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Edited Transcript of PEY.L earnings conference call or presentation 12-Nov-19 10:00am GMT

Q3 2019 Princess Private Equity Holding Ltd Earnings Call

ST PETER PORT Nov 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Princess Private Equity Holding Ltd earnings conference call or presentation Tuesday, November 12, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Felix Haldner

Princess Private Equity Holding Limited - Director

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Conference Call Participants

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* Milosz Papst

Edison Investment Research Limited - Financials Analyst

* George Crowe

Partners Group Holding AG - IR Officer

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Princess Private Equity Holdings Q3 2019 Investor Conference Call. I am Shyla, the Chorus Call operator. (Operator Instructions) The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. George Crowe. Please go ahead.

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George Crowe, Partners Group Holding AG - IR Officer [2]

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Thank you very much. Good morning, ladies and gentlemen. Thank you for joining us for the Princess Q3 2019 Update Call. During the next half hour to 45 minutes, we'll take you through the latest performance and portfolio developments for Princess. The basis for today's -- the presentation for today can be found on the Princess website in the Investor Relations section.

And at this point, I would like to hand over to Felix Haldner, a Partner at Partners Group and a Director at Princess. And Felix will guide you through the presentation.

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Felix Haldner, Princess Private Equity Holding Limited - Director [3]

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Good morning, dear investors. I'd like to dive in the presentation immediately. As a reminder for all of us, the strategy of Princess Private Equity Holding is basically to provide shareholders with exposure to global portfolio of leading private companies by investing alongside some of the world's largest institutional investors that are advised by the Partners Group.

We have a focus on profitable companies with a consistent track record of EBITDA growth and meaningful growth potential supported by long-term trends. And as an emphasis across all of our portfolio, we work with the companies to add value. All of the underlying companies are advised -- or Princess is advised by Partners Group, the leading private markets investment manager with assets under management of about USD 90 billion, whereof about half is corporate assets and the other half are kind of real assets and financing.

Now the private equity team consists of over 75 direct specialists, so both who really deal with the transactions, where we take majority interests. And they're embedded in a platform of 950 core private market professionals across 20 offices, where importantly, we are constantly growing an industry value creation team which [it stands] has over 40 dedicated operations specialist across 6 industry verticals. And the specialists basically drive the value creation at portfolio company level.

And Partners Group is a very responsible investor. The ESG factors are fully integrated in our investment process to drive value creation and mitigate risks. So we firmly believe that responsible investment benefit shareholders through superior returns. And by that, we identify ESG initiatives at portfolio level at each of the companies.

We target a 10% to 15% net NAV return, and we have demonstrated last 5 years an annualized return of 12.9%, well in the bandwidth. A dividend of 5% to 8% of opening NAV has been the long-declared policy by the board and we have delivered on that.

We have just paid the -- decided on the dividend, the second dividend for 2019 yesterday. So by December, 20 December, basically as a Christmas present, this dividend will be on your account. This leads us to a yield of 5.9% at the current trading prices.

I'll jump over the next slide and go to Page 6, where we now focus on the developments on the third quarter 2019. The highlights include new investments in Blue River PetCare, BCR Group and Schleich. I'll cover them in more detail a bit later in this presentation.

Certainly, another highlight has been the performance in the third quarter of a positive 4.4%, which brings the year-to-date performance to 14.4%. So the NAV per share rose to EUR 12.16 with net assets of EUR 840 million. The share price total return has also increased in the third quarter, 3.8% and year-on-year or, pardon, year-to-date, 19.1%. The share price as of earlier this morning is a bit above EUR 10 and market cap is a bit below EUR 700 million.

In terms of portfolio activity, we observed a basically an evenly balanced quarter, where about EUR 9.3 million of investments, EUR 42 million year-to-date and about EUR 10.4 million of realizations or year-to-date short of EUR 60 million.

Actually, post quarter-end, an agreement was signed to exit Vermaat, the Dutch hospitality services provider, with proceeds of EUR 17.8 million expected to be received in the course of this quarter. I mentioned the dividend that was declared. This was posted in the RNS system yesterday. And I want to highlight -- would like to highlight that we have now 9 years of track record of dividend payments.

On the next page, Page 7, look at the historic NAV performance. I would like to remind you that it was in the course of 2010 when the Board decided to reposition the portfolio from an indirect to a direct investment company. And after a couple of quarters and years, we are now fully invested. We've been invested for more than a year, and we are in what I call now a steady state of value creation. I would like to highlight the 1-year, 3-year, 5-year Princess NAV performance that outperforms the relevant MSCI World Index.

On the next page, you can look at the discount development since London listing. We stood at about 16.3%. This is well between the 15% and 20% we observed unfortunately in the last couple of months. We believe Princess, probably in parallel with the sector, is very attractively valued, particularly when we compare it to the PE secondary market, where we as an investment manager are very active and where high-quality portfolios trade around NAV.

