P10, Inc. (NYSE:PX) Q4 2022 Earnings Call Transcript

P10, Inc. (NYSE:PX) Q4 2022 Earnings Call Transcript March 6, 2023

Operator: Hello, and welcome to the P10 Fourth Quarter and Year-end 2022 Conference Call. My name is Daniel, and I will be coordinating your call today. . I will now hand the conference over to our host, Mark Hood, Executive Vice President of Operations and Investor Relations. Mark, please go ahead.

Mark Hood: Good afternoon, and welcome to the P10 Fourth Quarter and Year-End 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, 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, and filed with the SEC on March 21, 2022, and in our subsequent reports filed with the SEC from time to time. 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. In a year dominated by shifting and more challenging macroeconomic backdrop, P10 delivered double-digit growth and strong fourth quarter and full year 2022 profitability. Driven by an expanding and diverse set of strategies with long track records of investing through a variety of market cycles, we strengthened our position as the premier specialized private markets solution provider in the middle and lower middle market. For 2022, fee-paying AUM increased 23%. Revenues increased 32% and adjusted EBITDA increased 29%. Besides delivering noteworthy financial performance, P10 completed the acquisition of WTI, a clear market leader in the growing venture debt space.

We have much to be thankful for as we reflect on the year’s achievements. As we consider 2023, we want to reaffirm our previous fundraising guidance, which results in expected double-digit revenue and profit growth. Amanda will share more about this later in the call. One more thing I want to mention is that on December 27, 2022, we announced an additional $20 million stock buyback. In the fourth quarter, we found our stock undervalued and purchased 1,946,765 shares at an average price of $9.62. We will continue to seek opportunities to deploy our free cash flow to augment shareholder returns. I will now hand the call over to Fritz.

William Souder: Thank you, Robert. Despite macro headwinds in volatile public markets, we’re staying in front of our LPs and GPs, deepening our relationships with them and listening for ways to continue to add value. Experience has taught us that during times of market uncertainty, investors may take longer to make allocation decisions and some fund closings may stretch out of it. However, it is important to remember a few driving factors that support our confident outlook. First, I think many of our LPs understand the value of vintage diversity, especially as it relates to our private equity and venture capital strategies. With long track records and excellent returns, we rely on a time-tested and disciplined investment process.

Secondly, as we have entered the new year, we’re seeing LPs generally more positive about their 2023 allocations. Some of this is related to the simple fact that 2022 is in the rearview mirror. And some of the optimism may be due to the reduction of the denominator effect as a result of the public markets lifting over the past few months. Finally, remember the catch-up fees are earned from investors that commit during the fundraising period of funds originally launched in prior periods. So a late fund allocation is not lost revenue, rather it is revenue realized in a later period. On the deployment side, we are selective and opportunistic in this current environment. Our GP stakes, NAV lending, venture debt and credit products, all benefit from a disciplined investment approach and can thrive in the current market.

All of this gives us confidence in our ability to deliver continued organic growth. For 2023, we expect to have over a dozen funds in the market with cyclical and countercyclical products available to LPs to meet their investment objectives. We built solution lineup to surround GPs with market-leading products, ranging from credit to NAV lending and GP stakes. It means we have multiple ways to add value for existing clients while creating market space with new ones. As we think about the timing of expected fund launches, closes and deployments, this year’s fee-paying AUM growth is likely more skewed to the second half of 2023. Over the past year, we have observed that LPs appear to favor more established managers, which we believe gives us advantage over our competitors.

This benefit, coupled with terrific returns which you will see in our public filings, demonstrates that we are well positioned for continued growth. I will now turn the call over to Clark.

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Clark Webb: Thank you, Fritz. As we reflect on 2022, it’s an excellent time to remind shareholders why we believe we have a superior business model that uniquely positions P10 to take advantage of the secular tailwinds supporting private market demand. First and foremost, our business model is built upon long-term investment returns in asset classes that are difficult to access. With the P10 investment engine now covering lower and middle market private equity and private credit, venture equity and venture credit, middle market impact equity and impact credit and all supported by the leading lower middle market GP stakes franchise, we believe our investment engine is second to none. Across our traditional fund series alone, we have over a dozen strategies across 8 asset classes, with many flagship funds having a track record measured in multiple decades.

