Ladies and gentlemen, welcome to the Princess Private Equity Holding Q1 2023 investor conference call and live webcast. I am Alice, the core call operator. I would like to remind you that all participants will be in listen only mode. The conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing * one on your telephone. Webcast viewers may submit their questions in writing by the relative field. For operator assistance, please press * zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Felix Halmer. Please go ahead, sir.
Thank you. Good morning, to this quarterly conference call on the results of the first quarter of Princess. My name is Felix Halmer. I'm a director of Princess, and I'm a advisory partner to Partners Group. To recap, what is Princess about, we have the objective to outperform global public equity markets by about 5% on a net basis per year over the mid to long term period. By now it's really the direct investments in the portfolio that are the main driver of expected outperformance to public market. If you look through, on a kind of a quasi-consolidated basis, the EBITDA margins and the top line growth of the portfolio, consistently displays above 20%.
By now, the transition to direct portfolio is complete. The future performance is fully driven through operational value creation. We invest across multiple sectors. All of them should benefit from structural changes and secular growth. At all time, at Partners Group, we are sourcing our portfolio companies on a thematic basis. At all time, we endeavor to have about 40 to 60 specific themes that create the foundation for a strong investment pipeline and long-term portfolio performance. You will have noticed that the first dividend payment for this financial year was declared at EUR 0.365, and it's payable on the second of June.
This is to kind of to fill the claim of the objective to pay 5% of opening net asset value semi-annually, which was confirmed earlier this year. The prospective dividend yield for this year is in excess of 7% at the current share price. Before I dive into the portfolio and the first quarter movements, let me share with you some, let's say, market observations on the private markets versus public markets. We did so actually also with our institutional investors at our Vienna conference and with our Partners Group Holding shareholders more recently. There's actually also a white paper that was published by our firm, written by our chairman, and that can be downloaded on Partners Group Holding's website.
Let me just summarize some of the key findings or observations. Look, the starting point is probably or the observation is that public and private markets are almost changing roles in financing the economy, particularly the real economy. If you look at, and we are really looking at the financing of the new financing. I'm not talking about, let's say, incumbent old companies that have been in the market for years and so on. Traditionally, the IPO market, the IPOs, the IPO was a kind of a strategic corporate development as we've observed it the last, let's say 40 years. Whilst where a company with a kind of a mature business, a proven business model, went public. It went through...
There were all industry sectors were represented, and it were typically profitable companies with a solid earnings history. Now to the bottom right, what we observe today is that IPOs are much more kind of unprofitable businesses, often kind of hype companies, a bias towards technology, and by that no longer the same we observed maybe 40 years ago. I'll come to that in a bit more detail. The private markets, quite to the opposite. About 40 years ago, some of you will remember, it was mainly about acquisition of undervalued consumer or industrial businesses. We put a lot of leverage into them. There was not really a financing of the real economy involved. It was more like, let's say maybe a cleanup exercise of public markets. Today, it's the top right.
Private markets look very differently. Today, it's about long-term driving the broader economy. It's a focus on profitable companies and assets. All industries are involved, including real asset sector. We're longer term-oriented, lower leverage. We focus on value creation. We focus on profitable companies. Honestly, an investment by Partners Group, and by that by Princess, is probably more strategic for our portfolio companies than an IPO used to be. Roles, in our view, have completely changed. I would like to show you this in maybe an example as we basically divide between companies that we call more foundational and others that are more kind of in the spotlight. Well, it resembles at least to some extent to an iceberg.
All of us know that the bottom of the iceberg is much larger than the top. This shows our view on the composition in the two categories. Foundational companies in our view are, let's say, producing companies. They are helping to produce a product. They render a service. They provide a process. For example, in the food value chain, where you have an example here, it would be more like it would start from, well, agriculture business, the food packaging, food processing. It goes up to restaurants, retailers, and all the full supporting industries. Spotlight companies, in contrast, are very different. They typically take something existing through some sort of platform approach, deliver something, like for example, DoorDash or Uber Eats.
