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Edited Transcript of PEY.L earnings conference call or presentation 12-May-20 9:00am GMT

ST PETER PORT May 12, 2020 (Thomson StreetEvents) — Edited Transcript of Princess Private Equity Holding Ltd earnings conference call or presentation Tuesday, May 12, 2020 at 9:00:00am GMT

Ladies and gentlemen, welcome to the Princess Private Equity Holding Q1 2020 Investor Conference Call. I am Alessandro, the Chorus Call operator. (Operator Instructions) And the conference is being recorded. (Operator Instructions) The conference must not be recorded for publication or broadcast.

At this time, it’s my pleasure to hand over to Mr. George Crowe. Please go ahead, sir.

Good morning, ladies and gentlemen. Firstly, I hope that you and your families are all safe and well. Many thanks for joining us for the Princess Private Equity Q1 2020 Update Call. My name is George Crowe. I’m a member of management in Partners Group’s Client Solutions team in London and responsible for Investor Relations for Princess. I am also joined today by Felix Haldner, a partner at Partners Group and a Director of Princess Private Equity. The presentation for this morning’s call can be downloaded from the company’s website in the Investor Relations Webcast and Live Events section. A recording of this call will also be uploaded to the website afterwards.

During the call, we will provide an update on the company’s development during Q1 2020. There will also be an opportunity for Q&A at the end of the call.

And with that, I pass over to Felix, who will guide you through today’s presentation.

Good morning. Very warm welcome to all of our shareholders present at this call. I’m happy to report about a truly eventful quarter and then also the subsequent period until today in this — in the next, maybe half hour or so.

I’ll follow the presentation, you could download from our web page. And I’m actually on the overview on Pages 2 and 3. To remind everybody, the strategy of Princess Private Equity Holding is to provide shareholders with access to private companies by investing in Partners Group’s global private equity deal flow.

As a shareholder, you will know from previous calls that Partners Group invests with a so-called relative value approach, which aims to identify the most attractive investment opportunities throughout the cycle. So as a result, in recent years, in an investment environment where valuations for new investments are at elevated levels, our focus has increasingly been on those companies that benefit from long-term secular growth drivers, like demographics, health care, and as a consequence, Princess’ portfolio has a relatively low exposure to more cyclical sectors.

In addition to providing capital, we actively seek companies with clear opportunities for Partners Group to create value and to improve the business in which we invest. So not — it doesn’t come as a surprise that we find our companies in the middle market, maybe sometimes in the upper middle market, as opposed to in the very large market, but also as opposed to very, very small companies, where there is a disproportionate effort to bring companies up and running.

One of the key value creation initiatives we implemented across our portfolio is so-called platform strategies, where we acquire a market leader in a fragmented market and then consolidate the market by acquiring smaller players. We believe this strategy is well placed to benefit also in the current environment as smaller companies become more open to being acquired by a larger stable company.

And to remind you, in relation to ESG factors, Partners Group was one of the first private market investment managers to sign the United Nations Principles for Responsible Investment back in 2008. We take our responsibility as business owners very seriously and aim not only to deliver attractive investment returns for our clients, including Princess shareholders, but also to care for our stakeholders, including the employees of our portfolio companies. I’ll come to that in more detail as I’ll report to you about the Partners Group hardship fund we established to support, particularly employees of our portfolio companies that do not benefit from a social security or government-related bank program in — particularly in times of furlough courts abide.

In terms of resources, our company — well, Princess benefits from Partners Group’s global private equity platform of our 100 private equity investment professionals, just direct investment specialists, and over 50 industry value creation or operating professionals and then, of course, a dedicated team of capital markets professionals, legal support, tech support and other support functions.

One area of increasing focus is governance and Board composition. To remind you, I mean we are now — we are a direct investment company, about 85% of the portfolio is direct investments. And the vast, vast majority, over 70%, is lead control positions by Partners Group and its managed funds. So we take a lot of emphasis on having the right Board in our portfolio companies. We believe that private equity has an inherent advantage over publicly listed companies.

