Hello, and welcome to the P10 Q2 2022 conference call. My name is Jason, and I'll be coordinating your call today. I will now hand you over to our host, Mark Hood, EVP of Operations and Investor Relations. Mark, please go ahead.
Good afternoon, and welcome to the P10 Q2 2022 conference call. This is Mark Hood, EVP of Operations and Investor Relations. Today, we will be joined by Robert Alpert, Chairman and Co-CEO, Clark Webb, Co-CEO, Fritz Souder, Chief Operating Officer, and Amanda Coussens, Chief Financial Officer. Before we begin, I'd like to remind everyone that this conference call, as well as the presentation slides, may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect management's current plans, estimates, and expectations and are inherently uncertain.
Actual results for future periods may differ materially from those expressed or implied by these forward-looking statements due to a number of risks or other factors that are described in greater detail under Risk Factors in our annual report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 21, 2022, and in our subsequent reports filed from time to time with the SEC. The forward-looking statements included are made only as of the date hereof, and we undertake no obligation to update or revise any forward-looking statements as a result of new information or future events, except as otherwise required by law. I will now turn the call over to Robert.
Good afternoon. I'm Robert Alpert, Chairman and Co-CEO. Today, we will discuss our strong Q2 2022 financial results and the continued momentum we are seeing in the market from a fundraising and deployment perspective, and share why we believe P10 is well positioned for continued organic growth. We delivered exceptional results in the Q2 and performed well across each of our strategies. Gross fee-paying assets under management increased by $1.2 billion, offset by $299 million of fees step-downs and expirations. We ended the quarter at $18.5 billion, representing a 30% year-over-year increase. Organic fee-paying assets under management grew by $3.4 billion, or 22%, when compared to the Q2 of 2021. On a year-over-year basis, revenue increased 38%, with GAAP net income increasing 351%.
Adjusted EBITDA increased 52%, and adjusted net income essentially doubled. With our continued business momentum, we are well positioned to meet our expectations to raise approximately $5 billion over the course of 2022 and 2023. Because of our financial model, which generates growth and strong free cash flow, we continue to look to optimize our capital redeployment through M&A, debt paydown, share repurchases, and dividends. To that end, the board of directors today declared a $0.03 per share dividend payable September 20, 2022, for the holders of record as of the close of business on August 29, 2022. Now let's hand the call over to our Chief Operating Officer, Fritz Souder.
Thank you, Robert. We had an excellent quarter of fundraising and deploying capital, which I believe highlights the attributes of our business model. First, we invest in middle and lower middle market, an environment we know really well. By focusing on our segment of a large and growing market, we leverage and hone years of experience in market intelligence. The time-tested relationships we've nurtured and built with GPs and fund sponsors over multiple decades means our deal flow is unique and, we believe, best in class. Trusted relationships mean we get access to secondary, direct, and co-invest deals that others may not see. This access to elite access-constrained managers and deals translates into superior fund performance that drives LPs to continue to entrust us with their capital.
Our strategy is to invest with and alongside GPs who have a competitive advantage, great track record, and proven experience successfully managing through various market cycles. For the period ending March 31, 2022, our fund performance remained strong, which helped to support our fundraising efforts and our position as a market leader. Another key element I wanna highlight is our strategic diversity and broad product set. P10 does not depend on any one strategy or fund to drive growth. We have a variety of contributors to our asset base and revenue stream. For example, in the Q2, we had more than a dozen funds in the market, and some of those funds are countercyclical, such as our NAV lending funds.
Larger contributors to fee-paying assets under management in the Q2 were our GP Stakes strategy, Bonaccord Fund II, which held its first close at $367 million. RCPDirect IV, which held its final close at $645 million. Continued growth in our venture sector. Turning to deployment, we continue to see strong deal flow and quality assets. Since private equity assets have slowed, we've seen sponsors using credit and NAV loans as a way to fund portfolio companies and bolster returns as the hold periods lengthen. We expect to see continued growth from this credit sleeve, especially as spreads widen and durations lengthen. Finally, I want to thank our GPs and LPs for their continued support. The success of our business depends on superior market intelligence, data, and relationships. The most important of those factors is relationships.
