Partners Group Holding AG

SIX:PGHN

Earnings Call Analysis

Revenue and Earnings Up with Diverse Growth

The company has reported a 19% increase in total revenues, with performance fees making up a significant 25% share, jumping from 8% last year. Earnings grew by 13%, supported by infrastructure business performance fees, which now contribute significantly and represent a shift towards a more mature investment phase. AUM has been strengthened by a diverse client base across multiple asset classes and regions. The company has managed its business efficiently, maintaining an EBIT margin of 61% amid foreign exchange fluctuations and inflation. Management fees dipped slightly by 3% due to fewer closings. The firm invested around $5 billion across various sectors, highlighting a portfolio company, AMMEGA, with 71% earnings growth, and realized $5.4 billion in the period, reflecting an active and successful investment strategy.

Diversified Solutions Drive Growth

The company heavily emphasizes its solutions business, which has grown to $3 billion, accounting for 67% of the total asset base. This growth reflects the company's focus on providing bespoke solutions across hundreds of programs. By catering to individual investor needs and steering client allocations dynamically in real time, the company has strengthened its position in a niche mandate market worth approximately $250 billion. This strategic differentiation, particularly in mandates, has cultivated a robust and diversified investment platform with global reach.

Resilient Revenues Amid Fee Dynamics

Management fees have declined by 3%, influenced primarily by a lack of significant closings in the first half of the year. However, total revenues increased by 19%, bolstered by performance fees that now represent 25% of revenues, a significant jump from 8% in the previous year. The company's EBIT margin remains consistent with its 61% long-term target, demonstrating an ability to adapt to foreign exchange fluctuations and inflation. Additionally, the company reiterates its performance fees are projected to occupy 20% to 30% of 2023 revenues, conditional upon the successful exits in private equity and infrastructure assets.

Stability in Management Fees and EBIT Margin

Since its IPO in 2006, the company has kept management fees remarkably stable at an average of 1.28%, although a slight decrease to 1.25% in 2022 was noted due to the timing of fee accruals. Despite rising total operating costs by 31%, mainly from performance fee-related expenses and technology investments aimed at future growth, the firm maintains a solid EBIT margin of around 60%, underscoring its profitable operations and cost management prowess.

Solid Investment Performance and Forward-Looking Tax Rate

The company reports investing CHF 800 million in various programs and mandates alongside clients, achieving a 5% return in the first half of the year. Despite FX hedging costs, the net financial income was up, leading to a reported profit of CHF 551 million. Looking to the future, the company expects a consistent tax rate between 15% and 17% for 2023 but predicts a modest increase to 18%-19% in subsequent years due to the OECD Pillar Two implementation.

Strong Liquidity After Dividend Payments

Following substantial dividend payments of $1 billion in the first half of the year, the company's liquidity remains robust, with CHF 2.4 billion available. This is comprised of cash reserves, short-term loans to products, and an undrawn credit facility. The management's competent financial stewardship assures investors of the company's strong liquidity position and its ability to sustain growth and returns.

Earnings Call Transcript 2023-Q2

[Operator]

Ladies and gentlemen, welcome to the Interim Financial Results 2023 Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. I would like to remind you that all participants are in a listen-only mode and the conference is being recorded. The presentation will be followed by a question-and-answer session. [Operator Instructions] The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to David Layton, Chief Executive Officer. Please go ahead, sir.

[David Layton, CEO]

Thank you very much, and welcome to our interim financial results call for 2023. It's a pleasure to be with you all. It's great to be back in London live, where we have a number of our important stakeholders and shareholders that can be with us in the room here, and welcome also to all of you who are joining us over the phone. I'm the Chief Executive Officer, David Layton. I'll be doing today's update with Philip Sauer, who is our Head of Corporate Development and our Chief Financial Officer at interim.

Maybe starting off with a couple of big picture messages, I think this is an environment where it is absolutely essential to drive alpha and drive differentiated results. And we believe that our transformational investing strategies are key to the success that we'll be able to drive in the future. We're a business who's carved out a nice niche for ourselves within the bespoke solutions segment of the market. This has provided continued differentiated growth for us and a continued point of differentiation for our investors.

And we saw 68% of total funds raised coming from these bespoke strategies. We continue to confirm the guidance that we had provided of total fundraising between $17 billion and $22 billion for the year and believe that we're in a solid trajectory. We had good financial performance during the period. Revenue is up 19%. Earnings is up 13%.

Performance fees were obviously an important element of that story. And this is a period of time in which I think the differentiation that you get from a truly and diversified platform comes through. We had 80 different programs that contribute to our performance fees. This was also the period in which our infrastructure business came online from a performance fee perspective. If you go back just a couple of periods in 2021, that was obviously a big year for us from a performance fee perspective.

Out of the performance fee generated in that year, a very small modicum of performance fees came from the infrastructure business, about 1%. And that's because we were at a period of -- a stage of development within that asset class where essentially all of the realizations went to clients as we were recouping our clients' principal investments and they were achieving their minimum returns. And this is the period in which that asset class reach a point of maturity whereby they started paying performance fees. And we effectively move from a six-cylinder engine to an eight-cylinder engine for a performance fee generation perspective as a result of this infrastructure business coming online. And had the sustained management fee growth during the period and continue to manage our business towards a 60% margin despite some of the FX developments in the company with a meaningful cost base in [Technical Difficulty].

Throughout this presentation, we'll focus on three main sections. I'll give an update on our investment platform and our client activities, and then Philip will cover financials. The private equity industry has been around for a while, and you can go back in history and look at how returns have developed. And for your average performer within our industry, returns have been relatively consistent. We're pleased that over various economic cycles, we have been a top performer within our space and differentiated ourself well beyond median performance.

