Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis relates to the activities and operations of P10. As used in this section, “P10,” the “Company”, “we” or “our” includes P10 and only its consolidated subsidiaries. The following information should be read in conjunction with our selected financial and operating data and the accompanying consolidated financial statements and related notes contained elsewhere in this quarterly report on Form 10-Q. Our historical results discussed below, and the way we evaluate our results, may differ significantly from the descriptions of our business and key metrics used elsewhere in this quarterly report on Form 10-Q due to the effects of acquisitions which occurred during the year ended December 31, 2021, but may not have had a material impact on our statements of operations due to the limited period of time which they were included in our consolidated results. This quarterly report reflects the historical results of operations and financial position of P10 Holdings, our predecessor for accounting purposes, prior to the Reorganization and IPO. The following discussion may contain forward-looking statements that reflects our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this Form 10-Q, and in our annual report on Form 10-K for the year ended December 31, 2021, particularly in "Risk Factors" and the "Forward-Looking Information." Unless otherwise indicated, references in this Quarterly Report on Form 10-Q to fiscal 2022 and 2021 are to our fiscal years ended December 31, 2022 and 2021, respectively.
Business Overview
We are a leading multi-asset class private market solutions provider in the alternative asset management industry. Our mission is to provide our investors differentiated access to a broad set of solutions and investment vehicles across highly attractive asset classes and geographies that generate superior risk-adjusted returns. Our success and growth have been driven by our position in the private markets’ ecosystem, providing investors with specialized private market solutions across a comprehensive set of investment strategies, including primary investment funds, secondary investment, direct investment and co-investments and advisory solutions. As investors entrust us with additional capital, our relationships with our fund managers are strengthened, which drives additional investment opportunities, sources more data, enables portfolio optimization and enhances returns, and in turn attracts new investors.
During 2020, we completed several acquisitions to expand the private market solutions available to our investors. On April 1, 2020, we completed our acquisition of Five Points to serve as our Private Credit solution (which also offers certain private equity solutions). On October 2, 2020, we completed our acquisition of TrueBridge Capital Partners, LLC (TrueBridge) to serve as our Venture Capital solution. On December 14, 2020, we completed our acquisition of 100% of the equity interest in Enhanced Capital Group, LLC (ECG) to serve as our Impact Investing solution. These acquisitions were accounted for as business combinations, and these entities are reported as consolidated subsidiaries of P10. Additionally, on December 14, 2020, we completed our acquisition of approximately 49% of the voting interests and 50% of the economic interests in ECP, which is a related party of ECG. As we only acquired a non-controlling interest in ECP, it is reported as an equity method investment in accordance with ASC 323, Equity Method and Joint Ventures (“ASC 323").
On September 30, 2021, we completed the acquisitions of Hark Capital Advisors, LLC (Hark) and Bonaccord Capital Advisors, LLC (Bonaccord) to further expand on solutions available to our investors. The effect of these acquisitions is reflected in our Consolidated Balance Sheet at December 31, 2021 and the Consolidated Statement of Operations from September 30, 2021 to December 31, 2021. These acquisitions were accounted for as business combinations and are reported as consolidated subsidiaries of P10.
On October 20, 2021, P10 Holdings, in connection with its IPO, completed a reorganization and restructure. In connection with the reorganization, P10 became the parent company and all of the existing equity of P10 Holdings, which is a wholly owned subsidiary of P10, and its consolidated subsidiaries, including the convertible preferred units of P10 Intermediate were converted into common stock of P10. The offering and reorganization included a reverse stock split of P10 Holdings common stock on a 0.7-for-1 basis pursuant to which every outstanding share of common stock decreased to 0.7 shares. Net proceeds from the sale of our Class A common stock, after deducting underwriting discounts and commissions but before expenses was approximately $129.4 million. Of the proceeds, $86.8 million was used to pay down outstanding term loan debt, $12.4 million was used to pay off RCP Seller's Notes, $1.1 million was used to cash settle certain option awards, $1.0 million was used to fund the dividend on P10 Intermediate's preferred stock and $4.5 million was used to pay expenses incurred in connection with the offering.
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Following the reorganization and IPO, P10 has two classes of common stock, Class A common stock and Class B common stock. Each share of Class B common stock is entitled to ten votes while each share of Class A common stock is entitled to one vote.
On December 22, 2021, P10 entered into a $250 million credit agreement with a syndicate of banks, including JP Morgan Chase Bank and Texas Capital Bank as joint lead arrangers and bookrunners, which provided for the Term Loan in an aggregate principal amount of $125 million and Revolver Facility in an aggregate principal amount of $125 million with a four year term and an additional $125 million accordion feature. The variable interest rate is 210 basis points over the SOFR. Borrowings were used to pay down the outstanding balance under the previous credit facility with HPS and related transaction expenses, pay off Seller's Notes related to the RCP acquisition and to finance working capital needs and for general corporate purposes. During the first quarter of 2022, the Company paid down $25 million of the outstanding balance under the Revolver Facility and as of June 30, 2022, the outstanding balance was $65.9 million. In July 2022, the Company paid down an additional $12 million of the outstanding balance under the Revolver Facility.
As of June 30, 2022, our private market solutions were comprised of the following:
•Private Equity Solutions (PES). Under PES, we make direct and indirect investments in middle and lower- middle market private equity across North America. PES also makes minority equity investments in a diversified portfolio of mid-sized managers across private equity, private credit and real assets. The PES investment team, which is comprised of 38 investment professionals with an average of 24+ years of experience, has deep and long-standing investor and fund manager relationships in the middle and lower-middle market which it has cultivated over the past 20 years, including over 1,800+ investors, 200+ fund managers, 400+ private market funds and 1,900+ portfolio companies. We have 42 active investment vehicles. PES occupies a differentiated position within the private markets ecosystem helping our investors access, perform due diligence, analyze and invest in what we believe are attractive middle and lower-middle market private equity opportunities. We are further differentiated by the scale, depth, diversity and accuracy of our constantly expanding proprietary private markets database that contains comprehensive information on more than 4,900 investment firms, 9,000 funds, 43,000 individual transactions, 29,000 private companies and 260,000 financial metrics. As of June 30, 2022, PES managed $10.4 billion of Fee Paying Assets Under Management ("FPAUM").
•Venture Capital Solutions (VCS). Under VCS, we make investments in venture capital funds across North America and specialize in targeting high-performing, access-constrained opportunities. The VCS investment team, which is comprised of 15 investment professionals with an average of 20+ years of experience, has deep and long-standing investor and fund manager relationships in the venture market which it has cultivated over the past 14+ years, including over 540+ investors, 60+ fund managers, 55 direct investments, 230+ private market funds and 6,500+ portfolio companies. We have 14 active investment vehicles. Our VCS solution is differentiated by our innovative strategic partnerships and our vantage point within the venture capital and technology ecosystems, maximizing advantages for our investors. In addition, since 2011, we have partnered with Forbes to publish the Midas List, a ranking of the top value-creating venture capitalists. As of June 30, 2022, VCS managed $5.1 billion of FPAUM.