We have also a supportive initiative. That’s basically the network of over 300 industry experts and over 60 external operating directors. So these are individuals that have deep industry experience, which they then contribute during either our due diligence process or, in many cases, they invest their own capital alongside Partners Group and our clients and sit alongside our senior investment and IVC professionals on portfolio company Boards.

And having this strong leadership teams in place has enabled Princess portfolio companies to take decisive actions to mitigate the impact of the pandemic, and I come to that company-by-company a bit later in my presentation. But also importantly, it helped us to prepare for the relaxation of lockdown measures and the reopening of the economy in those countries where applicable.

Noteworthy to say, on the performance side, despite the recent volatility in equity markets and the associated mark-to-market downward regulations of a number of portfolio companies, Princess continues to outperform public equity markets, with an annualized net asset value outperformance of 6.1% per annum versus the MSCI World over the previous 5 years.

This brings me in more detail to the performance figures on Page 5. This is the first quarter of 2020. The NAV declined by 14.8%, a record 14.8%, actually, during the first quarter. We value our investments using a mark-to-market approach based on the valuations of comparable companies and consequently reflected the declines in public markets during the first quarter. We’ll have a separate page on the valuation methodology in detail.

The share price also declined by roughly 18% as investors seem to have factored in expectations of lower March NAV.

Now the markets have recovered some ground in the second quarter, in April and beginning of May, which else being equal, would have a positive impact again on multiples, if the portfolio was revalued again today. So it goes both ways.

If we consider the impact on the portfolio, the picture, as always, is mixed. In the short term, some companies will face challenges. Of the surprise, these are the companies that were basically prohibited from working, so suffered from the lockdown, including nurseries or restaurant chains. However, over the long term, we remain positive on the prospects for the portfolio and remain confident to reach our targeted returns for our investments. We actually expect that the portfolio will prove more resilient than the broader market due to the focus on companies and subsectors within benefiting — who benefit from secular growth drivers, which are typically less dependent on the economic cycles.

We expect a slowdown in transaction volumes for the coming months, as buyers and sellers wait for greater clarity over the impact of the pandemic on companies and the broader economy. Having said so, we are working on a number of transactions, while basically continuing to work on a number of transactions we have started earlier this year. However, as I said, it’s not likely that seller and buyer’s price expectations immediately meet in the next couple of weeks. So this can take a bit longer. This is also a bit our experience from the global financial crisis where it took months before transactions in a greater scale took place again.

We expect, however, early opportunities for add-on acquisitions by existing portfolio companies. I remind you, I mean, companies like Foncia have added 150 companies since our ownership 3 years ago, and most other companies have a platform strategy as well. So these times of uncertainty following the lockdown typically trigger smaller shop owners to consider a transaction.

The emphasis — the main emphasis, however, particularly in March and then in April, most of the April, at least, was on portfolio protection. So we have moved quickly to support the management teams of our portfolio companies. I remind you, we are the majority owners. We sit on the — we dominate the Board. We sit in the management and we advise the teams. So first priority was health and well-being of the employees. There have been lots of measures being implemented to ensure that employees are protected and are able to work remotely. There’s a lot of benchmarking and to learn from best method from others.

As I alluded to, we have established a portfolio employee support fund to provide financial support to the most financially vulnerable employees. Our portfolio companies has donated or raised about EUR 10 million among Partners Group partners and employees, which then has been doubled up by Partners Group’s balance sheet. And we have already allocated about EUR 7 million to portfolio companies’ hardship initiatives.

We have prepared detailed cash flow forecast for all portfolio companies to ensure that companies have sufficient liquidity under various scenarios. We at Partners Group, we don’t look into the crystal ball. We don’t know what’s the future. We just work in scenarios. And based on this analysis, we have identified a number of companies, which depending on the scenario, we expect will require additional liquidity. And when this cannot be met through, let’s say, cost reductions, credit facilities at portfolio company, we, that is the funds investing in these portfolio companies, and this includes Princess, will inject more equity. So consequently, we believe that the preservation of liquidity at the portfolio company levels, which then — but also translates to the balance sheet of Princess, that this is the most prudent approach that — to ensure that the fund — Princess is able to meet any equity requirements from portfolio companies.