This top quartile performance has been generated through what we call our transformational ownership approach, which we outlined on the next slide. This transformational ownership approach consists of two topics. The first is thematic investing and the second is entrepreneurial governance. Thematic investing has to do with identifying specific themes that we believe have structural tailwinds behind them. Our teams will do two, three years of research for an investment proposal made to our investment committee, getting deep on the space, developing conviction, meeting all of the relevant executives and companies in that space.

And that's a big part of how you differentiate in the current environment. It's not buying what's for sale, it's buying what you believe in what you have conviction in.

And then once you own those assets, it's our entrepreneurial ownership approach that helps us differentiate. We build very strong boards. We have a very strong focus on strategy, driving accountability for that strategy, and that has yielded good results. Those results are seen on the next slide. And this is something that we've shared in the past, just to reiterate, this is not an environment where a lot of people are counting on multiple expansions.

So here, we show returns between the public markets and using our funds as a proxy for the private market, to illustrate some of the contrast that investors are going through. This is one of the reasons why private markets continues to get a meaningful allocation in the current environment even though the rate environment has changed. Okay? It's because private markets have done a particularly good job of driving outsized and it's through, I think, the active hands-on approach to aligning interest with management teams, driving towards a fine set of strategies that has resulted in that. And so just on the right-hand side of the slide, for example, if you look at our equity business.

This had 133% uplift in returns when you don't account for multiple expansion, right? Factor that out because that's not a factor moving forward. And your average public market investor would have done very well in the public markets as well, but most of their gains would have come from multiple expansions. And we believe that, that provides a sustained competitive advantage for us in the current environment is the track record that we have driving alpha. Just to give you one case study of this.

AMMEGA is a portfolio company that we acquired a few years ago in the industrial belting sector, okay? And this was a part of a research project that our team had worked on in the automation space.

And when you look at the automation sector, right, there's a number of different ways that you can play that space. You can do it with capital equipment, service. We decided to do it on the consumable side of things. So if you think about a big automation project, only about 1% of the cost of that project comes from the belt. But those belts get chewed up on a regular basis to be in place.

If there's downtime associated with that belt, it creates a tremendous amount of cost for that environment. So it's mission-critical, relatively low cost consumable and it plays within a number of themes that have strong tailwinds behind us.

So our team had researched that space and come to the conclusion that this area would provide an attractive backdrop for us to execute on the transformational business strategy. And on the next slide, you can see how after we own -- got possession of that business and became an owner, built a Board with experts that had a very strong sense for how to create value in this particular business. They focused on a few key value drivers. When we come together with our Board meetings, we're not flipping through financials and going through working capital assumptions. We're getting into, are we making progress on our big strategic initiatives?

We highlight here some of the big initiatives that we outlined for this business. And by driving those initiatives, we've been able to drive 71% earnings growth in this business. We've driven revenue by 14%. Strong margins that are over 20% today. We shifted our mix of recurring revenue to over 70% and we've expanded into some core geographies like the U.S.

market. And that's the way you drive results in the current environment, okay? It's through hands-on ownership. And I think this is something that our company continues to excel at.

If you look at the investment activities in the first half of this year, we invested about $5 billion, 57% of that tied to direct investment type of businesses like we just outlined with AMMEGA and 43% of our investments were portfolio investments, diversified pools of investment content.

We realized $5.4 billion during the period, 66% of those realizations were tied to direct positions and 34% tied to portfolio assets. These realizations combined with the unrealized performance that we also generated has resulted in strong investment results for our clients. Here, we highlight the results achieved over the first half of this year, 5.4% uplift within our private equity business, 3.9% uplift in our debt business, 6.9% uplift in infrastructure and real estate negative 2.4%, about par for the course for that asset class.

You can also see that we've been able to drive strong returns over a long period of time, and we're very proud of where each of these asset classes lie. This is also an environment where we have a lot of confidence in the underwriting that's taking place today. This is an environment where the debt positions that we're able to underwrite today have particularly strong returns. There isn't a tremendous amount of investment activity occurring, but the stuff that is occurring we're really, really pleased with and believe that we're going to have a very strong vintage year coming out of 2023.

On the client side, Bespoke solutions has been a theme for us for a very long period of time. If you go back in time to the start of this last cycle, we had a small -- relatively small Bespoke solutions business, about $3 billion in size, and we have scaled that to be 67% of our total asset base over the last number of years. We're seeing disproportionate growth in that segment of the market. And this Bespoke strategy has also led to a platform that is highly diversified, okay? We are not an institution that has a few flagship funds that determine the fate of our investment business and determine the fate of our performance fees.

We have hundreds and hundreds and hundreds of programs, some of which are custom-built for individual investors, some of which are built around the needs of a group of like investors, and that diversification provides a lot of stability to our platform. We are truly an institution and have a platform that's reflective of that.

Now the mandate side of the business is maybe more of a niche. If you look at the total mandate market, it's only about a $250 billion segment of the market, okay? But this is our segment. And this is really where the strength of our platform comes into focus and where we differentiate ourselves, I think, most strongly.

And here, we have an example of a mandate client that's been investing with us for over a decade. You can see how we've scaled their portfolio. There are certain periods of time in which secondaries make a lot of sense. There are other periods of time that secondaries don't make sense, right? If you're an investor from the outside who's trying to steer your portfolio and get some secondary exposure, you might say, in 2023, that's something that we want to do, you'll launch a search.

