P10, Inc. (NYSE:PX) Q3 2023 Earnings Call Transcript
P10, Inc. (NYSE:PX) Q3 2023 Earnings Call Transcript November 9, 2023
Operator: Hello and welcome to the P10 Third Quarter 2023 Conference Call. My name is Latif and I will be coordinating your call today. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's conference call is being recorded. I will now hand you over to your host, Mark Hood, EVP of Operations and Investor Relations. Mark, please go ahead.
Mark Hood: Good afternoon and welcome to the P10 third quarter 2023 conference call. This is Mark Hood, EVP of Operations and Investor Relations. Today, we will be joined by Luke Sarsfield, Chief Executive Officer; Robert Alpert, Executive Chairman; Clark Webb, Executive Vice Chairman; Fritz Souder, Chief Operating Officer; and Amanda Coussens, Chief Financial Officer. Before we begin, I'd like to remind everyone that this conference call, as well as the presentation slides may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect management's current plans, estimates and expectations, and are inherently uncertain.
Actual results for future periods may differ materially from those expressed or implied by these forward-looking statements due to a number of risks factors or other factors that are described in greater detail under Risk Factors in our annual report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 27, 2023, and in our subsequent reports filed from time to time with the SEC. The forward-looking statements included are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statements as a result of new information or future events, except as otherwise required by law. I will now turn the call over to Robert.
Robert Alpert: Good afternoon and thank you for joining the call. In the third quarter, P10 continued to demonstrate the power of our differentiated financial model as we delivered another quarter of strong financial performance. Before we talk about the quarterly results, I want to welcome Luke Sarsfield, P10’s new CEO, to his first earnings call. As many of you listening to this call know, two weeks ago, Clark and I passed Luke the CEO baton, and we could not be more excited about the transition. The decision to transition leadership at this time reflects the strength of our business, our commitment to driving shareholder value, and the confidence we have in Luke's ability to take P10 to new heights. All the pieces are in place to continue strong organic growth, leverage inorganic opportunities and elevate the P10 brand globally.
We have built a best-in-class investment platform, tailored to the needs of our global clients and Clark and I have exceeded every goal we set for ourselves. We are confident Luke is the right choice for P10 and he has our full support. Over 23 years, Luke was a key contributor at Goldman Sachs. He held important leadership roles across the organization, including serving as Co-Head of Goldman Sachs Asset Management, which managed over 2.5 trillion in assets. Luke brings proven leadership skills that he honed over decades. At its core, P10 is a people business and it was important that we find a leader with the character to lead people effectively while making the interests of clients paramount. We also wanted an individual that had distinct experience building asset management businesses as well as thoughtfully identifying and executing value additive transactions.
We're confident that Luke will effectively lead P10 and capitalize on a myriad of opportunity for value creation. Clark and I remain large shareholders and look forward to remaining involved in key parts of the business. I remain Chairman of the Board and as part of the transition, I was elected Executive Chairman where I will focus on corporate matters. Clark will also remain on the Board and he was elected Executive Vice Chairman and will direct his attention towards strategic opportunities and assist Luke in potential corporate transactions. Welcome Luke. We're excited you're at P10, in a few moments you'll hear from Luke, but before that, I want to hand it off to Clark for a few comments.
Clark Webb: Thank you, Robert. I agree that Luke joins P10 at the perfect time and inherits a strong foundation for continued growth. This earnings call represents our two-year anniversary as a public company. Shortly after we went public, we laid out ambitious fundraising and financial targets. I'm pleased to report that we not only exceeded our two year $5 billion organic fundraising goal, but we have now exceeded $6 billion of fundraising, more than $1 billion in excess of our original plan, with one quarter still to go. Moreover, our accomplishments have not been confined to AUM growth. Since going public in October 2021, P10 has delivered impressive financial results, compounding intrinsic value for our stakeholders at attractive rates.
From the third quarter of 2021 to the third quarter of 2023, we have grown revenue, adjusted EBITDA and ANI by 55%, 36% and 50%, respectively. We believe that performance puts us in a unique position relative to our peer group, and our growth has been achieved despite a macroeconomic backdrop that has proven the most difficult in a generation with rising interest rates, market volatility, a global pestilence and war. When we went public, we positioned P10 as a long-term compounding bond. I believe the last two years has proven the merits of our financial model as we pass the baton of leadership to Luke, we believe P10 has never been stronger and we believe our best days are ahead. With that, it's a privilege to introduce Luke to the investor community.