Now this portfolio assessments and liquidity forecast and a lot of other measures, this is a dynamic process. Whilst we started doing this with high-intensity in March, we continue to do so on a biweekly basis. And so, for example, the liquidity outlook that led us to our RNS statement at the end of April is already a bit aged. So we have better information on a biweekly basis. So again, today, the IC, the global IC and the specialist ICs debate, get — reported about company’s developments and performances and updated on potential needs. So bear with us, we would like to have a full picture in the next couple of weeks of the lockdowns and then the reopenings before we can be very bold on the Princess level, particularly when it comes to declaring — distributing dividends.

Nevertheless, we expect to pay — with the forecast we’ve made so far, we expect to pay a reduced total dividend of not as less than half of last year, which would be equivalent to a yield of over 3% on the current share price. In doing so, we acknowledge we are taking today — as of today, we’re taking a conservative approach, but we believe it’s the best to be cautious while the outlook remains uncertain. I’m sure I’ll get questions in the Q&A to that.

On to Slide 6, you have basically an overview as to what fair value approach means in practical terms. So for the direct equity positions, which represent over 85% of portfolio value, our valuation professions applied the multiples for comparable companies to trailing 12 months EBITDA. We also factor in private transactions — for private market transactions in the period. However, as you can imagine, there have been less or hardly any. And so by that, the public market multiples have a greater — had a greater weight in this quarter than maybe in other quarters.

Please also note that the valuations do not forecast forward-looking EBITDAs and the impact of COVID and the lockdowns on EBITDA, which will be then reflected in the next quarter valuations and later in the year. So all parts of the portfolio were mark-to-market at the end of March, including third-party funds and debt overall, albeit it’s — that markets have already partially recovered during Q2. So it now remains on your own minds as to how you interpret this for the next couple of weeks and months. But as public markets have recovered, you can expect recovery also in the multiples as we apply them.

On the other hand, as some of the companies will suffer — will have suffered on the revenue side, maybe on the EBITDA side on — from the lockdown, there might be a countering effect. Not to forget that the companies as such, as you will see again in the general metrics, are basically fast-growing companies. So you can expect also to see some of this effect in the valuations in the next coming months and quarters.

On the more historic side, that’s on Page 7. Well, we lost basically a year of performance in the first quarter, but still remain ahead of public equity markets over the 1-, 3- and 5-year period.

On the discount development on Page 8, Princess has fared considerably better than our peers, which may be a reason, well for — well based on diversification, global approach and other reasons.

On the Page 9, here are the key figures of Princess after the first quarter. We had a cash position of EUR 30 million. We expect, actually following the receipt of the proceeds from the sale of Action, which is going to happen in the next 4 weeks or so, that we can repay the credit facility that has been increased in the period from EUR 50 million to EUR 80 million, and also fully drawn.

Commitments continued to decline. Of the total of — the EUR 72 million, EUR 25.7 million related to third-party funds. These commitments are extremely mature, relating to — which is in 2010 and earlier, and are actually not expected to be called in any material amount. Note that the remainder, as I alluded to, we typically do not expect a lot of transactions to happen in the short-term after an event like the COVID.

On Pages 19 — pardon, Pages 11 and 12 is a kind of a sector overview and some observations as to how companies in these sectors have fared or are likely to fare in the next couple of weeks and months. So on the consumer, not surprisingly, while nonessential physical consumer activities were down and in some countries are still down, in many markets, particularly where there were confinement measures, and as opposed to the more retail channels, particularly food, was benefiting.

On the education side, it’s a bit mixed picture. The more nursery type of education, I mean, were shut down — was just shut down. And there wasn’t much of e-learning, as you can imagine. However, with — more in the primary and secondary schools, like the international school’s partnership, basically business continued. However, from distance.

In the health care sector, there were a number, actually, of companies that had a short-term hit again because of the lockdown measures. Nonessential, so to free beds for urgent cases and so on. So elective treatments were basically postponed. And other sectors directly — well, at least, if not benefited, then certainly had a role in the hottest phase of the COVID crisis like, for example, the French laboratory, Cerba, or the — or PCI Pharma Services as a logistics provider to the health industry.

