P10 Inc

NYSE:PX

Earnings Call Transcript 2024-Q3

[Operator]

Hello, and welcome to the P10 Third Quarter 2024 Conference Call. My name is Latif, and I will be coordinating your call today. [Operator Instructions] As a reminder, today's conference call is being recorded. I will now hand the call over to your host, Mark Hood, EVP and Chief Administrative Officer. Mark, please go ahead.

[Mark Hood, executive]

Thank you, operator, and thank you all for joining us today. On today's call, we will be joined by Luke Sarsfield, Chairman and Chief Executive Officer; and Amanda Coussens, EVP, Chief Financial Officer and Chief Compliance Officer. Additionally, in the room with us today is Arjay Jensen, EVP, Head of Strategy and M&A. 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 the federal securities laws, including 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 and uncertainties that are described in greater detail in our earnings release and in our periodic 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 required by law. During the call, we will also discuss certain non-GAAP measures, which we believe can be useful in evaluating the company's performance. A reconciliation of these measures to the most directly comparable GAAP measure is available in our earnings release and our filings with the SEC. I will now turn the call over to Luke.

[Luke A. Sarsfield, executive]

Thank you, Mark. Good afternoon, everyone, and thank you for joining us today. I am exceptionally pleased with our record third quarter and year-to-date financial results as well as the progress we've made on our 5-point strategic growth plan. Before we discuss the quarter, I think it is important to recognize that we recently marked our 3-year anniversary as an NYSE-listed firm. Since our public debut in October of 2021, we have demonstrated that this business is durable, resilient and extremely well positioned for continued growth. As we celebrated our 3-year anniversary of being a public company, I also completed my first year as CEO. The past 12 months have been foundational in so many ways and represent an inflection point for the business as we developed our strategic growth plan, delivered and executed across each imperative, including announcing a value-creating strategic transaction, proved our team's ability to raise and deploy capital across our attractive and compelling franchises and enhanced our shareholder engagement and communication, culminating in our first Investor Day this past September.



And all the while, we've generated durable alpha while expanding our product offerings and the ways we engage with our clients. Upon joining the company in October of 2023, I sought the perspectives of our stakeholders who I knew would be instrumental in propelling our business into the future, namely our employees, our strategies, our clients and our shareholders. To do this, I embarked on a listening tour where I visited each of our strategies, met many P10 colleagues and engaged with LPs and public shareholders, both existing and prospective. This deep dive provided a more complete understanding of the organization, along with valuable insights that confirm my core thesis that P10 had the potential for significant profitable growth. Through listening and engaging with the team, we developed and launched our strategic growth plan last February, thus unveiling our North Star to direct our actions. In less than 1 year, we've made substantial progress against all the key objectives that I will cover in detail momentarily. 



First, I want to highlight a few key takeaways from our financial results. In the third quarter, we raised and deployed $1.4 billion in gross new fee-paying AUM with about $300 million of that amount coming from commitments that closed a quarter earlier than we expected. We delivered revenue of $74 million, representing 26% year-over-year growth. Fee-related revenue or FRR, was $73 million, a 26% increase compared to the prior year period, and we generated approximately $35 million of fee-related earnings, or FRE, a 19% increase from Q3 of 2023. This represents an FRE margin of 48%. In short, this performance represents record quarterly results across all our major KPIs, fundraising, revenue and fee-related earnings. Throughout 2024, we have driven significant demand from our funds that are currently in the market, and I want to take a moment to highlight some of our momentum on the fundraising front during the quarter. Our private equity solutions raised $1.1 billion. We have 3 large funds currently in the market, RCP Direct V, RCP Secondary V, and Bonaccord II. 



Additionally, our private credit solutions added $220 million to fee-paying assets under management, while our venture capital solutions sleeve raised $105 million in the third quarter. And while we saw brisk activity across our commingled funds, we also raised over $200 million in SMAs. As you will recall from our Investor Day, finding new ways to leverage our expertise on behalf of clients is critical to our future growth, and this highlights the early progress we're making on this front. As we think about 2025 and beyond, we will be focusing on additional ways for investors to interact with us outside of traditional commingled vehicles. Through the first 3 quarters of 2024, we've raised and deployed $2.9 billion, which handily beats our full year $2.5 billion guidance that we provided in February. Our momentum is a direct result of our team's unified efforts. Each of our strategies has been collaborative and constructive as we execute on the strategic growth plan that I shared at the beginning of the year. We have all bought in, and we know that we are better together.