•Impact Investing Solutions (IIS). Under IIS, we make equity, tax equity, and debt investments in impact initiatives across North America. IIS primarily targets investments in renewable energy development and historic building renovation projects, as well as providing capital to small businesses that are women or minority owned or operating in underserved communities. The IIS investment team, which is comprised of 12 investment professionals with an average of 21+ years of experience, has deep and long-standing relationships in the impact market which it has cultivated over the past 20 years, including deploying capital on behalf of over 82 investors. We currently have 35 active investment vehicles. We are differentiated in both the breadth of impact areas served, the type of capital deployed and the duration of our track record. We have collectively deployed over $4.8 billion into 750+ projects, supporting 400+ businesses across 38 states since 2000. We have invested $2.6 billion in Impact Assets across our Small Business Lending, Impact Real Estate and Climate Finance Strategies. Investments in solar assets have generated over 781 million KWh of renewable energy over the lifetime of the portfolio. As of June 30, 2022, IIS managed $1.7 billion of FPAUM.
•Private Credit Solutions (PCS). Under PCS, we primarily make debt investments across North America, targeting lower middle market companies owned by leading financial sponsors and also offer certain private equity solutions. PCS also provides loans to mid-life, growth equity, venture and other funds backed by the unrealized investments at the fund level and provide financing for companies that would otherwise require equity. The PCS investment team, which is comprised of 24 investment professionals with an average of 22+ years of experience, has deep and long-standing relationships in the private credit market which it has cultivated over the past 22 years, including 270+ investors across 11 active investment vehicles and 70+ portfolio companies with over $1.9+ billion capital deployed. Our PCS is differentiated by our relationship-driven sourcing approach providing capital solutions for
30
growth-oriented companies. We are further synergistically strengthened by our PES network of fund managers, characterized by more than 575 credit opportunities annually. We currently maintain 45+ active sponsor relationships and have 60+ platform investments. As of June 30, 2022, PCS managed $1.3 billion of FPAUM.
Sources of Revenue
Our sources of revenue currently include fund management fee contracts, advisory service fee contracts, consulting agreements, referral fees, subscriptions and other services. The majority of our revenues are generated through long-term, fixed fee management and advisory contracts with our investors for providing investment solutions in the following vehicles for our investors:
•Primary Investment Funds. Primary investment funds refer to investment vehicles which target investments in new private markets funds, which in turn invest directly in portfolio companies. P10’s primary investment funds include both commingled investment vehicles with multiple investors as well as customizable separate accounts, which typically include one investor. Primary investments are made during a fundraising period in the form of capital commitments, which are called upon by the fund manager and utilized to finance its investments in portfolio companies during a predefined investment period. We receive a fee stream that is typically based on our investor’s committed, locked-in capital; capital commitments that typically average ten to fifteen years, though they may vary by fund and strategy. We offer primary investment funds across private equity and venture capital solutions. Often, the fees are structured such that they step down, or decrease, over the life of the fund. Our primary funds comprise approximately $11.1 billion of our FPAUM as of June 30, 2022.
•Direct and Co-Investment Funds. Direct and co-investments involve acquiring an equity interest in or making a loan to an operating company, project, property, alternative asset manager, or asset, typically by co-investing alongside an investment by a fund manager or by investing directly in the underlying asset. P10’s direct and co- investment funds include both commingled investment vehicles with multiple investors as well as customizable separate accounts, which typically include one investor. Capital committed to direct investments and co-investments is typically invested immediately, thereby advancing the timing of expected returns on investment. We typically receive fees from investors based upon committed capital, with some funds receiving fees based on invested capital; capital commitments, typically average ten to fifteen years, though they may vary by fund. We offer direct and co-investment funds across our private equity, venture capital, impact investing and private credit solutions. Often, the fees are structured such that they step down, or decrease, over the life of the fund. Our direct investing platform comprises approximately $6.1 billion of our FPAUM as of June 30, 2022.
•Secondaries. Secondaries refer to investments in existing private markets funds through the acquisition of an existing interest in a private markets fund by one investor from another in a negotiated transaction. In so doing, the buyer agrees to take on future funding obligations in exchange for future returns and distributions. Because secondary investments are generally made when a primary investment fund is three to seven years into its investment period and has deployed a significant portion of its capital into portfolio companies, these investments are viewed as more mature. We typically receive fees from investors on committed capital for a decade, the typical life of the fund. We currently offer secondaries funds across our private equity solutions. Often, the fees are structured such that they step down, or decrease, over the life of the fund. Our secondary funds comprise approximately $1.3 billion of our FPAUM as of June 30, 2022.
Operating Segments
We operate our business as a single operating segment, which is how our chief operating decision makers (our Co-Chief Executive Officers) evaluate financial performance and make decisions regarding the allocation of resources.
Trends Affecting Our Business
Our business is affected by a variety of factors, including conditions in the financial markets and economic and political conditions in the North American markets in which we operate, as well as changes in global economic conditions and regulatory or other governmental policies or actions, which can materially affect the values of the funds our platforms manage, as well as our ability to effectively manage investments. With interest rates continuing to rise and the global economy outlook remaining uncertain, we continue to see investors turning towards alternative investments to achieve consistent and higher yields with our contractually guaranteed fee rate.
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The continued growth of our business may be influenced by several factors, including the following market trends:
•Accelerating demand for private markets solutions. Our ability to attract new capital is dependent on investor demand for private markets solutions. We believe the composition of public markets is fundamentally shifting and will drive growth in private markets investing as fewer companies elect to become public corporations, while more companies are choosing to stay privately held or return to being privately held. Furthermore, investors continue to increase their exposure to passive strategies in search for lower fee alternatives as relative returns in active public market strategies have compressed. We believe the continued move away from active public market strategies into passive strategies will support growth in private market solutions as investors seek higher risk-adjusted returns. Additional trends driving investor demand are 1) increasing long-term investor allocations towards private market asset classes, 2) legislation that allows retirement plans to add private equity vehicles as an investment option, and 3) the adoption of Environmental, Social, and Corporate Governance (“ESG”) and impact investing by the institutional and high net worth investor community.
•Favorable lower and lower-middle market dynamics, and data driven sourcing. We attribute our strong investment performance track record to several factors, including: our broad private market relationships and access to fund managers and investments, our diligent and responsible investment process, our tenured investing experience and our premier data, technology, and analytic capabilities. Our ability to continue generating strong returns will be impacted by lower and lower-middle market dynamics and our ability to source deals efficiently and effectively using data analytics. As more companies choose to remain private, we believe smaller companies will continue to dominate market supply, with significantly less capital in pursuit. This favorable lower and lower-middle market dynamic implies a larger pool of opportunities at compelling purchase price valuations with significant return potential. In addition, our premier data and analytic capabilities, driven by our proprietary database, support our robust and disciplined sourcing criteria, which fuels our highly selective investment process. Our database stores and organizes a universe of managers and opportunities with powerful tracking metrics that we believe drive optimal portfolio management and monitoring and enable a portfolio grading system, as well as repository of investment evaluation scorecards. Our ability to maintain our data advantage is dependent on a number of factors, including our continued access to a broad set of private market information on an on-going basis.
