Partners Group Private Equity Limited

Ladies and gentlemen, welcome to the Princess Private Equity Holding Q4 2022 Investor Conference Call and Live Webcast. I'm Poppy, the course call operator. I would like to remind you that all participants will be in a listen-only mode and the conference is being recorded. The presentation will be followed by a question and answer session. You can register for the questions at any time by pressing star and 1 on your telephone. Webcast viewers may submit their questions or comments in writing via the relative 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 Felix Heldner.

Good morning, ladies and gentlemen. It's a pleasure to give you an update on PRINCESS Q4 and partly, of course, last year. Everything is based on unaudited figures, so please bear with us. We'll publish the annual report in about three weeks from now. As you have seen by the release, the RNS today, we have a number of news for you. but I'll walk through one by one. On the highlight side for Princess, certainly we have a great portfolio that weathers the storm. Partners Group is a systematic investor, and the Princess portfolio reflects it. We have almost a full investment level of anywhere between 95% and 100%. As you have seen, we have reviewed the hedging policy and decided to unwind the currency hedging at the end of March. And basically, this is to reduce the cash flow volatility, which, as you recall, was one of the key reasons why we had to cancel last year's December dividend. The board has confirmed its objective to pay 5% of opening NAF. in two semiannual installments. Partners Group is highly committed to PRINCIS. To remind you, PRINCIS is the only direct lead program of Partners Group and by that showcasing its value creation capabilities. We have also, as a result of last quarter's dividend suspension, we have worked on with the board and partners group to provide more clarity on controls and communication. Finally, the portfolio speaks for itself. As you see in the last line, we have an extraordinary last 12-month revenue growth on a look-through basis of 23.8%. and an EBTA last 12-month growth rate of 16.1%, an EBTA margin of 22%. And this is ultimately what is going to drive the NAV gains in the coming quarters and years. On this page, on the next page, you basically see the history of Princess that started as a bond linked to a portfolio. as a funder fund, and only in 2011, we then changed it to a direct portfolio. Now, in 2023, we can certainly say that this change, this transition has been completed, and by that, the portfolio as of today serves as a basis for additional outperformance versus the MSCI world. The legacy portfolio has kind of provided some drag in the performance the last couple of years. However, this is now to an end. We have got just 2% left. So by that, going forward, the NRE will develop according to the development of the underlying portfolio companies. Last year, in a very difficult environment, we observed a slight decrease of 1.6% on a total return basis, which, however, kind of stacks up very positively to the MSCI World Index, which was down 12.7%. We invested 157 million in 2022. That's probably about 200 million less than the year before. but still 12 major transactions including the reinvestment in United States Infrastructure Corporation and we received distributions of 109 million, the majority of which from the direct portfolio. At the bottom of this page, you basically see the bridge from NAV at beginning of the year to NAV at the end of the year. On the next page, just to recap, why did we employ this FX hatching policy overall this year? I mean, it follows a policy of our firm. We employ for most of our client portfolios. It basically prioritizes NAV stability by hatching of the non-reference currency exposure. Now, given the initial composition of the shareholder basis, which was mainly European and Swiss, and the shift that over time happened towards the UK and other investors, and also reflecting that Prince's private equity holding is basically the only listed private equity company in the London market that employs such an FX hedging policy. And then as a result, of course, of last year's, of last quarter's dividend suspension, we came to that decision, which we announced earlier today. At the bottom of this page, you basically see that this hedging policy provided the results that it was designed for. However, what this table does not show, of course, is that with the swings, with strong swings in currencies at the settlement base, there's cash settlement, which ultimately led to the liquidity squeeze in September last year. By that, terminating the FX hedges will then, of course, also limit the FX impact on liquidity, and by that, also aligning it with the investment universe. This, whoever, I mean, we've got still a large investor base in the Euro rim, but also in Switzerland. So whoever wants to employ their own currency overlay can do so based on information we then provide in a timely manner. On the next page, you basically see what kind of information you can expect. That is basically the currency exposure now as of December. which then is the basis for each investor's own decision as to whether or not to employ an FX strategy. And just for those who won't, of course, fluctuating currencies will necessarily lead to an impact on the NAVs as expressed in the Prince's currency. And at the bottom left, basically on this table, you see some of the sensibilities. So if the US dollar moves on a 12-month horizon, you can see that a minus 10% is in the current portfolio probably having an impact of about 4.5%. positive on the NAV or a plus 10% change on the opposite. On the next page, you'll see an additional portfolio management consideration that is basically our intention to be fully invested. That's how then our