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. May I now hand you over to Doctor.
Wulfli, who will lead you through this conference. Please go ahead, sir.
Yes, thank you. Good morning, your shareholders, friends of Partners Group and colleagues here in Zurich as well as on the phone. Welcome to the annual results presentation. I'm joined on the podium by our 2 co CEOs, Christoph Rubenie and Andre Frei as well as our Co Head of Group Finance and Development Corporate Development, Philippe 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 kind of 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. And I think as a result of that, costs did not keep up with revenue dynamics and our margin shot through the roof. But it was, in that sense, to some extent, an unusual year.
So nevertheless, we're very pleased with it. Strategically, nothing has changed. That's why I have the courage to show you the same slide in, I think the 4th 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 $5,000,000,000,000 market is just about 2% of total estimated global financial assets. And the Partners Group market share is less than 2% of the private markets industry.
And the whole thing is growing. So you see there is plenty of growth potential in the industry. And 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. And 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.
And we just come back from a client conference at Bergenschok, which was fabulous. And I can tell you and Andre will go into detail, I haven't
met a single unhappy client. They're all extremely happy.
They love our performance, but but 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. And the result of that is a very robust double digit growth model at the level of revenue, assets, revenue, profit and ultimately dividend. So that's what Partners Group is. And also this slide, you have seen a year ago, it has not changed. Shareholders love it as well, and shareholders are as convinced as we are that this is a sustainable double digit kind of model to grow revenue, profit and dividend and obviously what would shareholders like better than something like that.
And I think that explains why we continue to have this level of valuation making us the 2nd most valuable private markets company on the planet. Now 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, we I have proposed in the Board that we appoint the shareholders of point Stefan Meister as my successor at our shareholder AGM in May. The reason is very simple. I've worked very closely with Richter 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 championship role as well as that he's ready now to do this. And I think there's no bigger privilege if you can than having a successor who is substantially younger and who has capabilities to lead this terrific growth story forward. The other reason is that I have or I am approaching the 10 year rule of tenure. And since the IPO, Hartn's group has been very strict in having a 10 year rule for independent board members. And while we there are many things we don't really believe in 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.
And so I think 10 year rule in leadership is a good rule. So 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 Stefan 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 SwissBancorporation. The world has changed quite dramatically in this almost a quarter of a century. And so I look forward to some next kind of hobbies that I will endeavor.
With that, I hand over to Andre.
Thank you, Peter, and warm welcome also from my side. So 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 3 plus days talking about the investment programs with Partners Group for those 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 equity, that infrastructure tangible.
So we've invited not only our own investment leaders, but also CEOs and Chairman and industry advisers who talked about how we have diligence the assets, but also how we now serve on the Board of these companies and assets to improve performance. So it was about value creation, what we want to accomplish on the Board of these assets and how we want to go about it. So we discussed also the differences between public and private market types of governance and why we believe private markets should outperform in years to come. And it's 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 investors in the asset class because private markets is still small in many portfolios.
And in order to ramp up allocations and 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 our partners group and private markets have developed and performed in 2017. And this is something I would also like to illustrate on Slide 8. You see on the left hand side a few of our client logos. On the right hand side, I'd like to cite an external independent study.
Investors in private markets have been asked whether they would decrease, maintain or increase allocations. And you see that, on average, 90% -plus have said that they would want to maintain or increase allocations to private markets. And actually, the reason for that is the expected outperformance of the private market asset class. You often hear this 3% to 5% net outperformance of private or public markets that investors look for. And as I just said, the reasons in our opinion are quite simple.
It's entrepreneurial governance. It's the owners' mindset that we have with 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 great durability to time not only the investments but also the exits in our portfolio. So these are three reasons why we believe a substantial outperformance is also doable going forward.
Before I talk about the industry, let's quickly recall how 2017 looked like on Slide 9. You see and this was all communicated in January that we have raised SEK 13,300,000,000 last year. There was a substantial number of flagships in the first half, but we took additional programs in the second half that led to this amount raised from our clients. Sale down effects from mature private market investment programs and redemptions from the liquid and semi liquid vehicles have amounted to €4,100,000,000 negative €4,100,000,000 in 2017. And there have been redemptions from our liquid and semi liquid structures because that's a feature we offer.
