P10 Holdings (PIOE) is an alternative asset manager that has a history of accretive acquisitions and strong revenue growth. It also stands to benefit from secular growth headwinds in the alternative asset management industry. Additionally, the company benefits from multiple holdover tax assets from its "prior life" as well as an accounting quirk that hides its true profitability.
Author's Note: Not long after I wrote this article, P10 Holdings announced another transformative acquisition, purchasing the venture capital firm TrueBridge. The market has... ummmm... liked it.
I will plan to post longer form thoughts on this new acquisition and a valuation update when the next quarter's results are released. In short, everything I wrote below applies, and this is just another example of P10 making a shrewd acquisition that will be accretive to earnings and cash flow. This company is going to be worth multiples of its current value years down the road, and you're not too late to join.
Now for the original article and thesis....
I am not a huge fan of our current market. The valuations scare me and won't lead to strong long term returns. While stock picking isn’t for everyone, more than ever this strikes me as a good time to look for inefficiencies and deep value. Last week I discussed another large holding of mine, Pershing Square Tontine Holdings, but today I want to talk about one of my favorite stocks.
What if I told you I stumbled across a company that:-Is small and not covered by analysts-Has growing revenue and is profitable-Has a clean balance sheet-Is run by smart capital allocators-Has (very) high insider ownership-Has a growth runway in place-Is participating in a generational, secular growth trend-Is planning to use acquisitions to further fuel growth with a track record of accretive acquisitions-AND is trading at a reasonable valuation?
You’d probably want the ticker.
So, let’s get to it. Today we’re going to be talking about P10 Holdings, Inc, a company that I think has big time potential.
I’ll warn you, this is going to be a bit of a long one, and we’re going to delve into some history. I had a LOT of fun with this one, and I hope you enjoy it too.
P10 Holdings, Inc began its life as Active Power Inc. The original company was founded in 1992 and designed and manufactured uninterruptible power supply products.
That sounds interesting, I guess, but it’s also irrelevant.
Active Power was a trash company, and if they did anything really well, it was lose money. We will be coming back to that later.
In 2016, the company sold essentially all of its assets and operations to a company called Langley Holdings, retaining a pittance of cash, some intellectual property, and tax benefits. The company then proceeded to file for bankruptcy in 2017 to eliminate liabilities related to assets that had been sold to Langeley.
Key to the restructuring process was a group called 210 Capital LLC essentially taking ownership of the company following a cash infusion. This is where Co-CEOs Clark Webb and Robert Alpert come into the picture, as they were Co-Founders and majority owners of 210 Capital LLC.
The company emerged from bankruptcy as P10 Holdings with a goal of monetizing its intellectual property portfolio and to “acquire profitable companies.” Digging back into the quarterly reports around this time is borderline comical. I particularly liked this line from Mark Ascolese’s June 2017 letter “I know many of you are anxiously looking for an announcement from the company regarding our IP monetization and/or acquisition activities; we have been active in both of these objectives and we look forward to updating you on our progress in future quarters.”
Can you feel the strain?
You really can’t blame investors for being antsy around that time. After all, the company had just burned a mountain of money, sold its operations, gone into bankruptcy, then emerged with some IP of apparently very little actual value. As of June 2017, the company had 0 revenue, and basically its entire balance sheet was the $4.6m that 210 Capital had used to buy the business.
Not long after this, P10 Holdings moved on from Mr. Ascolese. He had been CEO of P10 (then Active Power) since 2013, and as the new ownership didn’t seem all that interested in the energy storage business, you can imagine he wasn’t going to be sticking around for long.
This is where things start looking up.
In October of 2017, P10 took the first step to becoming the company it is today, acquiring RCP Advisors, a private equity firm specializing in funds of funds but also co-investment and secondary funds.
We should quickly note here that RCP Advisors really has a multi pronged corporate structure, and P10 didn’t acquire everything. They acquired the pieces of the business owning fund management fees - although not the fund’s performance fees, purportedly to incentivize the RCP fund managers on an ongoing basis.
Additionally, P10 structured this buyout to leave the RCP principals as owners of 49.5% of P10’s stock, further aligning RCP Advisors and P10 shareholders. The remainder was financed with debt, largely “Seller’s Notes” that are basically non-interest bearing promises to pay; since that time, P10 has been paying the Seller’s Notes off with cash that it pulls from its credit facility. The total purchase price was $171 million.
Suddenly P10 had… revenue. And income. It had done that “acquire profitable companies” thing it had been talking about.
At an acquisition price of $171 million and with RCP advisors pulling in $30.5 million in fees over the following 12 months, we end up with a not unreasonable P/S of 5.7 for the buyout.
At this point in the story, you’re probably wondering… why?
Why did a group of outside investors take over a shell company with no meaningful operations and a bunch of essentially worthless IP (related to power management no less), only to offer just shy of half of P10 Holdings to take out RCP Advisors, a private equity firm?
The answer is buried back in the original company’s messy history. Remember how I said Active Power (P10 before the name change) was great at burning money?
Well, operating at a loss actually earns you a tax benefit in our country.
In the bankruptcy proceedings, the company specifically preserved this “Net Operating Loss Carryforward” as a tax asset, worth about $270 million dollars to offset future income.
In other words, roughly the next $200-300 million of income P10 Holdings is able to earn will end up going straight into cash flow.
The marriage with RCP Advisors was really an “everyone wins” situation. P10 Holdings’ original owners were able to start to monetize their tax assets by obtaining a profitable company against which to burn the tax assets.
Conversely, RCP Advisors were able to transition their ownership stake in RCP into the more liquid P10 (private vs public) while also simultaneously keeping their profits away from the tax man.
