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Edited Transcript of PGHN.S earnings conference call or presentation 10-Sep-19 8:00am GMT

Half Year 2019 Partners Group Holding AG Earnings Call

London Sep 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Partners Group Holding AG earnings conference call or presentation Tuesday, September 10, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* André Frei

Partners Group Holding AG - Partner, Co-CEO & Co-Chairman of Executive Board

* David Layton

Partners Group Holding AG - Co-CEO, Partner & Member of Global Executive Board & Head of Private Equity

* Philip Sauer

Partners Group Holding AG - CFO

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Conference Call Participants

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* Amandeep-A Singh

Deutsche Bank AG, Research Division - Research Analyst

* Hubert Lam

BofA Merrill Lynch, Research Division - VP

* Neil Thomas Welch

Macquarie Research - Analyst

* Shamoli Ravishanker

Morgan Stanley, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Dear ladies and gentlemen, welcome to the webcast of Partners Group. At our customer's request, the conference will be recorded. (Operator Instructions)

May I now hand you over to David Layton who will lead you through this conference.

Please go ahead, sir.

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David Layton, Partners Group Holding AG - Co-CEO, Partner & Member of Global Executive Board & Head of Private Equity [2]

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Good. Thank you very much, and welcome to the semi-annual results call. My name is Dave Layton, Co-CEO of the firm. This is the first time that we're presenting here at the London Stock Exchange. 15% of our company is owned by U.K. investors and this is an important market for us, and we're happy to be here.

I'm going to start with a brief overview of our investment activities. We covered quite a bit of this on our July assets under management update, and so we won't dwell on this topic. I'll then hand over to André Frei who will cover some of our recent client developments. And then Philip Sauer will speak about our financial update.

Our firm today is one of the largest private markets firms globally. We have about EUR 40 billion in assets focused on corporate assets across a broad range of sectors. We have EUR 40 billion focused on real assets and financing activities across infrastructure, real estate and our financing businesses. We have stewardship for about 220,000 employees that work at our portfolio companies, and that's a responsibility that we take very seriously.

We view ourselves as a true partner to business, and we leverage the Boards of our portfolio companies to really drive the actions there. We call our approach entrepreneurial ownership or entrepreneurial governance. And we recognize that for some, entrepreneurial governance sounds like an oxymoron. You have entrepreneurship, which is this kind of drive to run through walls to accomplish and get things done, and governance tends to invoke more of a box-checking, oversight function.

But for us, what that means is that we look to guide our portfolio companies the way that a founder would guide those businesses. It's not just as an interested and engaged shareholder that comes in and looks to tweak a few things over a 3- or 4-year time period. But we're looking to build a board that becomes the center of vision and strategy for that company, that looks out 10 years, 20 years into the future to say, how do we need to shape this business to win market share and to beat our competition? And that approach is central to our ownership philosophy.

The market environment for private transactions today is quite robust and dynamic, but we did experience some temporary weakness in Q4 2018 that led to a gap in valuation expectations between sellers and buyers, which depressed private equity volumes in the first half of this year. As reported in our July assets under management call, we did have fewer realizations in the first half of 2019 versus the first half of 2018.

Where we have seen a meaningful rebound in that type of transaction activity and while the new investment levels as well were not up to the 2018 levels that we've seen, we're pleased with the $6.9 billion. We believe that's a satisfactory investment amount given some of the volatility that we've seen earlier in the year.

We have the benefit of operating within a market that is highly fragmented. Even as one of the larger players in the sector, we only have about a -- just over a 1% market share in Europe and less than a 1% market share in the U.S. and the rest of the world. And what that means to us is that we have a tremendous amount of blue sky ahead of us as we continue to grow and expand our platform.

But in this broad and expansive market which we operate within, we're also focused on being truly focused on key themes. So we have a proactive approach to origination whereby we identify topics and sectors that we believe are structural winners in the long run. And then we build a list of target companies in those sectors and we pursue them proactively. We call that approach thematic sourcing. And so while there's a lot that you could go and chase in the current market, we're very selective. We invested in only 2% of the direct opportunities that we saw in the first half of this year which resulted in 29 executed transactions. And we also invested $1.4 billion in secondaries and $1.4 billion in primaries, also very selective process.

Our platform today is quite diverse across geographies as well as asset types. We invested 30% of our investment dollars in Europe, 13% in Asia Pacific and rest of the world, and 57% in North America; in total, investing about $7 billion in the first half of this year. Consistent with prior periods, our asset mix has been about 60% direct investments and about 40% portfolio assets.