On the next page, some of the key figures. The first is basically that the company's NAV growth, despite of around EUR 40 million of annual dividend payments, we are at quarter-end, we were at negative net liquidity. However, this has to be also seen against the background that the Vermaat payment is expected this quarter.

There are actually within the negative EUR 33 million, there are accruals for performance fees that are not really payable unless there's an exit, and when there's an exit, then there's cash. But there's also about EUR 40 million senior loans as liquidity buffer and there's an undrawn credit line of EUR 24.5 million. Hence, also the Board is very confident and comfortable with the next dividend payment.

This already brings me to the portfolio review in the third quarter on Page 11. You will be pleased to see that some of our largest portfolio companies have performed disproportionately well, including Permotio International Learning, also trading as International Schools Partnership. Action again, just based on the year, the reported EBITDA, and just to preempt questions, Action certainly won't be a topic for me today to comment on as you all know from previous quarterly calls and from 3i's communication that there is a liquidity event in the make in the fourth quarter.

Foncia also developed well based on adjusted EBITDA growth the last 12 months and the number of other top 10 companies. So nice to see that a company like Grupo SBF, which is the largest sporting goods retailer in Brazil, positively contributed. This is a holding of 2019. It stands in terms of a multiple well above 2 but has demonstrated a strong run in the last 12 months.

On the negative side, we have Form Technologies that was actually on the negative side in previous quarter as well, a manufacturer of customized metal components. Form is certainly suffering under the sluggish development in one of their key markets, about 35% to 40% of their sales go into the automotive industry. And as we all know, they -- this industry is currently suffering. MultiPlan, the provider of health care cost management solutions, was having had a very positive run since we held it, has basically renegotiated a contract with one of the larger customers, which has not provided -- has not resulted in a congruent increase in volume this quarter. However, we view this as a temporary phenomenon.

Back to Permotio, the top performer this quarter. The upward valuation has really been based -- has been based on the increase in EBITDA. This company that was formed actually to create a leading international schools group was written up.

So adjusted EBITDA increased by 38% the last 12 months and this is both driven by acquisitions. There were about 5 school groups acquired. So it stands at 41 schools now in 10 countries, with about 39,000 students, but it was also based on like-for-like growth at existing schools.

KinderCare continues in their growth trajectory. It's the largest private early education provider in the U.S. It was just written up back -- on the back of robust financial results. The results are driven by higher tuition rates, a greater number of full-time students in attendance and strong growth from new center openings.

With that, I flip over to Page 12, where the realization activities in Q3 are shown, including distribution, a further distribution of -- by the sale of the Ceridian shares, the fund legacy portfolio contributed and some other factors. And as I mentioned post period end, there was the sale of Vermaat to a financial sponsor.

Just noteworthy, Vermaat was valued at about EUR 14 million end of August. And the sales price a month or 2 later was 25% higher than the last carrying value. Maybe just anecdotally, that then kind of gives us confidence that valuations generally in the portfolio tends to be, although fair, but tends to undershoot what is achievable in the market.

Now to the investment activity in the third quarter. The Blue River PetCare, BCR Group and Schleich, which I'll cover in more detail. But also signed and in closing as of the end of the quarter, we acquired as a coinvestor a portion of Nestlé Skin Health, alongside EQT, which we'll then comment in more detail in February in our next call.

In terms of the new investments, Blue River PetCare, founded in 2009. We invested short of EUR 5 million. It's a lead investment, for where we take a majority, the leading operator of general practice veterinary hospitals in the U.S. It actually has hospitals in 23 of the states and employs over 300 veterinarians and specialists.

And investment criteria include that it's basically a very resilient, cash-based operating model. It's independent from reimbursement and typical risks associated with health care. We believe there are industry tailwinds, so there's a large growing base of pet ownership across the U.S., accompanied by what we call an increased view of pets as a family. And so we expect this drives up veterinary visits even more. And there's a lot of potential for consolidation as it is a highly fragmented space. So corporates, whereof Blue River PetCare is just one, certainly one of the larger ones, represents just 13% of the vet market today.

And so it doesn't come as a surprise, it's one of the value creation initiative. So it's the expansion of the platform, so basically continue to execute bolt-on veterinary acquisitions. But then there's also necessary value creation within the group, so including recurring customer utilization, enable online scheduling, digital customer engagement and so on, but also to be disciplined in the pricing and execute on clinic-level pricing initiatives to match local rates across the footprint on goods and services. So a number of initiatives that have been identified and where the team, including the industry value creation team, together with the management team and the lead operating directors of the firm, will work in the next quarters to come.

The other new investment this quarter was BCR Group. Founded in 2008, it's a leading design, manufacturing and installation solution provider of retail display fixtures, mostly in the sports -- in the retail sports segment. It's Shanghai, China-based and we acquired it -- well, signed in the third quarter and executing in the fourth.

