Princess Private Equity Holding — Solid Q121, attractive dividend and well-filled pipeline

In Q121 (to end-March 2021), PEY’s NAV total return reached a notable 8.5% (after c 10% in FY20) with its NAV up by c €79m to c €1,002m. Its 10 largest portfolio companies (c 52% of PEY’s NAV at end-March 2021) contributed c €63m to the growth. This was largely attributable to a c €48m (or c +45%) uplift upon the exit from GlobalLogic (to be sold to Hitachi), a software development company providing experience design and digital engineering services (comprising c 10% of PEY’s NAV at end-March 2021).

Upon closing the GlobalLogic deal (expected in July 2021), PEY will achieve a multiple on invested capital (MOIC) of 5.3x and an internal rate of return (IRR) of 76%, according to the manager. Despite a relatively short holding period (since August 2018), Partners Group (PEY’s investment manager) was able to implement a number of value creation initiatives in the company, including establishing private equity sales channels (facilitating client introductions within the Partner’s Group portfolio and other private equity companies); improving the service delivery utilisation and modernising global shared services to assist business scalability; strengthening the company’s leadership team by appointing a number of key senior management members; and refining GlobalLogic’s M&A criteria, which led to the completion of four acquisitions over the holding period (including three in Europe, despite the company’s previous focus on the US market). These efforts were reflected in GlobalLogic’s EBITDA growing at a CAGR of c 28% since PEY’s initial investment, with an EBITDA margin of c 23% at exit versus c 20% at entry, according to the manager.

In Q121, PEY also agreed the sale of Cerba HealthCare (c 3% of PEY’s NAV at end-March 2021) to a financial sponsor, leading to an upward revaluation of 6.4% in Q121 and contributing c €2.0m to PEY’s Q121 NAV growth. The transaction will have generated a MOIC of 2.6x and an IRR of 27% (assuming a closing in June 2021 and with initial investment in 2017), according to the manager.

NAV TR in Q121 was also assisted by improving portfolio trading, which returned to double-digit pre-COVID-19 pandemic EBITDA growth rates (EBITDA at +10.3% on average for companies representing c 83% its NAV over the 12 months to end-March 2021 versus 7.7% LTM to end-December 2020). Finally, valuation multiples continued to be supportive for PEY’s portfolio in Q121, reflecting sector mix, particularly exposure to resilient companies from the technology, education and healthcare sectors. That said, average LTM EV/EBITDA went slightly down to 15.3x at end-March 2021 versus 15.7x at end-December 2020 (for companies representing c 84% of PEY’s NAV at end-March 2021).

Of PEY’s 10 largest investments, only KinderCare (c 3% of NAV at end-March 2021) contributed negatively to PEY’s NAV growth in Q121 (declining by €0.9m). The manager notes its valuation is based on LTM EBITDA, which still covers a period when the company was negatively affected by COVID-19. However, the manager highlights an improving outlook for the childcare services sector in the US as parents return to work and KinderCare has now reopened most of its centres. Moreover, some of its competitors have not been able to reopen, which the manager says created some supply shortages.

PEY’s NAV increased by a further 1.5% to €14.70 per share in April 2021, driven by portfolio performance (+1.7%). PEY’s NAV TR over a three- and five-year period was c 15% and c 14% pa, respectively, which compares with c 14% and 13% pa, respectively for MSCI World Index (listed equity) and c 7% and c 8% pa for LPX Europe NAV (private equity index).

The discount to NAV has been narrowing over recent months after solid NAV performance in FY20 and in the four months from January to April 2021. This was coupled with a gradual share price recovery since March 2020 (share price return at c 12% in FY20, c 11% in January 2021 to April 2021 and broadly stable since then). PEY’s discount to NAV of c 12% at 22 June 2021 is in line with the average c 11% over three years to end-February 2020 (pre-COVID-19 pandemic) and is lower than its peer group average of c 17% at 22 June 2021 (see Exhibit 6 and related comments below).

PEY’s realisations reached c €178m by the end of FY20, equivalent to c 19.3% of the opening NAV (vs c €149m or c 22.7% of opening NAV on average between 2015 and 2019). This was assisted by a c €98m full exit from Action, which it signed in November 2019 and completed in June 2020, and a €24m partial realisation from PCI Pharma. Strong realisations have continued in 2021, reaching c €52.7m to end-April 2021. Notably, this does not reflect the above-mentioned two signed and in-closing exits from GlobalLogic and Cerba HealthCare, which represent c €135m of proceeds.

