Ladies and gentlemen, welcome to the Partners Group's AUM announcement conference call and live webcast. I am Alice, the call operator. I would like to remind you that all participants will be in listen only mode, and 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 star and one on your telephone. Webcast viewers may submit their questions or comments in writing by the relative field. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to the Partners Group management. Please go ahead.
Welcome to Partners Group's Business Update and Outlook Call. I hope you're all well. My name is Dave Layton. I'm the CEO of the firm. Also on today's call is Hans Ploos, our CFO, and Sarah Brewer, our Global Co-head of Client Solutions. Philip Sauer, Head of Corporate Development, is also available for Q&A. Let's start off on slide two with a big picture overview. The 2022 time period started off with a lot of carryover momentum from the prior year. 2021 was an extraordinary year for private markets, and as the year moved on, we saw increased geopolitical tensions. Inflation hit peaks that we'd not seen in over 40 years, and central banks responded with faster rate hike cycles than we've seen in over three decades. This caused a lot of uncertainty, and we saw markets reprice accordingly.
This resulted in a recalibration of global investment activity, which evolved from the peaks of 2021 to levels closer to what we'd observed throughout 2017, 2018, 2019, et cetera. When we provided our asset-raising guidance in early 2022, we did so before Putin had marched tanks into Ukraine and before the full magnitude of inflationary pressures and rate hikes were manifest. While the global macro environment has deteriorated over the course of last year, I'm satisfied, and even a little proud, that we were able to deliver an in-guidance fundraising result of just over $22 billion. That fundraising result was balanced across asset classes. Investor demand within our client base remained reasonably robust during the period.
We're a firm that does pride itself on differentiation. I do think that our differentiated positioning served us well, particularly our differentiated positioning with mandates and bespoke client solutions as the needs of investors become more specific and require more customization. Today, we sit on a record mandate pipeline. Mandates account for 37% of our AUM. We've been onboarding mandates at a pace of almost one a week or one every other week. We've been laying the groundwork for our future growth here. However, as one would expect in this environment, we did experience that some investors had a certain degree of paralysis set in late in the year, given some of the macro uncertainty. Some clients did slow their decision-making and extended their conversion periods.
That happened throughout the second half of 2022, but particularly in the last 12 weeks of the year, and particularly for clients investing in traditional funds. It's not dissimilar from what we've seen in prior periods of macro volatility. Pipelines remain very robust, demand is intact, clients remain very engaged, but conversion time frames have just become harder to project out in some cases. It's with that lens of increased uncertainty that we provide our fundraising guidance for 2023 of between $17 billion and $22 billion. Our assumption is that the pace of client conversions will normalize throughout the year. We also expect that creativity will be needed, but the financing markets will support a reasonable level of investment activity.
We invested $26 billion throughout the period, and our thematic sourcing approach has given us the expertise, know-how, and confidence that we need to be able to pick winners throughout market cycles. We had $14 billion in realizations in 2022. We remain selective in bringing assets to the market this year, we also saw some pretty robust pricing and demand for the resilient assets that we did bring. I think that the private markets is a great place to be at the moment. For new investments, we can take a long-term view and find value where others are more short-term in their thinking. For exits, we don't feel time pressure. We wait until we have an appropriate market environment.
We have multiple companies that are ready for potential exit in 2023 if the markets are supportive. We'll bring them when the time is right. With that, let's move to the next slide. Lending conditions at the beginning of the year were quite accommodative, but as inflation turned out to be more persistent than markets had assumed, we saw central banks aggressively raise interest rates. Debt became scarcer. Bid-ask spreads between buyers and sellers subsequently widened, leading to a recalibration in investment activity levels in both private and public markets. From a transaction count perspective, we saw the number of private equity investments in the year fall by more than 25%. Now, not shown on this slide, but the volume of M&A activity also fell by around 35%, which implies smaller investment size. That was certainly our .
Activity levels are down. The bid-ask spreads play a role in that, plus financing and more expensive financing plays a role in that. We're still operating at activity levels that are comparable to where our industry was in 2017, 2018, 2019, et cetera. I see some public market commentators that are trying to project the capital formation patterns and trends from public markets over onto private markets. If you look at the data, it's a different order of magnitude. The number of IPOs were down by 87%. The number of private equity investments were down by 27%. Clearly, 2021 was the peak of the prior era's low-cost financing cycle, and the recalibration that we've seen this past year is reflective of this changing environment. However, private market participants tend to be quite long-term and sophisticated.
A high-quality investment thesis does not completely change overnight, especially if it's developed and honed over the course of multiple years. That brings us to the next slide. Our thematic sourcing process helps us to be systematic and disciplined in the way that we invest. Before we invest, it's crucial to understand where the structural sources of growth are and which companies are best positioned to capture this growth. We often study a company and its sector for two, three, four, five years before we invest, and this really helps us to understand how sustainable the growth will be and how much we're willing to pay for it. We're also very focused on transforming assets after we invest through hands-on ownership. We only invest in a company when we have a clear value creation plan.
We ask ourselves, what type of a board does this company need? How do we cement and defend the company's market position? How do we remain accountable for progress? This is what eventually drives return. This industrial mindset and the differentiated performance that this type of hands-on culture can drive is an important part of our plans for how we'll continue to differentiate ourselves over the long run. Our infrastructure team's investment in Budderfly is a good example of this. Budderfly helps small and medium-sized companies to reduce their energy footprint. It does systems upgrades. It puts up the CapEx on behalf of clients. It takes the place of clients with the utility provider. It makes clients' lives easy, and it passes on the savings that it generates, and it keeps a part of those savings.
In this current environment, our thematic team has developed a strong conviction that this company's services will become more and more prized by clients and by the market. We're rolling up our sleeves to help that asset to scale and to transform, and we're doing that in a very hands-on way. We have numerous other examples across asset classes for how our thematic work and our transformational ownership approach helps to set us apart. Let's move to the next slide. Oftentimes, these more challenging macroeconomic environments can produce some of the best vintage years for our asset class. We've remained steadfast and consistent in investing throughout the last year, largely by leveraging our thematic expertise and by investing into smaller situations that required less leverage. These efforts translated into $26 billion of investments on behalf of our clients.
