Petershill Partners PLC

LSE:PHLL

Earnings Call Analysis

Petershill Partners H1 Results Amid Industry Headwinds

In the first half of 2023, Petershill Partners faced industry-wide challenges with a decrease in earnings compared to the previous year. Total income was $138 million, which is a drop from $171 million, attributed to lower partner-realized performance fees and subdued transaction fees. Despite the rough market conditions, the company saw its Assets Under Management (AUM) and fee-paying AUM grow by 13% and 7% respectively. Fee-eligible assets raised by Partner-firms reached $14 billion. Asset raising across the industry declined notably, with funds and deals reducing nearly by half. Nevertheless, Petershill Partners declared an interim dividend of $0.049 per share, maintaining dividend policy alignment and proceeding cautiously in a slower M&A environment, with about 25% of a $50 million buyback completed.

Petershill Partners weathers a stormy first half of 2023

In the landscape of global uncertainties, the alternative asset management industry faced significant headwinds in the first half of 2023. Petershill Partners, a player within this sector, navigated these turbulent times marked by a banking crisis and volatile markets. Firm assets under management (AUM) increased by 13% over the past year, continuing a growth trajectory despite less favorable conditions impacting the realization of performance fees and the pace at which new funds became fee-paying.

A period of lower earnings and challenged asset raising

The earnings conversation highlighted that Petershill experienced a decline in total income to $138 million from the previous year's $171 million, primarily due to pressures on partner-realized performance fee revenues and a backdrop of slower transactions. Asset raising similarly decreased by 28%, with the number of funds raised falling by 45% year-on-year. Yet, amidst these challenges, Petershill saw silver linings—its Partner-firms succeeded in raising $14 billion in long-duration fee-eligible assets, showing resilience and potential for recovery once market conditions improve.

Sustaining dividends amidst a dip in performance fees

Petershill's interim dividend announcement of $0.049 per share underscores its commitment to shareholder returns even in hard times. This stance comes in the face of a significant reduction in performance fees, which plummeted by 68% compared to the first half of 2022, a consequence attributed to a subdued realization environment. Despite the current downturn in performance fees, Petershill's diversified portfolio and robust management fee structures offer a cushion and a base to continue supporting firm growth and capital return.

Steady cash generation and balanced outlook

Despite revenue dips, Petershill Partners maintained solid cash flow conversion, with cash in hand amounting to $478 million. Taking a forward-looking stance, the company anticipates $20 to $25 billion in fee-eligible AUM rates for 2023. They also remain selective with acquisitions, expecting these to fall at or below the low end of the medium-term guidance of $100 million to $300 million per annum. Such prudence, alongside an optimistic view of activity improvements, contributes to expectations of a stabilization in FRE margins and heralds a brighter path ahead for investors.

Future FRE growth and strategic focus on Partner development

Petershill Partners expects stabilization in its fee-related earnings (FRE) during the remainder of 2023, with a forecast of $190 million to $210 million. Earnings should resume growth in 2024, propelled by new fund activations. The company further articulates its commitment to adding value to Partner-firms, not solely through funding but also by providing extensive support and services for development and strategic growth. Petershill's strategy includes being selective in acquisitions, focusing on capital efficiency, and fostering a deeper market understanding of its business model.

Long-term industry perspective and enduring partnerships

While current market conditions have introduced volatility and uncertainty, Petershill Partners underlines the resilience and long-term growth prospects of the alternative asset management industry. Their portfolio of Partner-firms has shown solid performance, increasing fee-paying AUM by 7% over the last year and generating stable revenues. This base, coupled with $5 billion in stable investments, secures the company's position and outlook as a diversified investor in a high-margin, cash generative sector with significant locked-up capital—an attractive destination for patient capital.

Earnings Call Transcript 2023-Q2

[Operator]

Good day, everyone, and welcome to Petershill Partners First Half 2023 Results Call. [Operator Instructions] I would like to advise all parties that today's call is being recorded, and by remaining on the line, you are representing to the company and Goldman Sachs that you are located outside of the United States and are not a U.S. person as defined under regulation as of the U.S. Securities Act of 1933, or you are a qualified purchaser as defined under the U.S. Investment Company Act of 1940, and that you are not located in or resident of any jurisdictions where to attend this conference call would constitute a violation of the relevant law of such jurisdictions.

Now, I would like to hand the conference over to Gurjit Kambo, Head of Investor Relations for Petershill Partners. Please go ahead.

