Good morning. My name is Victoria, and I will be your conference operator today. At this time, I would like to welcome everybody to the P10 Earnings Call Conference Call, Q3 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star two. Thank you. I'll now turn the call over to your host, Mark Hood, Director of Investor Relations. Mark, go ahead.
Thank you. Good morning, and welcome to the P10 Q3 2021 conference call. This is Mark Hood, Director of Investor Relations. Today, I 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, section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995. Words such as will, expect, believe, estimate, continue, anticipate, intend, plan, and similar expressions are intended to identify these forward-looking statements. Forward-looking statements discuss management's current expectations and projections relating to our financial position, results of operations, plans, objectives, future performance, and business.
The inclusion of any forward-looking information in this release should not be regarded as a representation that the future plans, estimates, or expectations contemplated will be achieved. Forward-looking statements are subject to various risks, uncertainties, and assumptions. 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 of the company's prospectus, dated October 20, 2021, filed with the U.S. Securities and Exchange Commission on October 22nd, 2021, and in our quarterly report on Form 10-Q to be filed with the SEC, and in our subsequent reports filed from time to time with the Securities and Exchange Commission.
The forward-looking statements included in this release are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statement 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 morning, and thank you for joining the P10 Q3 2021 update. I'm Robert Alpert, Chairman and Co-CEO of P10. Today, we will review the results of our recent offering and our uplisting to the New York Stock Exchange, discuss important transactions, and present our Q3 financial performance. I'm excited to say P10 is now a New York Stock Exchange-listed company. Investors purchased 11.5 million primary shares and 8.5 million secondary shares at $12. The offering was fully subscribed by a high-quality set of investors, many of whom are well-versed in the alternative asset sector. As we think about compounding this business over years, not quarters, we welcome long-term shareholders to join us in this journey.
Becoming an NYSE company is a branding event, and we believe uplisting will raise awareness in the investment community as well as our ecosystem of limited partners, general partners, and portfolio companies. The listing, along with the offering we completed, also elevates our profile with acquisition candidates. The capital raise allowed us to pay down a portion of our debt, begin evaluating options for refinancing our remaining debt, and bolster our balance sheet for capital deployment opportunities. While P10's financial model generates substantial organic growth, we believe P10's unique market position makes us a partner of choice for other solution providers looking to integrate into a larger platform. Now let me turn it over to Clark to discuss the highlights of the quarter.
Thanks, Robert. Turning to the Q3, we witnessed strong demand across all of our investment solutions, lower middle market private equity, venture capital, impact, and private credit. At quarter end, fee paying assets under management, or FPAUM, stood at $16.3 billion, an increase of $8.9 billion or 122% from the Q3 of 2020. Organic growth over the same period was 27%. While asset growth is driven by many factors, I'd like to highlight three in particular. First, P10 operates in markets that enjoy strong underlying growth rates. While the shift to alternatives is a tailwind for all alternative asset classes, we believe we operate in select segments of growth, even within a growing macro environment.
Whether the nascent but growing institutional focus on impact, the structural growth of technology and ingenuity in venture capital, or the desire to optimize private equity risk-adjusted returns by including an allocation to the lower middle market, we believe we sit in a sweet spot for private markets. Second, we believe our investment performance is second to none. Our four verticals have an average track record that exceeds two decades and covers dozens of funds. Our strategies are battle-tested across multiple economic cycles and macro environments, making us a safe pair of hands for prospective clients who desire exposure to private markets. With two decades of proprietary data guiding investment decisions, we are uniquely positioned to uncover the opportunities for clients. Private markets can be challenging to enter directly, and being a solutions provider with innovative products and long-term performance sets us up for structural success.
Finally, we see significant opportunity to cross-sell investment products to our existing client base, which numbers approximately 2,400. With a strong global distribution network and investment products in high demand and limited supply, we are beginning to see the benefit of cross-selling in our asset raising and financial results. To be clear, we believe we are in the early innings, but initial results are very encouraging. While we see ample opportunity for continued strong organic growth, let me turn to discuss recent M&A and strategic activity. In the Q3, we announced the additions of Bonaccord Capital Partners and Hark Capital to the P10 portfolio. At the time we made the acquisitions, their combined FPAUM was approximately $900 million.