I will now turn the call over to Clark.
Ability of the P10 financial model. From the beginning, we set out to build a financial engine that in many respects mirrored a compounding bond with highly predictable contractual and growing revenues, visible and manageable expenses, limited CapEx and tax leakage, and very strong returns on capital. While we believe the model works well in robust markets, we shine in times of market turbulence. Q2 is a great testament to that. As we have discussed in past calls, a highlight of P10 is our impact business, Enhanced Capital. As a pioneer in impact investing for over two decades, Enhanced is committed to achieving quantifiable impact across the U.S. lower middle market while meeting investors' goals through investments in small business lending, impact real estate, and climate finance. On July 11th, we announced that Enhanced and Crossroads Impact Corporation meaningfully expanded their strategic relationship.
We encourage our P10 shareholders to read that announcement. What this means for P10 is that we now have a permanent capital vehicle that also provides access to the retail channel, given Crossroads shares are traded on the OTC. The transaction has the opportunity to provide nearly $500 million in dry powder that will earn fees and add to our fee-paying AUM as the capital is deployed. We think the announcement is yet another milestone for P10 and further strengthens our position as a leader in middle market impact investing. While organic growth remains our core focus, we continue to evaluate acquisition opportunities. As we like to say, this is a marriage, and it's best not to pressure discussions. We are busy, but we will remain patient and disciplined, looking only for the right partner with the right win-win transaction structure and price.
With that, I'll hand it over to Amanda to walk us through some of the quarter's financial highlights.
Thank you, Clark. For the Q2 of 2022, fee-paying assets under management were $18.5 billion, a 30% increase on a year-over-year basis. In the quarter, $1.2 billion of fundraising and capital deployment was offset by $299 million in step downs and expirations. As a reminder, step downs and expirations are a normal part of our business and typically take place at the end of a fund's life. We expect an additional $290 million in step downs and expirations for the remainder of our fiscal year.
Revenue in the Q2 was $46.7 million, a 38% increase over the Q2 of 2021 due to the increase in fee-paying assets under management from both organic and inorganic growth, with the acquisition of Hark and Bonaccord having closed at the end of Q3 in 2021. Average fee rates were 103 basis points, with the increase being primarily driven by $800,000 in catch-up fees attributable to several fund closings. As a reminder, when you look out across a cycle of four quarters, you should see our fee-paying assets under management deliver approximately 100 basis points of revenue.
Operating expenses in the Q2 were $31 million, a 21% increase over the same period a year ago, primarily driven by additional comp expense associated with the acquisitions of Hark Capital and Bonaccord, an increase in stock-based compensation expense from 2022 annual options and restricted stock unit awards, and an increase in general and administrative costs from higher premiums for D&O insurance following our IPO. GAAP net income in the Q2 was $11.2 million, a 351% increase when compared to the Q2 of 2021.
The increase is primarily attributable to the increase in revenue due to fee-paying AUM growth, margin expansion from 51% to 54% for the first half of 2022 compared to 2021, and an $8 million reduction in interest expense due to debt pay down and the lower interest rate from the debt refinance last December. Adjusted EBITDA in the Q2 was $25.7 million, a 52% increase over what we reported in the Q2 of 2021. For the quarter, our adjusted EBITDA margin was 55%. We plan to continue to reinvest in the business while targeting an overall 55% annual margin. For the Q2, adjusted net income, ANI, was $23.2 million, a 99% increase over the $11.6 million reported in the Q2 of 2021.
We believe our results this quarter continue to demonstrate our ability to efficiently convert a dollar of Adjusted EBITDA to adjusted net income due to lower debt costs from our debt refinance last year and minimal tax leakage as a result of our tax assets. As a reminder, our tax assets are composed of two distinct assets. A $212 million net operating loss and $306 million in remaining tax amortization. Taxable income is reduced first by our tax amortization and then further reduced by the NOL tax asset until the NOL is utilized. Goodwill from acquisition was amortized over a 15-year period and should continue to grow as we complete additional acquisitions. Cash and cash equivalents at the end of the Q2 were $23.6 million.