[Gurjit Kambo, executive]

Good morning, everyone. A very warm welcome to you, and thank you for joining us today to discuss Petershill Partners first half 2023 results.

Before we begin, I'd like to remind you that during this call, we may make a number of forward-looking statements which could differ from our actual results materially, and Petershill Partners assumes no obligation to update these statements. A replay of today's call will be available on the Investor Relations section of our website, along with a copy of our preliminary results and presentation.

Today, I'm joined by Ali Raissi-Dehkordy; and Robert Hamilton Kelly, Co-Head of the [ Operations ] of Petershill Partners, as well as Adam Van de Berghe, the CFO for the company. Ali will start by providing a business update and some market context, followed by Adam, who will run through our first half 2023 financials. We will wrap up by providing some concluding remarks and outlook, leaving sufficient time for Q&A.

With that, I'll turn the call over to Ali.

[Ali Raissi, executive]

Hello, everyone. Thank you for joining as we present our first half 2023 results.

Turning to Page 4. I will provide a summary of our performance during the first half of the year, and Adam will provide further details later.

As we previously announced in our AUM update in July, our Partner-firms continue to raise fee eligible assets totaling $14 billion in the first half, and our AUM and fee paying AUM increased by 13% and 7%, respectively, over the past 12 months. However, our Partner-firms were not immune to the slower pace of deployment and realization seen across the industry, which resulted in lower earnings in the first half of 2023 versus the comparable period in 2022. We reported partner FRE of $99 million, down from $110 million in the first half of 2022, reflecting a subdued backdrop for transaction fees net of fee offsets, the slower pace of deployments delaying the activation of fees on successor funds launched by our Partner-firms, and higher expenses reflecting the broader inflationary environment, and investments in the growing teams and talent at our Partner-firms.

Total income of $138 million, down from $171 million, was principally due to lower partner-realized performance fee revenues, in addition to the lower FRE highlighted. Our earnings are principally cash-based reflected in the strong cash flow conversion, which supports future growth and capital return. The Board has approved an interim dividend of $0.049 per share, in line with our policy of the interim dividend being 1/3 of the prior full year dividend. Around 1/4 of the $50 million buyback has been completed, and the Board and the operator remain focused on capital management and the current slower M&A environment as we continue to be very selective.

Turning to Page 6, I want to spend a moment to speak to the impact of the macro uncertainty on market activity across the private market industry which has created some allocation challenges, particularly for mature investors.

During the first 6 months of 2023, asset raising declined by 28% versus the comparable period in 2022, with the number of funds raised down by 45% over the same period. The backdrop was more challenging for industry deployment and realizations, both declining 48% during the first 6 months of 2023 versus the comparable period in 2022. We have started to see some signs of a pickup in capital market activity with a particular focus on post summer activity, although we believe it may still be too early to draw conclusions of an inflection point.

Now turning to Slide 7. The short-term industry challenges have impacted our Partner-firms by: one, subdued realization environment, deferring the generation of performance fees from our private market funds; and two, slower pace of deployment, which delays the timing of activation of fees on new funds, whilst cost increases are incurred ahead of fundraising and fee switching on. The combination effectively deferring and impacting our FRE growth, which Adam will discuss in more detail later.

We continue to view Petershill Partners as well positioned for the long-term growth, which is reflected in our Partner-firms in aggregate, raising long-duration fee-eligible assets of $14 billion during the first half of 2023, which we believe reflects the benefit of having exposure to a diversified group of Partner-firms across asset classes and strategies. The aggregate relative performance of Partner-firms remains strong, and our firms have a track record of successfully scaling successor funds, which they have demonstrated with $74 billion of capital raising since 2022.

On Slide 8, I want to take a moment to highlight the momentum and milestones from a select group of Partner-firms during the first half of 2023, with successful asset raising highlighted here from STG and AKKR as well as deal and realization activity highlighted for Clearlake, Francisco Partners, Harvest and ACP. We have also seen a pickup in activity since the end of the half, which I'll note when I discuss the outlook. In addition, our GP Services team has been in active engagement with our Partner-firms with over 280 engagements over the course of the first 6 months of 2023. There continues to be strong engagement relating to capital formation, but also increases in activity relating to investment portfolio services.

We also had our inaugural Firm Infrastructure & Operations forum, convening CFOs and COOs of our Partner-firms across the platform and covering a series of topics, ranging from hiring through to developments in fund facility use for private capital firms.

