Partners Group Private Equity Limited

Ladies and gentlemen, welcome to the Princess Private Equity Holding Q3 2021 investor conference call and live webcast. I am Paul, the course call operator. I would like to remind you that all participants will be in listen-only mode and the conference has been recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and 1 on your telephone. Webcast viewers may submit their questions or comments in writing via the related field. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to George Crow. Please go ahead, sir. Mr. Crow, your line is open.

Thank you very much. So a warm welcome from my side too. My name is George Crowe. I'm a member of management and partner with the Client Solutions team based in London. Also responsible for investor relations for Princess. With me today is Felix Haldner, who is a partner with Partners Group and also represents Partners Group on the board of Princess. So during the next 30 minutes or so, we'll talk you through the Q3 results. As mentioned, there will also be an opportunity for Q&A. So I'd encourage you to enter questions in the webinar tool as we go. With that, I'll hand over to Felix, who will take you through today's presentation.

Thank you, George. And a warm welcome from my side as well. My name is, as George mentioned, Felix Haldner. This quarter has been fairly eventful for Prince's private equity holdings. where we observed record realizations of close to 300 million, mostly actually by two companies, by International School Partnership and Global Logic. But we also observed that we made a number of new investments, and a lot of them actually also in the pipeline for the next quarters. But as always, before diving into the quarterly figures, some words to PRINCESS and its investment strategy, just as a reminder. So PRINCESS provides shareholders with exposure to Partners Group's direct private equity investment strategy, and by that, participating in transactions alongside our institutional clients. Partners Group as a manager, we are a so-called thematic investor, so we focus on investments in companies where growth is underpinned by long-term transformative trends. And then we bring extensive resources with a global team of over 150 investor professionals that are supported by a global network of external industry advisors and by operating directors. And then I'll further elaborate on the investment strategy when we cover recent portfolio activities later in the presentation. And so, again, as a reminder, all of Prince's investments are subject to Partners Group's responsible investment policy, and ESG factors are therefore fully integrated at all stages of the investment lifecycle alongside commercial and financial factors. And finally, the company's investment objective is to generate long-term capital growth and an attractive dividend of 5% of opening net assets. And over the last 10 years, the company has achieved double-digit NAV and share price total returns. This brings me to slide five. So performance continued to develop positively during the third quarter. of this year with a quarter total return of 2.6%, which brings us year-to-date to almost 20%. Equally, the share price total return of 16.2% over the year-to-date, where of 5.8% in the last quarter. In terms of portfolio activity, I alluded to the two realizations of global logic and ISP. I covered some of it in the previous call, but certainly later in the presentation, I'll use the ISP case as a showcase of how we add value to our portfolio companies. We made new investments in Apex Logistics and Reedy Industries. I will come back to them a bit later in the presentation. And there's, as I said, a high level of portfolio activity in the fourth quarter. We are in the midst of it. And a number of realizations and new investments are signed or are in closing. And as a reminder, we declared the second interim dividend in October, which brings us then to a total dividend of 67 cents per share in line with the company's objective to distribute the 5 percent of opening NAV. When we look at the historic NAV and share price performance, look, Princess NAV and share price continue to perform positively, maintaining the long-term outperformance of public markets. In terms of discounts, we observed as of last Friday a discount of 9.7 percent compared to The peer group, which was 12.9, so largely in line or slightly better. And so maybe for long term, the distance continues to narrow. However, it remains wider, slightly wider than pre-COVID. So by that, we scope for further concentration, contraction, please. On the key figures, well, following the realization of Globalogic and ISP, the investment level stood at 88%, as you can see on page 8. Princess has a number of new investments which are signed and in closing, and there's a visible pipeline of investment opportunities, so we expect to see the investment level to increase over the coming quarters. We'll come to that a bit later in the presentation. Just as a reminder, among the unfunded commitments, we distinguish between so-called active ones and so-called stale ones. We consider about 77 million as active. That is, we expect that they are going to be called over the next quarters and years, while the remainder is our commitment to mature funds that are no longer in the investment period and where we do not anticipate that they are called in full. This brings me actually to the to the revelations for the 10 largest portfolio companies in the last quarter. And as you can observe, a very positive development. I'd like to highlight particularly two companies, that is, KinderCare and Foam. Both of them, we provided comments in the last couple of quarters, particularly on KinderCare. the nursery and early childhood centers company in North America where we had a revaluation of 26.4% in the last quarter. This is basically a recovery or a consequence of the recovery of this business as life has come close to normal in the US when it comes to early childhood education. As you know, KinderCare, as I commented in one of the last calls, KinderCare is in an IPO process, so unfortunately I won't be in a position to answer many questions in the Q&A to this company. The other noteworthy development is form technology that, again, as a consequence of the recovery of the economy in general, has experienced a steep growth in revenue and EBITDA. So as fast we were in writing down or revaluating downwards, when form had issues, particularly as it serves clients, including in the automotive and in the oil and gas sectors. And they now benefit from the recovery, the broad recovery in these industries. This brings me to the portfolio overview. we can take note that we are invested in a very broadly diversified manner with a focus on resilient companies in sectors and sub-sectors that benefit from trends. We have a limited exposure to the cyclical sectors. We are also invested globally, diversified globally with half and half Europe and North America. Now with the exit of ISP, which was counted towards Europe, North America has gained in importance. However, as this ISP example shows, I think these donut diagrams only show, of course, part of the truth, as many of our companies are fairly fairly international, global themselves, and