They also may create new IP that has no real application in today's ecosystem. This is not judgmental. They can become great companies at both ends. Why is it so important? The observation is that IPOs, so initial public offerings today or in the last 10, 20, 30 years, give much better valuations to these spotlight companies. We investors may think or hope that the winner takes it all will pay out. As an observation, we just see that IPO markets have a preference for these businesses, whilst private markets firms focus on foundational businesses. Foundational businesses can be valued at maybe EUR 2 billion, EUR 3 billion, EUR 4 billion, maybe EUR 5 billion. By that, at the size, they can be financed by private markets and private equity. They don't get the valuations of spotlight businesses.
They probably get about the same valuation, would get the same at, at an IPO, certainly not less. These businesses, for just being financed, they have no reason to IPO, certainly not for valuation reasons. There are a number of reasons why these businesses don't wanna go public. It's easy to give some evidence to this observation. On the next page, you will see kind of the number of IPOs. You will observe from the blue bars, whilst there have been some volatility, the numbers of IPOs has come down massively, from 1990 to today.
If you drill down a bit further, IPOs in this period were either very large, let's say EUR 30 billion, EUR 40 billion plus, and by that, certainly too large for private equity to finance, and/or they were just more spotlight companies. Another way to distill it is on the right-hand side. Where we look at the profitability of the companies that were IPO'd at their time of IPO, and what you can observe is that profitability came down from 1990 to today to about 20%.
Hence, another piece of evidence for why the IPO, the private markets world has developed like that, and why spotlight companies have been in the focus of the financing through public markets in more than just the recent years. Now, we make the claim that the new economy, as far as new businesses are concerned, is increasingly financed by private markets.
We see on this page, basically a number of the themes, the clusters, the ecosystem clusters, the transformational topics, or as we refer to as themes, in our four in-industry verticals: goods products, technology, health and life, and services. Again, for example, for the food value chain at the top right, most of the activities in this theme are actually fairly foundational. That's why also the little iceberg you can see is colored at the bottom. This would say the majority of the companies we see in this sector, in this theme, are foundational, and by that ultimately targets of private equity.
You see some other themes where actually also the bottom is colored, and by that more foundational businesses can be spotted. Some of the themes there you will see both more spotlight and foundational activities. Some might ask as to whether if this is just an observation that is kind of temporary, maybe driven by kind of central banks, the interest rates or whatever. If you look at the next chart on the left-hand side, what you will see is, there's come kind of a trend line. A trend line in terms of financing. Private markets, for example, have grown independent of a low rate environment. Fundraising in recent years has exceeded by far the global equity issuance, so that's like the gray bars.
IPOs, IPO firms have decreased in profitability over time. The reddish bar, of course, with some volatility around the internet bubble and around the global financial crisis. Interestingly also, buyouts have increasingly utilized less leverage. From the nineties, where we had 80%-95% leverage, to today, where it is often less than 40%. Rates, finally, well, in all this period, there were only a couple of years where there was a zero rate environment. A potential explanation is on the right-hand side, where you see what basically created the value in public market versus private markets. What you can observe is that, for example, in the last.
while in the 10 years of observation, the public market benefited disproportionately from valuation changes. About 59% of the value was valuation changes, whilst and quite counterintuitively in private markets, this was only 25%. The bulk of value creation was by EBITDA growth. And as investors, Princess investors will know, this is basically where Partners Group is focusing when it comes to working with portfolio companies. Where does it bring us to? We believe actually that private markets is to some extent the new traditional asset class. If you wanna be invested in core companies, this is no longer what is being IPOed, but it's maybe much more what is sourced on a thematic way.
The thematic investing approach, private market firms like Partners Group employ and where Princess is a carrier, which then is executed by an entrepreneurial ship at scale. By that, all of this looks then much more like an industrial type of activity as opposed to a kind of a corporate finance or financial engineering activity private markets firm used probably in the 1990s and 2000s of the latter.