We paid down $12 million on the revolver in July, leaving $125 million outstanding on the term portion of our loans and $53.9 million outstanding on the revolver. We currently have $71.1 million available on the revolver and $125 million potentially available as an accordion feature on our credit facility. We expect to use the cash available from operations to continue paying down debt, paying quarterly shareholder dividends, potentially utilizing the stock buyback announced last quarter and for future acquisitions. In the quarter, no shares were purchased under the company's $20 million stock buyback program. Finally, on our share count at June 30, 2022, Class A shares outstanding were 37,307,745, and Class B shares outstanding were 79,761,550.
I will now pass the call back to Robert.
Thank you, Amanda. Now let's turn it over to the operator for a few questions. Operator?
If you would like to ask a question, please press * followed by 1 on your cell phone keypad. Our first question comes from Ken Worthington with JPMorgan. Your line is now open.
Hi, good afternoon, and thanks for taking the questions. Maybe first on capital deployment. You put those stock buyback program in place last quarter. You didn't buy any shares last quarter. What are the thoughts there? It was a tough time in the market. I don't know, just what are the thoughts?
Yeah, Ken, great question. I would say two things and others can add as well. First is we were in a quiet period for a lot of the quarter. The second thing is we certainly had an order in there, it just wasn't filled. We do believe that returning capital to our shareholders in the form of buybacks is a good decision when it makes sense. Obviously we continue to declare our quarterly dividend and we have what we believe is ample firepower for M&A. We feel good about all three pistons running. I would just say stay tuned on all three fronts.
Okay.
One other consideration, Ken, when we think about that buyback is, as we have some large shareholders, you know, like, when you see them in the 13Fs, if there are any large blocks of stock available, we're very cognizant about the liquidity in our stock, and so we wouldn't wanna just pick away at, you know, a 1,000 shares here or a 100 shares there. We were very cognizant if there was any large blocks, we would be interested in deploying meaningful capital there.
Okay, great. Assuming I did the math correctly, P10 generated, I think, $900 million or so in net commitments this quarter. I believe about $700 million of gross commitments was from funds, largely Bonaccord. Maybe first, talk about the momentum that you're seeing on the separate account side of the business and maybe any outlook you have in the coming quarter, I'm sorry. The big fund sales were in Bonaccord, and the first close looked great. How are you kind of feeling here about, you know, your target for Bonaccord, given kind of broader fundraising market conditions, and how that might impact things? Thanks.
Yeah, great question. I'll start and others can chime in. When you think about P10, I think it's really important to think about the ecosystem in total. I think we said in the script that we had a dozen strategies raising capital in the quarter. Some of those are more cyclical, some are more countercyclical, and some are acyclical. We do not rest our laurels on any one strategy, any one fund. I think it's another reason why we really see ourselves as a solutions provider. If you take lower middle market private equity, for example, we are surrounding that market with the primary fund to fund, secondary co-invest, seed and stake and some other new strategies that we're launching. Doing the same thing in venture, doing the same thing in impact, in terms of lots of different ways to win.
Broadly speaking, we are not looking at a single fund to hit our numbers. We're looking at the portfolio approach, because we do think we have a lot of funds that are attractive to folks. We think Q2 is a great testament to that. Raising, you know, nearly $1 billion is a big number in a quarter that, you know, we feel like was volatile to say the least. We still have a number of those funds that are open. We feel great momentum across the board. That being said, we recognize that there are challenges in the macro environment. Our goal is we wanna hit our numbers for each of our strategies. The funds will stay open as long as they need to to do that.
We don't see a single fund right now that we're struggling to hit the numbers we'd like to hit. In many cases, we're hitting our hard caps. I think RCPDirect IV in lower middle market is a great example of that. Actually hit the hard cap, expanded the hard cap, got LP approval to do so. So feel very good across the board about all of our funds. We're sticking to the $5 billion over the two years. Lastly, on Bonaccord in particular, we prefer not to talk about individual strategies and caps. We're very excited about the first close, approaching $400 million. We certainly expect that fund to be open into 2023. You can see how Fund I is performing, and we feel very excited about what's already in the ground in Fund II.
