P10 Inc (PX) 2022 Q2 法說會逐字稿

Hello, and welcome to the P10 Second Quarter 2020 Conference Call. My name is Jason, and I'll be coordinating your call today.

I will now hand you over to our host, Mark Hood, EVP of Operations and Investor Relations. Mark, please go ahead.

Good afternoon, and welcome to the P10 Second Quarter 2020 Conference Call. This is Mark Hood, EVP of Operations and Investor Relations. Today, we will be joined by Robert Alpert, Chairman and Co-CEO; Clark Webb, Co-CEO; Fritz Souder, Chief Operating Officer; and Amanda Coussens, Chief Financial Officer.

Before we begin, I'd like to remind everyone that this conference call as well as the presentation slides may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect management's current plans, estimates and expectations and are inherently uncertain. Actual results for future periods may differ materially from those expressed or implied by these forward-looking statements due to a number of risks or other factors that are described in greater detail under Risk Factors in our annual report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 21, 2022, and in our subsequent reports filed from time to time with the SEC. The forward-looking statements included are made only as of the date hereof and we undertake no obligation to update or revise any forward-looking statement as a result of new information or future events, except as otherwise required by law.

I will now turn the call over to Robert.

Good afternoon. I'm Robert Alpert, Chairman and Co-CEO. Today, we will discuss our strong second quarter 2022 financial results and the continued momentum we are seeing in the market from a fundraising and deployment perspective and share why we believe P10 is well positioned for continued organic growth. We delivered exceptional results in the second quarter and performed well across each of our strategies. Gross fee paying assets under management increased by $1.2 billion, offset by $299 million of fee step-downs and expirations, and we ended the quarter at $18.5 billion, representing a 30% year-over-year increase.

Organic fee-paying assets under management grew by $3.4 billion or 22% when compared to the second quarter of 2021. On a year-over-year basis, revenue increased 38% with GAAP net income increasing 351%. Adjusted EBITDA increased 52% and adjusted net income essentially doubled. With our continued business momentum, we are well positioned to meet our expectations to raise approximately $5 billion over the course of 2022 and 2023. Because of our financial model, which generates growth and strong free cash flow, we continue to look to optimize our capital redeployment through M&A, debt paydown, share repurchases and dividends. To that end, the Board of Directors today declared a $0.03 per share dividend payable September 20, 2022, for the holders of record as of the close of business on August 29, 2022.

Now let's hand the call over to our Chief Operating Officer, Fritz Souder.

Thank you, Robert. We had an excellent quarter of fundraising and deploying capital, which I believe highlights the attributes of our business model. First, we invest in middle and lower middle market, an environment we know really well. By focusing on our segment of a large and growing market, we leverage and hone years of experience in market intelligence. The time tested relationships we've nurture and built with GPs and fund sponsors over multiple decades means our deal flow is unique and we believe best-in-class.

Trust and relationships mean we get access to secondary, direct and co-invest deals that others may not see. And this access to elite access-constrained managers and deals translates into superior fund performance that drives LPs to continue to entrust us with their capital. Our strategy is to invest with and alongside GPs who have a competitive advantage, great track record and proven experience successfully managing through various market cycles. For the period ending March 31, 2022, our fund performance remains strong, which helped to support our fundraising efforts and our position as a market leader.

Another key element I want to highlight is our strategic diversity and broad product set. P10 does not depend on any one strategy or fund to drive growth. We have a variety of contributors to our asset base and revenue stream. For example, in the second quarter, we had more than a dozen funds in the market, and some of those funds are countercyclical, such as our NAV lending funds. Larger contributors to fee-paying assets under management in the second quarter were our GP stakes strategy, Bonaccord Fund II, which held its first close at $367 million, RCP Direct 4, which held its final close at $645 million and continued growth in our venture sector.

