Dear ladies and gentlemen, welcome to the Partners Group Annual Results 2017 presentation. At our customers' request, this conference will be recorded. As a reminder, all participants will be in listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participant has difficulties hearing the conference, please press star key followed by 0 on your telephone for operator assistance. May I now hand you over to Dr Wuffli, who will lead you through this conference. Please go ahead, sir.
Yes, thank you. Good morning, dear shareholders, friends of Partners Group, and colleagues here in Zurich as well as on the phone. Welcome to the annual results presentation. I am joined on the podium by our two Co-CEOs, Christoph Rubeli and André Frei, as well as our Co-Head of Group Finance and Corporate Development, Philip Sauer. We are very pleased to announce very solid results. To be very honest, I think the results are almost a little bit too good. We are used to double-digit growth, but more in the low teens and not in the high 20s and mid-30s, such as we have delivered both at the revenue level as well as at the profit level. As you will see in the presentation, that has to do with unusually high revenue elements that are very unlikely to reoccur, certainly this year.
I think as a result of that, costs did not keep up with revenue dynamics, and our margin shot through the roof. It was, in that sense, to some extent, an unusual year. Nevertheless, we are very pleased with it. Strategically, nothing has changed. That is why I have the courage to show you the same slide in, I think, the fourth time in a row, which essentially summarizes the Partners Group model in one slide. We are privileged to be in an industry which is large and growing. Private markets globally with about 5 trillion market is just about 2% of total estimated global financial assets. The Partners Group market share is less than 2% of the private markets industry, and the whole thing is growing. You see, there is plenty of growth potential in the industry. Partners Group is a market leader.
Partners Group has a unique model with its integrated global platform, with its multi-asset class offering, with its scale. As Christoph will show in his presentation, we see more and more tangible competitive benefits. For example, when we source assets because of our global structure, our scale, and our multi-asset offering. We just come back from a client conference at Bürgenstock, which was fabulous. I can tell you, and André will go into detail, I have not met a single unhappy client. They are all extremely happy. They love our performance. Not only that, they also love the fact that we are really able to service their ever more complex needs at different locations with our reporting across asset classes and so on. The result of that is a very robust double-digit growth model at the level of revenue assets, revenue, profit, and ultimately dividend.
That's what Partners Group is. Also this slide you have seen a year ago, it has not changed. Shareholders love it as well. Shareholders are as convinced as we are that this is a sustainable double-digit kind of model to grow revenue, profit, and dividend. Obviously, what would shareholders like better than something like that? I think that explains why we continue to have this level of valuation, making us the second most valuable private markets company on the planet. There's one thing that actually is changing, and this is the fact that this is the last time that you will have to bear with me in this role as chairman at this occasion.
As we have announced a week ago, I have proposed in the board that we appoint, or the shareholders appoint Steffen Meister as my successor at our shareholder AGM in May. The reason is very simple. I've worked very closely with Steffen over the past years. I've gotten to know him very well, and I'm just absolutely convinced that he has the right leadership qualities to take on the chairmanship role, as well as that he's ready now to do this. I think there's no bigger privilege than having a successor who is substantially younger and who has the capabilities to lead this terrific growth story forward. The other reason is that I have, or I am approaching the tenure rule of tenure. Since the IPO, Partners Group has been very strict in having a tenure rule for independent board members.
While there are many things we don't really believe in independence criteria, this is a criteria that I think the world is full of people who think themselves as irreplaceable, particularly the cemeteries are. I think tenure rule in leadership is a good rule. This also is not really a change because we have put it under the heading of continuity. We even called the project continuity internally. I have been asked by my colleagues to stay on as vice-chairman to help Steffen grow into the role. That's essentially it. Thank you. I'm a bit nostalgic, I must say. I've done my first result presentation in February 1995 when I was chief financial officer of Swiss Bank Corporation.
The world has changed quite dramatically in this almost a quarter of a century. I look forward to some next kind of hobbies that I will endeavor in. With that, I hand over to André.
Thank you, Peter, and a warm welcome also from my side. Let's talk about client activities in 2017 and 2018. As Peter has already said, we returned from our client annual general meeting in Switzerland. We welcomed more than 275 clients from all across the globe and spent three-plus days talking about the investment programs of Partners Group, about the investments and the exits that we have made recently and are about to make. For us, it was an opportunity to make private equity, private debt, real estate infrastructure tangible. We've invited not only our own investment leaders, CEOs, chairmen, and industry advisors who talked about how we have diligent the assets, how we now serve on the boards of these companies and assets to improve performance.
It was about value creation, what we want to accomplish on the boards of these assets, and how we want to go about it. We discussed also the differences between public and private market types of governance, and why we believe private markets should outperform in the years to come. It was also an opportunity for clients to look at Partners Group as a platform and the industry as a whole. Clients don't only want to talk about single assets, they also want to understand how they can deploy significant assets in the asset class, because private markets is still small in many portfolios. In order to ramp up allocations, clients are interested in investment managers that can offer scale and deploy substantial assets.
Overall, I sense that Peter already said that clients are really satisfied with how Partners Group and private markets have developed and performed in 2017. This is something I would also like to illustrate on slide eight. You see on the left-hand side a few of our client logos. On the right-hand side, I'd like to cite an externally independent study. Investors in private markets have been asked whether they would decrease, maintain, or increase allocations. You see that on average, 90% plus have said that they would want to maintain or increase allocations to private markets. Actually, the reason for that is the expected outperformance of the private market asset class. You often hear this 3%-5% net outperformance of private over public markets that investors look for. As I just said, the reasons in our opinion, are quite simple.
It's the entrepreneurial governance, it's the owner's mindset that we have as investors in these private assets. It's the long-term horizon that we have to really create value being on the board in these assets, and also the greater ability to time not only the investments but also the exits in our portfolios. These are three reasons why we believe substantial outperformance is also doable going forward. Before I talk about the industry, let's quickly recall how 2017 looked like on slide nine. You see, this was all communicated in January, that we have raised $13.3 billion last year. There was a substantial number of flagships in the first half, additional programs in the second half that led to this amount raised from our clients.