In terms of strategies, we invested the majority, 68% or $18 billion into direct assets, with the remainder $8 billion into portfolio assets like secondaries. Bid-ask spreads were also an issue in the secondary market. That limited volume to a certain extent. We invested an incremental $2 billion in secondaries in the second half of the year. That's $4 billion for the full year. Where we were able to transact, conditions really did line up for us, and we think we're gonna generate some really strong returns on those investments. We invested 12% in direct debt and 5% in broadly syndicated loans. BSL, generally speaking, is a bit more sensitive to market sentiment. The year started off with the successful issuance of a number of CLOs. Much of the activity slowed down in the second half.
In total, we launched four CLOs and deployed the majority in direct lending throughout the year. We're really happy about the risk return that we've been able to secure for clients in private debt this year. In terms of geographies, the US was our most active region with 53% of all investments, followed by Europe at 42%. That brings me to the next slide. I wanted to reemphasize a message that we previously placed that our portfolio companies continue to hold up well. We've maintained solid growth rates and have been able to protect our margins this year. This is important to underline, especially in a time of high inflation. This underlying asset performance is an important factor in the returns our clients to experience, which is shown on the next slide.
In private equity, for the period up to Q3 2022, our portfolio company's marks were reasonably resilient, and we experienced a 2.6% markdown until that point in the year. This was obviously achieved in a broader environment of declining equity valuations, and our marks were supported by the underlying growth and asset performance that we previously mentioned. Private debt is generally floating rate, and that helped this year's performance. While some investment-grade bond portfolios were down by more than 20%, our private debt portfolios protected capital quite well and generated a slightly positive return. We've got a great track record of protecting capital in that business. On the private infrastructure side, something like 80% of our underlying revenues are inflation-protected, with many contracts that we have, including previously agreed CPI escalators.
That's a great business with a lot of tailwinds. Our marks were up by 7% for the nine months ending September 2022. Lastly, for real estate, we tend to prefer investments where we can pass on rent adjustments more regularly. Through Q3 2022, performance was up by about 1%. You can see on the right-hand side of that chart that our long-term track records are very robust. Investors make a long-term commitment when they invest with us. We have a long-term track record of value creation across cycles. As we've talked about on prior calls, we took advantage of the market boom in 2021 to lock in a lot of realizations. That's meant locking in a lot of IRR for our clients, and it's helped to de-risk our track record in many segments of these asset classes.
Now let's move on to the next slide. In private markets, we're fortunate that we don't let markets dictate when we should sell assets. We'll always prefer to let an asset grow rather than just selling it into an environment that's not preferential for our investors. We elected to hold on to many mature portfolio assets that would have otherwise been well-positioned for divestiture during the period. With that being said, where we did test the market, we did find that investors were more than willing to pay appropriate and adequate prices for certain types of assets. Earlier this year, USIC expanded its shareholder base and had a solid liquidity event at a level that more than tripled our clients' original investment. USIC helps to locate, identify, and mark subsurface infrastructure like pipes, cables, and fiber.
Law actually mandates that groups like public utilities utilize this type of service whenever they engage in certain types of subsurface projects. Since we first invested five years ago, we've helped to grow USIC's organic revenue by 77% or organic EBITDA by 77%. We transformed that company, and it today has an enterprise value of over $4 billion. We're also quite proud to see CWP Renewables attract the interest that it did when we launched the sale process for that asset last year. Renewable energy has been a core focus of ours for multiple years now, given the central role that it plays within our decarbonization themes. When we first invested in CWP in 2016, it was a single wind farm, and we've transformed it into a renewable energy platform spanning multiple locations for wind and battery.
It now has 1.1 GW in operational assets. It supplies power to several blue-chip Australian clients like Sydney Airport, Woolworths Group, and Commonwealth Bank. It fetched an attractive valuation, and we felt good about our decision to divest last year. On the next slide, we show the divestment and exit activity in 2022 generated $14 billion in distributions for our clients. We told you in January last year in our business update call that the distributions had been exceptionally strong in 2021 and not to expect them at the same level for 2022. In 2020, given the volatility caused by COVID, we decided to postpone several exits into 2021.
In the second half of 2021, because the conditions were highly conducive to successful exits, we decided to advance several divestments originally planned for the first half of 2022 into 2021. Given the macro environment in 2022, we also decided to postpone other exits into future periods. It's important to keep in mind that when an exit is pushed back, performance fees are not foregone, but only postponed. You saw that in 2020 versus 2021. We never let our corporate planning dictate our divestiture decisions, but we have those decisions run through our investment committees. We do what's right for clients, when it's in the best interest of clients, and that flows through to the financials when it's appropriate.
We have a good underlying performance with a strong pipeline of mature assets, but we'll continue to make exit decisions on that basis. I'd now like to hand over to my partner, Hans.
Thanks, Dave. Also, a warm welcome from my side. We grew our underlying AUM by 10% to $135 billion in 2022. This is before the impact of a stronger US dollar. Including exchange rate movements, AUM increased by 6%. This was not without hard work. We stayed true to our core business builder mindset and our strategy of transformational investing, which combines thematic sourcing with hands-on value creation. The continued strong portfolio performance speaks to the strength of our investment approach, as do the commitments received by our clients. Let us look at the commitments in more detail. We raised $22.3 billion in new commitments within our 2022 guidance of $22 billion-$26 billion.
Fundraising continued to be very strong over the first half of the year, supported by the closing of our direct infrastructure funds and continued growth in our bespoke client solutions. While fundraising remained solid in the second half of the year, we saw a different market environment post the summer period, as uncertainty increased around inflation and interest rates. This impacted the fourth quarter as clients extended the conversion periods. Let's now look at the fundraising by asset class. Starting with private equity, which represented 59% of the total inflows at $13.2 billion. Private equity led fundraising throughout the year with $6.6 billion raised in both the first and the second half.
Fundraising was supported by our long-term excellent investment track record, as well as the breadth of the platform covering multiple investment strategies. Private debt represented 20% of new commitments or $4.5 billion. Private debt fundraising was skewed towards the first half. Our CLO offering drove strong demand in H1, where we raised three CLOs, whereas the BSL markets were essentially shut in the second half with only one CLO raised. We did see continued fundraising through our mandates, meaning that we raised assets that were ready to be called, which we only count after we invest, and the portfolio build-up of these mandates has just started. Given the significant change in base rates, we have seen a lot of inbound client interest recently for our direct lending activities. Remember that our direct lending business mainly invests into floating loans.