Turning to deployment. We continue to see strong deal flow and quality assets. Since private equity assets have slowed, we've seen sponsored using credit and NAV loans as a way to fund portfolio companies and bolster returns as the whole periods lengthen. We expect to see continued growth from this credit sleeve, especially as spreads widen and duration length. Finally, I want to thank our GPs and LPs for their continued support. The success of our business depends on superior market intelligence, data and relationships. And the most important of those factors is relationships.

I will now turn the call over to my partner Clark Webb.

Thank you, Fritz. We believe recent market volatility highlights the strengths and durability of the P10 Financial model. From the beginning, we set out to build a financial engine that, in many respects, mirrored a compounding bond with highly predictable contractual and growing revenues, visible and manageable expenses, limited CapEx and tax leakage and very strong returns on capital. While we believe the model works well in robust markets, we shine in times of market turbulence. Q2 is a great testament to that.

As we have discussed in past calls, a highlight of P10 is our impact business, enhanced capital as a pioneer and impact investing for over 2 decades, Enhanced is committed to achieving quantifiable impact across the U.S. lower middle market, while meeting investors' goals through investments in small business lending, impact real estate and climate finance. On July 11, we announced that enhanced and Crossroads Impact Corporation meaningfully expanded their strategic relationship. We encourage our P10 shareholders to read that announcement.

What this means for P10 is that we now have a permanent capital vehicle that also provides access to the retail channel, given Crossroad shares are traded on the OTC. The transaction has the opportunity to provide nearly $500 million in dry powder that will earn fees and add to our fee-paying AUM as the capital is deployed. We think the announcement is yet another milestone for P10 and further strengthens our position as a leader in middle market impact investing. While organic growth remains our core focus, we continue to evaluate acquisition opportunities.

As we like to say, this is a marriage and it's best not to pressure discussions. We are busy, but we will remain patient and disciplined, looking only for the right partner with the right win-win transaction structure and price.

With that, I'll hand it over to Amanda to walk us through some of the quarter's financial highlights.

Thank you, Clark. For the second quarter of 2022, fee paying assets in the management were $18.5 billion, a 30% increase on a year-over-year basis. In the quarter, $1.2 billion of fundraising and capital deployment was offset by $299 million in step-downs in exploration. As a reminder, step downs and expirations are a normal part of our business and typically take place at the end of the fund’s life. We expect an additional $290 million in step downs in expirations for the remainder of our fiscal year.

Revenue in the second quarter was $46.7 million, a 38% increase over the second quarter of 2021 due to the increase in fee-paying assets and management from both organic and inorganic growth with the acquisition of Hark and Bonaccord having closed at the end of Q3 in 2021. Average fee rates were 103 basis points, with the increase being primarily driven by $800,000 in cash of fees attributable to several fund closings.

As a reminder, when you look out across the cycle of 4 quarters, you should see our fee paying assets under management deliver approximately 100 basis points of revenue. Operating expenses in the second quarter were $31 million, a 21% increase over the same period a year ago, primarily driven by additional comp expense associated with the acquisitions of Hark and Bonaccord an increase in stock-based compensation expense from 2022 annual options and restricted stock unit awards and an increase in general and administrative costs from higher premiums for (inaudible).

GAAP net income in the second quarter was $11.2 million, a 351% increase when compared to the second quarter of 2021. The increase is primarily attributable to the increase in revenue due to Fee Paying AUM growth, margin expansion from 51% to 54% for the first half of 2022 compared to 2021 and an $8 million reduction in interest expense due to debt paydown and the lower interest rate from the debt refinanced last December. Adjusted EBITDA in the second quarter was $25.7 million, a 52% increase over what we reported in the second quarter of 2021. For the quarter, our adjusted EBITDA margin was 55%. We plan to continue to reinvest in the business while targeting an overall 55% annual margin.

For the second quarter, adjusted net income, ANI, was $23.2 million, a 99% increase over the $11.6 million reported in the second quarter of 2021. We believe our results this quarter continue to demonstrate our ability to efficiently convert $1 of adjusted EBITDA to adjusted net income due to lower debt costs from our debt refinance last year and minimal tax leakage as a result of our tax assets.

