Q3 2021 P10 Inc Earnings Call

[music].

Good morning, My name is Victoria and I'll be a conference operator today at this time I would like to welcome everybody to the P 10, <unk> Co conference call third quarter earnings call.

All lines have been mute pits are placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question answer session. If you'd 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 by Staci. Thank you I'll now turn the call over to your highest Mark Hajj.

Director of Investor Relations Mark go ahead.

Thank you good morning, and welcome to the <unk> third quarter 2021 Conference call. This is Mark Hood director of Investor Relations today, I will be joined by Robert Alpert, Chairman and co CEO Clark Web co CEO, French Souder, Chief operating officer, and Amanda cousins Chief financial.

Officer before.

Before we begin I would like to remind everyone that this conference call as well as the presentation slides may constitute forward looking statements within the meaning of section 27 to eight of the Securities Act of $19 33.

Section 21 E of the Securities Exchange Act of $19 34 in the private Securities Litigation Reform Act of $19 95.

Words, such as will expect believe estimate continue anticipate intend.

Land 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 22021 filed with the U S.

Charities and Exchange Commission on October 20 <unk>.

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.

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 Rob.

Good morning, and thank you for joining the <unk> third quarter 2021 update on Robert Alford, Chairman and co CEO of Pizza today, We will review the results of our recent offering and our up listing to the New York stock exchange discuss important transactions and present, our third quarter financial performance.

I am excited to say Ken is now in New York Stock Exchange listed totally investors purchased $11 5 million primary shares.

$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 assets 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 it branding of it and we believe uplifting will raise awareness in the investment community as well as our ecosystem, Our limited partners General partners and portfolio companies.

<unk> along with the offering we completed also elevates our profile with acquisition candidates.

Capital raised 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 <unk> financial model generates substantial organic growth, we believe <unk> unique market position makes us.

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 third quarter, we witnessed strong demand across all of our investment solutions lower middle market private equity venture capital impact and private credit at.

At quarter end fee paying assets under management or S. P. A AUM stood at $16 3 billion, an increase of $8 9 billion or 122% from the third quarter 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 P 10 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 and 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 day.

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 2400.

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 and 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 third quarter, we announced the additions of bottom chord capital partners and Hart capital to the <unk> portfolio.

At the time, we made the acquisitions they are combined.

AUM was approximately $900 million.

<unk> founded in 2018 acquires minority equity investments and a diversified portfolio of alternative markets asset managers with a focus on mid sized managers across private equity private credit and real assets.

Our investment strategy.

One in the industry as GP Stakes has experienced strong growth over the last few years and we expect that to continue.

We believe <unk> is a premier middle market GP Stakes franchise, and now with the benefit of <unk> vast GP network. We believe there are significant cross selling opportunities.

<unk> raised over $700 million in F. P. A M for their fund one and we would expect fund two to launch in early 2022, given the robust investment pipeline, we see today.

Also new to <unk> 10, as hard capital founded in 2013 Park is a pioneer in providing loans to midlife 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 it is drawn down all of their equity.

Limited partners and thus unable to make the investment by engaging heart the general partner retains their equity while pursuing opportunities that they would have otherwise not been able to act upon.

We believe heart fits perfectly into our ecosystem and will be an important part of our service offering to GPS we close both transactions on the last day of September and have successfully completed the integration into the <unk> portfolio.

Now, let me turn the call over to Amanda to walk through the third quarter 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 consistent at.

<unk> management and advisory fee based on committed capital through the life of assignment, which range between 10 and 15 years.

Simple stable revenue model gives <unk> tremendous visibility into future periods revenue was $38 1 million a 148% increase over the third quarter of 2020 fee rates on fee paying AUN averaged 100 basis points in the quarter consistent with our past performance and indicative of our highly diversified.

And reliable revenue stream.

In the third quarter, 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 third quarter were $27 $1 million and 106% increase over the third quarter of 2020.

Over half of our operating expenses consisted 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 third quarter was $4 1 million and meaningful increase over the $65000 to be delivered in the third quarter of 2020.

Contributing to our margin improvement was strong fundraising activity with marginal corresponding incremental cost.

Adjusted EBITDA in the third quarter was $21 $8 million and 148% increase over the third quarter of 2020.

Our target adjusted EBITDA margin is between 55 and 60%.

Adjusted net income or Eni as calculated by reducing adjusted EBITDA for cash interest expense and cash income taxes.

For the third quarter, NII was $16 2 million and 146% increase over the third quarter of 2020.

We believe Eni 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 Eni as we a small amount of capital expenditures cash interest expense and minimal tax leakage due to our tax asset.

Our tax assets are composed of two items.

The first is a $208 million net operating loss or NOL, which offset net income.

The second asset is $310 million in tax amortization tax amortization is created when we acquire a company usually unhealthy. It has no basis, and then has a full step up in value.

We advertise our tax goodwill over a 15 year period and the remaining federal taxable income is reduced by the remaining NOL balance.

Well, we expect to utilize an 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 fourth quarter, 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 third quarter, we had $319 million of debt and cash and cash equivalents of $22 million. The offering has improved the balance sheet at <unk> $129 million in offering the chapter paying down debt needed to post offering debt balance of $220 million.