On top of that, in May 2021 PEY agreed on a partial exit from ISP (see more details below), its largest portfolio holding (c 14% at end-March 2021). The agreed disposal of the 25% stake in ISP across all Partners Group-managed vehicles to the Ontario Municipal Employees Retirement System valued ISP at c €1.9bn, which translated into the value of PEY’s stake in the company of c €150m (versus its carrying value of €139m at end-March 2021 and residual cost of c €49m at end-December 2020), implying an uplift to carrying value of c 8%. Additionally, based on our discussion with management, we understand that PEY sold more than 25% of its own stake in ISP due to portfolio management considerations to reduce its single company concentration but will retain an investment of c €20m to continue to participate in the future growth of the business.

ISP is an owner and operator of private schools and education centres and a platform investment to pursue a ‘buy-and-build’ strategy. Interestingly, rather than acquiring a platform company that already had an extensive school chain, Partners Group set up an investment vehicle in 2013 from scratch specifically to consolidate the market and attracted an experienced leadership team composed of former senior executives of several for-profit school chains (World Class Learning, Alpha Plus, Cognita etc). Since then, the company has grown to become the fifth largest K-12 (ie from kindergarten to 12th grade) international school group globally, operating 50 schools across 15 countries and serving more than 45k pupils. The funds raised from ISP's shareholder expansion will predominantly be used to continue ISP’s platform-building strategy, with key value creation initiatives including ongoing investment in learning and technology, further improvements to the physical infrastructure of schools, and M&A.

The investment volume of c €65m in FY20 was only slightly lower than the c €69m in FY19 and the company deployed a further €68m in the four months to end-April 2021 (see Exhibits 4 and 5). Moreover, in Q121 PEY made a €25m commitment to the manager’s Partners Group Direct Equity 2019 programme, which provides additional exposure to its seed portfolio of five companies: Blue River PetCare, Confluent Health, EyeCare Partners, Rovensa and Schleich. This follows a €50m commitment PEY made to the programme in Q420, bringing its total commitment to €75m.

The manager expects the rest of 2021 to continue to be active with respect to both realisations and investments. The six-month pipeline as at May 2021 included nine live investment opportunities in the Americas (with aggregate equity volume of US$5.9bn), 11 in Europe (US$7.9bn) and 12 in emerging markets (US$7.0bn). It continues to focus on transformative growth themes (which benefit from long-term trends) and avoiding cyclicality.

PEY’s coverage ratio (calculated as the sum of net current assets and undrawn credit facility divided by unfunded commitments) was c 49% at end-April 2021, compared with 94% at end-December 2020. Its long-term €80m credit facility was partially drawn at end-April 2021, with c €65m still available at this date. That said, PEY intends to repay it after it receives proceeds from realisations of Cerba HealthCare and GlobalLogic, which are expected to close in June and July 2021, respectively. After PEY made a €25m commitment to the Partners Group Direct Equity 2019 programme in Q121, its unfunded commitments increased to c €117m at end-April 2021 (or c 12% of NAV), including c €44m commitments to mature funds (at end-March 2021), which it does not expect to be called in full. The remaining unfunded commitments is expected to be called over the next three years.

PEY has declared the first interim dividend for FY21 of €0.335 per share (payable in June 2021), in line with its guidance to distribute c 5% of opening NAV in dividends via semi-annual payments. This implies an LTM dividend of €0.625 per share and a solid yield of c 5%. The manager is confident in the outlook for the portfolio and PEY’s ability to pay future dividends even if in case of continued lockdowns. PEY’s total dividend for FY20 was €0.435 per share (or 3.5% of opening NAV), compared with €0.58 a year earlier (5.3% in FY19). The decline followed the company’s decision to revise its previous dividend guidance (ie distribute 5–8% of opening NAV in the form of dividends via semi-annual payments) due to the COVID-19 pandemic, and assume a total dividend of no less than €0.29 per share in FY20. While the first interim dividend for FY20 was €0.145 per share, the second pay-out increased to €0.29 per share (in line with the H219 dividend) following a robust performance of the portfolio and increasing transaction activity on capital markets in H220 after a muted H120. In turn, PEY reinstated its dividend guidance in H220 to its current form.

PEY’s LTM dividend yield is the second highest in the peer group (Exhibit 6). Its NAV TR (in sterling terms) was slightly above the peer group average over one year and five years to end-April 2020 and in line with its peers over a three-year period to end-April 2021. PEY’s shares are trading at a narrower discount to NAV compared to the peer group average. Two companies from PEY’s peer group are trading at a premium to NAV, including HgCapital Trust (which we believe is a function of its tech-focused portfolio) and Deutsche Beteiligungs (reflecting its asset management segment generating regular fee income).

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