Description

I will keep this short since I think the facts are simple and the opportunity is easy to analyze. You basically only have to believe a few things to be attracted to P10 (soon to be PX)

History

P10 was a failed IP litigation play that resulted in an approximate 500mm NOL shell which Robert Alpert and Clark Webb gained control of about 4 years ago. In quick order they set out to build a unique Alternative Asset Manager with the following key attributes.

First – “The Middle Market”

·  Focused exclusively on the “middle-market”. They believe fund flows are and will migrate away from expensive public markets and Mega Funds e.g. KKR, Apollo etc because those asset classes cannot achieve the returns that endowments, pensions etc now need.

·  Middle Market returns are less fragile because there is more growth or “Seams of Growth” as they say in the underlying businesses and less need for financial leverage to achieve outsized returns

·  Smaller investments give you exit flexibility. Mega deals have one exit, which is the public markets, thus there is reflexivity to Mega Private Equity that middle-market does not suffer from i.e. private assets dependence on public markets for financing (debt) and exit equity

·  Within the middle-market you have less aggregate capital, chasing more deals which results in the ability to be very selective and thus preserve returns and safety.

Second:

·  Create a premier “one-stop shop” for the middle market.

·  Make it easy for partners to gain exposure to the asset class, across strategies e.g. PE, Venture, Credit, ESG etc

·  One check and they can invest across asset classes, but all middle market. You deal with one relationship manager, and given the number of smaller funds in middle-market this makes a lot of sense, where a FoF approach works better

Third Alignment:

All other "alternative" managers KKR, Hamilton Lane, Apollo etc take a piece of the carried interest in the PubCo. This is bad for a few reasons. First it creates misalignment between the platform and the team that drives returns. P10 believes to best align incentives and maintain long-term performance that the Investment team on the ground should retain 100% of the incentive fee. PX is long-term focused. It takes longer to get to the same level of earnings, but the quality of earnings is higher (and should warrant a higher multiple).

Second, the carried interest is hard to predict, monetize and model for public markets. P10 takes only the management fee which is clean, recurring, growing, low capital intensity and has 10-15 years of visibility.

This creates an earnings stream that is of “the highest quality” and mimics a “compounding bond”. Per the S-1 at inception, the life of the underlying funds is 10-15 years.

From the S-1

We specifically aim to eliminate perceived challenges facing many publicly traded alternative asset management firms, (i) earnings volatility due to lumpiness of carried interest, (ii) tax complexities from the ownership of management and advisory fees and carried interest in publicly traded partnerships and (iii) potential misalignment of interest between investment professionals and the shareholders.

Their anchor transaction was with Chicago-based RCP advisors, a premier manager with a 20+ year record in the PE space. Soon after they have acquired around five other managers, in complementary strategies e.g. VC, credit, ESG. See website for each one.

In aggregate the company started 2021 with $13B of AUM with a goal of $3B of organic growth by March 2022. They are on track to exceed the $16B target and have recently acquired another $1B AUMS.

In the early transaction’s sellers took some cash, some seller’s notes, and lots of stock, such that insiders collectively own 82% of the fully diluted shares out. The smartest money is rolling their equity, and have not sold a single share.

P10, because of its large NOL, offered something that many other partners couldn’t. They couldn’t offer the highest price today, but for the right partner that believed in their business, they could offer the highest price in 15 years, and also allow you to still get a paycheck and 100% of the carried interest along the way. They afforded their targets the ability to get liquid, diversify, and roll their equity in a tax efficient way. The NOL’s allow an almost perfect conversion of EBITDA to free cash for the foreseeable future. This will allow the company to de-lever, and or pursue additional growth. Basically, the NOL lets them compound the “full-dollar” instead of the “after-tax” dollar and why I said that they could offer a higher future price. Any study of Webb and Alpert reveals shareholder-friendly individuals that are astute capital allocators. I expect they will pull all levers to create substantial value from today onward. Opportunities will emerge that we don’t even see e.g. GP Scout a data product, they own that could be its own business, or a SPAC or many other free options with these smart folks.

With critical mass, a repeatable playbook and an organic growth strategy this OTC listed company just filed an S-1 with an impressive set of bankers to uplist to the NYSE. We, love P10 management, believe that middle-market private alternatives are in the early stages of a multi-decade growth path, and if we look out 10-20 years, we could easily see an entity managing 100B+ of AUM’s, that becomes the crown jewel of the space. From this stage, the company will continue to selectively acquire assets which will have high earnings leverage to common shares, but they will, more importantly, take the funds that are already here and grow internationally, and into different distribution channels (endowments, private banks, 401K’s).

·  Each incremental $1 B of AUM moves the needle here, unlike at KKR et all, where they need 10-50 B to move the needle.

·  Morgan Stanley, UBS, Barclays and JP Morgan all on the cover for the up list, which I imagine means a few things. 1. Research coverage 2. Partnership in their Private wealth platforms. E.g. near term catalysts 3. Liquidity 4. Ultimate Index inclusion

We believe the barriers to entry here are significant. How does one build a 20-year track record of excellence in the asset management business? You build a 20-year track record of excellence, that if you care for, becomes an insurmountable barrier. It’s always a risk that people take their eye of the ball, but with the carried interest at the investment team level that risk is low(er).

Valuation: Shares have been on a tear, and here is where you really need to believe in the long-term thesis to buy into this story. I don’t think shares are “cheap” on next year’s earnings, but I believe in 10 years we will have a much more valuable an enduring franchise. Compounder bros please pay attention.

The final pitch: PX is a business with high barriers to entry, a low cost of capital, a multidecade growth runway, low capital intensity, earnings that are both recurring in nature and have visibility 10-15 years into the future where insiders own 80+% of the equity. We believe this business will be highly valued by the markets, when fully appreciated. We believe the ‘A’ list of bankers will accelerate the process of educating the market on these qualities. Today the shares are illiquid, and you can “front-run” the offering by buying on the OTC, or just participate in the offering.

At $20 B of AUM by this time next year at 1% management and 55% EBITDA margins = $110 m of EBIT effectively. Giving that a 30X multiple which I can’t believe I am saying I think is conservative given the growth, visibility, low capital intensity and barriers to entry I believe shares are worth 2X today price and much much more in 10-20 years.  There is significant debt but also significant NOL that is roughly a wash in this math, may be not but it won't make a difference in even just a few years.

Additional Resources:

Website: https://www.p10alts.com/

S-1- https://www.sec.gov/Archives/edgar/data/0001841968/000119312521284294/d118332ds1.htm

Investor Presentation and A compilation of their letters in one place for easy access:

https://www.dropbox.com/sh/swi3ablru6xvx2d/AACOfasywdzsipwxeqAILapBa?dl=0

Catalyst

-Uplist

--Coverage

--Liquidity

--Index Inclusion