I'll now turn it back over to Robert for closing comments. Thank you Amanda we're excited we have a significant and increasing tailwind in our markets. We built P tend 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 invest.

<unk> 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 P tuned 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 <unk> is well.

<unk> for continued growth with insider ownership in excess of 60% the management team and team members are aligned with long term shareholders now lets 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 with most with just a moment to compile the Q&A roster.

And our first question comes from Michael Cyprus from Morgan Stanley. Michael. Please go ahead. Your line is open.

Hi, Good morning, this is Stephanie on for Mike.

Thanks for taking our questions can you talk a little bit about your products offered to retail customers today any of that or a credit investor products and then broadly how do you think about the opportunity for bringing more to retail what steps might you need to take.

Yes, Great question why don't we have Fritz why don't you take that.

Okay great.

<unk>.

Well today and all the historical numbers you will see that most of our Lps are qualified purchasers and non accredited investors.

Though we are currently working on a couple of different over offerings. So I think you will start seeing a lots of the retail investors coming 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 and I think you'll see in the 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.

Just to add to that we are on.

A number of different <unk>.

That forms a warehouse platforms, where we distribute.

Some of our products on the warehouses and we continue to expand that.

That opportunity if you will.

We are also.

Pursuing its very early stages of retail distribution for alternative asset managers and so we are pursuing that and.

It is a great opportunity currently most of our capital.

Capital raising comes from our R 2400.

Partners 2400, plus partners across the world.

Great. Thank you and then 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 P.

Yeah. It's a great question listen I think that private equity is it's 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 40000 private companies with no public equity no public listed that these are companies that have between 10 and $25 million of EBITDA and they are very much under the radar. When you think about institutional access to those businesses. So 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 and 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 and 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.

And our next question comes from Chris Kotowski Fob opener, Chris. Please go ahead. Your line is open.

Yeah, Good morning, and thanks for taking my question.

Could see from the registration statement that the strong underlying annual growth and kind of relative peace stability that you have on an annual basis, but given that we have kind of a limit of quarterly history. I Wonder can you just point out to us or a flag for us any any seasonal patterns that we might expect.

<unk> either in Eden in the cadence of.

Fund raising you know what.

What major funds are in the market and.

When should we expect.

Flows to flow in and then also in terms of revenue recognition.

Some of the other companies that we have that we cover we see the the.

This step ups and step downs in catch up fees.

All of that kind of thing I Wonder if you can kind of flag out before the next.

Four to six quarters in general terms, what we should be expecting there.

Sure Hi, Chris.

Thanks for the question.

As you know our revenue is primarily based on long term committed capital.

We do see marginally higher fourth quarter.

Fourth quarter revenues at the margin as capital is deployed in our impact strategy associated with solar investments.

But other than that.

There is no real seasonality in our.

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 so yeah, we will see some catch.

Okay.

And Chris I think it's really.

Okay.

Yes go ahead.

I was just wondering.

Kind of can you size the magnitude of what one should expect in the fourth quarter impact from C. From impact and then also just to expand on the fund raising a bit or are the are there specific funds that we should expect flowing in and.

Having their final close some time in the year ahead or should we kind of be expecting.

This kind of continuous fund raising and kind of in the EBIT quarterly pattern.

Yes, Chris it's.

Two great questions I'm going to 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.

And so 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 going to give.

Magnitude number one we're not going to be giving guidance, specifically on future quarters, but number two it depends on things like weather and availability of products things like that so there is some slight seasonality in Q4.

And.

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, so 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.

We think it's better to have lots of funds surrounding that ecosystem, giving investors a menu of options whether they want to be in a primary fund of funds a secondary or co invest a GP stakes are NAV loan or a unit tranche credit whatever it might be and because of that we should see more consistent growth in our earnings pre.

While we always have lots of funds in the market. We always have funds that are closing on capital does that mean, it's going to be completely smooth no. It doesn't but it certainly means our revenue models should be more consistent we believe than some of our peers. We have much larger flagship funds when they are in the market, it's great and when they're not.

Les ideal.

Okay, Great and then the last thing for me is.

Can you discuss how how do you preserve the tax deductibility of the App.

On the <unk>.

Tangibles on the acquisitions that you've done because I was reading through the prospectus on some trials in some transactions you said the goodwill was deductible and the others it wasn't <unk>.

Drives that and how I guess.

The underlying question is as you do more acquisitions.

How how how how long lives can we or how how repeatable is that ability.

Our ability to preserve the tax deductibility of goodwill.

In the future.

Yes, 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.

So 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 too.

<unk> strategies that have been around for a long time, both in terms of LP distribution and in terms of cross sell so we do have a robust pipeline of strategies that would like to join our platform. So 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.

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 were able to deduct the goodwill when we purchase.

ELC units were.

As if it's a C corp that is.

More difficult exercise the good thing about this landscape is the vast majority of the business is out there our llc's and so 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 <unk>.

<unk> transactions.

Closed at the end of September those actually added around $40 million to our amortization schedule.

So 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 going to 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 nice to all the questions and I will now pass over to Rob Alpha 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 <unk>. Thank you have a great day.

Great. Thank you everybody for joining today's call you may now disconnect your lines.

Uh huh.

Sure.

Okay.

Yes.

Okay.

Yes.

Yes.

[music].