Your firm will make a few commitments. And three years down the line, you'll start to get secondary exposure after the window has likely passed. And so our ability to steer our clients' allocations on a dynamic real-time basis is a strong point of differentiation for us in the current environment where people are getting fed up with the limited partnerships, don't allow them to steer their exposure, don't allow them to be as dynamic as they would like to be. And even though this is a niche in the market, this is our niche and I think we're extremely strong in this particular segment.

We're able to do line-by-line allocations for our mandate clients in a way that I don't think anybody else can do, right? This is not -- make a commitment to this fund, make a commitment to this fund and I'll give you a discount, right, for making a group purchase with us. But this is line-by-line allocation with a dedicated portfolio manager on your account that will help you to meet your objectives. So I think this is a very strong point of differentiation that our firm has. In addition to that, as the institutional market has become more crowded and has slowed this year, there's been a tremendous amount of attention that has shifted to wealth.

And within the wealth segment, Evergreens will be the predominant investment type, okay? An individual investor is not going to hassle with the drawdowns and distributions that have been so typical with limited partners in our space.

They want products that have some structure to them. It solves some of their problems, that provide for a reasonable amount of liquidity during good times. And we have been an innovator within this space, an early mover, and we have a suite of Evergreen products that I think are second to none. These products give investors the ability to get day one diversification into a pool of capital. We have not fallen into the trap of growing too quickly in the space.

Let's remember that the liquidity that's generated this year, okay, the redemptions that are met this year will come from investments that were made six, seven, eight years ago, right? You have to be really smart how you scale these products and do so for the long term, so you don't miss client expectations. And I think we're a firm that's played the long game here. And today, we have, I think, a suite of Evergreens that have performed, that we have client trust around and we're launching a suite of new Evergreen solutions -- six new Evergreen solutions that should launch within the next 6 to 12 months that we're very, very excited about that meet the specific needs of distribution partners in the space. Our AUM growth was supported by a highly diversified offering.

We are not a one-dimensional firm. You will not see all of our growth in one asset type. We have had diversified client growth across asset classes. You've seen it across private equity debt, infrastructure and real estate, focus on Bespoke solutions, but balance across asset types. And I think that's a real strength of our firm.

On the next page, you see that our fundraising has also been diversified by region, which is not a one-dimensional story.

Yes, we have strongholds in certain parts of Europe, in particular. Those have continued to perform well for us, but the U.S. has also had disproportionately strong growth for us. You see contributions from the Middle East and Asia with increasing frequency from our business as we continue to grow our various efforts around the world. We confirm our full year guidance for asset raising for this year.

We're going to be on track, I think, to perform within the range as we previously outlined. And with that, Philip, I'll hand it over to you to walk us through the financials.

[Philip Sauer]

Thank you, Dave. It's a pleasure for me being here together with you in London, and I will walk you through the financials. So let me start with assets under management. In U.S. dollars, they grew 8% year-over-year.

However, in average -- the average AUM in Swiss francs, this growth translated only into 3%. This was mainly driven because of the strengthening of the Swiss francs against the U.S. dollar and euro, our main currencies in which we generate revenues. Management fees decreased 3%. This was primarily driven due to the late management fees, which were lower because we did not held any material closings in the first half of the year.

Total revenues increased 19%. Performance fees contributed meaningfully and represented 25% of revenues, up from 8% last year. The EBIT margin stood at 61% and is in line with our long-term target. So overall, I can say that this outcome shows our ability to navigate through a changing foreign exchange environment and inflation.

With that, I would like to move to the next page. Let's look at our revenues in greater detail. We have two sources of revenues: Management fees and performance fees. This slide will talk about management fees, which represent most of the revenues. After a very strong 2022, the growth in H1 was impacted by two factors: One was an unfavorable FX development and the lower late management fees because of limited closings of closed-ended funds.

We would not expect H2 to be materially different than H1. However, we will be launching a number of new programs in the second half of this year, but we expect these new programs to only pay late management fees in 2024. With that, I would like to touch base on performance fees on the next slide.

Performance fees amounted to CHF 265 million or 25% of revenues and were generated on the back of over 80 highly diversified programs and mandates. Across the investment programs, infrastructure strategies were the overall largest contributor, making up 53% of all performance fees generated.

In H1 alone, six new programs reached their hurdle rates and paid performance fees for the first time. This is a so-called catch-up effect. Reaching the hurdle of a closed-ended program is not a result of a single transaction, but accumulation of successful exits over a longer time period. Earlier this year, we expect the performance fee to be more strongly tilted towards the second half of the year. At that time, we expected that we would require more exits and distributions in order to reach the hurdle rates of some of these funds.

While it was apparent to us that performance fees were building up in these programs, we expected the release of performance fees only in the second half.

H1 performance fees, therefore, resulted -- were based on the strong performance of the underlying portfolio and further distributions from exits and infrastructure. I would like to give you some examples now why these infrastructure reached that hurdles. They have been built up over many years. For instance, in 2022, we sold Blauwwind, an offshore wind project off the Dutch Coast, powering 200,000 homes.

We partially exited USIC, you might remember a leading provider of outsourced utility located services. And at that time of that exit, most exclusively private equity programs benefited from performance fees of this asset. Infrastructure typically did not benefit that much because all the proceeds, as Dave said, were distributed directly back to clients because the programs did not meet the hurdle yet at that time. The asset sale that ultimately pushed the infrastructure programs over the hurdle was then the sale of CWP renewables.

We developed CWP from ground up and exited the asset as one of the largest renewable energy platforms in Australia. The closing and therefore, the cash flows associated with that transaction happened in the first half of this year. With that, I would like to move to the 2023 outlook.

