Dear, ladies and gentlemen, welcome to Partner Group's Semi Annual Results Presentation. At our customers' request, this conference will be recorded. As a reminder, all participants will be in a listen only mode. After the presentation, there will be an opportunity to ask questions. May I now hand you over to Andre Frei, who will start the meeting today.
Please go ahead, sir.
Good morning, everyone, and welcome to the presentation of Partners Group's Semi Annual Results 2018. My name is Andre Frei. I'm the Co Chief Executive Officer of Partners Group. And with me here in the room, Chetzenmeister, our Executive Chairman, Christoph Roble, Mike Kozio and Filip Sauer, who is the Co Head of our Group Finance and Corporate Development Department. So we look forward to presenting from different perspectives the successful start of 2018.
Naturally, I will talk about clients, Stefan will take the Board's perspective, Christoph will talk about investments, and Filip will talk about the financials of Partners Group in the 1st 6 months of 2018. So let me start on Slide 3 and talk about the key private market trend from a client perspective. Actually, we see a continued trend by institutional investors to invest in private markets, which is no longer an alternative for the well understood and established pillar in portfolio construction for institutional investors. And I would like to quote or cite a survey here. You see that about 90% of investors are pleased with the returns achieved by this asset class in the past, and about 90% of investors are looking forward to maintain or even increase allocations to private markets going forward.
And that is a trend that I also see in our client portfolio. Talking to clients, I see a good number of clients who have started maybe in one asset class and are interested in increasing allocation to this asset class or clients that have started with 1 asset class and are keen to diversify further and cover several of the asset classes the Partners Group does offer. So in George, this is an attractive trend. And as a company, we believe private market will grow in importance going forward. On Slide 4, you see that our client demand in 2018 has been driven by both program offerings as well as customized mandate solutions.
In 2018, to be specific, we have more than 25 programs and mandates in the markets that are open for inflows. Partners Group's assets under management covers about 2 third corporate assets on the infrastructure. In the first half of twenty eighteen, the corporate assets, private equity and debt, have amounted to about 3 quarter of fundraising, so strong interest by clients. Clients look at private equity as a complement to public equity. They do expect private equity to enhance returns.
And they look at private equity to really gain exposure, equity exposure to the real economy, which is not fully covered by public equities only. Clients look at real assets, for example, with the perspective of rising inflation. And clients also look at private debt, for example, from the perspective of rising interest rates because we do know that private debt typically has a floating rate nature, which is in contrast to the fixed income in public fixed income. Now going to talk about program and mandates illustrated on the right hand side in one of the coming slides. If you move to Slide 5, you see the sustained growth in assets under management of Partners Group in the last decade.
So at Parcelvix, we're grateful for this growth over the past 1 to 2 decades. And of course, we work hard to continue that growth trajectory also going forward. In the first half, we have seen inflows of €6,200,000,000 which is in line with expectations. We had announced or guided for €11,000,000,000 to €14,000,000,000 asset raising for the full year 2018. So that takes us from €62,000,000,000 assets under management to €67,000,000,000 assets under management as per June 2018.
And more assets under management naturally requires more professionals and leaders working at Partners Group. So we have talked many times about limited operating leverage. At Partners Group, this is certainly true on the equity investment side, where we simply need to source additional opportunities. We need to diligent additional investment opportunities and both invest that we need to create value in these assets for many years to come. That's why on the equity investment side, there's very little operating leverage for us as a company.
But of course, as a company, we do strive for efficiency and scalability in every area where this is possible. That can be using technology for available procedures and processes towards corporate and clients. And to some extent, the private debt, the senior debt platform, that is an element where certain scalability or operating leverage does exist. But roughly overall, very limited operating leverage for us as a company. So to say it positively, we are committed to really invest into the platform.
We want to build out our investment platform going forward. So the financial success that we have had in 2018 first half will give us the capital to build out the platform further and hire professionals to build up capacity. Let me move on to Slide 6, which illustrates the assets under management, dimensions. We are strong in our home market. That's what I referred to for Switzerland and Germany with about onethree of assets under management.
In this market, I see clients really continuing to allocate, some clients moving from almost over diversified private market portfolios to direct oriented, high conviction portfolios with fewer managers. So there's certain consolidation across managers in our home market like Switzerland and Germany. And very similar tendencies, for example, in the United Kingdom and the rest of Europe. I'm pleased with the strong growth we've seen in Asia and Australia, where we have a products that cater to the retail market. North America coming in 14%.
That is an area where I like to see more growth, where I'm also confident that we will see growth without growing positioning and brand in the United States without consistent strong track record. I'm convinced that the United States and North America will contribute more strongly to asset rating in the midterm. On the right hand side, you see the type of clients. Public pension funds continue to amount to about 50% of our capital rate. That will remain the case for the future, we think.
So 40% to 50%, I believe, will come from public and private pension funds also going forward. Insurance companies and sovereign wealth funds, certainly, 2 growth areas for us as a company. In terms of client diversification, Slide 7, you see that our largest clients amount to 3%, and our top 20 clients amount to about a quarter of our rest under management. Actually, when our investment teams look at client concentration, this is typically seen as a risk. A more diversified client base is better in terms of risk profile for a company.
At Partners Group, I see client concentration of large clients also as an opportunity. As a matter of fact, these are typically the mandate clients that have long standing established relationships with Partners Group. And in that sense, I look forward to more large clients contributing to asset rating and actually assets under management of Partners groups. So that is a positive picture also and not just a risk profile for stakeholders. On the right hand side, you see the split in terms of programs, mandates and structured programs.
This 20, forty-forty split is a split that I could envision as to be the case also for the coming years. We see strong interest by distribution partners at this point in the cycle. So a lot of asset raising for our semi liquid programs that are typically oversubscribed, and we manage the pipeline for these assets very carefully. And these are natural and good programs that allow midsized pension funds, for example, to allocate to private markets in a similar way like the big public or corporate pension funds will do. So a really strong element for our fundraising.
Closed ended programs, these are the natural flagship funds, let's say, just the product commingled structures that are simpler in nature, less high touch than the mandate solutions that amount to about 40% of active rating. And mandate solutions is actually something I would like to talk about on our next slide. So this slide, in a simplified way, illustrates the differences between an investment program and the mandate structure and how this makes a difference in terms of client interaction for us as a company. Close ended structures on the left hand side have been used by clients for many years to diversify across private market investment managers. So you see at the beginning, it's about the commitment decision.
