Preliminary Q4 2022 Petershill Partners PLC Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Hubert Lam - Bank of America Merrill Lynch - Analyst : I've got three questions. Firstly, on the FRE margin. I know for 2023, you're assuming it to be similar to 2022 of about 62%. How should we think about FRE margin after 2023? Do you expect that to increase or back to its -- I think your previous guidance was 65% to 70% or has it changed now to a lower number because of what you mentioned about the mix of firms today? So that's the first question. The second question, again, is on the FRE margin. I think previously I thought that there were some contractual guarantees with some of the GPs where the margin would be protected. Is this still the case? I'm just wondering how that works because the FRE margin probably was worse than what I had expected. And lastly, can you talk a bit about the M&A environment for doing additional CapEx like M&A? Do you expect to do a similar type -- the number of deals as you did last year or is it a different environment? And what's the bid-ask spread like today for some of the companies you're looking at? Thank you.

Question: Hubert Lam - Bank of America Merrill Lynch - Analyst : Great. Thank you very much. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 28, 2023 / 8:00AM, PHLL.L - Preliminary Q4 2022 Petershill Partners PLC Earnings Call

Question: Mike Werner - UBS - Analyst : It's Mike from UBS. Just a couple of questions from me, please. In terms of the buyback, $50 million, I calculate that's about 2%, 2.5% of the share base outstanding. But when we think about the float, it's closer to around 8% to 10% of the float. How do you think about that? Is directed buybacks a potential for you guys? Just trying to figure out how you weigh all the different factors when setting that $50 million guidance. And then second question, in terms of the operating expenses within the listing company, we saw a significant increase in the other operating expenses, but from I think about $5 million in the first half to $15 million for the full year. I was just wondering if you could provide a little bit of color with regards to the increase there. Thank you.

Question: Mike Werner - UBS - Analyst : Thanks. And maybe just a quick follow up on that. I mean, I saw the footnotes and I think the total one-off costs were in the range of $2.5 million to $3 million. But in terms of just trying to think about kind of the proper run rate for the [list co-operating expenses] should we think about the first half, second half, or kind of the full-year run rates as we look forward to '23?

Question: Mike Werner - UBS - Analyst : Thank you very much.

Question: Arnaud Giblat - BNP Paribas Exane - Analyst : I've got a couple of questions, please. Could you talk about the outlook for deployment at partner firms? I think you've got a slide there on page 27 showing some frequent data. What's the outlook? What are they telling you in terms of the ability to deploy and what they're thinking about in terms of lengthening of the fund cycle as a consequence? And secondly, during your comments, I think you talked about a 17% discount rate for valuing partner firms. What does that imply in terms of valuation multiple? And how do you think about those holding multiples versus the multiples at which you're willing to do new acquisitions?

Question: Arnaud Giblat - BNP Paribas Exane - Analyst : And just how you view those -- I mean, when judging new acquisitions versus what you're holding, your current portfolio of assets, I mean, how does that come into your thoughts, into your thinking processes?

Question: Arnaud Giblat - BNP Paribas Exane - Analyst : Yeah. So you're holding your portfolio companies at low-teens multiple. How do you calibrate the price at which you're willing to pay for new acquisitions in line of those valuations and where your shares are trading at a 50% discount to where NAV is?

Question: Arnaud Giblat - BNP Paribas Exane - Analyst : Thank you.

Question: Luke Mason - BNP Paribas Exane - Analyst : So we're doubling up, so I'll keep this short. But just firstly on performance fees, very strong in Q4. Can you just give any detail on what the drivers were there? Was it one specific firm or a handful of firms in absolute return? And then just on the pipeline, 20% to 30% range but with the volatile environment. I guess what needs to happen to get within that 20% to 30% range. Does that assume kind of a rebound in the markets from here on for the rest of the year? And then just secondly, on the M&A environment, which areas are you specifically focusing on? You mentioned like healthcare, PE, and real assets for 2022. Are there any areas that you're focusing on for 2023 given the change in the market outlook? Thank you.

Question: Luke Mason - BNP Paribas Exane - Analyst : Great. Thank you.

Question: David McCann - Numis - Analyst : A few from me. So just thinking about the valuation disclosures that you referred to as well partly in the presentation, it looks like more of the basis in which you're valuing these businesses is shifted again to DCF versus multiples spaces. It looks like now about 64% of the portfolio is valued on a DCF basis. It was 57% at the half year and 42% last year. So can you just give us some color on why you're valuing more on a DCF basis rather than multiples? And then sort of related to this question, the DCF rates, your discount rates you're using haven't really changed that much since the first half. I appreciate in the first half you did increase the discount rates quite a lot. But obviously, we have seen interest rates continue to move up since then. So why is the DCF rates not really moved up very much? I guess that's the first question with a couple of parts. And secondly, on the dividend. Can you just give us a sense of what you're actually -- what metrics you're actually thinking about when you set the dividend? So what payout ratio and payout ratio of what, just so we can get a sense of what the right measures to look at are there. And then finally, just more of a technical one. In terms of this new debt that you have that you referred, again, that's kind of 5.6%, 5% rate. Within the results, it refers to an effective rate of 6.2%, so what's the difference between 6.2% and the 5.65%? Thank you.