by that have exposure, for example, to emerging markets or to other continents. We also diversified broadly by investment and vintage years, and basically it shows that we have a fairly mature portfolio, which was demonstrated by the recent exits. But certainly by the vintage years, you can probably expect more exit activity over the next quarters and years. And finally, about the investment types, most of our investments are indirect investments. There's a small legacy portfolio on funds, which is in the runoff. and there is a bit higher debt portion by now, the reason being that we put some of the proceeds we received from the large exits in senior loans, that's basically for portfolio management purposes, so to earn a coupon of, say, take 3% or so, basically waiting for being deployed into direct investments in the coming quarters. on the portfolio metrics we we observe that we continue to to to have very healthy revenue growth over over the last 12 months very healthy epga growth as well actually increased significantly reflecting probably a combination of top-line growth and some base effects of Q3 2020, when more severe COVID restrictions remain in place. And so by that, these lower figures dropped out of the last 12 months, and by that, this significant increase. Whilst the valuations and the net debt remained broadly in line with previous quotas. Before discussing Prince's specific recent portfolio activity, I'll spend a few minutes discussing Partners Group's transformational investment strategy, which combines a thematic approach to sourcing investment opportunities with a very hands-on entrepreneurial governance model to then transform businesses. So, Partners Group has identified Three overarching, I call them, or we call them GIGA themes. Digitization, new living, and sustainability and efficiency. And these GIGA themes basically guide our investment activity. I alluded to this in previous quarters, that then within each of these GIGA themes, we then drill down into specific sub-themes, and by that, mapping the market to identify the most attractive target companies ahead of our competitors, so we can build our investment case ahead well in advance of the sales process. So, this proactive research-driven approach ensures we focus our sourcing efforts and that we ultimately buy what we should own rather than reacting to what is for sale or what the banks basically want to sell. So we invest then in companies that are basically supported by resilient long-term global trends. And on this page, you see basically a selection of these many, many sub themes. At any time, we probably have about 40 to 60 of them. So here, a small selection. So as an example, in technology, we like software businesses, So, for example, that deal with governance, risk compliance, that develop operations, so are basically software for software developers, and so on. And by that, we then identify ITERA, which is now in the portfolio. Or in services, that is, of course, a very broad area, we drill down to sub-teams where we believe there is a lot of tailwind, and then we drill down to companies that basically can play within this theme. So we basically identified really industries, and I'll come to that in a minute. In goods and products, we like beauty, personal care, we like actually specialty chemicals, we like sustainable agriculture, and as investors know, we made an investment in Rovenza, the bio-nutritional control company headquartered in Lisbon with global activities. Or in health and life, we like IT-related health and life, so healthcare IT. We like pharmaceutical services providers. that help the big pharma to speed up with products, to go to market, which was particularly important or particularly visible in the pandemic and the delivery of some of the drugs, the new drugs and vaccines to the market. Or in contract development and manufacturing organizations like very recently, but also with PCI pharma services. So, these are just a number of sub-teams we like and where then we send our investment professionals to look for actionable companies in the market. Then, having acquired a company, we then implement our entrepreneurial ownership governance model. This is very, very different to the approach of, for example, a VC, a venture capitalist, that are typically very smart people who identify sectors and then companies, and then they buy a minority stake, they buy maybe 20, 30, 40 minority stakes, and then some of them are then basically home runs and others are flops, and they're not intervening too much in their businesses. Very much to the contrary, we build high conviction in certain companies and then build them together with the management teams. So we are, of course, then shareholders with a controlling position and a board representation. And by that, we are able to drive growth and to implement our value creation playbook. that we developed jointly, typically with an ambitious management team. And this very systematic approach yields consistent results and ensures that best practice is implemented across our portfolio. By that, I give you maybe one example on our investments you have observed for a while in our portfolio and then and happily despite of the exit we are still exposed to because we reinvested some of the money so it's international school partnership which is by now a leading international group of schools schools of choice providing english or bilingual that's local language plus english education to local children so By now, we've got 52 schools across 15 countries with almost 50,000 students. And this was actually founded in 2013 by us and just a very entrepreneurial vision of an entrepreneurial team with a vision of creating a leading K-12 kindergarten to the 12th school year schools group. we, at that time, realized that the K-12 schools market was very fragmented. And actually, it still is, despite the fact that now about five, six, seven large school groups have been basically formed and have reached a size where actually some are even listed. But as you can see on the right hand, on the top, there are still many, many potential targets for us, particularly probably the two on the upper right side, so K-12 schools that are in small groups, group ownership, still about 500, or independently owned K-12 schools owned by mom and pop. And these are basically our targets. have been our targets and actually as we did the re-underwriting are still our targets for the journey in the next couple of years. So international school partnership was really very much about platform building by a buy and build strategy. So about 48 of the 52 schools were basically acquired We also had some green field operations where we opened new schools from building to acquisition of teachers and then, of course, attracting pupils with four schools. We then also increased the capacity through the expanding existing schools. improving facilities to create incremental capacity for more than 5,000 students. And we invested a lot in the learning team to deliver high-quality learning offer. This is probably also what is very attractive to teachers working in a group like ISP as opposed to working in a single school. This learning environment and this investment in teach-to-teacher is very attractive for