Business

P10 Holdings is an Alternative Asset Manager operating across multiple Private Capital verticals. P10 charges about a 1% management fee on Fee Paying Assets Under Management (“FPAUM”), which today stand at around $19Bn. P10 is different from other alternative asset managers in they fully allocate the carry from their funds to the investment team responsible for the fund. This creates advantageous selection among their employees as the most skilled and talented individuals in the Private Capital industry would be incentivized to work for P10 as they can maximise their earning potential.

Business History

In March 2017, Active Power, Inc, a manufacturer of power supply products, entered into a restructuring support agreement with 210 Capital, of which Robert Alpert and Clark Webb were principals. A condition of the agreement was that Active Power, Inc would be recapitalised, and Alpert and Webb would manage the newly formed company, P10 Holdings.

210 Capital invested $4.654m into the newly formed company for an ownership stake of 48%. By limiting the change in ownership to under 50%, they preserved valuable Tax assets present on the balance sheet that would have otherwise been wiped out.

P10 went on to acquire a series of Private Capital business and funds across different verticals.

Today, P10 manages $19Bn in FPAUM, spread across 112 investment vehicles. P10 offers middle market and lower-middle market private capital solutions in Private Equity, Venture Capital, Venture Debt, Impact/ESG Investing, and Private Credit.

By offering solutions in multiple Private Capital verticals, P10 reduces their exposure to just one vertical. In addition, P10 LPs often have recurring relationships with P10. As one fund comes due, LPs will often seek out P10 for their next investment. By offering multiple solutions under one roof, P10 can often cross sell their funds. A hypothetical LP with an investment in a P10 VC fund who wishes to gain some Venture Debt exposure does not need to go to another Asset Manager.

P10 has regularly acquired other Private Capital businesses and their future M&A is a significant part of this thesis. P10 can acquire other Private Capital businesses at attractive prices because they may wish to reduce their exposure to a single vertical. A VC firm may risk bankruptcy if the vertical underperforms for an extended period. By selling themselves to P10, the VC firm gains exposure to the management fees from other verticals while retaining the carry from their own funds.

P10 is deserving of higher multiple than other Private Equity/Private Capital firms. While other PE firms’ revenue is composed of a mixture of carry and management fees, P10 is entirely composed of management fees. Carry is both more volatile and more dependent on the overall market performance. In a way, Carry can be thought of as a levered bet on Beta. Management fees on the other hand are uncorrelated with overall market performance. Management fees are charged on committed capital. It does need to be invested before P10 can begin charging fees on it. In additional, it is almost impossible this capital to be recalled once it has been committed. The life of a P10 fund is extremely long and can, if necessary, be extended. P10 usually earns about 1%/year on committed capital, with various catch-up provisions in effect. Since P10 revenue is entirely composed of management fees, P10 deserves a higher multiple on their earnings than other PE firms.

P10 benefits from economies of scale and has high incremental margins, with almost 100% of new revenue flowing directly to the bottom line. There is almost no new cost associated with adding new FPAUM. P10 has not yet finished scaling its operations. PX’s single largest expense is its employee compensation. The greater P10’s FPAUM/investment professional, the greater PX’s long term margin. PX has slightly over $200m in FPAUM per investment professional. This figure may sound high but is less than half KKR’s figure of $425m in FPAUM per investment professional and almost a third of HLNE’s figure of $590m in FPAUM per investment professional.

PX’s latest quarter had EBITDA Margins of 36.1%. If PX can achieve the lower bound of their guidance even without growing sales, it would correspond to an increase in EBITDA of 80%. EBITDA can be a misleading figure for PX as amortization represents a significant operating expense for PX.

PX’s most recent quarter had EBIT margins of 23.5%, compared to 45.5% for HLNE. This corresponds to an almost 50% increase should PX reach HLNE’s scale, which I believe will happen in time

P10 has the unique corporate structure of having co-CEOs. Robert Alpert and Clark Webb have worked together for years and were both principals at 210 Capital prior to founding P10. Both are highly competent and own a large percentage of P10.

Competitive Advantages

P10 is a well-protected business with numerous competitive advantages that make it highly challenging for new incumbents to enter the Alternative Asset Management business.

P10 benefits from economies of scale. There are large upfront costs associated with running a PE firm, primarily employing workers. Workers in the PE space are highly skilled and often command large salaries. There is also little to no incremental cost associated with onboarding new Committed Capital. This creates a situation where a firm just entering the space would need to accept years of losses as it tries to reach the same level of AUM per employee as P10 and allow its business to achieve scale. At the time of writing, P10 manages about $200m per investment professional it employs.

P10 has existing relationships with LPs that makes raising capital easier than it would be for a firm that has just entered the space. It is much easier to raise funds from a LP that already is a client of P10 than one who has never had previous dealings with P10. In addition, once one of P10’s funds are liquidated, LPs will have excess capital that will likely need to be reinvested. P10 can raise another fund with this capital, assuming the performance of the just-expired fund has been satisfactory.

While P10 is a relatively new company, its management team have a long history of value creation, stretching almost 20 years, that they can point to as a reason to invest with them. Robert Alpert and Clark Webb have been in the PE space years before founding P10, serving as principals of 210 Capital. P10’s track record makes it a safe choice for LPs. A LP who chose to invest in a new entrant to the PE space who subsequently underperformed would likely face serious professional repercussions for their decision. There is a saying “Nobody ever got fired for buying IBM”. In this case, P10 represent IBM for LPs.