Looking back on what has now been the longest economic expansion since the 1930s, at least in the United States, we see valuations for many types of asset at the upper end of historical ranges. Rates are stubbornly low, and that's pushing investor demand into other higher-yielding asset classes. And private equity has certainly been a beneficiary of many of those -- of that investor demand.

At the same time, what we're finding is that anything that has a defensive label stamped on it is going for an incredible premium in the current market. It's late in the cycle, and businesses that have resilient cash flows and operate within historically defensive sectors are attracting real significant demand. And we're seeing, in many cases, unprecedented valuations being paid for businesses that have these characteristics.

And so we as a firm are beginning to rethink what defensiveness means, and we believe that in the current market environment, offense is the new defense. So instead of paying up for the next historically defensive asset, very, very high valuation and adding a tremendous amount of leverage to that business, we're focusing today on slightly smaller businesses where we can play an active role over the next 3 to 5 years to build out the defensive characteristics of that business to help them diversify into new customer segments, help them expand into new geographies, help them convert their business models from transactional into recurring business models. Those are the types of situations that we're gravitating towards.

It requires more work, it requires more effort, but that's where we're finding value and that's where we're finding opportunity in the current market. And so you'll see in some segments us focusing on slightly smaller transactions versus maybe what we've done in years past, but our investors give us a tremendous amount of flexibility to invest across the middle market with valuation sizes that have ranged from multiple-billion dollars of transaction value just down to a couple hundred million. So we have the ability to play the entire spectrum.

Our private equity business is established. We've invested $62 billion into private equity since our inception. We generated a net return of 20.2% on our direct investments. We have over 300 professionals that are focused on this segment of our business. And we have a portfolio of over 60 assets that we're responsible for.

One area that we're particularly active right now is on platform assets. Just about anything that you buy today, you're required to pay a very full and fair price to get access to those platforms. And so you'll see meaningful acquisition activity across many of our portfolio companies today as we look to buy a platform at a market price but then leverage that platform to be able to make smaller, add-on, tuck-in acquisitions at lower accretive multiples and buy down our multiple over time.

Our private debt business is also very established with $32 billion invested over time. We've generated a 4.6% unlevered net return on first-lien investments, an 8.5% unlevered net return on second-lien investments and we have over 100 professionals focused on this segment of our business.

In the current market environment where debt is cheap, we are focusing on leveraging the relationships that we've built with our investment partners over time. We're building custom structures -- custom tranches oftentimes to meet the specific needs of our investment partners to be a relevant and active partner for them.

With our private real estate business, we've invested $18 billion. We've generated a 12.7% net return within our real estate opportunities portfolio. We have over 100 professionals focused on this segment of our business. And we've made over 80 direct real estate investments.

In this part of our business, we're seeking opportunities in cities that benefit from transformative trends. These are expanding geographies, oftentimes tech economies. We're also looking to buy assets that are operating below their potential where we can expend resources, CapEx and human capital to help reposition those businesses -- or those assets through proactive measures to sell them at a gain.

In our infrastructure business, we've invested $10 billion over time. We generated a 14.8% net return on infrastructure investments. We have over 100 professionals in that business as well. And we have a portfolio of over 40 positions. Core infrastructure today are trading at very, very attractive levels, and so you'll see us engaged in building core platform. We're actively involved with the construction phase or in repositioning underperforming assets, ultimately to be sold to core investors that have very strong demand for these types of assets today.

So that's a little bit of an overview of our investment activities. I'd like to then hand over to my partner, André, who will walk us through our clients.

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André Frei, Partners Group Holding AG - Partner, Co-CEO & Co-Chairman of Executive Board [3]

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Okay. Thank you, Dave. And I'm excited to provide an update about how Partners Group made progress on the client side. So I would like to share my client perspective with you today.

Since the IPO of Partners Group back in 2006, we have actually seen sustained growth in our assets under management, which is illustrated on this chart. And today, Partners Group counts a bit more than 1,300 employees. And this build-out that you've seen at Partners Group also in 2019 really happens because we do see the growth drivers in our industry and also at Partners Group in tech. We see that there's a structural growth in institutional assets under management and we observed rising allocations to private markets.

And number two, we see that clients increasingly focus and intensify their relationships and collaboration with those managers that really has the capacity and capability. And with Partners Group offering solutions across asset classes, we are one of those managers of choice for many of our institutional investors.

Now actually, if I talk quickly about the hiring and the growth of the platform in 2019, you see that we did intensify hiring activities over the last 12 months, and that presents that for a few different time horizons here. So you see that over the past 10 years, average assets under management and the employees have been almost perfectly in line. We had, over the past 3 to 5 years, a slight under-hiring or basically assets under management growing more quickly than our employee force. And then on 2019, over the last 1 year, we see that we've successfully hired employees all across the globe to strengthen our platform.

