Snapshot

Long: Petershill Partners PLC – Public Markets Exposure to a Diversified Portfolio of Private Alternatives Managers, Trading at a Severe Discount

Thesis

Petershill represents differentiated exposure to alternative private asset management, offering exposure to GP economics derived from a portfolio of over 200 private equity and other private capital funds under the umbrella of 25 partner-firms.

Investor demand for private market and absolute return assets is a secular growth story despite the near-term slowdown in fundraising for regular-way private equity and private real estate. AUM in Petershill’s industry is expected to grow at a 9.3% CAGR between 2021 and 2027, or approximately low teens between 2022 and 2027, as 2022 recognized an ~11% decline in assets raised, partially reflecting the “denominator effect” as well as a record fundraising year in 2021.

Petershill’s partner-firm fundraising is supported by strong investment performance: over 76% of partner-firm funds are performing above their benchmarks and the private market funds’ aggregate realized net IRR is 17%.

Against a strong secular growth backdrop, Petershill has meaningfully outgrown its industry. Partner-firm AUM grew at a 28% CAGR between 2018 and 2022 and fee-paying AUM at 24%. This compares to overall private capital industry AUM growth of 18%. Petershill’s fee stream has grown faster, with net management fees growing at a 32% CAGR between 2018 and 2022 and fee-related earnings (“FRE”) at 29%. Partner-firms’ share of industry AUM is just 2% despite steady incremental share gain.

Petershill represents a highly durable and resilient earnings stream. Fee-related earnings come from a capital base with weighted average capital duration of 9 years. Management fees in 2022 represented 69% of partner-firm revenues – these fees are contractually agreed upon for each fund’s life. Typically, next generation successor funds are established 3 to 4 years into the current fund’s investment period.

Petershill’s is a highly cash generative and high margin model, with reported Group adjusted EBIT margins of 89% in 2022 and FRE margins of 62%. In 2022, Petershill realized $257mm of free cash flow against $336mm of adjusted EBIT, or 76% conversion. The company has limited overhead as a minority stake investment firm and a simple corporate structure.

Petershill is the first of its kind focused on acquiring minority stakes in alternative asset managers. Funds are incentivized to work with Petershill because of its track record and operational support capabilities, including but not limited to operational consulting, portfolio services, capital formation, and corporate finance and legal. Petershill Partners also has the right, but not the obligation, to coinvest alongside the privately held LP fund Petershill Fund IV, which was raised after the current perimeter of funds making up the public entity was listed. Petershill Fund IV allows them to be selective and discretionary across a breadth of potential opportunities.

Petershill has a long history of accretive inorganic growth, with plans to deploy roughly $100mm to $300mm into acquisitions each year. This repeatable motion is “capex-like” (per the company). Since its 2021 IPO, Petershill has made 6 new acquisitions representing 13% FY23 EPS accretion at the date of acquisition. Management incentives are aligned, as profit share is linked to accretive M&A post two-year holiday and hurdle.

Valuation is highly compelling. In 2022, Petershill did $213mm of FRE – current share price of $1.79 represents just 9.6x. The company’s 2023 outlook for $220mm to $250mm in FRE represents 8.7x at the midpoint. Consensus 2024 EPS of $0.29 at 9.5x represents up 54% versus the current share price. 9.5x represents a meaningful discount to comps – private market peers trade closer to ~12.5x. We see no reason that Petershill cannot at least partially close the gap given the durability of its earnings stream and its decade plus track record of execution. Petershill also offers a highly shareholder friendly capital allocation policy paying a $0.145 dividend per share in 2022 with a commitment to a progressive dividend policy going forward (2022 represents >8% dividend yield). 

Key risks include:

• Deteriorating investment performance at partner-firms
• M&A execution (though this has been strong historically)
• Existing ownership overhang and illiquidity

Business Overview

Goldman Sachs launched Petershill in 2007. It was the first of its kind acquiring GP stakes in alternative asset managers. Other managers followed including Dyal (2010, subsequently executed a SPAC merger with Owl Rock) and Blackstone’s Strategic Capital unit (2013). Petershill is a pioneer of the space, closing on the first GP single asset realization and the first portfolio level realization, as well as acquiring the first VC partner-firm minority stake.

Petershill is managed by the Petershill group within Goldman Sachs Asset Management. It has launched four funds with plans to launch successor funds. We believe Petershill’s opportunity set is attractive because they focus slightly downmarket of Dyal and Blackstone where the market is less efficient and valuations are lower.  In fact, Dyal’s large cap bias (e.g., recent $13bn Fund V raised) makes them more a source of potential exit opportunities for Petershill’s companies as they scale, rather than a direct competitor for deal flow.

Petershill owns a 13.5% weighted average stake in the FRE of its partner-firms. Petershill grows organically through AUM growth at its partner-firms, and inorganically through acquisitions of new partner-firms.

Petershill’s earnings streams are: (1) partner-firm FRE; (2) partner-firm realized performance revenues (“PRE”); and (3) partner-firm realized investment income.

Through GS, Petershill has a unique proprietary sourcing engine. Over 80% of its transactions come through proprietary channels, which is unusual within private markets where auction processes typically drive transactions.