Partners Group Private Equity Limited

Ladies and gentlemen, welcome to the Q3 2023 Investor Conference Call and Live webcast. I am Alice, the cover call operator. I would like to remind you that all participants will be listed in only mode and the conference is being recorded. The presentation will be followed by a Q&A session. Webcast viewers may submit their questions in writing at any time by the relative field on the webcast page. If you are connected on the phone, please press star and 1. For operator assistance, please press star and 0. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Sarah Page, Head of Investor Relations for Princess Private Equity. Please go ahead.

Good morning and welcome, everyone. Thank you for joining Princess' 2023 third quarter results call. My name is Sarah Page, Investor Relations for Princess, and I'm joined today by Cyril Whipsley, Senior Partner at Partners Group, and Craig Lyne in our London office from the Capital Markets team at Partners Group. Page 3 summarizes the Q3 developments. Princesses NAV grew to 15.12 euro per share, which is 2.4% in Q3 and a 6% increase year-to-date. Operational value creation was the main driver of the NAV performance. In the current market environment, our investment teams have adjusted value creation plans to prioritize organic growth and margin improvements. Gains in market share and productivity levels are likely to drive more sustainable value creation in the medium to long term, as compared to add-on acquisitions due to higher cost of capital and price increases. The largest three contributors in value creation in Q3 were PCI Pharma, Vishal Megamart, and Godelma. PCI and Vishal we will discuss later under the top 10 holdings. Galderma is a specialty pharmaceutical company which develops, manufactures and distributes a broad range of dermatological treatments. The Swiss headquartered company operates in 40 countries and it includes brands such as Epiduro, Differin, Dysport, Cetaphil and Benzac. So you may be familiar with them if you have sensitive skin. They make, for example, body washers that don't dry out your skin, baby creams and acne products for teenagers. Beldona's unique integrated strategy continues to drive product and channel synergies, alongside platform efficiencies resulting in strong growth, especially in its dermatological skincare and therapeutic dermatology business segments, and stronger margins. Princess's liquidity is healthy, with an undrawn credit facility balance of €134 million and and €3 million in cash, thanks to €13.9 million of realisations received during the quarter. Princess invested €1.9 million, with €1.4 million of this invested in an add-on investment in International School Partnership, which I'll also cover later. Princess will pay the H2 2023 dividend of €0.365 per share on 15 December. And with the share price increasing by 2.9%, share price total return was 31.5%, and the discount remained stable at 30%, keeping Princess in line with its peers. For the portfolio, I'll now hand over to Cyril.