As a reminder, our tax assets are composed of 2 distinct assets, a $212 million net operating loss and $306 million in remaining tax amortization. Taxable income is reduced first by our tax innovation and then further reduced by the NOL tax asset until the NOL is utilized. Goodwill from acquisitions was amortized over a 15-year period and should continue to grow as we complete additional acquisitions. Cash and cash equivalents at the end of the second quarter were $23.6 million. We paid down $12 million on the revolver in July, leaving $125 million outstanding on the term portion of our loans and $53.9 million outstanding on the revolver.

We currently have $71.1 million available on the revolver and $125 million potentially available as an accordion feature on our credit facility. We expect to use the cash available from operations to continue paying down debt, paying quarterly shareholder dividend, potentially utilizing the stock buyback announced last quarter and for future acquisitions. In the quarter, no shares were purchased under the company's $20 million stock buyback program. Finally, on our share count at June 30, 2022, Class A shares outstanding were 3,737,745 and Class B shares outstanding were 79,761,550.

I will now pass the call back to Robert.

Thank you, Amanda. Now let's turn it over to the operator for a few questions. Operator?

(Operator Instructions) Our first question comes from Ken Worthington with JPMorgan.

Maybe first on capital deployment. You put those stock buyback program in place last quarter. You didn't buy any shares last quarter. So what are the thoughts there? It was a tough time in the market, I don't know just what are the thoughts?

Yes, Ken, great question. I would say 2 things and others can add as well. First is we were in a quiet period for a lot of the quarter. And then the second thing is we certainly had an order in there just wasn't filled. So we do believe that returning capital to our shareholders in the form of buybacks is a good decision when it makes sense. Obviously, we continue to declare our quarterly dividend, and we have what we believe is ample firepower for M&A. So we feel good about all 3 pistons running, and I would just say stay tuned on all 3 fronts.

One other consideration, Ken, when we think about that buyback is as we have some large shareholders, like what you see them in the 13s, if there are any large blocks of stock available, we're very cognizant about the liquidity in our stock. And so we wouldn't want to just pick away at 1,000 shares here or 100 shares there. So we were very cognizant if there was any large blocks. We would be interested in deploying meaningful capital there.

Okay. Great. And then assuming I did the math at all correctly, P10 generated, I think, $900 million or so in net commitments this quarter. I believe about $700 million of gross commitments was from funds largely Bonaccord. So maybe first, talk about the momentum that you're seeing on the separate account side of the business and maybe any outlook you have in the coming quarters -- coming quarter, I'm sorry. And then the big fund sales were in Bonaccord and the first close look great. So how are you kind of feeling here about your target for Bonaccord given kind of broader fundraising market conditions and how that might impact things?

Yes, great question. I'll start and others can chime in. When you think about P10, I think it's really important to think about the ecosystem in total. I think we said in the script that we had a dozen strategies raising capital in the quarter. Some of those are more cyclical, some are more countercyclical and some are acyclical. We do not rest our laurels on any one strategy, any one fund. I think it's another reason why we really see ourselves as a solutions provider. If you take lower middle market private equity, for example, we are surrounding that market with the primary fund-to-fund secondary co-invest, seeded stake and some other new strategies that we're launching, doing the same thing in venture, doing the same thing and impact in terms of lots of different ways to win.

So broadly speaking, we are not looking at a single fund to hit our numbers. We're looking at the portfolio approach because we do think we have a lot of funds that are attractive to folks. We think Q2 is a great testament to that, raising nearly $1 billion is a big number in a quarter that we feel like was volatile to say the least. We still have a number of those funds that are open. We feel great momentum across the board. That being said, we recognize that there are challenges in the macro environment.