•Expanding asset class solutions, broaden geographic reach and grow private markets network effect. Our ability to continue growing is impacted by our scalability and ability to maximize investor relationships. The purview of private markets has meaningfully broadened over the last decade. As investors increase their allocations to private markets investments, we believe the demand for asset class diversification will rise. Furthermore, as part of this evolution we believe investors will seek out private market solutions providers with scale and an ability to deliver multiple asset classes and vehicle solutions to streamline relationships and pursue cost efficiency. Our scalable business model is well positioned to expand and grow our footprint as we develop our position within the private markets ecosystem to further leverage our synergistic solutions offering. We currently have a leading presence in North America, but believe that expanding our investor presence into international markets can be a significant growth driver for our business as investors continue to seek geographically diverse private market exposure. Further, expanding into additional asset class solutions will enable us to further enhance our integrated network effect across private markets by, among other benefits, fostering deeper manager relationships. We believe that the growing number of private markets focused fund managers increases the operational burden on investors and will lead to a greater reliance on highly trusted advisors to help investors navigate the complexity associated with multi- asset class manager selection.
•Increasing regulatory requirements and political uncertainty. The complex regulatory and tax environment could restrict our operations and subject us to increased compliance costs and administrative burdens, as well as restrictions on our business activities. There is additional uncertainty around potential legal, regulatory, and tax changes, which may impact our profitability or impact our ability to operate and grow our business.
•Our ability to raise capital in order to fund acquisitions and strategic growth initiatives. In addition to organic growth of our existing solutions and services, our growth will continue to depend, in part, on our ability to identify, evaluate and acquire high performing and high-quality asset management businesses in order to expand our team of asset managers and advisors, as well as expand the industries and end markets which we serve. These acquisitions may require us to raise additional capital through debt financing or the issuance of equity securities. Our ability to obtain debt with acceptable terms will be influenced by the corporate debt markets and prevailing interest rates, as well as our current credit worthiness. The funding available through the issuance of equity securities will be determined in part by the market price of our shares.
•Increased competition to work with top private equity fund managers. There has been a trend amongst larger private markets investors to consolidate the number of general partners in which they invest and work with. At times, this
32
has led to certain funds being oversubscribed due to the increasing flow of capital. This has resulted in some investors, primarily smaller investors or less strategically important investors, not being able to gain access to certain funds. Our ability to invest and maintain our sphere of influence with these high-performing fund managers is critical to our investors’ success and our ability to maintain our competitive position and grow our revenue.
•Data advantage relative to competitors. We believe that the general trend towards transparency and consistency in private markets reporting will create new opportunities for us to leverage our databases and analytical capabilities. We intend to use these advantages afforded to us by our proprietary databases, analytical tools and deep industry knowledge to drive our performance, provide our clients with customized solutions across private markets asset classes and continue to differentiate our products and services from those of our competitors. Our ability to maintain our data advantage is dependent on a number of factors, including our continued access to a broad set of private market information on an on-going basis, as well as our ability to maintain our investment scale, considering the evolving competitive landscape and potential industry consolidation.
Key Financial & Operating Metrics
Revenues
We generate revenues primarily from management fees and advisory contracts, and to a lesser extent, other consulting arrangements and services. See Significant Accounting Policies in Note 2 of our consolidated financial statements for additional information regarding the way revenues are recognized.
We earn management and advisory fees based on a percentage of investors’ capital commitments in our funds or deployed capital. Management and advisory fees during the commitment period are charged on capital commitments and after the commitment period (or a defined anniversary of the fund’s initial closing) is reduced by a percentage of the management and advisory fees for the preceding years or charged on net invested capital or NAV, in selected cases. Fee schedules are generally fixed and set for the expected life of the funds, which typically are between ten to fifteen years. These fees are typically staged to decrease over the life of the contract due to built-in declines in contractual rates and/or as a result of lower net invested capital balances as capital is returned to investors. We also earn revenues through catch-up fees ("catch up fees") on the funds we manage. Catch-up fees are earned from investors that make commitments to the fund after the first fund closing occurs during the fundraising period of funds originally launched in prior periods, and as such the investors are required to pay a catch-up fee as if they had committed to the fund at the first closing. While catch-up fees are not a significant component of our overall revenue stream, they may result in a temporary increase in our revenues in the period in which they are recognized.
Other revenue consists of subscription and consulting agreements and referral fees that we offer in certain cases. Subscription and consulting agreements provide advisory and/or reporting services to our investors such as monitoring and reporting on an investor’s existing private markets investments. The subscription and consulting agreements typically have renewable one-year lives, and revenue is recognized ratably over the current term of the subscription or the agreement. If subscriptions or fees have been paid in advance, these fees are recorded as deferred revenue on our Consolidated Balance Sheets. Referral fee revenue is recognized upon closing of opportunities where we have referred credit opportunities that do not match our investment criteria.
Operating Expenses
Compensation and benefits are our largest expense and consists of salaries, bonuses, stock-based compensation, employee benefits and employer-related payroll taxes. Despite our general operating leverage that exists, we expect to continue to experience an incremental rise in compensation and benefits expense commensurate with expected growth in headcount and with the need to maintain competitive compensation levels as we expand into new markets to create new products and services. In substantially all instances, the Company does not hold carried interests in the funds that we manage. Carried interest is typically structured to stay with the investment professionals. As such, while this does not impact the compensation we pay to our employees, it allows our investment professionals to receive additional benefit and provides economic incentive for them to outperform on behalf of our investors. This structure differs from that of most of our competitors, which we believe better aligns the objectives of our stockholders, investors and investment professionals. The result is the substantial majority of our compensation and benefit expense is predictable.
Professional fees primarily consist of legal, advisory, accounting and tax fees which may include services related to our strategic development opportunities such as due diligence performed in connection with potential acquisitions. Our professional fees will fluctuate commensurate with our strategic objectives and potential acquisitions, and certain recurring accounting
33
advisory, audit and tax expenses are expected to increase as our Company has become an SEC registrant and we must comply with additional regulatory requirements.
General, administrative and other includes occupancy, travel and entertainment, technology, insurance and other general costs associated with operating our business.
Strategic alliance expense is included in operating expenses. This expense is driven by a Strategic Alliance Agreement (SAA) that Bonaccord had entered into with an investor at the time Bonaccord was acquired in exchange for a portion of net management fee earnings and net distributable carried interest at the time of acquisition.
Other Income (Expense)
Interest expense includes interest paid and accrued on our outstanding debt, along with the amortization of deferred financing costs, amortization of original issue discount and the write-off of deferred financing costs due to the repayment of previously outstanding debt. Interest expense also includes the effects of the imputed interest on certain non-interest-bearing notes payable.
Income Tax Expense/Benefit
Income tax expense/benefit is comprised of current and deferred tax expense/benefit. Current income tax expense/benefit represents our estimated taxes to be paid or refunded for the current period. In accordance with ASC 740, Income Taxes (“ASC 740”), we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are recorded to reduce deferred tax assets to the amount we believe is more likely than not to be realized.
Fee-Paying Assets Under Management, or FPAUM
FPAUM reflects the assets from which we earn management and advisory fees. Our vehicles typically earn management and advisory fees based on committed capital, and in certain cases, net invested capital, depending on the fee terms. Management and advisory fees based on committed capital are not affected by market appreciation or depreciation.