Clients need to perform a due diligence on the investment manager in the program. They make a commitment decision. The manager is mandated to build up exposure to create value and ultimately realize positions. And the question that the client needs to add 5, 7 years later is whether or not to re up with an investment manager. And that is a typical commitment, addition or typical program constellation that you will see in private markets.
I believe partners will be even stronger on the mandate side as illustrated on the right hand side. So here it's about strategic allocation decisions that clients make to the private market asset class. There's a communication, there's a collaboration, and we want to find out what the strategic allocation to private markets in the midterm could look like. You might agree on a 2.5% allocation to private markets managed by Partners Group. You could agree on a €250,000,000 NAV target, let's say, to be achieved, maintained, increased by Partners Group over time.
So here, the collaboration between the limited partner, actually not the limited partner, but the client and then Partners Group has a very different nature. So on the right hand side, you see that Partners Group as an investment manager diversifies for clients across private markets, asset classes as opposed to be just one of several managers that this mandates to build up exposure. So in short, at Parascope, it's forty-forty, forty products, forty mandates in terms of percentage points. And I believe Partners Group on the mandate side is really positioned to perform at our best, and that is an important pillar for our company. Let move on to my last slide before I hand over to Felix Auer, which is about the expected client demand 2018.
I'm happy to reconfirm our expected range of new growth client commitment in 2018, €11,000,000,000 to €14,000,000,000 is coming months. In 2018, we continue to expect fundraising across a number of programs in land days, as I referred to the roughly 2 dozen offerings that we have currently in the market. As already highlighted, for example, semi liquid stock is a strong contributor with about 20%. We have a number of offerings in the market. And in 2019, some of our flagship funds will be back in the market.
Tail down effects from mature private market programs and potential redemptions from liquid and semi liquid programs are expected to amount to €4,500,000,000 to €5,500,000,000 As we previously don't provide guidance on other effects such as FX rates. And so basically, in short, we reconfirm what we had communicated earlier. So I'm satisfied with the successful first half of twenty eighteen. Rest assured that we will work hard to make the full year 2018 a little bit. And with this, I'd like to hand over to Filip Sauer for an update on the financials.
Thank you, and good morning from my side. I have the pleasure to present you and walk you through our financials in the first half of this year. And with this, I would like to start on Page 11 with our key figures. I think important to understand PartnerScrip is a top line growth story. So assets under management growth is important for us, which drives ultimately management fees and performance fees later in the cycle.
So we had average assets under management growth of 20%, which translate in revenue growth of 17%. Our cost base grew in line with these revenues, and that means that EBITDA grew also 17%. Profit grew by 10%, but already started from a higher base in 2,000 in H1 2017. And let me explain why this is the case. So on the revenue side on Page 12, you see that revenues were both supported were supported by both by management fees and by performance fees.
Both were growing 16% management fee, 19% performance fees. The EBITDA margin stayed stable or remained stable at 66%. I will elaborate on that later in the presentation. But below EBITDA, there are 2 factors which drive profit, which is, 1, the financial results and the other one is taxes. On the financial results side, it is important to note that Partners Group invests in its own products alongside clients, and this was about 1% of the product size.
This is the major contributor to a positive financial result during the year. And this was also positive last year. It was positive this year, but we had a FX effect, which was slightly negative this year and that is opposed to a slightly positive effect in the financial result of FX in H1 2017. And this, combined with a higher tax rate, led to a 10% profit growth in H1. Let me talk about revenues a bit more in detail because I think it's important to understand.
Once you understand the top line, you will understand the remaining part of Partners Group's financials will be a bit more easy to understand. So first, I will talk about management fees and talk about performance fees later. So on the management fee side, management fees at Partners Group are contractually recurring. They are recurring based on long term client agreements, which can last up to 12 years. And they have a certain additional component, which we call on the slide the late management fees and other income.
And this little component is not recurring or contractually recurring, but it comes with a slight volatility depending on fundraising and when we open or closing products. And this little component decreased by 23% in the first half of this year compared to last year, which was quite high. And that means that our overall management fee growth was 16% and slightly lower than assets under management growth, which was 20%. And I think it's important to give you a bit more insight on Slide 14 on this late management fees because this is always a topic which is not so common in the public market space and more special in for private market funds. So typically, late management fees occur in our products, not in our mandates.
And they typically occur during the fundraising period of such programs. So in periods where you raise or where partners could raise a lot of new funds, typically these late management fees tend to be lower. Vice versa, for instance, like last year, 2017, where we closed a number of products which were already longer in the market, then the late management fees are higher. So what you can see here on this slide, Page 14, is that a number of products for Parkinson's Group which we launched this year started to invest. And clients committing into this product a long day ago, so they're still open.
They need to pay or they have the ability to buy into a portfolio, which is now building up at cost. And as Partners Group already invests the money of the clients who commit early in the cycle, those clients who come a bit later into these programs need to pay management fees backwards to the point where the product actually started to invest. So that the end of the day that all clients joining that product will pay equal fees. So for instance, clients joining in 2020 for products which are still open or might be open until then, they will render management services backwards. And these are years, for instance, where management or late management fees could be a bit higher.
But now as we raise a lot of new products, they are lower. And we expect them to be lower also lower than 2017, also for the full year 2018. Now switching gears to performance fees. Performance fees are also driven by AUM in theory. So because an increasing AUM base allows us to increase to deploy more money in the market, and that should increase the potential future performance fees.
But this not really happened in history if you look at that chart. So there was more a spike in performance fees in 20 sixteen-seventeen instead of a gradual increase. And the main reason for that was the financial crisis, the great financial crisis in 2,008, 2009. This crisis postponed a lot of performance fees, which we expected to have come in 2012, 'thirteen, 'fourteen, 'fifteen. And they were postponed to 'sixteen, 'seventeen.
Now most of this catch up effect, which we have seen in 'sixteen, 18, our 170 So for instance, in H1 2018, our €175,000,000 performance fees, which we generated, mainly stem from products launched between 2,008 2012. Going forward, Partners Group expects to produce or generate meaningful performance fees as well. Now we give you guidance that these performance fees might be in the magnitude of 20% to 30% of overall revenues. What does that mean? That means on Page 16, that means if you generate €1,000,000,000 in revenues, performance fees could be in that bandwidth of €200,000,000 to €300,000,000 So there is a volatility of about €100,000,000 in there where we cannot give you guidance.