On TMT, a mixed picture again. We observed some degree of resilience, often due to the recurring revenue models and mission-critical offerings. Of course, whoever hasn’t had an online strategy so far also will have thought about it, then maybe starting implementing it or, at least, this is going to be at the case in the next couple of weeks and months.

On financial/business services, the 2 companies have fared excellently, though some of them couldn’t avoid a market — mark-to-market downgrade. However, not much touched.

Whilst in the industrials, there’s a — typically depending on the product and on the confinement measures, they’ve been more severe — most severely been impacted.

Now in more detail, I’ll cover the revaluations for the 10 largest portfolio companies. So as I said, these are mark-to-market revaluations and not representative of the trading of the companies. So just one example, this Techem metering company, this is the leading German-based sub-metering and energy contracting company, had actually a good performance in the period, with billing production stable. Yes, there was limited installation of new devices, basically only in newly built buildings as opposed to already occupied ones or in else — just in urgent cases. Sales force is focused on telesales with positive lead generation, but certainly also lower conversion rates. And we expect actually a very minimal impact on EBITDA.

So — and, of course, the management has taken some measures, including a cost measures. They had — are also, in a precautionary way, like most of our companies actually, drawn revolving credit facilities just to be liquid. As the last financial crisis, at least, showed that the — that problems popped up at that end, at the financial sector so — to be prepared. So the downward valuation of Techem is purely due to comparable companies that are in the public market.

With the Permotio, that is also the trading of the International Schools Partnership. As you remember, this is an investment vehicle for — to create international private schools through a buy-and-build strategy. So we own and operate a platform of 46 schools across Americas, Europe, Middle East and Asia. Permotio has actually temporarily closed all 46 schools in response to government’s social distancing measures. However, despite school closures, the financial impact to date has been very limited. The one reason is as simple as the tuition fees are paid in advance. So schools have been able also to deliver their curricular through distance learning. As you remember, one of the value-creation initiatives implemented has been the development of a digital platform. It’s called the Learning Hub. It has actually been designed to allow collaboration between schools around the world, and this has turned out to be the perfect vehicle to deliver distance learning during the crisis.

Now again, the downward adjustment is a mark-to-market, so public comparables in — basically in March. Having said so, we do expect some — reasonably, we do expect some negative trends as well, because over the medium term, there could be a negative impact on enrollments and maybe some ancillary fees, particularly if schools are unable to reopen for an extended period. So we also — while the management — the Board and the management decided to proactively lower the current year’s tuition fees or basically the reimbursement in lieu of the reduced level of services, the parents and the kids receive by the government measures on the lockdown.

Action, probably not a lot to say here. This has not moved. We have received the dividend this quarter. And basically, the valuation is as — the price was determined on the sales and purchase agreement — purchase sales agreement with Hellman & Friedman, which is expected to close in the next 4 weeks or so.

At GlobalLogic, the leading global software development company, the impact on — from COVID to date has been very limited due to the — well, company’s somewhat resilient business model. So most of the company’s contracts are long-term in nature, and the majority of the company’s software development services can be performed remotely. Close to 100% of the company’s 12,000 employees, actually, globally were able to work from home, as you would expect from such a company.

Revenues are predominantly linked to project-based, long-term contracts and consequently, there has been no immediate impact on profitability. Now an assessment of the potential impact on new project is being undertaken as clients, which have been heavily hit by the crisis, may cut R&D and may cut CapEx spend. So we expect to see a delay in launch of large projects. But in the medium term, we do not see — foresee a materially negative scenario.

The company is liquid. So it’s in a healthy liquidity position with large — with low leverage, sorry, and low covenant breach.

At Foncia, again, a downward mark-to-market valuation at the property management, real estate services company, with around 600 branches located throughout France, Switzerland, Germany and Belgium by now. So it’s a very resilient sector to date as the majority of the revenues are from property management activities, and they are recurring. So certainly, a slowdown in the noncore activities, such as brokerage and rentals, particularly holiday rentals.