So where did we hire? You see, for example, in the United States that we have intensified our investment platform build-out, for example, in the new Denver campus that Dave is leading. But we also did hire substantially in Europe and in Asia. And in Asia, for example, we did hire substantially also into corporate client services functions that are important to provide services that go beyond investment function. Our clients do equally benefit. And so do you, as a shareholder. Our clients benefit also from compliance and risk management, from portfolio management and reporting and data analytics. So we are equally building out functions that are not increasing capacity in the short term but are important to satisfy client demands and position us well for the future.

All right. So there can be no doubt that we live in a challenging world and market environment. Of course, I could talk about trade war and Brexit and disruption and low interest rates. But the fact is that despite this complexity of building up private markets portfolio and also despite or amidst these challenges in financial markets and public markets and private markets, investors really seek additional and more substantial exposures in private equity investor, real estate and infrastructure.

And I strongly believe that the investors do that because they want to have exposure to real economies that they cannot access via public markets, that many companies go public later or not at all. Clients like the Partners Group offers a relative value exposure, so we [effectively] shift allocations across regions or asset classes if you're a mandate client. And last but not least and very importantly, as Dave's just said, Partners Group stands for operation and value creation. We want to actively engage with our portfolio companies to create growth as opposed to just betting on growth in public markets that we don't see for the years to come.

If I look at our assets under management in terms of regions and types of clients, you see a strong diversification. On the left-hand side, you see the regional split of our EUR 80 billion of assets under management. You see about 1/3 plus has been contributed by clients out of the United Kingdom and the Americas, you see about 1/3 from Germanic-speaking Europe and 1/3 by countries and regions like Asia, Australia, Northern Europe that really have become stable contributors and really pillars by now in terms of asset weighting for our platform.

On the right-hand side, you see the type of clients. Still about 50% of our assets under management has been contributed by pension funds, pension funds both public and corporate. You see that Partners Group has very substantial assets from endowments, some wealth funds, asset managers, family offices that often want to access our asset class by mandates. And finally, but importantly, you see that distribution partners and individuals had contributed significantly to the assets under management of Partners Group.

Actually, if I look at the split of our clients, you see that our roughly 900 institutional clients really are nicely diversified. The largest client only amounts for 3% of assets under management. The top 20 clients account for about 25%, slightly less. And you see a nice split, I believe, in terms of mandates, products but also structured programs. So what makes me happy and a bit proud is that Partners Group can cater to the largest and most sophisticated and most demanding clients like sovereign wealth funds or larger pension funds. But equally, Partners Group has an offering like software programs that allow retail investors, individuals -- high net worth individuals to allocate their portfolios in a similar way as institutional investors. And as a company, I believe we truly grow by combining the large and the small investors. They have different presences needs and this, of course, has often allowed us to build out our platform on the investment side but also in ancillary services in a nice way.

In terms of client demand, 2019, we're happy to reconfirm the full year guidance. EUR 13 billion to EUR 16 billion is what we expect for the full year. With EUR 7.4 billion raised in the first half, that's pretty much in the middle of that range. Our guidance does assume that markets are a bit more volatile and low growth but actually still overall benign. Over the next 12 to 18 months, we expect to raise from various solutions, including flagships and mandates and semiliquid offerings, so pretty much a continuation of what you have seen in the past.

Tail-down effects and the redemptions actually will account for about EUR 6.5 billion to EUR 7.5 billion, and there's a tilt towards the second half as we have communicated in the past. Partners Group does not provide guidance on other effects such as FX rates. I don't believe we are experts in those areas, and that's why we don't provide guidance, which I think you'll appreciate.

In general, we're really satisfied about the dialogue that we have with our clients. And one of those topics that causes a lot of interest is, of course, ESG. Actually, we did not talk about the environmental, social and governance considerations last time, and many of you approached us afterwards whether that's important for Partners Group. So this -- we decided this time to simply make it part of the presentation.

I think Partners Group has a real unique and operational approach to ESG, and I believe it's in contrast to public markets because in private markets, it's about really doing it, really contributing to ESG aspects as opposed to pretty standardized and sometimes generic way of assessing a company in terms of ESG. So what we do at Partners Group is we fully embed ESG considerations into our investment process. So like the ESG experts work hand-in-hand together with the investment teams during the due diligence process, but afterwards, once an investment has been done, it's really about identifying those aspects in terms of ESG development, most are material and beneficial for a company.