And I think the capital market needs to be get more comfortable with that little volatility we have on performance fees. Why that? We have a high visibility on performance fee generation, but not so high that we can forecast them better than this indication. Now for instance, at Partners Group, a product will pay performance fees after 6 to 9 years. So it is for us today very difficult to say of the product pace, which we launched today, pays performance fees in 6 to 9 years.
But what we can say is if we go 6 years down the road and look backwards and look at the performance of the product, we need to turn around and say, okay, this is here. The likelihood that this product will pay performance fees is high. So we have today over 2 50 products which are diversified across vintages, geographies, and most of these products have hundreds of assets embedded. So the likelihood that these performance fees are more recurring going forward is very high. Now nonetheless, performance fees are charged on realizations.
So what this means, if there is a crisis at partners in the market that could which could shortfall that exit window. And there will be, of course, less cash flows, which we can generate because we can exit less. And then performance fees could also be lower than 20% to 30%. Important to note is here is that 70% to 80%, so the bulk of our revenues is still recurring and contractually recurring in nature, and this is our management fees. And they have been recurring on Page 17 for the last 12 years.
So you see on Page 17, our management fee margin, it has been very stable, on average around 125 basis points. And we can assume that this margin remains stable going forward. The reason why we have that stability to that market is because Partners Group has increasingly shifted its investment focus towards direct investments. And direct investments have the advantage that they come at a slightly higher fees. However, they have the disadvantage that they are less scalable.
So you need more investment professionals to deploy the assets in the market. Now with the €175,000,000 of performance fees, the overall revenue margin adds up to 177 bps. Let me switch to costs on Page 18. On Page 18, you see that our cost base increased alongside revenues. And we have a very easy budgeting principle at Partners Group saying when we increase our assets under management, the additional management fees we generate, we give ourselves a budget of 40%.
So with this 40% of this additional management fees, we hire people in order to broaden the platform to allow us to invest more capital in the market. Now this is all this holds also true for performance fees. So performance fees which are if you go to Page 19, our EBITDA margin should be around 60%. But it is not right now. It is, as you can see, at 66%.
We expect going forward over the midterm, over the next 3 to 5 years, that this margin heads towards the 60% again because we will continue to hire people in order to broaden our platform and increase our investment capacity. Now there are 2 factors which influence or which impact the EBITDA margin. 1 is hiring, of course. If you hire more people, costs increase, EBITDA margin goes down. And the other one is FX.
And part of the high EBITDA margin we have seen in the first half of this year was also due to FX. And that needs an explanation on Page 20. Client perspective. This is now an AUM split according to from a program perspective. So 50% of our assets under management is in euro denominated products.
That means 50% of our management fees stem from euro denominated products. But we have hardly any euro costs against that. Most of the costs are still Swiss francs, but we will diversify over the years to come because we will not grow ultimately only in Switzerland. Our offices around the world are all growing. Now if you look at the FX development, especially the Swiss francs against the euro.
So the Swiss francs depreciated or the euro strengthened by roughly 9% in the first half of this year compared to the first half of last year. And now if you have a 9% strengthening of the euro that produce means that our euro denominated product produced simply more revenues in Swiss francs. And there are no costs against that. And that means or no additional costs against that. That means our EBITDA margin was slightly lifted also because of FX development.
With this, I think I want to jump to Page 21 and give you a little overview about our balance sheet data. Currently, at Partners Group, as of the end of H1 2018, we have €1,000,000,000 net liquidity. This is after the €500,000,000 dividend payment which we had in May. Roughly €650,000,000 we have exposure to our own products on our balance sheet and have an equity shareholder equity of about €1,800,000,000 And with this, I think we are well equipped also to withstand more difficult economic environments. And with that, I would like to hand over to Christoph to give you an update about the investment environment.
Thank you, Philippe. Good morning. It's my pleasure to share with you a snapshot of the investment activities in the first half of twenty eighteen. On Page 23, you can see that we continue to navigate in a market which is characterized by relatively modest growth, by a tightening of the overall market conditions as far as the Central Bank is concerned, relatively high prices but still very liquid financial markets. You can see on the right hand side that we therefore focus on niches in areas which are special transformative trends.
And if the focus really is on added value, on hands on management of the assets in a very direct fashion. The overall figures on Page 24, you can see that we've been quite active in the first half. We have deployed SEK 7,700,000,000 across the platform in different asset classes. And the activity of direct investments continue to be the backbone of the investment activities. We've been equally active on the distribution side.
So in total, SEK7.4 billion came back to our client portfolios. So it's been a market that is quite benign on the exit front. And I'm happy to report that all of these have also happened at very, very decent profitability ratios. If you look at the Page 25, you see the brief snapshot of the deal flow, which is sort of the lifeblood of our industry. You have to screen many different opportunities to focus on a select few.
We continue to be disciplined as in the past and roughly 3% of the transaction have come to fruition. You can see again that the direct equity contribution of €2,800,000,000 was the backbone of the firm in the first half and we expect a similarly strong result for the second half. The splits between the geographies, you can see that the United States has been close to 50%. Overall, we felt 40, 40, 20 is probably a good ratio to have. That always swings a little bit with the closing of the transactions.
The second half, we'll see a little bit more European closings with larger deals like TechEn, Amerald Beltec, Megadine that we have signed recently are in the process of closing. We'll certainly shift that balance a little bit more towards the European market. You see the split on the right hand side in terms of styles. Directs again 60%, the backbone of the firm over the years. And this is in line with our long term strategy where we feel roughly 60, 2020 is a good split to have between fund investments, the secondary markets and 1st and foremost, direct.
We practice, as you know, this relative value approach. We believe that the significant contribution to returns comes from doing the right thing at the right time. So we're spending quite a bit of time with the turbine led by under the guise of our Chief Risk Officer, what are the expected returns that we believe the different instruments, the different market areas will yield. We are in the middle focusing on what we call relative value. In a very granular fashion, we look at every niche at every industry, at every geography, at every size of the market to determine what are the things, what are the themes that we wish to invest in over the next 18 months.
And that sort of produces a cookbook for the investment team, what are we going to hunt for. So it's a very proactive approach that we apply. You see over time that the themes change in a pretty dramatic way. So certain years, the secondary market prevails like in 2009, 2010, right after the Lehman crisis, the global financial crisis. We have essentially focused on buying existing things at a deep discount.