For the full year 2023, we expect performance fees to fall in our mid- to long-term range of 20% to 30% of revenues. While the performance fees in the first half of the year were driven by performance, diversification and the catch-up effect, the second half of the year will be mainly dependent on exits on individual assets and businesses in private equity and infrastructure.

As now most of our mature private equity and infrastructure programs are in performance fee mode, 2023 will likely be a good year if we successfully exit those assets. And that will also depend on the financial stability of the financing markets. However, if you look a bit longer term out, we are also confident to reach our mid- to long-term goals on performance fees.

With that, I would like to move on the next slide. Performance fees are ultimately a reflection of the value created for our clients. The greater the value we can create, the higher the performance fees. Performance fees follow AUM growth with a time lag of six to nine years. And in the past, a lot of our performance fees were driven by private equity.

Despite our private infrastructure business, being a long-standing and successful asset class for Partners Group. For example, if you look on the slide, 2021 were the year with record exits and performance fees. However, private infrastructure performance fees was only 1% of the overall performance fees generated. Over 90% stem from private equity. Infrastructure has today over $20 billion in AUM and has so far not meaningfully contributed to performance fees.

This picture has changed now. We will not only see more private equity performance fees as the asset class has grown, but we will also see private infrastructure contributing to the overall mix. This fact allows us to look confident into the future that performance fees will not be only more diversified, but also more stable going forward due to our conservative approach on how we recognize them. When we show performance fees, it is irrevocably ours. Why is this so?

In closed-end investment programs, performance fees are typically only charged once investments are realized and a predefined return hurdle has been exceeded.

To further ensure a low probability of revising realized performance fees, we stress test the unrealized part by applying a significant discount of up to 50%. This is also the reason there is a less strong correlation between overall distributions received in the period and performance fee recognized. Sometimes, it simply requires the distribution of one asset to trigger the recognition of performance fees of many assets being sold in the past. Let's move to the next slide.

Since our IPO in 2006, our management fees has been remarkably stable at an average 1.28%. This can vary in any given year because of the timing of the fee clock. We expect this stable development to continue because we have pricing disciplines and driving innovative program innovation. For 2022, the management fees -- the management fee margin was slightly lower at 125 basis points, and that was mainly due to late management fees. So let's move to the costs on the next slide.

Profitability remained strong with an EBIT margin of 61.2%. Total operating costs increased by 31%. Out of these costs, 83% are personnel expenses. As you can see, the increase in performance fee revenues also triggered an equal increase of variable performance fee-related personnel expenses as we continue to allocate a fixed proportion of up to 40% to our employees. Regular personnel expenses grew 11%, so below the average FTE growth of 15%.

These costs were positively impacted by foreign exchange effects as well as lower bonus accruals compared to the prior period. Other operating expenses increased 11% during the period. This was primarily driven by increased technology investments to support sustained growth firm's platform in the years to come and cost inflation. We expect those expenses going forward to move in line with management fee growth.

Now on the next slide, I talked a lot about FX and would like to dive a bit deeper into its impact on our P&L. We are a global business and reporting in Swiss francs, and most of our revenues come from U.S. dollars and euro-denominated funds. As the Swiss franc strengthened, FX negatively impacted management fees by 4 percentage points and positively impacted costs by 2 percentage points. So in total, the impact of the EBIT margin was about 2 percentage points.

Given that the market knows our revenue and cost exposure, I assume the FX did not come as a surprise to you. We would expect FX to have also a similar impact for the full year.

Our long-term track record on the next slide of our EBIT margin or maintaining our EBIT margin is remarkable. We have now, over the last decade, managed our business around 60%. We continue to target 60% EBIT margin going forward. With that, I would like to move to the next slide, talking about financials below EBIT and our liquidity position.

Today, we invested about CHF 800 million alongside our clients and in different programs and mandates. In H1, these investments generated a positive performance of 5% or CHF 45 million for the year -- for the first half of the year supported by robust portfolio performance. The net financial income was plus CHF 17 million as the positive returns were offset mostly by FX hedging costs. The tax rate stood at 16.6%. For 2023, we expect tax rate to be between 15% and 17%.

For 2024 onwards, we anticipate the tax rate to slightly increase to 18% to 19% following the OECD Pillar two implementation. This leaves us with a profit of CHF 551 million.

Now let's turn quickly to our balance sheet before I conclude. We have available liquidity of CHF 2.4 billion after $1 billion of dividend payments in the first half. This includes CHF 360 million in cash and CHF 1.2 billion in short-term loans to products. Plus, we have about CHF 900 million in an undrawn credit facility. All of this confirms that our liquidity remains strong.

This brings me to the end of my presentation. And with that, I would like to hand over to the room for questions. And yes, we take it from there and there after we...

[David Layton, CEO]

Maybe we start here in the room and then move to the phone afterwards. We start here.

[Angeliki Bairaktari]

It's Angeliki Bairaktari from JPMorgan. So a couple of questions from me, please. With regards to performance fees, I do hear your explanation with regards to why they were so high in the first half. As you pointed out, you had initially indicated that we should expect a tilt in the second half. Is that still valid?

So in other words, should we expect performance in H2 to be higher than the very high level that we saw now in the first half? Or has that now partly been changed because of the very strong realization or the very strong recognition in the first half? And second question with regards to cost. We saw a very good cost performance versus the second half of last year. So I was just wondering -- and you mentioned lower bonus accruals as well.

So I was just wondering, is there any element of a catch-up with regards to the bonuses in the second half that we should have in mind? And third question on the fundraising outlook. When you reported your AUM update, you said that you had seen stronger client conversions over the past eight weeks. Is that something that you still see now during the month of August?