Results of Operations
For the three and six months ended June 30, 2022 and June 30, 2021.
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|
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|
|
|
|
|
|
|
|
|
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|
For the Three Months Ended |
|
|
For the Six Months Ended |
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|
|
June 30, |
|
|
June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
REVENUES |
|
(in thousands) |
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
Management and advisory fees |
|
$ |
46,451 |
|
|
$ |
33,517 |
|
|
$ |
12,934 |
|
|
|
39 |
% |
|
$ |
89,478 |
|
|
$ |
66,090 |
|
|
$ |
23,388 |
|
|
|
35 |
% |
Other revenue |
|
|
287 |
|
|
|
471 |
|
|
|
(184 |
) |
|
|
(39 |
)% |
|
|
541 |
|
|
|
666 |
|
|
|
(125 |
) |
|
|
(19 |
)% |
Total revenues |
|
|
46,738 |
|
|
|
33,988 |
|
|
|
12,750 |
|
|
|
38 |
% |
|
|
90,019 |
|
|
|
66,756 |
|
|
|
23,263 |
|
|
|
35 |
% |
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
17,815 |
|
|
|
12,337 |
|
|
|
5,478 |
|
|
|
44 |
% |
|
|
36,309 |
|
|
|
24,273 |
|
|
|
12,036 |
|
|
|
50 |
% |
Professional fees |
|
|
2,740 |
|
|
|
3,406 |
|
|
|
(666 |
) |
|
|
(20 |
)% |
|
|
5,352 |
|
|
|
6,137 |
|
|
|
(785 |
) |
|
|
(13 |
)% |
General, administrative and other |
|
|
4,250 |
|
|
|
2,215 |
|
|
|
2,035 |
|
|
|
92 |
% |
|
|
8,362 |
|
|
|
4,252 |
|
|
|
4,110 |
|
|
|
97 |
% |
Contingent consideration expense |
|
|
(140 |
) |
|
|
132 |
|
|
|
(272 |
) |
|
|
(206 |
)% |
|
|
(13 |
) |
|
|
160 |
|
|
|
(173 |
) |
|
|
(108 |
)% |
Amortization of intangibles |
|
|
6,153 |
|
|
|
7,484 |
|
|
|
(1,331 |
) |
|
|
(18 |
)% |
|
|
12,334 |
|
|
|
14,968 |
|
|
|
(2,634 |
) |
|
|
(18 |
)% |
Strategic alliance expense |
|
|
153 |
|
|
|
— |
|
|
|
153 |
|
|
|
100 |
% |
|
|
305 |
|
|
|
— |
|
|
|
305 |
|
|
|
100 |
% |
Total operating expenses |
|
|
30,971 |
|
|
|
25,574 |
|
|
|
5,397 |
|
|
|
21 |
% |
|
|
62,649 |
|
|
|
49,790 |
|
|
|
12,859 |
|
|
|
26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS |
|
|
15,767 |
|
|
|
8,414 |
|
|
|
7,353 |
|
|
|
87 |
% |
|
|
27,370 |
|
|
|
16,966 |
|
|
|
10,404 |
|
|
|
61 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER (EXPENSE)/INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense implied on notes payable to sellers |
|
|
— |
|
|
|
(219 |
) |
|
|
219 |
|
|
|
(100 |
)% |
|
|
— |
|
|
|
(434 |
) |
|
|
434 |
|
|
|
(100 |
)% |
Interest expense, net |
|
|
(1,525 |
) |
|
|
(5,245 |
) |
|
|
3,720 |
|
|
|
(71 |
)% |
|
|
(2,910 |
) |
|
|
(10,500 |
) |
|
|
7,590 |
|
|
|
(72 |
)% |
Other income |
|
|
791 |
|
|
|
257 |
|
|
|
534 |
|
|
|
208 |
% |
|
|
1,120 |
|
|
|
545 |
|
|
|
575 |
|
|
|
106 |
% |
Total other (expense) |
|
|
(734 |
) |
|
|
(5,207 |
) |
|
|
4,473 |
|
|
|
(86 |
)% |
|
|
(1,790 |
) |
|
|
(10,389 |
) |
|
|
8,599 |
|
|
|
(83 |
)% |
Net income before income taxes |
|
|
15,033 |
|
|
|
3,207 |
|
|
|
11,826 |
|
|
|
369 |
% |
|
|
25,580 |
|
|
|
6,577 |
|
|
|
19,003 |
|
|
|
289 |
% |
Income tax expense |
|
|
(3,879 |
) |
|
|
(734 |
) |
|
|
(3,145 |
) |
|
|
428 |
% |
|
|
(6,634 |
) |
|
|
(1,395 |
) |
|
|
(5,239 |
) |
|
|
376 |
% |
NET INCOME |
|
$ |
11,154 |
|
|
$ |
2,473 |
|
|
$ |
8,681 |
|
|
|
351 |
% |
|
$ |
18,946 |
|
|
$ |
5,182 |
|
|
$ |
13,764 |
|
|
|
266 |
% |
34
Revenues
Three Months Ended June 30, 2022 and June 30, 2021
Our revenue is composed almost entirely of recurring management and advisory fees, with the vast majority of fees earned on committed capital that is typically subject to ten to fifteen year lock up agreements, therefore our average fee rates have remained stable at approximately 1% for the three months ended June 30, 2022 and June 30, 2021. For the three months ended June 30, 2022 compared to the three months ended June 30, 2021, revenues increased $12.8 million or 38% due to both higher management fees primarily from the impact of organic 2022 growth as well as 2021 acquisitions of Hark and Bonaccord.
Management fees increased $12.9 million, or 39%, to $46.5 million for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 due primarily to organic growth efforts in 2022, which contributed management fee and advisory revenues of $9.1 million. This growth is driven by increases in FPAUM, primarily from additional fund closings and capital raised. The remaining increase of $3.8 million represents an increase in the Company’s management fees due to the acquisitions of Hark and Bonaccord in September 2021. Catch up fees during the second quarter of 2022 were $1.8 million associated with the fund closings at TrueBridge and RCP. Catch up fees were $0.3 million during the second quarter of 2021.
Other revenues, which represent ancillary elements of our business, decreased by $0.2 million or 39% to $0.3 million for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 driven primarily by ad hoc referral fees.
Six Months Ended June 30, 2022 and June 30, 2021
Total revenues increased $23.3 million, or 35%, to $90.0 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, due to higher management and advisory fees, largely attributable to organic growth as well as our acquisitions, partially offset by a small decrease in other revenues.
Management fees increased by $23.4 million, or 35%, to $89.5 million for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 due primarily to organic growth of FPAUM, which contributed $15.8 million to management fee and advisory revenues, in total. Revenue also increased by $7.6 million due to the acquisitions of Hark and Bonaccord in September 2021. Catch up fees for the six months ended June 30, 2022 were $2.5 million associated with the fund closings at TrueBridge and RCP. Catch up fees were $1.2 million during the six months ended June 30, 2021.