Bonaccord, founded in 2018, acquires minority equity investments in a diversified portfolio of alternative asset managers with a focus on midsize managers across private equity, private credit, and real assets. Their investment strategy, known in the industry as GP Stakes, has experienced strong growth over the last few years, and we expect that to continue. We believe Bonaccord is a premier middle-market GP Stakes franchise. Now, with the benefit of P10's vast GP network, we believe there are significant cross-selling opportunities. Bonaccord raised over $700 million in FPAUM for their Fund 1, and we would expect Fund 2 to launch in early 2022, given the robust investment pipeline we see today. Also new to P10 is Hark Capital. Founded in 2013, Hark is a pioneer in providing loans to middle-market private equity, growth equity, venture, and other funds.
Known as NAV Lending, Hark steps in when a fund's general partner sees a compelling investment opportunity but has drawn down all their equity from limited partners and thus unable to make the investment. By engaging Hark, the general partner retains their equity while pursuing opportunities that they would have otherwise not been able to act upon. We believe Hark fits perfectly into our ecosystem and will be an important part of our service offering to GPs. We closed both transactions on the last day of September and have successfully completed the integration into the P10 portfolio. Now let me turn the call over to Amanda to walk through the Q3 financial results.
Thank you, Clark. Fee paying assets under management grew by $2.1 billion in the quarter. As a reminder, our fee paying AUM largely consists of funds that charge management and advisory fees based on committed capital through the life of the funds, which range between 10-15 years. This simple, stable revenue model gives P10 tremendous visibility into future periods. Revenue was $38.1 million, a 148% increase over the Q3 of 2020. Fee rates on fee paying AUM averaged 100 basis points in the quarter, consistent with our past performance and indicative of our highly diversified and reliable revenue stream. In the Q3, we had 14 funds in the market raising money. As we raise additional funds, we could see upward margin expansion.
We expect to use additional margin dollars to grow our marketing teams and to drive additional organic growth. Operating expenses in the Q3 were $27.1 million, a 106% increase over the Q3 of 2020. Over half of our operating expenses consist of employee compensation, with the remainder primarily consisting of intangible amortization, professional fees, and general and administrative costs. We believe there is continued leverage in our operating model and do not expect substantial increases in operating expenses. Earlier this year, we made many of the necessary investments to become a public company. Net income in the Q3 was $4.1 million, a meaningful increase over the $65,000 we delivered in the Q3 of 2020. Contributing to our margin improvement was strong fundraising activity with marginal corresponding incremental costs.
Adjusted EBITDA in the Q3 was $21.8 million, a 148% increase over the Q3 of 2020. Our target adjusted EBITDA margin is between 55% and 60%. Adjusted net income or ANI is calculated by reducing adjusted EBITDA for cash interest expense and cash income tax. For the Q3, ANI was $16.2 million, a 146% increase over the Q3 of 2020. We believe ANI is the best profit measure for our business and comparable to after-tax fee-related earnings for our peers. As you can see, we continue to have an efficient conversion of a dollar of adjusted EBITDA to a dollar of ANI, as we have small amounts of capital expenditures, cash interest expense, and minimal tax leakage due to our taxed assets.
Our tax assets are composed of two items. The first is a $208 million net operating loss or NOL, which offsets net income. The second asset is $310 million in tax amortization. Tax amortization is created when we acquire a company, usually an LLC that has no basis and then has a full step-up in value. We amortize our tax goodwill over a 15-year period, and the remaining federal taxable income is reduced by the remaining NOL balance. While we expect to utilize and exhaust the NOL over future years, we do expect tax amortization to increase as we make additional acquisitions. Cash interest expense will be less in the Q4 because we made a $99 million payment on our outstanding debt.
We also expect cash interest expense to continue to decline in future quarters as we expect to refinance our remaining debt. At the end of the Q3, we had $319 million of debt and cash and cash equivalents of $22 million. The offering has improved the balance sheet as P10 netted $129 million in offerings, which after paying down debt, leaves a post-offering debt balance of $220 million. I will now turn it back over to Robert for closing comments.