portfolio companies and their underlying growth then it's basically contributing to the overall energy of the company. We have managed to be there in the last couple of years with certain swings, so the target investment level should be around 95 to 100%. To help us stay in that target range, we have actually extended and increased the size of the senior revolving credit facility, which you can see on the next page, which basically serves us to bridge cash flow needs on a more short-term basis. So, the facility will be increased to $140 million. Previously, it was at $110. This is going to be implemented in the next couple of days or weeks. And it is going to be extended to the end of the 2026. Previously, it was until 24. The key terms are basically substantially similar to the ones that are currently in place. And the lender is Lloyds Bank Corporate Markets PLC. By that, there were also questions over governance and control. And just to remind you, Prince's private equity holding has a board of six and the usual committees, including an audit and risk committee and a management engagement committee, the main tasks of which are described on this slide. We also announced earlier today that there is a change in so far that Richard Petty, the current chair, is not standing for re-election and hence the board, subject of course to re-election of its members then by the AGM, is going to change in so far that Steve LePage is going to chair. Fionnuala is going to head the Management Engagement Committee, and Maryse Wheatley, the Audit and Risk Committee. Whilst myself, being an advisory partner and shareholder of Partners Group, remain the representative of the investment manager on Prinz's board. Many investors appear to suspect as to whether the net asset values of the private equity, private markets companies really reflect what happened, for example, in public markets last year. And I introduced you last quarter to a kind of a bridge chart which we have updated for the year end. Let me start with the left-hand side where you see public markets, this time MSCI expressed in U.S. dollars. And at the right-hand side is basically the Partners Group platform performance, private equity platform performance of plus 4%. And there's quite a gap. And that's probably what investors ask themselves as to whether this is sound and it's a good basis. Now, if you look at more closely what happened in our portfolio, at least, you first see that we corrected kind of the public markets index, the MSCI, and basically only showed those sectors that basically mirror more or less what we have in the portfolio. And so by that, the gap is already smaller. The next step is basically the third bar from the left-hand side. We have a pro forma bar where we show the platform performance without maybe some, I would say, positive outliers. And then we have a number of positive outliers, that is companies, six performance drivers that account for about 50% of the positive value creation in 2022. And you will be happy to hear that most of these six are actually part of Prince's portfolio. There are companies where valuation has been driven, for example, by a recent landmark transaction, such as in the case of USIC, which we discussed in one of the former calls. And so by that, we believe doing the fair value calculations on a month-by-month basis valuing profitable companies and then applying public market comparables results in very, very robust NAVs. Now, I can't speak for the whole industry. However, I can certainly stand behind the devaluation approach and then the results you then can see in the Princess NAV. And it doesn't come as a surprise that I will remind you that I believe there is a lot of value buying such a portfolio at such a great discount as the stock is trading at the exchange. This is actually further underpinned on the next page by just some of the metrics of the portfolio companies. comparing them to some of the more the public market metrics. So you will see that for example enterprise to EBITDA multiple as of the end of the last quarter was in the sector adjusted public markets and in our portfolio much higher than in the general in the MSCI world. You also see that Then on top of that, that the EBITDA growth, so basically the selection of the companies and how we create value has resulted in EBITDA growth in 2022 of 15.7% as opposed to the public market sector adjusted 8.3. And this is ultimately what then drives the energy and the outperformance of the now fully invested portfolio. And you can see this in different graphs at the bottom of that page. In more detail, on the NAV-weighted portfolio company metrics at the end of the last year, where we took basically about 75 to 80% of the portfolio companies where we had exactly the right level of information. So it's like a kind of a consolidation on a look-through basis. And you will see that the last 12 months revenue growth of 23.8 in a very difficult economic environment with inflation, with geopolitical turmoil and so on. We've got a last 12-month EBITDA growth of 16.1% and a margin of a stellar 20.5%. And again, on the valuation metrics below, a 16 times enterprise value to EBITDA and a 6.1x, that's the net debt to EBITDA, which translates to about 40% net debt to enterprise value ratio. basically the result in figures of our schematic sourcing, so where we identify the most attractive growth trends, where we then employ our entrepreneurial governance playbook. Our companies are governed by the boards, assisted by the whole partners group teams, And we then transform assets, enhance business models. We typically add fundamental value through targeted add-ons to grow companies and build greater resilience. Now, this basically translates then into some examples. And for the examples on our portfolio companies, I'll hand over to my colleague Sarah.