Other revenues decreased by $0.1 million, or 19% to $0.5 million, from the six months ended June 30, 2022 compared to the six months ended June 30, 2021. This decrease was primarily attributable to a decrease in ad hoc referral fees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
OPERATING EXPENSES |
|
(in thousands) |
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
Compensation and benefits |
|
$ |
17,815 |
|
|
$ |
12,337 |
|
|
$ |
5,478 |
|
|
|
44 |
% |
|
$ |
36,309 |
|
|
$ |
24,273 |
|
|
$ |
12,036 |
|
|
|
50 |
% |
Professional fees |
|
|
2,740 |
|
|
|
3,406 |
|
|
$ |
(666 |
) |
|
|
(20 |
)% |
|
|
5,352 |
|
|
|
6,137 |
|
|
|
(785 |
) |
|
|
(13 |
)% |
General, administrative, and other |
|
|
4,250 |
|
|
|
2,215 |
|
|
$ |
2,035 |
|
|
|
92 |
% |
|
|
8,362 |
|
|
|
4,252 |
|
|
|
4,110 |
|
|
|
97 |
% |
Contingent consideration expense |
|
|
(140 |
) |
|
|
132 |
|
|
$ |
(272 |
) |
|
|
(206 |
)% |
|
|
(13 |
) |
|
|
160 |
|
|
|
(173 |
) |
|
|
(108 |
)% |
Amortization of intangibles |
|
|
6,153 |
|
|
|
7,484 |
|
|
$ |
(1,331 |
) |
|
|
(18 |
)% |
|
|
12,334 |
|
|
|
14,968 |
|
|
|
(2,634 |
) |
|
|
(18 |
)% |
Strategic alliance expense |
|
|
153 |
|
|
|
— |
|
|
$ |
153 |
|
|
|
100 |
% |
|
|
305 |
|
|
|
— |
|
|
|
305 |
|
|
|
100 |
% |
Total operating expenses |
|
$ |
30,971 |
|
|
$ |
25,574 |
|
|
$ |
5,397 |
|
|
|
21 |
% |
|
$ |
62,649 |
|
|
$ |
49,790 |
|
|
$ |
12,859 |
|
|
|
26 |
% |
Operating Expenses
Three Months Ended June 30, 2022 and June 30, 2021
Total operating expenses increased by $5.4 million, or 21%, to $31.0 million, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 primarily driven by increases in compensation and benefits and general and administrative expenses associated with the growth of P10 since acquiring Hark and Bonaccord in September 2021 and
D&O insurance driven by the IPO transaction at the end of 2021.
35
Compensation and benefits expense increased by $5.5 million, or 44%, to $17.8 million for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. The acquisition of Hark and Bonaccord in September 2021 brought an additional $1.9 million of compensation expense. The remaining $3.6 million increase is recognized across the existing entities. Stock compensation accounts for $2.2 million of the $3.6 million increase. This was driven by RSUs and stock options granted to employees during the first quarter of 2022 as well as RSAs granted in late 2021. There was a $0.5 million increase associated with the build out of P10 back office to meet compliance needs of a public company. The final driver is a $1.0 million increase associated with an increase in headcount across all subsidiaries.
Professional fees decreased by $0.7 million, or 20% to $2.7 million. This is primarily driven by timing of acquisitions. The acquisition of Enhanced occurred so late in 2020 that the Company incurred professional fees well into 2021. Whereas, the acquisitions of Hark and Bonaccord were the only acquisitions of 2021 and did not close until the last day of the third quarter.
General, administrative and other increased by $2.0 million, or 92% to $4.3 million and was primarily due to the increase of insurance expense as noted above in D&O insurance driven by the IPO transaction at the end of 2021. This added an additional $0.7 million of expense compared to the second quarter of 2021. The acquisitions of Hark and Bonaccord brought an additional $0.5 million of expense. The Company entered into two new leases since June 30, 2021 which added an additional $0.3 million of expense. The remaining $0.5 million of additional general and administrative expense is derived from additional IT expenses and increased travel since last year.
Amortization of intangibles decreased by $1.3 million, or 18% to $6.2 million, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. The decrease is driven by a fully amortized intangible asset at RCP and less amortization at ECG in 2022 than in 2021 driven by unique syndication fee contracts. This is offset by added intangible assets at Bonaccord and Hark following their acquisitions in September 2021.
The SAA at Bonaccord added an additional $0.2 million of expense in the second quarter of 2022.
Six Months Ended June 30, 2022 and June 30, 2021
Total operating expenses increased by $12.9 million, or 26%, to $62.6 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021. This increase was primarily due to increases in compensation and benefits and general and administrative expenses and offset by a decrease in amortization expense of intangible assets. This is primarily driven by increases in stock compensation associated with RSU, RSA and stock option grants at the end of 2021 and beginning of 2022 as well as insurance expense associated with D&O insurance driven by the IPO transaction at the end of 2021. The acquisitions of Hark and Bonaccord in September 2021 also contributed to these increases.
Compensation and benefits expense increased by $12.0 million, or 50%, to $36.3 million, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021. The acquisitions of Hark and Bonaccord made up $4.2 million of this increase. Another $3.2 million consisted of stock compensation expense related to RSUs and stock options issued to employees during the first quarter of 2022 as well as RSAs issued in late 2021. There was a $1.6 million increase associated with the build out of P10 back office to meet compliance needs of a public company. An additional $1.6 million related to increases in headcount across all subsidiaries. Finally, Five Points made a $1.7 million one time payment to buyout the employment contracts for the prior partners during the first quarter of 2022.
Professional fees decreased by $0.8 million, or 13%, to $5.4 million primarily due to timing of acquisitions as we had less acquisition-related professional fees in the first half of 2022 as compared to 2021.
General, administrative and other increased by $4.1 million, or 97% to $8.4 million. The acquisitions of Hark and Bonaccord added an additional $0.8 million of expense for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. As previously mentioned, D&O insurance added an additional $1.3 million of expense related to the IPO transaction. Additional office space in New York added $0.6 million of rent expense. The additional $1.4 million of expense relates to increased costs associated with expanded headcount and increased travel expenses.
Amortization of intangibles decreased by $2.6 million, or 18%, to $12.3 million, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. The decrease is driven by a fully amortized intangible asset at RCP and less amortization at ECG in 2022 than in 2021 driven by unique syndication fee contracts. This is offset by added intangible assets at Bonaccord and Hark following their acquisitions in September 2021.
36
The SAA at Bonaccord added an additional $0.3 million of expense in 2022.
Other Income (Expense)
Three Months Ended June 30, 2022 and June 30, 2021
Other expenses decreased $4.5 million, or 86%, to $0.7 million for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. This decrease was primarily due to a $3.7 million decrease in interest expense related to the extinguishment and replacement of the credit and guaranty facility with the revolver and term loan facility. The credit and guaranty facility incurred interest at a rate of 7%. This was replaced with the revolving credit facility and term loan which incurs interest at a base rate of 2.1% plus SOFR. The decline in interest expense for the three months ended June 30 2022, as compared to the three months ended June 30, 2021 is a function both of lower interest rates as well as $65.1 million less in outstanding interest-bearing principal as of June 30, 2022. The lower principal balance was a result of the paydown of debt with IPO proceeds and operating cash flow during the last year. P10 completed an additional pay down of $12 million of principal on the revolving credit facility in July 2022. There was also a $0.5 million increase in income from unconsolidated subsidiaries at ECG.
