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Edited Transcript of PEY.L earnings conference call or presentation 12-Aug-19 9:00am GMT

Q2 2019 Princess Private Equity Holding Ltd Earnings Call

ST PETER PORT Aug 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Princess Private Equity Holding Ltd earnings conference call or presentation Monday, August 12, 2019 at 9:00:00am 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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* Mark Thomas

Hardman & Co. - 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 Q2 2019 Results Conference Call. I am Myra, the Chorus Call operator. (Operator Instructions) The conference is being recorded. (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, sir.

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

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Thank you very much. And good morning, ladies and gentlemen. Thank you for joining us for the Q2 2019 Princess Update Call. During the next 30 minutes or so, we'll take you through the performance of Princess and also some of the portfolio activity. The basis for today's presentation is the presentation that you can find in the Investor Relations section of the Princess website.

At this point, I'd like to hand over to Felix Haldner, partner at Partners Group and Director of Princess, who will guide you through the presentation. And after that, there'll be a Q&A session. I now hand over to Felix.

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

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Good morning, ladies and gentlemen.

We'll dive into the presentation. I'm on Page 2 and 3.

Just to remind you the strategy of Princess. Princess provides investors in listed markets with access to leading private companies and invest alongside some of the world's largest institutional investors. It's basically a co-investor in the deal flow to direct a co-investment deal flow of Partners Group. Partners Group is a manager -- is a leading private market investment manager that has invested more than EUR 59 billion in private equity since '96 and a total assets under management of EUR 80 billion. Princess relies on the large resources of Partners Group and particularly on their focus on value creation. I'll come to that in more detail with some examples later in the presentation.

Princess has a 5-year net asset value return of 13.3% per annum and a 5-year share premium return of 14.2%. We target a 10% to 15% net NAV return, so we are well in that bandwidth, of which half is paid -- or about half is paid via dividend and half as capital growth. The yield currently stands at 6.1%.

On Page 6, I would like to point you to the following.

After a positive start in the first quarter, the portfolio continued to develop positively in the second quarter. The Princess achieved an NAV total return for the first half of plus 9.6% and to which a number of companies actually contributed. The share price total return was flat during the second quarter, but remains in positive territory for the year with 14.7%.

When reflecting that the previous year 2018 was a very active investment year, the activity has been a bit slower in 2019, at least year-to-date. This may also have some timing differences or timing issues. As we speak, we'll have a number of transactions that Princess has underwritten, however, are not yet in the portfolio.

As a manager, the competitive investment environment we are in presents us with -- also with decisions regarding exits, of course. Challenging times on the investment side can be good times to sell. However, you'll note proceeds then also need to be redeployed in new investments.

Now Princess has the advantage as a so-called evergreen vehicle to hold assets for longer, if they merit it, and has done so with the company's 2 largest investments actually, particularly with Action and Permotio International Learning, and both have actually significantly outperformed their base case. They in aggregate now represent almost 20% of Princess NAV.

Where we see potential for further value creation to benefit from the compounding of EBITDA growth, this may lead to longer holding periods than our initial underwriting in some of our companies. So consequently, realizations in 2019 are likely to be a bit lower than 2018, but they maintain very positive on the prospects of the portfolio. And of course, Princess continues to invest into traditional buyouts where we expect to sell once our value creation objectives have been achieved typically within a 3 to, say, 6 years' period.

And following the strong NAV performance, over the past year, the Board was pleased to announce an increased interim dividend to stay within the range of 5% to 8% as opening NAV that was communicated to shareholders. And Princess has now a 9-year track record of dividend payments, and it's the Board's clear intention to maintain this policy.

This leads me to Slide 7 with the NAV performance.

I'd like to point you particularly to the 1, 3 and 5 years' performance and remind you that Princess basically started its repositioning as a direct investment company late 2010. Whereafter, it needed some time for the buildup and the value creation, and thereafter, the NAV developed actually very, very solidly.

On Page 8, the discount development is depicted.

That's certainly a slide I'm not always pleased to talk about. I personally believe that Princess, but maybe also the broader listed private equity market, remains very attractively valued compared at least to the secondary market in private equity where their portfolios typically trade at or around NAV or even above.