Good morning from my side. We have mentioned in the past presentation how the strategy has changed in 2011 from a fund-by-fund to a direct investment strategy, and I'm happy to say that this transition is now complete with 99% of the net asset value being direct. The advantage of this, of course, is that there is no double-fee layer, and Partners Group has control over the transformation of the assets, meaning the value creation plan. Furthermore, pure direct vehicles trade at a significant higher discount than fund-to-funds at the London Stock Exchange. So private equity makes up, to date, 95% of net asset value, a percentage that will continue to increase to 100% once the 3% private infrastructure assets and 2% private debt assets will have been exited. Prince's status portfolio is broadly diversified across over 70 positions in well-established, high-quality companies, typically market leaders in their field. And when you flip the page, then you see that Prince's is also nicely diversified across regions, industries, and vintage years, meaning the year when the investment was made. Prince's provides investors with access to Partners Group's $74 billion private equity platform, And its portfolio composition fully reflects the firm's investment strategy, focusing on stable, developed, low-risk regions such as North America and Western Europe, and on resilient industries representing the foundational backbone of our economy, supported by long-term megatrends. In terms of vintages, having invested in a disciplined manner across the years, we have a healthy mix of companies at different stages in their value creation journeys. While we continue to hold some assets for longer in this current environment, about 27% of the portfolio NED was invested the last five to six years ago, which is a sweet spot that has historically been our average holding period, which means we sell these assets if the environment is right. In addition, another 22% of NOEs expected to reach a mature stage for exit at the next two to three years. So providing a robust exit pipeline that is waiting for the right conditions to realize value. If you look at revenue growth and EBITDA margins and EBITDA growth of our portfolio companies and compare that to MSI World, Then we can see that in the last 12 months to September 2023, we grew revenues in our direct private equity portfolio companies by 16% and EBITDA by 15%, which is in line with the historic average of 15% EBITDA growth and clearly above what broader public markets have delivered. Also, the average EBITDA margin of 24% in the Princess portfolio is very stable and offers a higher safety buffer than the average MSCI World company does. If you look at the top 10 positions, then I have to say I elaborated a lot on them on the last call, so I'll make it short for you today. As Sarah mentioned, the largest contributor of the value creation in Q3 was PCI Pharma Services, which is the largest investment in Prince's portfolio. PCI Pharma is a global provider of outsourced supply chain services for pharma and biotech companies. PG invested in the company in 2016 due to its leading position in commercial packaging, deep and long-term relationships with its top pharma customers, and the opportunity to further consolidate the market. Since 2016, the company's footprint has expanded geographically in North America and into Asia Pacific. The service offering has expanded from packaging to drug development and clinical trials, making it a one-stop shop for clients. while just-in-time manufacturing has made operations more efficient. The valuation of BCI increased over the quarter on the back of continued strong financial performance. The companies reported robust double-digit growth in both revenues and EBITDA, driven by organic growth from cross-selling, diversifying customer base and optimizing manufacturing margins. On the next slide, I would like to highlight Vishal, which in this quarter was the second largest contributor in value creation. Vishal Megapart is the sixth largest investment in the Princess portfolio. Vishal is the franchisor and wholesale supplier for a network of stores across India targeting lower middle-income customers. Vishal recorded strong top-line results driven mainly by strong like-for-like growth in the apparel segment. This was underpinned by the improvement in fabric mix, introduction of new fashion fits, and investments in apparel vendor management and quality insurance teams. Partners Group invested in Vishal in 2018 because it was a market leader with a healthy financial position and the opportunity to grow the footprint all across India, targeting second- and third-tier cities. For those who have seen the press release yesterday, we also announced yesterday that Partners Group has agreed to sell Civica, which is the 10th largest company in Princess, to Blackstone, and the transaction is expected to close next year, subject to regulatory approvals. With this, I'll hand over to Sarah.

Thanks, Cyril. So the main investment in Q3 was an add-on to International Schools Partnership, or ISP, which I'll cover in more detail on the next slide. In terms of realizations, we had two loan repayments, the first from Essentia, and that stems from the successful refinancing of its debt in August. Essentia is the only integrated system in Mexico capable of delivering low-cost Oaxaca gas from the United States to key demand centers in Mexico. Partners Group continues to work closely with Ascentia's management to drive Ascentia to become the largest, most interconnected gas pipeline in Mexico. KinderCare, which was bought in 2015 and to date, it has gone through a digital transformation with a back office CRM system and mobile app for family members. It has also strengthened its market leading position with new location openings, especially near commercial centers and small hack-ins. It has performed above budget year-to-date, continuing to receive significant stimulus proceeds from COVID-era government programs, putting the business in a strong financial and cash position. Continued strong earnings performance due to favorable net tuition rate and increasing average weekly full-time enrollments, coupled with favorable labor efficiency. On the back of this performance, the debt was restructured and delivered, both the quantum and ratio of total net debt, hence the distribution. As I mentioned, I'll delve more into ISP. And this was founded in 2013 by Partners Group with an entrepreneurial vision of creating a leading network of schools. And today, International Schools Partnership educates more than 74,000 students in 76 schools across 22 countries, stemming from kindergarten through primary school, right up to high school. And it was underwritten in 2021. The investment thesis continues to be on the back of strong parental demand for high quality and multilingual education to do a buy and build strategy in a fragmented market. They continue to be highly visible revenues and cost structure, attractive margins, and strong cash flow, driven by an experienced management team with an excellent track record of building businesses in the school sector. Focus is also on driving enrolments and promoting best practices to strengthen market position. For example, using digital tools for in-class teaching, such as online exchange across schools, and increasing school capacity to address the growing demand local catchment demand. Another example of one of our portfolio companies is CloudFlight, and a great part of value creation in our portfolio companies is driven by digital transformation. We have the portfolio company CloudFlight, whose business it is to help businesses make the most of data, which is driving change in how customers' needs are being met and creating new opportunities to grow and better compete in fast-changing markets to penetrate diverse market segments with cloud and AI-customized software. We'll play a short video explaining what they do.