That is today's no longer possible as all the prices are quite elevated. So today, the focus really is on direct investments, select secondaries and to round that off a few of the fund investments that we do in parallel. You share on the right hand side transformative trends to find those niches which offer you above average growth is really the core of this investment activity. What are the themes? You have on Page 29 a brief snapshot that sort of shows you with the green bullet points what are the themes that we actually like better than others.
And I will visualize that with 2 examples. On one hand, in emerging markets, you have this growing middle class that has more money to spend. That is certainly one theme that we like to exploit. You see on the right hand side in financial services, the commercial services which are being implied. TechEm is one of the examples that I will use to illustrate this.
TechM is one of the larger deals we have done this year. It's a €4,600,000,000 transaction with a German company that really focuses on metering and measuring utility sort of things, everything from water to electricity to gas. It is by far the largest company in that space. It has about 30% market share. So it's a dominating franchise leader in this industry.
And we believe it's actually an ideal candidate for the medium to long term because today quite low tech business can be digitized, can be transformed into something more modern. We have here 2 business partners which have followed us in the transaction, CDPQ and Ontario Teachers Loans from Canada. They have provided about €1,000,000,000 of the equity and we have provided a little bit more than them. So we own 52% of the company, our business partners especially 48. Second example that I will use for the emerging markets is Vishal.
Vishal is a retailer in India, has over the last year shown growth between 20% 30%. So it's a highly successful company, but it's still a company with a lot of white space ahead of it. So we believe there is a long term growth pattern that we can exploit. We will help them to have better SKU management, to have the products a bit more rearranged. But we're extremely excited about the prospects of this company in the Indian market.
Here we have deployed roughly €500,000,000 for a 61% stake in this company. On the real estate side, I'm using this 7 assets in 4 different fronts, which are managed by a U. S. Firm called Daxessa Partners based in Miami. It's existing office parks.
It's a very good example for both hotel and liquidity events where you have essentially a asset base that is intact, but an asset base that can still grow and be improved, but an investor base that is somewhat fatigued. And we provide a liquidity solution for those investors. We can essentially help them to have an exit. And together with the operator, together with the manager, we then give them like a new life and lead it into a next phase and profit from the return potential that is unexploited still. It's very office parks about 7 assets, which are in different United States cities anywhere from Texas over to Minnesota.
Last example I'm going to provide you with is Urrabara. It's a rules project in Australia, very close in Victoria, the state of Victoria. We've been very active in renewables right across Asia, starting in Japan, Fukushima, then in Taiwan, but then also more recently in Australia where major wind parks have been set up. Here it's a project that from an investment perspective is particularly interesting because it is to a large degree already derisked. About 80% of the revenue base is already contracted and it's already in the middle of the construction process.
So a very, very attractive project from a risk return perspective. Over the years, you see this on Page 34. We have deployed more than SEK 100,000,000,000. So we're very proud of what we have built in terms of size, in terms of volumes, in terms of business architecture. But more importantly, we're very proud of the track record, which we have generated in all of those different asset classes.
You see on the right hand side, the long term figures with more than 20% in private equity, bit more than 14% in infrastructure and 7% private debt, 12% on the real estate side. So all of these, if you compare them to the market average, actually have done very well. I want to finish my presentation with a personal note. I think you have seen the announcement of last week where we have announced a transition in the Co CEO office. Already 6 years ago, when we discussed who is going to be after our CEO, Jeff Stefan the next CEO, we came to the conclusion the firm is getting bigger, the firm is getting more complex.
And I was asked together with Andre Frei to then become co CEO in 2013. Already then he was clear that I was going to last for some time. I'm getting older. So therefore, I want to focus on a continued basis on investments. But I'm very, very happy that a capable partner is taking over the reins and will from January onwards lead the firm as COSIO together with Andre Freig.
It was a privilege to serve in that capacity. I want to thank Stefan for having given me this opportunity. And I want to thank Andre Frei that has been a great partner alongside. I think it reflects our culture that is somewhat special that we share things that there is a consensus and that we believe in inclusion and transition, which are somewhat smooth. I think that was what happened in the past.
I will going forward focus mostly on governance They continued build out of the investment platform where we have this industry reality creation team, which is in a hands on fashion helping companies to grow and also making sure that the boards are led in a capable fashion. With this, I'd like to hand over to our Chairman, Stefan Leister.
Good morning, everyone. From my side also thank you, Christophe and Andre and Filip for your presentations. Let me actually add first a word on that change of the Co CEO of this, I think that's called the service. As Christoph said, when Christoph and Andre took over in 2013, it was clear that Christoph was excited, but Christoph also mentioned at that time already that he would not see this assignment beyond maybe 4 or 5 years. I think that's what roughly the period indicated.
And at the end this year, it will be actually 5.5 years. So we actually have extremely grateful for that commitment during the time and very, very happy for all of these achievements. I can understand Christophe's decision. I have to say that from a personal note. I mean, this job comes with crazy hours sometimes, comes with mad traveling, especially on the investment side.
Our investment platform is getting globally So I have sympathy for that change, Christophe. And while it's not a farewell today because there's another half year to run actually, my friend, but still, I want to use this audience here the last time in this audience here to say thank you for all what you've done. I think the success last few years not least is attributable to what you guys did, of course, together with the ex co, all the other colleagues in the firm. But I think this was outstanding, great commitment. And thank you very much for that, Christophe.
So we can for you.
Of course, we'll do
this still work. We'll do this more fun way, I mean, in a real way at the end of the year or so. There's two reasons why you see me still with a bit of a smile on my face actually talking about this event or despite that event, and this is for two reasons. The first one is, as Christophe said, we are again able to retain a deserved partner, very important partner in our firm in a very important function beyond that previous assignment. As Christoph said, he will take over an extremely important role.
We spent increasingly time and I will talk about in a moment on the governance topic, on establishing our operating partners and where the governance of the portfolio companies, that's very decisive for us. And it's not an easy role to play at Beyonds because you have to be at in a level playing field with CEOs, with other Board members. There's actually few people in our organization next to Chris who can play that role. So we're extremely happy about that. I'm personally looking forward to continue to working with you quite closely actually in that role in the coming years.