On the key figures side of Slide 9, we observe that the net asset value continues to grow while distributing around EUR 40 million in dividends to shareholders per annum. I'd also like to point you to the credit line that has been slightly drawn, however, EUR 42 million undrawn. And I also remind you that Princess has a liquidity buffer of around -- of 5% of NAV. It means another around EUR 40 million of liquid assets.

This already brings me to the 10 largest value drivers in the portfolio for the second quarter 2019. We observed that we have a positive contribution from across the portfolio actually, including a number of Princess' largest investments.

Permotio, a lead investment, basically an investment vehicle formed to create a leading international school group, develops very nicely. And based on last 12-month revenue growth and EBITDA growth, it has been revalued.

Action, a joint investment, the European nonfood discount retailer continues to develop very solidly. And again, the position has been revalued following the positive growth in revenue and EBITDA over the last 12 months. Action has a very healthy financial performance, driven by strong like-for-like sales growth and by expansion plans, which added actually 70 new stores this year.

GlobalLogic, another lead investment, is a global provider of software product engineering services, has demonstrated a very strong growth both in revenue and EBITDA, and by that, they had been valued upwards.

Foncia, I go -- I'm going to cover a bit later in this presentation.

But then also other companies like Vishal, which has only been added last year, Civica, PCI or Techem, Techem also had 2018 an investment already contribute very positively to the NAV growth.

As always, there are also laggers. This time, it is in the largest, Form Technologies and Envision. Form is a lead investment, a global manufacturer of customized metal components. And the revaluation is basically -- is based on flattish revenue and a slight decline in EBITDA. The company serves a range of end markets. However, we have seen some weaknesses from the automotive and oil and gas markets.

Envision, finally, is a U.S.-based provider of integrated physician-centric care, where Princess is owner of a mezzanine piece. It has been basically revalued based on public market revaluation of outstanding bonds. And this is basically a consequence of U.S. -- a change -- or a potential change in U.S. legislation regarding health care services pricing disclosure. Now we -- whilst it's been downward adjusted, we also are aware that Envision -- that only 5% of Envision's revenue is potentially affected by this potential change.

In terms of realization activity in the second quarter, I think the main contributor was the Legacy fund portfolio, whilst there was also a further sell-down in the public listed stock of Ceridian.

In terms of investment activity, and I'm now on Page 13, there have been 3 investments: Project Fox, basically a specialty, property and casualty manager; IDERA, a cloud-based infrastructure software solutions provider; and Confluent Health. I'll cover them -- cover Confluent in the next slide. But there are also a number of deals that are in closing such as Blue River PetCare, Schleich and Project Andersen.

In relation to Confluent, Confluent Health is headquartered in Kentucky, Louisville, Kentucky. It's one of the largest independent outpatient physical therapy service providers in the U.S. with over 2,000 employees and a bit short of 200 operating clinics. We have sourced this transaction basically after an initiative we call thematic sourcing, so whereby we are specifically targeting themes we would like to own. So this has been an effort that took quite some time, but resulted then in this deal as I'm explaining it. It's considered an attractive investment given its position as a leading physical therapy player in a very fragmented market, with the top 15 clinics representing just about 12% of total clinics in the U.S. And Confluent, as probably the whole sector, is expected to benefit from long-term industry tailwinds, simply driven by actually an aging population with chronic conditions and the fact that physical therapy is typically a cheaper treatment than any other medical treatment. Following the acquisition, we will work closely with the management team on opening new locations and driving same-store growth. And the company will also continue to execute its M&A strategy through bolt-on acquisitions and selective larger strategic acquisitions.

In terms of portfolio allocation, the overall picture has not changed. We observed that the fund's allocation is shrinking, as planned. It's now well below 10%. The investments by sponsor show that short of 70% is Partners Group lead and colead direct equity deals. There's about 13% in co-investments, 10% in debt, including the more liquid one, and 9% in funds. The portfolio is also very well diversified by investment years, as can be shown in the donut diagram at the bottom right-hand side.