And now I want to offer a little more color on the progress we've made year-to-date. First, we have now built a corporate level organizational structure that is positioned to accelerate growth with 4 experienced and talented leaders guiding key parts of the organization and reporting directly to me. I am proud to work alongside this exceptional team, and they are already delivering results. Second, we're focused on enhancing organic growth through deepening and expanding our relationships with clients. As you heard me say earlier, we have real fundraising momentum. As we continue to deepen and amplify our leading position in the middle and lower middle market, we will create momentum for our strategies as they raise capital. Further, in September, Sarita Narson Jairath began her role as Global Head of Client Solutions. Sarita's appointment is a milestone for us as we now have a senior leader who is singularly focused on organic growth, and we are implementing operational protocols and processes to better serve our clients. P10 has real momentum. We're a category killer in the lower middle market, and Sarita is helping us accelerate that vision as we enter 2025. 



Third, we are laying the appropriate foundation for generating inorganic growth. In September, we announced our acquisition of Qualitas Funds, the first addition to our platform since 2022. Qualitas Funds is a leading European private equity fund of funds manager based in Madrid, managing approximately $1 billion in fee-paying assets under management. It provides fund of funds, direct co-investing and NAV financing products in the European lower middle market to more than 1,300 limited partners across the ultra-high net worth, family office and institutional channels. The founders and their talented team have built an incredible firm with strong performance and a deep and loyal investor base. Furthermore, the firm has a strong expected growth trajectory, and we are so excited to add them to our platform. This acquisition will establish a European presence and meaningfully grow P10's investor base, positioning us as a leading global multi-strategy private markets firm focused on the middle and lower middle markets. As we talked about at Investor Day, Qualitas Funds is extremely complementary with RCT Advisors. They share an existing relationship through a joint venture dating back to 2017.



More recently, the Qualitas team has also been working with Hark on NAV lending opportunities in Europe. They share our client-centric culture and dedication to serving clients with elite access-constrained investment opportunities in the middle and lower middle markets. We continue to expect to close the deal in the first quarter of 2025 and thereafter, we'll provide more color on what we see as a terrific opportunity for us in Europe. Fourth, we are generating operational efficiencies through incentivizing collaboration and leveraging data insights. We're creating value through doubling down on focus areas that are performing, eliminating ancillary processes and implementing world-class systems that are set to yield tangible results. To support our strategies, we curate top-tier technologies and manage vendor relationships so our strategies can focus on generating alpha for our LPs. We're also collaborating by rolling out shared software tools and by using our buying power to generate savings in areas like employee benefits. And finally, we're enhancing our transparency and shareholder dialogue.



During the third quarter, we hosted our inaugural Investor Day, which provided a fantastic opportunity to showcase the attractive and compelling attributes of our business. You will also recall that earlier this year, in our commitment to enhance transparency, we began providing new KPIs that make it easier for our public investors to compare us to peers. Last month, at Investor Day, we reported client re-up rates for the first time, and we also introduced long-term guidance in several key areas. First, we intend to more than double fee-paying assets under management by 2029, with the vast majority coming from organic growth. Secondly, we're focused on value-creating M&A and believe we can become the acquirer of choice in our market space. Finally, we expect core organic FRE margins, excluding M&A, to expand from the mid-40s percent range in the near to intermediate term to near 50% in the out years.



All Investor Day materials are available on our Investor Relations website, including a full replay of the event. We believe in telling the investment community our plans and then reporting back on our progress. We delivered that in my first year, and we'll continue to abide by that principle moving forward. Our progress to date is only an indicator of what's to come. There are so many compelling and positively differentiated attributes of our business model, and we have multiple avenues for growth, both organically and inorganically. We are relentlessly focused on supporting our strategies through our one P10 culture that we have carefully cultivated and fostered. As we head toward the end of 2024, our outlook is positive, our future very bright, and we continue to believe our stock repurchases are a reflection of our view that the current price represents an attractive entry point for investors. When we speak again on our fourth quarter earnings call in February, we plan to share our updated strategic initiatives for 2025, along with more granular 2025 financial guidance, including the impact of the Qualitas Funds acquisition. With that, I'll hand the call over to Amanda.