Turning to Slide 9. The market backdrop has been challenging during 2023. And whilst it is difficult to know with certainty when conditions change, we continue to view the long-term industry growth dynamics remaining attractive. There are signs that inflation is moderating, and we're getting closer to the peak in interest rates, which we believe may reduce market uncertainty and lead to a pickup in capital markets activity.

The alternative asset management industry remains highly cash generative, with high profitability margins and strong value creation in the private markets environments, with firms remaining private for longer. Despite a slowdown in industry asset raising during 2023, as you've seen from our Partner-firms, established top-performing managers continue to raise funds and the long-term trend for growth in the industry remains positive, with continued expected growth from both institutional investors in the medium to long term but also growth from new distribution channels such as the wealth management and retail channels, which remains significantly under-allocated to alternative assets.

Finally, during periods of market dislocation, there are opportunities for our Partner-firms to seize that can lead to strong vintage fund performance, for which our partners now sit on around $74 billion of newly-raised capital over the last 18 months.

With that, I'd like to hand over to Adam to run through the first half financial results.

[Adam Van de Berghe, executive]

Thanks, Ali, and good morning, everyone.

The company delivered steady results in the first half of 2023 amid the banking crisis and resulting market volatility. Our Partner-firms continue to lift their AUM, as you've heard Ali mention, growing 13% over the past 12 months. Fee-paying AUM was up 7% over the past 12 months, driving management fees of 8% in the 12-month period and 6% for the 6 months ended 30th of June, excluding transaction fees and offsets. Our FRE was lower during the period, predominantly due to subdued transaction fees net of offsets.

As noted previously, we expect transaction fees to vary and are dependent on market activity. While both the FRE and margins were lower when compared to the first 6 months of 2022, we did see margins stabilize over the last 12 months at 59%.

The adjusted profit after tax was $69 million and the adjusted earnings per share was $0.06, which were both impacted by lower PRE. Our tax and tax-related expenses for the 6 months was approximately $33 million and was comprised of approximately $17 million in current tax and $16 million, reflecting 1/2 of the expected annual payment under the tax receivables agreement. The payment in 2023 is expected to be similar to the payment in 2022. The current tax of $17 million includes approximately $10 million related to estimates from the prior year. When compared to the first half of 2022, a greater proportion of the company's income was derived from management fees and interest income, which is taxed at a higher rate than performance fee income generally is. During periods of lower performance fees, the adjusted tax and tax-related rate will typically be higher overall.

The Board announced an interim dividend of $0.049 per ordinary share, in line with our policy of the interim dividend being 1/3 of the prior final year dividend. Our cash flow conversion continues to be strong as the majority of our earnings are cash based, supporting our progressive dividend policy.

On Page 12, we see fee-paying AUM and ownership weighted fee-paying AUM growth of 7% over the past year. Since the year-end, we saw modest growth in fee-paying AUM from $194 billion to $196 billion, as fee eligible AUM raised has yet to become fee paying. At 30 June, our Partner-firms had $28 billion of AUM not yet paying fees, the largest component relates to Francisco Partners, which is scheduled to be activated during September. As these fees switch on, they will drive future FRE growth. Total AUM of $300 billion is up 13% year-on-year.

Turning to Page 13. I would note that over 80% of the assets raised were in private equity, which has the highest management fee rate across asset classes. Two notable Partner-firms closing funds in the first half included AKKR that closed on a combined $5.3 billion, representing a 51% increase over the successor funds, and STG raising $4.2 billion, an increase of 110% compared to the prior vintage. Despite the challenging market backdrop, strong performing firms are still able to raise and scale fund sizes.

On Page 14, management fees, excluding net transaction fees, increased 6% year-over-year, broadly in line with the increase in ownership weighted fee paying AUM. Net transaction fees during the first half were around $9 million lower than the first half of 2022, reflecting a softer environment for capital market activity. This period of lower net transaction fees led to overall net management fees coming in flat year-on-year.

The partner blended net management fee rate over the last 12 months was 133 basis points, around 8 basis points lower than 2022. We can attribute half of that decline to lower net transaction fees, the remainder due to business and asset mix. Blended partner-firm FRE ownership in the first half was 13.6%, broadly stable compared to 2022. We would anticipate the ownership percentage to decline as fees yet to turn on are in Partner-firms where we have lower ownership stakes.

On Page 15, first half FRE of $99 million decreased year-over-year, reflecting stable net management fees reduced by higher partner-firm costs due to partner-firm fundraising, team expansions and the shift in the inflationary environment year-on-year. The increase in cost and subdued net transaction fees were the contributing factors for the decline in FRE margins in the first half of this year compared to the first half of 2022. However, the cost growth was already evident during the second half of last year, with costs in the first half of this year broadly stable with the second half of last year, which saw the FRE margin also stabilizing at 59%. FRE excluding net transaction fees during the first half increased 2%.