Thank you Felix. So to give you a little more colour around the results that we have been presenting to you, on the next slide we highlight the top three performers for the year which also happen to be in the top ten in the Princess portfolio in terms of the largest investments. The first one on the left hand side is PCI Pharma which is the second largest investment in the Princess portfolio. and was the best performing holding in 2022 with a positive 24.8% uplift in valuation. This company offers full service integrated pharmaceutical supply chain platforms, and the value creation came from increased sales and also improving operational efficiencies through lean manufacturing and digital transformation of their complex workflows, which then drove the further efficiencies. SRS, you'll probably be quite familiar from our previous calls. We have covered it previously as it's our second, it's our largest, sorry, our largest holding for Princess. And for the year, it had a 21.6% positive revaluation. And its EBITDA grew thanks to recurring revenue streams that have been supported by the construction boom in the US, as well as flight to suburban areas since COVID-19. And there have also been some extreme weather events. And on top of that, roofs typically have a replacement cycle of 15 to 20 years, which feeds into that recurring revenue stream. A company which we haven't brought to your attention before, but was actually the third best performer in our portfolio for the year is Apex Logistics. And They are Asia's leading freight forwarder, especially on the Trans-Pacific and Intra-Asia trade routes. And Partners Group acquired a 24.9% stake in 2021 alongside the majority shareholder Hunagal Group, who in turn are one of the world's leading logistics companies. And here the key initiatives will include new freight forwarding routes as well as identifying new growth verticals such as healthcare and M&A. And Apex's performance has been driven by cross-border e-commerce. Next slide, please. So on the following slide, we have the top 10 portfolio companies, which we usually show you. And we wanted here to highlight the revaluation, not just for the fourth quarter, but also for the year. And here you see SRS and PCI on top, which have already been covered. Another company which, well, there's two companies here which you'll see have had modest downward revaluations, which are Techem, the sub-metering company, and Vishal, the Indian mega-mart franchisor. And here the revaluations for the year declined somewhat due to the multiples of observed comparables not being completely offset by the EBITDA growth. However, you'll see that in Q4, they have rebounded in particular for Techem. Next slide, please. The following two slides actually is the list of the notable direct investments that Princess made in 2022, and that amounts to 156.7 million euros. We stated in the past that investments slowed since Q3, and the investments you see going through in the third and fourth quarters were mainly investments that were committed to earlier in the year. The one investment we haven't previously covered is USIC, or at least not recently. This is a provider of utility location services in the US. As a matter of background, Partners Group initially invested in USIC in this company in 2017. And in 2022, Partners Group sold 50% to Colberg and Company to expand the shareholder base, whilst retaining a 50% co-lease interest. So the partial sale resulted in a 36.7 million euro distribution for Princess, and then Princess invested 20.6 million euro alongside Partners Group. Next slide. As Felix mentioned on slide 5, €109 million was received in distributions. Here you see the figure of €241.4 million because it includes €132 million of redemptions throughout the year from a related party fund that invests in floating rate senior loans. And this position has now been completely exited. The total of €241.4 million is equivalent to 22.9% of opening NAV. The largest distribution from an exit of €18 million came from the sale of Voyage Care, and they are a UK specialist care provider. The value that was created came from building a best-in-class management team and deepening the healthcare experience with strategic hires, as well as further developing and expanding specialisms via developments and select acquisitions. And with that, I'll hand back to Felix.

Thank you, Sarah. Before I open for questions, let me by that summarize and give you some outlook. So the hedges will unwind and end off March to give shareholders time to apply their own hedging overlay. And the transition basically to a direct portfolio is now complete, and this is going to drive future performance basically through operational value creation. So the direct private equity portfolio will be the main performance drivers. We invest in overarching as we call them giga themes that benefit from structural change and secular growth. And we call this actually a thematic sourcing. So at any time we have 14 to 60 specific themes that then basically create the foundation for strong investment performance. And finally, once these companies are selected, The boards of these companies jointly with the team of partners group basically is responsible for this extraordinary EBTA growth. Now, as a company, Princess continues with its objective to pay 5% of opening NAF. This was reaffirmed. This is going, you can expect a 36 cents on the Euro payable first time in June. I remind you that Princess has a track record of paying one of the highest dividend yields amongst its peers the last 10 years. And we have increased the revolving credit facility, but also extended its term to further support the dividend claim. By that, I hand back for questions. We have seen some that have been handed in in writing. But first of all, I think we'll answer the questions that are asked on the phone.

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 telephones. 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 question or comments in writing via the relative field. Anyone who has a question may press star and 1 at this time. The first question comes from the line of with DCI Investment Management. Please go ahead.

Morning, Felix and Sarah. Thanks for the presentation. I'm just wondering whether you could shed any light, are there any costs associated with unwinding the hedge?

Thank you. There are absolute minor costs, so absolutely negligible.