teachers. So we invested a lot in the digital infrastructure. Some of you remember we developed a proprietary online platform which we call the Learning Hub. It was originally designed for teacher development and best practice sharing and then by default basically also served us as the learning platform when governments ordered people to go home and where we had e-learning or distance learning. This brought us then basically from more or less zero in 2013 to financial year 21 with 52 schools and a running EPTA of 115 million. And as you know, we sold the company, the school platform for 1.9 billion euro. We attracted a minority buyer, Ontario municipal employee retirement scheme, with a 25% stake and reacquired the remainder. And so by that, on the next page, you'll basically see our realization activity on one page. I covered ISP and GlobalLogic. There was some other, and the Legacy Fund and debt investments also provided some realization proceeds. More importantly, we acquired Again, at stake in ISP. And we actually, apart from this 13.3 million, we also reserved additional equity for its ongoing acquisition and expansion tour. We acquired an interest in Apex Logistics, an Asia-based, China-based, integrated logistics solutions providers. I briefly alluded to that in the last call. And finally, we invested in Reedy, an industrial company, so it's a provider of commercial heating, ventilation, and air conditioning services. And following this, well, strong strong period for realizations and also a portion of the proceeds was invested in senior loans on a temporary basis. This is just for liquidity management purposes. So, this loan position will be reduced over time to fund the closing of new private equity investments. Maybe on really There you will see that this is a North America, actually Chicago headquartered company, a very established provider of aftermarket commercial HVAC maintenance repair and replacement services. We believe as they are a market leader in a growing market that is underpinned by very stable demand, as they have a very proven M&A and integration capabilities, a very ambitious team that will be tangible. There are tangible benefits to scale. route optimization, technician productivity, response time improvement, technical expertise improvement, and so on, and their favorable market tailwinds. So what we believe, what we can do with this company in terms of value creation, as with most companies, there is an M&A plan. We'll also accelerate organic growth. We'll build best-in-class technical expertise, we'll optimize benefits of density by improving utilization. So I'll be happy in the next quarters to report on the progress. Apart from these signed and closed investments in this quarter, we have also a number of activities actually post the quarter. As you can see, we had an investment level, as earlier alluded to, of about 88%, including the 75 million of senior loans. We had realizations, partial realizations or full realizations, like Hortifruti, Strafe, Foncia, but then, which we'll receive cash for in the next, we'll have by now or receive in the running quota. But we also have a number of investments that are in closing, including Foncia, pardon, again, that is the real estate property management company. We talked about a number of times, Pharmathon, this pharmaceutical company, a contract development and manufacturing company that's are basically specialists in the development of so-called sustained release technologies. What is that? That's technologies that improve patient compliance. So, for example, by long-acting injectables or slow-releasing oral medicines and of the . So, Pharmacen is in the closing. ACT, a broadband provider, particularly in southern India. I'm happy to report in more detail next time. Blue Sky, which is a commercial restoration service provider in the US. So basically, if a thunderstorm destroys roofs or other parts of a building, There's basically a rescue provider that organizes restoration and so on. And very recently, you may have observed a press release whereby partners group agreed to buy a portion of Breitling, the iconic Swiss watchmaker. and also happy to report more about this investment in one of the next calls. This brings us actually on a pro forma basis, as we speak, to about 95% of investment level, which includes some additional 60 million in senior loans to be executed in October. Apart from this very specific investment activity that is in closing, We have a near-term pipeline that is the next six months or so that is again focused on resilient sectors and growing businesses. So you will see that in all of the geographies we cover, there are investment activities. And in all the sectors we cover, particularly goods and products, technology services, health and life, as industrials that are below our GIGA themes. There are topics like consumable cutting tools, data intelligence platform, tertiary education provider, fund administration services, cancer care provider, healthcare IT, and so on. So the sub-themes or some of the sub-themes we mentioned before or we alluded to in the last call, the last quoted. This brings me already to the summary. So PRINCESS follows this thematic investment approach whereby a partners group identifies companies that benefit from trends and then we invest into attractive companies with clear development potential. We are builders, so we build leading companies, and then we integrate ESG factors fully into the process. And these factors are actually not only to mitigate risk, but also to create and drive value. We've got deep resources with a large team. We've got, apart from the direct equity professionals, we've got a network of industry experts and operating directors. And by that, we built a very diversified global private equity portfolio that provides exposure to thematic growth trends. It's very balanced across investments in various stages of the value creation mode. We've got mature investments where we will report about exits and crystallization of value. And we've got others that are basically just in the starting phase where we start the journey with the management team to an accelerated growth. And there's a near-term investment pipeline, as I just alluded to, which across all regions actually. And so I'm not worried about all about the redeployment of the pile of capital we have seen in this last, in this third quarter come back to the company. By that, I'm at the end of my presentation, maybe just the final word. This was also the last investor relations call by George Crow as he decided to move on. So in the name of the many, many investors you met, George, in the last years, thank you. Thank you very much and all the best for your future. By that, I pass back to the moderator, to the operator, and thank you for your attention.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and 2. Questioners on the phone are requested to use only handsets and eventually turn off the volume from the webcast. Webcast viewers may submit their questions or comments in writing via the relative field. Anyone who has a question may press star and 1 at this time. As a reminder, if you wish to register for a question, please press star and 1 on your telephone. There are no questions from the phone.