Again, luckily — well, we implemented a — as one of the value-add initiative, implemented a digitalization project. When we acquired it, it was largely paper-based. So we invested significant resources towards — in building an in-house software solution. And now, as a consequence of this, most employees have been able to work remotely. There have been some cost-reduction measures. There have been some employees that have been put under temporary unemployment under government schemes or insurance schemes where applicable.

So the long-term investment base remains absolutely intact. We also see opportunities for more offensive measures, actually. There’s — the market consolidation, we are continuing to lead. So we have — as I said, we have executed over 150 small tuck-in acquisitions in the last 3 years and are bound to continue. So these are actually — typically at an average enterprise value to EBITDA amount of about [6.5]. And by that, averaged down our purchase — our original purchase considerably by now.

Now this is our problem child. This brings me to KinderCare Education. It’s the largest for-profit provider of early childhood education in the U.S. It operates 1,500 centers. And as we — well, in beginning of May, there were still about 400 — there were about 400 KinderCare centers open, but also 1,100 closed. So the open ones were basically to provide childcare for essential workers, including nurses, health care employees, in general, but also army, security personnel. But the remainder had to be closed down temporarily. Now the center closures are expected to have a material impact on 2020 sales and earnings and so why the cost reduction plans have been implemented.

Now, of course, childcare is going to be a crucial part of the reopening of the U.S. economy, and we expect this business to ramp up fairly quickly. Once restrictions are lifted, the parents are able to return to work.

Just the business model in the U.S. is that, typically, tuition fees are paid on a weekly basis, maybe on a monthly basis. And you can imagine, if there is no fees coming in, there’s still some costs running, including for rent, maintenance. There are some salaries. And so by that, this is a company where we observe very closely liquidity needs, and where it’s probably not too difficult to imagine that there is also some need to support, again depending on the scenario and how severe it’s going to be, how long the lockup is and how quickly they can ramp up again.

On Fermaca, this is the operator of gas infrastructure in Mexico. Whilst the energy was hit hard, Fermaca, who was — whilst energy in the name, its energy infrastructure. So the market generates revenues primarily through the sale of capacity, actually, of pipeline capacity on the U.S. dollar-denominated take-or-pay contracts, with fixed prices and no volume exposure. So there has been actually very, very little, if at all, impact by now. So there are no projected liquidity or covenant issues.

On PCI Pharma Services, it’s a provider of outsourced pharmaceuticals services, it operates in a resilient sector and has only suffered marginally to date. No significant disruptions to operations so far. And it’s — well, it’s also actually ensuring a supply of critical drugs for many patients. So PCI is also supporting the supply of several drugs used to treat conditions arising from COVID-19. So management and our team continues to monitor the company’s liquidity position. However, again, we do not currently see or project liquidity or covenant issues.

As Vishal Mega Mart, that’s be the franchisor and wholesale supplier of apparels and general merchandise and consumer goods in India. Now there was a national shutdown in India until May 3. And whilst about 90% of the stores were still open for business, sales could — only detected on food and groceries, which is, unfortunately, in this case, is only 25% of revenues.

And, of course, social distancing meant that, for example, not more than 20 to 25 people can stay in the same store. Some stores were only allowed actually to do home deliveries, depending on the state. And so not — it comes — it doesn’t come as a surprise that gross margin is lowered, with the increased sales of lower-margin food and groceries. So there were cost liquidity measures. There were ongoing discussions of — for a drawdown of the revolving credit facility. And this company is also expected to need some additional capital just to bridge the time until things normalize.

AMMEGA, that’s the global manufacturer in polyurethane transmission belts and the lightweight conveyor belting. So yes, it has been classified as an essential service in most of the countries’ directive because food is the largest end market. So AMMEGA stayed in operations across all regions, except 3 sites in Italy and one in India that were temporarily closed, suspended. So clients were then served from inventory through logistics centers.