Tail down effects from mature private market investment programs and redemptions from the liquid and semi-liquid vehicles have amounted to -EUR 4.1 billion in 2017. There have been redemptions from our liquid and semi-liquid structures, and because that is a feature we offer, these semi-liquid assets now amount to about 20% of our AUM. Foreign exchange effects, you see -EUR 2.9 billion. Quite simply speaking, it is the 36% U.S. dollar-denominated assets that we have, and the U.S. dollar weakened about 12% against the euro, and that is why we have this -2.9 effect on our AUM. Last positive contribution is the EUR 1.4 billion stemming from performance-related effects and other effects that have been contributed by a small number of vehicles. We end the year at EUR 62 billion or about $74 billion.
If you look at our client base, you have seen these charts, they are largely unchanged compared to what you have seen before. You see a diversified client base in terms of regions but also types of clients. One third plus, 35% to be more precise, is contributed by Germanic-speaking Europe. That is Germany, Switzerland, and Austria. 36% has been contributed by the U.S. and the U.K. in terms of AUM, and about 30% contributed by further regions and countries. If you look at this chart, you see that Germanic-speaking Europe is a really sizable portion of our AUM, where we have a strong reputation, also a strong footprint. But there is still growth potential in these markets by way of clients diversifying and not only being invested in one asset class but several asset classes.
Basically clients diversifying and building up more diversified private market portfolios. But there is also markets like, let us say, South America or Asia generally, where the allocation to private markets and also maybe the footprint of Partners Group is less mature and also in these markets, you see growth potential. On the right-hand side in terms of type, you see about 55% has been contributed by pension funds. That is the single biggest source of capital, and that is expected to be the case also going forward. You see 15% or 14% contributed by distribution partners. Here it is the strong interest in our semi-liquid structures. Also 5% and 11% by sovereign wealth funds and insurance companies, and these are 2 types of clients where I see strong demand for our offerings and inflows in the years to come.
If you look at 2018, we expect about CHF 11 billion to CHF 14 billion of new client demand. That assumes the benign market environment, which is our base case. We want to build out the platform. That is why we feel comfortable onboarding additional CHF 11 billion to CHF 14 billion because we also see that we can deploy these assets in good investment opportunities. 2018 fundraising is expected to be spread across a number of products. In January, we discussed that 2017 was the year with many flagship funds in the market. 2018 is a year without flagships, but we have a number of offerings on the shelf that should allow us to really grow in the expected and communicated range. Tail down effects -CHF 4 billion to -CHF 5.5 billion, and we do not comment on effects and other related changes. Let us zoom out quickly.
Let's zoom out of Partners Group and let's look at the overall private market industry. You see this little blue dot on slide 12, which is the size of private markets, about CHF 5 trillion, which is relevant and substantial, but still small compared to overall public markets. Partners Group's market share is about 1.6%. Public markets are 20 times larger than private markets. We see structural growth or tailwind in private markets, but probably with more headwind in terms of public markets. If you look at the number of public stocks, for example, in the U.S., you see that since the mid-'90s, it has almost halved. At the same time, the private markets universe has been growing. We see ourselves in a favorable spot.
On the right-hand side, you see the single double-digit growth rates that we have seen in private markets over the past five years. We do expect strong growth in the years ahead. If I quickly reflect on how private markets have evolved, I believe there has been a pretty substantial transformation going on in the market. Private markets or private equity initially in the mid-'80s was really a niche business. It was private equity. It was asset-heavy deals only. Since then, the industry has really grown from private equity only to real assets also. Now we have a real estate and a private infrastructure industry on top of private equity. It's not only about financial engineering, it's now also about value creation. It's primarily about value creation in the deals that we do.
Number 3, the industry has really grown from traditional sector specialists to several players like Partners Group offering multi-asset coverage. The industry today looks different than how it looked like 20 years ago. This brings new challenges. We call this the moment of truth, and this is the challenges and the opportunities that our industry is facing at this point in time, but actually for the decade to come. It's about institutionalization, about standardization, and about transformation of valuation. Let me, on my last slide, just share a few words and comments about these three trends. In terms of institutionalization, there is an increasing intermediation in private markets that manifests itself, for example, by way of ever faster auction or simply processes in private markets. Basically, we had an opportunity to diligence an asset for six to nine months a few years ago.
Right now, the intermediaries, the banks really make you analyze and diligence these assets ever faster. That gets difficult, and it's just basically impossible to look at an asset in depth within just a few weeks or less than a quarter. What it really means for Partners Group is that we want to benefit and can benefit and must benefit from the size and the depth of our platform. If you have to diligence an asset faster because there's just a few weeks or months between start of due diligence to execution, that basically simply means that you need to start earlier. That is why Partners Group is looking at thousands and hundreds of investment opportunities well before they come to the market. We want to have an investment hypothesis and the value creation strategy even before the seller has decided to sell.
The second trend is commoditization or standardization. Quite simply speaking, not all assets in private markets have outperformance potential anymore. While private markets is typically characterized as an alpha asset class, it is true that, for example, in the secondary, but also in the liquid loan market, it is about beta as well. Not all assets in private markets must create alpha. It is also about portfolio construction. That is why as Partners Group, we want to be an asset manager, and we want to be a manager of assets. As a manager of assets, it is about value creation. It is about enhancing returns at asset level. As an asset manager, we want to manage the liquidity, the investment level, and the diversification on behalf of our clients. We believe that combining both is a unique value proposition.
Last but not least, we have seen increasing prices also in private markets. We believe that these valuation levels could be structurally elevated simply because in private markets, there's a control premium. Actually, if you have control over private market assets, maybe there's not a reason why this private market asset should be much cheaper than in public markets. What it means is that in order to benefit on asset level, we must really start with the diligence early, as I've already said, and we must focus as an investment manager on the value creation to add value on top of the multiple expansions we've seen in the past and the multiple contractions that we might see in the future.
