Partners Group Private Equity Limited

Ladies and gentlemen, welcome to the Princess Private Equity Holding Q1 2023 investor conference call and live webcast. I am Alice, the call operator. I would like to remind you that all participants have been listening on remote and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. Webcast viewers may submit their questions inviting by the relative field. For operator assistance, please press star and zero. must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Felix Halbner. Please go ahead, sir.

Thank you. Good morning to this quarterly conference call on the results of the first quarter of PRINCESS. My name is Felix Halbner. I'm a director of PRINCESS and I'm an advisory partner to Partners Group. Now, to recap, What is Prince's about? We have the objective to outperform global public equity markets by about 5% on a net basis per year over the mid to long term period. And by now, it's really the direct investments in the portfolio that are the main driver of expected outperformance to public market. If you look through on a quasi-consolidated basis, the EBITDA margins and the top-line growth of the portfolio consistently displays above 20%. By now, the transition to direct portfolio is complete, and so the future performance is fully driven through operational value creation. And we invest across multiple sectors, All of them should benefit from structural changes and secular growth. And at all time at Partners Group, we are sourcing our portfolio companies on a thematic basis. And at all time, we endeavor to have about 40 to 60 specific themes that create the foundation for a strong investment pipeline and long-term portfolio performance. You will have noticed that The first dividend payment for this financial year was declared at 36.5 cents of a euro, and it's payable on the 2nd of June. And this is to fulfill the claim of the objective to pay 5% of opening net asset value semi-annually, which was confirmed earlier this year. And so the prospective dividend yield for this year is in excess of 7% at the current share price. Before I dive into the portfolio and the first quarter movements, let me share with you some, let's say, market observations on the private markets versus public markets. We did so actually also with our institutional investors at our Vienna conference and with our Partners Group Holding shareholders more recently. And there's actually also a white paper that was published by our firm, written by our chairman, and that can be downloaded on Partners Group Holding's website. But let me just summarize some of the key findings or observations. The starting point is probably, or the observation is that public and private markets are almost changing roles in financing the economy, particularly the real economy. If you look at, and we're really looking at the financing of the new financing, I'm not talking about, let's say, incumbent old companies that have been in the market for years and and so on. So, traditionally, the IPO market, the IPOs, the IPO was a kind of a strategic corporate development, as we've observed it the last, let's say, 40 years. Where a company with a kind of a mature business, a proven business model, went public. It went through, they were all industry sectors were represented and it were typically profitable companies with a solid earnings history. Now to the bottom right, what we observe today is that IPOs are much more kind of unprofitable businesses, often kind of hype companies, a bias towards technology. And by that, no longer the same we observed maybe 40 years ago. And I'll come to that in a bit more detail. The private markets are quite to the opposite. About 40 years ago, some of you will remember, It was mainly about acquisition of undervalued consumer or industrial businesses. We put a lot of leverage into them. That was not really a financing of the real economy involved. It was more like, let's say, maybe a cleanup exercise of public markets. Today, it's the top right, private markets look very differently. Today, it's about long-term driving the broader economy. It's a focus on profitable companies and assets where all industries are involved, including real asset sector. We're longer-term oriented, lower leverage. We focus on value creation. We focus on profitable companies. And honestly, an investment by Partners Group and by that by Princess, is probably more strategic for our portfolio companies than an IPO used to be. So roles, in our view, have completely changed. I would like to show you this in maybe an example as we basically divide between companies that we call more foundational and others that are more kind of in the spotlight. And this picture should, well, it resembles at least to some extent to an iceberg. And all of us know that the bottom of the iceberg is much larger than the top. And this should also kind of, this shows our view on the composition in the two categories. Foundational companies, now you are, let's say, producing companies. They are helping to produce a product. They render a service. They provide a process. For example, in the food value chain, where you have an example here, it would start from agriculture business, the food packaging, food processing. It goes up to restaurants, retailers. and all the full supporting industries. Spotlight companies, in contrast, are very different. They typically take something existing through some sort of platform approach, deliver something like, for example, DoorDash or UB. They also may create new IP that has no real application in today's ecosystem. This is not judgmental. They can become great companies at both ends. Now, why is it so important? The observation is that IPOs, so initial public offerings, today or in the last 10, 20, 30 years, give much better