So our goal is we want to hit our numbers for each of our strategies. The funds will stay open as long as they need to, to do that. We don't see a single fund right now that we're struggling to hit the numbers we'd like to hit. In many cases, we're hitting our hard caps. I think Direct 4 in lower middle market is a great example of that, actually hit the hard cap, expanded the hard cap, got LP approval to do so. So I feel very good across the board about all of our funds. We're sticking to the $5 billion over the 2 years.

Lastly, on Bonaccord in particular, we’d prefer not to talk about individual strategies and caps. We're very excited about the first close, approaching $400 million. We certainly expect that fund to be open into 2023. And you can see how Fund 1 is performing, and we feel very excited about what's already in the ground in Fund II. So that fund is going to remain open for a handful of quarters, and we think that fund should be nicely larger than the predecessor fund, which was $750 million.

Our next question comes from Michael Cyprys with MS.

I wanted to go back to the Crossroads partnership that you mentioned the opening script. I was hoping you might be able to expand a little bit on that partnership, how it works, how you might deploy the $500 million that you referenced and what the economics are for P10?

So within -- with Crossroads, think of Crossroads as our publicly traded LP, we raised a fund from 2 investors, as you will note in the press release around that and invested that capital directly into Crossroads. So Crossroads becomes our publicly traded permanent capital vehicle. As Enhance goes about originating solar loan -- any impact loan or investment, they will put it on the Crossroads balance sheet. And there is a -- enhanced earns a fee -- a management fee and a carry just as if it was a regular LPGP structure.

And I would just add, it is -- we think it is transformational. When you think about what Crossroads is, it is a publicly traded B Corp, also a CDFI community development financial institution. What it does for society is extraordinary. And we do think in the press release you saw that Crossroads is exploring options for a potential uplifting in the future. We do think in the public equity world, there's a dearth of real ESG and impact opportunity, and I'm sure folks have read about that in the press. We think having a publicly traded CDFI, a publicly traded DCOR with an extraordinary multi-decade track record and then marrying that with the enhanced manufacturing of impact assets, we think that could be a real long-term win for Crossroad shareholders and for Enhanced and P10 shareholders alike.

Great. And just as a follow-up question, I was hoping you might be able to talk about broadly retail product initiatives, just kind of where you guys stand on that today. And as you look across your products at which of your existing products or strategies you think could be the most meaningful driver of flows from the retail channel from your existing product set? And as you kind of look at over the next 3 to 5 years, what new strategies or areas could make sense to bring to the retail channel?

Yes. So right now, I would think of it as we really have 4 different pistons in retail. Now these are early days. And so we don't believe that they are moving the numbers as of yet. One is obviously the relationship that we announced with Crossroads. That is about as retail as you get, especially to the extent that Crossroads elects to pursue an uplifting in the future. So that's one channel. The second is the large platforms, the wire house platforms where we are becoming more successful putting some of our product on those channels, and we do have some wins there, which we hope will grow in size.

The third is we are looking at the interval funds and making progress there may not be a P10 branded interval fund, but I certainly want to participate in that arena. And then the third is we're trying to create partnerships with RIAs, whether they're large or small and even create the spoke product that can take advantage of multiple strategies that we have. So these are all early days. Our peers are miles in front of us, but we do think it's a large and growing market. These are not in the numbers yet, and we feel like they can only get better. So lots of focus on that, but I think this is a multiyear story, not a multi-quarter story.

Our next question comes from Robert Lee with KBW.

Great. Good afternoon, everyone. I hope everyone is doing well. Maybe my first question will be just on fundraising. Just kind of curious, I guess, it's really only over the last couple of years that the various businesses came together. And I know one of your goals is to kind of maybe get more cross selling, so to speak, out of it. Do you have any -- I don't know if there's any kind of statistics or anything you could share in terms of as you look -- as you fundraise now, how often you're seeing new commitments come to, let's say, RCP that didn't previously invest on that platform?