By that, we probably behave much more like the successful industrial conglomerates, where transformational investing was based on, let's say the five key ingredients such as a strategic rigor, entrepreneurial governance, strong focus on operational value creation instead of like a major M&A, best in class systems, processes, and of course, talent leadership and talent development. This observation of the industry is quite important to understand and to basically confirm investors in Princess that to be invested and to finance the real economy, the new real economy, the private markets is probably the space to be in, and Princess is one of the great examples how to do it.
Now back from the more industry overview and kind of the Partners Group assessment. Now back to the portfolio. I hand over this part to Sarah. Sarah Page, the head of investor relations. Please, Sarah.
Thank you, Felix. Now let's dive into the detail of the portfolio companies before we cover the overall results for Q1. Next slide. Just on the left-hand side of this slide, a very quick recap. Partners Group transformational investing approach is made up of the two pillars. The first pillar being the thematic sourcing, that is finding the right opportunities in the three core giga-themes of Digitization & Automation, Decarbonization & Sustainability, and New Living. This is further broken down into four key sectors of goods and products, services, health and life, and technology. Within these four main sectors, there are about 40 to 60 subsectors that are researched for opportunities by the investment teams. The second pillar of entrepreneurial governance is a very agile approach to the actual execution of a particular business strategy.
It's a very hands-on type of governance, which we think like Felix just mentioned, many Asian conglomerates are a great example of. It's also about value creation through strategic rigor. From the inside, transforming the asset by improving margins and cash flows, et cetera, and then also adding to it with strategic add-ons, not big M&A. Despite the challenging environment continuing into Q1, we have, however, observed at the Partners Group portfolio company level a good level of tuck-in activity. Secondly, the operational performance continues to be enhanced with strategic initiatives tailored to each company. This is why you'll see that the companies in the Princess' portfolio are consistently delivering EBITDA margins and top-line growth above 20%. Although EBITDA growth has remained healthy, it has been impacted by inflation.
We've observed in the portfolio companies that inflation is coming down on, say, goods and products as well as energy costs, but remains sticky for services. Our in-house economist also believes that inflation has plateaued and is expected to come down in the next 12-24 months, but when exactly that will be is still hard to predict. Next slide, please. For the top 10 companies, I can confirm that they continue to perform in line or above expectations. Partners Group valuation methodology, as you may know, is based on fair market values updated monthly. Hence, you'll see the monthly NAV reports in between these results calls, and this should counter investor concerns about valuation lags. The two companies which weren't top 10 by NAV in the last results call are DiversiTech and Civica, so I thought I'd quickly introduce them to you.
Firstly, DiversiTech is a manufacturer of components and supplies for the U.S. residential heating, ventilation, and air conditioning market. It was written up over the first quarter on the back of strong financial performance. A few of its priorities for 2023 will center around delivering best-in-class customer experience through the customer journey, supply chain excellence, and it also remains focused on its disciplined pursuit of add-ons. The other one is Civica, who is a global leader in public sector software, serving over 2,000 major customers in 10 countries. It was positively revalued over the first quarter of 2023 on the back of continued positive revenue and EBITDA growth. This was driven by strong organic developments in its core software business, supported by growing demand and a healthy customer base.
Looking forward, it will also focus on enhancing its customer journey, as well as enhancing their cloud software offering and international expansion to cement its global GovTech leadership. Instead of going through all the top 10 companies today, we'd like to spotlight AMMEGA for you. We have a short video to play, but before we do that, just a quick recap. AMMEGA is the global leader in mission-critical industrial power transmission solutions, conveyor belting, and fluid power solutions. It's been a portfolio company since 2018 and was created from the consolidation of two companies, and is an excellent example of one of our subthemes called industrial automation. The video discusses how value creation was created by being customer-led and how that transformed the business. Please play the video.