Six Months Ended June 30, 2022 and June 30, 2021
Other expenses decreased by $8.6 million, or 83%, to $1.8 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021. This decrease was primarily due to a $7.6 million decrease in interest expense related to the debt refinance mentioned in the above paragraph that took place in December 2021. Other income increased by $0.6 million driven by ECG’s increase income from unconsolidated subsidiaries in the first six months of 2021.
Income Tax/Benefit Expense
Three Months Ended June 30, 2022 and June 30, 2021
Income tax expense increased by $3.1 million to $3.9 million for the three months ended June 30, 2022 compared to the three months ended June 30, 2021 due primarily to higher net income during the 2022 period.
Six Months Ended June 30, 2022 and June 30, 2021
Income tax expense increased by $5.2 million to $6.6 million for the six months ended June 30, 2022 compared to a benefit of $1.5 million for the six months ended June 30, 2021. The increase was primarily due to higher net income during 2022.
37
FPAUM
The following table provides a period-to-period roll-forward of our fee earning AUM on a pro forma basis as if Hark and Bonaccord were acquired on January 1, 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(in millions) |
|
|
(in millions) |
|
|
(in millions) |
|
|
(in millions) |
|
Balance, Beginning of Period |
|
$ |
17,593 |
|
|
$ |
13,712 |
|
|
$ |
17,263 |
|
|
$ |
13,269 |
|
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Capital raised (1) |
|
|
944 |
|
|
|
1,340 |
|
|
|
1,440 |
|
|
|
1,741 |
|
Capital deployed (2) |
|
|
212 |
|
|
|
190 |
|
|
|
435 |
|
|
|
271 |
|
Net Asset Value Change (3) |
|
|
4 |
|
|
|
3 |
|
|
|
8 |
|
|
|
7 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled fee base stepdowns |
|
|
(30 |
) |
|
|
(130 |
) |
|
|
(109 |
) |
|
|
(162 |
) |
Expiration of fee period |
|
|
(269 |
) |
|
|
(32 |
) |
|
|
(585 |
) |
|
|
(43 |
) |
Balance, End of period |
|
$ |
18,454 |
|
|
$ |
15,083 |
|
|
$ |
18,452 |
|
|
$ |
15,083 |
|
(1)Represents new commitments from funds that earn fees on a committed capital fee base.
(2)In certain vehicles, fees are based on capital deployed, as such increasing FPAUM.
(3)Net asset value change consists primarily of the impact of market value appreciation (depreciation) from funds that earn fees on a net asset value basis.
The following table provides a period-to-period roll-forward of our fee-earning AUM on an actual basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(in millions) |
|
|
(in millions) |
|
|
(in millions) |
|
|
(in millions) |
|
Balance, Beginning of Period |
|
$ |
17,593 |
|
|
$ |
12,935 |
|
|
$ |
17,263 |
|
|
$ |
12,624 |
|
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Capital raised (1) |
|
|
944 |
|
|
|
1,161 |
|
|
|
1,440 |
|
|
|
1,443 |
|
Capital deployed (2) |
|
|
212 |
|
|
|
190 |
|
|
|
435 |
|
|
|
258 |
|
Net Asset Value Change (3) |
|
|
4 |
|
|
|
3 |
|
|
|
8 |
|
|
|
7 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled fee base stepdowns |
|
|
(30 |
) |
|
|
(85 |
) |
|
|
(109 |
) |
|
|
(117 |
) |
Expiration of fee period |
|
|
(269 |
) |
|
|
(32 |
) |
|
|
(585 |
) |
|
|
(43 |
) |
Balance, End of period |
|
$ |
18,454 |
|
|
$ |
14,172 |
|
|
$ |
18,452 |
|
|
$ |
14,172 |
|
(1)Represents new commitments from funds that earn fees on a committed capital fee base.
(2)In certain vehicles, fees are based on capital deployed, as such increasing FPAUM.
(3)Net asset value change consists primarily of the impact of market value appreciation (depreciation) from funds that earn fees on a net asset value basis.
FPAUM as of June 30, 2022
FPAUM increased $0.8 billion, or 4.9%, to $18.5 billion on a pro forma basis and actual basis for the three months ended June 30, 2022. This increase is due primarily to an increase in capital raised from our private equity and venture capital solutions. FPAUM increased $1.2 billion, or 6.9%, to $18.5 billion on a pro forma basis and $1.2 billion or 6.9% to $18.5 billion on an actual basis for the six months ended June 30, 2022, due primarily to an increase in capital raised from our private
38
equity and venture capital solutions. Our FPAUM growth and concentration across solutions and vehicles has been relatively consistent over time but can vary in particular periods due to the systematic fundraising cycles of new funds, which typically lasts 12-24 months. We expect to continue to expand our fundraising efforts and grow FPAUM with the launch of new specialized investment vehicles and asset class solutions.
Non-GAAP Financial Measures
Below is a description of our unaudited non-GAAP financial measures. These are not measures of financial performance under GAAP and should not be construed as a substitute for the most directly comparable GAAP measures, which are reconciled below. These measures have limitations as analytical tools, and when assessing our operating performance, you should not consider these measures in isolation or as a substitute for GAAP measures. Other companies may calculate these measures differently than we do, limiting their usefulness as a comparative measure.
We use Adjusted Net Income, or ANI, as well as Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) to provide additional measures of profitability. We use the measures to assess our performance relative to our intended strategies, expected patterns of profitability, and budgets, and use the results of that assessment to adjust our future activities to the extent we deem necessary. ANI reflects our actual cash flows generated by our core operations. ANI is calculated as Adjusted EBITDA, less actual cash paid for interest and federal and state income taxes.
In order to compute Adjusted EBITDA, we adjust our GAAP net income for the following items:
•Expenses that typically do not require us to pay them in cash in the current period (such as depreciation, amortization and stock-based compensation),
•The cost of financing our business,
•Acquisition-related expenses which reflects the actual costs incurred during the period for the acquisition of new businesses, which primarily consists of fees for professional services including legal, accounting, and advisory,
•Registration-related expenses includes professional services associated with our prospectus process incurred during the period, and does not reflect expected regulatory, compliance, and other costs associated with those that were incurred subsequent to our Initial Public Offering, and
•The effects of income taxes.