The investment criteria, well, include industry tailwinds. We believe that the sportswear retail market -- retail display market is one of the fastest-growing markets, very resilient. We have a very robust customer base, blue-chip customers, that's basically the sport retailers, has core growth, attractive margins, and it doesn't come as surprise that we want to grow. So that's platform development, particularly in China, but also improved production facility and basically address the higher demand by expanding capacities in our factories.

The third investment, new investment, is called Schleich, a Schwäbisch Gmünd, Germany-based company, a toy manufacturer, a company that was founded in 1935. It's the #1 market position of mini figurines and scene sets in the German, Austria, Switzerland region. However, they're sold in 50 countries through about 40,000 offline points of sales. So it's, in our view, a very trend-resistant brand that appeals to customers who wish to preserve imaginative playtime with premium-quality toys, and there's a proven multi-lever growth strategy.

The value creation initiative we envisage include expansion, international expansion, so beyond as we call the DACH or Germany, Austria, Switzerland region. And in Europe, North America and Asia, there is a large and big initiatives underway for an e-commerce rollout. And last but not least, then also with increased production needs to improve supply chain.

This brings me to maybe the overview of Princess' portfolio on Page 17. As we can observe, we have a very diversified private equity portfolio, although with an allocation to -- substantial allocation to mature companies. I would like to point your attention to the bottom right, where from pre-2011 to including 2015, so much more than 50% of our portfolio holdings are actually from vintages year 2015 and older. We have by now a more than 90% direct portfolio. The funds are being basically run off, so in a 1 to 2 percentage points per quarter.

We have the ability not only to invest alongside Partners Group, but also alongside other managers, our other leading managers, depending on availability of transactions and, of course, the availability of financing our financial means within Princess. The debt proportion, about half of it, it's senior loans basically serving as a liquidity buffer, the other half, subordinated debt that is providing returns.

By that, Princess is invested across stages and regions, a focus on middle-market or upper middle-market companies. If we also look at the investments by industries, the consumer discretionary seems -- it's a bit of an overweight. This has just to do that some of our largest companies, including the Permotios and the Actions, but also the education assets, are part of that.

Then I would like to point you on Page 19 to some of the performance metrics. On a look-through basis, the largest direct companies display a revenue growth of short of 12% over the last 12 months and an EBITDA growth of more than 14%, which is very strong vis-à-vis a somewhat slow economy, although on the valuation and debt metrics, we feel very comfortable with equity levels of over 60% in this environment.

On the next page, 20 and actually 21, you have an overview, our largest 10 direct investments, jointly, about half of the portfolio. We have covered some of them either this quarterly report or last one. So I would certainly be happy to answer questions if there are in the Q&A, but maybe do a little bit of a deep dive in our company, the third-largest portfolio company by now, it's called GlobalLogic.

GlobalLogic, we acquired actually only about 1.5 years ago. It's a -- to remind ourselves, it's a leader in digital product engineering services. So what is it about? It's an innovator in the digital product engineering services space, has over 12,000 employees worldwide and in working at design studios, engineering centers across the globe. Basically, the firm helps their clients build innovative digital products that enhance customer engagement and create new revenue streams. So an activity that, in many cases, large firms did from in-house basically has -- are basically increasingly just outsourcing to specialists like GlobalLogic.

Now one -- a bit more than 1 year in ownership. I mean whilst we had about EUR 500 million in revenue and projected a 20% or more organic growth, where I can confirm that we are actually exceeding these rates. We are performing above plan, with double-digit EBITDA growth. And basically, the value creation initiative that bear fruit include the international development and expansion was one of the goals, to expand particularly to Europe and rest of the world. So we have won a number of major clients in Europe and rest of the world without basically slowing the growth in the U.S.

We have also successfully introduced projects through increased pricing discipline and align kind of the current average increase to market and peer standards of higher rates. And we are -- we have hired and are complementing teams, kind of a strategic hiring of sales, particularly Europe, rest of the world and corporate finance teams to support bolt-on acquisitions. So we're very happy about the development so far, only a good year in the ownership. However, there's still a lot to do, and we are very well positioned to capture a good portion of the growth in this industry.

And by that, I just would spend some words on the macro environment, so how we see it and basically our consequences, our behavior, our investment consequences on Page 25. We believe we are very late in the cycle. The expansion continues, however, at a fairly modest pace. We believe there will be rising headwinds and that there is an increased chance of deviation from our base case scenario, so risks are generally slightly higher. The rates, they are where they are and they're probably there to stay for a while. In our investment, we believe we need to rethink defensiveness, create growth, so buy -- [among] search for, then buy companies with growth and stability.