Turning to Page 16. The realization environment across the industry was particularly muted, with realizations during the first 6 months of 2023 down 48% compared to the same period in 2022. For Petershill Partners, this backdrop resulted in $15 million of partner realized performance fees during the first half of 2023 compared to $47 million in the prior comparable period. The largest contributing asset class was private equity, with absolute return strategies typically crystallizing performance fees during the second half of the year. Over the last 12 months, partner realized performance fees were $101 million or 22% of total Partner-firm revenues.

Accrued PRE of $608 million at the end of June was broadly stable versus the year-end. Whilst this doesn't run through our P&L until it is realized, it is a good indicator of our Partner-firms' ability to generate future PRE.

In the bottom right chart, you'll see a steady increase in performance fee eligible AUM to $274 billion, which also supports future potential PRE generation. Investment income of $11 million during the first half of 2023 was broadly flat compared to the first half of 2022.

On Page 17, you can see our balance sheet is primarily comprised of the fair value of our investments in Partner-firms. The fair value of investments at 30th of June was $5 billion, and broadly stable compared to the year-end. Our weighted average discount rates used in our valuations were relatively unchanged from the year-end.

Turning to Page 18. We had cash of $478 million, down from $581 million at the end of December, principally reflecting the $125 million final dividend that was paid earlier this year. Petershill Partners continues to experience strong cash conversion of its income.

On Page 19, the company is underpinned by the strong free cash flow generation and our capital allocation can support our progressive dividend policy, finance growth and provide optionality for additional capital return, as evidenced through 2 buybacks announced since the IPO. To date, the company has completed around 1/4 of its $50 million buyback program announced earlier this year.

We take a long-term view with our Partner-firms as we look ahead. While the near-term market uncertainty has led to some volatility in their earnings, the base of stable fee paying AUM and diversification among our Partner-firms provides what we believe is a platform for future growth. We anticipate the fee eligible AUM rates for all of 2023 to be $20 billion to $25 billion. While there does appear to be signs of a pickup in investing activity, we expect the softer environment we are currently in, to delay the activation of fees on some of the funds at our Partner-firms through the remainder of the year, which combined with anticipated lower net transaction fees in the second half, we now expect our FRE range to be $190 million to $210 million for the full year.

We anticipate PRE as a percentage of partner-firm revenues for 2023 to be below our medium-term target of 20% to 30%. While we have seen M&A this year in the GP stakes market in general, we continue to be highly selective on new acquisitions and have not completed any acquisitions during the first half of 2023, despite undertaking due diligence on a number of potential new partner firms. Consequently, we expect acquisitions to be at or below the bottom end of our medium-term guidance of $100 million to $300 million per year.

With that, I will hand it back to Ali to provide some concluding remarks before we open up to questions.

[Ali Raissi, executive]

Thank you, Adam.

Before closing, I wanted to share a few thoughts on strategy and outlook. On Slide 22, I'd like to highlight that since the end of June, we've seen a pickup in deal activity across a number of our Partner-firms. To mention a few, we've seen Francisco Partners, together with TPG, complete the $6.5 billion acquisition of New Relic, our client acquired ownership interest in clean energy systems. And we've seen some realizations from the likes of Clearlake, STG and AKKR. Consequently, there are some signs that activity has started to improve, boding well for the medium term.

On Slide 23, I'll make a few comments about our continued focus on our long-term strategic goals. We aim to continue to support partner-firm development and growth by a robust and proven framework for our value-added GP Services. This year, this has seen us undertake and engage on over 280 projects and engagements with our partners. We aim to continue to identify and evaluate attractive acquisitions and access the fastest-growing areas of the alts industry, where we can be the most impactful with our capital. Over the last half year, this has meant that we've evaluated numerous opportunities for the company, but we've held a very high bar for new acquisitions. We also aim to be highly efficient with a focus on shareholder returns, and we've demonstrated this since the IPO through increasing dividends and the implementation of our buyback programs. More broadly, we continue to have significant focus on broadening and deepening market understanding of the company.