This is something that our investment teams, overseen by my Co-CEO, Christoph Rubeli, is working on a daily basis, and Christoph will share some more insights on the investment side.
Thank you, André. It's my pleasure to share with you what happened last year on the front of the investments. I will first briefly discuss the volumes that we have invested as well as the regional trends. We will, in the second phase, briefly go through the four different investment divisions, lastly, share some thoughts on added value and ESG. If you look on page number 16, you see now that we have, despite a somewhat challenging market environment, been able to deploy $13.3 billion of US dollars. That's a healthy notch more than last year, where we had $11.7 billion in the same time frame. The backbone is still and continues to be the direct investment business. There was 77 transactions, about 50% of that debt, about 50% of that equity. Across the globe, we see a bright, healthy diversification on a global scale.
Why is it possible to continue to invest as much as we did? I think as André already alluded to, you want to be fast, you want to be ahead of any option. You want to really understand in which direction you go. You have to be very proactive. That is something that our team is spending a lot of time and energy on, to track in the systems and any other information base that we can get hold of. What are the assets that we wish to own? Proactively link up with management, build a relationship, and try to position us better. Secondly, it's the integrated platform. Peter Wuffli has already alluded to that. The teams are increasingly working together, which is close to the transaction. The infrastructure team and the private equity team have worked hand in hand.
It's a U.S.-based business, which is sort of helping on the construction side, avoiding to trip up the utility lines. A very simple and very nice business, also a very stable business with a fast growth. Also, by the way, of the setup of the market, a very resilient business. I think this convergence of the teams increasingly starts to take place. I see the same thing happening between private equity and real estate. If you take the schools or hospitals or other operations, there's always a brick-and-mortar element to it, as well as the operational end. To have this broad platform where people naturally help each other to source, to do transactions, and to actually share the insight is truly helpful. Lastly, I think it's the balance that we have. You see $13.3 billion of investments.
You see at the bottom of the page, CHF 11.8 billion of distributions. You have heard before from André Frei, $13.3 billion of funds raised. It's not all the same currencies, but it's sort of within a small band. The firm at large has stayed very disciplined in terms of how much dry powder we have. At the moment, it's roughly 1.5 years, between 1.3 and 1.5, depending on the programs. That is something which in the industry compares and is a very healthy, reasonably disciplined sort of figure. The platform has continued to scale. We are now slightly above 1,000 employees. You know that our business has limited economies of scale. As you grow the asset base, since it is a hands-on way of doing investments, we obviously also continue to increase the team, and that goes right across the platform. The investment teams continue to grow.
We make a special effort today on the industry value creation team, the people which operationally work together with the companies to grow them, also on the service side and the client side, we certainly will see additions to the team. I come to page 17, where you see the deal flow. Those are metrics which are not too dissimilar from the last years, except that they are somewhat at an elevated level. The success ratio or the decline ratio, whatever you want to look at it, stays about the same. Roughly 1%-3% of the transactions really happen, and this discipline, the bench, the high sort of bar that we set ourselves, we continue to maintain. We turn to page 18, where you see the regional split. We envisage roughly 40% Europe, 40% U.S., 20% the rest of the world, emerging markets.
Emerging markets are again at the somewhat lower level. All of you know that Latin America still is in recovery mode. We have done select small additional transactions to existing portfolios, but no new major transactions. The rest of the world allocation really is India and China mainly, where we see promising prospects, but I would also expect this year the figure to be slightly higher than the 13%. Europe has been slightly higher than the average. It is driven by two larger transactions, in particular Cerba, which is a French labs company, as well as Civica, that is a U.K. software company serving the public sector, and they have shifted to some extent the percentages in the direction of Europe. The secondaries continue to be underway. It's probably the most pricey segment in the market, so it's roughly 17% of the last year.
Here again, we envisage roughly 60% direct, 20% secondaries, 20% funds. You see that we're not too far from this medium-term asset allocation. With this, I come to page 19, where we briefly share some light on private equity. We have in previous presentations already talked about the style of platform transactions where we buy a substantial holding in a given industry, and we then continue to consolidate by buying smaller pieces to it. That is still something which is actually prevalent in most of our transactions. Take Foncia, we have presented in an earlier update to you, the French real estate-based company which has services from joint property management over to brokerage. We have bought it in September of 2016, and till then, we have proceeded with 51 additional acquisitions, so we continue to mop up the market.
The company still today has roughly 14% market share, so there is ample room to grow. That is just to show that this platform idea is one way to sort of mitigate the high level of pricing that we have. You look at the trends, that's maybe the second dimension. We really want to identify trends which have long-term sustainable growth, which grow better than the average of the market. For instance, cost optimization continues to be prevalent across the board. Civica, that I've mentioned before, is helping U.K. public units from the counties to anything else to better manage their software systems, to levy taxes, to have the traffic fines optimized, and whatever else there is. They're very much on top of this outsourcing trend that is going on in the public sector.
On the right-hand side, you see that there is demographic shifts, that there is a growing middle class, which has money to spend. That is obviously also bringing the need for better education. We have now for many years been very active in this segment, investing close to CHF 1.5 billion with companies like KinderCare, the leading firm of preschool education in the U.S., or like Guardian, the very same in Australia. Here, the example is a Vietnam-based company which is helping people to better speak English, which is also for Vietnam, a big need for the growing demography there. I turn to page 20 with real estate. Here, the style has really not changed much since our last update. You simplify it, we developed the core asset that people wish to own. There's again different trends that we exploit.
On one hand, again, it's those demography shifts that people, again, want to live in the downtown centers. There's a need for more affordable housing. You see this one example here with a location in Stockholm. We have a very similar sort of building in Vienna, which is financed, which is in the middle of the Danube River. It's going to be homing students, young professionals that want to have a downtown location. Those lifestyle shifts and the different housing preferences, again, is something that we can back. In the middle, you see technology growth. Here again, a sector that is going through a big transformation. It's mainly data centers and things of that type, which are required, and we see that around the globe. On the right-hand side, you see the rise of internet and e-commerce. You need big regional hubs to service the logistics.
