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, 2022and 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, 2021and the Consolidated Statement of Operations from September 30, 2021to 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 Holdingscommon 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 millionwas used to pay down outstanding term loan debt, $12.4 millionwas used to pay off Seller's Notes, $1.1 millionwas used to cash settle certain option awards, $1.0 millionwas used to fund the dividend on P10 Intermediate's preferred stock and $4.5 millionwas used to pay expenses incurred in connection with the offering. 30 -------------------------------------------------------------------------------- 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 millioncredit agreement with a syndicate of banks, including JP Morgan Chase Bankand Texas Capital Bankas joint lead arrangers and bookrunners, which provided for the Term Loan in an aggregate principal amount of $125 millionand Revolver Facility in an aggregate principal amount of $125 millionwith a four year term and an additional $125 millionaccordion feature, which the Company exercised in September 2022. The variable interest rate is 210 basis points over 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. The outstanding balance as of September 30, 2022was $174.9 million.
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 40 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, 260+ fund managers, 480+ private market funds and 1,900+ portfolio companies. We have 50 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, 9,800 funds, 44,000 individual transactions, 29,000 private companies and 276,000 financial metrics. As of September 30, 2022, PES managed $10.6 billionof Fee Paying Assets Under Management ("FPAUM").
Venture Capital Solutions (VCS). Under VCS, we make investments in venture capital funds across
North Americaand specialize in targeting high-performing, access-constrained opportunities. The VCS investment team, which is comprised of 15 investment professionals with an average of 21+ 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 930+ investors, 60+ fund managers, 55 direct investments, 230+ private market funds and 6,500+ portfolio companies. We have 18 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 September 30, 2022, VCS managed $5.2 billionof 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 billioninto 750+ projects, supporting 400+ businesses across 38 states since 2000. We have invested $2.6 billionin Impact Assets across our Small Business Lending, Impact Real Estateand Climate Finance Strategies. Investments in solar assets have generated over 781 million KWh of renewable energy over the lifetime of the portfolio. As of September 30, 2022, IIS managed $1.8 billionof FPAUM.
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 23+ years of experience, has deep and long-standing relationships in the private credit market which it has cultivated over the past 22 years, including 290+ investors across 9 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 31 -------------------------------------------------------------------------------- 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 50+ active sponsor relationships and have 70+ platform investments. As of September 30, 2022, PCS managed $1.4 billionof 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
$11.5 billionof our FPAUM as of September 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
$6.2 billionof our FPAUM as of September 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
$1.4 billionof our FPAUM as of September 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 32 -------------------------------------------------------------------------------- uncertain, we continue to see investors turning towards alternative investments to achieve consistent and higher yields with our contractually guaranteed fee rate.
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. 33 --------------------------------------------------------------------------------
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 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
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.
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. 34 -------------------------------------------------------------------------------- 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 advisory, audit and tax expenses are expected to increase as our Company has become an
SECregistrant and we must comply with additional regulatory requirements.
General, administrative and other expenses include occupancy, travel and entertainment, technology, insurance and other overhead costs associated with running 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 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.
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. 35 -------------------------------------------------------------------------------- Results of Operations For the three and nine months ended
September 30, 2022and September 30, 2021. For the Three Months Ended For the Nine Months Ended September 30, September 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change REVENUES (in thousands) (in thousands) Management and advisory fees $ 49,479 $ 37,939 $ 11,54030% $ 138,957 $ 104,029 $ 34,92834% Other revenue 517 206 311 151% 1,058 872 186 21% Total revenues 49,996 38,145 11,851 31% 140,015 104,901 35,114 33% OPERATING EXPENSES Compensation and benefits 23,984 14,055 9,929 71% 60,293 38,328 21,965 57% Professional fees 4,064 2,901 1,163 40% 9,416 9,038 378 4% General, administrative and other 4,031 2,667 1,364 51% 12,393 6,919 5,474 79% Contingent consideration expense 1,380 (26 ) 1,406 (5,408)% 1,367 134 1,233 920% Amortization of intangibles 6,153 7,484 (1,331 ) (18)% 18,487 22,452 (3,965 ) (18)% Strategic alliance expense 124 - 124 100% 429 - 429 100% Total operating expenses 39,736 27,081 12,655 47% 102,385 76,871 25,514 33%
OPERATING INCOME 10,260 11,064 (804 ) (7)%
37,630 28,030 9,600 34% OTHER (EXPENSE)/INCOME Interest expense implied on notes payable to sellers - (223 ) 223 (100)%
– (657 ) 657 (100)% Net debit interest (2,358 ) (5,261 ) 2,903 (55)%
(5,268 ) (15,761 ) 10,493 (67)% Other income 183 257 (74 ) (29)% 1,303 802 501 62%
Total other (expenses) (2,175 ) (5,227 ) 3,052 (58)%
(3,965 ) (15,616 ) 11,651 (75)% Net income before income taxes 8,085 5,837 2,248 39% 33,665 12,414 21,251 171% Income tax expense (2,468 ) (1,759 ) (709 ) 40% (9,102 ) (3,154 ) (5,948 ) 189% NET INCOME
$ 5,617 $ 4,078 $ 1,53938% $ 24,563 $ 9,260 $ 15,303165% Revenues
Three months completed
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
September 30, 2022and September 30, 2021. For the three months ended September 30, 2022compared to the three months ended September 30, 2021, revenues increased $11.9 millionor 31% due to higher management fees, primarily from the impact of organic 2022 growth. Management fees increased $11.5 million, or 30%, to $49.5 millionfor the three months ended September 30, 2022as compared to the three months ended September 30, 2021due to organic growth efforts in 2022. This growth is driven by increases in FPAUM, primarily from additional fund closings and capital raised. Catch up fees during the third quarter of 2022 were $0.8 millionassociated with fund closings at TrueBridge and RCP. Catch up fees were $1.7 millionduring the third quarter of 2021 also associated with Truebridge and RCP. Other revenues, which represent ancillary elements of our business, increased by $0.3 millionor 151% to $0.5 millionfor the three months ended September 30, 2022as compared to the three months ended September 30, 2021driven primarily by fund interest income, subscription revenues and ad hoc referral fees.