Moving to Page 24 to conclude. The market backdrop during the first half of 2023 was challenging, and this has impacted transaction activity, realizations and deployment of new funds, hence deferring and impacting the earnings of Petershill Partners during the period. We expect to see stabilization in FRE during the remainder of 2023 and a return to FRE growth in 2024 as firms turn on fees from funds raised in prior periods, with cost growth moderating and the environment for transaction fees improving. We believe the fundamental attractions of Petershill Partners remains strong, providing a diversified exposure to a growing, cash-generative, highly profitable industry with long duration, locked up capital. The company continues to demonstrate strong cash generation, supporting future growth and capital return to shareholders.

With that, we thank you for joining the call, and we'd like to open up for questions.

[Operator]

[Operator Instructions] We will take our first question from Hubert Lam.

[Hubert Lam, analyst]

I've got 3 of them.

Firstly, can you give us your expectations on fund activation in the second half? It seems like it slowed since your previous update, or you've been more cautious. So how much of that $28 billion fee eligible AUM you've raised, you expect to activate in the second half? I know you mentioned Francisco Partners, but how about the rest?

Second question is on FRE margin. It's continued to be below 60%, I guess, on the back of higher costs as well as lower fees. What's your guidance for the rest of the year and also into 2024? And do you think you can get back to your previous guidance of about mid-60s?

And last question is on M&A. You said it's slower for you despite other GPs out there doing deals recently. Why do you not see the same opportunities? What valuations are you seeing? And if you do continue to wait, what is your plan for the higher cash accumulation you'll have?

[Ali Raissi, executive]

Hubert, and thanks for the questions. I'll take questions 1 and 3, and then I'll ask Adam to take 2 afterwards.

So maybe just first on the fund activations, around $17 billion of that $28 billion of AUM not yet earning fees is expected is switching on this month, which is the Francisco Partners raise that you mentioned. The remaining amount is really going to be determined by the pace of deployment of predecessor funds, and as we've kind of seen, that's somewhat kind of be dictated by the broader macro environment of opportunities and transaction activity. However, I think given we're already in September and we've had the summer period, we expect some of that to be skewed to FY '24.

In terms of the question around the slower M&A environment, I'd note that we've actually been very, very active, and we've looked at a lot of different opportunities, pretty much everything that we've seen go through the market right now. There is a bit more activity that you've noted recently, which I think is more controlled type transactions, and I think that bodes well for us because that's always been a use of capital that we provide Partner-firms, is that M&A and consolidation.

In terms of why we haven't transacted? Look, we've got a really high bar. I think we've now been doing this for our 16th or 17th year, and there are points in the cycle where we see great opportunities. We evaluate everything that goes through the market, and sometimes, we just can't get there on our underwriting or on the pricing, so we have a high bar for these investments. And I think it means that we'll continue to look at everything that goes through. And if it achieves the threshold for the company, then I think we'll hopefully continue to add firms as we did in 2021 and 2022.

In terms of what we would look to do with that capital, I think the Board has demonstrated a focus on capital efficiency, and we've continued to show that through the dividend and the buyback programs that we've enacted. But it might be a little bit too early to call in terms of whether or not we end up having deal activity for this year, and we'll clearly continue to monitor it and reflect on it later in the year.

And then Adam?

[Adam Van de Berghe, executive]

Yes. Thanks, Hubert.

So the FRE margin in the first half of 2023 was around 59%. That was broadly stable with the second half of 2022. So we've seen that stabilize over the last 12 months. I would note that over the last year, higher costs were driven by hiring by the Partner-firms as well as some inflationary pressures. Some of which have softened, but have not completely gone away. We believe that costs have stabilized over the period, and I would say overall, margins are expected to be somewhat stable, but net transaction revenues driven by the market environment could shift those slightly in either direction.

[Operator]

[Operator Instructions]

We will take our next question from Angeliki Bairaktari.

[Angeliki Bairaktari, analyst]

First of all, with regards to the consolidation that we have seen in the private markets industry, in particular, in the infrastructure space recently. Do you see any opportunities to actually realize any of your investments in GPs on the back of that trend -- ideally at a higher exit point than the entry point, which could also send a signal with regards to sort of the underlying value of all of those GP stakes?

Then with regards to the fee-paying AUM inflows, we saw only $3 billion of inflows in the first half as some of these activations have been delayed. Can you give us some guidance with regards to your expectation for the second half in terms of the fee-paying AUM inflows, please? And then is it fair to expect some improvement of the blended partner-firm management fee rate next year, considering a large share of the not yet activated AUM is in private equity, which should earn a higher margin?

[Ali Raissi, executive]

Maybe I'll just touch on the consolidation point.