P10 has access to a proprietary database, GPScout, for tracking potential investments. P10’s deals are on the smaller side so informational advantage plays a larger role in outperformance. This database tracks over 25,000 private companies and 9,000 funds. Management has explicitly cited this database in relation to inefficiency in middle market PE as an advantage for P10

Valuation

I estimate investors can earn a 34.94% IRR if shares are purchased and held for 5 years. The assumptions that I used for building my valuation are expanded upon below.

A link to the DCF and DCF notes in excel form can be found by clicking this link

I assume a 50% increase in revenue attrituable to P10’s strong fund raising in H1 2022 and its acquisition of Westech Investment Advisors, its second largest acquisition to date. I then assume revenue growth slows to 32.5% for 2023 and 2024, 30% for 2025, and 27.5% for 2026 and 2027. This is above P10’s historical organic growth rate but below its actual revenue growth rate. With a strong M&A program, this figure may end up being conservative.

I assume P10’s operating income margin expands to to 40% over the next 5 years. This is well below Hamillton-Lane’s, who management has cited as P10’s clostest comparable publicly traded company.

I assume spending on acquisitons will grow at 20% per year from 2023 on out. As P10 gets larger, it will be forced to pursure larger deals in the PE space. It is difficult to predict acquisition expenditures ahead of time as they can be irregular and can vary in amount. Market wide high valuations can mean that PX may go through a drought like period where no acquisitions take place then go through a period where valuations are depressed and many acquisitions take place.

I assume a Net Debt position of $200 million in 2027. P10’s consistent, uncorrelated cash flows mean it can support a debt load that other companies with similar Cash Flow profiles cannot. I would be happy if this figure were higher if it meant a more aggressive buyback policy were initiated today.

I assume the shares outstanding figure will grow to 135 million in 2027. Despite recently beginning repurchasing shares, the intangible nature of the business means that some shares must be issued to keep insiders aligned. Many acquisition targets also demand shares in P10 as part of their consideration.

Risks

P10 has the unusual corporate structure of having co-CEOs. Robert Alpert and Clark Webb have been instrumental in the success of P10 in the past. In another company, my concern would be that this unorthodox structure would create tension between the two executives. I do not believe this is applicable for P10. Alpert and Webb have worked together long before P10 was created, at 210 Capital. I do not believe the two men would have begun building P10 together if their professional relationship were inharmonious.

A concern for potential P10 investors would the issue of Mega-Cap Alternative Asset Managers entering the space and begin competing with P10. I do not believe this is a major cause for concern or P10 holdings. Blackstone, KKR, and Apollo both manage hundreds of billions of dollars, and the middle market and lower middle market, where P10 primarily operates, does not offer enough potential AUM for move the needle. For a sense of scale, KKR manages $385Bn in FPAUM, Apollo manages $515Bn in FPAUM, Blackstone manages $881Bn in FPAUM, while P10 manages $18.5Bn. If Mega Cap managers do decide to enter the space, it may make more sense for them to acquire P10 as a valuable strategic asset rather than compete with it. Because P10 operates across many verticals, its acquirer would obtain a foothold in multiple middle market Private Capital verticals with one acquisition.

P10 financial performance is directly tied to its ability to raise FPAUM. FPAUM is very closely tied to the underlying performance of P10’s funds. If P10’s funds have an extended period of underperformance, it will adversely affect P10’s fund raising ability and, by extension, financially impact P10. If P10’s fund performance does deteriorate, there would likely a time lag before FPAUM’s raising was adversely affected in a material way. By carefully monitoring P10’s fund performance, the position can be exited before FPAUM is affected.

Closing Thoughts

I am writing this on the 1st of March 2024. Following a poor earnings report, P10 Holdings class B stock closed today at $8.33, a 10.4% decline on the prior days closing price, and a 21.6% decline in price since being posted to this blog.

The TSR of P10 Holdings since being posted to this blog is -20.3%, corresponding to an IRR of -17.1%. Frustratingly, this period of time saw major indices like the S&P 500 and Russell 2000 rise 27.8% and 14.0%, respectively. Shareholders who owned common stock during the period 13th December 2022 to today have both seen a material decline in the value of their capital invested in P10 and missed out on earning an attractive IRR by simply investing in the market. On a relative basis, it is by far the worst performing idea posted on this blog.

Perhaps most frustrating is the fact that there were warnings signs that not all was well under the hood. In no particular order, investors should have been concerned by:

·         The short report published by The Friendly Bear

·         Robert Alpert and Clark Webb stepping down as Co-CEOs

·         Other senior executives leaving

·         Decelerating organic growth (10% for Q3 2023 vs 17% for Q3 2022)

·         Significant increases in employee compensation despite declining top-line growth and languishing share price. (104% YoY increase for Q2 2023)

All of the above facts were known to me prior to the release of P10’s Q4 results yesterday. I made the mistake of assuming that P10’s prior history of creating value and for shareholders would outweigh these issues. I regard this as the worst kind of error on my part, an unforced error. The facts changed, I knew they changed, but I did not change my mind.

Although investors have rightly lost faith in the company, P10 Holdings still has the opportunity to be an attractive investment. Management seems keen to signal that they believe shares are undervalued. The Market Capitalization of P10 Holdings today stands at $975 million. They have authorised a share repurchase plan of $40 million and still have $10.6 million remaining on their old repurchase plan. Time will tell if their actions will match their words and we begin to see insider buying at these levels. I cannot imagine any prospective shareholder should have faith in current management without seeing significant insider buying on the open market.