At RCP, for example, we expect to launch Fund XVIII sometime in 2023. In short, we do not believe there is another investment manager out there offering institutional scale access to our verticals with the kind of long-term investment performance we exhibit. Next, we believe the P10 alignment is truly unique. We believe in a win-win-win: a win for P10 Fund LPs, a win for P10 shareholders and a win for P10 employees. As it relates to our LPs, our investment professionals personally put up the vast majority of the required GP commit and received virtually all of the carried interest. As it relates to stockholders, P10 insiders own more than 55% of the shares outstanding, and are committed to the long-term investment success of each strategy, given our significant GP co-investment and expected carried interest.

And for P10 employees, we believe our platform is unique as evidenced by the unbanked off-market acquisitions of leading investment managers over the last 7 years at what we believe are meaningfully lower multiples than other public transactions. Finally, the combination of our investment manufacturing and peer-leading alignment results in a business model that we believe is second to none. Virtually all of our earnings are fee-related earnings with little tax leakage and no meaningful reinvestment requirements. In a year where many of our peers expect distributable earnings to decline and some meaningfully from 2021 levels, we expect double-digit growth in revenues, adjusted EBITDA and adjusted ANI. As a result of the confidence we have in our business model and our robust free cash generation, we have been taking advantage of the market sell-off to purchase P10 stock at what we believe is a material discount to intrinsic value.

We believe shares purchased at recent levels will prove an excellent return on deployed capital over time. With that, let me hand the call over to Amanda.

Amanda Coussens: Thank you, Clark. Fee-paying assets under management were $21.2 billion, a 23% increase on a year-over-year basis. In the fourth quarter, $645 million of fundraising and capital deployment was offset by $89 million in stepdowns and expirations. For the first half of 2023, we expect $1.1 billion in stepdowns and expirations. This includes WTI’s Fund VII which steps down in Q1. For the second half of 2023, we expect an additional $150 million. 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 fourth quarter was $58 million, a 28% increase over the fourth quarter of 2021. Year-over-year revenue increased from $151 million to $198 million for a 32% increase.

Average fee rate in the fourth quarter was 115 basis points as the combination of WTI’s higher fee rates on fee-paying AUM coincided with additional closings and our higher fee strategies during the quarter. We expect 2023 fee rate to normalize to 105 basis points as WTI’s Fund VII rolls off and we have consistent closings across all of our strategies. Operating expenses in the fourth quarter were $53 million, a 57% increase over the same period a year ago. The increase was primarily driven by additional compensation and benefits and noncash stock-based compensation expense related to the acquisitions of WTI, Bonaccord and Hark. For 2022, operating expenses were $155 million, a 41% increase over 2021. The fourth quarter was our first with WTI operating expenses consolidated in our financial reporting.

GAAP net income in the fourth quarter was $5 million, a 221% increase when compared to the year-ago period. The difference is primarily attributable to double-digit revenue growth and a reduction in interest expense. On a year-over-year basis, GAAP net income increased from $11 million to $29 million, a 173% increase. Adjusted EBITDA in the fourth quarter was $31 million, a 17% increase over what we reported in the fourth quarter of 2021. For the year, adjusted EBITDA grew from $83 million to $107 million, a 29% increase. We believe adjusted EBITDA growth of 29% in an otherwise difficult macro environment reflects the strength and durability of our business model. For the quarter, our adjusted EBITDA margin was 53%, and for the full year, it was 54% as WTI operates at a lower margin than the average of our other strategies.

For 2023, when you take into consideration our implied WTI guidance that we provided last August, with Fund VII rolling off, we expect the combined P10 and WTI adjusted EBITDA margins to equate between 51% and 52%. This margin guidance reflects the full integration of WTI into the pre-existing P10 business model and the continued strong growth of our direct strategies which can carry a lower margin as they scale. We expect to maintain strong margins in 2023 while still hitting our $5 billion gross AUM goal and growing revenue, adjusted EBITDA and adjusted ANI at double-digit rates on a year-over-year basis. Again, we believe double-digit expected growth should compare favorably to peers in a difficult environment. For the fourth quarter, adjusted net income, or ANI, was $27 million, a 24% increase over the $22 million reported in the fourth quarter of 2021.