You need local centers which are not too far from the city centers. The hubs are usually about 20,000, 30,000 sq m, and they have a central location. You see this example here, which is a Southport sort of base in Australia. Then you have regional centers in Melbourne, in Sydney, and in others, which are typically 5,000 to 10,000 sq m. We help really delivery of those internet services with the real estate establishments. Infrastructure. Here again, three trends which have been around for a while. Renewables have kept us busy for the last years. We were very active in Japan right after Fukushima. We continued in Australia. We were then quite active in Taiwan. We continuously look for niches which have a better return than the average. Here in Europe, it was mainly the offshore wind, which was the most promising sort of sector.
We have financed a German company called Merkur about a year ago, which is now in advanced stages of construction. Here the example is a Netherlands-based one, which is called Borssele, which again is not far from the shores. It's very shallow, so also from a construction point of view, not too challenging. Again, from the return perspective, somewhat better than the rest of the market. There is a big need for connectivity and communications that is also deriving infrastructure needs, in particular the fiber cables. The last mile, for instance, has also been a theme which around the globe has offered us interesting opportunities. Two, three years, the add-on acquisition to a French-based company, which is called Covage, which is working together with a Canadian company called Axia that we have taken private about two years ago. Energy infrastructure, again, something which continues to change.
Here is Sentinel. This is very close to Los Angeles. It's a gas-fired plant, which is sort of helping to amortize the peaks. It actually goes from 0% to 100% capacity utilization in just a very few minutes. It can very, very nicely complement the grid if there is additional need for electricity. Private debt is essentially focusing on similar companies and private equity. We have here especially a focus on resilience. We wish to have stable revenues and high cash conversion. We have started mainly with a subordinated part, a mezzanine debt. We have now, in the last years, grown substantially on the more liquid side of things, where we have the broadly syndicated loans and the more liquid loans. That is something which has worked very well in Europe, and we are sort of completing the picture with an extension in the Americas.
You see at the bottom, the companies are not really similar from the private equity niches. There's an interesting example in Australia called Laser Clinics. The equity was supplied by KKR. We helped them to provide with a customized solution on the second lien side. VFS Global is actually quite known to the Swiss people, I guess. It was part of Kuoni. Equity has bought this whole group some time ago, has then essentially sold the traditional travel business. What stays is this very, very highly attractive visa business where they essentially have long-term contracts with different countries like Saudi Arabia, like China, like many others, and are for reasonably high price essentially looking after that visa service. It's a highly profitable, highly growing company, and we have again helped to carve out on Kuoni. It was from a technical point of view, a quite complicated transaction.
I come to page 23, where we talk about added value and value creation. André has already highlighted a few aspects. We believe the key reason why private markets are continuously outperforming the public market really has to do with the corporate governance setup. You can define strategy, you can define management, you can essentially appoint them, you can change, and therefore you can also directly impact what you do. What you see on the right-hand side, this is also generating then good figures. We have observed last year in our portfolio 20% revenue growth, 80% EBITDA growth, and we have created roughly 13,000 jobs. It's really something which is leaving tangible marks in our portfolio. That is the basis and the foundation for the continued outperformance of the private markets in general, but in particular on our firm.
I finish by pointing to the UN report, which is issued on an annual basis. This is about the responsible investment sort of criteria that we have applied for many years now. Every investment that we do needs to comply with this UN code. We have spent quite a bit of time in our industry value creation team to be able to deal not just with the added value to the upside, but also to hedge the downsides. In reality, this is also helping to create additional returns. When you see here the ratings that we have received, they're all single A or A+. We're very, very happy with the results here. With this, I would turn to Philip Sauer, who will walk you through the financials.
Good morning, everyone. It's a pleasure for me to stand here today in presenting you the 2017 financials of Partners Group. I actually start with a slide which you might be very familiar with. This is our development of our assets under management since the IPO. What you can see is this is a very sustained growth path. More importantly, what you also see is that we grow our people in line with our assets under management. This will play a role, especially when we talk about our 2017 financials later. If we now look a bit closer into our numbers for 2017, you see that our average annual growth in CHF, which because we report in CHF, was 18%. Our overall revenue growth was significantly stronger.
The reason here is due to, first of all, strong AUM growth, secondly, late management fees, which came in at the higher end of what we expected. I will explain that later. We had a very high amount of performance fees. Given that the revenues grew so strong, our costs, which is literally hiring, couldn't keep up. That means our EBITDA margin grew a bit stronger, up to 37% to CHF 825 million. EBITDA and profit as Partners Group historically has always been roughly the same. You see in line of the growth of EBITDA, you see profit growth of 35%. We are well aware that these numbers are very strong. We are also well aware that this is largely also due to the very benign environment we are currently in.
After eight years riding the bull market, we see that in particular on the fundraising and on the realization side, the stars couldn't be more aligned for Partners Group. Equally more difficult, as Christoph elaborated on, is the investment side. Let us dig a bit more in detail into the P&L. What you see on the revenue side, its revenues consist of two components, which is performance fees and management fees. Both grew. On the EBITDA margin side, we have seen a four percentage point uptick in the EBITDA margin. This should not come as a big surprise to you, because in the first half of this year, we had already 66%. It is more another fact when we can go back to our long-term target of 60%. We have a positive financial result. This is maybe worthwhile to explain.
We have about CHF 650 million, which we invest alongside our clients. These perform and produce in a good environment, a positive contribution to our profit. On the other side, we had higher income. That means a higher profit. That means our taxes we paid went up to CHF 95 million. The tax rate remained stable. Going forward, because, as André elaborated on, we are doing more and more business outside of Switzerland in the U.S., in countries where there's a higher tax rate, we think going forward, the tax rate will increase to about 12%-14% in the medium term. This brings us to a CHF 28 earnings per share on a diluted basis. Let me go quickly into the revenues. As said, revenue components, we have two revenue components. One is management fees, one is performance fees.