Yes. Great question. We certainly track it to the pending as our sales force is going task. It's not something that we are publicly providing. But certainly, I think we can give some broad strokes. We are absolutely seeing the initial fruits of cross-sell. We -- I think as we've talked about, we feel like we do have a very strong European platform. And only one of our verticals really has raised capital from Europe historically, our private equity vertical. And so we have been very active bringing our teams over to Western Europe, and we are starting to see meaningful capital come in, in the form of fund commitments and separate accounts.

We also believe that we've been able to take, especially a product like Hark and NAV lending product, which is just not well understood. Most LPs are not aware that, that's an option. And as you see in the results, we believe that NAV lending continues to grow at a very nice rate for us and we are absolutely seeing cross-sell there. And then Bonaccord, the GP Stakes Fund II. We had a very nice first close. I think it's more than 50% the size or roughly 50% the size of the entire Fund I, and that certainly has been a team effort. So we are seeing the beginnings of the cross-sell take hold. But as you know, these are -- I think it’s first referenced in the script, these are relationships. And we want to make sure that we're talking to the right people at the right time and that takes years. So we believe it's early days. Again, we all see this, whether it's retail or cross-sell. We think we've got very good results right now, and we think there's a lot to build upon.

Great. And maybe at the risk of focusing a bit too much on one of the businesses, but can you keep talk a little bit about the VC market. Obviously, there's been a lot of pressure on a lot of VC investments last 6 months or so? And how is that impacting, if at all, your fundraising for your DC products?

TrueBridge, we have not seen a near-term slowdown in that, given our ability to access the premier venture capitalist, it has not been a -- we have not seen a big slowdown in that. Now you're talking about a reaction to this quarter's market volatility or this first 6 months market volatility. And if you think about the fundraising cycle, how long that is, we've been in the market out raising capital, meeting with LPs and explain the story.

So we have not seen that. That's not to say that we wouldn't -- we've certainly seen markdowns in valuations in the venture world and whether investors react to that and don't pull back. But we have not seen that year-to-date with TrueBridge or any of our venture products.

Okay. Great. Then maybe one last question. I know this is not a number you've disclosed in the past, but you did mention with Crossroads the, I guess, the dry powder potentially of about $500 million. You mean obviously, probably some other products. But can you maybe update us on the amount of -- just kind of drawdown dry powder you have? Because, I mean, clearly, deployment has been helping to grow fee paying assets. So just trying to get some sense of kind of what's been raised or committed and what kind of the potential is just drawing down on what you already have in the bank, so to speak?

Yes. That's probably -- the Crossroads relationship is probably our biggest drawdown dry powder opportunity. And clearly, we just signed that. So it's -- we have not deployed capital very quickly. We -- so I don't think it's going to be -- I don't think it will be dramatically higher overall.

Our next question comes from Chris Kotowski with Oppenheimer.

Just wondering on the occasion of the first close of the Bonaccord Fund II. I wonder if you could talk a little bit about the dynamics in that business a bit more. And I'm wondering specifically, I mean, you said that you expect the fund rating to go on into next year and we end up with more than in Fund 1. But I was wondering, is Fund I fully turned -- fully committed already. I see in the table telling me 47%. And then like have the fees on Fund II turned on? Or does that happen sometime in quarters in the future?

On Bonaccord Fund I, it is fully committed, but only 40% -- 46% drawn down. So that's -- I think that's the answer to the second part of your question. The first part of your question was around Bonaccord II, correct?

Well, yes, I guess I'm wondering, a, have the fees turned on? And then should we expect this pattern that we see with some other companies that as more people come in, that they're going to be (inaudible) as you kind of future closings.

Yes. Yes. The fees in Bonaccord II have turned on, and we will have catch-up fees. We will have catch-up fees in our numbers as more investors come into that fund.

Yes. And one I would like to clarify -- sorry, one thing I would like to clarify our catch-up fees are actually $1.80 billion for the quarter, and I believe I said 800,000. So I just want to clarify that.