I think, look, it's a fair point, and we've also seen consolidation both in terms of infrastructure firms, and you'll note that we have a couple of infrastructure firms in our Partner-firm group. But also just more widely, and we think this is just reflection of the attractiveness of sector specialists and high-performing sector specialists as firms try to build out suites of capability. I think that's good for us, clearly because we have a number of high-performing sector specialists but also some consolidators in the group. Historically, the program on the private side has pursued realizations and transactions, and I'd say that it's something that we always continue to evaluate in terms of good opportunities. And clearly, we'll do -- we do that for the public company as well.

I'd note that on the private side of the program, we've had realizations as recently as in the last year. And again, I -- sort of positive references north of where we held those positions, so -- and also with some of the consolidators that you see in the market. So clearly, I think that that's a theme that we've been able to take advantage of. It's something that we continue to look at for the public company.

I'll hand it over to Adam to talk about the [indiscernible] inflows and the blended.

[Adam Van de Berghe, executive]

Sure. Thanks, Ali.

So Angeliki, on your question about fee paying AUM inflows and for the second half, it's difficult to put a precise number on that given the timing of deployment that can trigger the recognition of that either just before the end of the year or just after the end of the year. However, we have noted that of our $28 billion of fee-eligible AUM, approximately $17 billion of that is expected to activate going into the end of the year.

In terms of blended partner -- net management fee rates, as we think about that, there's probably 2 things that can drive that: number one is just the mix of the contributions from the relative Partner-firms. And so as they're turning on revenues on their newer products, that will shift from the different firms, that will shift their -- our blended rates. And so where some managers are managing products that might be at higher rates and, for example, the private equity and others in private credit, for example, might have lower effective fee rates. That mix will drive that overall. The other component is really what we've seen this year, the net negative transaction revenues. And so as that number shifts, that will cause the blended rate to shift as well.

[Operator]

We will take our next question from David McCann.

[David McCann, analyst]

Three for me, please.

So firstly, on the portfolio valuation, you mentioned it's broadly stable. And we can also see, and I think you mentioned as well that you basically used stable cost of equity and stable multiples, broadly speaking, within the mix. So I mean, that also implies that you've got broadly the same cash flow reductions and earnings projections for the relevant categories. I mean, the question there is, does that not seem a bit of odds with some of the outlook you've given in the subdued environment, at least in the short term, on some of these companies? I guess, how can you justify keeping your cash flow projections the same? That's question one.

Question two on the tax. I mean clearly, high level, this came in an awful lot higher than the sort of 12% to 14% guidance. You did give a couple of brief comments around that, Adam, on the call, but I just wanted to dig into that a bit more detail. So it seems part of it was due to the mix of PRE being lower. Part of it was due to the tax receivables agreement. I think you also mentioned something around the sort of -- the forward-looking impact of that. So can you just confirm, is the 12% to 14% range still the right range for thinking about this going forward? And if PRE is a lower mix, what does that look like? And also, can you just reiterate that guidance you gave about the tax receivables part of that? That would be helpful. That's question two.

And finally, a technical one on Slide 32. You've given partner management fee revenues there. There's no labels on this. Can you confirm this is the last 12 months? It doesn't look like 6-month period revenue.

[Adam Van de Berghe, executive]

Thank you, David.

I'll take the -- on valuations, I would say, you're right in that the valuation has been broadly stable. I'd note a couple of -- 3 things primarily: one, the majority of the fair value is derived using discounted cash flows and we have a blended rate of approximately 17%, which is relatively conservative. The valuations take a long-term view on cash flows, and so while the softer environment that we're experiencing may push certain revenues to the future in the near term, it doesn't necessarily materially reduce or change the overall picture on those cash flows. I would also add that multiples have ticked up slightly. We've seen discount rates tick down slightly, but multiples have also ticked up slightly as well. And so the combination of these 3 factors have really resulted in roughly a 1% increase in the fair value. I would say another 1% increase has really come from additional fundings on balance sheet that we've done during the period.

On the tax question, the TRA payment that we expect to make for this year is approximately $31 million, and that's consistent with the last year. I would say there's probably 3 points just impacting, and I'll just -- some of this I may have covered, but I'll just touch on 3 points on the tax. One is, as I mentioned, the tax rate being lower for PRE predominantly against management fees and so, as we see that shift of PRE lower versus management fees in terms of overall, that will just lead to a blended higher rate. We've seen that lower this year in the first half compared to last year, and our guidance, expected to be below the medium-term target will lead to a higher mix or a higher percentage of management fee income. As I mentioned, the TRA payment, and so we've reflected approximately half of that estimated payment in the first half of this year, but for the full year, we expect it to be broadly similar to where we were last year.