Okay, good. And then if I can ask a second question. So the underlying company performance looks pretty robust with margins above 20% and earnings growth is pretty strong. But clearly the share price is down a 34% discount to the last NAV. And that simply reflects the fact that the damaged sentiment from the cancellation of the dividend What are you trying to do to kind of close that discount? Because clearly there's value in the portfolio. And how are you going to kind of realize that value for shareholders?

I think by this call and by the announcements of today, we have hopefully made a big step by reassuring that we put priority in paying a dividend. by showing that the underlying portfolio is developing in a very difficult economic environment in a very satisfactory way. And so by that, the growing NAVs over time will then hopefully also convince shareholders that they really buy a lot of value for a depressed price.

Okay, thank you.

As a reminder, if you wish to register for a question, please press star and 1 on your telephone. Once again, to ask a question, please press star and 1 on your telephone. The next question comes from the line of Brown-Crees with JP Morgan. Please go ahead.

Hi, Felix. Hi, Sarah. Just a quick question. I just want to really sort of quickly run through what the cash position is and how you expect that to change over the coming months.

Thank you. I mean, you could see the cash position as of December. It was positive. And as we last looked at it the last week, it's still positive.

Are there any sort of proceeds you're expecting in or any sort of big investments that have yet to complete that would change that number? I'm just thinking, obviously, in terms of the dividend and where we are there.

This goes well in some other questions in relation to maybe exits or planned investments. Activities in the leveraged buyer market for the time being are very slow, I would say. This also applies for the Princess portfolio. So we don't expect immediate large exits nor acquisitions. So the main reason for it is still the, as I see it, the debt markets are still depressed, I would say. So buyers find it difficult to get financing, bank financing and the like. The other thing is that in the current situation, sellers dream of the prices of the past and buyers look forward at prices they want to pay in the future. And so the matching process takes longer. This has been seen in similar situations in the past. And it can unwind quickly. However, for the time being, we don't see it.

Mr. Brown, are you done with your question?

Yes, thank you.

For any further questions, please press star and 1 on your telephone. At this time, there are no further audio questions. We may now proceed with the written web questions from the live feedback.

Thank you. So one of the questions is, are you still invested in Global Blue? The quick answer to that is yes, we are, and we have seen the performance of that company rebound, especially with the opening of the Asian markets and China. Another question that we have is in relation to China. Sorry, just seeing here from Matt Hose at Jefferies saying, just noting the difference between the partners group valuation multiple of 14.5 versus 16 times as a result. What are the main differences in the composition of the two portfolios? From what I think, that's Q3 to Q4. Well, I'm not sure actually what you're comparing there, Matt, if you're on the line, if you wouldn't mind just elaborating on that question.

Sarah, maybe I can just skip in, but the major difference is probably just the weighting, the weighting of the portfolio in the Partners Group kind of overall portfolio versus the weighting within Princess.

Great. Thank you, Felix. Another question we have is, are there still commitments from the legacy portfolio? The answer is yes. We do provide in the appendix of the presentation, which you will have online, and in the appendix we say that about €43.8 million in unfunded commitments is to third-party funds, of which €22.1 million is have completed their investment period, and we don't expect investments to call any more capital. Another question that we have is... From Frank B. Laveld, the current market conditions for financing are not optimal. To what extent does this impact the acquisition initiatives by the portfolio companies who already have reasonable debt positions?

Maybe I can answer this one. It's correct, yeah. It's not optimal. Our portfolio companies, well, we have on average a secured financing for the next two and a half years. And by that, they rely on contracts being renewed on time. That's the one part. And the other part is certainly, I mean, They not only rely on debt, they also produce a lot of own cash flow for the investment activities. And last but not least, in many investment cases, a partners group with its investors have committed some additional equity to these portfolio companies.

Thank you, Felix. Another question is would you feel comfortable drawing down on the credit facility to pursue new investments at this stage?

I think this is not the priority for what we have, the credit line. So unless it would be for kind of a very short-term bridging of an expected cash flow that would offset it again. So the answer is we don't want to use the credit facility for gearing.

Thank you, Felix. Another question is, will the removal of the dollar hedging and the costs associated now make investing in the US that bit more attractive and lead to greater US exposure?

That's not really a consideration we make. We look at regions, I mean, according to the opportunity set, and certainly not because of the currency moves.

Thank you. And a question around, do you have an approximate estimate of the number of shareholders in the Swiss euro area in percentage terms? Have you discussed the hedging strategy with the larger shareholders in this area and their thoughts?