Okay. And then I guess just in sort of general on Bonaccord, just I'm curious like when you make an investment there, is there an average kind of check size that you target and percentage ownership in the manager? Or is it all different kinds of investments?

You teed us up (inaudible). Thank you for that. Yes. So we find it fascinating that we have the opportunity to be the market leader in middle market GP stakes. I think everybody on this call is well aware of the success of our much larger brethren up in a large part of the market (inaudible) just done an extraordinary job. They are in the upper end of the market. And the middle market has really been illiquid for the last number of years. We hope that we are the liquidity provider. In Fund I, we have 9 extraordinary GPs. It's a global fund. It's across private equity and real assets and private credit. And you can see the results, we think it's off to a great start.

Fund II, we already have 2 assets in the ground, and we think that they are premier GPs and a very strong deployment pipeline as well. So I think we'll be active before the end of the year. So it is a market we believe is beginning to become liquid. We think we can be at least a, if not b, primary liquidity provider. And we do think this strategy fits really well within P10. Obviously, our entire business model is built upon interacting with GPs and being a partner of choice, no better way to be a partner of choice than a minority owner.

And each of the deals is bespoke. They work with the manager and craft a solution for their particular needs and strategy. So it's not all cookie-cutter just straight up.

Okay. And then the last one for me is I see you on the front tables RCP 17 appeared. And I guess it strikes me is somewhat unusual for you to have more than one fund per vintage year there. Is there a reason for that?

Yes. Fund 16 grows -- you go ahead, Fritz.

That being said, I can handle that. Fund 16, the RCP model is really to continuously be in the marketplace. So Fund 16 closed right around the end of the first quarter, maybe it was early Q2 and is tradition over the last 20 years, we then begin to open up Fund 17. So it's constantly in the market. Fund 16 now is fully invested, and that is invested in other funds. So it's very lightly drawn. It will be drawn out over 5 years, but we're now investing at a Fund 17. We had a small close here right at the end of Q2, and we have another close coming here very shortly, if it's not already, but on pace with that is matching our historical levels. So that's just continuing of what we've done for the last 20 years in that model.

Our last question comes from John Campbell with Stephens.

Congrats on the continued momentum. Back to the expanded relationship with Crossroads. That was a great development for you guys, obviously. But a few months ago, you guys had the RCP and Eaton partnership, just in like your appetite is maybe building for these strategic partnerships, but I'm curious about how important these are to you and whether we should expect a continuation of new or maybe expanded partnerships kind of moving forward?

Well, every relationship is important to us. So you're absolutely right about that. It's -- as opportunities present themselves, we will try to take advantage of them and try to create win-win situations with new partners. And so we absolutely -- it's certainly part of our strategy moving forward. But the -- it's much like our acquisition pipeline. It is not a cookie cutter and it's episodic and opportunistic, and it takes the right partners, and we view our acquisitions as marriages and we've used these strategic relationships as marriages. So it takes a while, and there's a lot to -- that goes into them to get them to where we can actually announce something.

Yes, makes sense. And then 2 quick ones for Amanda. As far as the exploration step down, you said the 290 for the back half. Any sense of how that's going to break down between the 2 quarters?

Yes, I think generally in the end -- towards the last quarter.

Okay. And then you also mentioned -- you called out the 55% EBITDA margin target. I don't know is that more of a kind of managed to intermittently over time? Or is that something you're feeling like it's still a good mark for this year? I mean I think in the front half, you guys had 53.5% EBITDA margin, looks like you might maybe get 56.5% in the back half. So just any kind of call out from that?

Yes. I mean I think as we expect to have double-digit growth, we will likely see some upward pressure on the margins, but we will continue to reinvest in the business. And so we still expect to target 55% for the year.

Thanks, everyone, for joining our quarterly call. We look forward to speaking to you. We will be at the Barclays Conference in September, Financial Service Conference in September. So we hope to see you there. Otherwise, please reach out with any follow-up questions, and thank you for joining.

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.