Private real estate represents 5% of total new commencements or $1 billion. The team has been actively investing its dry powder, deploying $3 billion. We will be launching a new flagship fund targeting real estate opportunities in the second half of 2023. Private infrastructure represented 60% of new commitments or $3.5 billion. Infrastructure successfully closed its latest direct offering in February 2022, with $8.5 billion in commitments, most of which were accounted for in 2021. The February closing caused fundraising to be tilted to the first half, with $2.7 billion of assets raised. During the second half, fundraising came predominantly from bespoke client solutions. The team was focused on investing the capital raised.
Across our product offering, bespoke solutions, which cater to clients demand for tailored private market investments, remains the largest contributor, representing 70% of total fundraising. These solutions include both open-ended evergreen funds and tailored mandates. We raised $8.4 billion in mandates or 38% of our fundraising. Mandates, along with private equity, were the winners with continued strong client demand also in the second half of 2022, confirming the continued strength of our mandate offering even in today's market environment. Evergreens were a record $7.2 billion or 32% of assets raised, even beating the exceptional growth in 2021. Evergreen AUM grew strongly by 11% in 2022, with very strong growth momentum over the first half.
While demand slowed towards the latter part of the year, they also were a net AUM growth contributor in the second half. Our traditional closed-ended programs also performed strongly with $6.7 billion in fundraising or 30% of total capital raised. The final closing of a direct infrastructure fund skewed funding towards the first half. It must be clear that also in the current market environment, clients see the benefits of our unique offering and remain confident that with our ability to provide clients with tailored and diversified access to private markets will continue to fuel strong future growth. We discussed the $22 billion in gross inflow. Let's go through the impact of drawdowns, redemptions, exchange rates, and performance-related effects.
We have good visibility on drawdowns and redemptions and provided the market with the 2022 guidance of $10 billion-$11 billion for both factors. Starting with drawdowns, they were aligned with expectations at $7.3 billion and were mainly driven by maturing private debt programs. Redemptions are different. We managed approximately $41 billion in evergreen programs. For 2022, redemptions were $2.9 billion or 7.7% of the average evergreen AUM. We saw an increase in the second half to $1.9 billion compared to $1 billion over the first half. While redemptions increased in the second half, again, these programs continued to be a net contributor to growth in H 2 as inflows more than exceeded the redemptions.
We do not have visibility on factors such as exchange rates and the other performance-related items, and as a result, we do not provide guidance on them. Foreign exchange rate effects had a negative impact of $4.7 billion. This was mainly driven by a 6% lower euro against the US dollar at the end of December. Remember that around 43% of our AUM come from euro-dominated programs. With regard to the other performance-related effects, AUM growth in the year was supported by strong performance across our private markets portfolio, particularly our evergreen programs. This led to a positive contribution of $600 million from products that link their AUM to the NAV development. This leaves a total AUM increase of $8 billion.
Now let us dive deeper into our evergreen offering, as there have been a lot of conversations in the market about semi-liquid private market solutions. Given the targeted type of clients, which to a large extent are wealth management clients, liquidity is the key differentiator, and it will remain a standard feature of these solutions. In more volatile markets, where redemption activities generally increase, these funds mechanically enforce gates. To date, at Partners Group, we have only two evergreen programs that have been gated. We represent less than 3% of total evergreen AUM. Whether there will be a potential gating of additional funds at a later point depends on many factors. Let me go with you through some elements which are key when talking about semi-liquid solutions. Evergreens are designed to allow for a degree of realizations in normal times while preventing unwanted liquidations in volatile times.
This activity protect long-term investors, ensuring that the fund's asset allocation deliver on their targets and preventing a forced sale of assets. Therefore, liquidity limits are welcomed by investors who fully expect Partners Group to make use of them whenever market circumstances make it advisable to do so. This typically occurs in periods of prolonged market downturn, where redemptions are expected to increase, and in the event they exceed the limit, gating will be installed automatically. If limits are exceeded, any redemption request not fulfilled will be automatically fulfilled in the subsequent quarter. During a 20+ year track record, we have successfully managed our portfolio of evergreen programs through previous market cycles, including the financial crisis and the downturn triggered by the COVID pandemic. Many of our current clients were invested throughout those periods and remain long-term investors today, trusting us as leaders in this space.
Next to managing redemption, this also means balancing inflows. Over the last 5 years, we have restricted inflows of evergreens so that we can deploy capital in an optimal way and achieve a healthy vintage year diversification. Looking ahead, Partners Group remains committed to expanding evergreen solutions to provide access to private markets for individual investors as they increasingly seek exposure to this growing part of the real economy, which can only be accessed through private markets. We have developed market-leading capabilities in providing for such unique client solutions, which positions us to continue to capture strong growth in this area. Moving to the next slide. Slide 16 provides a more detailed summary of the AUM breakdown and fundraising by asset class. In summary, we had a strong year and are pleased with how our teams are navigating the changing environment.
We remain confident that we're strongly positioned to continue our growth journey and are looking forward to drive our business forward in 2023. With that, I would like to hand over to Sarah.
Thank you very much, Hans. Greetings from London. I'll be providing some more color on our planned fundraising activities in 2023. In terms of growth client demand, we expect to raise between $17 billion and $22 billion in total assets for the full year 2023. Our guidance is based on the assumptions that client conversion time frames will start normalizing by the second half of this year. What you have to keep in mind is that one of the frustrations of private market clients can be having their capital sit in undrawn facilities in the form of dry powder for too long. Partners Group's clients really expect investment volumes to be reasonably tied to fundraising in any given year. As such, our guidance assumes that we invest capital at a reasonable pace and have supportive financing markets.
In terms of timing, we expect the length of client conversion periods in Q1 to largely resemble those in Q4 2022, leading to generally lower initial client demand, and as a result for the fundraising to be skewed towards the second half of 2023. On the traditional program side, we expect closing for our 5th direct private equity offering, and we've already laid the foundations for three key strategies that offer attractive relative value in this environment that we plan to bring to the market this year. That's firstly, the launch of our next direct infrastructure fund, then our private equity secondary fund.