[David Layton, CEO]

Maybe I'll take one and three, and then you can take question number two. So first of all, with regards to a tilt in performance fees, we still believe that the second half of this year has the potential to be disproportionately strong relative to the first half of this year. But the exit that we're currently in process with will determine if that comes through or not. And so we did have some degree of catch-up in the first half of this year, I would call that 15% or so of the performance fees that we generated in the first half of this year were a result of the catch-up effect. But the second half of this year, with the exit processes that we're running could be a quite strong period for us even in light of the strong performance in the first half of this year.

With regards to the fundraising outlook, we have largely seen a continuation of the picture that we had articulated on the last call. So the momentum continues to be good. The mandate side, in particular, continues to hum. We're quite happy with the pace of things on the client side of the current one.

[Philip Sauer]

So I think regarding the bonus growth last year, just to recap a bit where we're coming from last year, we had a double-digit AUM growth, performance of the underlying portfolio is strong, general performance, strong performance fees down. So we had room to pay a special bonus out of management fees, which we do not need to repeat this year. And because this year, if you look at the AUM growth, it's not like what is our ambition for the longer term. And I think this is well known to the organization. So when you say what is -- how do we envisage a catch-up or something like that, I wouldn't say so.

I think we steer the cost again towards that 60% margin. And that is also what you should expect going forward.

[David Layton, CEO]

Got a microphone that's correct. Maybe we'll hit this outside of the room and then up this side.

[Oliver Carruthers]

Oliver Carruthers from Goldman Sachs. Just to make sure I -- in terms of what you said correctly, Dave. So 15% of the performance fees in the first half, that was in relation to the soft hurdle rate catch-up for those six super funds got us 40 million. Okay, very clear. And then my second question was on the 60% EBIT margin target.

Should we see this going forward as an average level that you want to hit over a multiyear period? Or should we see this 60% as a level, as a target you want to hit every year?

[David Layton, CEO]

It's a great question. You can't steer a business around short-term currency moves, right? That's not -- we're not going to cut costs in order to achieve margin as a result of currency moves, for example. But over the long term, this is a business that should be performing at about a 60% margin. We also use it to steer our decisions on a year-by-year basis.

We're not going to do something unnatural in order to -- I actually think a 60% margin is very achievable for the current year. We'll see how next year develops. But it's a little bit of both, right? It's a long-term target that we kind of orient ourselves towards and it does influence decisions that we take in a given year. But we're not a short-term firm.

We're not going to take short-term measures in order to hit an arbitrary margin target. Let's just hit the room all the way down. Anybody else?

[Charles Bendit]

Charles Bendit from Redburn Atlantic. So I just wanted to follow up on that question around the EBIT margin. So it makes sense that it's a long-term target. Driving that, I just want to get a sense of what you think average FTEs should grow over the long run. They obviously grew very fast in 2022, 17%, I think that slowed down materially in H1 this year.

What's the kind of reasonable level of growth should we expect that to grow in with management fees? Is there operating leverage in the business you expect? That would be very helpful. That's my first question. The second question is on the AUM mix.

So the macro backdrop has changed significantly over the last 18 months. And can we just hear your updated thoughts on which asset classes you think is going to grow stronger than others over the next decade? And whether, if any, there are implications for the management fee margin? And then third question related to that, maybe if you could give us your updated thinking around the mix between direct versus portfolio assets going forward?

[David Layton, CEO]

So we are well resourced today. If you look, for example, our high watermark year from an activity perspective was 2021, and our headcount has increased materially since then. We're a long-term firm. At the same time, we do feel well resourced today and will not be growing our head count at the same rate that you saw it grow in the first half of this year or in the second half of last year, for example. Over the long term, though, you should expect headcount growth more or less in line with assets under management growth.

Now you have seen slightly higher headcount growth and assets under management growth in the short term, leading to that well resource dynamic that I just described, but that's how I think about that.

With regards to asset classes, clearly, this has been a year where the debt play has been very strong for our space, in particular with regard to captive insurance strategies. We've come to a conclusion that, that is not a fit for us. There have been $750 billion raised in captive insurance strategies since COVID, basically since 2020, and that has been a significant driver of assets under management for some other players in the space.

But for us, we're, let's call it, more focused on, I think, building a diversified business and growing across asset types. Now infrastructure does have particular tailwinds behind it at the current point in time. And when I sit down with investors from around the world, it almost doesn't matter where, it could be in Asia, it could be in Europe, it can be the U.S. One of the first things they want to talk about is infrastructure. So I do expect for infrastructure to grow disproportionately strong, but we're focused on growing in a balanced way across asset types and we are not letting up at all on private equity fundraising despite the fact that it's -- some people are overexposed there.

We believe that we continue to have solutions that are differentiated and relevant. So I'd say a little bit of a higher mix towards infrastructure. But overall, we're going to stay reasonably balanced.

And portfolio assets, look, we're at a comfortable level, right? For a number of years, those of you who have followed us for a long period of time, we had a strategy that was more -- it was a go-direct strategy. Where -- wherein, we've shifted our mix of direct investment from the time we were public, I think it was about 10% back then to 70%-ish level today. And I would say that strategy has been implemented. It's been implemented for several years, and the mix that we have today of portfolio investments versus direct investments is about right, to be able to meet the needs of our clients.

Many of those clients are looking not for just exposure to 10 or 12 companies like they are with maybe a traditional financial product, but they're looking for us to build a comprehensive solution for them across asset types. And the portfolio solutions are very relevant in constructing those Bespoke solutions in particular. So I think we've got a solid mix today, and I would not anticipate a dramatic shift.