The second reason why I'm still confident about the future and about that CEO office change or co CEO of this change is because of the incoming partner that is David Leighton. David Leighton is the Head of Private Equity. It's the largest department. He is in
the Executive Committee Global Executive Board. He is
an Investment Committee. So he is a very senior leader in the firm. Dave has joined Palmshoop pretty much actually off the business school. So he has been with us for close to 14 years now. And he has literally built up the private equity last 15 years.
He has in that period done a lot of very important transactions for us investments. He still sits on the board of a number of them actually like Kinsicat, that's the private our largest private sector, early childhood education business in the U. S. Or Pacific Bells that you probably know from maybe trips, select trips to the U. S.
That's a fast food restaurant business. And the reason why I think the Board is so confident about that change is really fourfold. Dave Leighton is a PG entrepreneur. He has several times demonstrated with his assignments in private equity in building up the team, in building up the Denver hub for us that he's an extremely entrepreneurial person. He's also a real PG leader.
I mean, being an entrepreneur is only effective at one stage if you can really have your troops behind you following you and really achieve together with you your goals. And he has been, I think, remarkable in the way he built up the teams in the U. S. In particular. The third one is, he's a real PG investor.
He shares the DNA, the mindset of how we go about investments. He's more focused on the actual governance, developing the assets than the transaction side of things. He shares our values, the long term thinking here, and he has proven this many, many, many times actually. And he's clearly here a role model for our people in the firm. And the last one, and maybe that's the most important one, he's a real PG culture carrier.
Our firm and our success will depend massively going forward on the ability to retain that culture, that long term culture, that mindset, that team oriented cooperation that we have in our organization, nothing with Dave being at the helm, at the co helm together with Andre, we're extremely confident that we can retain this. There have been 2 questions frequently asked with that change.
The one question is why do
you have again co heads? Why does this actually work at Pavel's group? Because it doesn't seem to work in literally any other organization. First of all, I think it's a culture question. As I said, I think we have a very strong team focus in how we run businesses, between all the teams, the same in Board.
I don't think we're big fans of lonely rules or cap on the deck that essentially cut their shots. That's not how we work. And it's essentially where you see a lot of growth or development in the business where we are convinced, it's our assessment at least, that to have actually 2 guys or girls at the helm that can influence each other and can bring in directly different perspectives in decision making. It can make the decision making faster and can be more effective depending again on the team situation than maybe with a single head function. The other question was, do you actually look for these kind of positions outside Partners Group?
And we were pretty blunt in answering that, no, full stop. It's not realistic in our assessment. Done as a co CEO offer requires such a huge amount of understanding of our strategy division, how we see product market shaping up, and I'll talk about that because they're changing quite massively actually. It requires understanding about operation. There's complexity in that platform despite the fact that we only about 1,000 people.
So it's not a big firm, but it does come with a big need for understanding, especially as with that size. Our co CEOs, they don't have big stocks. They don't have teams of 20 people who do their work. They do the work themselves, right, at the Board. That may be the size of the company we have in the building, but the DNA, the culture.
So with all of that, and then last but not least, the cultural aspect that I mentioned before, we don't see it as realistic in hiring through a headhunter, a person out there and just talking the CEO of this with such a person.
So we're confident about that change.
We'll talk more in our policy meeting about that change and celebrate this. But thank you for that change for all that work that has been done. Of course, you will meet Dave Leighton in our, I think, March presentation for the full year 2018 numbers. So with that, I'd like to move to some perspectives on pipe markets. As I mentioned, pipe markets continue to change quite a bit.
They grow disproportionately. They change disproportionately. They take market share from public markets. You hear notions like long term governance, differences public in private markets. You probably hear about long term investing propositions in private markets.
We are at the forefront of this with a very small number of large private equity firms. So let me shed some light on some of these developments and what they mean to us. So to start a little bit with the developments, important to have the context here. The private markets industry has changed massively over the last decade. It used to be an industry that worked essentially with leverage, putting leverage on businesses, waiting for some corporate action and selling again.
It's probably more what like hedge funds tries to do sometimes today, maybe not through the financial leverage, but the media leverage, but maybe
a little bit the same notion.
Now as this arbitrage has gone away in the 80s, 90s, the business has fundamentally changed. In the last 15 years, the industry has to adapt to a very value creation oriented approach. And if you look today at the typical value creation bridge or return bridge, then the big part of the upside is clearly what can you do in terms of growing the cash flow, the free cash flow of these businesses. How do you do that? The industry has adapted.
I mean, thinking about our firm, the fastest growing team in Partner's group and that continues to be the fastest growing team is our industry value creation team. That's a global team that spends from research people that look at subsectors, some of these sectors that Christoph has alluded to, think about the subsectors or subsectors transformative trends about companies in these sectors operating successfully, providing its input to people on the investment side, Once you invested, there's a very Once you're invested, there's a very close relationship between Board and Management, and I'll talk about it in a second again, To actually agree on the investment offices and the value creation efforts and make them happen with the IVC team, the external operating partners. So these are the board specialists, the NEDs, project management offices stocked by us, by outsiders and then ultimately leveraging the whole platform of the firm to actually grow these assets and these businesses. So how do you achieve that value creation of board management level? Because that's probably the biggest difference between private markets and public markets.
Well, it's about entrepreneurial governance at that Board and management level. This is something we have been fairly vocal about in the last 12, 24 months. We have actually even wrote about this in a book that we published in March. There is this increased bifurcation in how public market or at least some public market boards operate relative to private markets. With all what we've seen as baggage in public markets like Enron's, Kennels and so forth, feedings and solvent oxygen, things like that, there has been a direction taken by public markets, which essentially forces board or let boards believe that they are forced to really think about processes, about controls, about compliance, a lot of administrative check the box kind of things, but not significantly spending time on strategic direction and value creation.
And again, I'm generalizing there's fantastic public firms, especially those that have maybe families involved and founders as maybe shareholders, but there's could be many public firms that go into that direction. They measure success by short term accounting earnings. And that's very different from private markets, where the Board is tremendously focused on this agenda of typically 3, 4, 5 large evaluation projects. We measure that process based on KPIs like mid term cash flow. And by the way, if you speak to entrepreneurs, right, but that's consistent elsewhere, I'm not sure how many entrepreneurs base their success on, I don't know, use GAAP or IFRS earnings, right?