Thirdly, we will offer clients our next real estate opportunities fund. That is not including the other specialized traditional products we plan to launch to cater to our clients and investors asset allocation needs, such as different dedicated direct lending programs and our second sustainability-focused offering as well. We believe that all of these combined fundraising efforts should help us achieve our fundraising target. We also expect tail downs and redemptions to stabilize at between $10.5 billion-$12.5 billion. To start, we expect tail downs to stabilize over the next two years to three years. This is in part supported by a gradual shift of our AUM from traditional programs to bespoke solutions. Tail downs are typically associated with traditional programs, whereas bespoke solutions are often more perpetual in nature and as such, do not have tail downs.
Counterbalancing the lower tail downs, we expect the amount of redemptions to increase as a function of our growth on the evergreen business. These two effects net out an overall tail downs and redemptions should remain stable in the medium term. Let us now move to the next slide. 2022 showed that clients increasingly want exposure to the growing portion of the real economy that can be accessed through private markets. A private market investor will be able to access profitable companies in sectors that provide outsized growth potential. As such, we continue to see the structural tailwinds for the private markets industry as really intact and its outlook for long-term sustainable growth very much remains in place.
This is supported by the general consensus in the industry, which points towards AUM of $18 trillion by 2027, or a compound annual growth rate of 10%+ from 2021 onwards. Reflecting on 2022, I'm particularly excited about the number of new clients that we were able to get engaged with, especially on the insurance side, where we have developed bespoke solutions for them both in the U.S. and in Europe, totaling more than $1 billion in AUM. These solutions match the client's specific needs and their risk-return preferences. In general, it's fair to say that 2022 was an excellent year for investors that sought customized solutions for these kind of requirements.
As Dave mentioned, we closed a record 33 mandates last year from clients across the globe, where our proven capability to build custom solutions is really increasingly being seen as a differentiator in the market. On top of any current year's fundraising activities, we also dedicate a significant portion of time to laying groundwork for future years. We've added in new senior talents across the globe with a focus on strengthening our team in the U.S. and Asia-Pacific. In 2022, we put in place multiple initiatives to have success in 2023 and beyond. For instance, we established a separate private wealth business unit to be led by my colleagues Rob Collins and Christian Wicklein. We have, as you know, been a major player in this space for 20 years and have dozens of products across all asset classes.
We need to keep on innovating to remain leaders within the private wealth space. In 2022, we started a partnership with another large global bank to give them access to our evergreen product line in a highly customized way, joining a growing list of the world's leading wealth managers that partner with us. They have access to over EUR 80 billion in discretionary AUM and will be able to integrate us in the form of fully diversified portfolios from growth-orientated portfolios to more defensively orientated ones with their clients. Their clients will be able to get exposure to fully diversified private markets allocations from day one. This brings me to the end of the presentation. Before I open the floor for questions, please let me conclude on the following. Firstly, we expect fundraising for the year to be skewed to the second half.
That is informed very much by a bottom-up demand pipeline and the conversion timeframe discussions we've been having with our clients. I would not be surprised if the relative fundraising mix for H1 versus H2 2023 is the inverse of what we saw in 2022. It's 60%, 40% last year, and it very well may be 40%, 60% this year. Secondly, our track record and underlying performance of our assets, as Dave has mentioned, is strong and this is what will drive fundraising in the long term. Thirdly, in our business, we take a long-term view. As a leader in providing bespoke solutions, our ability to build flexible private market portfolios across multiple asset classes will continue to drive AUM growth in the years to come.
Thank you very much for joining us today, and I would now like to open up the line for questions.
We will now begin the question-and-answer session. Anyone who wishes to ask a question or make a comment may press star and one on their touch-tone 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. Participants are requested to use only hands as well asking a question. Webcast viewers may submit their questions in writing by the relative field. Anyone who has a question or a comment may press star and one at this time.
Our first question comes from the line of Nicholas Herman from Citigroup. Please go ahead.
Yes, good afternoon. Can you hear me all right?
Yes.
Perfect.
Yes, we do.
Cool. Perfect. Okay. Yeah. So three questions, please. One on fundraising and two on investment returns. On the fundraising side, I guess it looks like private equity fundraising in 2023 will fall almost to 2019, 2020 levels. Can you envisage reaching private equity inflows reaching 2021 levels again? I guess what would have to happen for that to happen? I mean, clearly, rising markets, public markets and more activity would help, but is there any more to it than that? Then, on the investment return side, your private equity returns were down 5% in the first half. You're now indicating down 2.5% or so for the nine months.
Now, Q3 obviously saw pretty weak markets, even with your slightly better mix, portfolio mix than the aggregate market. I'm just curious what drove the improvement in private equity performance in the third quarter, especially as it looks like LTM EBITDA growth slowed from 15% in Q1 to 13% to Q3. The last question would be, I mean, in the current environment, given. Is it fair to assume weaker private equity investment performance in 2023 than in 2022, or is that something you would disagree with? Thank you.
Thank you so much for the questions. Maybe I take the first one on fundraising before I hand over to Dave on the investment side. Look, I think we strongly believe, as we have iterated within our presentation today, that there is clear structural long-term trend towards private markets. As we have seen market uncertainty in the last year, that demand for private markets has absolutely not gone away. It's not dissipated. What has happened, and I can tell you from a kind of bottom-up client perspective, is that this sort of market uncertainty sometimes leads to a certain amount of paralysis with our clients for short periods, or they just have other areas of focus within their portfolio.
Every discussion that you have with end clients is their long-term allocations to private markets are increasing. That, that's clear, and that's what we see. Do I have confidence that we go back? I think I have confidence that those allocations will actually grow further. There's elements such as the private wealth part of the business that over time also will further grow as we allow access to private markets for a wider amount of people. Those discussions that we've had really show that the demand, long-term demand for private markets has not abated at all.
Thanks, Sarah. Nicholas, on the investment returns versus the public markets, particularly for Q3. You know, the returns that you see within our portfolio have outperformed public markets. As we've drilled down and provided this analysis for our clients on what's driven that, there's a couple of different things. one is industry selection. If you look at the way the public markets have been bouncing around and a lot of the correction that's happened there, much of that has happened in certain sectors. For example, high price, tech, which is a big part of the public market indices. You don't find a lot of that in our portfolio that tends to be non-cyclical, foundational businesses with good pricing power.