And these semi liquid assets now amount about 20% of our assets under management. Foreign exchange effects, you see minus €2,900,000,000 Quite simply speaking, it's the 36% U. S. Dollar denominated assets as we have, and the U. S.
Dollar weakened about 12% against the euro, and that is why we have this negative 2.9 percent effect on our assets under management. And last, the positive contribution is the 1,400,000,000 stemming from performance related effects and other effects that has been contributed by a small number of vehicles. So we end the year at €62,000,000,000 or about €74,000,000,000 If you look at our client base and you have seen this chart, they are largely unchanged compared to what you have seen before. You see a diversified client base in terms of regions for those types of clients. 1-thirty plus, 35% to be more precise, is contributed by Germanic speaking Europe.
That's Germany, Switzerland and Austria. 36% has been contributed by the United States and the United Kingdom in terms of assets under management and about 30% contributed by further regions and countries. Now if you look at this chart, you see that Tremendous Deep in Europe is a really sizable portion of our assets under management, where we have a strong reputation, also strong footprint, but there's still growth potential in these markets by way of clients diversifying and not only being invested in one asset class, but several asset classes, so basically clients diversifying and building up more diversified private market portfolios. But there's also markets like, let's 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, we see growth potential.
On the
right hand side, in terms of type, you see about 55% has been contributed by pension fund. That's 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. And here, it's the strong interest in our semi liquid structures, but also 5% 11% by sovereign wealth funds and the 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 €11,000,000,000 to €14,000,000,000 of new client demand. That assumes a benign market environment, which is our base case. We want to build out the platform. That is why we feel comfortable onboarding additional €11,000,000,000 to €14,000,000,000 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 shelves that should allow us to really grow in the expected and communicated range. There are then effects, minus SEK 4,000,000,000 to minus SEK 5,500,000,000, and we do not comment on FX and other related changes. Let's 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 $5,000,000,000,000 which is relevant and substantial, but still small And then we see we see structural growth or tailwind in public And then we see we see structural growth or tailwind in public private markets, probably with more headwind in terms of public markets. If you look at the number of public stocks, for example, in the United States, when you see that over or since the mid-90s, it has almost halved. At the same time the private market universe has been growing. So we see our sales in a favorable spot. And on the right hand side, you see the single double digit growth rates that we have seen in private markets over the past 5 years, and we do expect strong growth in the years ahead.
If I quickly reflect on how private markets have evolved, then 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. But since then, the industry has really grown from private equity only to real assets also.
So now we have a real estate and a private infrastructure industry on top of private equity. 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 tech specialists to several players like Partners Group offering multi asset coverage. So the industry today looks different than how it looked like 20 years ago.
And this brings new challenges. We call this the moment of truth, and this is like 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 the institutionalization, about standardization and about transformation of valuation. So let me, on my last slide, share a few words and comments about these three trends. In terms of institutionalization, there is an increasing intermediation in private markets that manifest itself, for example, by way of ever faster auction or simply processes in private markets.
So basically, one had we had an opportunity to diligence an asset for 6 to 9 months a few years ago. Right now, the intermediaries, the banks really make you analyze and diligence these assets ever faster. But 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. And 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. So if you have to diligence an asset faster because there's just a few weeks or months between start of the due diligence to execution, that basically simply means that we need to start earlier.
That is why Partners Group is looking at 1,000 and hundreds of investment opportunities well before they come to the market. So we want to have an investment hypothesis in the value creation strategy even before the seller has decided to sell. The second trend is commoditization or standardization. As quite simply speaking, not all assets in private markets have out outperformance potential anymore. So while private markets is typically characterized as an alpha asset class, it is true that, for example, in the secondary, but also the liquid loan market, it is about retail as well.
So not all assets in private markets must trade elsewhere. It's also about portfolio construction. And that is why at Partners Group, we want to be an asset manager and we want to be a manager of assets. As a manager of assets, it's about value creation, it's about enhancing returns at asset level. And 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 these private market assets will be much cheaper than in public markets. So 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 expense we've seen in the past and the multiple contractions that we might see in the future.