For the year, ANI increased from $63 million to $98 million for a 56% increase. Fully diluted ANI EPS on a year-over-year basis grew 43% to $0.80 per share, which puts us in the highest echelon of publicly traded asset managers. 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 2 distinct assets: a $177 million net operating loss and $397 million in tax amortization. If you review our financial statements we posted today, you will note some additional state tax paid in the period. As we have expanded our footprint to California and New York, we expect to have about $4 million annually in state cash tax obligations.

Cash and cash equivalents at the end of the fourth quarter were $20 million. At year-end, we had an outstanding debt balance of $293 million and $82 million available on the current credit facility. We also repurchased 1,946,765 shares of P10 stock in the fourth quarter. For 2022, we have repurchased 2,088,057 shares at an average price of $9.68 per share. We believe this represents an accretive use of capital given our view of the intrinsic value of the P10 franchise. We also continue to pay our quarterly dividend of $0.03 per share for Class A and Class B common stock. We have declared a dividend of $0.03 per share payable on March 31, 2023, to stockholders of record as of the close of business on March 16, 2023. Finally, at December 31, 2022, our Class A shares outstanding were 42,365,266 and Class B shares outstanding were 73,008,374 shares.

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.

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Q&A Session

Operator: . The first question comes from the line of Michael Cyprys of Morgan Stanley.

Unidentified Analyst: It’s Stuart here standing in for Mike. If I could just ask about fundraising really quickly. Could you just describe to us what you’re hearing? I heard the — I guess, the better mood music for ’23. Which strategies, in particular, are resonating? Which strategies are a bit more cautious on? And generally, what’s been the reception you’re getting when you walk into these meetings?

Clark Webb: Absolutely. Thanks for the question. Yes, so I would say a couple of things. First of all, we had a great Q4. It was not an easy Q4 as you can hear from many of our peers, but we still raised a good amount of capital, and it was actually very evenly spread across most of our strategies. So we are continuing to see nice interest in every single one of our strategies. We do have the benefit of having some strategies that are seen as more countercyclical. I would call out some of our credit strategies in particular. And so we do believe that we are getting the benefit of being able to lean in with some of our credit strategies. And then we have many that we feel like are just in a structural growth mode. I think folks have seen the success of our larger peers in GP stakes and how that business continues to institutionalize.

And as everyone sees from the recent announcements, we think Bonaccord is the premier franchise in lower middle market GP stakes. And as such, given how large that market is, we continue to expect continuing interest there. So again, we built P10 with the opportunity to invest both in equity and credit across multiple asset classes. We have the benefit of being in the market with more than a dozen strategies. And I wouldn’t say that one significantly outperforms the others. They’re all gathering a significant amount of interest. But in particular, we have some of those countercyclical strategies and we have our GP stakes, which certainly is generating some nice interest.

Unidentified Analyst: Great. And if I could just follow up with a question about Crossroads. I wondered if we can get an update there. I know it’s been a little while since we talked about that. So anything you can share incremental?

Clark Webb: Yes, we don’t want to get out ahead of Crossroads. It is a listed company, and so we certainly won’t share any material nonpublic news. That being said, I think what has been put out there is this is a relationship that has now generated a few hundred million dollars of fee-earning assets, and it is really proving the strength of the enhanced origination machine. And so I would certainly direct questions to Crossroads, but given where we started 18 months ago with a clean slate, now having hundreds of millions of dollars deployed at what we think are great returns, great risk-adjusted returns and really importantly, the impact that this portfolio generates, we think, is second to none. We are thrilled with how that’s going.

Operator: The next question comes from Adam Beatty of UBS.

Adam Beatty: Just wanted to circle back on fundraising, maybe from a little bit of a different angle. Fritz talked a little bit about kind of the denominator effect may be going away at this point. So I just wanted to get your sense on, I know you’ve got a large number of LPs and potential LPs, so it may be difficult to generalize. But if you could, just in terms of the public markets and that backdrop, is flat from here combined with some reallocation, maybe a pause last year from LPs, is that enough to really offset that denominator effect, do you think, by middle or end of this year? Or do we need a little bit more of a market rally from here?