Thank you, Amanda. We are excited. We have a significant and increasing tailwinds in our markets. We've built P10 to thrive in this environment by assembling best-in-class private market solutions for institutional and high net worth investors who desire exposure to our expanding investment portfolio. We have unparalleled data that reinforces our ecosystem by giving us better insights on our managers and their teams, as well as operating metrics of the underlying companies that allow us to make better investment decisions. We have uniquely structured P10 to align shareholders, team members, and clients to create a diversified recurring management fee stream based on long-term, contractually locked up, committed capital that provides robust margins and predictable earnings. We believe that P10 is well-positioned for continued growth. With insider ownership in excess of 60%, the management team and team members are aligned with long-term shareholders.
Now let's turn the call over for a few questions.
Great. Thank you. At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question comes from Michael Cyprys from Morgan Stanley. Michael, please go ahead. Your line is open.
Hi. Good morning. This is Stephanie on from Mike. Thanks for taking our questions. Can you talk a little bit about your products offered to retail customers today, any that are accredited investor products? Broadly, how do you think about the opportunity for bringing more to retail? What steps might you need to take?
Yeah, great question. Why don't we have Fritz? Why don't you take that?
Okay, great. Well, today in all the historical numbers, you will see that most of our LPs are qualified purchasers and not accredited investors. Although we are currently working on a couple of different of our offerings, I think you will start seeing lots of the retail investors come in. Also, working with various partners to attack this space, and it's definitely a strategic initiative for us to grow this out in 2022 and beyond. I think you'll see in the years ahead lots of growth in the retail asset class, partnering with groups like yourselves and lots of others that are around the globe.
To add to that, we are on a number of different platforms, wirehouse platforms, where we distribute some of our products on the wirehouses, and we continue to expand that opportunity, if you will. We are also, you know, pursuing that. It's very early stages of retail distribution for all alternative asset managers, you know, so we are pursuing that, and it is a great opportunity. Currently, most of our capital raising comes from our, you know, our 2,400, you know, partners, 2,400 plus partners across the world.
Great. Thank you. Just as a follow-up, maybe taking a step back, how do you and your clients look at the middle market space versus larger private equity fund universe? What drives the decision to go to middle market and lower middle market versus larger PE?
Yeah, it's a great question. I mean, listen, I think that private equity is a big industry. There are tens of thousands of companies out there. Our brethren in the larger markets, they do a great job for their LPs. We like the middle market because it is far less efficient in our opinion. If you just look at our database alone, we have nearly 40,000 private companies with no public equity, no public listed debt. These are companies that have between $10 million and $25 million of EBITDA, and they're very much under the radar when you think about institutional access to those businesses. We just think we have an advantage being in the market for 20 years, having a database that we think is second to none and deploying north of $1 billion a year into this segment.
We feel like we have an information advantage. Folks come to us with opportunities. As we've talked about in the roadshow, we really like the idea of being the ecosystem in which private equity operates for the middle market. The more we can surround those GPs and LPs with products and services, we think it enhances our information advantage, enhances our efficiency and allows us to make better investment decisions. I certainly would highlight the investment track record we have in the deck. You can see it spans two decades. It's across dozens of funds. We think it's certainly reflective of what we think is a structural advantage within the lower middle market.
Great. Thanks for taking our question.
Great. Thank you so much. Our next question comes from Chris Kotowski from Oppenheimer. Chris, please go ahead. Your line is open.
Yeah, good morning, and thanks for taking my question. You know, we could see from the registration statement that, you know, the strong underlying annual growth and kind of related fee stability that you have on an annual basis. You know, given that we have kind of a limited quarterly history, I wonder, can you just point out to us or flag for us any seasonal patterns that we might expect, either in the cadence of fundraising, you know, what major funds are in the market and you know, when should we expect fund flows to flow in?
In terms of revenue recognition, you know, in some of the other companies that we have that we cover, we see the step-ups and step-downs and catch-up fees and all that kind of thing. I wonder if you can kind of flag out for, you know, the next four to six quarters in general terms what we should be expecting there.
Sure. Hi, Chris, thanks for the question. You know, as you know, our revenue is primarily based on long-term committed capital. We do see marginally higher Q4 revenues at the margin as capital is deployed in our impact strategy associated with solar investments. Other than that, there is no real seasonality in our revenue stream.