I mean, that comes with all kind of effect. And you see that's a different in thinking. So there is a clear difference in the way governance works, how management teams operate, how goals operate. And that has led to a reduction of attractiveness in some instances of public markets. Increasingly see minority owners,
they don't want to go
back into public markets or sell to corporates in exchange against corporate stock. We see increasingly management teams that prefer to be operating in 5 markets for 10 years, 15, 20 years. And you see that development, the number of public companies in the U. S. Have come down from about 8,000 20 years ago to about 4,000.
And that's not just consolidation. That's also because IPOs have come down massively actually in the meantime.
So how does this play into this
whole notion of not only the growth that is probably more evident, but also long term investing in maybe new forms of governance? So let me talk a little bit about that. So if you think about our typical approach in direct equity investing, that's equity, that's for infra businesses, for real estate platforms, that's really from a, I would say, market structure perspective, 3 types of situations we look for in all these sectors that we find attractive. Platform situation, so very fragmented markets that we often find in healthcare, for instance, CERBA is a clinical laboratory business based in France, very fragmented markets. They essentially take a big part of the market share, which is growing through small acquisitions.
And you have that in many, many instances in many, many subsectors. You have companies that we call niche companies. These are companies that have typically won very, very strong product. CV Card is a U. K, a business service software provider to governance, mostly in U.
K, some Anglo Saxon countries, now internationalization happens in Australia and other parts of the world and franchise companies that have a unique more defensive kind of capabilities. Our approach with that entrepreneurial governance and that value creation is to bring these organizations lead them to what we call category leaders. Category leaders are companies that in their space, product or market or service area start to dominate the market because they have market shares like 30%, 40%, 50%. You mentioned TechM that has a market share in Germany of about 30%, 40%. We have SEERBA that is growing to 30%, 40%.
Companies like Universal Services of America that we have bought many years ago and through acquisition have grown to become today called Allied Universal, the largest security business in U. S. They dominate that security business market in U. S. Once you have a company that has that kind of current leadership, these companies get very hard to compete with.
Think of it as kind of Belmaritz, I'm not sure whether the team is not controversial, pick your favorite team in Champions League, okay? These are businesses that are very hard to compete with because they're very scalable. They have lower cost of this because of size. They're probably better on in most cases, and they can grow more quickly through additional acquisitions that they can digest better than other people or just maybe organic growth. In some cases, these business operate in sectors that we feel are quite resilient, meaning that the industry per se is something that we don't expect to massively change in the next 10 to 15 years.
Or if that changes that industry, we believe that these businesses will actually be the ones that lead that disruption and take, if anything, probably even more market share in that kind of change. If that's the case, we want to keep on owning, holding, developing these assets. This is what long term investing about is about in private markets at Partners Group. In other words, if you think about it in a slightly more conceptual way here on Page 41, you have, of course, still that traditional buyout space. We call this relative value assets because that's the process, the relative value thinking, kind of 5 year plus minus time horizon and you typically sell.
But in the instances when you have developed businesses that have so dominant positions and they happen to be an industry that have that resilience, a special characteristic, we want to own them for longer. These are assets that look a little bit like public market assets in terms of maybe the sizes, maybe not very big assets in public markets, but I would say reasonable size assets in public markets in terms of their positioning, in terms of their risk characteristics. And that makes them also attractive for the clients. That's why clients like that proposition because they see it really as achieving 5 mark returns with a risk characteristic, which is much more resembling public market portfolios. So what does it mean for our organization?
I mean, we have started to hold on longer to assets, 8 years, 10 years, it could be up to 15 years. We have discussions with clients and this is where Andre discussed the mandate aspect because that's mostly important for the mandate declines that actually changed our mandate structures that allow for 10 years for 15 year holding periods. And it will come also in our firm, if anything, with even more of a stringent push to become a partner to industry. We have never been a Wall Street firm. But I think if anything, we'll probably even move away more from being a financial firm in the way we operate, in the way the DNA works, how we hire people towards more of an industrial partner.
Internally, we make that reference and we talk about the 1982 General Electric kind of mindset from setup when Wells took over from Jones. That's probably a little bit how we should think about what Paulus Group is going into in the next 5 to 10 years, more of an industrial business, more value creation, more people from the different industry sectors that actually govern and own these business in the future. That will be a slow process. This doesn't change anything today or tomorrow. It will not have any significant impact on our financials in the next 1 or 2 years.
But in the long run, the next 5 to 10 years, I think with that, we get additional market share and AUM relative or at the cost of public markets with this long term investment strategy. And we'll certainly talk more about this it in the next few years to come. So with that outlook to Fibonacci Industry and Partners Group, I guess we finish the official part of presentation and move to questions.
Ladies and gentlemen, we will now begin our question and answer session.
Secondly, on performance fees, we have now seen again higher performance fees in H1. So we now see or temporarily our expectations for H2 in performance fees. And Yes. Daniel, thank you for your questions. First of all, with the management fees are remarkably stable, yes, but that has you have to look a step deeper, which is, for instance, into our different asset classes.
And we have moved over the years into, as I said earlier in the presentation, into more equity related investment strategies, which are less scalable, which are coming at higher fees. And with this shift in with this investment shift mix we see at Palmsco, we think we can maintain our margins on the management fee side. So I think from that end, it should be quite stable going forward. From a performance fee perspective, I think we you need to stick unfortunately to our guidance, which is 20% to 30% of overall revenues. And if you do your math in terms of whatever you I think Andre elaborated on assets under management fee growth for the full year, so you pretty much know where our target AUM will be at the year end.
This gives you enough guidance to calculate the management fees. And if you then calculate a 20% to 30% performance fee on top, I think then you would be in that range. And that means also, yes, we expect meaningful performance fees for the second half as well. But it should be 2% 20% to 30% of overall revenues for the full year. With regards lastly, sorry, is the tax rate.
I think Partners Group has become more and more in jurisdictions which have a higher tax rate. And therefore, you might see going forward that our tax rate slightly increases going forward. It is we guided for you see a couple of percentage points probably, which we will see the tax rate increasing over the next to 4 years. Maybe you're right. I think from yes, it's the guidance on EBITDA margin, whether to what extent what can bring our EBITDA margin towards that long term target of 60%.