We have spent quite some time the last couple of months discussing with a number of shareholders, or a large number actually, including in Germany, Switzerland, and other countries. I'm well aware that most, for example, of the Swiss institutional investors employ currency overlay anyway, and so for them it's basically just getting the right kind of receiving the right information. In Germany, this applies for many as well, but there will be some that have relied on Princess Hedging and certainly do not, well, would have appreciated if you had continued. Now, having said the two main drivers which led us to kind of discontinuing, that is basically the change of underlying shareholders and the composition. But then also, the fact that many, many of the shareholders in EuroREM by now have kind of established procedures to employ in their own currency hedging.

Another question is, are you obliged to insure ESG companies? Where do you find information regarding equity debt capital?

We are not obliged. However, as part of our due diligence, ESG considerations are at the forefront of our considerations. not only at the investment due diligence stage, but then we specifically measure, define goals to improve companies in terms of ESG metrics. if I understand correctly, the equity to debt in underlying companies. We don't disclose this information on a company-by-company basis. However, we disclose it on a princess level in the metrics section where you see the 6.1 times debt to EBTA or the 40% debt to enterprise value, which is basically on a look-through basis of 60% equity cushion.

Another question we have is PEY's portfolio EV EBITDA multiples spiked up to 18.7 times at 30 September 22, up from 15.6 times in June, and now it's back at 16 times at 31 December. What were the drivers for this? I can probably give a little more colour on that. Basically, in the past, the calculation was based on assessment and manual adjustments, and we wanted the method going forward to be more mechanical and mathematical, so less dependent on judgment. So we only include companies that are valued on EV EBITDA, whereas in the past, we included companies that use DCF, sum of parts, and we are no longer doing that. So the spike in Q3... is due to us including all valuation methodologies and the small debt holdings that we had. And so there were no exclusions made at all, whereas now there will be. Another question we have is around the growth in EBITDA relative to revenue for the portfolio implies that there is margin compression. Now, is this something that you are seeing continuing into Q123? Also, were the levels of growth in revenue and EBITDA in the last 12 months representative of the trends in Q4 and the first quarter of this year?

That's a bit difficult to answer. I wouldn't read too much into that, particularly not into trends. something we'll observe over the next quarters.

Another question we have is, what does the current USD hedging look like? Does the falling USD mean that liquidity improves overall and the first half dividend for 2023 can be paid out? And do you consider any buybacks within the big discount to NAV?

We reconfirmed our objective for the dividend payment. And so that's an objective. And again, we reconfirmed it. So you can expect we even calculate that. And so that's what we intend to do. In terms of... Of buybacks, this is a topic the board discusses at every meeting. For the time being, our objective is to pay the dividend.

And a related question is, in an environment where realizations are depressed, how comfortable are you in maintaining a dividend target of 5% of opening love? Does the RCF allow you to use it to pay a dividend if required?

Yes, it allows us, yeah. And the other answer is probably we don't expect this environment to take for years and years. There have been times where exit activities have been reduced, but then other times where it reverts sooner or later.

Another question is, you note that sellers dream of prices in the past, implying valuations remain excessive in some quarters. Why would you say this does not apply to Princess?

The last couple of quarters, we observed a contraction in multiples. And we reflected this in our valuations. However, at the same time, again, our companies demonstrate, on average, a very strong growth. And so basically, strong revenue and EPTA performance can still lead to higher valuations, despite of lower multiples. And that's exactly what we are observing. and what our task is as a manager of these companies to help them keep that growth rate.

And the final question is, why do you think that Princess's returns have lagged that of other listed PE names?

Until, let's put it that way, until let's say the pandemic outbreak, we basically outperformed the relevant indexes. With the pandemic and then the extraordinary expansion of multiples in certain sectors that Princess was less exposed to, we probably lacked a bit, particularly, for instance, not invested in non-profitable technology or healthcare. And these are exactly factors that have seen unprecedented multiple expansions and also reversion as we observed since. observation is that until about five years ago about 35 percent of the portfolio was still legacy and the legacy portfolio clearly underperformed our direct investment portfolio now as we have said and reiterate happy to reiterate this is gone this legacy portfolio is close to nil and the The performance going forward and also the expected outperformance over the indices is stemming from the direct portfolio.

Thank you, and I believe that's all the questions.

Ladies and gentlemen, I would now like to turn the conference back over to Felix Holdner for any closing remarks.

Thank you. Thank you very much for your interest. And as I said, there's great value at this price. We can observe this from the broader secondary market where discounts are much smaller than what you now see in the stock price. I hope that I'll see you on the buyers list. Thank you.

Ladies and gentlemen, the conference now is over. Thank you for choosing Coruscall, and thank you for your participation in the conference. You may now disconnect your lines. Goodbye.