[Amanda Coussens, executive]

Thank you, Luke. At the end of the third quarter, fee-paying assets under management were $24.9 billion, a 10% increase on a year-over-year basis. In the quarter, $1.4 billion of fundraising and capital deployment was offset by $285 million in step-downs and expirations. As anticipated, most of the third quarter step-downs and expirations are attributable to repayments in our private credit solutions businesses. For the full year, we expect step-downs and expirations to total approximately $1.5 billion, which leaves roughly $200 million expected in Q4. Revenue in the third quarter was $74.2 million, a 26% increase over the third quarter of 2023. Average fee rate in the third quarter was 119 basis points, which was driven by direct strategies with higher fee rates becoming a larger part of our fee-paying AUM mix as well as higher catch-up fees. In the third quarter, catch-up fees were $6 million, bringing the total for the year to about $20 million. Catch-up fees are driven by the timing of fund closings and in the third quarter, the fees were primarily attributable to closings related to Bonaccord II and RCP Multi-Strat II. Due to the timing of Bonaccord's closes, our year-to-date catch-up fees have exceeded our previously stated annual guidance of $16 million.



It will be helpful for investors to think of our catch-up fees in 2 categories: normal course catch-up fees from our primary funds and more episodic catch-up fees from our direct and secondary strategies, which tend to be larger in size and have longer fundraising periods. For the quarter, nearly all of the catch-up fees were from our direct and secondary strategies. In bifurcating our catch-up fees, investors will see a more normalized run rate of our revenue growth. Operating expenses in the third quarter were $65.4 million, a 12% increase over the same period a year ago. The increase was primarily driven by compensation expense, placement fees and professional fees from the Qualitas Funds transaction and our recent debt refinancing. GAAP net income in the third quarter was $1.3 million, an increase compared to a GAAP net loss of $8.8 million in the prior year third quarter. Adjusted EBITDA in the third quarter of 2024 was $35.3 million, an increase of 19% from the third quarter of 2023. For the quarter, our adjusted EBITDA margin was 48%. Our margin came in a bit higher than expected due to catch-up fees and product mix. We still expect margins for the year to be in the mid-40s as we continue to make key investments that we believe will deliver clear ROI.



FRR in the quarter was $72.9 million, representing a 26% annual increase and FRE was $35.1 million, representing a 19% increase. Our FRE margin was 48% in the third quarter. For the third quarter, adjusted net income, or ANI, was $30.8 million, a 26% increase over the third quarter of 2023. Fully diluted ANI EPS was $0.26 per share, an increase of 32% on a year-over-year basis. Cash and cash equivalents at the end of the third quarter were $61 million. At quarter end, we had an outstanding term loan balance of $325 million and no balance on the revolver. There is $175 million available on the revolver and an additional $125 million available on the accordion feature. In the third quarter, we repurchased 609,300 shares at an average price of $10.15 per share. That brings the number of shares repurchased since the beginning of 2024 to about $5.8 million, representing about $48.7 million in aggregate value. Since the inception of our repurchase program in 2022, we have repurchased a total of 8.9 million shares at an average price of $8.80 per share. As of September 30, 2024, we had approximately $13.9 million remaining on the program. You'll note we did not repurchase as many shares in the third quarter as we did in previous quarters.



This is a reflection of having fewer days to repurchase shares as a result of our blackout impost as we work to announce the Qualitas Funds transaction. As Luke mentioned, we continue to believe our stock presents a compelling entry point for investors who are looking for access to a diversified alternatives platform focused on the lower and core middle market. We also continue to pay our quarterly dividend for Class A and Class B common stock. Today, we declared a quarterly cash dividend of $0.035 per share payable on December 20, 2024, to stockholders of record as of the close of business on November 29, 2024. Finally, as of September 30, 2024, our Class A shares outstanding were 53,813,892 and Class B shares outstanding were 57,407,903. As I discussed at our Investor Day in September, our robust business model continues to strengthen with every dollar of new capital we deploy, every new company added to our database and every new fund that launches. Our FRE-centric financial model creates investor alignment by leaving the majority of carried interest with our investment teams, furthering investment performance and leading to solid fee-paying AUM growth. I am thrilled with our third quarter results and our progress year-to-date. Thank you for your time today. We look forward to updating you on our continued progress in February as we execute against our growth initiatives. I'll now pass the call over to the operator to begin the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from Kenneth Worthington with JPMorgan.