In fact, this tax benefit is so valuable and so critical to future operations of the business, that the P10 Board of Directors has adopted what amounts to a “Poison Pill” in the event that someone buys up 5% of the company that would massively dilute the new 5% owner. (Author's Note: They also have this poison pill to avoid an ownership change which would negative the value of these tax assets.)
The folks in charge of this one know they have a tremendously valuable asset on their hands, and they are going to do what it takes to protect it.
This is a win for shareholders as well. Insiders own about 70% of the float and appear clearly incentivized to grow the company for the long run… and they’re doing what they can to keep this away from anyone else.
Things get even more interesting when you take a moment to look at the financials. For example, let’s take a look at the most recent Annual Report.
With a net income of $12 million and a market cap of $230 million, you end up with a PE of about 20.
For a company growing revenues year over year by 31% and actually doubling net income, that doesn’t feel unreasonable at all. Heck, in our current market, you’re seeing any stock that claims to be involved in electric vehicles, the cloud, or working from home launch to the moon with less exciting financials.
However, the profitability of P10 Holdings is actually understated, and you can figure this out if you take a look at the “Amortization of Intangibles” line.
Due to the takeover of RCP Advisors, P10 Holdings assumed $76 million in intangibles which they must then amortize as an expense every quarter. These intangibles were made up of asset management fund contracts, technology, and tradenames. While this $10 million counts against P10’s income every year, these intangibles don’t actually have any meaningful actual cost associated with them (at least as long as RCP Advisors is able to continue to grow its asset management business which it has done a phenomenal job of thus far). What we are really seeing is an accounting quirk that does a wonderful job of hiding this company’s true profitability.
Adding back in $8 million of the $10 million amortization expense (to be conservative and allow for some depreciation of technology and etc), you end up with a company trading at 11.5x earnings. Again, this is for a company that has demonstrated 30% revenue growth and outsized growth in net income as well.
First, management is going to continue to grow RCP Advisors.
RCP Advisors has been aggressive in raising cash for its new funds. As seen above, the growth rates in place have been impressive, and I expect this trend to continue. RCP recently closed it’s Fund XIV with just shy of $400m in April and has already raised $145m for Fund XV. P10 indicates that RCP will continue to bring funds to the market.
What’s more, though, P10 Holdings has a fantastic opportunity to take advantage of a secular tailwind in private equity.
With interest rates at essentially zero around the world and expected to stay there, and with stocks trading at all time highs, it is very reasonable to expect future returns from a stocks and bonds portfolio to be below average. As a result, investors will increasingly turn to alternative assets.
Brookfield Asset Management (BAM) projects that alternative allocations could go as high as 60% if interest rates remain near zero.
Whether or not this projection is optimistic, I have exactly ZERO doubt there will be long term secular growth in the alternative asset space due to the current macroeconomic environment, and P10 Holdings stands to benefit from this.
Additionally, P10 Holdings has its eye out for further acquisitions. They recently closed on an acquisition of Five Points Capital, a private equity firm specializing in the private credit market. Management also revealed that they came close to pulling the trigger on a $250 million dollar acquisition in 2019 but did not end up moving forward with the deal. I expect there to be more accretive buyouts in the next couple of years, and even in the absence of this, I think P10 will be able to grow revenues and earnings at a high rate through its current holdings.
Last, the cash flows here are resilient. When a private equity firm raises a fund, it typically has those funds locked down and earning fees for about 10 years. This keeps cash flows highly predictable. With the expectation to raise new and larger funds in the future, you get a revolving door of assets under management with the general trend towards increased management fees. The flip side is that P10 Holdings has low fixed costs. Excluding employee compensation and interest expense, the company has very little in the expenses column, particularly when you factor in NOLs.
There are several risks to consider.
First, this is a small company trading in the OTC market. It is illiquid, and the bid/ask spreads are occasionally as high as 10 cents. The company has indicated it is taking steps to be re-listed on the NYSE, but this has not yet materialized.
Second, there is the risk that future acquisitions are not as accretive as in the past, resulting in a drag on earnings, or, worse, dilution of current shareholders. Typically management has structured its buyouts to give shares in Holdco, a holding company within P10 it has set up that can only convert to P10 shares at a higher price (for example, Five Points Capital's principals' Holdco shares have a P10 Holdings conversion price of $3, 20% above current prices).
Third, if RCP or Five Points were to materially underperform other alternative asset managers in a durable way, they could lose reputation and branding power and suffer a decreased ability to raise funds in the future.
Fourth, with a likely change in political power coming in November, there is no guarantee P10's tax assets will be preserved. I will say I find the risk to these assets almost negligible.
Fifth, the company is materially levered with $150m in debt against its market cap of $230m. I am not yet concerned about this for a few reasons. First, it owes much of this to "itself" (RCP principals). Second, interest rates are very, very low. Third, P10 has predictable, long term cash flows without tax drag which it has been using to pay down the debt.
When you put it all together, P10 Holdings looks like a winner.
Management is aligned with shareholders with heavy insider ownership and has demonstrated themselves to have an eye for accretive acquisitions (and an eye for clever accounting…). The company has tax assets that reduce drag on cash flow. The company’s current “surface level” profitability is heavily understated due to an amortization expense, and the company is ably demonstrating rapid growth. The company stands to benefit from long term secular growth due to our current investing environment, and its earnings and cash flows are of high quality, with assets under management in individual funds typically earning fees for 8 years or more.
I will be holding this one for a long time.
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Disclosure: I am/we are long PIOE, BAM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.