And that depends -- or differs from industry to industry. You see the examples from this slide. It can be about energy management. It's about reducing energy costs, which is good for the planet, but equally beneficial in terms of cost reductions. It can be about health and safety measures, which can save lives, but at the same time, reduce claims. So kind of you can really do well by doing good in terms of ESG. And at Partners Group, that's an important aspect not only because investors ask for it, but because we believe it's the right thing to do and it does really make us better investors and achieve a better risk-adjusted return for our clients.

But as I am happy that Partners Group has again retained very high scores from UN PRI for our responsible investment practice. Actually, for the fifth consecutive year, Partners Group has received an A+, which is the highest possible score for our overall strategy and governance, which nicely compares to a median rating of A. And we will keep that up also going forward. We will be an ESG leader in all aspects because we think it is, as I've just said, the right and an important thing to do in terms of our investment practice.

With this, I would like to hand over to Philip Sauer who's going to talk about how our activity and achievements in the first half of 2019, plus actually over the past 2.5 decades, have translated into our financials.

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Philip Sauer, Partners Group Holding AG - CFO [4]

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Good morning, everybody. On behalf of the whole firm, I am proud presenting you our H1 2019 numbers.

And with that, I would like to switch on Page #23 on the presentation. What you see is that our average assets under management grew 16%, and that translated into a 14% management fee growth. This basically confirms the structural growth trend of our industry. Now if you look at revenues from a -- if you look at our overall revenues, you see it grew 4%, and that was mainly due to the fact that we had lower performance fees in the first half of this year.

As André mentioned, we accelerated the build-out of our platform. We hired, over the last 12 months, over 200 professionals. And we expect to hire also into 2019 and '20 further professionals. And therefore, our personnel expenses, they grew disproportionately in the first half compared to our revenues, and that muted the EBITDA development.

Now let me please talk about our revenue composition and then dive into costs. Now from our revenues, they basically consist of 2 metrics: it's performance fees and it's management fees. Now while management fees are contractually recurring, they are based on close-ended, long-term structures. For instance, they have initial terms in the private equity space or equity space up to 10 to 12 years; on the private debt space, 5 to 7 years. And that represents about 80% of our AuM. 20% of our AuM and therefore also management fees are based on so-called structured programs, semi-liquid programs where the fee base is the NAV development of the program. Now the 14% management fee growth was supported by late management fee and other income. They grew by 50% to CHF 51 million, and that supported management fee growth in general.

Now other income is earned for fundraising and investment services but mainly also due to treasury management services. This is where we literally help clients pool their cash and make efficient use of their cash flows. Now looking at this number, if you look into the second half of this year, we believe that this number will not be quite as high but will be more elevated.

Now if we move on to Page #25. On Page 25, you will see that management fees will make the bulk of our overall revenue composition. They represent about 70% to 80% of our revenues going forward and they will do so also for the mid to long term.

If you look at our performance fee development, in the first half of the year, they represent 19%, and they were marginally below our long-term guidance. Now if you look ahead, we confirm the full year guidance of 20% to 30% for performance fees, and we confirm that performance fees will make up 20% to 30% of our revenue streams in the very future.

We also acknowledge that there is a 10% gap, [like] 20% to 30%, and this gap is quite wide. Now why is this the fact? We have over 300 different investment programs and mandates currently running. They are in different life cycles. They have -- they're all well-diversified. They have contained hundreds of assets. But that means on the one hand, it will provide a quasi-recurring contribution to our revenues, but on the other hand, there is a certain volatility component which is, for instance, as Dave said at the beginning, affected by volatility in the market.

Now if we look at on the next slide, on Page #26, I would like to actually make 3 statements on our performance fees. The first one is the very short-term development of what we have seen in the first half this year. Now if you look at the very short-term half year results over the last 4 years, there, you see that our performance fees has leveled somewhere between CHF 130 million to CHF 170 million and actually reduced in the first half of 2019 to CHF 130 million again, which was mainly due to the market volatility experienced in the first half of the year.

Now although that correction was rather short-lived, it hindered us to make use of the full potential of the year, obviously. So assuming that we have a benign market environment into 2019, we think that we can make and realize the full potential of our performance fees, meaning they're ending up between 20% to 30% of revenues.

Now you see CHF 130 million of revenues, so stemming from performance fees, they again were highly diversified. Over 50 programs and mandates contributed to this performance fees. And the majority of that performance fees in H1 stemmed from investment programs which were launched prior to 2012.

Now my second message on that slide is if we [now not look] at past, so what we have actually generated in the first half of the year, but just look a bit short-term outlook into the future, 2019 and '20, you will see that we will see more programs providing additional performance fees coming through off the vintages which we raised between 2012 and '14. Over the next probably 18 to 36 months, you will see programs contributing to performance fees from the vintages 2012 to '14.