[Alexander Bernstein, analyst]

This is Alex Bernstein on for Ken. Congratulations on the strong quarter. Just wanted to double-click on fee rates. I appreciate the comments you made around the different allocations and what types of strategies are driving those higher. Page 24 is also helpful for us to visualize that. I believe you've previously guided to 105 as sort of a steady state. Now we've been above that ex retro fees for 2 quarters in a row, which I think makes us wonder how high do you think that fee rates can get in the future? And how does the asset raising mix expected to change over time?

[Amanda Coussens, executive]

Thank you, Alex. The vast majority of fee-paying AUM at P10 today comes from traditional commingled funds. Our fee rates within our primary strategies have also remained stable over the last several years. And that's due to our funds often being oversubscribed. We also giving our investors access to the attractive middle market and lower middle market sectors and strong investment returns over decades. I think as we give additional guidance for 2025, we'll be able to comment a bit more on our average fee rate growth. But really, it comes from the mix of our traditional commingled funds and SMA relationships as we continue to build this out.

[Alexander Bernstein, analyst]

Great. And to ask another one, fundraising, obviously, a really strong quarter, even if you're considering the pull forward from Q4. To what extent can you attribute any of that to some of the initiatives that were laid out on the Investor Day, cross-selling, things of that nature, having more dedicated folks? Is it still early for those items to be the driver here? Or was there an impact? And any anecdotes that you can provide for us?

[Luke A. Sarsfield, executive]

Thanks, Alex. Look, I'd love to tell you that it was all due to all the strategic initiatives we're driving, but I think we have to be honest. Clients, particularly clients where we're engaging with them and we're trying to build and deepen and broaden relationships, those can take quarters, if not years, many times, right? That's just the reality of how it is. And so, I think we've built great infrastructure around it. I think we have outstanding teams who are already engaging in it in day-to-day activities with these clients. But obviously, over time, we think there's another kind of growth leg that we can push on, and we obviously are very focused on continuing to build that out. And so, we will do that. I think this success that we saw in this quarter is really just a testament to a few things. One is the compelling nature of our investment strategies and the outstanding alpha that we've generated for clients; two, the depth of the client relationships that we have and the appeal that I think our product offering has in the current market, which is really, really appealing.



And then I would point out one other thing. As I mentioned, we are really focused on finding ways outside of traditional commingled drawdown vehicles to engage with our clients. And as I noted, there's about $200 million of SMA assets in there, which obviously, while still a small number in the grand scheme of things, we think is a really kind of compelling sign of things we can do with clients to engage with them in ways beyond traditional drawdown commingled funds. And so that's something we're super excited about, and we see real promise for and like our cross-selling initiative, like many of our other initiatives to deepen and broaden our client base, product design and development is another important attribute of how we see ourselves growing that asset base that we have here at P10.

[Operator]

Our next question comes from Ben Rubin with UBS.

[Benjamin Rubin, analyst]

My first one is on the FRE margin. Amanda, you just reiterated your guidance for the mid-40% FRE margin for this year. But with year-to-date margins around 48%, I guess, number one, how should we think about the step down and what's driving that in the fourth quarter? And then secondly, at Investor Day, you guys spoke about getting back to that 50% margin over the long-term. So, at a high level, how should we be thinking about the balance between expense discipline with the ongoing investments you're making in the platform?

[Amanda Coussens, executive]

Thank you, Ben. So, margin did come in a bit higher than expected due to the strength of our direct strategies and product mix. We still expect margins for the year to be in the mid-40s, as we said, as we continue to make our key investments that we do believe will deliver clear ROI. As mentioned at Investor Day, we do expect margins to expand from the mid-40s in the near to intermediate term to near 50% longer-term. We have ongoing mix shift within our existing portfolio of strategies. We have newer and faster-growing businesses such as Bonaccord, Hark and WTI that have lower core adjusted EBITDA margins than other parts of our business. And then another influence on the margin is our foundational human capital investments, as you mentioned, which we expect to drive core growth and high ROI for investors.

