P10, Inc. (NYSE:PX) Q1 2023 Earnings Call Transcript May 15, 2023

P10, Inc. misses on earnings expectations. Reported EPS is $0.18 EPS, expectations were $0.19.

Operator: Hello. And welcome to the P10 First Quarter 2023 Conference Call. My name is Matt, and I will be coordinating your call today. one. [Operator Instructions] I will now hand you over to your host, Mark Hood, EVP of Operations and Investor Relations. Mark, please go ahead.

Mark Hood: Good afternoon. And welcome to the P10 first quarter 2023 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, 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, 2022, filed with the SEC on March 27, 2023, 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. 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.

Robert Alpert: Good afternoon and thank you for joining the call. I’m pleased to report that P10 delivered another excellent quarter of financial performance, meeting or exceeding all our key metrics. We are particularly proud that we were able to raise and deploy over $900 million of fee-paying AUM in the first quarter. The macroeconomic backdrop continues to be challenging. Nonetheless, we delivered double-digit growth in revenue, adjusted EBITDA and adjusted net income. Since going public in October of 2021, we’ve proven the value of our model by demonstrating a differentiated business characterized by durability, resiliency and predictability. Because P10 has a diverse set of strategies, we have multiple tools to achieve our organic growth plans.

Shortly after our IPO, we gave guidance that we expected to raise $5 billion in fee-paying AUM over the course of 2022 and 2023. With this quarter’s performance, we have raised over $4.3 billion with three quarters remaining to achieve our target. Last quarter, we laid out our objectives for 2023 that included double-digit revenue, adjusted EBITDA and adjusted net income growth. We remain confident in our ability to skillfully navigate difficult market conditions, while delivering on our objectives. Later in the call, Clark will discuss steps we are taking to strengthen our executive team as we continue to grow. Although, we like to highlight our organic growth, we continue to evaluate M&A opportunities in new and existing strategies domestically, as well as internationally.

We don’t feel any pressure to do a deal, but instead want to ensure we find the right partner. As Clark likes to say, these are marriages. In the first quarter, we repurchased 100,000 shares and retained $18.9 million under our buyback program announced in December of 2022. We continue to believe our stock is undervalued and we will be opportunistic with repurchases to take advantage of market dislocations. Finally, our Board of Directors approved a $0.01 per share or 8% increase in our annual dividend from $0.12 a share to $0.13 a share. Our stable and growing business model gives us great comfort in increasing our dividend without the concern of limiting capital flexibility to continue to reinvest in our business and achieve our goals. With that, I will now hand the call over to Fritz to share some thoughts on the fundraising and deployment environment.

I’m proud of our results and appreciate the hard work of our team. Fritz?

Fritz Souder: Thank you, Robert. I think this quarter’s fundraising and deployment performance demonstrates the attractiveness of our business model. Since 2017, we’ve assembled seven premier strategies in their respective verticals, all of which focus on the middle and lower middle market. In our private equity vertical, despite headwinds, we added gross fee-paying AUM of $610 million during the quarter. While the denominator effect is still present and this continues to slow investor’s decisions for allocations, we have every reason to retain our confidence as we’ve been at this for over two decades with proven investment performance that wins and retains clients. We also believe in innovation around our verticals, identifying new ways to package our investment manufacturing for clients.

One of the new products you will see in our performance table is what we call Multi-Strat within private equity. It is a combination fund that blends our primary fund to funds with secondaries and co-invest. The result is a product that shortens the J curve and has the opportunity to deliver strong returns. In the first quarter, we launched Multi-Strat II and is off to a good start with over $64 million in capital raised. RCP’s Secondary Fund IV is also seeing good demand and we’ve now raised almost $600 million. In our venture equity business, we believe we benefit from a flight to quality. There appears to be enthusiasm for venture equity with institutional investors as high-quality managers continue to grow and raise capital. In fact, according to a Venture Capital Journal survey, roughly 80% of institutional investors intend to maintain or increase their exposure to the venture asset class in 2023.