Luke, over to you.
Luke Sarsfield: Robert and Clark, thank you for the kind words. I’m truly energized to be here today, speaking with all of you and I look forward to our interactions moving forward. As the new CEO of P10 and as a shareholder, I’m grateful for your support and we will work hard to earn it every day. First, I'd like to start by recognizing Robert and Clark and acknowledging their vision for creating a truly differentiated private market solutions provider. The platform of leading investing franchises that they have assembled is extraordinary and it provides a superb foundation for future organic and inorganic growth. I also appreciate their leadership and support to-date and look forward to working closely with them to create exceptional value for P10 stakeholders.
I was fortunate to spend over 23 years at Goldman Sachs where I held a numerous senior leadership roles and honed the skills necessary to create value for clients and shareholders. My experience is gained as a leader of the firm's financial institution investment banking team, running the asset management, client and distribution team. Then ultimately heading the overall asset management business will be directed to broadening P10's global footprint and elevating its brand. When I reflect on why I chose to join P10, I really think about the outstanding people and the compelling platform. From a human capital perspective, each of P10 strategies are made up of world-class, long tenured investment teams with durable track records. Each strategy is a leader in its respective market with a demonstrated ability to produce consistent alpha on behalf of clients.
Our ongoing success in raising precious capital from our LPs and then deploying that capital to generate very strong returns is a testament to the strength of the platform and the operating infrastructure is robust, thanks to the foundational work done by the P10 management team. Personally, I see rich opportunities to drive organic growth in multiple ways. First, given the strength of our individual franchises, the ongoing organic capital raising opportunity is extremely meaningful, as is evidenced by our exceeding of our initial two-year $5 billion gross fundraising goal, two quarters early. There are attractive opportunities to expand and deepen our fundraising capabilities across the whole of the P10 platform as we introduce existing LPs of one of our strategies to our broader offering set.
Furthermore, there are vast numbers of prospective LPs who are not yet aware of P10 where we can introduce the platform and its robust capabilities. Next, there is the prospect of distribution arrangements with a wide range of potential partners from retail platforms to insurance companies, which can accelerate our capital raising plans. Finally, I see a real opportunity for P10 to create broader brand awareness. When I was initially approached about the CEO job, I had never even heard of P10. But as I got to know the company better, I was incredibly impressed and I believe we have an opportunity to increase the profile of P10 with global pools of capital. I also see tremendous potential inorganic growth opportunities. Our disciplined focus in the middle and lower middle market results in us being a true partner of choice for numerous firms, and there are many potential areas for expansion that fit strategically and synergistically with our existing franchises.
Of course, we will be thoughtful and disciplined in how we prosecute these opportunities, but the universe is broad. One thing that I believe is critical for any new leader is to gain a deep understanding of how their organization works. To that end, I am spending my first several months on an in-person listening tour with the broadest range of voices, including my P10 colleagues across our strategies, our clients and prospective clients, our current investors, prospective investors, research analysts, potential partners and others. Importantly, we want to ensure that we are clearly articulating the P10 story to investors. To that end, we plan to hold our first Investor Day sometime in 2024 where we will share greater insights around our leading franchises and our growth framework.
I will close by again saying how excited and humbled I am to have the incredible opportunity to lead P10 and how much opportunity I believe there to be here. With that, I will turn it over to Fritz.
Fritz Souder: Thank you, Luke. We continued to see steady contributions of fundraising and deployment across the platform in the third quarter. We are frequently asked about what we’re seeing in the market and what we are hearing from LPs. From our vantage point in the middle and lower middle market, we don’t see much change over the last couple of quarters. As we’ve said on previous calls, in times of uncertainty, investors may take longer to make decisions and that is certainly understandable when an LP is evaluating a fund commitment that could last a decade or more. We’re confident that we will continue to benefit from strong relationships of delivering durable alpha over long periods of time in all sorts of markets.