My third message on that slide is if we now go fast forward into 5, 6, 7 years ahead, you will see -- or we believe that our performance fees will, in absolute terms, be significantly higher than what we have seen today. Why is this the case? If you just look at the past, over 2015, '16, '17 and '18, what we have invested, we have done significant buildup of our investment platform. We have invested a significant amount of equity in these years, and we believe that, that would definitely contribute to an absolute higher number of performance fees.

With that, I would like to move to Page #27 and quickly talk about our management fee margin. Our management fee margin has been quite stable since our IPO. A lot of shareholders ask us why this is the case. Why can you, in a market which is constantly under pressure for fees, maintain your management fees? The reason is we have changed our business over the last 10 years as well. We have heavily invested into our investment platform. We have heavily invested into our direct investment capabilities. And that is a skill which you cannot copy quickly.

And with that where we how -- and how we are today positioned, I think we can defend the margins in general. And overall, we see a surplus in demand for strategies like us which we provide, like direct equity strategies, direct infrastructure and credit and direct real estate. And that's why we also believe that our fees will stay stable on the management fee side also in the years to come. The average since our IPO is 125 -- 126 basis points, sorry, and that is about [81%].

Now with that, I would like to move to Page #28 and talk about cost. When we at Partners Group talk about cost, we talk about expenses and we talk about personnel expenses. And personnel expenses, they make up [80%] of our total cost base. So if we talk about cost fee, let us talk about the buildup of our platform. But when we look at personnel expenses, we need to really separate between 2 things. We need to separate between regular personnel expenses and performance fee-related personnel expenses.

Now if you look at the personnel expenses or the regular ones, they increased 25%. They actually increased even more than our average head count. Our average head count increased by 20%, expenses by 25%. This is due to this acceleration of hiring. Now this is also a temporary measure. We believe that for the full year 2019, these expenses will be about in the same magnitude, the growth of these expenses.

So you couldn't consider 2019 as a catch-up year for hiring, but you could also expect for 2020, 2021, that we remain to our -- within our margin guidance of 60%.

Now there are –- there is a second component, which is our performance fee-related personnel expenses. They actually decreased by 25%. Now why is this the case? Because we allocate a straightforward 40% of the performance fees to our employees, the team. Now as performance fees decrease, we have a linear decrease on the performance fee-related expense as well.

Now for those of you who cover us a bit longer and you know that we have changed our key performance indicator from EBITDA to EBIT with this announcement. Now EBITDA served us very well ever since our IPO over the last 13 years, and what we believe EBIT will be a better operating measure going forward. Why is this the case?

In 2019, there was a new accounting standard. With this accounting standard, we recognize now right-of-use assets or lease liabilities on our balance sheet. So we don't have expenses anymore, for instance, on rents in our other operating expenses, but we need to depreciate them. So that, as you can see on the slide, we had a significant increase in depreciation and actually a reduction in other operating expenses.

Now there was a reclassification of CHF 6 million. And we said, look, it makes just more sense to look at EBIT because that is probably going forward a more -- a better measure of our operating performance.

Now if you look ahead and Partners Group will grow, we continue to build out the platform, how do our operating expenses develop? I think from now on, what you see, I think you can expect that the operating or the other operating expenses will develop alongside AuM or alongside management fee growth.

With that, I would like to talk about our new/old margin targets. Originally, we had an EBITDA target of 60%, now it's an EBIT target of 60%. And that has come down slightly from 65% in 2018 to now 63%, mainly due to the accelerated hiring, what we have experienced in 2000 –- in the first half, but also we'll experience for the full year 2019.

Now going forward, we have a target in place, which is about 60% on every incremental management fee dollar or management -- performance fee dollar, what we generate, what we spend. Now that is all under the assumption that FX rates do not move.

And why do I talk about FX rates? On Page #30, you see our exposure currently. And you see that our AuM/management fee exposure to FX or currencies are predominantly euro and U.S. dollar-denominated. If you compare that against our costs, you see that our costs are still tilted towards the Swiss franc denomination, although the Swiss franc decreased from 40% -- from 45% to 40% in the first half. Now the U.S. dollar actually strengthened from 20% to 25% mainly due to the fact we're building out Denver quite substantially. Now all that said is FX movement have an impact on our EBITDA margin. And now if we look at the first half of this year, the FX actually decreased our EBITDA margin by roughly 1%. 1 year ago, actually, FX supported us by 1%. So there is always a bit of a volatility.

Now if you look at performance fees, which is 20% to 30% of our revenues, they don't [are] exposed to FX fluctuations because whenever we receive performance fees, we convert it into local currencies and pay it out to our employees.