[Luke A. Sarsfield, executive]

Yes. I'll just add a few things, Ben, just to put some context on it. I think one of the other things you heard Amanda say as part of her comments was that because of some of the catch-up fees, kind of excess catch-up fees relative to what we had guided at the beginning of the year, those come at a very high margin. And so, they will have the natural impact of pulling margin up in a certain period of time. But obviously, they're not something that -- some will persist for an extended period of time, but not those direct and secondary, very lumpy ones that Amanda talked about. And so, I think they had the net effect of kind of pulling margin up, obviously, in a very positive way, but that's going to be a transitory effect. I want to go back to the Investor Day guidance because I think that's really the key of what we're talking about.



We expect margins to be in the mid-40s ex M&A in the near to intermediate term. And then we do think because of the nature of our business, because of the inherent operating leverage in our model, because of our product and strategy mix shift over time, that there will be some things that will accrue and that will enable us to move back closer to the 50% range. But again, the guidance, as we laid it out, near to intermediate -- and remember, that was 5-year guidance. I want to be clear on that, right? So near to intermediate term, we're talking about kind of a mid-40s margin guidance ex M&A. And then we think because of the favorable dynamics, particularly operating leverage dynamics that it can expand from there as you get into the out years.

[Benjamin Rubin, analyst]

That's great. I appreciate the color. And then just for my follow-up, you mentioned you did $6 million of buybacks last quarter, but you also flagged that you're out of the market a little bit due to some other issues. And Luke, as you mentioned, the stock still looks compelling at these levels. So, I guess just kind of stepping back, how should we -- what's the best way to think about the pace of buybacks going forward from here given the stock still is attractive from a buyback perspective?

[Luke A. Sarsfield, executive]

So great question. I'd say a few things. One is we think the stock continues to look incredibly compelling. I think you heard me say that. I think you heard Amanda say that. I probably can't say that enough. So let me say it one more time. We think the stock is unbelievably compelling at these levels. Secondly, you heard exactly kind of what Amanda said, which is because of the fact that we were executing on the Qualitas transaction during the quarter, we made, we think, a very sound and prudent judgment that we had to suspend some of our buyback activity, given we were getting close to something that we viewed as a kind of a material event and a material disclosure we had to make and obviously didn't want to be doing anything inappropriate, and we were very, very careful to be cautious and prudent in getting a lot of great legal advice and legal input around that.



Having said that, as you note, we think it continues to present a very attractive opportunity. I would just go back to our kind of hierarchy of capital uses. Use one will always be to pay the dividend, right? And we continue to do that. You see us do that this quarter as we do every quarter. And then we'll have kind of 2, I would say, co-equal uses. One will be for share repurchase and the other will be for value-enhancing M&A, and we'll continue to execute on both of those. And obviously, over any given period of time, if we're executing an M&A deal, you might see a little less on share repurchase. If we're not doing an M&A deal, then the primary use for that quarter will be share repurchase. And then obviously, if we have excess capital left over after embarking on those 3 in the hierarchy, we'd repay debt, but that's going to be the lowest priority. Look, we are very, very focused on being disciplined and prudent stewards of shareholder value and shareholder capital, and we want to find ways to return that capital and reward our long-standing shareholders.

[Operator]

Our next question comes from Ben Budish with Barclays.

[Benjamin Budish, analyst]

I wanted to just touch on M&A. I know you talked quite a bit about this. But just could you remind us kind of going into the next year, you have announced a deal recently in Spain. Just curious how you see the next, say, like 3 or 4 quarters unfolding in terms of cross-sell. You've talked about kind of changing how the organization will go to market. So how should we think about expectations, specifically for how the new asset will function as part of P10 going into next year?

[Luke A. Sarsfield, executive]

Well, look, great question. And we have been and continue to be just unbelievably excited about Qualitas Funds, about Eric and Sergio, the incredible team they've built. And it's funny, you spend a lot of time with somebody announcing the M&A deal, but then you get the privilege of spending even more time with them after the M&A deal as you work through integration, we're very excited about where we stand vis-a-vis that. And I would say the more time we spend, the more excited we are. It is an incredible strategy. They have built an incredible team. And as you heard us talk about, it is just so strategically aligned with so many of our existing strategies, in particular, RCP, long-standing relationship, long-standing partnership, tremendous amount of respect across those organizations and mutual touch points across those organizations.