So that explains about half of the outperforming relative to the public market comparison. In addition to that, our portfolio has been growing at a stronger level than the public markets by several hundred basis points, and that explains another 25% or so. In addition to that, there's a number of assets that have very specific events. Some of them did have liquidity events or had financing events where there were third-party pricing done on the equity that exceeded the levels at which we had marked them at. That drives the last bit of outperformance. It's very bottom up and very specific, and in the specific to the Q2 versus Q3 marks.
A lot of that was very specific, liquidity events or financing events that we had where there were marks that were higher than where we had it marked. That explains that. With regards to the returns, for our industry and what to expect for 2023 versus 2022, I actually think this is a pretty good time to have a long-term perspective, but you have to be careful. I mean, if you just take your typical private equity model, the inputs to that are things like growth assumptions, capital structure assumptions, margin improvement assumptions, and the output is your expected IRR.
If you just took, you know, your typical private equity model from a couple of years ago, two years ago or a year ago, and you were to plug in the new assumptions for growth in a lot of these industries, new assumptions for the cost of debt and less debt available. We've all been riding a big wave of globalization that's allowed us to take costs from our portfolio out into the global marketplace to improve margins. That globalization trend is challenged. You can make an argument that the return for the industry more broadly, are gonna come down by several hundred basis points. At the same time, we feel really good about the returns that we're able to underwrite in the current market environment, but it's on a smaller subset of assets.
The average company that we've been investing into didn't just have, you know, solid single-digit growth, but it had a solid double-digit growth. We did in fact have less debt that we used within many of the acquisitions, down from about 50% in prior years to more like 25%, maybe 35%, loans to values from a financing perspective. These are assets that really do have transformational plans associated with them. We believe that we're gonna be able to generate pretty consistent returns with what we've done historically, but we're gonna have to work harder. We're gonna have to transform businesses as opposed to just improve, you know, certain things.
For the industry overall, though, I do think it's safe to say that, it's gonna be more challenging in this environment, with the current levels of financial gearing and growth assumptions, to generate returns more broadly. I think it's going to favor those firms that have really been thematic and really developed their investment thesis.
That's helpful. Thank you. If I could ask one follow-up to Sarah, please. You referenced reaching fundraising private equity even exceeding 2021, 2022 levels at a time. Is that something you think you could on your base case, at least, see expect to achieve? Not obviously in the, in the, in the short term, but let's say on a medium to a three-year to four-year view.
Absolutely. I mean, that's sort of what we're trying to. You know, that's where we see the market very much going. Look, as I said, there's a structural move towards private markets, that has remained absolutely consistent even through short-term market uncertainty. You know, that's very much reinforced, as I said, by all of the conversations we have with clients and what people see in the market. I think, yes, I would say absolutely.
Thank you. That's helpful.
The next question comes from the line of Hubert Lam with Bank of America. Please go ahead.
Hi. Good afternoon. I've got three questions. Firstly, for your target range of $17 billion-$22 billion for 2023, what are your macro market assumptions for the bottom end of the range and for the top end of the range? That's the first question. The second question is on the demand for evergreen funds in 2023. Do you expect that to be the same proportion of the assets raised as in the past? I think in the past it used to be between 25%-30%. Do you still expect it to be the same proportion going forward? Also tied to that, for the redemptions in 2022 within evergreens, did it accelerate in Q4, how are your clients reacting to the gates that have been imposed on them?
Last question is on the mix of fundraising. How do you expect that to change in 2023, or do you expect a similar term fix in 2022 and any impact that would have on the fee margins going forward? Thank you.
Maybe I take the first.
So-
Sorry, Dave. You go ahead.
Yeah. I was just gonna say on the fundraising range, you know, it's about 20% lower than the prior range provided. That's a similar adjustment that we've made to prior periods of market volatility. If you think about, for example, during COVID, we had a revised range that we presented that was about 20% lower, which is just reflective of the increase in uncertainty. You know the big, the big factors that kind of control what's there are the conversion time frames. We have a sales force that is, I think, world-class, manages their funnels very systematically and professionally. We look at the contacts that we make, you know, the discussions that we're having, how those progress through the different phases of our pipeline.
Look at conversion rates. Right now we just have time frames that are tougher to predict out, and that is the primary driver. We also have an assumption that we'll be able to finance new portfolio acquisitions in a reasonable way, and that we'll be able to have investment pace that's more or less on target with our fundraising assumptions. Because one point of feedback that we do consistently hear from clients and have heard for years is the days of sitting around in dry powder for years and years and years are over, and clients want to see their capital put to work. The key assumptions around our fundraising range have to do with conversion time frames and investment levels.
Second, with regards to demand from evergreen funds and redemptions. You know, the redemption pattern did accelerate later in the year, but it wasn't dramatic. We have not put up meaningful numbers of gates. It's low single digits in terms of percentage of our evergreen assets that have gates up at the moment. If you look versus last year, 2021, we only had about $1 billion more redemption requests in 2022 than we had in 2021. We had positive inflows into evergreens in both the first half and the second half of the year. Now, there was a slowing in terms of the fundraising pace in the second half of the year on a net basis.
We do expect redemptions to continue to be a topic, but we did not, we didn't see a material shift that required us to put gates up in our big Evergreen structures. Yeah. Maybe.
I have a few-
Hans, you want to add?
It's maybe good to. As Dave said, on the target range, it's the structural demand, I myself in the clients group every Monday, is continuing to be very positive. It's just when the market strikes would become a little bit more clear that demand will come back. The range is just driven when that will happen. That happens sooner you're at the upper end of the range, if that would happen. That's a little bit too early to now put a number on. When we talk in March, we can give some more color on that. The other things, as Dave said, we have seen a little less inflows, but it's nothing we haven't seen in the past during these times. It's just a little bit of slowing on the structural strong demand. You also asked the question on the fundraising mix.
We always give a little bit, a boring answer because we like traditional funds because they're very important for us, because they're testimony of the strength of our investments. The mandates will continue to grow. We grow the Evergreens. In any given year, they can vary a little bit given where we're at on fundraising of a fund or where we're at. Structurally, all three are important into the mix.
Great. Thank you.
The next question comes from the line of Gregory Simpson with BNP Paribas Exane. Please go ahead.