And this is something that our investment teams are overseen by my coach, Christoph Ruble, is working on a daily basis. And Christoph will share some more insights on the investment side.
Thank you, Andre. 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 then, in the second phase, briefly go through the 4 different investment divisions and lastly share some thoughts on added value and ESG. If you look on Page 16, you've seen how we have decelerated somewhat challenging market environment, been able to deploy US13.3 billion dollars of US dollars, but that's a healthy notch more than last year where we had US11.7 billion dollars in the same time frame.
The backbone is still and continues to be the direct investment business. There were 77 transactions, about 50% of that debt, about 50% of that equity. Across the globe, we see bright, there is a healthy diversification on a global scale. Why is it possible to continue to invest as much as we did? I think as Ondrej already alluded to, you want to be fast, you want to be ahead of your auction, you want to really understand in which direction you go.
So you have to be very proactive. And that is something that our team is spending a lot of time and energy on to track into systems and any other information base that we can get hold of, what are the assets that we wish to own, then proactively link up with management, build the relationship and try to position us better. Secondly, it's the integrated platform. Peter Wolf has already alluded to that. The teams are increasingly working together, which is close to this transaction, but 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. Very simple, a very nice business, also a very stable business with a fast growth. And also, by the way, of the setup of the market, a very resilient business. But I think this convergence of the teams increasingly starts to take place.
See the same thing happening between private equity and real estate. If you take the schools or hospitals or other operations, there's obviously brick and mortar element to it as well as the operational end. So they have this broad platform where people naturally help each other to source, to do transactions and to actually share the insights is truly helpful. Lastly, I think it's the balance that we have. You see SEK 13.3 billion of investments.
You see at the bottom of the page SEK 11,800,000,000 of distributions. You have heard before from Andre Frei, SEK 13,300,000,000 of funds raised. It's not all the same currencies, but it's sort of within a small band. But Affirm at Large has stayed very disciplined in terms of how much drive power do 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 is a very, 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, but 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.
So roughly 1% to 3% of the transactions really happen. And this discipline, the venture the higher sort of a 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% 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, but we have done select small additional transactions in existing portfolios, but no new major transactions. So 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.
That is driven by 2 larger transactions, in particular, Cerba, which is a French lab cell company as well as Silica, that is a U. K. Software company serving as a public sector, and they have shifted to some extent the percentages in the direction of Europe. The secondary continued video 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% secondary, 20% funds. And 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.
But that is still something which is actually prevalent in most of our transactions. Take Fonseca, we have presented in an earlier update to you, the French real estate based company, which has services from joint property management over the brokerage. We have bought it in September of 2016. And since then, we have proceeded with 51 additional acquisitions. So we continue to mop off the market.
But the company still today has roughly 14% market share. So there's 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. If you look at the trends, that's maybe the 2nd 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. CV Cast, that I've mentioned before, is helping U. K. Public units from the counties or anything else to better manage their software systems, to levy taxes, to have the traffic fines optimized and whatever else there is. So they're very, very much on top of this outsourcing trends 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, very active in this segment, investing close to €1,500,000,000 with companies like Kindercare, the leading firm of preschool education in the States, 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 ethnography there. I turn to Page 20, Duke Real Estate.
Here, the style has really not changed much since our last update. We if you simplify it, we developed the core assets that people wish to own. And 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. So there's a need for more sort of affordable housing.
You see this one example here with a location in Stockholm. It's 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, sort of young professionals that want to have a downtown location. So those lifestyle shifts and 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 20000, 3000 square meters, and they have a potential location. You see this example here, which is a Southport sort of based in Australia. And then you have regional centers in Melbourne, in the city and in others, which are typically 5000 to 10000 square meters. So 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. But 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 Merkruld about a year ago, which is now in sort of advanced stages of construction. And here, the example is a Netherlands based one, which is called Borselli, which again is not far from the shores. It's very shallow. So also from a construction point of view, not too challenging.
And 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 driving 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. 2, 3 years, the add on acquisition of a French based company, which is Sohol Covage, which is working together within a Canadian company called Axia that we have taken private about 2 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% sort of capacity utilization in just a very few minutes. They're getting 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, a high cash conversion. We have started mainly with the subordinated part and 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.