Although this isn't seasonality, we will see some lumpiness quarter to quarter since we do have catch-up fees, as you mentioned, associated with capital raises, and we don't control the timing of when our investors want to invest. Yeah, we will see some.
Okay.
Lumpiness from the catch-up.
Chris, I think it's really important.
And, and-
Yeah, go ahead.
I was just wondering, the kind of can you size the magnitude of what one should expect in the Q4 impact from Impact. Also just to expand on the fundraising a bit, are there specific funds that we should expect flowing in and having their final close sometime in the year ahead? Or should we kind of be expecting kind of continuous fundraising and kind of an even quarterly pattern?
Yeah, Chris, it's two great questions. I'm gonna take them in reverse order. When you think about our business model, again, the vast majority of our revenues are tied to AUM, where we're being paid on committed dollars. We don't have the issue of shadow AUM, or AUM being deployed and turning on fees, except for a few of our businesses. As Robert said, our solar investment business is based upon deployed capital, and that is a seasonal business where you see some strength in Q4. We're not gonna give magnitude. Number one, we're not gonna be giving guidance specifically on future quarters. Number two, you know, it depends on things like weather and availability of products, things like that. There is some slight seasonality in Q4.
When you think about our business in terms of the funds we have in the market, we have north of a dozen funds in the market today. Our view is we like to surround the GPs and the LPs with products and solutions. Rather than attack a market with one product, a flagship, and when you're in the market, that's great, but when you're out of the market, that's it. We think it's better to have lots of funds surrounding that ecosystem, giving investors a menu of options, whether they wanna be in a primary fund of funds, a secondary, a co-invest, a GP stakes, a NAV loan, a unitranche credit, whatever it might be. Because of that, we should see more consistent growth in our earnings profile. We always have lots of funds in the market.
We always have funds that are closing on capital. Does that mean it's gonna be completely smooth? No, it doesn't. It certainly means our revenue model should be more consistent, we believe, than some of our peers, where you have much larger flagship funds. When they're in the market, it's great, and when they're not, it's less ideal.
Okay, great. The last thing for me is, can you discuss how do you preserve the tax deductibility of the intangibles on the acquisitions that you've done? Because reading through the prospectus in some transactions, you said the goodwill was deductible and others it wasn't. What drives that? How repeatable is that ability to preserve the tax deductibility of goodwill in the future?
Yeah, Chris, great question. Let me start with the premise that we do believe that we have a business model that generates substantial organic growth. We don't need to make acquisitions. We are not out there actively trying to grow the business by M&A. That being said, we do believe that we're in a bit of a sweet spot in terms of what we're able to bring to the table to strategies that have been around for a long time, both in terms of LP distribution and in terms of cross sell. We do have a robust pipeline of strategies that would like to join our platform.
We do believe that M&A activity is going to be a part of our future, not because we need it, but because it is such a win for all parties involved. When you think about the tax deductibility, I believe what you're referring to in the prospectus really is there are some instances where we purchased a C corp as opposed to an LLC. We're able to deduct the goodwill when we purchase LLC units. Whereas if it's a C corp, that is a more difficult exercise. The good thing about this landscape is the vast majority of the businesses out there are LLCs.
As we think about deploying capital into M&A, we do believe that the vast majority of that capital is going to come back to us in the form of amortization. Just to give you a great example with the recent Hark and Bonaccord transactions that closed at the end of September, those actually added around $40 million to our amortization schedule. As we generate free cash flow, as we redeploy that cash flow into growing the platform, we do believe in the vast majority of cases that we are gonna get those tax benefits back in the form of step up in basis.
Great. Thank you. That's it for me.
Great. Thank you so much for your question, Chris. At the time being, we have no further questions, and I'll now pass over to Robert Alpert for final remarks.
Thanks everyone for joining our earnings call. If you come up with any more questions or follow-up questions, please reach out to Mark Hood and we will try to get them answered as quickly as possible. Appreciate your support and interest in P10. Thank you. Have a great day.
Great. Thank you everybody for joining today's call. You may now disconnect your lines.