We combined two companies to initially create AMMEGA. The AM comes from Ammeraal Beltech, Mega comes from Megadyne. The spirit of the combination was very much to retain the best of both pieces. We saw in belting a direct use of industrial automation. Anything we eat today that's washed, harvested, prepared is made on multiple belts. Any logistics center in the world, the packages, but also the letters are sorted using multiple belts. We realized that within the first six months that the gap between management, leadership, and our people became bigger and bigger. This was the moment when we decided, let's take a step back. Let's focus on what made these two companies successful also over the past.
Let's put the customer in the center of our day-to-day business again. Help the people to understand what the vision is about, invest time to take them on board, make sure that they feel part of this journey.
We are very successful to strengthen the team, bringing people from key industries like automotive industry, tech industry. From helping experts, we became a really strong global team. Being part of Partners Group is also helping us to attract the top talent into our organization. When you are having a journey like with Partners Group, passion is helping you to focus and to drive the growth and to drive the financial results, because this is a very intense journey.
In the beginning, we really were very, very close to the Partners Group, asked them for help wherever they could give us help in terms of operational support, commercial support, leadership development or trainings, et cetera.
Today, AMMEGA has created significant value for all of our clients. Having been part of the journey from the very beginning, there's so much more value to be had. The main discussion we currently have is, what do the next five years look like? What is the next transformation?
Thank you. We also announced this morning that Princess has committed EUR 30 million to invest in Partners Group Direct Equity V, which will have approximately 25 companies in the upper mid cap buyout space. Which usually have an enterprise value anywhere between $500 million and $2.5 billion. There are currently 4 seed investments in the portfolio, 2 of which Princess already has in its portfolio, and that's Breitling and Foundation Risk Partners. The other 2 are new investments for Princess, which are SureWerx and Cloudflight. As the last 2 are less familiar, I'll quickly introduce them to you. Cloudflight is a leading full service provider for digital engineering and digital transformation, mainly focused on the DACH region, so that's Germany, Austria, Switzerland.
The company helps customers to design, build and operate mission-critical and scalable platforms and applications with a strong foundation in digital engineering services and software development. Cloudflight focuses on complex projects where they can serve as an innovation partner to its customers for their digital transformation of processes, products or business models. The plan is to expand beyond the DACH region as well as boost organic growth through cross-selling, strengthening customer relationships, and strengthening its operations. The other company, SureWerx, was founded in 1957 and is a manufacturer and supplier of safety protection products based in the U.S. It has an industry-leading brand and has grown exponentially over the years with successful acquisitions. Here the plan is to enhance the supply chain, the customer experience and continue with its successful acquisitions as well.
The investment and realization activity has been muted in the first quarter of this year, with the largest investment made in February, where Princess added to its investment in Rovensa. Rovensa provides specialty crop nutrition, biocontrol, and crop protection products. Rovensa completed its acquisition of Cosmocel, which is a developer, manufacturer, and distributor of specialty biostimulant solutions in North America. This acquisition is highly synergistic and should generate good cross-selling opportunities to support the ambitions to establish Rovensa as the leading independent biosolutions company globally. On the distributions side, this quarter, there was EUR 8.1 million received mainly from Apex Logistics. Now I'll hand back to Felix.
Thank you. On the next page, you'll basically just see the performance development of Princess versus public markets as expressed through the MSCI World Total Return in Europe. As you can see from the various donuts graphs, that's the development of the portfolio in terms of composition, exposure to indirect, that's the early days, to direct, to reemphasize that the journey is basically completed or more or less completed, and future performance is fully driven through the operational value creation in the direct portfolio. If you drill down a bit more in detail, you can observe as to what was the performance attribution of the three sectors, of the three different segments we distinguish.
The dark blue is basically the Princess' lead investments. It's basically where Partners Group is in full control of the board, where it executes the strategy. Versus the Princess' joint investments, where we are a co-investor alongside another GP and typically retains a seat on the board and have some say, versus the kind of the greenish that is basically the legacy investments. You clearly observe that the direct portfolio is driving the performance-wise. The indirect portfolio has basically provided a substantial drag in the last couple of years. Just the, why is the 3 years gross IRR much better than the 5 year? This is just the kind of the timing.