And now increasingly with Hark on their NAV lending strategy in Europe, the ability to kind of coordinate, collaborate and work together has been extraordinary. And so, we're really excited about it. We think they bring a lot to the table. We think there's a lot we can learn from each other. We think there are opportunities that they will open up for some of our legacy franchises in Europe. And I imagine there are concurrent opportunities that we will open up for them in the U.S. And so, it's really early days. Again, a reminder, we haven't closed the deal yet. We won't close the deal until the first quarter. But once we get it closed and really embark on what we think is going to be a super exciting journey together, we think the sky is really the limit for what we can do in tandem.

[Benjamin Budish, analyst]

Got it. Helpful. Maybe another question sort of thinking about next year. Just if you look at the market reaction to a lot of the asset manager stocks in the past couple of days, clearly, there's an expectation things are about to be a lot better. Your model has always kind of been one, especially thinking about franchises like RCP, where you're in the market more frequently, you're not asking for as big a check size. And so, you've seen like less of an impact in the past couple of years on your fundraising. And so, as activity picks up and in the kind of traditional private equity narrative, it's going to get easier theoretically to raise as more capital is returned, how do you see P10 as positioned to benefit? Where do you see the biggest opportunity to, say, upsize fund sizes to sort of increase fundraising? How do you think about that playing out over the next, say, 12 to 18 months?

[Luke A. Sarsfield, executive]

Well, look, from your lips to God's ears on the macro environment, I certainly hope that's right. And if it were, we'd all be excited by it. You did kind of hit on an interesting point there. One of the things we've always prided ourselves on is that we think we have an all-weather mix of businesses. And we think we have strategies that work in virtually every market environment, and frankly, any market environment. Now obviously, in different market environments, different strategies will come to the fore and different strategies may not be so relevant. But one of the beauties of the diversified portfolio is that it is inherently hedged against market volatility. The other thing I would just note, and of course, you know this and we talk a lot about this, but there are some really attractive characteristics of our meaningful presence in the middle and lower middle market that also provides inoculation against some of this market volatility, I think, to your point, that maybe some others have seen, obviously, to your point, if you're in the traditional buyout business, there's a huge focus on DPI. And I think there's probably increasing enthusiasm that maybe some things will break on the macro, whether it's borrowing costs, whether it's M&A activity that will allow for more DPI to be unleashed. 



And I think that will be a net positive for the industry. And clearly, things that are positive for the industry can also be positives for us, right? And so, I think to your point, we see a lot of opportunity in the traditional kind of buyout business. And we think, obviously, through RCP and then through Qualitas as well, we're really a leverage proxy to be a beneficiary of a lot of that activity. Also, I think we're seeing some very heartening signs in the venture market environment in general. There was probably a period of time where that market was in reset mode and now it seems to have found a base and some stabilization and continue to move on the forward. And we think there's also some real opportunities for us, and we continue to see attractive opportunities for us across many of our credit businesses. So, we're really excited about the forward. We think we've got this great diversified all-weather portfolio in a protected part of the market where we are the category killer. But obviously, a rising tide will lift all ships, and we hope to be a beneficiary of that should there be a rising tide.

[Operator]

Our next question comes from Michael Cyprys with Morgan Stanley.

[Stephanie Ma, analyst]

This is Stephanie filling in for Mike. Just wanted to double-click into the SMA opportunities. You raised over $200 million this quarter. Hoping you could unpack that for us a bit in terms of pace versus last few quarters or maybe contributors from either RCP or TruBridge? And then just going forward, how should we think about the growth trajectory or opportunities for further SMAs? What steps are you taking to accelerate and capture what still seems like an early innings opportunity for you guys?

[Luke A. Sarsfield, executive]

Thanks, Stephanie, and great question. So, you're right. This is still a very early innings opportunity for us. I think we showed a slide at Investor Day where we talked a little bit about our existing book of business, I shall call it, in the SMA space, which represents rough justice 15% of our total assets at this point. So, remember, the vast majority of our assets and the even vaster majority of our fees are still coming from the traditional commingled vehicles. But we see a real opportunity to engage with clients, to go deeper, to do more things with them. We think engaging particularly with bigger and more sophisticated clients who want to do something a little bit more customized, a little bit more bespoke, maybe a little bit more off the run than what you would get in a traditional commingled format, it's a great way to do it. 