With that, I would like to move on my last slide before we open up for questions, and this is on the left side, you see P&L, which I actually talked about until EBIT. So let me talk about everything below EBIT and then talk about our balance sheet.

Now below EBIT, there is a certain component which we call the financial result. The financial result is basically the result of the performance of our own assets which we have on the balance sheet. Partners Group invests roughly 1% for every client dollar or euro we raised, 1% alongside the client [in the half]. Today, we have CHF 700 million on these own investments on the balance sheet. And movement of those they will go through our financial result. Now we had actually, throughout the first half of the year, quite a strong performance of the programs across the platform that supported this financial result in particular in the first half.

Now in terms of taxes, our tax rate will be also in the future between 12% to 14%, and that resulted in a profit growth of, moderately, 1%.

Now quickly talking about the balance sheet. I think our return on equity remained high, and we expect this to be the case also going forward. Now from a balance sheet perspective, we have almost CHF 1 billion net liquidity. So I think our war chest is well filled for opportunities which might arise. And with CHF 1.9 billion in equity, I think we can withstand probably more economic challenging times.

That said, so far, from the financials. And with that, actually, I would like to open up for questions in the audience and then maybe on the call.

Hubert?

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Questions and Answers

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Hubert Lam, BofA Merrill Lynch, Research Division - VP [1]

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It's Hubert Lam from Bank of America Merrill Lynch. Three questions. Firstly, on performance fees for the second half. What is the visibility on pipeline for performance fees in H2? I guess we're almost halfway through the second half, so you probably should have a good sense in terms of what the asset environment has been. What would you say is kind of also playing forward in the Q4? So that's -- yes, for the second half performance fees.

Second question again, sorry, is on performance fees. What would you say is the sensitivity of performance fees to the global macro cycle. You admitted yourself we're reaching late cycle now. Does that mean that it's more likely that performance fee range will probably be in the lower half of that range that you've given?

Third question is on personnel expenses. So this year, it seems like you've had to catch up in personnel expenses, which is running higher than revenue growth and AuM growth. Would you -- is it just for this year or would you say there's probably more catch-up or more reinvestment in 2020? Or should we expect personnel expenses to kind of grow in line with revenues again?

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André Frei, Partners Group Holding AG - Partner, Co-CEO & Co-Chairman of Executive Board [2]

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We see -- in terms of the build-out of our platform, you see the personnel expenses have grown more substantially in 2019. We expect this for the full year to happen. 2019 will be a catch-up year in terms of growth of personnel expenses. Thereafter, I think it goes line in line with management fee development. Maybe on the performance fees, I'm not going to talk about performance fees because I think we talk about exit environment first, because performance fee are always a derivative of the exit activity.

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David Layton, Partners Group Holding AG - Co-CEO, Partner & Member of Global Executive Board & Head of Private Equity [3]

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I think we have seen a more robust exit environment in the second half of what we've seen so far in the second half of this year.

You asked about the sensitivity of our exit fee. There is a certain element that's always going to be linked to the market environment. We have a strong philosophy as a leadership team that is clients-first and we don't put our clients in a compromised position, trying to sell positions that they're invested in if it's not a market that's well-suited for that. And we believe that's sort of the right thing for shareholders over the long run. And so we did hold off on certain divestitures from the first half of the year given the volatility that we saw. But we like what we're seeing right now out of the second half of this year and, hopefully, that window continues.

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Philip Sauer, Partners Group Holding AG - CFO [4]

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Translating that into sensitivity performance fees is probably like we had a bit of a tougher start in Q1, that potential is lost in a sense. But if you would consider just in terms of sensitivity, if all our exit activities are going through as planned, we could end up at the higher end of the range.

Now if you have something like a Q1, it lowers that potential, if you have, for instance, some postponements of exit activities, it could go even across the portfolio, it could even go lower to the 20% bandwidth. Now unfortunately, this is very tough to tell you where it will be because we don't know where we are in the next quarter. But also what we want to stress and highlight is, of course, if the world falls apart [on this, at least] last quarter, that can have an impact on performance fees in general so that they would even fall below 20%, but this is not what we -- not our base-case scenario.

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Shamoli Ravishanker, Morgan Stanley, Research Division - Equity Analyst [5]

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Shamoli Ravishanker from Morgan Stanley speaking. Just a further question on how your market shares have been developing within different asset classes, geographies and even client sites. As LPs start consolidating their GPs, what has this really meant for Partners Group over the last few months and also does your more mid-market strategies relative to some of the global players benefit you at this point in the cycle?