I mean, we are talking about Q1 so the data is from Q1 2020 to today. As you can imagine, as we had the major market corrections due to COVID, that the starting basis to calculate the IRR was just very low and hence a bit higher IRR. 5-year gross IRRs are probably more reflective of what we expect going forward. On the next page, you also see this was a question by a number of investors since the last call as to how the Princess compares to the broader Partners Group platform. What this picture basically tells you that the Princess is fully aligned. The platform performance and Princess performance is actually about the same.
Of course there's some timing issues in Princess as a closed-ended companies when there exits as cash, when do we reinvest and so on. By that there is a slight deviation. However, this is basically neglectable. Finally, we come to this portfolio at-attribution analysis where you have to bridge between NAV in December to the NAV at the 31st of March, where you can see that the revaluations were the main driver, some income received, some FX movements. I remind you that we discontinued the FX hedging at the 31st of March and operating expenses. This brings me to the summary and the outlook. Again, transition to the direct investments is complete.
This is going to drive future performance through operational value creation. The portfolio investments, we continue to focus on overarching giga-themes, and we should benefit from structural change and secular growth. Princess can rely on Partners Group's thematic sourcing across specific themes that basically create the foundation for a strong investment pipeline and portfolio performance. By that a solid EBITDA growth like we showed in the metrics early in this call that are basically generated through operational value creation initiatives should result in below average multiple contraction. Finally, we reconfirm the dividend objective, and we have the first payment announced like declared that is payable on the second of June.
By that, I hand back to the operator and then to investors, shareholders for Q&A. Thank you very much for your attention.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Question is on the phone. I request you choose only handsets. Webcast viewers may submit their questions in writing by the relative field. Anyone who has a question may press star and one at this time. Once again, for your questions over the phone, please press star and one. We have no questions over the phone at the moment. Sarah, back to you to read out questions coming from the webcast.
Certainly. The first question that has come through is do you plan to make new investments exclusively by making new commitments to Partners Group direct programs are also through co-investments alongside Partners Group managed private funds? The answer really is that we will be doing both and as we have been doing historically as well. The second question is can you please talk about your view in NAV-based lending and the risk? What is your view on continuation vehicles? What is your view on GPs selling stakes of the GP to external investors? The first thing to point out is really that about the NAV-based lending is that Princess focuses on PE direct equity investing.
In terms of continuation vehicles, it's really that there's been a bifurcation in the market, and in some instances, this has contained a mixed bag of some good and not so good companies, which are harder to solve. In other processes, GPs were looking for liquidity for some other strongest assets. In all the processes you would see additional fee component. As a Princess investor, you are not subject as we go direct. There has been a question about. I'm just quickly going through. How comfortable are you with the balance sheet? What made you happy making new investments given recent issues with the dividend? Felix, if I pass that one over to you.
Well, what gives us the confidence is basically the liquidity situation, and particularly also the liquidity outlook. We have fully repaid the credit line at quarter end. We basically have a liquidity outlook that allows us to cautiously restart investment activity. We have done so as a starting point by this relatively small commitment to the last Partners Group, most recent Partners Group flagship fund. By that, basically caught up to some extent, certainly got an exposure to Cloudflight and to SureWerx, for example.
Thank you. I've received a few questions about the outlook for realizations. When do you think exits will start to pick up?
Maybe I can continue. I mean, there's been some press coverage on both Civica in the U.K., the public sector software services provider, and on childcare education in the U.S., the early childhood chain. This, this comes probably as no secret to shareholders here as we discussed this in another investment in investor calls. If you look at the investment years, 2013, you can expect actually that this is, these are more mature businesses. By that, there are some processes underway, and we expect liquidity events later this year may be tilted towards the end of the year.
Great. Also related to that is, How do you think investments will compare to distributions for Princess in the next 12 months?