I think you know this because of the nature of the dialogue, it's never going to be linear, right? So, it's not like we're going to do x 1 quarter and then 1.2x the next quarter and 1.4x the following quarter. These are generally longer-tailed conversations. They generally are initiated by, hey, let's get to know each other a little bit better, talk about what you, the client want, talk about what we P10 across our strategies can do. I think increasingly, there's an opportunity to do it across some of our P10 verticals. So, they may just not be kind of single affiliate conversations. They may be multi-strategy, multi-affiliate conversations that we can have. I think that's really exciting. I don't, at this point, Stephanie, want to get into the details of -- I think you can go down a rabbit hole pretty quick about what client and what vertical. I would say stepping back, our focus is on doing this, on doing it more broadly, on doing it with a broader cross-section of clients. being able to lift our eyes and maybe do it with larger clients than we've traditionally had. There are some very, very exciting conversations, I will tell you right now that we are having. The beauty of these is, I think once you manage to work something out with the client, they are very durable. They are very sticky, and I think they tend to grow over time. And so, the initiation is really important. 



And once you get it in place and working well, the opportunity to grow together is massive. And I think, again, it comes back to what we can provide that nobody else can provide. And that is this differentiated access in the lower middle market, and that is this differentiated ability to access specialized niche and fragmented markets and alternatives. And so, I think increasingly, as clients are maybe getting more open to stepping out from just traditional large-cap buyout, traditional large-cap private credit, we're really a unique and differentiated partner, and we hope to capture that real estate.

[Stephanie Ma, analyst]

Got it. Appreciate that color. And as we think about this opportunity contributing more going forward, any implications to the mix impact of fee rate or margins that we should be considering, especially if you're successful here?

[Luke A. Sarsfield, executive]

Well, I would pull those 2 apart a little bit. I would say on the revenue mix, I presume, which is what you're asking, clearly, generally, I'm generalizing, but I think it is almost always true. These will come at lower fee rates than the traditional commingled business, right? And we showed that you could see that in our Investor Day slides where the 85% of our business that was in commingled fund format was at a higher fee rate than the 15% of our business that was in SMA format, and that was why there was an even greater differentiation when you looked at it on a revenue basis. What I would say is, I actually think that's only half of the story. And your margin question is a really interesting part of it. Generally speaking, because these are leveraging core areas of expertise that are already resident at P10, the incremental cost to setting up these kind of SMAs is generally quite low. In some cases, virtually 0, or at least 0 in that it can be done with the existing team. Presumably, there was some time and resource and capability use that will be subsumed by that. But at least in the narrow, this should be very, very high-margin business because it leverages existing embedded in-house expertise, capability, knowledge, et cetera. So, I think while it will have potential kind of if we were to do a lot of it, it would have pressure on revenue over time. I could actually see it being a margin contributor in the same way.

[Operator]

I would now like to turn the call back over to Luke Sarsfield for any closing remarks.

[Luke A. Sarsfield, executive]

Well, thank you, operator, and thanks to you all for joining us today. In addition to our earnings release, you may have seen an 8-K today announcing the departure of co-founders, Robert Alpert and Clark Webb from the P10 Board of Directors. We want to extend our sincere appreciation for their many contributions to the company over the last few years. We are so pleased with the Board we have in place with Tracy Benford as our Lead Independent Director, and we believe we have the proper governance and oversight in place to guide the company to higher heights in 2025 and beyond.



Finally, as we made clear during our Investor Day and on this call, it's an exciting time at P10, and we are gaining momentum every day. As I close today, I would like to remind you all of the key factors that summarize how we are thinking about the opportunity in front of us. First, there are powerful and favorable secular trends supporting the growth of private markets. Second, we're specialists with over 2 decades in what we believe to be the most attractive parts of the market, and that is the middle and lower middle market. Our reputation, our focus and our longevity producing information advantage that results in asymmetric investment opportunities. 



Third, we have significant white space as we focus on deepening and expanding our large and diverse global LP base. Fourth, the Qualitas Funds acquisition demonstrates the disciplined and process-driven M&A engine we are building. And finally, our team is aligned and dedicated to collaboration across our platform. We're driving operational efficiencies and building scale in meaningful ways. Thank you again for your time. We so appreciate your ongoing support, and we all look very much forward to speaking with you again in February.

[Operator]

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.