[Arnaud Giblat]

It's Arnaud Giblat from BNP Exane. I've got three questions, please. In -- six months ago, you gave us an indication of the EBITDA growth. I think it was in the mid-teens for your portfolio on average. Could you update us where -- if it's still growing at that rate?

And if it's the case, can you run us through the differential in EBITDA growth versus valuation growth? Are you still compressing multiples? And are we at comfortable levels here?

My second question is on the wealth space. So a lot of the larger number of competitors have started to enter a bit more aggressively in the space. It's quite hard for us to get a clear picture if you -- where the distribution channels are? So in particularly on your specific distribution partners, are you seeing more competition from these new entrants? And is it really competition?

Or is it just not emulating I suppose, private assets to a broader audience. You also talked about six new products. If you could give a bit more detail that would be quite interesting to hear.

[David Layton, CEO]

So we have continued to see strong performance. It's not quite to the same level that we saw in 2022, but it's still double-digit. Very healthy earnings growth within the portfolio. A portion of that growth was driven through acquisition. And so that's one of the reasons why you don't see a direct translation of growth rate that's reasonable because yes, we've paid for part of that growth, and we've driven part of that growth organically.

Multiples are largely pretty consistent. A lot of people think of this year as being a very good year from a public market perspective. But let's not forget that a large part of that has been driven by multiple expansion in the technology space. The market is effectively flat. I think it's a 2.6% year so far this year, if you factor out multiple expansion within the tech space.

And so our portfolio has not experienced material multiple expansion or compression, it's been largely consistent.

With regard to the wealth space, let me shed a little bit of light on that area of the business. So the evergreen market, which is the predominant tool used by wealth clients has grown from a niche that we started effectively years ago to today about a $400 billion market and more or less, okay? We're $42 billion of that. And the distribution channels are a few fold. There's different ways to get access to wealth clients.

You can go through the big wire houses. Let's talk about the U.S. market first because that's where the battleground is at the current point in time. There's 84,000 wealth advisers in the U.S., 44,000 of them are affiliated with one of the big wire houses, okay? About 40,000 of them are independent RIAs, where the big battleground is at the moment is with the distribution with the big warehouses, okay?

And yes, there are a number of people who are coming into that space, hoping to get access, leveraging the fees that they pay to Wall Street, for example, to get access to that distribution channel. It is becoming increasingly competitive, but we have a big advantage in that we have a long-term track record. We have portfolio management capabilities that are second to none. We have the trust of those wealth advisers who have spent time with us, who have spent time on our products. And we do believe that we can defend our turf.

Now can we maintain a 10% market share in the wealth channel? No. That's probably not a good assumption.

But can we continue to be one of the dominant providers there? Yes, I think absolutely, we can. We've had competition in that space for a long time, okay? We've had big brand-name firms that have been in that space some as long as a decade. We've been there a little bit longer, right?

But some -- as long as a decade and we've been able to defend our space there, given the capabilities that we have. That is an area where if you're a novice coming in to manage an Evergreen vehicle for the first time. There's a lot of lessons to learn with regard to how to portfolio manage, how to trade off between asset classes, et cetera. And we think that we're going to continue to perform strongly in that category. But yes, there's a lot of competition there.

No question about it.

[Philip Sauer]

If I may also add. You mentioned the single line location to Evergreen. That is something that is so unique and most competition have a big struggle actually to replicate that. And with that, you have the flexibility to manage the portfolios in different points in time of the cycle and that differentiates us still quite substantially.

[David Layton, CEO]

And then the last question -- my memory -- the six new products that are launched in that space largely done in consultation with the big distribution partners as they think about their relationship with their wealth advisers, how they can best serve them, how they can create model portfolios for them to be able to leverage with different client types. There are specific holes that they have had in their portfolio, different holes that they've had in their private allocation.

And we are filling those holes with the evolution that we're driving to the market. Some of those products will be asset type specific. For example, our new Evergreen infrastructure program that we're currently warehousing capacity for. Some of them will be more ESG focused. We have what we call our Partners Group Life Fund.

It's an impact-focused fund that we're going to be bringing out an Evergreen companion to in the relatively near future and have a number of other areas that we have been evolving. And so our wealth clients should have the same range of solutions and products that our institutional clients have had historically. That's where that evolution has come from.

[Mark Rogers]

Mark Rogers from Montanaro Asset Management. Could you just explain why infrastructure seems to be such a popular asset class? I thought in light of some of the short-term developments in markets, the edge may have been taken off the attractiveness of the asset class.

[David Layton, CEO]

No. It's quite the opposite, actually. Debt and infrastructure are two asset types where maybe some people beginning of this rate hike cycle believe that they might be displaced by more traditional fixed income products. But in fact, the demand has been enhanced for both private debt and private infrastructure as people are, let's call it, more yield focused, more downside protection focused, but still want to move towards the higher end of the return spectrum in that segment of the market. So our infrastructure business, in particular, this is not toll roads and things like that at very low returns.

We're taking development risk. We're driving business platform transformation within that with a very similar mindset. Mid-teens returns is what we target in that asset type. And there is good strong demand for infrastructure.

[Sharath Ramanathan]

This is Sharath from Deutsche Bank. So I just had one pending question on fundraising. So I hear you when you reiterate your guidance, but eight months now over, would it be possible to slightly narrow down the range? Or maybe to ask it differently, how realistic do you think is eating the top end of the range?

