Shift To Direct Investments Will Boost Performance Fee Potential

Key Takeaways

• Direct investments and a strong exit pipeline enhance performance fee potential, boosting earnings and revenues.
  
• Focus on U.S. private wealth and new products are driving record inflows, enhancing revenue growth and client diversification.
  
• Currency fluctuations and geopolitical tensions pose risks to stable earnings and revenue growth, with reliance on performance fees adding unpredictability.

Catalysts

A private equity firm specializing in direct, secondary, and primary investments across private equity, private real estate, private infrastructure, and private debt.

• The shift towards more direct investments enhances performance fee potential, with a mix shift in their investment portfolio providing a tailwind. This is expected to increase performance fee contributions from 20-30% to 25-40% by 2026, impacting earnings positively.
  
• The company has a robust $19 billion exit pipeline, with a significant portion of mature assets ready for realization. This should drive future performance fees and liquidity, thereby boosting revenues.
  
• Partners Group's increased focus and investment in U.S. private wealth have led to record inflows, representing a 33% increase in fundraising from the U.S. This should enhance revenue growth and diversify their client base.
  
• New evergreen products and bespoke client solutions are expected to attract significant capital from both existing and new distribution partners, potentially increasing management fee revenues.
  
• M&A activities and the adoption of EBITDA margin as a profitability measure suggest a strategy to consolidate and enhance operational efficiencies, which can lead to margin improvement and impact the bottom line positively.

Partners Group Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Partners Group Holding's revenue will grow by 16.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 53.1% today to 49.2% in 3 years time.
• Analysts expect earnings to reach CHF 1.7 billion (and earnings per share of CHF 63.92) by about March 2028, up from CHF 1.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.4x on those 2028 earnings, down from 30.2x today. This future PE is greater than the current PE for the GB Capital Markets industry at 17.7x.
• Analysts expect the number of shares outstanding to decline by 0.78% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.83%, as per the Simply Wall St company report.

Partners Group Holding Future Earnings Per Share Growth

Risks

• The gradual recovery of the private market industry, along with relatively low liquidity, might hinder future revenue growth and the ability to realize assets timely, affecting net margins and earnings stability.
  
• The competitive pressures in the U.S. wealth management sector could necessitate significant investment, potentially impacting net margins and overall profitability if returns do not align with expectations.
  
• Marked currency fluctuations, such as the strengthening Swiss franc, could negatively influence revenue and management fee margins. This currency exposure poses a risk to achieving stable earnings.
  
• The reliance on performance fees, which are subject to the timing of exits and market conditions, could lead to variability in revenue, affecting predictable earnings. There is uncertainty in performance fees despite current favorable conditions.
  
• The geopolitical environment, including trade tensions and tariff impacts, may affect portfolio companies’ growth potentials, thereby negatively influencing the firm’s ability to maintain consistent revenue growth and ultimately impacting earnings projections.

Valuation

• The analysts have a consensus price target of CHF1407.0 for Partners Group Holding based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CHF1550.0, and the most bearish reporting a price target of just CHF1210.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CHF3.4 billion, earnings will come to CHF1.7 billion, and it would be trading on a PE ratio of 24.4x, assuming you use a discount rate of 4.8%.
• Given the current share price of CHF1313.0, the analyst price target of CHF1407.0 is 6.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.