Management fees are based on long-term contracts, which we enter with our clients. They are recurring of up to 12 years. We have a second component in these management fees, which come with the ongoing course of business. They will come every year, sometimes a bit more and sometimes a bit less. This year it was very high. This is the so-called late management fees and other income. They nearly doubled, which also drove the revenue component. I would like to explain you what this is in detail, not because of 2017, but also giving you a bit of guidance how 2018 looks like. Now imagine what really happened is we raised a lot of our direct flagship products in 2017, but these products were already in the market since 2015.
If you see that slide, some clients, they entered already in 2015 in this product, we worked with the capital commitments of these clients. We built portfolios, we bought companies. These products are typically open for 18 to 24 months. That means whenever a client comes in on the later stage, they can buy in to portfolio at cost. That means when they can buy in at cost, they need to pay backwards the management fees when this product was originally started. At the end of the day, we want to treat every client equally. What you see here now, in 2017, we had enormous success, or these products generated a lot of demand, suddenly, a lot of clients entered these products and needed now to pay back the management fees when this product was started.
We received in 2017 management fees for nearly one and a half to two years, which is unusual. Why do I tell you this? If we look into 2018. In 2018, we will have new products. We start new initiatives, logically, because we closed the old ones. What happens is 2018 will look again more like a 2015. We start the fundraising. There will be new products open, a small amount of clients coming in. That means late management fees and other income will be significantly lower because we start new initiatives. This is not a problem. This is just the nature of our business. Talking about performance fees now. What you see on this chart, and I am now on page 31, is you see the long-term development of our AUM since the IPO and the performance fee development since 2010.
We had a very good year of performance fees because we did a lot of exits. Christoph said 11.8 billion distributions of our underlying portfolios. That resulted in CHF 372 million. We are well aware this is a high number, but I would like to give you some more sense about what you can think about performance fees going forward. There are two factors what influence our performance. One factor is assets under management, because when you grow your assets under management, that means you are able to onboard new assets, which you need to invest again. About six to nine years later, these funds which we raise today will translate into performance fees. We have difficulties to say whether or not a fund pays in seven years performance fees, but we know there is a likelihood that it will.
What we do is, although there is a very low return environment, our goal is to increase our investment capacity and deploy more money in the market, therefore, we need more people. In that regard, producing performance fees become more difficult in this environment because we need to simply invest more. The second factor which comes at play is the so-called catch-up effect, and you see this with the triangles on that chart, is because of the financial crisis, some of our holding periods of assets were longer than we originally anticipated. That means the funds after the financial crisis actually generated performance fees a bit later, now they came somewhat all together. This catch-up effect is now largely absorbed, there will be no further catch-ups in 2018, 2019, and so on.
What you will see is that more or less the normal growth path of vintages from 2008, 2009, 2010, 2011, what would currently pay performance fees. Lastly, we have in our EUR 62 billion AUM , we have 250 products which we manage, and 50 of which produce the EUR 372 million performance fees. What can you expect going forward is our performance fees in 2016 and 2017 were at 30% of overall revenues, and this is the very end of our guidance. You need to be, as investors of Partners Group, be more comfortable with the fact that Partners Group, when we have EUR 1 billion of revenues and have 20%-30% of such revenues in performance fees, that performance fees could fluctuate between EUR 200 million-EUR 300 million in a case we do EUR 1 billion. This is normal.
That doesn't mean we have bad performance or very good performance. It's just a matter of fact that performance of products will hit the hurdle and pay us performance fees. This is unfortunately always seven to nine years out. The bulk of our business is still management fee driven, and I am on page 33. The bulk of our business is still management fees. As you can see, we have a very stable management fee margin of between 120 and 130 basis points. The average of the blue bar is 125, and I think this is a reasonable average to assume also going forward. The 133 in 2017 was literally driven by these late management fees and other income. Of course, if you add performance fees on top, the overall margin actually increases.
Let us switch to the next slide, on slide 34, and look at costs. Where we talked about revenues, which is the main driver of Partners Group's growth, our cost base is pretty much, or it's very simple in that regard, that 85%, we literally only have personnel costs. In order to catch up with the revenue growth, we need to increase our cost base to have a stable margin, but that means hiring more people. We have a dedicated hiring plan. Partners Group knows exactly how much people we will onboard and what we can onboard and what we want to onboard.
We receive roughly 30,000 CVs a year, at least that was the case in 2017, and we select the very best talents out of those, but we cannot just open the gates and hire not controlled in order to bring down our margin. That is the result that we continue to build out our people so that we can increase investment capacity, and that means our margin going forward, the EBITDA margin, will slightly decrease. It is now at 66%. This is the same amount as it was in the first half of the year. Our target is 60%, and that means in the years to come, we continue to build out and hire our people, bringing this margin rather towards that 60% in the next two to four years. This is always depending on FX rate.
Partners Group currently manages over 80% of its assets under management on slide 36 in EUR or USD. This is the typical denomination of our funds. That means we also receive management fees out of EUR, USD, and EUR. If you look at our smaller cost base, it looks a bit different. That means changes in currencies have an impact on the EBITDA margin. Looking at the profit development on page 37, what we see is that our profit then increased 35%. Maybe giving you some balance sheet data on the right-hand side is at this point in time, in the top right, Partners Group has roughly CHF 2 billion of equity. As already said in the very beginning, we have CHF 650 million of investments we do with our clients and have a net liquidity currently of CHF 1.3 billion.
This is, by the way, before our dividend payment announcement. We want to pay out CHF 500 million in dividends. Speaking about dividends on page 38, the CHF 500 million translates into CHF 19 per share. What we want to pay out, this is an increase of 27% compared to last year and a bit below our profit growth. Profit growth was 35%. Why did we do this? This was intentionally because we had a year, like 2017, which was driven by late management fees, a high amount of performance fees. For those of you who know us very well, you know that we are actually following a steady growth path in dividends.
