'Tough market' erodes Partners Group performance fees

Partners Group Holding AG reported a 22% decline in revenues in the first half compared to the same period a year ago, as slower exit activity eroded performance fees.

"This is a tough market. We won't dispute that," CEO David Layton said on the firm's Aug. 30 earnings call. Layton described a "disconnect between buyers and sellers on valuations" when the firm gave its midyear update in July. Six weeks later, Layton said the marketplace was still "maybe a quarter or two away from having some more reasonable eye-to-eye discussion."

Performance fees generated just 8% of the listed Swiss asset manager's revenue in the first half, compared to 39% in the same period a year ago. CFO Hans Ploos Van Amstel tied the decline in performance fees directly to a shifting timeline for exits. In 2021, some exits were accelerated to take advantage of favorable conditions, while others were delayed in the first half as the exit environment deteriorated.

Ploos Van Amstel said performance fees are expected to generate less than 20% of the firm's overall revenue in 2022. That is significantly below the firm's medium- to long-range guidance that performance fees will account for 20%-30% of revenues.

Performance fees spiked to 46% of Partners Group's total revenues in what the firm's earnings presentation termed an "exceptional" 2021, and they averaged 26% of revenues between 2016 and 2020.

"We remain confident that our performance fees will come back to 20% to 30% over time, and this is underpinned by a very strong portfolio performance," Ploos Van Amstel said.

PE performance

Still, that performance stumbled in the first half.

Portfolio companies logged "solid, double-digit earnings growth" in the six months ended June 30, Layton said. But the firm's private equity portfolio lost 5.2% of its value over that period as Partners Group absorbed the eventual impact of the first-half sell-off in public markets.

Layton said the decline "was 100% a result" of the firm updating marks on its portfolio companies to bring them back in line with the valuations of their publicly traded peers. The CEO also said volatile market conditions, including higher inflation, would weigh on future returns, requiring transformational business plans for portfolio companies.

"The game of going long-leveraged equity and generating 20-plus percent returns is over. And so, the business plans that we're implementing in order to generate those high-teens, low-20s returns are quite extraordinary, actually. It requires a very, very heavy lift," Layton said.

Smaller entries

Layton said the firm also "scaled down [its] average investment size slightly over the last couple of months" due to market conditions.

"This is not a market environment where you want to eat everything being served up. I think you want to pick your spots very, very carefully," Layton said.

The firm was "actively pursuing add-on acquisitions" for "just about all" of its large platform companies, Layton said. A market dislocation will push some mom-and-pop companies to the point of selling, creating opportunities for smaller entries, Layton said.

"We have invested in some slightly smaller businesses in this period of time. And I do continue to think that it's probably going to be until the latter half of this year, maybe 2023, until you start to see stability in the much larger end of the market."