valuations to these spotlight companies. we investors may think or hope that the winner takes it all will pay out as an observation we just see that ipo markets have a preference for these businesses whilst private markets firms focus on foundational businesses Foundational businesses can be valued at maybe 2, 3, 4, maybe 5 billion, and by that FSI, they can be financed by private markets and private equity. They don't get the valuations of spotlight businesses. They probably get about the same valuation, would get the same at an IPO, certainly not less. These businesses, for just being financed, they have no reason to IPO, certainly not for valuation reasons. and there are a number of reasons why these businesses don't want to go public. It's easy to give some evidence to this observation. On the next page, you will see kind of the number of IPOs, and you will observe from the blue bars, whilst there have been some volatility, the numbers of IPOs has come down massively from 1990 to today. And if you drill down a bit further, IPOs in this period were either very large, let's say 30, 40 billion plus, and by that certainly too large for private equity to finance, and or they were just more spotlight companies. And another way to distill it is on the right-hand side. So when we look at the profitability of the companies that were IPO'd at their time of IPO, and what you can observe is that profitability came down from 1990 to today to about 20%. Hence, another piece of evidence for why the IPO, the private markets world has developed like that and why spotlight companies have been in the focus of the financing through public markets in more than just the recent years. Now, we make the claim that the new the new economy, as far as new businesses are concerned, is increasingly financed by private markets. And we see on this page basically a number of the themes, the clusters, the ecosystem clusters, the transformational topics, or as we refer to as themes, in our four industry verticals, goods, products, technology, health and life, and services. So again, for example, for the food value chain at the top right, most of the activities in this theme are actually fairly foundational. And that's why also the little iceberg you can see is colored at the bottom. So this would say the majority of these the companies we see in this sector in this theme are foundational and by that ultimately targets of private equity. You see some other themes where actually also the bottom is colored and by that more foundational businesses can be spotted. Some of the themes there you will see both more spotlight and foundational activities. Now, some might ask as to whether this is just an observation that is kind of temporary, maybe driven by central banks, interest rates, or whatever. Now, if you look at the next chart on the left-hand side, what you will see is this kind of a trend line, a trend line in terms of financing. So private markets, for example, have grown independent of a low rate environment. Fundraising in recent years has exceeded by far the global equity issuance. So that's like the gray bars. Then IPOs, IPO firms have decreased in profitability over time. It's the reddish bar, of course, with some volatility around the Internet bubble and around the global financial crisis. Interestingly also, buyouts have increasingly utilized less leverage. So from the 90s, where we had 80% to 95% leverage, to today where it is often less than 40%. And rates, finally, well, in all this period, there were only a couple of years where there was a zero-rate environment. Now, a potential explanation is on the right-hand side, where you see what basically created the value in public market versus private markets. What you can observe is that, for example, in the last, well, in the 10 years of observation, the public market benefited disproportionately from valuation changes. So about 59% of the value was valuation changes, whilst, and quite counterintuitively, in private markets, this was only 25%. And the bulk, the bulk of value creation was by EBTA growth. And as investors, Princess investors will know, this is basically where Partners Group is focusing when it comes to working with portfolio companies. Now, where does it bring us to? We believe actually that private markets is, to some extent, the new traditional asset class. So if you want to be invested in core companies, this is no longer what is being IPO'd, but it's maybe much more what is sourced on a thematic way. So the thematic investing approach, private market firms like Partners Group Employee and where Princess is a carrier, which then is executed by an entrepreneurial ship at scale. And by that, all of this looks then much more like an industrial type of activity. as opposed to a kind of a corporate finance or financial engineering activity, private markets firm used probably in the 90s and 2000s of the law. And so by that, we probably have much more like the successful industrial conglomerates where kind of transformational investing was based on, let's say, the five key ingredients such as kind of a strategic rigor, entrepreneurial governance, strong focus on operational value creation instead of sector nature M&A, best in class systems, processes, and of course, that talent leadership and talent development. So this observation of the industry is quite important to understand and to basically confirm investors in Princess that to be invested and to finance the real economy, the new real economy, the private markets is probably the space to be in and Princess is one of the great examples how to do it. Back from the more industry overview and kind of the partners group assessment, now back to the portfolio. I hand over this part to Sarah, Sarah Page, the head of investor relations. Please, Sarah.