Assuming that our business grows in all asset classes, that we fundamentally believe that our business has potential to grow, you can also assume that dividends may rise, although there is not necessarily the same amount of late management fees or performance fees next year. With this, actually, this is my last slide of the presentation. I would like to open up for questions. If there are any who are on the phone, I think we would start here in the room and go via the phone. Questions?
Limited time. They will hear us.
Can you please state your name and the company you're working for?
Daniel Regli, MainFirst. Could you maybe elaborate a little bit more on client demand trends, particularly you already mentioned a bit where you see a particularly strong demand, but what is shifting within your client segment and where do you continue to see huge potential to grow your client base, particularly in retail?
Well, let me just give you trends on the client side. As a highlight is like in the mature Partners Group markets like German-speaking Europe or the U.K. The name is broadly known. Investors have invested significant amounts of money with us. There's two trends. On one end side, there's certain consolidation. Clients don't want to diversify as not only 50 GPs, but actually another 50 GPs and then administrate a portfolio of 100 different private market clients in a pension fund portfolio. That doesn't make sense in terms of effort it takes to administer. There's a certain consolidation happening in terms of clients that have already built up substantial private market portfolios. There's consolidation on the one end side. On the other hand, there's a conviction that private market portfolios should be not only right-sized but also rightly diversified.
I believe private markets investors that have tapped into this allocation like 10 years ago, by now have often ended up with portfolios that are over-diversified. They have chosen too many GPs, too many underlying assets. Basically, a single asset doesn't really make a difference anymore to a pension fund or sovereign wealth fund portfolio. The second trend we see is only consolidation but also right-sizing and accepting portfolios that are properly diversified but not over-diversified anymore. At Partners Group, we see this consolidation, but also clients, and I talk about professional and cautious investors that now are willing to look at direct investment strategies that give a higher weight, let's say 10 basis points or 25 basis points of the overall assets under management of a pension fund or institutional portfolio allocated to an underlying high conviction asset.
For example, Foncia or Civica that Christoph has just highlighted before. Another trend we see is clients approaching us and wanting Partners Group to hold these assets for longer. Basically, clients say, "I like the investments that you make. I like the returns that you generate. I just don't understand why you don't compound these returns for longer. Why do you pay us back after five years?" There's the feedback by a number of clients that say, "We would like you to be invested longer." That is something that we take seriously, and we believe that this entrepreneurial governance that we have in private markets ideally is suited to hold certain types of private market assets longer. These will be assets that are resilient, where there's not too much disruption risk, where we have the conviction and the plan for the many years to come.
I believe this industry as a whole, but also Partners Group will want to compound private market returns in select portfolios or in select assets for longer and not try to realize an exit sell after an IPO immediately after already 3-5 years, but try to hold these assets for 8-10 years if we actually can.
Next question.
Yeah. Michael, Commerzbank. First question, if the exit environment is terribly benign, what does it mean for the BD and the potential exit in five, six, seven, eight years down the line? Are you going to feel confident that you can find deals that can promise a similar kind of return? The second question would refer to slide 31. If my recollection is not completely wrong, we've seen almost the same slide one year ago when we witnessed a performance fee bump in 2016, and you then guided for the same triangle, we think, for a flat 2017. Now you reported another bump in performance. Was it just again several BDs coming together, or was the exit environment even more benign than 2016? Or where exactly have you come from that you ended up far in front of the triangle?
First question, please. First question, please.
We have highlighted on the exit environments that really it's been very benign. The values are high, debt is abundant, and things are quite liquid. In that regard, it was a good year, and we certainly also did profit from that. Look at the performance levels, a healthy notch above the medium-term sort of returns. In that sense, it has really worked well. What do we do on the underwriting side at the moment? We actually sensitize each case to a multiple contraction. We might get in at 11x EBITDA, and we actually then sensitize and look at what is the return if we might get out at the long-term average of that given segment, say an eight, a nine, a 10, whatever that ratio happens to be.
Actually, therefore, make sure that although we are buying at a reasonably high level today, we can actually still generate reasonable returns. What does it imply? The only way we can really make money is to add value. That goes back to what André and myself have discussed. We have to, in a hands-on fashion, create value somehow. Buy additional acquisitions, buy new business lines, buy geographic expansion, buy new technology, whatever it might be. That ultimately helps you to still have commensurate returns for our client programs.
Bill? Thank you. With regards to performance fees, I think the guidance on what we give you with the 20%-30%, where does it end up with this?
With all our funds, what we look at, which have a certain maturity, we can pretty well assess where performance fee will be at year-end or 2 years out, or even sometimes with a certain visibility for up to 3 years. What happens is it is very difficult to assess whether or not a fund pays performance fee in a December or in a January. Performance fees and these fluctuations drive literally our bandwidth of 20%-30%. If we continue to shift towards that more direct investment activity going forward, we will expect also more performance fee Guidance of 20%-30% also depends a bit on how our assumptions are on asset raising, because asset raising drives our management fees, and therefore, I would expect the 20%-30% to be the range.
Which is why we don't give more guidance yet than the 20%.
Do you have questions on the phone?
Ladies and gentlemen, if you'd like to ask a question, please press 01 on your telephone keypad now to enter the queue. We've already received the first question. It comes from Gurjit Kambo of J.P. Morgan. Please go ahead, your line is now open.
Hi. Good morning. I've got three questions, if I may. The first question is, in terms of the demand that you're seeing with Preqin, is that consistent with what you're hearing from your clients when you did your conference recently? That's the first point. Secondly, how is Partners Group embracing technology? We hear a lot about traditional asset management companies doing a hybrid with quants and technology. Just any thoughts on how you're looking at technology within your business? The final one, in terms of the net liquidity post-dividend, it's up about more than CHF 250 this year. Just how should we think about liquidity? What are the needs for that liquidity to be so high? Those are the three questions. Thank you.
The first two, I think, are questions for André.