And 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 been this example in Australia called Laser Clinics. The equity was supplied by KKR. We helped them to provide with a customized solution on the second hand side.
VFS Global is actually quite known to the Swiss people, I guess. It was part of Quodi. Equity has bought this whole group some time ago, has then essentially sold the traditional travel business. And 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 a 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 Crody.
So it was from a technical point of view quite a complicated transaction. I come to Page 23, where we talk about added value and value creation. Andre 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.
And we 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 staffing jobs. So it's really something which is leaving tangible marks in our portfolio, and that is the basis and the foundation for the continued outperformance of the private markets in general, but in particular, on our firm. I'll 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. So we have spent quite a bit of time in our industry reality creation team to be able to deal not just with the added value to the upside, but also to hedge the downsides. But in reality, this is also helping to create additional returns. And you see here the ratings that we have received, they're all single A or A plus, so we're very, very happy with the results here. With this, I would turn to Felix Auver, who will walk you through the financials.
Good morning, everyone. It's a pleasure for me to stand here today and presenting you the 2017 financials of Partnerships. And 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. And what you can see is this is a very sustained growth path.
And 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. So if we now look a bit closer into our numbers for 20 17, you see that our average AUM growth in Swiss francs, which as we report in Swiss francs, was 18%. Our overall revenue growth was significantly stronger. The reason here is due to, 1st 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. And 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. And that means our EBITDA margin grew a bit stronger, so up to 37 percent to €825,000,000 EBITDA and the profit at Partners Group historically has always been roughly the same.
So 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, and we are also well aware that this is largely also due to the very benign environment we are currently in. And after 8 years riding the bull market, we see that, in particular, on the fundraising and on the realization side, the SAARs couldn't be more aligned for Partners Group. Equally more difficult is, as Christoph elaborated on, is the investment side. But let us dig a bit more in detail into the P and L.
So what you see on the revenue side is revenues consist of 2 components, which is performance fees and management fees, both grew. On the EBITDA margin side, we have seen a 4 percentage point uptick in the EBITDA margin. This should not come as a surprise to you because in the first half of this year, we had already 66%. It is more a matter of fact when we can go back to our long term target of 60. We have a positive financial result that is maybe worthwhile to explain.
We have about CHF 650,000,000 which we invest alongside our clients. And these perform and produce in a good environment a positive contribution to our profit. On the other side, we had higher income, and that means a higher profit. That means our tax rate went our taxes we paid went up to €95,000,000 and the tax rate remains stable. Going forward and because, as Andre elaborated on, we are doing more
and more business outside of Switzerland in
the U. S. In countries where there is a higher tax rate. We think going forward, the tax rate will increase to about 12% to 14% in the medium term. This brings us to a CHF 28 earnings per share on a diluted basis.
So let me go quickly into the revenues. And as said, revenue components, we have 2 revenue components. 1 is management fees, 1 is performance fees. Management fees are based on long term contracts which we enter with our clients, and they are recurring of up to 12 years. And we have a second component in these management fees, which come with the ongoing course of business.
So 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. And 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.
So 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. So if you see that slide, some clients, they entered already in 2015 in this product, and we worked with the capital commitments of these clients. So we built portfolios, we bought companies. But 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.
And that means when they can buy in at cost, they need to pay backwards the management fees when this product was originally started. Because at the end of the day, we want to treat every client equally. So what you see here now in 2017, we had enormous success or these products were generated a lot of demand. And suddenly, a lot of clients entered these products and were now needed now to pay back the management fees when this product were started. So we received in 2017 management fees for nearly 1.5 to 2 years, which is unusual.
Why do I tell you this is now if we look into 2018, in 2018, we will have new products. We start new initiatives logically because we closed the old ones. So 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. But 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 11,800,000,000 distributions of our underlying portfolios that resulted in €372,000,000 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 2 factors what influence our performance. So 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. And about 6 to 9 years later, these funds which we raise today will translate into performance fees.