The next page, on Page 16, another view to the portfolio is on the investments by stages, by regions and by industry. Also here, no big change. And overall, very balanced, very diversified. We can observe -- we continue to observe very attractive earnings growth and healthy capital structures that then also support the NAV development. For example, on Page 17, the 11.6% revenue growth over the last 12 months, the 12.1% EBITDA growth over the last 12 months, so well above and in excess of what you would expect from the broader stock market.

On the valuation, there is not much change. There is an average 13.8x enterprise value to EBITDA. There is about 5.2% net debt-to-EBITDA, about 39.9% leverage, so 60% equity financed across the direct portfolio. And the average enterprise value stands at around EUR 2.9 billion.

This leads me to Page 18 and 19 where you see the 10 largest direct investments. We have touched on some of them as they are also within the group of the largest value drivers, including the Permotio or the International School Partnership, Action, Foncia, GlobalLogic.

And I'll turn maybe your attention to the more generic slides on Page 21 to 25, where, as a reminder, you can see what Partners Group as an investment manager on behalf of Princess is focusing on. Taking regard to the macro summary, so our response basically is sourcing and then creating value. That's basically the generic theme in a market that can be described as somewhat turbulent, but certainly also can be described as being valued historically at the upper end.

So on Page 22, as a reminder, the type of companies or strategies we focus on is platform companies, niche vendors, defensive companies and category leaders. And depending on the type of strategy, we need a different -- we require different underwriting goals. So there's a mix of stable buyout targets underwritten at a bit more than 15% to 20% gross IRR and then the more growth-driven buyout targets that are underwritten at 20% more expected internal rate of return.

Key to finding the right target is a very proactive sourcing. I covered on that in one of my last calls. Thus, the observation that the formal process timelines have shortened. And in order to have a full due diligence and not just a shortcut, we need to wrap around assets way before they come to market. I think Confluent is one of the examples where we actually actively were looking for assets like that, but also the company that is going to be in the portfolio soon, the PetCare, the clinic is an example where, basically, the target was not just found because somebody showed us an investment deck, but because the team explored the sectors and then found a number of targets that were actionable.

Apart from sourcing, once the assets are in our portfolio, there's a big emphasis on value creation. It comes as no surprise that this team is growing fastly. It has about doubled the number since 2014 and expecting to be doubling again in the next 4, 5 years. So the evolution of the IVC team can be seen on Page 25. And also, the guidelines, the 5 Is of the industry value-creation team, we have an in-house team as opposed to just relying on outside consultants. It's very integrated in the entire investment process. The leaders are part of the investment committee. They're incentivized same way like the investment professionals. And it's a very institutionalized, standard, tried, true processes, a way of how to approach the value-creation initiatives.

Maybe as an example of what we have been doing. In Foncia, the third-largest portfolio company of Princess, a company that is actually developing a bus plan.

On Page 27, a snapshot on top line, bottom line, finance, governance type of value-creation initiatives.

Starting with M&A strategy where Foncia, the last 2 years of our ownership, had 94 acquisitions, which basically represented EUR 38 million of adjusted EBITDA additions. We have an EUR 18 million EBITDA impact from various initiatives, including price increases, invoicing for all services and late payers. We've got -- we have a client satisfaction program. We launched SatisFoncia initiative, which measures Net Promoter Scores. We have bottom line initiatives such as -- well, basically, introducing a new operating model. We transform the complex networks of entities to a more standardized and simple structure of regional clusters. We have a large digitalization project. We drive forward a new ERP and IT system to support new operational model. We have actually hired a whole digital team. The coding now is completed. Pilot projects started in the first quarter. And there's a target of EUR 15 million EBITDA gains by 2021. And of course, like every private equity player, we also work on finance capital structure. And in particular, all these initiatives are actually only possible if the governance is right. So we put a great emphasis on having the right people, not just at our end, but also third party. We appointed Baudouin Prot, former Chairman and CEO of BNP Paribas, as the Chairman of the Supervisory Board, and we appointed Philippe Salle, former CEO of a larger company, Elior, as CEO.

So just to give you an example that the IVC, industry value creation is not just a buzzword for us, but there's a lot of very tangible projects. We have on our account around 200 tangible projects across our direct lead portfolio we are kind of working on.