We are witnessing changes in the world, and many of them are driven by digital transformation. It has changed the way we live, work, interact, buy and sell. Digital transformation doesn't just drive change, it creates opportunities in places where there were little to none to begin with. Many industrial companies see digitalization as an opportunity to grow and better compete in an economic environment that is constantly changing in response to evolutions in technology. But what actually is industrial digital transformation? It is new technologies integrated into all areas of business it is fundamental changes in processes products business models and customer interactions with the right digital transformation strategy your company can become a digital native enterprise to innovate span across industrial markets and penetrate diverse customer segments cloud flight empowers you to master digital transformation through value driven custom software cloud native and ai We deliver an end-to-end approach from optimized human machine communication to scalable platforms and tailored software solutions that meet your individual needs and help you lead in the markets where you compete. With a successful digital transformation, we support you to take your organization to the next level and stand out from your competitors. Ready for digital transformation? Get to know us.

So to give you a bit more detail on CloudFlight, which differentiates itself with its delivery model using customized software development, cloud-native and AI solutions, as well as e-commerce capabilities. Some tangible examples where they've put digital transformation into action include developing a credit card mobile app for a bank to not only provide a real-time payment facility, but also better customer service with monthly statements, and online payment authorizations on a single platform. Another example is where the building permit process was streamlined with AI technology for the city of Vienna by extracting key information with real-time text recognition to pre-process applications and validating that all necessary files are included in the permit application, thus saving city clerks on time on manual processing. On our Q2 call, we had several questions on the impact of rising interest rates on the debt financing of our private equity direct investments. This is why we've invited Craig Lyne from Partners Group Capital Markets Team to give you more insight into the debt financing for our portfolio companies. Craig, over to you.

Thank you, Sarah, and also welcome everyone from my side. Look, the Capital Markets Team was established in 2014. with an initial focus on private equity direct transactions. With the value add of the team established, coverage increased private infrastructure a few years ago. We are a global team of eight, all highly experienced financing professionals, having spent our careers at many of the financing providers we engage with today. What are we responsible for? We are responsible for all financing related aspects of our direct private equity and infrastructure investments, new or existing, globally, and that also includes interest rate hedging aligned to that debt. The top half of this slide that we're on now reflects the new investments. Our responsibility is to structure, negotiate, and secure competitive financing packages for those investments. Working closely aligned with investment teams to define the financing strategy and priorities, this can be speed, confidentiality, or it could be a particular debt quantum. financing needs always need to be tailored to the particular investment thesis. The bottom half of this slide reflects financing activity across existing investments. This includes active management of the debt maturity profiles, amending and extending or refinancing where appropriate, and raising incremental capital to support the investment strategy, or even repricing existing debt where markets are constructive. Moving on to the next slide now. Look, rising rates, high inflation, geopolitical and macro uncertainty have also impacted capital markets. Yields have been rising rapidly, as you can see from the chart on the left, from the beginning of 2021 to peak in September 20. And since then, they have come back and stabilized. What the chart also shows is that debt volatility has increased with the fluctuations in the yields. Now, higher cash yields means higher cash interest expense, and volatility means hampered risk appetite. That has led to a decline in leverage levels for new transactions, as you can see on the right-hand side of the slide. If we turn to the next slide, please. What the previous slide did not show is that for a good part of last year, the syndicated market was effectively shut. Banks had underwritten financings that they could not syndicate, Capital was tied up and they were unable to underwrite new transactions. Direct lenders continued to gain share, as you can see from the right-hand side, but they also changed their behavior. If you turn to the next slide, please. Here is a snapshot of the private equity direct portfolio of Partners Group, which is very similar to the Princess portfolio in terms of metrics. Key messages and takeaways here. Our portfolio is well positioned to weather capital markets challenges. We are actively managing the maturity profile, proactively refinancing and extending maturities where appropriate. You can see on the left-hand side of the chart, more than 97% of debt maturities are 2025 or beyond, and 65% of that matures beyond 2028. The portfolio is well protected against downsides. As you can see from the middle chart, almost 90% of the financings are covenant light. And we are well hedged on the interest rate side. And we were early on this. In Q3 2021, we made the decision to increase the notional of hedged floating rate debt to 90%, which is positioned as well today to protect the cash flows in our portfolio companies from the rising rates that have occurred. All stats for the Princess portfolio private equity direct assets are in line with what's shown on this page. Now, a portfolio sell well position like this creates an opportunity for us in the current environment because myself and the broader team could spend time assisting investment teams on new transactions, spending time to develop financing solutions for new opportunities that we look at. Now, if we turn to the next slide, I can give you an example of a transaction this year on the financing side of the portfolio that's been extremely effective. And we already touched on it already at Civica, the global leader in public sector software. It's a 2017 investment. The exit was announced yesterday, as we've already talked to. A few months ago, we were faced with a situation where we have an upcoming maturity in October 2024, but we were also exploring a potential exit. So what did we do? We went out early on the refinancing. We designed a process where we went wide and educated lenders, different pockets of capital, working with a large group of direct lenders to create momentum and to be able to drive terms. We were able to refinance with a 1.1 billion unit tranche. We addressed the 2024 maturity. It's covenant light, so it's downside protected. It has a large unfunded acquisition facility that allows Civica to continue to capitalize on the value add M&A opportunities in the current market. But more important than all of this, it's portable. What does portable mean? It means that any potential new acquirer, and in this case, it was Blackstone that was announced in the press, any potential new acquirer can retain the financing. So in an environment where financing is scarce, It provides certainty on the terms, certainty of capital, and it has ultimately facilitated the exit. Handing back to Sarah to cover the next slide.