So we have difficulties to say whether or not the fund pays in 7 years performance fees, but we know there is a likelihood that it will. So 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. And therefore, we need more people. So in that regard, producing performance fees become more difficult in this environment because we need to simply invest more. The second factor which comes into 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, and now they came somewhat altogether. This catch up effect is now largely absorbed. So there will be no further catch ups in 2018, 'nineteen and so on. What you will see is that more or less the normal growth path of vintages from 2,008, 2009, 2010, 2011, 2011, 2011, what we currently paid performance fees. Now lastly, we have in our €62,000,000,000 AUM, we have 2 50 products which we manage and 50 of which produced the CHF 372,000,000 performance fees.
So now what can you expect going forward is our performance fees in 2016 'seventeen were at 30% of overall revenues, and this is the very end of our guidance. So you need to be, as investors of Partners Group, more be more comfortable with the fact that Partners Group, where we have SEK 1,000,000,000 of revenues and have 20% to 30% of such revenues in performance fees, that performance fees could fluctuate between SEK 200,000,000, SEK 300,000,000 in the case we do SEK 1,000,000,000 But 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. And this is unfortunately always 7 to 9 years out.
Now the bulk of our business is still management fee driven. And I'm on Page 33. The bulk of our business is still management fees. And as you can see, we have a very stable management fee margin of between 120 bps 130 bps. The average of the blue bar is 125 bps, 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. And of course, if you add performance fees on top, the overall margin actually increases. But now let us switch to the next slide, on Slide 34 and look at costs. While we talked about revenues, which is the main driver of Partners Group's growth, we our cost base is pretty much or it's very simple. In that regard, that 85% that we literally only have personnel costs.
So 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. The Partners Group knows exactly how much people we will onboard and what we can onboard and what we want to onboard because we receive roughly 30 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. So 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 2 to 4 years. But this is always depending on FX rates.
Partners Group currently manage about over 80% of its assets under management on Slide 36 in euros or dollars. This is the typical denomination of our funds, And that means we also receive management fees out of euros, dollars and euros. Now, if you look at our smaller cost base, it looks a bit different. And that means changes in currencies have an impact on the EBITDA margin. Now looking at the profit development on Page 37, what we see is that our profit then increased 35%.
But maybe giving you some balance sheet data on the right hand side is at this point in time, on the right, partners group has roughly CHF 2,000,000,000 of equity. As already said in the very beginning, we have €650,000,000 of investments we do with our clients and have a net liquidity currently of €1,300,000,000 And this is, by the way, before our dividend payment announcement, we want to pay out €500,000,000 in dividends. And speaking about dividends on Page 38, the €500,000,000 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, high amount of performance fees. And for those of you who know us very well, you know that we are actually following a steady growth path in dividends. So assuming that our business grows in all asset classes that we fundamentally believe that our business has the 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. And if there are any, we're on the phone, but I think we would start here in the room and then go via the phone. Questions?
Daniel Rigley, MainFirst. Could you maybe elaborate a little bit more on client demand trends, particularly you already mentioned where you see particularly strong demand. What is shifting within your client segment? And where do you continue to see future potential to grow your client base, particularly in the Netherlands?
Well, let me just give you
a sense on the client side. As I highlighted, like in the mature partners group market, like German speaking Europe or UK, the name is broadly known. Investors have invested significant amounts of money with us. So there's 2 trends. On one side, there's certain consolidation.
Clients don't want to diversify as not only 50 GPs, but actually another 50 GPs and then administrate the portfolio for 100 different private market clients in the pension fund portfolio. It doesn't make sense in terms of effort to take the administer. So there's a certain consolidation happening in terms of clients that have already built up substantial private market portfolios. And also this consolidation on the one hand side, on the other hand, there's a conviction that private market portfolios should be not only right size, but also rightly diversified. So I believe private markets investors that have stepped into this allocation like 10 years ago, by now have often ended up with portfolios that are over diversified, They have chosen too many cheeses, too many underlying assets.