This brings me already to Page 29, the summary, the outlook.

So Princess enjoyed a 5-year annual NAV total return of 13.3% per annum, a 6.1% dividend yield. We have the policy to distribute the 5% to 8% of opening NAV via semiannual dividends. We actually increased the first interim dividend to EUR 0.29 per share. We continue on the investment side to focus on platform companies, niche winners, franchise companies, defensive leaders, basically companies that profit from transformative trends. For example, outsourcing, specialization, digitalization. There is a big emphasis on the industry value creation with an ever-increased team with a lot of initiatives and which then translates in solid EBITDA and revenue growth that can be observed year-on-year for the direct equity investments.

We continue to realize assets where value creation has been achieved. As alluded to, we do not expect 2019 to be a prominent exit year. However, that could be the one or the other. However, there may be also the one or the other that comes then into the first half next year. And we preserve our investment selectivity and focus on very proactive sourcing.

This basically concludes my summary on Page 20 -- particularly on Page 34. On one snapshot, you see what we stand for. We provide public market investors with the exposure to global portfolio of leading companies, and we are, as Princess, we are fully invested by now.

By that, I hand back to the operator and then to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from [Serge Bourrier] from [Geramont].

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Unidentified Analyst, [2]

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I understand your average valuation for the portfolio is 13.7 EBITDA. Can you provide us with the minimum valuation of the portfolio under highest valuation if you take your holdings? Or is there a difference between companies you have?

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

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There is a difference, yes, of course, because the valuation depends basically on public -- observable public markets data points. And so by that, depending on the industry, public market would attribute higher PE multiples or lower PE multiples. And our valuation team basically, as a main source, takes public market data points. And so by that, I wouldn't now know by heart as to what's lowest and highest, but there's quite a range, I would say.

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Unidentified Analyst, [4]

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Okay. You don't provide a detailed valuation per holdings?

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Felix Haldner, Princess Private Equity Holding Limited - Director [5]

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I don't think so.

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

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No. No, we don't. I mean it's unfortunately, for commercial reasons, we don't disclose things line by line, but we do try and give investors a sense of the average valuation. So the 13.8% is a weighted average and you can see how that develops over time.

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Operator [7]

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(Operator Instructions) The next question is from [Joshua McCartney] from [Downing].

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Unidentified Analyst, [8]

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Just following on from that the point -- the question on valuation. Obviously, you're giving the average, which is 13.8%, and you're taking that from obviously publicly available information. But surely, as we've seen over the sort of -- over the last sort of -- over this, well, first half of this year, valuations in sort of the public space have actually come off slightly. So I wanted to know how you've managed to push your valuations up. Is that more so the sector mix and where you're investing or, yes, basically, what's behind that?

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Felix Haldner, Princess Private Equity Holding Limited - Director [9]

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I think the main drivers of our valuation, upward valuation, was basically the fundamental company information. That's basically growth in revenue and EBITDA of underlying companies. That's the main contributor, I would say. And of course, the public market uplift has then contributed a bit as well.

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Operator [10]

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(Operator Instructions) The next question is from Mark Thomas from Hardman & Co.

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Mark Thomas, Hardman & Co. - Analyst [11]

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Perhaps a third point essentially. If you were to look sector by sector, what type of multiple premium do you think you'll be trading on looking within each sector? Just as an indication.

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George Crowe, Partners Group Holding AG - IR Officer [12]

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I would say, again, this may not be an entirely satisfactory answer, Mark, but it will vary hugely on the individual assets. I would say there are certain sectors we like at the moment, things like health care, things like education, which probably drag the average up, but unfortunately, I wouldn't say there's any broad average we can give you. With private equity, it's very much about the individual company by company valuations.

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Felix Haldner, Princess Private Equity Holding Limited - Director [13]

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Yes.

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Operator [14]

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

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George Crowe, Partners Group Holding AG - IR Officer [15]

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Well, in that case, I'd like to thank everybody for taking the time to join us this morning. And we do hope you'll join us again in 3 months' time, at which point we'll provide an update on the Q3 2019 figures. Thank you very much.

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Operator [16]

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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.