Hi there. Good afternoon. A few questions from my side. First, could you just provide some commentary on how you're thinking about hiring in current times? Are you planning similar to history, or slowing in response to market conditions? Any kind of color there would be great. That'd be the first question. The second one would be on exits and the pipeline you have right now. Should we expect a similar path to what you're saying about fundraising, so H1 being slower and then a recovery in H2 should market conditions stabilize? The third question would be on Asia. It was only about 5% of investments in the period. Could you share any color around Asia? How do you see the opportunity set going forwards with China reopening? Thank you.
Maybe I start with the headcount, and then Dave, if you could give some. We will end this year with 1,834 people in headcount, which is an increase of 17%. We have been, and we will continue to grow our headcount with our AUM growth within our margin target of 60+. We will continue to do that. We end the year actually with a well-staffed. Remember, we have hired this year a little bit also more because the last two years we had very strong activity, so there was some catch-up effect into the hiring. Going forward, we will continue to hire in line with AUM growth at our 60%+ margin.
That means in the current environment that we enter the year relatively well-staffed, which actually is positive because that means in the current market environment, we have our troops ready to manage the investments, to drive more growth with the clients in an environment as we deliver on our margins. You will see probably a little bit less hiring in the first half, and then in the second half, as the growth will have come back, we will continue to hire.
On exits, we do not have a large number of active exit processes that we're running at the moment. Oftentimes there is a little bit of a timeframe associated with these. I do not project the first half of this year to be a large number of big direct asset liquidity events occurring. I wouldn't be surprised if the pattern does follow what we're projecting out for asset raising on being skewed a little bit more towards the second half of this year. For Asia, you are right. We found more opportunities in the US this year and had an even higher mix towards US investments versus some of the other geographies.
Asia came down a little bit, Europe came down a little bit in terms of percentage of our mix. You know, I think emerging markets are interesting at the moment. You know, in the public markets, emerging markets traded only about 10 times forward earnings at the moment. They have some of the highest growth, highest growth to consumption rates in the world and some of the lowest debt ratios. Similar value can be found within the private markets. So our team in Asia is active, and we're actively looking to deploy capital there. I wouldn't be surprised if you saw that percentage increase over the course of this year, but it won't be anything dramatic. I think it'll be incremental steps.
Thank you.
The next question comes from the line of Bruce Hamilton with Morgan Stanley. Please go ahead.
Hi there. Good evening. Thanks very much for the presentation, taking my questions. A couple from me. Just on kind of fundraising, anecdotally, certainly we hear that, you know, U.S., U.K. DB schemes and endowments are kind of through targets in a lot of cases. I just wanted to check whether that's something you see or comment with still the allocations are growing, but is that kind of skewed to, you know, a part of the market, sovereign wealth funds, Asia or something? Or is that sort of anecdotal stuff, you know, perhaps not completely correct. Secondly, just to clarify, make sure I heard correctly, did you say that there have been very modest gatings of a small proportion of your evergreen funds, or was that something that happened historically, just to check.
Finally, in terms of the tilt in sort of asset gathering 2023, would you expect, you know, greater client demand for, say, infrastructure and credit and relatively lower for private equity and real estate, or is it, you know, fairly balanced in terms of your conversations with clients? Thank you.
Sarah, do you wanna take question number one and three, and then I'll pick up number two?
Absolutely. Maybe I can, I can pop those together. On your question on that regard, I think there have, as you rightly point out, especially if you look at, say, U.K. DB schemes, and then perhaps separately we can take the U.S. endowment schemes. There have obviously been some clear short-term impacts to their ability to invest, period, on liquidity and their overall fund size. My point is a more general one across the board of what we see, that is that there is increased demand for private markets in general. In the U.K., that won't be the DB market will not be the kind of future of private market investing necessarily. That will probably move to the DC space over time.
Here I'm talking much more on a global basis, and you pointed out some of the respective clients where we have obviously had some fantastic traction with, like sovereign wealth funds and so on. Not limited to that. You know, we've seen, as I mentioned, increased appetite from insurance clients globally, both in Europe and the U.S., where we had meaningful traction with them last year and we're having quite intense dialogues with quite a few going into this year, increasing their allocations to private markets overall. I think that's really where we, where we see that and why I stand behind that conviction overall.
For the fundraising mix in terms of asset classes, I think we have the benefit at Partners Group of having the ability to move across the different asset classes to take advantage of relative value. Having said that, you know, we see demand across the board and it will remain, I believe, fairly balanced, going into 2023.
On gates, we have very modest gates up at the moment. Like we're talking, I think 2% of our evergreen asset base has gates up at the moment. Primarily, small vehicles related to real estate because kinda everybody's gated within real estate. You asked about historically. If you look back to the, you know, prior period of market volatility, which was kinda during COVID, we had at one point in time, I think 30% or 35% of our evergreen asset base that had gates up at one point in time. I wouldn't be surprised if it followed a similar pattern here if the market continues on its current trajectory.
You know, I think liquidity limits within private markets funds are a really important element of the funds that we provide. We provide access to private investment types. We prioritize long-term performance over convenience and over short-term liquidity. I think those liquidity limits are welcomed by a number of investors. I think it's been painted in a very bad light so far in this kind of period of market volatility. If you talk to the vast majority of clients, they invest into private markets because they're looking for the type of, you know, performance that private markets are known for, and that takes a while to develop and to build.
The vast, vast majority of clients provide positive feedback that you use the tools that you have to make sure that you don't have long-term value that's being eroded by short-term liquidity needs. So I think our industry can do a better job of, I think, framing the liquidity limits that do exist. We've not needed to use them at this point in the cycle, but I wouldn't be surprised if things continue if we do end up using them in a similar way that we've used them in just about every prior market downturn that we've experienced.
Got it. That's really helpful. Thank you.
Yep.
The next question comes from the line of Martin Emmet with UBS. Please go ahead.
Yes, good evening. I have a couple of questions, please. The first one is on financing markets. I'm just wondering if you could share your views on how the normalization from here onwards could look like, what are the prerequisites, and what sort of timeframe are we looking at here? The second question is on the -2.6% performance number for direct private equity from slide eight. I'm wondering if you could just provide us some sort of breakdown. What is underlying operating profit growth there, repeat that growth, and what is perhaps revaluation or multiple contraction? The last question is on fundraising in 2023.
