Description

P10 Holdings (PX) is a provider of financial solutions for the lower middle market.  The company offers investment alternative in private equity fund of funds, venture capital fund of funds, general partner stakes, NAV lending and venture capital debt. 

PX is mispriced as investors have not appreciated the high quality of the company’s business model which offers cash-flow stability, organic AUM growth, strong cash flow generation and a large opportunity to bolt-on accretive businesses in a tax-efficient manner.

Attractive Business Model

PX’s cash flow stability is driven by the fact that most of its revenue is driven by management fees on committed capital. As opposed to other alternative managers, PX leaves the incentive fees with the investment teams which provides a much more stable stream of fee revenue while also incentivizing the investment teams.

P10 is also able to drive significant free cash flow due to the low capital intensity and the company’s large NOL balance which limits cash taxes.  While the NOL is finite, the company also has the ability to continue replenishing it via M&A where they can create an additional tax asset through the step up in basis of the acquired company which creates amortization that can shield taxes.

P10 is an attractive acquirer because they allow target firms to diversify their exposure and be part of a larger company while retaining control of their operation and keeping the incentive fees for the investment team.  P10 is also starting to show evidence of their cross-sell capabilities as they use their relationships to bring acquired firms into new markets (ex Truebridge into Europe where they had never been before).  P10 also has a strong origination team with 5 of their 6 initial deals being internally sourced.

In 2022, PX acquired venture credit investor Western Technology Investment (WTI) for 11x EBITDA.  This acquisition added over $1bln of AUM and diversifies PX into an attractive growth area as many banks have pulled back from debt financing for venture companies post SVB.

While fund of funds have gotten a bad rep, PX’s portfolio companies have strong, long-term track records. Most of its AUM is with firms with ~20 year track records. Conversations with friends at family offices and smaller institutions also support the notion that PX’s firms have strong reputations in the industry.

As these assets are more greatly appreciated, I expect PX to rerate significantly higher while downside is well protected by its stable cash flows and strong management team.

Valuation

PX has a $1.5bln market cap at $11.85 and 258mln of net debt for a total EV of $1.75bln.  The company has a $650mln NOL which could be worth >$100mln.  2023 EBITDA is expected to be ~123mln (14.3x) and 2023 EPS is $0.80 (14.8x). 

For upside, 2026 AUM should be ~33bln which would drive ~$1.10 in FCF per share at a normalized tax rate.  Given the nature of this FCF, I believe a 20x FCF cash flow multiple is warranted which suggests a total value of ~$21 per share or an almost 40% CAGR over 2 years.  Significantly higher upside could exist if PX gets revalued to greater appreciate its underlying stability and growth opportunities (the “compounding bond” as CEO Webb puts it.

For downside protection, I believe PX should generate ~$0.75 per share of normalized FCF which would be worth ~$10.50 at 12.5x FCF.

Catalyst

Organic Growth

Accretive Acquisitions

More Seasoning