[David Layton, CEO]

Yes. So any time you have a range, you tend to gravitate towards the middle of that range, right? And with the current visibility that we have, I think that continues to be a base case range of outcomes for us. The top end of the range could be possible if we see a further acceleration downside case, could get you to the bottom end of the range if things really get sticky here for some reason or if you have some shock to the system. But we have a range for a reason.

We're a firm that does have a culture and a track record of underpromising and overdelivering, but in this case, I think that range is merited.

[Philip Sauer]

Maybe to add. In Q4, kind of a number of flagship programs coming online. It's one quarter, whether now a bit of demand is pushed into January or February, right? It's very hard to foresee at this point in time. So from a financial perspective, whether this is now being closed funds in December or January, February does not make financially a big difference.

[Bruce Hamilton]

Bruce Hamilton, Morgan Stanley. Can I start just on the management fee margins and EBIT margins? I guess currency has further moved in the second half. So just to check, do you think the sort of 125 basis points management fees, the 61% EBIT. That's still deliverable despite that further shift.

Secondly, in terms of the -- you've been very clear on the opportunity in infrastructure and growth more generally. What about your secondary business? Are you seeing elevated sort of demand from clients there and investment opportunities, given liquidity challenges at some of the LPs? So maybe just some thoughts on that. And then finally, in terms of the debt financing market, how are you thinking about deal structures today, what debt packages are available?

What sort of deals can be supported? And can you still underwrite 20% IRRs with rates at 4% or whatever? Or is that going to be tough going forward?

[David Layton, CEO]

Do you want to take the first question, Philip, and I'll take the second.

[Philip Sauer]

So the 125 basis points, I think that is quite reasonable for the full year because we do not expect late management fees to pick up in the second half. Regarding your 61% margin, I think no. That is maybe too optimistic. I think we will see as we go on into the full year, further drag on the FX rates. So it's very likely that, that margin is now on the upper end.

So 61% probably will be lower for the full year.

[David Layton, CEO]

And with regards to secondary, maybe in the broader backdrop of how you've seen us perform over time, when we had a larger portfolio mix let's call it, going back in time to when we had a higher mix of fund investments. And that part of the business started to commoditize, we didn't scale up that part of the business at relatively low fees. We evolved into more value-added services for our clients, areas of higher differentiation. Secondaries was part of that. The secondary market started to commoditize, we didn't scale up huge at relatively low fees within the secondary business, but we migrated more towards direct investments as direct investments becomes more competitive.

We don't just scale up low fees, but we're focused on transformational investing, continuously climbing the value curve for our clients. So we can be a high-value service provider and a high-value partner to our investment partners. And that's largely what you've seen from us over and over again. We're less focused on asset management and more focused on investment content and alpha generation for our clients. And so I think that's what's driven the mix shift you've seen over time, it's been continuously climbing that value curve and even becoming more customized to meet their needs, and so we can be highly, highly valued by them and maintain a stable management fees as a result of that.

There are opportunities in the secondary business. You are seeing a mix shift from some of our clients, and in particular, mandate clients, where we give them the flexibility quarterly updates with the portfolio manager where they can sit down and we can meet their respective needs. You are going to see a mix shift a little bit towards secondaries probably in the second half of this year. We do have a number of secondary investments that are under contract.

But one of the, let's call it, tools that we're using to enhance secondary returns right now is delayed closing. And so we'll shake hands on a transaction, but push the closing time frame out several quarters and in a market that is rebounding and increasing in value that can be a way to enhance returns. And so that's one of the reasons why you see relatively low secondary volume right now, it's because those transactions are not closed, but we're leveraging the IRR with delayed time frames.

And with regard to the debt packages, we have been I'd say, reasonably pleased with how the debt market has continued to develop. We have a $1.4 billion financing that's going on right now. I just talked with our team about it yesterday, and we believe that that's going to get done inside of the expectations that we had set at the start of that financing process.

And so once debt levels get back to that level, we can support by and large, most of the activity within our portfolio. Our largest portfolio position is about €9 billion, just to give you a sense. Some of the smaller positions are €200 million-ish size, but about a $2 billion enterprise, that's about the sweet spot for our portfolio side. So as soon as the debt markets get back to consistently being able to finance $1 billion, $1.5 billion, we're quite pleased. I think it's going to be probably some time until the mega packages come back, but middle market, I think, is well supported for an environment.

[Hubert Lam]

It's Hubert Lam from Bank of America. Just one question. Can you discuss the recent SEC proposals around greater disclosure, around quarterly performance, around contracts, pricing, et cetera, how it impacts you and the broader industry?

[David Layton, CEO]

So we have 600 new pages of regulation that hits our industry and it is material. We have reasonably standardized pricing across our various programs. We've, I believe, been less opportunistic than some of our peers. But effectively, what this means is life is difficult for a small manager today. It's increasingly difficult.

It's already been competitive. It's been very hard to compete a meaningful number of smaller funds are failing in their fundraising attempts today. And so one of the things that this is going to drive is more consolidation within our space. okay? We're in a sector that has 11,000 market participants in it, okay?

11,000 different private market firms. And today, you have a handful, 24, 25 that are raising most of the capital that's being accumulated at the moment. And this regulation just, I think, further drives the natural consolidation that we're already moving towards within our space where the big platforms are going to be able to put the infrastructure in place to meet that regulation and the smaller firms will struggle.

[Isobel Hettrick]

Isobel Hettrick from Autonomous Research. I have three questions, please. So you talked about tailwinds to mandate fundraising and also six new Evergreen program which you're going to launch. So is it fair to say that Bespoke client solutions will account for the majority of fundraising in the short term? And how do you expect that mix to change over the medium to long term?