Question: Angeliki Bairaktari - J.P. Morgan - Analyst : First of all, you have reiterated the fund raising guidance of $20 billion to $25 billion for this year. And that's despite the fact that a number of your peers have actually revised down their guidance recently given the current market volatility. So I was just wondering if there is any risk that fund raising may be pushed back to 2024 if the current market conditions remain challenging? And if you can perhaps give us an idea of what is the pipeline in terms of fund raising and how many firms out of the 25 you expect to see fund raising this year? A second question. There have been some concerns recently on CRE exposures in particular in the US. Do you see any risk of equity or credit write-downs in the real estate asset class potentially impacting your real estate managers? And one last follow-up, please, on the FRE margin. I heard your response earlier on the contractual protections that you have with your partner firms. So I just wanted to make sure that I understood correctly that there isn't actually a floor or a minimum FRE margin level that you have sort of contractually agreed with each firm below which the FRE cannot fall effectively. It's just a question of assessing sort of which costs you are accepting to share or not. Is that correct? Thank you.

Question: Andrew Shepherd-Barron - Peel Hunt - Analyst : Just a couple from me, if I may. Firstly, on your fundraising guidance, does that mean that you expect to raise funds again faster than the general market? Or how have you sort of positioned yourself against frequent stats or whatever you care to look at? And secondly, just what are you going to do? I mean, your shares are trading at a huge discount to the published NAV, whether that's relevant measure or not. But it does mean that obviously on a PE basis, you're trading at way below the sort of prices you would pay for M&A. And perhaps you answered this earlier, but I missed it. Does it make sense to continue to make M&A at prices higher than your stock is trading at? Thanks.

Question: Andrew Shepherd-Barron - Peel Hunt - Analyst : Okay. Great. Thanks.

Question: Beltrßn Palazuelo - DLTV Europe - Analyst : I have two, if I may. First of all, more strategic one regarding M&A and your strategy. How has your strategy changed since the IPO, since last year and currently? Is it a thing of the current assets you are looking for the firms or it's just the hurdle rate that is not being there, so you are not REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 28, 2023 / 8:00AM, PHLL.L - Preliminary Q4 2022 Petershill Partners PLC Earnings Call transacting? And then regarding, let's say, buybacks and your biggest shareholder, the 75% held by the funds of Goldman Sachs, is there a possibility of, let's say, executing the buybacks and buying stakes directly from them in order, let's say, to eliminate the overhang that supposedly is not doing good for the current stock? Thank you very much.

Question: Beltrßn Palazuelo - DLTV Europe - Analyst : Thank you. I had a follow on, if I may.

Question: Beltrßn Palazuelo - DLTV Europe - Analyst : Just regarding the M&A strategy, I think there's a very interesting slide that you put in 27. It's regarding when you allocate capital depending on what part of the cycle the returns of your funds. So my question is, you have like more than $1 billion of firepower in the guidelines you gave. So wouldn't it be more intelligent to allocate more capital in your partner firms currently where there's lots of uncertainty and where the risk-free rates are very high? So my question is, why are you not having the opportunity to really allocate and execute on your mandate to really invest through the cycle? And then regarding the buybacks, I don't think you answered my question. My thing is that you have a big shareholder that currently has 75% of the shares that at some point they will have to divest. My question is, is there a possibility legally to execute it -- to at some point execute that buyback through direct purchasing of stakes of that 75% in order to buy the shares cheaply and to not affect the free float?

Question: Beltrßn Palazuelo - DLTV Europe - Analyst : Thank you very much for your answers. I really appreciate the hard work.

Question: Alexander Bowers - Berenberg Bank - Analyst : Just one from me. Would you be able to provide some color around how your portfolio firms that are fundraising at the moment find the current environment and whether they are providing any different terms to LP such as maybe changes to the arrangements or higher levels of co-invest? Thanks. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 28, 2023 / 8:00AM, PHLL.L - Preliminary Q4 2022 Petershill Partners PLC Earnings Call

Question: Alexander Bowers - Berenberg Bank - Analyst : I guess just in terms of fee arrangements, is the environment causing, I guess, firms to offer different fee arrangements to LPs in order to kind of get them on board or kind of offer higher levels of co-invest or is that not coming through yet?

Question: Alexander Bowers - Berenberg Bank - Analyst : Thank you.

Question: David McCann - Numis - Analyst : Just one follow up, actually, just on this valuation of the investment portfolio point. I mean, given the comments earlier about the FRE margin, it feels like it's sort of now permanently lower in the sort of low 60s rather than the 65 to 70. If that is the case, I mean, I guess, why is that not more reflected in the valuations we're seeing ascribed to the companies if there is a permanent reduction in the operating margin of those businesses? Thank you.