance fees are ultimately a reflection of the value created for our clients. The greater the value we can create, the higher the performance fees. Performance fees follow AUM growth with a time lag of six to nine years. And in the past, a lot of our performance fees were driven by private equity, despite our private infrastructure business being a longstanding and successful asset class for Partners Group. For example, If you look on the slide, 2021 was a year with record exits and performance fees. However, private infrastructure performance fees was only 1% of the overall performance fees generated. Over 90% stem from private equity. Infrastructure has today over 20 billion in AUM and has so far not meaningfully contributed to performance fees. This picture has changed now. We will not only see more private equity performance fees as the asset class has grown, but we will also see private infrastructure contributing to the overall mix. This fact allows us to look confident into the future that performance fees will not be only more diversified, but also more stable going forward due to our conservative approach and how we recognize them. When we show performance fees, it is irrevocably ours. Why is this so? In closed-ended investment programs, performance fees are typically only charged once investments are realized and their predefined return hurdle has been exceeded. To further ensure a low probability of revising realized performance fees, we stress test the unrealized part by applying a significant discount of up to 50%. This is also the reason there is a less strong correlation between overall distributions received in a period and performance fee recognized. Sometimes it simply requires the distribution of one asset to trigger the recognition of performance fees of many assets being sold in the past. Let's move to the next slide. Since our IPO in 2006, our management fees has been remarkably stable at, on average, 1.28%. This can vary in any given year because of the timing of the fee clock. We expect this stable development to continue because we have pricing disciplines and driving innovative program innovation. For 2022, the management fee margin was slightly lower at 125 basis points, and that was mainly due to late management fees. So let's move to the costs on the next slide. Profitability remains strong with an EBIT margin of 61.2%. Total operating costs increased by 31%. Out of these costs, 83% are personnel expenses. As you can see, the increase in performance fee revenues also triggered an equal increase of variable performance fee related personal expenses as we continue to allocate a fixed proportion of up to 40% to our employees. Regular personal expenses grew 11%, so below the average FTE growth of 15%. These costs were positively impacted by foreign exchange effects, as well as lower bonus accruals compared to the prior period. Other operating expenses increased 11% during the period. This was primarily driven by increased technology investments to support sustained growth of the firm's platform, in the years to come and cost inflation. We expect those expenses going forward to move in line with management fee growth. Now, on the next slide, I talked a lot about ethics and would like to dive a bit deeper into its impact on our P&L. We are a global business and reporting in Swiss francs, and most of our revenues come from U.S. dollars and Euro-denominated funds. As the Swiss franc strengthens, FX negatively impacted management fees by 4 percentage points and positively impacted costs by 2 percentage points. So in total, the impact of the EBIT margin was about 2 percentage points. Given that the market knows our revenue and cost exposure, I assume the FX did not come as a surprise to you. We would expect FX to have also a similar impact for the full year. Our long-term track record on the next slide of our EBIT margin or maintaining our EBIT margin is remarkable. We have now over the last decade managed our business around 60%. We continue to target 60% EBIT margin going forward. With that, I would like to move to the next slide, talking about financials below EBIT and our liquidity position. Today, we invested about 800 million Swiss francs alongside our clients. and in different programs and mandates. In H1, these investments generated a positive performance of 5% for 45 million for the year, for the first half of the year, supported by robust portfolio performance. The net financial income was plus 17 million, as the positive returns were offset mostly by FX hedging costs. The tax rate stood at 16.6%. For 2023, we expect the tax rate to be to be between 15% and 17%. For 2024 onwards, we anticipate the tax rate to slightly increase to 18% to 19% following the OECD Pillar 2 implementation. This leaves us with a profit of $551 million. Now let's turn quickly to our balance sheet before I conclude. We have available liquidity of $2.4 billion in Swiss francs after $1 billion of dividend payments in the first half. This includes $360 million in cash and $1.2 billion in short-term loans to products. Plus, we have about $900 million in an undrawn credit facility. All of this confirms that our liquidity remains strong. This brings me to the end of my presentation. And with that, I would like to hand over to the room for questions. And yeah. And we take it from there and there.