I'm just wondering if you could give us a sense, what sort of flagship strategies do you expect to launch from what I understand, mainly in the second half of the year? That would be very helpful. Thank you.
I'll take the first two questions, and then Sarah, if you could pick up the third. The debt markets are indeed tricky to navigate at the moment. We still have about $55 billion of home loans on banks. You know, the banks kind of closed their doors back in November, and we heard that they were hoping to kinda reopen in January, but still a little too early to tell. There's a little bit of pre-marketing that's going on for a couple of new issuance markets, but there's been real no market testing that has given the banks confidence that they know where to price. They did try to clear inventory a couple of times late last year.
Some of those were done as low as kind of the mid-80s and were unsuccessful. I don't think the banks have a lot of confidence at the moment that they know how to price the market, or they know where the kind of the market clearing levels are. Because of that, groups like us are having to get creative, and we're having to go to private lenders. You know, we recently did a financing of one of our infrastructure investments, a $300 million financing. Our capital markets team called 70 lenders to get that loan placed. We have the benefit, I think, of having a big capital markets team that's sophisticated and can help advantage us in a market environment like this.
We also have the benefit of being a firm that's very well connected to a broad set of asset managers, investment managers, private debt firms, because of the position that we hold within the private markets. Oftentimes we've been co-investors with them in the past. We've sometimes invested into funds or bought secondaries in their funds. We're a firm that has a meaningful network and a meaningful set of relationships within private investors, and that has, I think, helped us to get things done in a time when other organizations that have been more dependent on banks, have not been able to get things done. I think it's gonna take some time to clear off some of that old inventory.
Nobody's gonna be buying, you know, X, off of these banks' balance sheets anytime soon. I think it's gonna take a little, you know, it's gonna take a couple of months, at least until I think these banks are re-underwriting again in any type of a normal way. Until then, we're gonna continue to work with, you know, the private debt channels that we've been working with up until this point. On the 2.6% performance correction and how much of that comes from multiple contraction, all of it comes from multiple contraction. Again, we showed very positive earnings growth within the portfolio, stable margins, and so all the correction there is from the changing market environment.
We have the benefit of a couple of things that have made that correction less pronounced within our portfolio versus what people observe within the public markets. I went through that just a little bit ago. Our in-industry selection is a big part of that. That's about half of the difference of our portfolio versus what you see in the public markets. We have higher growth rates within our portfolio versus what you see in the public markets. That's another proportion of that. Then we have a couple of really strong performers that have had positive events or developments over that period of time that gave us a boost as well and gave us some tailwinds as well.
It's those factors combined that has led to the 2.6% number that you see on the slide. Sarah, maybe you wanna take the third question around fundraising.
Yeah. You mentioned, you asked about the flagship funds that we have out. We'll have further closes for our fifth direct private equity offering, and then we will also have our direct infrastructure fund. We'll have our private equity secondary fund, and we'll have our real estate opportunity funds. Those are the flagships out in the market.
Very helpful. Thank you very much.
The next question comes from the line of Oliver Carruthers with Goldman Sachs. Please go ahead.
Hi there. Thanks for taking my questions. Coming back to the evergreens, and really on the redemption side of the evergreens, just to follow up to your answer to Hubert's question. The pickup in redemption notices at the end of the year that you mentioned, did this accelerate?
After the public announcements of BREIT and BCRED, which was in the 1st week of December, or was it already picking up before then? Can you remind us of the lag time between redemption requests coming through and when that redemption is recognized in your AUM in a normal market environment? The second question, I think you introduced stricter gating rules in the last couple of years on select share classes within your Evergreen Funds that you can trigger. My question is, does the $4 billion lower bound of your redemption guidance, does that factor in the stricter gating rules being triggered, or could a theoretical worst-case scenario actually be higher than this $4 billion? Thank you.
On the Evergreens, the redemption pattern, we didn't see any trigger by what was happening in the portfolios of some of our peers. We did have a pickup in redemptions in the second half of this year, but I think it was more the broader market. It's not like the queue increased meaningfully after BREIT. I think, most of our big Evergreen funds in the U.S. tend to be more private equity-focused. I do think that that triggered some activity in other real estate programs, from what I understand, and much of that market is now gated. We didn't see a direct correlation within our portfolio. There is a lag time.
We have about three months from the time that redemption notices come in until we have to fulfill those. We did have a project, we called it Project Shield, that we had a couple of years ago to introduce stricter liquidity limits. We're not saying that the, you know, that the guidance that we provide here is an absolute cap in the amount of liquidity that we would facilitate, but we do have the ability to steer, you know, liquidity in a meaningful way and to provide outflows based on our liquidity limits in a way that is measured and paced and appropriate for the various programs.
We don't anticipate meaningfully more liquidity than we're guiding for.
Yeah. Just to add maybe two points. First, what we saw is very modest, right? It was less than 3%, so we didn't see anything special. On the gating we provided, right, we have liquidity gates, and again, they're positive for the investor. What we provided for next year in redemption is already, I would say a prudent, maybe a little bit conservative estimate as if the market remains a little bit more challenging. I wouldn't read more into that based on what we see. We have seen actually that in Q4, the markets, right, were more challenged, and we only had three, and we haven't seen something different. The guidance we provided for next year is relatively prudent.
Thank you.
The next question comes from the line of Angeliki Bairaktari with JP Morgan. Please go ahead.
Good afternoon. Thanks for taking my questions. First of all, if I may follow up on the fundraising slowdown that you're guiding for 2023, could you give us some color whether this slowdown is also driven by sort of private banking, high net worth channels, having a temporary sort of pause or slowdown in demand? That's my first question. With regards to the deployment of capital, you mentioned that you have invested in smaller deals in 2022. Have you seen a change in the percentage of leverage that you deploy this year relative to the past? In other words, are you putting a higher share of equity in those investments now, given the difficulties with sort of the banking market to finance deals?
Third question, at the H1 stage, you had guided for performance fees below 20% of revenues. If I remember correctly, in particular, closer to perhaps 12%-13% of revenue subject to additional exits. We now know that you have concluded $7.6 billion of exits in the second half. Can you please provide an update to these performance fee guidance for the full year? Thank you.