Thank you, Felix. And now let's dive into the detail of the portfolio companies before we cover the overall results for Q1. Next slide. So just on the left-hand side of this slide, a very quick recap. So Partners Group transformational investing approach is made up of the two pillars. The first pillar being the thematic sourcing that is finding the right opportunities in the three core giga themes of automation and digitization, decarbonization and sustainability, and new living. And this is further broken down into four key sectors of goods and products, services, health and life, and technology. And within these four main sectors, there are about 40 to 60 subsectors that are researched for opportunities by the investment teams. And the second pillar of entrepreneurial governance is a very agile approach to the actual execution of a particular business strategy. So it's a very hands-on type of governance, which we think, like Felix just mentioned, many Asian conglomerates are a great example of. It's also about value creation through strategic rigor, so from the inside, transforming the asset by improving margins and cash flows, etc., and then also adding to it with strategic add-ons, not big M&A. Now, despite the challenging environment continuing into Q1, we have, however, observed at the Partners Group portfolio company level a good level of tuck-in activity. And secondly, the operational performance continues to be enhanced with strategic initiatives tailored to each company. And so this is why you'll see that the companies in the Princess portfolio are consistently delivering EBITDA margins and top line growth above 20%. Now, although EBITDA growth has remained healthy, it has been impacted by inflation. And we've observed in the portfolio companies that inflation is coming down on, say, goods and products as well as energy costs. but remains sticky for services. Our in-house economist also believes that inflation has plateaued and is expected to come down in the next 12 to 24 months, but when exactly that will be is still hard to predict. Next slide, please. So for the top 10 companies, I can confirm that they continue to perform in line or above expectations. Partners Group valuation methodology, as you may know, is based on fair market values, updated monthly, hence you'll see the monthly NAV reports in between these results calls. And this should counter investor concerns about valuation lags. The two companies which weren't top 10 by NAV in the last results call are Diversitec and Civica, so I thought I'd quickly introduce them to you. Firstly, Diversitec is a manufacturer of components and supplies for the U.S. residential heating, ventilation, and air conditioning market, and it was written up over the first quarter on the back of strong financial performance. And a few of its priorities for 2023 will center around delivering best-in-class customer experience through the customer journey, supply chain excellence, and it also remains focused on its disciplined pursuit of add-ons. And the other one is Civica, who is a global leader in public sector software, serving over 2,000 major customers in 10 countries. It was positively revalued over the first quarter of 2023 on the back of continued positive revenue and EBITDA growth. And this was driven by strong organic developments in its core software business supported by growing demand and a healthy customer base. And looking forward, it will also focus on enhancing its customer journey, as well as enhancing their cloud software offering and international expansion to cement its global GovTech leadership. Now instead of going through all the top 10 companies today, we'd like to spotlight Omega for you. So we have a short video to play, but before we do that, just a quick recap. Omega is the global leader in mission-critical industrial power transmission solutions, conveyor belting, and fluid power solutions. It's been a portfolio company since 2018 and was created from the consolidation of two companies and is an excellent example of one of our sub-themes called industrial automation. The video discusses how value creation was created by being customer-led and how that transformed the business. Please play the video.