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David Layton, Partners Group Holding AG - Co-CEO, Partner & Member of Global Executive Board & Head of Private Equity [6]

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We look at market share a couple of different ways, one from a transaction activity perspective, and I'll speak to that, and maybe, André, you can speak to -- from a client perspective.

I think that the current environment requires a tremendous amount of effort to get a transaction done. So we'll have 6 or 7 lines in the water to get one transaction across the finish line. I think that type of environment where you have to expend a tremendous amount of speculative resources on situations that aren't necessarily at your door yet, I do think benefits the larger platforms. There've been a number of people that have commented on market share pickup that were large platforms they've had at the expense of maybe some of the smaller monoline funds. And I do think that this very resource-intensive environment there is one of the factors driving that. We have a platform with 13 people -- 1,300 people around the world, and we can spend resources on businesses that aren't for sale yet and develop a thesis over 2 or 3 years, I think that's benefited us and we've been a share gainer over the last number of years as a result of that.

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André Frei, Partners Group Holding AG - Partner, Co-CEO & Co-Chairman of Executive Board [7]

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In terms of clients, I believe [partners to be] probably based now in Europe, that is where we have been founded. And like German-speaking world contributes 1/3 of our assets under management. A very strong position also like here in the U.K. And so I believe the positioning of Partners will remain strong in Europe. A lot of positive key pipelines, they like to track markets, they also like the services that we provide. The Partners Group, from a client perspective, is always a combination of investment track record for those additional service that it provides. Maybe that's not like on top of everyone's minds right now because the markets are positive. But should the market shake at one point, clients really start to appreciate the additional services and risk management and portfolio construction. But that is precisely what we have demonstrated in Europe now for like 2-plus decades and this is being recognized also in Asia and in the United States. So we see a strong interest and increasing interest in PG from Asia and then the same is going to happen in the United States.

You asked, what is good about Partners Group? As I said, it's this combination of the mandates, products and structured program. Probably, we are quite unique in structured programs and we're also at the front in terms of mandates and we want to just be like our peers in terms of flagship offerings. So that's the combination of these 3 access routes into private markets that allow Partners Group to have this strong positioning on the client side.

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Neil Thomas Welch, Macquarie Research - Analyst [8]

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Neil Welch from Macquarie. Two questions, please. The first is with the increasing emphasis that is being placed on ESG investing, maybe that's just because the press is speaking out. But as a leader in that space, how do you think that affects allocations between private assets and the more public markets and your positioning in that?

And the second is, you're clearly investing significantly in your U.S. base, in Denver. I'd just be interested to know where you are in that development. I understand it is a long-term project. It would be interesting to know where you are in terms of delivery. Are you fully built out, both on the client and the investment side? What you think the plan is going through? What you can share with us would be great.

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André Frei, Partners Group Holding AG - Partner, Co-CEO & Co-Chairman of Executive Board [9]

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In terms of ESG, I don't believe that is the driving force why investors will relocate from public to private markets. We see interest in private. We see a number of investors that do have decreased public equity allocations and increased private equity allocations, let's say. But ESG is one of the benefits but not the key driver of that move.

I think what's interesting is that public markets are probably more advanced, there's a lot of reports. You can read a lot, it's all standardized, it's all available at the push of a button, but it's often very superficial, isn't it? So kind of we try to do a great job in assessing hundreds and thousands of companies. And then here comes in the private market disadvantage and advantage. Now private market is probably pretty much pragmatic and focused on increasing or improving in terms of ESG criteria.

While public markets are better in reporting and sharing information, I believe private markets are better in really focusing on triggering change in these respective companies. The parts will be (inaudible) of ESG initiatives across our portfolio. As I just said with the examples, it will positively impact the assets. So it's not about finding out what is the perfect ESG assets, but it's about creating a better ESG asset during our holding period.

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David Layton, Partners Group Holding AG - Co-CEO, Partner & Member of Global Executive Board & Head of Private Equity [10]

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With regards to our build-out in the Americas, and specifically at our Colorado campus, we're about 2/5 of the way through that ramp-up. And so we -- after the next leg of our construction project is complete, and we expect for it to be complete in Q1 of next year, we'll have capacity for about 500 at that location and we're just above 200 today. Very well represented across client activities, investment activities and services. Yes.

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Amandeep-A Singh, Deutsche Bank AG, Research Division - Research Analyst [11]

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This is Amandeep from Deutsche Bank. I have got a couple of questions.

(technical difficulty)

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David Layton, Partners Group Holding AG - Co-CEO, Partner & Member of Global Executive Board & Head of Private Equity [12]

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it was primarily on the equity side. So the debt business tends to have a higher velocity of liquidity through refinancings as rates go lower. But the deficit is not a huge driver of performance fees, overall. So primarily, it's going to be linked to our equity business.