Although, fundraising is happening more slowly because of market uncertainty, it is happening nonetheless and we think the current market plays to our strength, with a long track record of excellent investment performance in a variety of market cycles, we are optimistic. In the quarter, we added $144 million in gross fee-paying AUM spread across several products. Turning to our credit fleet. We continue to feel the wind at our backs. Hark, our NAV lending strategy has never been busier as the product is becoming more acceptable by GPs as a viable financing alternative. Deal flow is extraordinary as PE firms need more time and capital to achieve success in a market where exits are challenging. We believe NAV lending is rapidly becoming an established asset class and we’re in the right place at the right time.

For WTI, we’re seeing excellent deal flow as a result of the Silicon Valley Bank exiting the market. Clark will speak more about this in a moment. Overall, the credit part of our business added $68 million of gross fee-paying AUM and we are excited about our market position as banks go risk off and prepare for more regulations. We also see the potential for improved returns as a result of favorable market conditions. Turning to our impact business. It continues to grow with secular tailwinds driving small business lending, climate finance and impact real estate. In the first quarter, the team added $89 million in gross fee-paying AUM. I am proud of the efforts from all of our strategies and it is exciting to see success across a wide range of investment products and strategies.

I will now turn the call over to Clark.

Clark Webb: Thank you, Fritz. I too have confidence in our ability to maneuver through what has become a challenging set of macroeconomic forces, including the recent upheaval in the banking sector broadly and SVB in particular. For much of the recent past, SVB was our largest competitor in venture debt. Their failure, combined with the pullback we’re seeing from smaller banks has created exceptionally favorable market conditions for our venture debt solution. WTI has been operating for over 40 years and has a business model that is time-tested across market cycles. Our portfolio companies are in good condition and our pipeline of new high quality opportunities is robust. We are working on WTI’s Fund XI and hope to see strong demand as we plan to launch early next year.

We like the WTI strategy as it combines a 40-year loss record that mirrors high yield bonds with the ability to produce private equity-like returns. In other words, liquid high yield credit risk alongside private equity-like returns. We look forward to telling the WTI narrative to our clients over the coming quarters. Despite a challenging global picture, we believe P10 is positioned to prosper with investment strategies that have performed well over decades. Looking back when we went public 18 months ago, we laid out an intermediate 24-month target to raise $5 billion in new gross fee paying assets under management. At that time, on a base of $17.3 billion, committing to a $5 billion target with no small ambition. Few would have envisioned what the ensuing 15 months would bring, with a global war, a record rise in interest rates, a 30% drop in the Russell 3000 and multiple bank failures.

Despite these conditions and with nine months left to go, we are already standing today at $4.3 billion raised across our platform. And as Robert mentioned earlier, we expect to exceed our $5 billion target. This is quite an accomplishment and we would like to publicly commend our team and thank them for their outstanding performance. But even with our success, we continue to believe that cross-sell across P10 is in its mere infancy and we intend to continue investing in P10 marketing in the coming quarters. As part of that process and as we lay the groundwork for our next intermediate fundraising target in 2024 and beyond, Jeff Gehl, our Head of P10 Fundraising, notified us of his decision to retire from his formal role at P10 after an incredible 22-year career.

Jeff co-founded our private equity solution over two decades ago and his contribution to P10 has been invaluable. Jeff is a large P10 shareholder, a large investor across P10 funds and a large owner of carried interest. While his retirement marks the end of his executive leadership with the firm and concludes his tenure in a formal role with P10, his allegiance to and support of P10 is expected to endure and we’re hopeful he’ll find ways to be helpful to P10 in a new informal way in the future. As a result, we are actively searching with the help of a professional firm to bolster the P10 executive team with a specific focus around fundraising and raising the P10 profile globally. We believe our investment manufacturing is second to none across asset classes and high demand.

In short, we expect significant interest from outside parties. Jeff, on behalf of the P10 family, we want to thank you for your continued support at P10 and we wish you and your family all the best. With that, let me hand the call over to Amanda.

