A note: Life comes at you fast. Only a few hours after I published this post, P10 announced a major acquisition of a venture capital manager, Truebridge Capital Partners. The deal will provide a major uplift to P10’s earnings and free cash flow. I will prepare some sort of update.
P10 Holdings is Alluvial’s largest position. Clearly, I have a very high level of conviction in P10’s management, strategy, and operations. For the unfamiliar, P10 is alternative asset manager. P10 acquires the existing and future management fee streams of private equity fund managers. These fee streams are highly predictable and long-lived, and will grow as these managers increase assets under management.
P10 Holdings is a micro-cap unlisted stock with minimal trading volume, a short operating history, and a low float. The company is not SEC-reporting. Investors should be cautious when trading in P10 Holdings and all similar stocks. I make NO recommendation to buy, sell, or hold shares of P10 Holdings.
In April, P10 acquired its second private equity manager, Five Points Capital. The second quarter report was P10’s first to include details on the transaction. Notes to the financial statements reveal much about P10’s near-term plans. Here are a few of my impressions from the report.
- The acquisition goes a long way toward building scale. With the purchase of Five Points, P10’s run rate annual revenue goes from $49 million to $63 million. For P10 to be taken seriously as an asset manager and to achieve a valuation comparable to other public alternative asset managers, the company needs to continue adding revenue by acquiring multiple additional managers and management fee streams.
- Fund-raising continues despite the difficult macroeconomic backdrop. P10’s subsidiary RCP Advisors saw its RCP Fund XIV reach its final close in April, having raised $393.5 million. RCP Fund XV is off to a good start, raising $145.1 million for its first close in July. P10’s managers will introduce additional funds in coming quarters.
- The addition of Five Points improves both GAAP income and cash earnings per share, but it will take a little time for the true economics to show. The second quarter was burdened by legal and professional expenses related to the acquisition. Compensation expenses were also quite high in relation to revenue, again related to the acquisition. Once a few quarters go by and the integration process is complete, I expect both professional fees and compensation to return to historical baselines.
- The company is already planning for its next acquisition. A P10 subsidiary issued $61.3 million in convertible preferreds to fund the Five Points acquisition. In note 13 to the statements, the company reveals that one of the purchasers of these preferreds has the right to purchase another $15 million worth to fund another acquisition. All of the preferreds are puttable three years after issuance, but this put date is extended an additional two years if a qualifying acquisition is completed.
- Most exciting of all, P10 is planning to become an SEC-reporting, listed company. P10 has the right to convert all outstanding subsidiary preferred stock into common shares in a new public entity. Per the footnotes, “It is probable that the Company will go public prior to the triggering of the redemption feature on the preferred shares.” An up-listing in connection with a share offering would certainly be done in a manner that would preserve P10’s substantial tax assets.
All told, P10 enjoyed a successful quarter. Once acquisition-related costs are in the rearview mirror, I estimate the company’s free cash flow per share will be 30 cents. (26 cents assuming assuming all preferred stock is converted.) The company is clearly capable of financing another acquisition using cash from operations and additional external capital. I wholeheartedly support the company’s plan to reregister with the SEC and to achieve an exchange listing, which should result in much greater investor attention.
I continue to believe P10 shares are worth well over their current trading price given the company’s cash flow profile and management’s proven ability to identify and execute productive acquisitions.
Alluvial Capital Management, LLC holds shares of P10 Holdings for clients. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at email@example.com.
Wow – that was quick!
I like the $3.30 convert price on the convertible as you have to believe TrueBridge thinks that will be achieved in the not too distant future.
this is the most well timed blog post ever! congrats Dave
Turns out, it was!
Thanks for the write up, one question:
In 2019 annual report the income tax benefit is $10M, and the net income before taxes is $1.7M. Don’ t understand why they had those $10M when the net income before taxes is so low. I thought it must be just 80%of the net income before tax.
Liked very much the write up.
I listened to your podcast with Walker. I was disappointed that Walker did not cover the your fascination with negative working capital business models. To me this was the most interesting subject in your latest letter. I wish you would write more on the subject.
I’ll try to!
Any updated thoughts on PIOE.
Curious about the earning power, this year and next. Unclear where they are in the up listing. The acquisitions, may or may not have 3 years of audited financials to allow a public offering. It would seem that an analyst or two would pick up coverage if a brokerage house managed/comanaged the secondary offering. The insiders could agree to sell their shares in the green shoe to increase float