And then 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 will only consolidation, but also rightsizing and accepting portfolios that are properly diversified, but not over diversified anymore. So as partners do business consolidation, but also clients, and I talk about professional and cautious investors that now are willing to look at direct investment strategies that keep a higher rate than, 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 CvCard that Christoph has just finalized before. And another trend we see is clients approaching us and wanting to wanting partners 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. So why do you pay us back after 5 years? That's a feedback by a number of clients that say, we would like you to be invested longer. And then that is something that we take seriously.
And we believe that the venture renewal governance that we have in private markets ideally is suited to hold certain types of private market assets longer. So these will be assets that are resilient, but it's not too much disruption risk, where we have a conviction and the plan for the many years to come. So 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 and exit sell off to an IPO immediately after over the last 3 to 5 years, but try to hold it back for 8 to 10 years if you actually can.
Next question?
We have highlighted on the equity environment that clearly has been very benign. The values are high. Debt is abundant. The things are quite liquid. So in that regard, it was a good year, and we also did profit from that.
When we look at the performance levels, healthy notch above the medium term sort of returns. And 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 of the long term average of that given segment, say, an 8% and 9% and 10%, whatever that situation happens to be, and actually therefore make sure that although we are buying at a reasonably high level today, we can actually still generate business opportunities.
What does it imply? The only way we can really make money is to add value. And that goes back to what Odie and myself have discussed. We are doing a hands on fashion, create value somehow, buy additional acquisitions, buy new business lines, buy geographic expansion, buy new technology, whatever it may be, and that ultimately helps you to still have commensurate returns
for our client programs.
And with regards to performance, I think the guidance what we give you with the 20% to 30% and where
does it end up with is
All our funds, what we look at, which have a certain maturity, we can pretty well assess where mortgage fees will be at year end or 2 years out or even sometimes with a certain visibility for up to 3 years. Now what happens is it is very difficult to assess whether or not the fund pays almost in a December or in a January and and these fluctuations drive literally our bandwidth of 20% to 30%. So now if we continue to shift towards that more direct investment specifically going forward, we will expect also more performance fees. But this guidance of 20% to 30% also depends a bit on how our assumptions are on asset rating because asset rating drives our management fees and therefore, I would expect the 20% to 30% to be in the range,
which is why we don't give more guidance
yet
than the 20%.
We've already received the first question. It comes from Kujit Kambo of JBPMorgan. Please go ahead. Your line is now open.
Hi, good morning. I've got 3 questions, if I may. The first question is, in terms of the sort of the demand that you're seeing with prequen, is that sort of consistent with what you're hearing from your clients when you did your conference recently? So 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. So just any thoughts on how you're looking at technology within your business? And the final one, in terms of the sort of net liquidity post dividend, it's up about more than CHF 250 for this year. Just how should we think about liquidity? What are the needs for that liquidity to be so high?
So those are the 3 questions. Thank you.
The first two, I think, are questions for Andre.
So the first question is about client interest to increase or maintain exposure to private markets. And as Peter said, yes, we believe clients the typical parts of the client is not decreasing the private markets portfolio, but is keeping it flat or is building it out. And the best difference is in terms of our clients, we have clients that are of 5% to 10% or higher private market 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 and these clients. I expect to increase allocation, not only with Partners Group, but also with Partners Group.
And I believe, in many cases, a substantial amount proportion with Partners Group. In terms of technology, a sensing question. Maybe I answer first and then Chris over that. In terms of Technology Partners Group, that is really a conviction that we have had already 10 years ago. So kind of like 10 years ago, we have significantly ramped up our own efforts as a company to digitize partners move.
Today, we call our system, we gave it a name, right? So it started off by simply catching up in terms of technology. But after some time, we realized that we have developed something really, really powerful. So we call it Premera. And Premera stands for private market intelligence to manage, explore, report and analyze private market data.
So the digitization effort at Partners Group really took place 10 years ago. And by now, we're in a position not only to operate complicated structures if regulation requires us to do so, but it also allows us to communicate in a friendly, in a positive way with our clients who, on the bottom hand, appreciate its insight into the private market portfolios, but then also enjoy the ease of communication because they can look at their private market portfolios on an iPad or on a solution. The digitization, at least, is advanced. We don't trust. You may have seen the press release in 2017, the Partners Group has launched a known little blockchain using this Ethereum blockchain.