The first question is about client interest to increase or maintain exposure to private markets. As Christoph has said, yes, we believe the typical Partners Group client is not decreasing the private markets portfolio, but is keeping it flat or is building it out. There's less differences in terms of our clients. We have clients that are of 5%-10% or higher private markets allocation, and naturally, these type of clients would maintain. At the same time, there's a number of clients that actually have only started to invest in private markets, these clients I expect to increase allocation, not only with Partners Group but also with Partners Group, and I believe in many cases, substantial amount or portion there with Partners Group. In terms of technology, that's an interesting question. Maybe I answer first, and then Christoph after that.
In terms of technology at Partners Group, that is really a conviction that we have had already 10 years ago. 10 years ago, we have significantly ramped up our own effort as a company to digitize Partners Group. Today, we call our system, we gave it a name. It started off by simply catching up in terms of technology, but after some time, we realized that we have developed something really powerful. We called it Primera. Primera stands for Private Markets Intelligence to Manage, Explore, Report and Analyze private markets data.
The digitization effort at Partners Group really took place 10 years ago, by now, we are in a position not only to operate complicated structures if regulation requires us to do so, it also allows us to communicate in a friendly, in a positive way with our clients who on the one hand, appreciated insight into everything in the private markets portfolios, also enjoy the ease of communication because they can look at their private markets portfolios on an iPad or on a browser-based solution. Digitization, I believe, is advanced. We don't rest. You may have seen the press release in 2017 that Partners Group has launched an own little blockchain using this Ethereum blockchain. Basically, we said, we want to have the first attempt.
What would be something helpful is that we want to use the blockchain to reduce external fraud risk on behalf of our clients. It is actually in collaboration with our service providers. We request them only to issue payments, make capital calls, each by way of using a blockchain. It is confirmed that indeed Partners Group has instructed the service provider to issue a capital call and send money from account one to account two. This is, I think, a powerful little app. It is really beneficial for our clients and shareholders because fraud risk has been minimized. I believe at Partners Group, this is an attempt to learn. Our business is not IT. Our business is to source investment opportunities and create value on the boards, on various boards, maybe Chris can add some color. The use of technology is a critical value creation component.
On the investment side, it's obviously helpful to have this database. It just gives you a much, much better transparency on the asset you're looking at. We are therefore using this database, which has been developed quite a number of years ago. We were the first mover in that regard to source transactions, as André said. Also you have the KPIs for performance. You can actually much better price your transactions. You have a view as to what actually works in the business world, therefore it's also very helpful. We use it for business development, we use it for add-on acquisitions, we use it for the M&A, even the sourcing of our own transactions. It absolutely gives a dimension.
On the liquidity and the dividend question, Partners Group has, as you all know, an organic growth strategy, we don't need liquidity for making acquisitions. We essentially use liquidity for two reasons. One is rather simple to determine, the other one is extremely difficult to determine. I think the simple one is we use it to service our clients. We, for example, give bridge financings just for convenience of our clients that we don't have to ask them unnecessarily to send money back and forth. We bridge, for example, between exits and investments. The more difficult one is obviously to look at stress tests.
Here we do every year an exercise where we have all sorts of different scenarios, what could really go wrong in terms of both macro as well as micro, ugly things. Those of us having been here for a while know that usually whenever you do a stress test, these risks usually don't happen, but the risks that actually hit you come from somewhere completely different. That's why we do have some preference for substantial liquidity buffer, and we always obviously look at scenarios to the extent that they could hinder us to have an increasing dividend. Our growth, as Philip explained, our strategy on dividend is to have a kind of continuously growing dividend, and I think that determines our liquidity needs.
We feel comfortable with the liquidity where we are today, and that we will every year look at the environment, look at us, look at the risks, and do a new assessment.
That's great. Thank you very much.
More questions on the phone?
Yes. Thank you. We've received another question. It comes from L. Labiszakos of HSBC. Please go ahead, your line is now open.
Hi. Thank you very much for the presentation. My first question is regarding the tax rate. I've seen the guidance being stable at 12%-14%. Just wanted to confirm that there isn't any impact from the U.S. tax reforms, on whether that 12%-14% already includes that. Also, since we are on the U.S. tax reforms case, I'm just wondering whether now, first of all, you expect to be able to accelerate the disposal of your existing USA AUM because there's going to be more M&A activity. Secondly, whether you believe that now the valuation for U.S.-based assets is actually more appealing compared to six months ago, given that the P for most of the investments there is looking more positive. My second question is regarding the EBITDA margin.
You are allowed three questions, right?
The fourth is on the EBITDA margin. Do you expect it to go below 60% in the short term before it goes back to 60% in the medium term? Clearly, the 66% was very high this year. I wonder what will be the negative fluctuation, if you like, when you start to accelerate the hiring. Thank you.
Let's have the U.S. tax rate question, then Christoph, U.S. environment, I'll take the last one.
To answer your question with regards to the tax rates. If you look at our P&L of our balance sheet, our deferred tax assets, which was one of the major drivers for tax rates in 2017 for U.S. corporates, is very low at Partners Group. The effect which you mentioned or you want to see is largely neutral in 2017. It might be slightly beneficial with the lower tax rate going forward for our business in the U.S. Other than that, it's neglectable. We think it's not only the U.S. where we do business and why we think the tax rate will increase. This is also because of all other geographies where we are entering.
Christoph.
If I understood your second question correctly, was to what extent would this have an impact on the AUM in the U.S.? I think in terms of pension funds, probably none. They're shielded from this stuff. Banks are typically investing much less in private markets, Insurance companies certainly will probably increase their allocations as this big chunk of liability is falling away. It will have some effect, probably not a huge effect. On the valuation side, which was your third question, again, for most of the companies, there's a healthy element of taxation left to take, which certainly will have an impact on valuations. In most of the segments that we currently assess, I don't think it has a huge effect. It's probably mostly with the banks, again, in the financial sector, where this effect is playing out most, which is an area we don't naturally touch.
They will have a small effect between 5%-15%, probably, in terms of valuations that may potentially increase.
On the EBITDA side, our guidance is 60%. Those of you having been here for a longer time as PG investors know that we always look at it from a new business perspective. That means new hiring plans have to fit an EBITDA margin target of 60%. We do not control our Swiss franc FX. That's very unlikely, and I guess then we could probably have other issues if that happens. I think you can safely say that there is no real plausible scenario by which in the short term we'll see an EBITDA margin of 60%.