Adjusted Net Income in 2021 reflects the cash payments made for interest, which differs significantly from total interest expense that includes non-cash interest on the non-interest-bearing Seller Notes related to our acquisitions of RCP 2 and RCP 3 that existed. Similarly, the cash income taxes paid during the 2022 and 2021 periods differ significantly from the net income tax expense, which is primarily comprised of deferred tax expense as described in the results of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
|
For the Six Months |
|
|
|
Months Ended |
|
|
Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Net income |
|
$ |
11,154 |
|
|
$ |
1,978 |
|
|
$ |
18,946 |
|
|
$ |
4,193 |
|
Add back (subtract): |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation & amortization |
|
|
6,264 |
|
|
|
7,551 |
|
|
|
12,540 |
|
|
|
15,102 |
|
Interest expense, net |
|
|
1,525 |
|
|
|
5,464 |
|
|
|
2,910 |
|
|
|
10,934 |
|
Income tax expense |
|
|
3,878 |
|
|
|
734 |
|
|
|
6,633 |
|
|
|
1,395 |
|
Non-recurring expenses |
|
|
207 |
|
|
|
612 |
|
|
|
2,938 |
|
|
|
1,411 |
|
Non-cash stock based compensation |
|
|
2,717 |
|
|
|
568 |
|
|
|
4,232 |
|
|
|
992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
|
25,745 |
|
|
|
16,907 |
|
|
|
48,199 |
|
|
|
34,027 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash interest expense |
|
|
(1,892 |
) |
|
|
(4,533 |
) |
|
|
(2,290 |
) |
|
|
(9,157 |
) |
Cash income taxes, net of taxes related to acquisitions |
|
|
(664 |
) |
|
|
(740 |
) |
|
|
(428 |
) |
|
|
(1,147 |
) |
Adjusted Net Income |
|
$ |
23,190 |
|
|
$ |
11,634 |
|
|
$ |
45,481 |
|
|
$ |
23,723 |
|
39
Financial Position, Liquidity and Capital Resources
Selected Statements of Financial Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
|
|
|
|
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
23,613 |
|
|
$ |
40,916 |
|
|
$ |
(17,303 |
) |
|
|
(42 |
)% |
Goodwill and other intangibles |
|
|
535,231 |
|
|
|
547,489 |
|
|
|
(12,258 |
) |
|
|
(2 |
)% |
Total assets |
|
|
654,914 |
|
|
|
676,217 |
|
|
|
(21,303 |
) |
|
|
(3 |
)% |
Debt obligations |
|
|
187,913 |
|
|
|
212,496 |
|
|
|
(24,583 |
) |
|
|
(12 |
)% |
Stockholders’ equity |
|
$ |
402,290 |
|
|
$ |
395,164 |
|
|
$ |
7,126 |
|
|
|
2 |
% |
There was a decrease in cash from $40.9 million as of December 31, 2021 to $23.6 million as of June 30, 2022 due to the paydown of $25 million on the revolving credit facility principal balance in February 2022 and a $3.5 million dividend payment in June 2022 offset by excess operating cash flows. There was a decrease in goodwill and intangible assets of $12.3 million due to amortization of intangibles during the six months ended June 30, 2022. Remaining total assets increased in the same period by $8.3 million. This was primarily driven by amounts due to related parties increased by $12.7 million due to the Advisory Agreement between ECG and Enhanced PC that is discussed in Note 13 of our consolidated financial statements.
Historical Liquidity and Capital Resources
We have continued to support our ongoing operations through the receipt of management and advisory fee revenues. However, to fund our continued growth, we have utilized capital obtained through debt and equity raises. Our ability to continue to raise funds will be critical as we pursue additional business development opportunities and new acquisitions.
On December 22, 2021, P10, Inc. entered into a Term Loan and Revolving Credit Facility with JP Morgan Chase Bank, N.A.. The term loan and revolving credit facility provides financing for acquisition activity. The term loan provides for a $125.0 million facility and the revolving credit facility provides for an additional $125.0 million. There is also a $125 million accordion feature available in the credit agreement.
Both facilities are Term SOFR Loans. The Company can elect one or three months for the Revolver Facility and three or six months for the Term Loan. The Company elected a six month SOFR rate at the time of draw for the term loan and a one month SOFR rate for the Revolver Facility at the time of draw. Principal is contractually repaid at a rate of 1.25% on the term loan quarterly effective March 31, 2023. The Revolving Credit Facility has no contractual principal repayments until maturity, which is December 22, 2025 for both facilities.
As of June 30, 2022, the Term Loan is incurring interest at a SOFR rate of 2.61%. As of June 30, 2022, the Revolver Facility is split into three tranches. The first tranche has a principal balance of $12.0 million and incurs interest at a SOFR rate of 1.59% for a one month period through July 2022. The second tranche has a principal balance of $40.0 million and incurs interest at a SOFR rate of 1.43% for a three month period through August 2022. The third tranche has a principal balance of $13.9 million and incurs interest at a SOFR rate of 2.10% for a three month period through September 2022.
The Credit Agreement contains affirmative and negative covenants typical of such financing transactions, and specific financial covenants which require P10 to maintain a minimum leverage ratio. As of June 30, 2022, P10 was in compliance with its financial covenants required under the facility. In February 2022, the Company repaid $25 million of the principal balance outstanding on the revolving credit facility. As of June 30, 2022, the balance drawn on the revolving credit facility is $65.9 million and on the term loan, the balance is $125.0 million. For the three and six months ended June 30, 2022 and June 30, 2021, $2.5 million and $0 and $1.6 million and $0 interest expense was incurred, respectively. On July 27, 2022, the $12.0 million tranche of debt on the Revolver Facility incurring interest on a one month period was repaid in full.
40
Cash Flows
Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021
The following table reflects our cash flows for the six months ended June 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
23,171 |
|
|
$ |
17,604 |
|
|
$ |
5,567 |
|
|
|
32 |
% |
Net cash used in investing activities |
|
|
(320 |
) |
|
|
(643 |
) |
|
|
323 |
|
|
|
(50 |
)% |
Net cash used in financing activities |
|
|
(40,989 |
) |
|
|
(10,578 |
) |
|
|
(30,411 |
) |
|
|
287 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents and restricted cash |
|
$ |
(18,138 |
) |
|
$ |
6,383 |
|
|
$ |
(24,521 |
) |
|
|
(384 |
)% |
Operating Activities
Cash from operating activities increased $5.6 million or 32%, to $23.2 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021. The components of this net increase primarily consisted of a $13.8 million increase in net income and the following changes in operating assets and liabilities:
•An increase of $5.8 million in due from related parties driven primarily by the receivable from the Advisory Agreement between ECG and ECP as further discussed in Note 13;
•An increase in expense for deferred taxes of $5.6 million primarily driven by reduction of deferred tax assets;
•An increase of $4.0 million in accounts receivable driven by closing of new funds at the end of the quarter and collections in arrears;
•A decrease in amortization of intangibles of $2.6 million driven by a fully amortized intangible asset at RCP and less amortization at ECG in 2022 than in 2021 driven by unique syndication fee contracts. This is offset by added intangible assets at Bonaccord and Hark following their acquisitions in September 2021.
Investing activities
The cash used in investing activities increased by $0.3 million, or (50)% to $0.3 million, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. This increase in the cash used was due almost entirely to the increased note receivable balance as discussed in Note 6 coupled with an increase of purchases in property and equipment attributable to leasehold improvements on the newly rented spaces in New York and North Carolina.
Financing Activities
We used a net $41.0 million of cash for the six months ended June 30, 2022 for financing activities, as compared to cash used in financing activities of $10.6 million for the six months ended June 30, 2021 due primarily to the pay down of $25.0 million on the Revolving Facility in the first quarter of 2022. We also settled 1.1 million stock options from a grantee with a fair market value option price of $11.83, less a negotiated discount of 2.5%, totaling $12.5 million and paid a dividend of $3.5 million.