Okay, it looks like we have a few coming in over the webinar tool, so I'll move to those now. So firstly, a couple on the senior loan allocation. The first is asking, is that held in individual names or within a fund? The question's coming from a risk perspective. That's what I can take, Felix. So the allocation is via a fund. We hold around 400 underlying loans, so very broadly diversified. Those are, for the most part, first liens are the most secure part of the capital structure and floating. So for a risk perspective, it's broadly diversified exposure. And the purpose is, as Felix mentioned, to mitigate the potential drag of holding cash. Now, we have another question on the senior loan allocation. Can we elaborate on how much of the NAV is now in senior loans? Could these be sold in order to deploy capital into transactions? And any color we can add on the timeline to invest the senior loan balance? So on a pro-form basis, accounting for the additional deployment that Felix mentioned that took place in October, we are now around 13% of NAV in senior loans. you know, these are only to be held on a temporary basis. So we aim to redeploy into private equity investments as they close. This is certainly not a strategic allocation. In terms of the timeline, I think we won't be rushing to get this to redeploy and get this to 100% private equity. We have a very broad pipeline of deals that will extend not only for the rest of this year, but into next. So we do need to preserve some capital. So I would say, and Felix has chipped in a few sort of see this differently, but I would say we're looking more towards the second half of next year to be close to fully invested. But you should certainly expect us to see us chip away at a bit of that loan allocation in the coming quarters. Question on the dividend, Felix maybe one for you as in your capacity as a board member. Do we stick to the target of 5% dividend of opening net asset value?

