P10 Industries Inc. (PX)

[value1008]

UPDATED REMARKS
I had promised in my Seeking Article that i would come back to the comment thread once the 10-K document was released by PIOE to update with newer remarks. I did so, and i'll re-post all those remarks here and then "sticky" this post so that people can more easily find my updated thinking.

Here is the link to the Shareholders Letter of 3/30/18 and the accompanying 10-K, audited and approved by KPMG, one of the world’s “Big Four” auditing firms: http://ir.p10holdings.com/static-files/50c71c0e-1173-4ac7-b881-f03fef4d4158

First, let it be noted once again (as I emphasized several times in my article) that the 10-K financial results are only very partial and incomplete at this point in time:
“The [two-step] structure of the RCP acquisition [by P10 Holdings] also means that the financial statements included in the annual report only reflect our ownership of RCP2 and its financial results from October 5th to the end of 2017. With the acquisition of RCP3, alongside the initial refinancing of the Sellers’ Notes in January, the positive cash flow effect to P10 should begin to be more fully reflected in our second quarter for 2018, when both RCP2 and RCP3 will be fully consolidated.”

In the Shareholders Letter we deduce that, on RCP Advisors’ AUM-management fees for an AUM (assets under management) that is clearly growing (see quoted passages further below), PIOE will be generating revenues at or over $40 million / year, which is at or above the higher end of my revenue-estimate that I gave for this article.

This revenue projection is based on management stating (see passages below) they believe they can achieve an annual run-rate “in excess of $20 million” in EBITDA by the end of 2018, which is 22.4 cents per share (on PIOE's 89.235M shares). There will be no taxes on that because of PIOE’s large amount of NOLs (net operating losses) from a former business that was divested in Nov. 2016. That EBITDA, therefore, represents some excellent earnings power and will throw off a lot of free cash flow. There will be interest to pay on a cheaply-refinanced version of the sellers note, but I surmise that PIOE will be piling up cash year after year to create more growth in shareholder value.

As the Shareholders Letter tantalizingly states: “P10’s unique financial position and tax attributes [the NOLs] allows us to support our debt, reinvest in the RCP funds, and pursue growth opportunities, such as new fund offerings and acquisitions.”


Here are the two key passages in this Shareholders Letter upon from which we hear about the EBITDA margin “in excess of 50% of revenues” and “an annual EBITDA run rate in excess of $20 million by the end of 2018”:

“The benefit to P10 is twofold: (1) we have an RCP team that remains highly motivated to perform; and (2) the P10 revenues consist almost exclusively of highly predictable and stable management and advisory fees. Moreover, we have an extraordinary team in place with significant capacity to add incremental assets under management ("AUM"). As a result, to the extent we can continue to grow our AUM, thereby growing our management fees, we would anticipate an expanding profit margin and growing earnings for P10. For 2018, we project the RCP business should generate an EBITDA margin in excess of 50% of revenues; and because our management fees are, for the most part, locked up by contract for up to a decade, we believe this profit stream will prove to be stable.”
[...]

“We expect our quarterly EBITDA to achieve $5 million per quarter during the second half of 2018, with an annual EBITDA run rate in excess of $20 million by the end of 2018. Our business is not seasonal, and because our revenues are mostly contracted for many years into the future, we believe quarterly numbers can be “annualized” in normal periods. Moreover, because of the unique tax attributes of P10, we believe that EBITDA minus cash interest expense is a good measure of “free cash flow” generation by P10. Finally, our cash interest expense is significantly lower than a company with a comparable debt balance because approximately half of our debt remains in the non-interest bearing Sellers’ Notes.”

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The reader may wonder whether RCP Advisors can, in fact, keep growing its AUM, but note that in my S.Alpha article the various Amended Form D SEC filings by RCP Advisors clearly indicate their AUM is already MUCH HIGHER than the totals as of Sept. 30, 2017. That AUM had grown nearly $180 million from June 30, 2017 to Sept. 30 2017, and, as I wrote in the article in light of those Amended Form D’s: “When adding the increased GAVs [gross asset values] on four of the RCP 3 managed Funds, the overall AUM is up AT LEAST AN EXTRA $514 million from just late Sept. into early January 2018, which means that AUM management fee income is up.”

Now for CORRECTIONS to my S.Alpha article: contrary to a couple of things I focused on in the article, P10 is NOT getting any of the carried interest (performance fees) from RCP Advisors. Nor will PIOE have as part of its balance sheet the considerable RCP cash-equivalents in the ownership percentages from investments in their own RCP Funds. Thus my statement that PIOE has $1.57 in cash equivalents per share is not correct.

These two “lacks” (relative to what I and others had assumed) are, I believe, countered by the prestige with which RCP is described by the P10 co-CEOs Alpert and Webb:

“We could not have asked for a better acquisition than RCP. The 46 RCP dedicated employees are not only top-notch investment advisors; they are also extraordinary people and professionals. They are folks who care deeply about providing superior risk-adjusted performance, and superior client service, to the investors in the limited partnerships RCP manages. This has been the case since RCP's founding over 17 years ago. Since that time, investors have entrusted RCP with over $6.5 billion of capital to deploy into lower middle market private equity. The RCP investment returns speak for themselves; and importantly, RCP has not allowed either its growth or success to diminish its core focus on its investors. […] In our opinion, RCP is the crown jewel in lower middle market private equity. Their investment returns, brand equity, history, and continuity of team is unmatched. They had plenty of suitors, including those who were willing to pay far more than we ever could. RCP selected P10 precisely because they didn't want to ‘sell out.’ In fact, they remain the largest stockholders of their own business through their ownership of P10 common stock.”

In other words, i think we have a unique play here with PIOE that will merit attention from big money investors when they begin more and more to realize that one way of investing in RCP is not just through their RCP Funds but also by investing in PIOE stock. I think that will create and sustain a higher valuation (e.g. P/E) over time.

There was no mention in the Shareholders Letter of uplisting, but i think our previous arguments in favor of an uplisting are certainly already known by P10 and RCP and will eventually come to pass.

I'm going to continue to hold all my PIOE shares for the long term. I think this is worth well over $2 for much of this year and higher as RCP grows its AUM (and AUM mgmt fees), and as P10 explores the "additional investments and acquisitions" we've heard about in prior PRs and explicitly state here, too, in the shareholders letter