Well, the liquidity planning on a rolling basis basically tries as much as possible to match distribution activity with investment activity, of course, and include the dividend payment and other costs. By that, this should be a very balanced approach. We are doing this on the planning side on a monthly basis on a rolling basis. By that, this is a process that the Partners Group and is reporting to Board and does so.
There's also a, of course, the credit facility, that is basically serves as a buffer and as a liquidity bridge, credit facility of EUR 140 million, where we just extended the term to 2026. By that, this is basically then the buffer.
Do you see an IRR performance uplift since Q4 2022?
I'm not sure whether I can see that. We'll have to dig down a bit more in detail. More generally, in this environment, we observe across the portfolio revaluations because of public multiple contractions that are then counted to some or all extent through positive earnings. A number of our companies suffer or need to cope with the inflationary pressure and the consequences, for example, on the labor market, generally on the imports, input side. Not all of the businesses can pass on higher prices as they go, as they have maybe contracts that have a longer tenure, for example, in healthcare services, whilst in other businesses, they can adjust prices maybe on a quarterly basis.
This is very different from business to business.
What do you see as the biggest threats to continued earnings and revenue growth?
I don't see anything particular that applies to Princess and its portfolio. It's probably more than macroeconomic, geopolitical things that are not different from equity markets. Certainly inflation and as I've mentioned before, is of course something we need to observe very closely and take regard.
Probably a similar question we've already had, but regarding the slowing of both distributions and investment activity, do you expect this trend to continue? In this scenario, how does Princess plan to continue generating cash to pay the dividend as well as continue making new investments?
Look, this is, in our base scenarios for the planning, we have actually very, I mean, a fairly healthy distribution activity, for example, in the next two years that allows for dividend payments, that also allows for reinvestments. Of course, financing markets still remain rather choppy, and we are part of that and need to just act and react as good as we can.
The next question I have is, recent consequences we witnessed from the massive increase in interest rates over the past 15 months, that there are both positive and negative factors for the PE sector. On the positive side, we see more investment opportunities for PE funds. That is, PE funds are looking more for long-term classic bank lending. About the financing side, what risks do you see looking forward?
Look, of course, most, if not all of our companies have some financing in place. Now as we, as we explained in earlier investor calls, we basically jointly with the management teams, we organized these financing packages in a way that we extended the terms. By that all of our portfolio companies are in a position to have a kind of a longer term visibility, kind of contractual terms that go well into 2024 or 2025. By that, I think on the financing side, there shouldn't be too much of a problem. Also a reminder, the average equity cushion in our companies is about close to 60%.
Great. Another question was that we read that there's a sale of Guardian Early Learning Group stake pending. Is Princess invested in the stake? Are there plans to sell KinderCare education completely? What impact do you see on the sale process regarding ChatGPT discussion?
Now in Guardian, this is clearly, clear, yes. It's in the portfolio, and it's in a process to be sold. ChatGPT and the like is not really affecting the early childhood education. This is more kind of personnel intensive than just a kind of intellectual challenge. On KinderCare, I think I mentioned that it is in the press that there is a process underway. I unfortunately I can't comment now on details.
Do you have any idea or do you see any significant reason why the stock price is below 10 EUR? Is the dividend generated from profit or is it paid from equity?
On the share price, this is a question I probably revert back to shareholders as they trade. It's certainly what our, the brokers tell us that there's been reasonable activity generally with large cap stock and very depressed activity with small cap and investment trust sector. When it comes to the dividend, this is paid from long-term target returns. I would say it's from long-term profits. Yeah. I stop here. Thank you.
That's all the questions from the web. Oh, sorry. There is one more. Following up on the positive side of higher rates and attracting new investments from banks to PE funds, are you seeing any potential new investments that may come in as companies are looking to alternative financing away from banks?
This may well be the case, however, that's not where Princess has its focus on. We are an equity investor. We take majority positions in the equity, and by that this is probably not really applicable to Princess.
That's all the questions from me.