And also, the Chinese operations are back by now at 100% utilization since — actually since end of March. We didn’t have supply chain issues, just a slight increase in logistics costs. So AMMEGA is focusing on its e-ordering platform, particularly for its replacement business, which is about 75% of the total. There’s cost reduction measures, there are liquidity initiatives and, again, a precautionary drawdown of the revolving credit facility.

Finally, on this list, Techem, I mentioned. What you don’t see any longer on the list of the 10 largest is actually Form Technologies. Form Technologies, the global manufacturer of customized metal components, it has dropped from place 8 in February to place 28, so dramatically has been revalued about by 2/3. So firstly, due to multiple contractions according to market observation, but then also the company’s Dynacast division continues to be negatively impacted by the softness in the global automotive industry, and then on top of that, from customers in the oil and gas sector. So a perfect storm for Form. So macroeconomic indicators continue to show weakness in these industries, particularly automotive, as sales in the U.S., China, Europe remained, I mean, considerably behind prior years. It now constitutes 1.2% of net asset value. Its total value over — paid in is down at about [EUR 6.4 million]. I’m sure we’ll have to discuss this in more detail in the coming quarters as we work with the company to recoup some value.

Now these are the largest companies. Now there are also company initiatives to fight the pandemic, actually. So on to Page 14, you see, again, Cerba, the French laboratory, was the first private medical diagnostic provider of tests in France and Luxembourg. And it entered into partnership with local regulators, corporates, to support them in the testing.

PCI, I mentioned.

Civica interestingly developed a COVID-19 app. The first app of this kind developed in the U.K. and Ireland, developed and launched in less than 10 days, with functions include interactive symptom checker, chatbot, notifications and so on.

On the Q1 realization activities. Noteworthy, we received the dividend from Action and ongoing down sales of shares on Ceridian. The legacy portfolios contribute and some sale of senior loan and debt. And as mentioned more than once, we expect to receive the proceeds from the sale of Action later — in the next couple of weeks.

On the investment side, there was some activity, particularly EyeCare Partners. I come to that in more detail on the next slide. eResearch Technology, that’s a co-investment alongside lead investors Astorg and Nordic Capital. eResearch is a provider of online software application services that enable the pharma, biotech and medical device industry to collect and interpret cardiac safety and clinical data more efficiently, particularly during clinical trials. And so the investment is an opportunity to gain exposure to a company with a leading market position, in a growing resilient segment with high barriers to entry.

Finally, Allied Universal, that’s not an unknown to Princess and to us. Formally known as Universal Services of America, it’s a U.S.-based provider of facility, security services. So previously was invested in the business, between ’13 and 2015 when Partners was the majority owner and then sold the controlling equity stake to Warburg Pincus. So Princess now, with the current transaction, we’ll reinvest in Allied Universal through a new vehicle managed by Warburg Pincus. So through its initial investment, Partners Group and then Warburg, Allied has basically led an industry consolidation in the U.S. and now expanding to Central and Latin America and also to the U.K.

Finally, AMMEGA, is basically an add-on investment. We used the proceeds, the funding to finance the acquisition of Midwest Industrial Rubber, the largest, actually, lightweight belting fabricator and value-added distributor in the U.S., with 29 locations and serving many, many blue-chip customers. So this will help us to further penetrate the market. So it is basically a milestone for AMMEGA for the expansion in the U.S. market and the key value creation initiative, which have been part of the investment thesis.

Finally, EyeCare Partners. I alluded to that in the last quarterly call. So we invested EUR 13.8 million. It’s the largest vertically integrated medical vision services provider in the U.S. So it has a full scope of medical optometry and ophthalmology practices in more than 500 locations across 15 states. Now, as alluded before, on the COVID and lockdown measures, some of them were nonessential. By that, we suffered by — well, by just closure. However, this has — we are now — we have now opened the clinics again gradually, actually, and expect actually that our business case, the underwritten business case, is not affected by this crisis.

So what are we going to do in terms of value creation? We will work closely with EyeCare Partners to support, particularly its platform, M&A activity, to enter new markets, expand market reach, scale up and so on.

This brings me to the overview on the portfolio allocation. There, the picture remains basically unchanged. We are broadly diversified. The large retail portion in the doughnut diagram is basically Action, which is going to go very soon. And on the education side, it’s basically, it’s Permotio, Guardian and KinderCare.