So basically, we said we want to have the first attempt. What would be something helpful that we want to use the blockchain to reduce external fraud risk on behalf of our clients. So it's actually in collaboration with our service providers. We request them only to issue payments, make capital calls. If by way of using a blockchain, it is confirmed that indeed, partners who have instructed service provider to issue a capital call and send money from account 1 to account 2.
So this is a, I think, a powerful little act, and it is really beneficial for our clients because and shareholders because the growth rate has been minimized. But I believe as Partners Group, this is an attempt to learn our business is not IT, our business is the source investment opportunities and value, create value on the board. And on various boards, maybe Christoph has some color, the use of technology is a critical value creation component.
And on the investment side, we want to be healthy to have this database. It just gives you a much, much better transparency on the asset you're looking at. So we are therefore using this database, which has been developed by a number of years ago, because we were the 1st mover in that regard. To source transactions with some of the assets, but then also you have to do KPIs for performance. You can actually much better price your transactions.
You have in U. S. What actually works in the business world. And therefore, it's also very helpful. We use it for business development.
We use it for add on acquisitions.
So on the liquidity and the dividend question, Barkshook has, as you all know, an organic growth strategy. So we don't need liquidity for making acquisitions. We essentially use liquidity for two reasons. 1 is
rather simple to determine.
The other one is extremely difficult to determine.
I think the simple one
is we're using to service our clients. So we, for example, give bridge financing just for convenience of
our clients so that we
don't have to ask them unnecessarily to send money back and forth, but we bridge, for example, between exits and investments. And the more difficult one is obviously to look at stress tests. And here, we do every year an exercise where you have all sorts of different scenarios. What could be going wrong in terms of both macro as well as micro, ugly things. And those of us having been here for a rise note 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.
And so that's why we do have some preference for substantial liquidity buffer. And we always, obviously, look at scenarios the extent that they could hinder us to have an increasing dividend. And so our growth, as Felix explained, is as bad as the dividend is to have a kind of continuously growing dividend, and I think that determines our liquidity. So we feel comfortable with the liquidity where we are today, but 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 El Alabisakos of HSBC. Please go ahead.
Your line is now open.
Hi. Thank you very much for the presentation. So my first question is regarding the tax rate. I've seen the guidance being stable up to up to 14%. Just wanted to confirm that there isn't any impact from the U.
S. Tax reforms on whether that 12% to 14% already includes that. And also since we are on the U. S. Tax reforms case, I'm just wondering whether now the first of all, you expect to be able to accelerate the disposal of your existing U.
S. AUM because there's going to be more M and A activity. And secondly, whether you believe that now the valuation for U. S.-based assets is actually more appealing compared to 6 months ago given that the PE for most of the investments is looking more positive. And my second question is regarding the EBITDA margin.
I know that the
You asked 3 questions, right?
And the 4th 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? Because clearly, the 66% was very high this year. But I wonder what would be the negative fluctuation, if you like, when you start to accelerate the hiring? Thank you.
Your question with regards to the tax rates. And if you look at our P and M of our balance sheet, our deferred tax assets, which was one of the major drivers for tax rates in 2017 for U. S. Corporate is very low at positive. So the effect which you mentioned or you want to see is largely neutral in 2017.
It was 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 tax rate will increase. This is also because of all other geographies where we are entering.
If I understood your second question correctly, it 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. There's yield from this stuff. Banks are typically investing much less in private markets.
The insurance companies certainly will probably increase their allocations as it's a big chunk of our ability to fall in the way. It will have some effect, but probably not a huge effect. The valuation side, which was your question, again, for most of the companies, there's a healthy element of taxation less to take, which certainly will have an impact on our operations. But in most of the segments, as 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 get a touch.
But we may 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 a EBITDA margin target of 60%. But we do not control our Citibank FX. The scenario the only scenario I could see under which we would fall below the appreciation of the Swiss franc 30%, 40%.
But that's very unlikely, and I guess then we do we could probably have other issues if that happens. But I think you can safely say that there is no yield plus in scenario by which in short term we'll see the negative margin.
Great. Thank you and well done for the set of results.