The third item is really the onetime tax related to just a prior year estimate to actual. And what I would just elaborate a little bit more on that, really has to do with just the estimate of the taxable income and the timing and finalization versus the final characteristics of the income for the prior year, so related to certain Partner-firms. And so we don't expect that to be recurring in the second half of the year.

On your question on the chart, that's really the long-term -- last 12 months through the 30th of June.

[David McCann, analyst]

Great.

And this is a quick follow-up on that tax point, particularly the TRA point. So you've given the sort of number for this year. What would you expect for future years? That would be useful.

[Adam Van de Berghe, executive]

Yes. That -- we'd expect that number to be broadly similar in future years as we go forward.

[Operator]

[Operator Instructions]

We will take our next questions from Luke Mason.

[Luke Edward Mason, analyst]

First question is on fundraising or following up into 2024. So I mean, $20 billion, $25 billion guidance for this year. How are you thinking about 2024? Should we see some bigger fundraisings coming back in terms of the cycle of fundraising for some of your larger Partner-firms?

And then second question is on the FRE margin. You talked about stability in H1 to the 59%. I think if we look at Q2, it dropped to 57%. So is that kind of the run rate level? And how should we think about FRE margins moving as you get the activation of these larger funds? Like Francisco Partners come through in September, should that bump them up again? So just some more detail there, please?

And then just thirdly, on the exit outlook. Could you give more detail around the exit outlook more broadly? And then I think in the statement, you say some recent realizations have been done at a premium to holding values for the underlying funds. So if you could just give any more detail on what you're seeing there, that would be interesting.

[Ali Raissi, executive]

I'll take questions 1 and 3, and then we'll get Adam to comment on 2.

With regards to the pipeline for fundraisers for 2024, I think that -- I think you're referring to some sort of commentary around some firms speaking around fundraising in 2024. I think at this point, it's too early to give any firm indication on who might be looking to raise larger funds in the market, as a lot of that is going to sort of depend on market macro backdrop and deployments that we see from the current funds. So we're not giving any guidance at this stage on 2024, but it sounds like you're also sort of hearing some of the same commentary.

With regards to realizations, I'd say that the private markets continue to be active. We have continued to see relatively sort of resilient pricing, but also a lot more focus on the long-term outlook and the long-term opportunity that the industry sort of has. In our own program, we've had realizations in assets that weren't part of Listco because they were acquired during the IPO. And in those situations, we've had relatively strong realizations, premiums versus the prior NAVs that we were held at. And again, it's sort of reflective of the fact that if you have high-quality businesses that have good growth prospects, there are a lot of interested parties. And in the case of the 2 transactions I was referring to, in 1 case, we had repurchased by management. And in the other case, we had a purchase from -- by listed alternative asset manager to -- Blue Owl, purchased a firm called Oak Street Real Estate from one of our private funds. And so we've had relatively sort of strong activity there.

If I've taken that realization is the wrong answer, but you're looking at AUM realization from our own Partner-firms, I would say that we've had -- we're maintaining our guidance of $5 billion to $10 billion for the year. And we've already seen $4 billion of realizations through the first half, so relatively on track there.

[Adam Van de Berghe, executive]

Just on your FRE margin question. So quarter-to-quarter, the margin can vary a bit depending on the mix of the Partner-firms contributions to the company. And so given that different Partner-firms have different relative margins, I would say that as funds activate and those revenues are generated, that would create some uplift in margins in general, but the mix relative contribution would also have an impact.

I think the thing to note for us around the margins is that we've viewed the -- looked at the costs as being relatively stable over the period. And so whether it's net transaction revenues that could create uplift or a little bit of downward pressure on the short-term margins or it could be new fund activations on the revenue side that could also as well, but the mix of those will have an impact as well.

[Ali Raissi, executive]

Sorry, and just to go back to question 2, I think we also refer to this in the RNS. But in terms of $4 billion of realizations that we have seen, we've also seen them occur at premiums to their holding value. So we've seen our Partner-firms realize assets above where they were holding them as well.

[Operator]

We will take the next questions from Alexander Bowers.

[Alexander Bowers, analyst]

Three questions for me.

The first one is, would you be able to provide some feedback from any conversations you potentially had with your Partner-firms on the new rules or rule amendments announced by the SEC in August on the regulation of private fund advisers?

Second was, I was wondering if you're able to elaborate a little bit as to which of your firms you're expecting to raise in H2 this year?