Amanda Coussens: Thank you, Clark. Fee-paying assets under management were $21.6 billion, a 23% increase on a year-over-year basis. In the first quarter, $911 million of fundraising and capital deployment was offset by $516 million in stepdowns in expirations. Most of the expirations during the quarter related to WTI Fund VII, which stopped charging fees on $362 million of fee-paying AUM. For the remainder of 2023, we expect $830 million in additional stepdowns in expirations. Stepdowns and expirations are a normal part of our business and typically take place at the end of a fund’s life or when a fund has reduced fees after a period of full fees. Revenue in the first quarter was $57 million, a 32% increase over the first quarter of 2022.

Average fee rate in the quarter was 106 basis points, driven by continued expansion of our direct strategies, such as WTI, Bonaccord and Hark. Operating expenses in the first quarter were $52 million, a 65% increase over the same period a year ago. The increase is primarily attributable to additional compensation, benefits and non-cash stock-based compensation expense related to the acquisitions of WTI, Bonaccord and Hark. GAAP net income in the quarter was $769,000. Adjusted EBITDA in the first quarter was $28.4 million, a 27% increase over what we reported in the first quarter of 2022. As we have discussed on prior calls, the acquisition of WTI brought a higher average fee rate and a lower operating margin. Moreover, we continue to generate strong growth in our direct strategies, which share similar financial profile.

Ultimately, this should lead to more revenue and adjusted EBITDA dollars with margins in the low 50% range on an annual basis. For the first quarter, adjusted net income or ANI was $25.5 million, a 14% increase over the $22 million reported in the first quarter of 2022. We continue to efficiently convert $1 of adjusted EBITDA to adjusted net income due to small amounts of capital expenditures, cash interest and minimal tax leakage due to our tax assets. As a reminder, our tax assets are composed of two distinct assets, a $177 million net operating loss and $388 million in tax amortization. Cash and cash equivalents at the end of the first quarter were $25 million. At quarter end, we had an outstanding debt balance of $275 million and $98 million available on the current credit facility.

Since quarter end, we paid down an additional $12.9 million of debt. In the first quarter, we repurchased 100,000 shares of stock at an average price of $8.51 per share. We have $18.9 million available under the buyback program for additional repurchases. We also continue to pay our quarterly dividend. As Robert mentioned, we are increasing our annual dividend by 8%, taking the dividend from $0.12 per share to $0.13 per share annually. We declared a dividend of $0.0325 per share on May 15, 2023, to stockholders of record as of the close of business on May 30, 2023, and payable on June 20, 2023. Finally, at March 31, 2023, our Class A shares outstanding were 43,088,962 and Class B shares outstanding were 72,831,689 shares. Finally, as Robert noted, we reaffirm our guidance and continue to expect double-digit growth in revenue, adjusted EBITDA and adjusted net income for the calendar year 2023, all the while achieving our $5 billion growth fee-paying AUM fundraising targets.

We believe this puts us in a distinct class among our peers, showing strong growth in the face of a difficult market environment. We also expect to lay out our next intermediate fundraising targets for 2024 and 2025, alongside our Q4 earnings call early next year. I will now pass the call back to Robert for closing remarks.

Robert Alpert: Thank you, Amanda. Now let’s turn it over to the Operator for a few questions.

Q&A Session

Operator: [Operator Instructions] The first question is from the line of Kenneth Worthington with JPMorgan. Your line is now open.

Operator: Thank you for your question. The next question is from the line of Michael Cyprys with Morgan Stanley. Your line is now open.

Operator: Thank you for your question. Next question is from the line of Chris Kotowski with Oppenheimer. Your line is now open.

Operator: Thank you for your question. The next question is from the line of Ben Budish with Barclays. Your line is now open.

Operator: Thank you for your question. The next question is from the line of John Campbell with Stephens Inc. Your line is now open.

Operator: Thank you for your question. The next question is from the line of Adam Beatty with UBS. Your line is now open.

Operator: Thank you for your question. There are no additional questions waiting at this time. So I’ll pass the conference back to Robert for any closing remarks.

Robert Alpert: Well, thank you. Thank you everyone for joining us and we look forward to speaking with you next quarter and call if you have any questions. Thanks.

Operator: That concludes the conference call. Thank you for your participation.