Thanks very much, Craig. So the key points I'd like to leave you with are firstly that greater emphasis is now placed on organic growth and asset transformation. However, inorganic platform expansion is still appealing if it can be achieved through cash flow generation. Nonetheless, Princess PE portfolio continues to generate double-digit LTM EBITDA and revenue growth and exhibits attractive diversification qualities across vintages, industries, and geographies. In addition, the portfolio companies benefit from strong capital structures with over 97% of maturities extending beyond 2025. Also, the Princess H2 2023 dividend will be paid on the 15th of December. Finally, we welcome Peter McKellar as the new Chair of PRINCESS, with effect from today. Subsequent to Peter's appointment, Partners Group is looking forward to working with the Board to enhance engagement with current and prospective shareholders. I see there are no questions in writing, so we'll open up for questions from the phone lines.

We will now begin the question and answer session. Webcast viewers must submit the questions invited by the Redfield. If you are connected on the phone, please press star and one. We have a question from Gerhard Roggeman. Please go ahead. Mr. Roggeman, your line is open. You may ask your question.

No, you can hear me now? Hello? Yep. Yes, I have two short questions. One is concerning the Techem divestiture. I just wondered if you're getting closer to finalize that. It was the first question. The second is slightly longer. Despite the importance of sound financial structure, So I wonder if you shouldn't make more use of your share buyback program, which you have in place for many years. If your share is trading at a discount of 30%, actually recently it was even more, up to 40%, which is slightly higher than the market average. And it kind of shows some skepticism about your NAV assessments. And that might be a reason. That as well as the need to increase shareholder return might be a reason for you to be more active on the share buyback program. So if the discount is large, you might want to buy back some shares. If the discount gets small, you resell those shares into the market. Each time you do this, you would enhance shareholder return And I just wonder why you would not do that. That's about the question.

Thanks very much for your question. So, regarding TechGam, unfortunately, obviously, we cannot mention any details on that. But for sure, just looking at the age of the investment, of course, that is a potential exit soon. But I cannot disclose more information. Regarding the shareholder, the share buyback program, I think I don't want to speak on behalf of Peter McKellar, the new chair of the board of princes. But we mentioned in the press release, we have a very clear, he has a very clear agenda of three points which are very important to him. One is further strengthening the board. The second is engage more in shareholder communication, especially in the UK. And the third is establish a robust and clear capital allocation policy, which actually exactly covers this. So expect here more to come. And let's wait and give Peter a little bit of time to go into the saddle. And then you will hear more about this.

There are no more questions over the phone. I'll hand back to Sarah to read out the questions from the webcast.

Thank you very much. So the first question comes from Mark Thomas at Hardman & Co. and he's asking that a number of listed PE companies have been talking of green shoots of recovery. Have you seen this and do you see more benefit next year from further realizations or new investment opportunities?