And then secondly, we've already touched on your competitors entering the private wealth space and also more U.S. managers looking to expand into European private markets. So can you talk to us about how you retain your staff and also higher positions that you want to fill, given the expertise that they will have and competitors will look to take? And then finally, you talked about how performance fees for the second half are going to be dependent on exits. So can you just give us some color on how that has -- how that market has developed so far this half?

Or do you expect more activity to be in the later months of the year?

[David Layton, CEO]

Okay. So the first question, I can't read my notes. Can you say the first question one more time?

[Isobel Hettrick]

So just basically the fundraising mix, short and near term.

[David Layton, CEO]

Okay. Sorry. The fundraising mix, I think, will largely follow the trajectory that we've outlined in the paper. It's already the majority of our fundraising, okay? 68% in this period and that is a disproportionately high mix to what it's been historically.

So continues to shift towards Bespoke solutions. And we're not a firm that is going to dramatically change overnight in one direction or another. So I would take a look at that historical development and feel pretty good about extending that out over the next couple of years. But yes, certainly, the majority of fundraising coming from Bespoke solutions at the current point in time and moving forward. With regards to -- sorry, what was the second question again?

Private wealth. So if you think about the different areas of structural growth, it's shifting, right? The supply-demand dynamics for different positions and different roles can change over time. As our industry was building up investment capacity, a very, very aggressive pace in 2021, for example. There was a big shortage of investment professionals that were able to kind of drive investment volume.

That's less of a factor today that there is just less investment volume to go around and people are reasonably well staffed with regards to investment capacity. But it is the business development functions and probably the wealth channel being one of those that many people are targeting where the supply/demand imbalance shifts towards. And I think we've got a good track record of being able to smell where the needs are and to be able to retain the key positions that we need to retain and be able to attract new talent that's necessary to grow.

And so I don't worry broadly about the supply-demand dynamics. I think we're in a very healthy place. We're at a point of institutionalization within the private markets. And I think we're one of those institutions that's going to drive and shape this next decade of activity within the space. And I don't think -- I don't see any, let's call it, talent shortcomings that we would not be able to meet or fill as a result of the business plan that we've laid out.

I think it's very good.

And with regard to the exit market, it's okay-ish at the moment. I think where you see strong demand is for A+ assets. We're not going to try and bring second tier, third tier assets to the market. I mean, clearly, this is an environment where you want to bring the top quality businesses, and there is indeed a market for those. And so we're early still in the exit processes, but feel good about the level of responsiveness and demand that we're seeing.

And with that...

[Philip Sauer]

I think there are two more questions on the phone and then...

[Operator]

[Operator Instructions] The first question comes from Daniel Regli from ZKB.

[Daniel Regli, ZKB]

Can you maybe talk a bit about the longer-term outlook on performance fees and fundraising into 2024, given you're expecting a rather benevolent environment in H2 2023, how long can this last, particularly with regards to performance fees. And also on fund raise when I just take what you just said and we are aiming for the middle of the range for this year, this would mean like $11.5 billion for H2. And if I now assume you continue in this space, this would get me to $23 billion into 2024. Does this sound like a reasonable number mid- to longer term in terms of fundraising?

[David Layton, CEO]

So with regards to the longer-term outlook for performance fees, obviously, with the infrastructure cylinders coming online, we feel good about our ability to continue to generate performance fees. And what that means is that every realization is that much more likely to result in performance fees over the second half of this year. So we feel very good about the 2023 outlook. 2024, I think remains robust. And then beyond that, it's a little too early to discuss, but we continue to like the way that our platform is developed from an ability to generate consistent performance fees.

And from a fundraising perspective, this is an off year. I mean, let's just be -- this is a year where we're going through a tremendous amount of transition as an industry. This will be the first year in decades where we won't see growth in allocations from institutional investors, and that's where that's throwing a lot of firms in different directions. But I reaffirm what we discussed on our last call that we are a platform that believes that it can grow assets under management by 10% to 15% a year. And so I would not draw a straight line from this year into next year, but I would take that guidance of 10% to 15% growth because that's the level that we think we'll be running at our potential.

And I think this is the type of environment that we should be able to support that. That wraps up, I think, the calls that we have over the phone...

[Philip Sauer]

There's one.

[Operator]

The last question comes from [indiscernible] from UBS.

[Unidentified Analyst]

I've got two quick ones. You're in the market for two new Swiss franc corporate bonds. Can you elaborate on the use of proceeds for these? And following up on the private debt comment, how healthy do you view the market overall? I mean, are you seeing any increases in default rates like you can see in the high-yield market at the moment?

[Philip Sauer]

Yes, I can do that quickly. I think the corporate bonds we issued used for the same purpose all over, we use that capital to actually for corporate purposes. Most of the time, we use them for bridging facilities to loans and products. The reason here is simply liquidity management, cash flow services for clients. And given that our platform has grown, the demand for these services has grown and when we raise a bond that is naturally that we use that for the same purpose as we use the other old bonds.

[David Layton, CEO]

And with regards to default rates within the private markets, no, there's not been a material spike. There's been a few large defaults, particularly in the health care space, which we've been involved on the restructuring side, but not an uptick. Now having said that, the terms within private markets, particularly leading up to this current environment have been particularly flexible. And so you would not expect for similar economic conditions for the default rate to be comparable with the public market. You're going to see more abilities for sponsor secure and more flexibility within private debt terms than any of you might be surprised.

But no, we're not seeing a big spike though in defaults within the private markets. And with that, we'd like to thank everyone for participating. Thank you for your interest in our company and thank those of you in particular who are present in the room here today. It's a pleasure to be with you, and we look forward to the next update call. Thank you very much.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.