I would like to bring your attention to the portfolio metrics on the Page 19. So I just want to highlight, while these figures still look great, they do not reflect the impact of COVID-19, which we will then be over, obviously, in the next couple of months. However, I’m confident that compared with the broader economy, we still will look much better or still look great. But also, I’d like to point you to the fact that the balance sheets of portfolio company levels are fairly robust, with capital structures comprising close to 60% of equity.

On the next pages, you will see the largest direct investments. I have covered actually most, if not all of them. And by that, this brings me to a summary. I realize it has taken me a bit longer, but the long lockdown has basically helped my voice to sustain a bit longer.

So in summary, we have a quarter that was basically, I would call it, a mark-to-market one. Although we have already seen public markets partially recover in the last — in April and in May, we expect to see the impact of COVID-19 crisis in the earnings of our companies during the quarters are hit but also believe that the situation is manageable. There are a number of scenarios where our investment teams are varied, if not — or, at least, very careful when it comes to liquidity position of a number of companies. However, there are the more base case scenarios where we are very confident and also are very, I mean, confident that there is a lot of upside, particularly for the platform companies, which are actually the majority of our portfolios.

So we see potential for offense, and we also plan to capitalize on the opportunity to even accelerate buy-and-build strategies. So as an investment manager, we remain very confident on the long-term outlook for the portfolio. However, very cautious on the more — the next couple of months in terms of how the lockdown measures and the reopening, working as to how they affect the numbers of our companies.

So we thank shareholders for the continued trust. And by that, I’ll hand back to George, the operator, and then to the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from [Gerardo Berman] from [Rogerman Salaries Office].

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Unidentified Analyst, [2]

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Yes. My question is, it was mentioned a few times, the sale of Action, and I think it was announced in November last year. And now we’re expecting EUR 80 million. And my question is, how confident are we that the money is really arriving?

Question two, if the money would not be arriving, would we then continue to sit on our participation to Action? Or what would happen?

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Felix Haldner, Princess Private Equity Holding Limited – Director [3]

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We are — there’s no sign whatsoever that we shouldn’t — that Hellman & Friedmen wouldn’t comply with the contract. So we will have the money in the chest for the next 4 weeks. Now risk managers, also at our end, of course, work on scenarios. Now I’m not completely sure what the scenario is in terms of ownership or continuing ownership. I mean we have a contract. This needs to be just, I mean, settled. And so in the next 3, 4 weeks, I think we will be out of doubt.

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Operator [4]

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The next question comes from [Charles Murphy] from [Melbourne Investments].

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Unidentified Analyst, [5]

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Two questions. What sort of multiple compression did the portfolio suffer over Q1? And then how much of your portfolio performance do you recon relative to markets is a function of the mix of sectors’ exposures versus actually just the individual companies?

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Felix Haldner, Princess Private Equity Holding Limited – Director [6]

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I wonder, George, whether you have a number for the multiple compression over the quarter?

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George Crowe, [7]

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I mean so it’s very much asset-by-asset. We went through — we looked at comps. So there are actually companies where rather small number of companies where the multiples didn’t move, and there were some where it significantly moved. So I think an average figure probably doesn’t really give that much insight into the portfolio.

What I would say in terms of public markets, look, I mean again is this portfolio is really not representative of what you see in the public markets. So we do not spend a lot of time analyzing, at a portfolio level, how did this move relative to the market. Again, this is, as you know, very much bottom-up. And the exposure to sectors like education, like technology, like health care, clearly, if we do enter an environment of lower economic growth, these are resilient sectors that we would expect to outperform the market. But in terms of kind of analyzing the performance quarter-by-quarter, it’s not something our teams focus a lot of their time on, to be quite frank.

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Felix Haldner, Princess Private Equity Holding Limited – Director [8]

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Okay. Excellent. So…

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Unidentified Analyst, [9]

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So I’ve got one follow-up question. So looking at your historic sales and EBITDA growth, how much of that was driven by M&A and consolidation versus organic growth? My thought behind it is, there will be a slowing of deal activity and so it’s sort of just trying to sort of underpin what the organic growth should look like and then go from there.