That fund is gonna remain open for a handful of quarters. We think that fund should be nicely larger than the predecessor fund, which was $750 million.
Okay. There was a lot there in the answer. Thank you very much.
Our next question comes from Michael Cyprys with MS. Your line is now open.
Great. Thanks. Good afternoon. I wanted to circle back to the Crossroads partnership that you mentioned in the opening script. I was hoping you might be able to expand a little bit on that partnership, how it works, how you might deploy the $500 million that you referenced, and what the economics are for P10.
With Crossroads, think of Crossroads as our publicly traded LP. We raised a fund from two investors, as you will note in the press release around that, and invested that capital directly into Crossroads. Crossroads becomes our publicly traded permanent capital vehicle. As Enhanced goes about originating, you know, solar loan, any impact loan or investment, they will put it on the Crossroads balance sheet. There is a, you know, Enhanced earns a fee, a management fee and a carry, just as if it was a regular LP GP structure.
I would just add, you know, it is transformational. We think it is transformational. When you think about what Crossroads is, it is a publicly traded B Corp, also a CDFI, Community Development Financial Institution. What it does for society is extraordinary. We do think, and in the press release you saw that Crossroads is exploring options for a potential uplisting in the future. We do think in the public equity world, there's a dearth of real ESG and impact opportunity. I'm sure folks have read about that in the press.
We think having a publicly traded CDFI, a publicly traded B Corp, with an extraordinary multi-decade track record, and then marrying that with the enhanced management of impact assets, we think that could be a real long-term win for Crossroads shareholders, and for Enhanced and P10 shareholders alike.
Great. Just as a follow-up question, I was hoping you might be able to talk about, broadly retail product initiatives, just kind of where you guys stand on that today. As you look across your product set, which of your existing products or strategies you think could be the most meaningful driver of flows from the retail channel from your existing product set? As you kind of look out over the next three to five years, what new strategies or areas could make sense to bring to the retail channel?
Right now, I would think of it as we really have four different pistons in retail. These are early days, and we don't believe that they are moving the numbers as of yet. One is obviously the relationship that we announced with Crossroads. That is about as retail as you get, especially to the extent that Crossroads elects to pursue an uplisting in the future. That's one channel. The second is the large platforms, the wirehouse platforms where we are becoming more successful putting some of our product on those channels. We do have some wins there, which we hope will grow in size.
The third is we are looking at the interval funds and making progress there. May not be a P10-branded interval fund, but certainly want to participate in that arena. The third is we're trying to create partnerships with RIAs, whether they're large or small, and even create the spoke product that can take advantage of multiple strategies that we have. These are all early days. Our peers are miles in front of us, but we do think it's a large and growing market. These are not in the numbers yet, and we feel like they can only get better. Lots of focus on that. I think this is a multiyear story, not a multi-quarter story.
Great. Thank you.
Our next question comes from Robert Lee with KBW. Your line is now open.
Great. Good afternoon, everyone. Hope everyone is doing well. Maybe my first question will be just on fundraising. Just kind of, you know, curious. I guess it's really only over the last, you know, couple years that, you know, the various, sort of, you know, businesses came together. I know one of your goals is to kind of, maybe get more cross-selling, so to speak, out of it. Do you have any? I don't know if there's any kind of statistics or anything you could share in terms of as you look, as you fundraise now, you know, how often you're seeing, you know, new commitments come to, let's say, RCP that, you know, that didn't previously invest, you know, on that platform.
Yeah. A great question. We certainly track it to the penny, as our sales force can attest.
It's not something that we are publicly providing, but certainly I think we can give some broad strokes. We are absolutely seeing the initial fruits of cross-sell. We think as we've talked about, we feel like we do have a very strong European platform. Only one of our verticals really has raised capital from Europe historically, our private equity vertical. We have been very active bringing our teams over to Western Europe, and we are starting to see meaningful capital come in in the form of fund commitments and separate accounts. We also believe that we've been able to take especially a product like Hark and NAV lending product, which is just not well understood. Most LPs are not aware that that's an option.