And Michel Koons mentioned rightly saying, I think a collapse of the euro is probably the most this is probably the quickest way to bring the margin down, as you rightly said. Performance fees is more margin neutral. I think they come with a 60% EBITDA margin or 40% costincome ratio. Now the reason why we give you guidance towards a more 3 to 5 year time horizon is because in order to bring that margin down, we need to hire disproportionately to management fee growth. And this is our intention and that's we cannot I think if you look at our assets under management growth outlook for 2018, it assumes already a double digit growth on the midpoint.
So we need to hire in excess of that in order to bring that margin or head that margin towards 6%. And that will not happen overnight, and that's why this reversion to the long term target will happen rather slowly.
Thanks for that question. Indeed, that business is one of the more rapidly growing businesses, a Partners Group. We have many, many years ago started to extend our equity capabilities into more mezzanine type structures. Over the last couple of years, we have also in parallel to this mezzanine business, 2nd lien business, subordinated sort of that offerings focused on the broadly syndicated loan market. We have launched a series of CLOs here in Europe first, then in the United States and have in parallel also added quite a bit of capabilities to our team that we can actually digest that and that we can responsibly manage and in a disciplined fashion manage this business.
I do expect it to grow continuously over the next 2, 3 years as the clients are still looking for this regular and really sort of inflow. Clients also like it because it's essentially on a LIBOR basis. So should there be more inflation? And we all expect that inflation will probably edge up and the interest rates will rise. You have a natural hedge with those debt programs.
So I think they continue to see quite healthy demand on the client side and we can see ample investment opportunities in the market. Cynically speaking, whenever a deal gets too expensive for the equity guys, typically the debt team would then finance, but there's also a lot of synergies within the platform that help each other to actually stabilize the work that has been done on a particularly given asset.
The current environment of as you see right now, I mean, how this could potentially impact the performance fees? And then the second question is much narrower. Could you repeat the net
On the overall macro environment, I mean, anybody's guess this is good. Crystal ball nobody has. With all the relative value that we practice, it's very, very hard to predict the future. I think the level of uncertainty that we have at the moment is probably as high as it's ever been. We have certainly seen a big rise of political risk.
And he alluded to the trade wars. We've seen actually very little change currently in the portfolio. And on the deal doing side, prices have remained quite high, have remained quite elevated. So expectations on the vendor side remain quite ambitious and high. We have seen abundance in the debt markets that continues as we discussed before.
So on that front, a little change. What we do on our side is we just want to be very disciplined by really choosing things, which as Stefan earlier pointed out, are resilient here for the long term, here to stay, which are well managed and which have growth potential beyond the next phase sort of phase. With that, I guess, even if there is a hiccup, you can sustain. The second thing you want to be careful about is the use of leverage. We've seen in 2,006 and 2,007, if you have great companies, but they're over levered, it doesn't take too much for that equity to be wiped out.
That is certainly something that we're very mindful of that We have covenant light structures and things which bear very little refinancing risk. So that's really what we can do on the investment side, the sort of pound of balance this uncertainty. From a client perspective, I
would say that Partners Group is known as a company that focuses both on portfolio construction and asset allocation, but then also asset selection. So clients do know the Partners Group does not take either of the 2 elements lightly. And actually, they're focused on portfolio construction, which will help. Should there be like should there be recessions? Should there be market dislocations?
Should there be debt crisis? So asset allocation is an important element on top of what Christoph just mentioned. I guess from a client perspective, clients are convinced that private market, as Stefan alluded to, is an asset class where it's about hands on value creation. It's about stabilizing assets in a downturn. It's about creating growth in an upside environment.
So in that sense, private equity, private equity and infrastructure is an asset class that from a client perspective should not do worse, actually better than public equity or public markets in negative market environments.
And from a financial perspective, I need to follow-up on Christoph's. I think in the short term, we don't see a big impact on performance fees for on trade war and on our portfolio because at this point in time, prices remain quite high. You asked a second question on the financial results. We assume until year end that our portfolio still runs well and will perform. And if this is the case, probably the run rate is a good way to assume for the rest of the year of what you have seen in the first half.
Well, in terms of the question is about how the platform growth will manifest itself. Is it employee driven? And also what are the investment opportunities? So maybe I'll start on the employee side. Partners Group has grown organically in the past.
We want to grow organically going forward. Platform growth will entail substantial hiring on a global basis, primarily also in the United States and in the markets where investment opportunities exist. So that is not going to be focused on ZUK. The hiring going forward is going to take place on an international level. It's going to be a combination of lateral hiring, but also of financial analysts and associates or more junior employees joining our platform.
So we have a strong brand. Lateral hiring works good for Partners Group, but of course, you need to convince these talents to join the platform. I'm also proud of the social program the Partners Group offers. About 100 employees will be hired over the next 12 to 18 months to join our platform straight from university to learn about private markets, learn about Partners Group and then there will be full professionals within a number of years. So there will be strong growth, not only on the electrical side, but also from a university level and some sites.
From the investment perspective, I think Page 29 really sums up the themes. You look at those verticals and the green dots, that's where we focus the energy on. The biggest change, I guess, is that if you want to be successful, you have to be proactive. You cannot wait for a bank to approach you and say, hey, there's a potential transaction coming. You have too many months and sometimes even years before the transaction process starts.
You have to be ready. You have to get to know the vendors. You have to get to know the management teams. You have to do your homework because by the time the process unfolds, you do not have this time to essentially start from 0. We really have to essentially, on a very proactive basis, develop a transaction idea, a special angle way, way ahead of anything starting.
And that ensures you a rate of success better than others. And that's also honestly what has helped us greatly in the first half of this year to really deploy as much volume as we have deployed. And year to date, in fact, the figure stands at a slightly higher figure than even for the full of last year. So we're extremely happy about the results, which are really based on this proactive approach, proactive sort of following of transactions that will continue over the next years.
The third question that was asked is about the loss of declines and how we wanted to prevent a loss of declines. But I believe it's simply a combination of track record and service excellence. So we need to perform as an asset class. We need to perform as a company. It's about the track record to performance and the outperformance of private markets over the public comparables.
Secondly, service excellence. I'm really proud of the corporate and services teams at Partners Group that make public that make private markets feel public, that allow institutional investors to invest in private markets in a way that is efficient for the client. And ultimately, I believe the most important element is to treat clients like clients rather than limited partners. So actually, we like especially the large clients to feel like unlimited partners to partners group. So it's about close dialogue.
It's about service excellence. It's about track record. And that's how we want to call our clients back.