That's great. Thank you, and well done for the set of results.
Thank you. One more question from the phone?
Thank you. Yes, there's another question. It comes from Andreas Venditti of Bank Vontobel AG. Please go ahead, your line is now open.
Thank you. On the hiring and the costs, I think Philip obviously explains where it comes from, why, let's say compensation expenses grew less than revenues in general. However, if I back out 40% as comp for the performance fees, which were very high, the remainder actually is a very small growth number in terms of comp. If I look at the number of staff, you added 100, it still doesn't really fully explain why this number looks so low. Is that related mainly to FX? First one. Second one, just more a smaller technical one. On the finance expense, this jumped in the second half. Is it related to FX as well, FX hedging, and if so, can you maybe remind us what you're doing there? Thank you.
I think generally the trend is that we have in recent years increased our staff levels in relatively low-cost locations. For example, we had a movement to go east. We have opened an office in Manila for certain services, that may explain the somewhat moderate growth on the compensation side. On hedging, generally, we do not hedge, I don't know, Philip, do you want to add something here?
You probably refer to the financial results. Here, financial result is a blend between investments or positive performance of our own investments, we also have certain financing costs to bear, that's why the result does not look as high as some of you might have expected. This is simply due to the fact that we play this treasury management services, or we service our clients with treasury management services, offering cash bridging facilities, where we need to deduct the costs we have for this financing from the financial results. I don't know if this explains your question.
Yes. We can discuss later. Thanks, Philip. Thank you.
Maybe come again to here. Are there any questions here? Yes.
Maybe one again, Daniel Regli, MainFirst. Could you maybe elaborate on client segments you haven't really harvested so far, which from a regulatory perspective or maybe restricted in investing in private assets, and are there any efforts to make private assets accessible to these kinds of clients or to pension funds?
I guess one area where we have not fully exploited the potential, I think, are the insurance companies. That does not necessarily require a lot of structuring but a profound approach, asset liability, matching, and management, and that is something where we want to make more conscious effort as a company. I believe They can buy the off-the-shelf standard product that Partners Group already offers. Insurance companies can ask for mandates. I believe if you make a concerted effort and then get closer to the real issues that insurance companies have, then I think our product catalog offers investment opportunities that will suit insurance companies well. If you think of infrastructure, for example, these are often long-term assets. These are long-term cash flow streams with a high cash yield. There should be possibilities to offer solutions that will fit the insurance companies better.
In terms of regulation, as I said, there are certain markets like, for example, Latin America, where basically regulation needs to change, will change, probably that will allow these types of clients to increase private market allocations on the one hand. On the other hand, it will most likely allow these clients to invest internationally, because Partners Group would not want to be a private market solution provider for just a country or just a sub-region or just a region. The real benefit of the Partners Group platform is its investor base gives us the flexibility to invest in a flexible way all across the globe. I think we want to be a solution provider to those clients that have an ambition and the possibility to invest, let's say, 40% in the States, 40% in Europe, and 20% in Asia and emerging markets.
We would not want to be a niche in the niche solution provider to a problem that a local professional investor has as a result of regulations.
More questions here in the room? Seems not to be the case. Do we have more questions on the phone?
Yes. There's one more question via telephone. It's from Tom Mills of Credit Suisse. Please go ahead. Your line is now open.
Hi. Thank you. Good morning. I was just referring to slide 14. You talk about a structural increase in valuations or even a sort of cyclically high point. Perhaps more broadly, give us an idea of where you expect multiples to kind of drop out in this new sort of structurally higher valuation environment that you see us being in. Thank you very much.
We alluded to this before saying that the valuations are today at a high level. We don't necessarily believe they're going to increase much from here because it just doesn't compute that easily. Debt levels have probably also reached a level where we don't want to exceed the current levels. In that regard, we are probably at the top. The only thing we can do is sensitize to the down, which a correction might at some point happen, where there's mean reversion of those valuations. That is something we consciously do in every underwriting, sensitizing to maybe two or three multiples for points of contraction. We can convince ourselves it's still at sort of four or five x.
Thank you.
Great. Any other question on the phone?
Thank you. We have no more questions via phone. We've received another question via chat. It comes from Ed Ballard. I would read it out loud. It's, "Can you elaborate on how you expect to reach your CHF 11 billion-CHF 14 billion of fundraising this year if your flagship funds were largely raised last year? Will these be new strategies or mainly successor funds?
Okay. Thanks for the question by chat. That's the first time, I believe. It's good that we are reachable that way, too. For example, on the private equity side, last year we had a direct equity flagship fund in the market. What we do as a platform, and we've talked about this many times, is that we invest roughly 60% direct, but we also have 20% secondary, and we also have 20% primary. One strategy, for example, that we want to use or offer in 2018 is a strategy that does not focus 100% on direct investment, but again, tries to build up portfolios that are more diversified.
That is like what we call a global value type of offering, where we don't only have the flexibility in terms of region, as I just highlighted with 40/40/20 Americas, Europe, Asia, but we also have a flexibility, depending on the market environment, to be investing directly. Actually, should there be a correction, quite substantial in the secondary market or investing by way of complementing the portfolios and giving money to third parties. These are adaptations of existing structures and solutions that we had in the past, but they are typically not 100% direct portfolios because this flagship is not available. What is important to say is that these products are not perpetual bonds. They are not counting on a deal flow that is not proven.
Actually, contrast, it will be different angles, different weighting, different approaches, but still leveraging and basing it on the deal flow that we see as a company in the full asset classes.
I think what we should also mention is that about half of our new business are mandates which are not flagship oriented, but where essentially clients have a customized mandate where they, depending on their criteria, ask for a selection of direct primary secondaries across asset classes increasingly, and I think that's a growing part of our business.
Yeah.
Are we done?
There are no further questions.
Thank you for your support and have a good day.