As you see in the results, we believe that NAV lending continues to grow at a very nice rate for us. We are absolutely seeing cross-sell there. You know, Bonaccord, the GP stakes fund too. We had a very nice first close. I think it's more than 50% the size or roughly 50% the size of the entire Fund I. That certainly has been a team effort. We are seeing the beginnings of the cross-sell take hold. But as you know, these are, I think as Fritz referenced in the script, these are relationships. We wanna make sure that we're talking to the right people at the right times, and that takes years. We believe it's early days.
Again, we all see this, whether it's retail or cross sell. We think we've got very good results right now, and we think there's a lot to build upon.
Okay, great. Maybe at the risk of focusing a bit too much on one of the businesses, but can you talk a little bit about, you know, the VC market? Obviously, you know, there's been a lot of, you know, pressure on a lot of VC investments last six months or so. How is that, you know, impacting, if at all, you know, your fundraising for your, you know, VC products?
TrueBridge is, we have not seen a near-term slowdown in that, given our ability to access the premier venture capitalists. You know, it has not been a. We have not seen a big slowdown in that. Now, you're talking about, you know, a reaction to this quarter's market volatility or this first six months market volatility. If you think about the fundraising cycle, how long that is, you know, we've been in the market out raising capital, meeting with LPs and, you know, explaining the story. We have not seen that. That's not to say that we wouldn't. You know, we've certainly seen markdowns in valuations in the venture world and whether, you know, investors react to that and don't go, you know, pull back.
We have not seen that, you know, year to date with TrueBridge or any of our venture products.
Okay, great. Maybe one last question. I know this is not a number you've disclosed in the past, but, you know, you did mention with Crossroads the, I guess, the dry powder potentially of about $500 million, I mean, obviously probably some other products. Can you maybe update us on the amount of drawdown dry powder you have? Because, I mean, clearly deployment has been helping to grow fee-paying assets. Just trying to get some sense of kind of, you know, what's been raised or committed and what kind of the potential is just drawing down on, you know, what you already have in the bank, so to speak.
Yeah, that's probably. You know, the Crossroads relationship is probably our biggest drawdown dry powder opportunity. Clearly we just signed that. It's, you know, we have not deployed capital, you know, very quickly. You know, I don't think it'll be dramatically higher, you know, overall.
Okay. That's it for my questions, everyone.
Our next question comes from Chris Kotowski with Oppenheimer. Sorry. Your line is now open.
Yeah, good evening. Thank you. Just wondering, on the occasion of the first close of the Bonaccord Fund II, I wonder if you could talk a little bit about the dynamics in that business a bit more. I'm wondering specifically, I mean, you said it, you know, expect the fundraising to go on into next year and end up with more than in Fund I. I was wondering, is Fund I fully committed already? I see in the table it's only 47%. Then, like, you know, have the fees on Fund II turned on, or does that happen sometime in future quarters?
On Bonaccord Fund I, it is fully committed, but only 40%, 46% drawn down. That's, I think that's the answer to the second part of your question. The first part of your question was around Bonaccord Fund II, correct?
Right. Well, yeah, I guess I'm wondering, well, A, have the fees turned on? And then should we expect this pattern that we see with some other companies, that as more people come in, that there are going to be retro fees, you know, as you-
Yeah.
Have future closes?
The fees in Bonaccord II have turned on and we will have catch-up fees in our numbers as more investors come into that fund.
Yeah. One thing.
Okay.
Sorry, one thing I would like to clarify, our catch-up fees are actually $1.8 million for the quarter, and I believe I said $800,000. Just wanna clarify that.
I guess just in sort of general on Bonaccord, just I'm curious, like when you make an investment there, is there an average kind of check size that you target and percentage ownership in the manager, or is it all different kinds of investments?