We focus on tailwinds, transformative trade tailwinds, be it by demographics, the health care, by trends to outsourcing, including for firms like GlobalLogic. We also factor in actually longer holding periods as we have done actually with a number of companies in the portfolio, including the 2 largest, including KinderCare, including some other companies, and to also factor in a multiple contraction.

So that's what we are doing when we buy a company. The base case for this position is a lower multiple. We also basically disclose this to our investors, how this develops over time. But certainly, 1 to 2 multiple ticks, depending on the industry, even up to 3. That's what we factor in. And by that, the entry hurdle is much higher because obviously the lower excess multiple needs to be balanced and needs to be caught up by initial value creation.

On the next couple of pages, you will see what we focus on in terms of strategies, and not a surprise, platform companies, niche winners, defensive companies are still on the top of our list. We observed valuations that are near or at record-highs -- I'm on Page 27, if you wish. And we also observed that kind of the time for a transaction has been further shortened. And our response is basically to source transactions very, very proactively.

It's our ambition to know the assets we want to own a year, 1.5, 2 years ago, which we actually enforce through our investment teams through systems-enabled, I talked about the T-List, that a target list, where each and every professional has at least 5 targets, whereof maybe 2 immediately or well within the next 6 to 12 months transactionable, whilst the remainder are more development assets for the next maybe 2 to 3 years.

And having this done in a very disciplined manner, this brings us in a position to still be very selective and select from our vast deal flow what we really want to own. The other focus is certainly on building our IVC team, industry value creation team, so that a growing number of our specialists can engage with the management teams, with the operating directors and the lead operating directors of our portfolio company.

All this brings me to the summary and the outlook. So these results actually in within Princess, I'm on Page 31, on a 5-year annualized NAV of short of 13% per annum, a dividend yield of 5.9%, with the firm intention to continue distributing dividends in the range of 5% to 8% of opening NAV. The current investment focus on global, middle, upper middle-market companies with good development potential. The opportunities we identify will be leveraged with our industry value creation teams' resources. We want go for companies that benefit from transformative trends towards outsourcing, digitalization, specialization and by that, create value.

We've got more than 200 ongoing value creation initiatives at any time. And the portfolio, on a look-through basis, basically shows and demonstrates that we are on the right path, with EBITDA and revenue growth of 14% and 11.7% year-on-year for the direct investments.

We want to continue also to realize assets, where value creation has been achieved. And we will see probably a bit more realizations towards the end of the year or next year than we will have observed over the 2019. And certainly, we want to preserve the selectivity and focus on what we call proactive sourcing.

By that, I'm at the end of my presentation, and I'm happy to give back to probably George for then the questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Milosz Papst, Edison Investment Research.

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Milosz Papst, Edison Investment Research Limited - Financials Analyst [2]

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I have two questions, if I may. Firstly, I just wanted to understand what's the cash-generative profile of your platform investments and to what extent are these platforms able to support further M&A acquisitions on their own, so from their own cash flow, and to what extent do you think you will have to perform follow-on investments similarly to what you did with Permotio recently with the EUR 8 million follow-on investment?

And secondly, on your portfolio valuation, would you be willing to disclose whether your portfolio is mostly valued based on last 12-month EBITDA or your budgeted EBITDA for this year?

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George Crowe, Partners Group Holding AG - IR Officer [3]

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Sure. So maybe for the first of those, with the platform strategy, it varies, depending on the individual investments. So for some investments, if they're making small add-ons, that's all funded from the cash flow from the business.

For certain portfolio of companies, they have access to a revolving credit facility. But if we identify more meaningful M&A targets, there is the potential that Princess and other Partners Group programs invest more equity. So it's very much on a case-by-case basis. As to valuations, it's predominantly last 12 months. It's very, very rare that we're taking run rate.

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Operator [4]

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(Operator Instructions) The next question comes from the line of [George Mueller] from [Proza].

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Unidentified Analyst, [5]

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I've got a question, maybe I missed the answer before. The maturity of the debt facility is December 2020. Are you still in negotiation with the bank for a longer time frame?

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George Crowe, Partners Group Holding AG - IR Officer [6]

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Yes. It's actually something we're looking into at the moment. We do expect to extend. It's a useful tool that we have to help us manage our liquidity.

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Unidentified Analyst, [7]

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So what time frame do you expect?

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George Crowe, Partners Group Holding AG - IR Officer [8]

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There's nothing I can disclose on the call. But look, we're not going to run this up to December 2020. So it's something we're discussing at the moment.

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Operator [9]

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(Operator Instructions) There are no questions at this time.

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George Crowe, Partners Group Holding AG - IR Officer [10]

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Okay, thank you. Well, in that case, what remains is to thank you all for your time today. We will hold the next call around 3 months' time to update investors on developments in the fourth quarter, and look forward to speaking with you again then. Thank you very much.

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Operator [11]

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