I don't understand the question. Sorry, sorry.

Are there more investment activity next year?

Oh, yeah, of course. Of course, the investment pipeline is actually looking very attractive for the next years. And also next year, I think, will be a very interesting exit environment. So expect more investments and distributions next year, for sure.

And another question from Milos Pabst from Edison Group for Craig. Do you expect to use portable debt across other portfolio companies and does this affect your financing terms?

Thank you, Sarah, and thank you for the question. We will always explore the opportunity where relevant. I think it's a great precedent that we set on Civica. it is slightly determined by the pocket of capital that best finances the asset. For example, portability is much more challenging to secure in the syndicated market, but in the direct lending market, as we proved with Sivica, it is possible, and we will continue to explore that where available or where appropriate.

Great. Thank you very much, Craig. Another question we have is, have you seen any conversions from straight to pick debt across your portfolio company? So another one for you, Craig.

Yes, another topical question. I think it's obviously a point of topic where you have pressure on your cash flows and your burden and you're unable to refinance at the same levels in the new rates environment that we've already talked to. The short answer is we have not done that yet or had to do that. You obviously, whilst it releases the burden on the cash flow, it is an incremental interest cost. It's just payment in kind and picked. Given some of the themes that I'd already talked to around refinancing ahead of time and positioning ourselves appropriately on interest rate hedging, we haven't seen the same pressures on cash flows and we have not had to refinance with pick to date. That's not to say it's not something we'll explore in the future. but it's not been necessary to the current day.

Great. Another question from Georg Muller. Do you see a way to enable private investors in Germany to buy the shares? Georg, we are well aware of the issue currently, but we are looking into it. So rest assured that this will be fixed as soon as possible. So another question, actually, we've had a couple of these regarding Civica asking what has been, has it been a successful exit?

Yeah, so I was the person who presented in the last quarter that. In the past, actually, the valuations of exits have been historically always higher than 12 months before the exit. Unfortunately, at Civico, that's not the case. We sold Civico at the same valuation, which was one year ago.

I believe that's all the questions we have from the webcast.

Are there any on the line? Yes, we have a follow-up from Mr. Ackermann. Please go ahead.

Yes, well, one brief remark to Mr. Müller. I noticed that since recently banks were again able to sell princess shares in Germany. I explored this a little bit. I think it was not before April 26 that our partners group deposited the basic information memorandum with the German banks. Wertpapiermitteilung, which I think the institution called. And afterwards, I think it is now possible again to trade in princess shares. And I think it is important also from the institutional investor's viewpoint that you have some liquidity, retail liquidity. I think this is just positive for price finding, I think. And then I have a little question again. I think when I most welcome that we have a new chairman, Mr. Keller, and when this announcement was made, there was a remark in the press release that he would pay particular attention to the dividend policy. And I just wondered, it sounded like we would abandon the existing dividend policy. If you have anything more on this.

That's the question. Again, I don't want to speak on his behalf. So let's give him a chance to actually his first day today. Let's give him a chance to actually talk to the board and discuss this. But he wants the opposite. Actually, he wants a signal that Prince is very much committed. to the dividend policy, and that is part of the capital allocation policy, which then defines if you have distributions from exits, what you actually do with this money, how much goes into dividends, how much goes into new investments, and how much goes in potential share buybacks. That's exactly the core point of the capital allocation policy. So if anything, you want to strengthen that point, certainly not weakening it. Thank you. And while I'm talking already, actually, I quickly wanted to revert to your attention to a very interesting research paper Parts Group has announced. So a lot of questions on the last call regarding the importance of rising interest rates and the impact on our private equity investments. In the meantime, we have... actually published a research article. It's called This Record Isn't Broken, How Private Equity Buyers Can Continue to Succeed in the New Macro Regime. You can download this in the Partners Group website. You go to News and Views, Perspectives, and then you scroll down until you find this one, which actually exactly answers many of the questions which were asked in the Q2 call. For example, you see a return sensitivity analysis that in a typical buyout, if you increase interest rates from 5% to 10%, you probably can expect a drop in IRR of 2%, for example. So it gives you some nice sensitivities on that topic.

Thank you everyone for joining the Q3 call today and we look forward to seeing you, hearing from you again for our annual results next year. Thank you and goodbye.