Well, the focus, I guess We'll see growth across the platform. Clearly, the investment side will need to grow in line with assets under management. I think Pierre Felix Hauser already alluded to the fact that our business is not overly scalable, only certain parts. Preference on our side certainly is on organic growth. So we hire a lot of financial analysts and associates that we integrate and train and rotate with the firm that they also learn this DNA and the culture that Stefan Meister has alluded to.
But clearly, as the platform grows, there will also be selective lateral hires, as Andre already pointed out. But the growth will be right across the platform, from IT to the service side to the treasury, the corporate sort of activities as well as the investment side. The biggest growth at the moment is probably going to be this industry value creation team that we can really, from a hands on industrial perspective, add value tangibly to the assets that we own.
Sorry, if I just may add perspective here to clarify a little bit because there's 2 questions that have a little bit the same kind of answer. I mean, what makes us successful? How can we retain the big clients? Why do we grow so much? It goes back to the same point.
It's about achieving better returns than the public markets than the average investment private markets. And to do that, you need size. Also in our industry, we do see more of that winner takes all kind of phenomenon that you've seen in other industries, of course, very heavily in technology based businesses, but it happens also in our industry. It reminds me sometimes a little bit of what we have seen in Investment Banking between the early 80s and the end of 90s. And if I make that comparison, don't get me wrong, right?
I mean, our DNA is very different from Investment Banking. But what you have seen is you have a relatively fragmented market early 80s with a number of players that were more reactive in the way they actually reacted to opportunities. And in these 20 years, the market has changed fundamentally, right? It has become extremely professional, extremely proactive, where you would entertain a dialogue with CEOs of corporates, for instance, for M and A purposes just all the time ahead of any transaction. And this is exactly what's happening in our industry.
And you need massive resources to do that because you literally talk to hundreds of companies all the time. And it's not just one guy talking to them. You need to have the industry people. You need to have operating partners to actually vet some investment hypotheses upfront. And there will only be a number of organizations who will have that scale.
Like in Investment Banking today, literally, there are 4 or 5 firms that actually dominate that space. I could well see that maybe also in our space in 10 years from now, there's 5 to 10 organizations that have a very big market share, at least when it comes to larger assets, maybe except for maybe some small cap businesses that are small regional in nature. So all of that plays together in a great opportunity, but certainly from a Board perspective, it's also a challenge, right? We need to be there. We need to have that market share.
We need to have that proximity to these businesses, the understanding, the proactiveness to actually get that market share. And only then will the firm be able to grow as much as we want to in the next 5 to 10 years and deliver the returns, that's the most important thing, for our clients to be successful. So this comes altogether in this, I would say, development that we foresee in the market and how we actually want to respond to it. Maybe some questions from telephone conference.
Yes, of course. The first question we received on the telephone line is from Tom Mills of Credit Suisse. Your line is now open. Please go ahead.
Good morning. Thanks for taking my question. I actually the generating the route to crisis that have taken longer to realize are embedded within the €175,000,000 number that you generate in the first half. So what are we down to at this point so we can have a better idea of what a kind of more normalized number might be going forward, obviously taking account of what you've said earlier in terms of the 20% to 30%. Then secondly, on Slide 38, please could you give us an idea how the IRR has evolved over those different phases of industry development?
And what sort of premium growth relative to private markets do you think is required in order to see allocations towards private markets continue to shift the kind of attractive rates that we've been seeing? And finally, could you give us an idea what your average cash on cash return on the CHF 7,400,000,000 1,000,000,000 of exit or euros or other exits that you did in 1H 'eighteen were, please? Just to get an idea how your performance is tracking?
Maybe let me start with the performance fees first. From the first half of twenty 18, a very, very small board is almost neglectable, is part from a catch from still part of this catch up effect I alluded to. I said most of the performance fees are a significant decline in the majority stems from vintages from 2,008 onwards till probably 2012. And that's why it is probably this is the post rate financial crisis area, which starts now.
In terms of returns expected by clients and how returns of the asset classes have developed over the past 10, 20 years, well, actually, today, clients still look at private markets and expect an outperformance of, let's say, 3% to 5%, right? So 3% to 5% is a classical figure looked at in order to warrant the efforts, the inefficiency of the asset class and those are to justify the illiquidity of the asset class. So I believe outperformance expectations have not changed that dramatically over the past 10% or 20%. It's still 3% to 5%. What does have changed in our opinion is like the general outlook and what, let's say, public equities can do.
So public equities over a very long term horizon has been close to 10%, let's say, 8% to 10%. At this point in time, we believe as a company that public equity returns over the next 7 years, let's say, are going to be much lower than that. So we clearly see single digit returns realistic for public equities, but that doesn't take anything away from 3% to 5 percent outperformance. So at this point in time, I think clients do expect private equity or the corporate assets private equity to clearly be double digit, mid double digit from an SIRR perspective. And that we expect also real assets like real estate and infrastructure to be double digit, but a healthy notch below what would be expected for private equity.
In terms of IRRs achieved on exits, this is a very good environment also to exit and realize investments. So the IRRs achieved on the exits in 2018 are clearly above the levels I've indicated since these investments have been held, created value and exited during a very beneficial market environment.
That's clear. Thanks very much.
The next question is from Gurjit Kambo of JPMorgan. Your line is now open. Please go ahead.
Hi, good morning. Thank you for taking my question. Really one question. In terms of you talked about the consolidation in the industry and how clients are looking to use less managers. And clearly that helps you in your home markets.
Are you finding it difficult for yourselves to maybe enter into markets where you're not as large and given other players may be seeing the benefits of consolidation?
It is fair to say that like mandate relationships that cover several asset classes or that are very substantial in size, be it in dollar terms or percentage terms of overall asset management. Sizable mandate relationships take a while to really to happen and to materialize to cement and ultimately grow. So I don't believe the partners will be differently positioned outside our home market, but it's true that the type of mandate relationships in a region like the United States or Asia might take a bit longer. Having said that, we do have mandate relationships all across the globe, an overweight, let's say, to Europe, but we do have a very large very long standing mandate relationships of size also in the States in Asia, for instance, and Australia.
Okay. That's great. Thank you.
We haven't received any further questions via the telephone lines.
Is there a question in the room maybe?
Okay. There does not appear to be further questions. I would like to thank you for your time today. We overran, but I hope it was worth the effort. It was great talking to you.
Let's continue the dialogue, and I wish everyone a successful week ahead of us. Enjoy.