Yeah, the short answer is yes, that's what we intend to do.

Perfect, thank you very much. I had a question on the market environment. How competitive is it and what do we consider partners groups edges when competing for new transactions? Felix, maybe one for you.

No, thank you. It appears that the very difficult ones come to me, end up with me. Now, the market environment is as difficult as it could be, I would say. We have observed during many, many quarters record high valuations of our assets. Our response actually hasn't been much different during all these quarters other than adding resources at our end. sticking to our beliefs, that is the thematic investment, so to really acquire what we should own as opposed to what's on the market. So to put as many thoughts as required in defining the themes and then the sub-themes and the sectors and the sub-sectors. where we want to seek exposure. And by that, then acquire companies at historically very elevated valuations. And so by that, we need to build a very high level of conviction that we can that we can develop these companies, that there is sufficient visibility, clarity on the path to growth. Even factoring in that at an exit in four, five, six, seven years, the market environment or the valuations will be lower, and that's how we how we go into transactions. So probably not much different from previous quarters. Maybe the macroeconomic outlook is even a bit more uncertain as people's views deviate a bit as to whether we go into inflationary periods or whether it's inflation paired with stagnation certainly not easy. Our ambition as a manager in any case is independently as to where the economy is going, the macro level, that we are outperforming certainly public markets in any cycle. but particularly also in a downward cycle by investing in very resilient middle market companies that should experience growth despite of the economic environment. Hope this lengthy answer provides at least some insights in our thinking.

Perfect. Thank you, Felix. And could you say a few words also about geographic allocations? Do we expect those to change, particularly looking at emerging markets? Do we think we'd do more there?

Look, we like emerging markets, particularly because of certain demographics, the rising middle class for consumers, for products. ACT is an example of that. We just acquired, or we are in the closing process of buying its services, one of the largest broadband providers in Southern India, where we basically benefit from a growing middle class. However, we also like actually very much buying companies in North America and Europe. with an exposure to emerging markets without being headquartered there. And many, many of our companies have a very significant portion of revenues or facilities in emerging markets. But generally, we like kind of a 40-40 I would say, among Europe, Americas, and emerging markets. And the more detailed slate you can see actually on the page in the appendix of our presentation. Well, I think that's about what I can say here.

Okay, thank you. And one final question, again, on the senior loan allocation. What is the current yield? I can take that one, Felix. It's about 4.2%. So, yeah, let's trade over 4%. Okay, which I think brings us to the end of the questions from the tool as well. So it just remains to thank shareholders again for their time for dialing in today. And we do hope you'll dial in in three months' time when the company will provide an update on its 2021 results. So thank you once again. Wish you a good day.