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George Crowe, [10]

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Yes. So when we’re doing analysis, what we actually do is we remove the impact of material M&A. So if the large acquisition has caused a significant increase in EBITDA, we would adjust to that. The type of M&A that it does include is where a company, and maybe to give you a tangible example, something like Foncia, which executes sort of more or less one small tuck-in acquisition in the French property management market each week. Those acquisitions are typically funded from free cash flow, in which case that’s a fundamental part of how that business operates. So those are included in the figures.

Now as Felix mentioned earlier on, that type of M&A, we actually believe can continue and potentially, for the right asset, even accelerate. So actually, our deal teams are already having discussions with a number of smaller competitors within certain industries that, having gone through this pretty challenging period of lockdown, are now a bit more receptive than they previously were to being acquired by a large and better resource parent. So actually, I would say those figures, they’re not unrepresentative and a — is not a huge factor. And I think look, our portfolio is certainly well positioned with good EBITDA growth coming into this COVID-19 crisis period.

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Operator [11]

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The next question comes from [Nick Dent], a private investor.

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Unidentified Participant, [12]

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Just wondering how confident you are about the cash position. If we do have a fairly prolonged recession, many of your investing companies may need further cash. That was the first question.

And the second question, if I may, is I see that the average net debt-to-EBITDA, that ratio, I think, 5.2x. Is that a multiple that you’re comfortable with, bearing in mind the climate at the moment?

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Felix Haldner, Princess Private Equity Holding Limited – Director [13]

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Thank you. Maybe I’ll start with the cash in the portfolio. I mean as I alluded to, we are doing this analysis bottom-up on a biweekly basis, in the IC discussed and forecast. I can tell you that the forecast has considerably changed to the better, actually between the time we did it first in March and most recently, late April, actually today, that’s being the next. So we are confident — I mean as confident as we can be, but we are sufficiently confident to, at least, release a news to shareholders and the public that we believe that, at least, half of the dividend should be reasonably — reasonable to be paid this year. And as we observed again, the needs of companies, particularly now, interestingly, the April results and then maybe the results in May as — particularly as a consequence of the reopening of a number of markets, will be particularly interesting than for the further forecast.

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Unidentified Participant, [14]

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And then the second one was about the net debt-to-EBITDA multiple of 5.2x. I was wondering whether that’s a concern?

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Felix Haldner, Princess Private Equity Holding Limited – Director [15]

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Yes. We are in the leverage buyout business. And debt — the use of debt is a tool, which we use like everybody else. Having said so, it is — we feel comfortable because the investors in these companies are funds like Princess and our institutional limited partnerships that have typically funds available in times of need. So by that, the answer is, I think, yes, it is sustainable, particularly as the companies we buy have just an extraordinary growth. And this is basically the — this is the main difference to the general economy, where you just find lower debt levels, but also companies, on average, that have a way lower growth, if at all.

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Operator [16]

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The next one is a follow-up question from the line of Charles Murphy from Melbourne Investments.

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Unidentified Analyst, [17]

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Apologies for coming back. 7% of the portfolio is in debt investments. Is that sufficiently liquid that will provide a source of funding, should that be an unanticipated or unexpected demand for additional investment?

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George Crowe, [18]

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We don’t model that. That’s not considered liquid. It’s part mezzanine, part first lien. In normal market environments, it is possible to liquidate first lien debt over the course of the few weeks. But probably in today’s environment, you would not get an attractive price for doing so. But now, we just consider that as a nonperforming debt. And yes, I’d say it’s not reflected in our liquidity projections.

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Operator [19]

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(Operator Instructions) We have no other questions at this time.

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George Crowe, [20]

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Okay. Well, in that case, we thank you for your time today. We look forward to providing shareholders with further update on the development of Princess and its portfolio, following the publication of the company’s interim results.

So with that, I thank you once more for your time, and wish you all a good day. Goodbye.

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Operator [21]

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Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.

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