Description

P10 is an alternative asset manager with highly durable earnings, excellent management, a long runway to grow, and a reasonable valuation.  Chuplin1065 posted a P10 write-up last October, which covered some of the background.  Since then, the company has been listed on the NYSE and continued to make attractive acquisitions, including one just announced last Friday.  We expect PX to compound in the mid-teens to low twenties over the next 5-10 years, with a low risk of permanent capital loss.    

History and Management

Co-CEOs Rob Alpert and Clark Webb are a big part of our P10 thesis.  They are former hedge fund managers who still think like investors and have been quite clever in building and structuring the company.  While they have a few other endeavors, including Elah Holdings (ELLH - also written up by Chuplin1065 in Nov-2020), P10 is by far their largest holding and area of focus.   

Rob previously managed Atlas Capital for 20 years, a long/short fund in Dallas with a heavy emphasis on short selling.  Clark was the co-portfolio manager of the Lafayette Street Fund inside of Select Equity, where he invested heavily in publicly traded alternative managers.  A former endowment fund manager who invested with Clark at Lafayette Street told us: “As great as the business model is, Clark is my real bet there.  He’s extraordinary and I expect him to find ways to make money that are above and beyond our current underwriting.  I have an irresponsible amount of my net worth committed to PX and ELLH and feel great about it.”

P10 was a failed IP litigation company with a large (~$500 mm) NOL shell when Rob and Clark gained control of it.  What P10 is today came to be in 2017 when the shell purchased RCP Advisors, a leading middle market private equity fund of funds.  P10 creatively structured the deal, only buying the management fee stream of RCP while leaving performance fees with the team.  This structure keeps the team incentivized to focus on performance while putting the more predictable, recurring fee stream in the public company. 

Public markets have never placed high multiples on performance fee streams of asset managers – for example, Goldman currently puts a 30x multiple on Blackstone’s management fees and an 8x multiple on its carry.  While public markets might not like the lumpiness of the carry, team members at investment firms are pretty happy to keep it, in my experience, so this structure is a true win/win.  The RCP team was also compensated heavily in P10 shares, which further aligned incentives and led to an excellent outcome for the RCP team as P10 stock has appreciated in recent years.  

P10 Today

P10 has followed that playbook and purchased six other asset managers since, all with a focus on niche-oriented private markets.  P10 manages $18.5 billion today, on which it collects about 1% per year in highly predictable management fees from long-term (10-15 years) locked-up vehicles.  The company has low corporate overhead and targets EBITDA margins of around 55%.  P10 is highly tax efficient, with over $500 million of tax assets remaining as of 6/30 - $212 million of NOLs plus $306 million of goodwill and intangibles from its acquisitions.  As it makes more acquisitions, the tax asset will grow, and the company expects to have zero federal taxable income for several years. 

P10’s asset managers have excellent reputations and track records.  RCP and Truebridge Capital, the leading fund of funds focused on venture capital, are the two largest and most important managers inside P10.  Their track records are below:

Truebridge Capital Case Study

Truebridge is a jewel of an asset and an excellent example of what makes P10 stand out vs. other publicly listed asset managers.  Truebridge was launched in 2007 by Mel Williams and Edwin Poston, who previously managed private investments at the Rockefeller Foundation and UNC’s endowment.  Their initial funds were a partnership with the Kauffman Fellows program, a non-profit focused on fostering entrepreneurship globally.  That partnership, plus the team’s relationships from their time at leading endowments and foundations, gave Truebridge access to leading VC firms that are typically only available to large endowments and foundations.  Over the years, Truebridge has invested with top-tier VCs like Sequoia, Founders Fund, Accel, A16Z, Thrive, First Round Capital, Benchmark Capital, Y Combinator, Craft Ventures, and Addition.    

Truebridge also created the Midas List, a widely followed industry ranking of the top venture capitalists published annually in Forbes.  This was a significant branding win for Truebridge and also helps it collect information on VCs (to be considered for the Midas List, VCs need to provide information to Truebridge.)

One of Truebridge’s largest investors is the State of Florida, which helpfully has detailed public disclosures on its fund managers and performance.  Since 2010, Florida has committed $840 million to 10 Truebridge funds and has seen excellent results:

Of the $840 million committed, $644 million has been called, $582 million returned, with over $2 billion of value remaining, for a total multiple of 4.1x.  These are returns that any investor would be thrilled with and have helped the massive state plan’s VC portfolio consistently outperform other institutions:

*Source: State Board of Administration of Florida

Building an enduring asset management firm is hard, but Truebridge has one of the most unique and compelling sales pitches we’ve seen (“we have access to Sequoia and other top VCs that you can’t get into.”)  While there will be short-term bumps, and we expect the recent vintage IRRs to come down, we are highly confident that Truebridge will be able to raise capital and continue to generate attractive returns in the future. 

Valuation

P10 trades at a ~6% free cash flow yield, and we believe it can grow at least 10% organically over time.  Organic growth in recent years has been in the 20s, which can be seen below.  While there may be some slowdown in the short-term given the environment, we were encouraged to see net capital raised of over $900 million during the recent quarter. 

While you don’t need a re-rating upward for P10 to do well, it is worth noting that the stock trades at a slight discount to peers – a recent Morgan Stanley piece has the average alternative asset manager at 17x P/E vs. P10 at 15.7.  That is despite faster growth and an income stream based 100% on long-term, recurring management fees:

P10 has a relatively low float and liquidity – it trades about $2 mm/day – so we don’t expect the multiple to re-rate in the short term, but we think it's quite possible over time.     

Additional optionality comes from P10 continuing to make attractive acquisitions, which Rob and Clark are highly focused on.  While there is competition to buy asset managers, P10 has positioned itself as an attractive acquirer, given its strong existing brands, tax assets, and focus on niche strategies.  Last Friday, P10 announced it was acquiring Western Technology Investment, a market leader in venture debt.  Western has an excellent reputation and track record and, like P10’s other managers, has highly recurring long-term management fees.  P10 paid under 12x EBIDTA and the acquisition will be accretive to P10 earnings.  It’s not a huge acquisition relative to P10’s current size, but it's the type of deal that will meaningfully boost returns if P10 can find 1-2 of them a year in the future. 

Risks

·         Fund of funds are usually not our favorite businesses, but in this case, we think that P10’s managers, especially RCP and Truebridge, provide a valuable service to their investors and should continue to generate attractive returns

·         P10 is partially exposed to tech via Truebridge, but it’s important to note that management fees are based on committed capital (they don’t swing around based on quarter-to-quarter market movements.)  While we expect recent returns to come down, we remain confident that there will be demand for Truebridge’s funds in the future

·         P10 has some debt, but we think its quite manageable given the extremely durable earnings and talented management team

Catalyst

• Additional acquisitions, share buybacks, and/or debt paydown as the company continues to spit off cash into the hands of talented capital allocators