Future Sources and Uses of Liquidity
We generate significant cash flows from operating activities. We believe that we will be able to continue to meet our current and long-term liquidity and capital requirements through our cash flows from operating activities, existing cash and cash equivalents, and our external financing activities.
Off Balance Sheet Arrangements
We do not invest in any off-balance sheet vehicles that provide liquidity, capital resources, market or credit risk support, or engage in any activities that expose us to any liability that is not reflected in our consolidated financial statements.
41
Contractual Obligations, Commitments and Contingencies
In the ordinary course of business, we enter contractual arrangements that require future cash payments. The following table sets forth information regarding our anticipated future cash payments under our contractual obligations as of June 30, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
2022 |
|
|
2023 |
|
|
2024 |
|
|
2025 |
|
|
2026 |
|
|
Thereafter |
|
|
|
(in thousands) |
|
Operating lease obligations (1) |
|
$ |
20,050 |
|
|
|
$ |
1,082 |
|
|
$ |
2,976 |
|
|
$ |
3,222 |
|
|
$ |
2,066 |
|
|
$ |
1,727 |
|
|
$ |
8,977 |
|
Debt obligations (2) |
|
|
190,900 |
|
|
|
|
— |
|
|
|
6,250 |
|
|
|
6,250 |
|
|
|
178,400 |
|
|
|
— |
|
|
|
— |
|
Total |
|
$ |
210,950 |
|
|
|
$ |
1,082 |
|
|
$ |
9,226 |
|
|
$ |
9,472 |
|
|
$ |
180,466 |
|
|
$ |
1,727 |
|
|
$ |
8,977 |
|
1)We lease office space under agreements that expire periodically through 2032. The table only includes guaranteed minimum lease payments under these agreements and does not project other related payments.
2)Debt obligations presented in the table reflect scheduled principal payments related to the various debt instruments of the Company.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the accounts of the Company and its consolidated subsidiaries. The preparation of the Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. We believe the following critical accounting policies could potentially produce materially different results if we were to change the underlying assumptions, estimates, or judgements. See Note 2, “Significant Accounting Policies” for a summary of our significant accounting policies.
Basis of Presentation
The accompanying Consolidated Financial Statements are prepared in accordance with GAAP. Management believes it has made all necessary adjustments so that the Consolidated Financial Statements are presented fairly and that estimates made in preparing the Consolidated Financial Statements are reasonable and prudent. The Consolidated Financial Statements include the accounts of the Company, its wholly owned or majority-owned subsidiaries and entities in which the Company is deemed to have a direct or indirect controlling financial interest based on either a variable interest model or voting interest model. All intercompany transactions and balances have been eliminated upon consolidation. Certain entities in which the Company holds an interest are investment companies that follow specialized accounting rules under GAAP and reflect their investments at estimated fair value. Accordingly, the carrying value of the Company’s equity method investments in such entities retains the specialized accounting treatment.
Principles of Consolidation
The Company performs the variable interest analysis for all entities in which it has a potential variable interest. If the Company has a variable interest in the entity and the entity is a variable interest entity (“VIE”), we will also analyze whether the Company is the primary beneficiary of this entity and if consolidation is required.
Generally, VIEs are entities that lack sufficient equity to finance their activities without additional financial support from other parties, or whose equity holders, as a group, lack one or more of the following characteristics: (a) direct or indirect ability to make decisions, (b) obligation to absorb expected losses or (c) right to receive expected residual returns. A VIE must be evaluated quantitatively and qualitatively to determine the primary beneficiary, which is the reporting entity that has (a) the power to direct activities of a VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.
To determine a VIE’s primary beneficiary, we perform a qualitative assessment to determine which party, if any, has the power to direct activities of the VIE and the obligation to absorb losses and/or receive its benefits. This assessment involves identifying the activities that most significantly impact the VIE’s economic performance and determine whether we, or another party, has the power to direct those activities. When evaluating whether we are the primary beneficiary of a VIE, we perform
42
a qualitative analysis that considers the design of the VIE, the nature of our involvement and the variable interests held by other parties. See Note 7 for further information.
The Company has determined that certain of its subsidiaries are VIEs, and that the Company is the primary beneficiary of the entities, because it has the power to direct activities of the entities that most significantly impact the VIE’s economic performance and has a controlling financial interest in each entity. Accordingly, the Company consolidates these entities, which include Holdco, RCP 2, RCP 3, TrueBridge, Hark and Bonaccord. The assets and liabilities of the consolidated VIEs are presented gross in the Consolidated Balance Sheets. The liabilities of our consolidated VIE’s are obligations of those entities and their creditors do not generally have recourse to the assets of P10. See Note 7 for more information on both consolidated and unconsolidated VIEs.
Entities that do not qualify as VIEs are assessed for consolidation as voting interest entities under the voting interest model. Under the voting interest model, the Company consolidates those entities it controls through a majority voting interest or other means. Five Points, P10 Intermediate, P10 Holdings, and ECG are concluded to be consolidated subsidiaries of P10 under the voting interest model.
Revenue Recognition of Management Fees and Management Fees Received in Advance
On January 1, 2019, the Company adopted ASC 606, Revenue from Contracts with Customers (“ASC 606”) using the modified retrospective method. The adoption did not change the historical pattern of recognizing revenue for management fees. Accordingly, the Company did not record a cumulative adjustment upon adoption.
Revenue is recognized when the Company transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled to in exchange for those goods or services.
While the determination of who is the customer in a contractual arrangement will be made on a contract-by-contract basis, the customer will generally be the investment fund for the Company’s significant management and advisory contracts.
Management and Advisory Fees
The Company earns management fees for asset management services provided to the Funds where the Company has discretion over investment decisions. The Company primarily earns fees for advisory services provided to clients where the Company does not have discretion over investment decisions. Management and advisory fees received in advance reflects the amount of fees that have been received prior to the period the fees are earned. These fees are recorded as deferred revenue on the Consolidated Balance Sheets.
For asset management and advisory services, the Company typically satisfies its performance obligations over time as the services are rendered, since the customers simultaneously receive and consume the benefits provided as the Company performs the service. The transaction price is the amount of consideration to which the Company expects to be entitled based on the terms of the arrangement. For certain funds, management fees are initially calculated based on committed capital during the investment period and on net invested capital through the remainder of the fund’s term. Additionally, the management fee may step down for certain funds depending on the contractual arrangement. Advisory services are generally based upon fixed amounts and billed quarterly. Other advisory services include transaction and management fees associated with managing the origination and ongoing compliance of certain investments.
Income Taxes
Current income tax expense represents our estimated taxes to be paid or refunded for the current period. In accordance with Accounting Standards Codification (ASC) 740, Income Taxes (“ASC 740”), we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are recorded to reduce deferred tax assets to the amount we believe is more likely than not to be realized.
Uncertain tax positions are recognized only when we believe it is more likely than not that the tax position will be upheld on examination by the taxing authorities based on the merits of the position. We recognize interest and penalties, if any, related to uncertain tax positions in income tax expense.
43
We file various federal and state and local tax returns based on federal and state local consolidation and stand- alone tax rules as applicable.