You know, you teed us up for a sales pitch. Thank you for that. Yeah, we find it fascinating that we have the opportunity to be the market leader in middle market GP stakes. I think everybody on this call is well aware of the success of our much larger brethren up in the large end of the market and Blackstone and Petershill that's just done an extraordinary job. They are in the upper end of the market, and the middle market has really been illiquid for the last number of years. We hope that we are the liquidity provider. In Fund I, we have nine extraordinary GPs. It's a global fund. It's across private equity and real assets and private credit. You can see the results.
We think it's off to a great start. Fund II, we already have two assets in the ground, and we think that they are premier GPs, and a very strong deployment pipeline as well. I think we'll be active before the end of the year. It is a market we believe is beginning to become liquid. We think we can be at least a, if not the primary liquidity provider. We do think this strategy fits really well within P10. Obviously, our entire business model is built upon interacting with GPs and being a partner of choice. No better way to be a partner of choice than a minority owner.
Okay.
Each of the deals is bespoke. They work with the manager and craft a solution for their particular needs and strategy. It's not all cookie cutter, just straight up.
Okay. The last one for me is I see in the fund tables RCP XVII appeared. I guess it strikes me as somewhat unusual for you to have more than one fund per vintage year there. Is there a reason for that?
Yeah.
Yeah, I can.
Fund XVI closed. Oh, you got it, Fritz.
Yeah. If I can handle that. Fund XVI, the RCP model is really to continuously be in the marketplace. Fund XVI closed right around the end of the Q1. Maybe it was early Q2. It's tradition over the last 20 years, we then begin to open up Fund XVII. It's constantly in the market. Fund XVI now is fully invested, and that is invested in other funds, so it's very lightly drawn. It'll be drawn out over 5 years. We're now investing out of Fund XVII. We had a small close here right at the end of Q2, and we have another close coming here very shortly, if it's not already. On pace with that too is matching our historical levels.
That's just continuing what we've done for the last 20 years in that model.
Great. All right. That's it for me. Thank you.
Our last question comes from John Campbell with Stephens. Your line is now open.
Hey, guys. Good afternoon. Congrats on the continued momentum.
Thank you.
Just back to the ex-
Yeah, sure.
Back to the expanded relationship with Crossroads. That was a great development for you guys, obviously, but you know, a few months ago, you guys had, you know, the RCP and Eaton partnership. It seems like your appetite is maybe building for these strategic partnerships. I'm curious about how important these are to you and whether we should expect a continuation of new or maybe expanded partnerships kind of moving forward.
Well, every relationship is important to us, so you're absolutely right about that. You know, as opportunities present themselves, we will try to take advantage of them and try to create win-win situations with new partners. And so we absolutely, it's certainly part of our strategy moving forward. You know, but it's much like our acquisition pipeline. It is not a cookie cutter and it's episodic and opportunistic, and it takes the right partners, and we view our acquisitions as marriages, and we view the strategic relationships as marriages. It takes a while and you know, there's a lot that goes into them to get them to where we can actually announce something.
Yeah, makes sense. Two quick ones for Amanda. As far as the expiration step-downs, you said the $290 for the back half. Any sense for how that's gonna break down between the two quarters?
Yeah, I think generally in the towards the last quarter.
Okay. You also mentioned, and you called off the 55% EBITDA margin target. I don't know, is that more of a, you know, kind of manage to immediately over time, or is that something you're feeling like is still a good mark for this year? I mean, I think in the front half you guys had 53.5% EBITDA margins. Looks like you might need to get 56.5% in the back half. Just any kind of call out on that?
Yeah, I mean, I think as we expect to have double-digit growth, we will likely see some upward pressure on the margin, but we will continue to reinvest in the business, and so we still expect to target 55% for the year.
Okay, great. I appreciate it. Thanks, guys.
Thank you.
Thanks everyone for joining our quarterly call. We look forward to speaking to you. We will be at the Barclays Financial Services Conference in September. We hope to see you there. Otherwise, please reach out with any follow-up questions. Thank you for joining.
That concludes the conference call. Thank you for your participation. You may now disconnect your lines.