At other times, we see LPs make a fund commitment sooner than expected, as they did in the second quarter, where we pulled forward about $300 million of fee paying AUM. In Q3, we had a dozen funds in the market. Our private equity strategies raised and deployed $309 million with our primary fund of funds driving most of the fundraising. Later next year, we expect to launch RCPDirect V and RCP Secondary V. We think the current macro environment we find ourselves in will bolster demand. The same can be said for our GP stake strategy, which benefits in conditions where GPs find fundraising more challenging than normal. Our venture equity strategy TrueBridge had another impressive quarter and raised $180 million and continued to demonstrate institutional demand for elite investment opportunities.
The majority of the LP commitments to TrueBridge were to the flagship fund of funds and our inaugural secondaries fund. The credit size of the house raised and deployed $56 million with our NAV lending strategy Hark contributing to fee paying AUM. WTI continues to work on Fund XI and we expect it to launch in mid-2024. With 42 years invested in venture lending, we’re seeing strong deal flow and attractive deployment opportunities. Historically, WTI has produced excellent returns and we think the exit of certain market participants expands our opportunity set. In the third quarter, our impact strategy Enhanced Capital drove $154 million of fee paying AUM. Enhanced Capital continues to deploy capital into impact investments to achieve both investment and impact objectives of a wide range of investors.
Enhanced has a long history of customizing funds to effectuate a particular investor’s goal, such as helping a bank achieve their Community Reinvestment Act requirements. In the third quarter, an existing bank client increased their commitment by an additional $91 million to invest in that bank’s footprint. Additionally, Enhanced Capital deployed $28 million on behalf of a third-party whose balance sheet Enhanced manages, among other funds deployed. In conclusion, our diversified all weather strategies continue to demonstrate the power and potential of our platform. I will now hand the call over to Amanda.
Amanda Coussens: Thank you, Fritz. Fee paying assets under management were $22.7 billion, a 20% increase on a year-over-year basis. In the third quarter, $699 million of fundraising and capital deployment was offset by $168 million in stepdowns and expirations. For the remainder of 2023, we expect $120 million in additional stepdowns and expirations. Revenue in the third quarter was $58.9 million, an 18% increase over the third quarter of 2022. Average fee rate in the quarter was 104 basis points driven by continued expansion of our direct strategies such as WTI, Bonaccord and Hark. Catch up fees in the quarter were $2 million. Operating expenses in the third quarter were $58.6 million, a 47% increase over the same period a year ago.
The increase is primarily attributable to additional compensation benefits and non-cash stock-based compensation expenses related to the acquisitions of WTI, Bonaccord and Hark. GAAP net loss in the quarter was $8.8 million, compared to $5.6 million of net income in the third quarter of 2022. The GAAP loss is primarily attributable to higher compensation expense related to the executive transition, acquisition related non-cash stock-based compensation and earn-out expenses related to the WTI acquisition. Adjusted EBITDA in the third quarter was $29.6 million, a 7% increase over what we reported in the third quarter of 2022. Adjusted EBITDA margin was 50%. For the full year, we continue to expect margins to be in the range of 51% to 52%. For the third quarter adjusted net income or ANI was $24.3 million, a 3% decrease over the third quarter of 2022.
I would note that while adjusted EBITDA grew 7%, the historic increase in interest rates added approximately $2 million to our interest cost this quarter, reducing ANI. Fortunately, with our cash generative business model, we would expect below the line headwinds to turn into tailwinds in 2024 and beyond as all three potential uses of our free cash flow, acquisitions, share buyback and debt paydown are currently all accretive to our bottom line. Cash taxes for the full year should be approximately $3 million as we continue to benefit from our tax assets. As a reminder, they are composed of two distinct assets, a $158 million net operating loss and $368 million in tax amortization. Cash and cash equivalents at the end of the third quarter were $20 million.
As of today, we have an outstanding debt balance of $274 million and $69.5 million drawn on the revolver. There is $93 million available on the credit facility. No shares were repurchased in the quarter and we have $18.9 million available on the share buyback program. We also continue to pay our quarterly dividend. We declared a dividend of $.0325 per share on November 9, 2023 to stockholders of record as of the close of business on November 30, 2023 and payable on December 20, 2023. Finally, on September 30, 2023, our Class A shares outstanding were 44,932,190 shares and Class B shares outstanding were 71,343,739 shares. Thank you. Now let’s turn it over to the operator for a few questions.
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