Thank you. One more question from the floor.
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 Philippe obviously explains where it comes from, why, let's say, compensation expenses grew less than revenues in general. However, if I back out 40% for as comp for the performance fees, which were very high, The remainder actually is a very, very small growth number in terms of comp. And if I look at the number of staff, I mean, you added like 100, it still doesn't really fully explain why this number looks so low. Is that related mainly to FX?
First one. 2nd one, just more 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 kind of 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, and that may explain the somewhat moderate growth on the compensation side. On hedging, generally, we do not hedge, but I don't know if you want. Add something here.
We probably refer to the financial results. Here, financial results is a blend between investments or positive performance of our own investments, but we also have certain financing costs to bear. And 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 service our clients with treasury management services, offering cash bridging and facilities where we need to deduct the costs we have for this financing from the financial results. But I don't know if this explains your question.
Yes. We can discuss later. Thanks, Philippe. Thank you.
Maybe come again to here. Are there any questions you
may have?
Yes. Yes. Again, Daniel Rekerman first. And could you maybe elaborate on client segment? 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 kind of clients.
I guess one area where we have not fully explored the potential, I think are the insurance companies. That does not necessarily require a lot of structuring, but the profound approach, asset liability, matching and management, and that is something where we want to make more conscious effort as a company. I believe the joint companies are taken by the off the shelf standard products that Partners Group already offset. The insurance companies can ask for mandates. And I believe we can make a concerted effort and then get closer to the real issues that the insurance companies have, then I think our product catalog offers investment opportunities that will improve the insurance company as well.
If you think of infrastructure, for example, these are often long term assets. This is our long term cash flow streams with a high cash yield. So there should be possibilities to offer solutions that will fit the insurance companies better. In terms of regulation, there are certain markets like, for example, Latin America, where basically regulation needs to change, will change, probably that will allow these type 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.
The 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 who've platform is this in their stores, give us the flexibility in a flexible way all across the globe. Then I think we want to be the solution provided to those clients that have an ambition and the possibility to invest, let's say, 40% in the space, 40 percent in Europe and 20% in Asia and emerging markets. So 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. We have more questions on the phone.
Yes. There is 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. And perhaps more broadly, give us an idea of what where you expect multiples to kind of trough 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 quite easily. That levels have probably also reached a level where we don't want to exceed the current levels. In that regard, we believe
we're probably at the top. The only
thing we can do is sensitize the hit, we will do the down, which correction might at some point happen. There's a need to be version of those valuations. That is something we consciously do, we're underwriting, sensitivities maybe towards the multiple points of contraction, but we can convince ourselves to still suffer for our client base.
Thank you.
Great. Any other question on the phone?
Thank you. We have no more questions via phone, but 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 year 11 to 14 bn of fundraising this year if your flagship funds were largely raised last year?
Will these be new strategies or mainly successor funds?
Thanks for the question, but just that's the first time, I believe. It's good to be a reachable debt rate too. For example, on the private equity side, last year, we have had a direct equity flagship fund in the market. We do as a platform, and we've talked about this many times, is that we invest roughly 50% direct, but we also have 20% secondary and we also have 20% primary. So one strategy, for example, that we want to use or offer in 2018 is a strategy that we cannot 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 region, as I just highlighted, the forty-forty-twenty Americas Europe Asia, but we also have the flexibility depending on the market environment to be investing directly. But actually, should there be a correction quite substantially in the secondary market or investing by way of complementing the portfolios and giving money to third parties? These are adaptions of existing structures and solutions that we had in the past, but they are typically not 100% direct portfolios because the flagship is not available. What is important to say is that these products are not like they're not pet balloons, they're not counting on a deal flow that is not proven actually in contrast. It will be different angles, different weighting, different approaches, but still leveraging and phasing it on the deals that we see as a company in the core asset classes.
I think what we should also mention is that about half of our new business mandates, which are not kind of flagship oriented, but they're essentially customized. And clients have a customized mandate where they, depending on their criteria, ask for selection of direct primary secondaries across asset classes increasing. And I think that's a growing part of our business. So are we done?
There are no further questions.
Then thank you for your support, and have a good day.