And then lastly, I think you mentioned the drop in fee margin was broadly sort of half transaction fees, half business and asset mix. Does the latter category include lower negotiated or discounted management fees?

[Ali Raissi, executive]

I'll take the first 2 questions.

In terms of the new rules, I'd say that they were anticipated. Clearly, there have been some concessions against -- versus the rules that were originally proposed back in February 2022. These rules predominantly focus on providing greater disclosure, including quarterly statements and annual audits, and they could end up being more onerous on much smaller GPs and could actually sort of drive consolidation at that level across the industry. I think we have seen our Partner-firms leaning more on our GP Services team to provide support and infrastructure, but it's probably also something that the whole industry is evaluating.

I think in terms of that opportunity for M&A, that 1 observation I would make is that it's always been a use of capital that we provide for our Partner-firms. And so we also see that as a potential opportunity for some of our Partner-firms to grow their footprints.

[Adam Van de Berghe, executive]

In terms of discounts on products and fee rates, we haven't, across the board, really seen our firms need to discount their fees in order to raise assets. The shift or our shift in blended management fee rates is more primarily to do with a combination of just net transaction revenues driven by the market environment as well as a shift in the contributions from different asset classes. So private credit, as an example, might have different rates than our private equity assets that Partner-firms are managing. And so that's predominantly the shift.

[Ali Raissi, executive]

But -- and maybe just to finish off on the H2 fundraising expectations. There are no real sort of single big firms that would sort of stand out in terms of that second half fundraising. We've already crossed the $14 billion threshold. The target is maintained at $20 billion to $25 billion, so it's relatively sort of diverse across a number of firms.

[Operator]

We will take our next question from Andrew Shepherd-Barron.

[Andrew Shepherd-Barron, analyst]

Two, if I may.

The first is just thinking about sort of split between fee and performance-related earnings. Can you give us some idea, given the use of [ DCS ] substantially to valuation, what the -- how the NAV splits between the 2 percentage-wise? If I had to guess, I would have thought that PRE is about 20%, 25% of NAV, perhaps, but probably not more given this numbers you use. That will be my first question.

And secondly -- and also related to that, I'm sorry, is that if you -- when you're buying -- when you're looking at businesses today, my understanding in the past is that you bought the same strip of both FRE and PRE. By today, would you think be thinking it? Would you change that? Would you focus more on purchasing FRE? Some comment on that would be great.

And my other question is just a follow-up on the FRE margin question which is, do you think that when things have normalized -- to be discussed, do you think the margin can go back up to where it is? Do you think it should be 65%, 66%%? Or has something structurally changed in the industry, our cost structurally higher [indiscernible]?

[Adam Van de Berghe, executive]

Sure.

So on the first question, I'd probably refer to on our Slide 31 where we give a breakout of the fair value across private markets, absolute return and investment capital. And we'll see the fair value related to PRE on private markets is about $1.3 billion and the fair value for absolute return related to PRE is about $149 million. So we'll call that around $1.5 billion of the total that is fair value for performance fees.

I'll touch on the FRE question as well in terms of margin normalization. So we've certainly seen, over the last 12 months, cost relatively stable. That was, I think, last year, we saw in the second half upward pressure on costs driven by hiring ahead of some of the fundraising cycles as the firms have raised about over $70 billion in fee-eligible AUM between last year and so far this year. And of course, some higher compensation and operating expenses driven by some inflationary costs, and a full -- more fuller return to office.

I would note that -- I would note that overall, where we sit now over the last 12 months at about 59% is a very good margin relative to the rest of the industry. In terms of as we look forward, that margin will certainly be driven by transaction revenues as those begin to stabilize, and so we would expect some uplift in those as that normalizes.

[Ali Raissi, executive]

And maybe just to sort of touch on your question around acquisitions and bifurcating the ownership, it's definitely something we've looked at and have historically done. I think depending on the characteristics of the business, clearly, we also have a preference for FRE. And you'll see that in terms of our discount rates and in terms of how we've historically structured transactions.

The only note I would make is that we also look to have alignment with the principles who run these businesses. And so we want to make sure that the same incentive set that drives them, drives us, and sometimes, that incentive set clearly features PRE.

[Operator]

That concludes today's question-and-answer session.

At this time, I will turn the conference back to Gurjit Kambo for any additional or closing remarks.

[Gurjit Kambo, executive]

Yes. I just like to thank everybody for joining the call today. And if you have any further follow-up questions, please do reach out to me, and I can take that offline. Thank you very much, and have a good day.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.