And it was reasonably balanced across geographies, some of the volatility we saw, both in the U.S., at least Europe, there was about a 31% reduction in transaction volume within the private equity market overall, in the first half of 2019 as compared to 2018 -- in the first half of 2018. But it was primarily in the equity side of our business balanced across geographies.

And in terms of what we can do to protect against volatility there, I mean, I think performance fees, we can protect through diversification. We have a number of products that contribute to this. It's not just a couple of big, chunky direct investments in there. We have our secondary business that's a meaningful contributor that. We have our real estate business, infrastructure business. 50 programs internal that contribute in some way. Yes, we do have a couple of bigger, chunky positions in the lead private equity portfolio that can move the needle a little bit one way or the other. And -- but we have, again, the firm believes that it's clients first, and we're going to hit the windows that are appropriate to make sure that they have good returns and good realizations. And if that happens to be next year or the year after that, if that's when the best windows present themselves, then that's when they present themselves. We're not going to try and time liquidity out of our clients' portfolios to meet our financial objectives here. We're very focused on making sure that we have good returns for our clients, that we meet their needs and then it kind of falls how it falls.

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Philip Sauer, Partners Group Holding AG - CFO [13]

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Different asset classes as well, and you will see in the years to come that infrastructure and real estate significantly contribute to performance fees as well. Given that the funds and the asset classes in itself are younger, contribution, we have talked about this, 6 to 9 years' time lag, that will take some time. But as private equity is still the largest and most mature asset classes for us, you will see also the vast majority of the performance fees in that. But you will see them coming and they will be more diversified in [most asset class].

Question on the call?

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Operator [14]

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(Operator Instructions) The first question is from [Reinhardt Vantete] of [Larkin Asset Management].

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Unidentified Analyst, [15]

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I have 2 questions. Sorry, in the beginning, David described the historical returns since inception or since the IPO, which was in 2009, of the 4 asset classes, which all were very, very acceptable. Now we know of course that the 2009 was a pretty good year to start a record because it was after the crash in 2008. So can you -- are you willing to share with us the -- what those percentages -- performance percentages were over the last 5 and 3 years? Because I would assume that there's a decline curve in the performance percentages.

And the second question is a simpler one. Your own portfolio is about CHF 700 million, you've shared with us. If I can do my math, you make about a CHF 70 million return on that in 2019, if I analyze the first half. So is the 10% of return we can expect for that portfolio, is that a pretty good benchmark?

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David Layton, Partners Group Holding AG - Co-CEO, Partner & Member of Global Executive Board & Head of Private Equity [16]

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Yes, I'll start on the historical track record. So we went public in 2006. And those -- the track records actually start at the inception of the investing activities for those different businesses. And so for the direct private equity business, for example, I believe it was 1998 or 1999 and goes across cycles. And so it wasn't just from the 2009 time period up, it's literally across every environment that the firm has been through. And we haven't seen a material degradation in returns over the last couple of years.

Now we have been supported by a very buoyant market. We're certainly not underwriting to return to that level in every instance. I think it's safe to say that, from an underwriting perspective, there have been returns that have come out of the market over the last number of years and we need to supplement the loss in market returns with additional resources from our side. And that's why you see us building out our operational capabilities to the extent that we are because we have to go from impacting businesses to truly transforming businesses in order to drive the same types of attractive returns moving forward versus what we've been able to generate historically.

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Philip Sauer, Partners Group Holding AG - CFO [17]

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Maybe from an -- our own investment perspective. The historical returns, if you use the 10% return on those, and then you're quite aggressive, typically, we have seen in the past anything between 5% and 10% because they're highly diversified across vintages. Some of these own investments are very young. They don't contribute at all. Some of the own investments are very mature, so they also don't contribute so much. And then you have kind of the bulk in the middle, which is actually in full value-creation mode.

So I think assumptions of 5% to 10% is probably a reasonable one. So we have seen everything. It depends a bit on how also kind of the market environment looks like. So that's why I cannot give you one number, but currently, we're running at a 10% run rate, and that is on the upper end.

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Operator [18]

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(Operator Instructions) There are no further questions via the telephone lines.

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David Layton, Partners Group Holding AG - Co-CEO, Partner & Member of Global Executive Board & Head of Private Equity [19]

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Okay. Well, with that, we'd like to thank all of you for your attendance and for your interest in our company. Thank you for your support, and look forward to connecting with you on our next announcement. Thank you very much.

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Operator [20]

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Ladies and gentlemen, thank you for your attendance. This conference has been concluded.