Thank you very much.
Yeah.
On your first question, you mentioned about high net worth, whether that was impacting or whether that had sort of decided, you know, our kind of slowdown in fundraising. As you're aware, we have a very diversified client base at Partners Group. No, this one, this factor is not what has driven that. It's rather the uncertainty that we see in the market in general. As we've said, those conversion rates, client conversion rates are more inconsistent than they have been in the past. Whilst the demand has remained incredibly high across our client base, the conversion time or the conversion speed is less clear and less predictable.
Which is why we kind of mentioned as well, we skew that towards the second half of the year. No, it's not based on one factor or one client type.
On the deployment side, indeed, we have seen a shift towards smaller transactions. If you think of a typical transaction for us in the past, $1 billion-$2.5 billion in size, 50% leverage. The first lien would have usually been syndicated by banks. Second lien, you know, usually you're working with direct lending funds on that. In the new world, you're looking at transactions of, you know, $400 million-$1 billion, generally speaking, leverage levels between 25% and 35%.
We're working with either existing lenders that wanna roll over and stay invested or working with private lenders or asset management firms that we know have an appetite in order to place that debt, typically single tranche debt facilities in some of these new transactions. What that means is that you are limited in terms of the types of transactions that you can pursue in a market like this to investments that have truly transformational attributes. These are assets that are growing at mid-single digit earnings levels as opposed to in the past with the prior dynamics. You could buy, you know, single digit growers with a meaningful amount of leverage and still make a good return.
Today, we're really buying companies that really have to be transformed, and that's where our time and our effort has shifted to. Hans, do you wanna take the third question on performance fees?
Yes. Indeed, what we said, always is that remember the first half performance fee were 8% of total revenue, and we said we would be below 20. You what you said, we indicated that we would be somewhere in the middle on that. The first half annualized would be four then. You get to the number you just said. USIC has closed Q4. Yeah, we're consistent with that.
The next question comes from the line of Daniel Regli with Credit Suisse. Please go ahead.
Good evening and good afternoon, everybody. I mean, obviously, there were already a lot of questions, just following up on what you just said, Hans, about the performance fees that are related... Let's say more specifically about the exit environment. To read something into the realization number of 7.6 in H2 versus 6.4 is being a bit too optimistic as it sounds, just to confirm. The exit environment is still kind of in a difficult stage, and you don't see the end of the tunnel yet. Is this kind of a correct interpretation of what you just said? Secondly, just on your gross client demand guidance for 2023 in a broader context, obviously.
To be honest, I'm a bit surprised that your guidance is now even below the lower end of the old guidance. Can you maybe just put this new guidance a bit into context with the old guidance for 2022 or what you have achieved in 2022 and 2021, where it is just exceptionally good years, and now we're entering into a period where we have to expect more like, let's say, the $17 billion-$22 billion going forward. We're also thinking about 2024, for example, and beyond. Should we then expect kind of a normalization from an exceptionally low year, again, 2023, or even lower year, 2023, and then see again, higher gross client demand numbers for 2024? How shall I think about this? Thanks.
Yep. Thank you for your questions. On the performance fee side, or rather on the exit environment side, you are right. This is not a light at the end of the tunnel that we're seeing at the moment. Where we do launch exits, it's because we have really strong inbound demand from a specific group of investors that are targeting one of our assets. And we have confidence that we'll be able to achieve a reasonably high price, or it is a asset that we think plays particularly well in the current environment. Where we have had recent exits for assets that play particularly well in the current environment, we have been pleased with the results that we've been able to generate.
We highlighted a couple of case studies, on this example of some recent exits that have fetched, what we feel like are fair at appropriate prices. By and large, we are not launching exit processes en masse at the moment. You can read into the performance fee, you know, implications, what you will, from that.
With regards to the range, you know, the new range that we've provided follows a very, very similar pattern to what we've done during prior periods of market uncertainty. If you think about during COVID, when the environment got more difficult to predict out as the client conversion pipelines got more challenging, we also set the top end of our range at the bottom end of the last range and moved the entire grid down by about 20%. That's what we're seeing in the current environment as well. Conversion type timeframes become more difficult to predict. There's just a higher degree of uncertainty. That's the same pattern that we followed. It's not disproportionate to that.
Do we expect for the fundraising to ramp up to similar levels to what we've seen in prior years, 2021 as our kind of high-water mark benchmark as soon as the market environment normalizes? Yes, I do think that we have that type of potential, and we do have that type of a client relationship. In the current environment, it's just more uncertain, and so the range reflects that.
Can I maybe quickly follow up on the first one, just to understand what kind of needs to happen that we see this normalization we are probably all waiting for? Is it really the financing side which is the issue, or is it more like the bid-ask spread, which is too wide in the market to find or reasonable exits? Or what kind of signals can we watch out for to call the end...
Well, all of these-
dark 20.
All of these things... Yeah, all of these things are connected.
Right.
The reason why the financing is tough is because the banks don't know where the market is going to clear at the moment, and that relates to the bid-ask topic on the debt side. In addition to that, the sharp acceleration in rate increases that we saw over the course of 2022 has created a little bit of a bid-ask spread that needs to get worked through as well. It's there's a lot of different indicators that you can watch for. But I think it's a general stabilization of the market that's going to lead to, you know, buyers and sellers coming together and both sides feeling like they're getting a fair shake.
Just a final point on the performance fee, Daniel, so that it's not as linear with the exits because it's a little bit more complicated like that. Just one thing, because how high-water mark funds work, how all the funds work. It's not like one on one. We are coming in in line with the guidance we gave, right? In a challenging market environment. I think it was very important to never forget we postpone exits because the portfolio is delivering strong portfolio performance in growth, in EBIT. As we said that, like post-COVID, what's not exited this year will be exit when the markets are ready and performance fees is like almost a saving account. What we don't exit now, we will exit later.
We model that, and we're comfortable when markets are there, we will recollect what we don't collect now, and we will deliver within the range of 20%-30%. That's, I think, important to have. Are we not that?
Great. Thanks a lot for the clarification. Thank you. I don't see any more calls over the phone. I don't believe that there's any over the online system. I'd like to thank all of you for your In the call today and for your interest in our company, and we look forward to our next update in March. Thank you very much.
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