Nine month period ended
Total revenues increased
$35.1 million, or 33%, to $140.0 millionfor the nine months ended September 30, 2022compared to the nine months ended September 30, 2021, due to higher management and advisory fees, largely attributable to organic growth as well as the acquisitions of Hark and Bonaccord on September 30, 2021. Management fees increased by $34.9 million, or 34%, to $139.0 millionfor the nine months ended September 30, 2022as compared to the nine months ended September 30, 2021due primarily to organic growth of FPAUM, which contributed $27.3 millionto management fee and advisory revenues, in total. Revenue also increased by $7.6 milliondue to the acquisitions of Hark and Bonaccord in September 2021. Catch up fees for the nine months ended September 30, 2022were $3.3 millionassociated with the fund closings at TrueBridge and RCP. Catch up fees were $2.9 millionduring the nine months ended September 30, 2021also associated with TrueBridge and RCP. 36 -------------------------------------------------------------------------------- Other revenues increased by $0.2 million, or 21% to $1.1 million, from the nine months ended September 30, 2022compared to the nine months ended September 30, 2021. This increase was primarily attributable to fund interest income. For the Three Months Ended For the Nine Months Ended September 30, September 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change OPERATING EXPENSES (in thousands) (in thousands) Compensation and benefits $ 23,984 $ 14,055 $ 9,92971 % $ 60,293 $ 38,328 $ 21,96557 % Professional fees 4,064 2,901 $ 1,16340 % 9,416 9,038 378 4 % General, administrative, and other 4,031 2,667 $ 1,36451 % 12,393 6,919 5,474 79 % Contingent consideration expense 1,380 (26 ) $ 1,406(5,408 )% 1,367 134 1,233 920 % Amortization of intangibles 6,153 7,484 $ (1,331 )(18 )% 18,487 22,452 (3,965 ) (18 )% Strategic alliance expense 124 - $ 124100 % 429 - 429 100 % Total operating expenses $ 39,736 $ 27,081 $ 12,65547 % $ 102,385 $ 76,871 $ 25,51433 % Operating Expenses
Three months completed
Total operating expenses increased by
$12.7 million, or 47%, to $39.7 million, for the three months ended September 30, 2022as compared to the three months ended September 30, 2021primarily 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 2021and D&O insurance driven by the IPO transaction at the end of 2021. Compensation and benefits expense increased by $9.9 million, or 71%, to $24.0 millionfor the three months ended September 30, 2022as compared to the three months ended September 30, 2021. Stock compensation accounts for $7.3 millionof the $9.9 millionincrease. This was driven by RSUs and stock options granted to employees during the fourth quarter of 2021 and the first and third quarter of 2022 as well as RSAs granted in late 2021 and the third quarter of 2022. The Bonaccord and Hark Units discussed in Note 16 account for $4.5 millionof the stock compensation expense. There was a $1.1 millionincrease associated with the acquisitions of Hark and Bonaccord on the last day of the third quarter in 2021. The final driver is a $1.5 millionincrease associated with an increase in headcount across all subsidiaries.
Professional fees increased by
General, administrative and other increased by
$1.4 million, or 51% to $4.0 millionand 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 millionof expense compared to the third quarter of 2021. The Company entered into two new leases since September 30, 2021which added an additional $0.3 millionof expense. The remaining $0.4 millionof additional general and administrative expense is derived from additional information technology 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 September 30, 2022as compared to the three months ended September 30, 2021. The decrease is driven by an intangible asset that fully amortized in 2021 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. Contingent consideration increased by $1.4 millionfor the three months ended September 30, 2022as compared to the three months ended September 30, 2021. This increase is driven by the quarterly revaluations of Hark and Bonaccord contingent consideration, which was part of the acquisition in September 2021.
Bonaccord’s SAA has added another
Nine month period ended
Total operating expenses increased by
$25.5 million, or 33%, to $102.4 millionfor the nine months ended September 30, 2022compared to the nine months ended September 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 and the third quarter 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 2021also contributed to these increases. Compensation and benefits expense increased by $22.0 million, or 57%, to $60.3 million, for the nine months ended September 30, 2022compared to the nine months ended September 30, 2021. The acquisitions of Hark and Bonaccord made up $5.3 millionof this increase. Another $11.3 millionconsisted of stock compensation expense related to RSUs and stock options issued to employees during the fourth quarter of 2021 and the first and third quarters of 2022 as well as RSAs issued in late 2021 and the third quarter of 2022. Of the $11.3 millionof stock compensation expense, $4.5 millionrelates to the Bonaccord and Hark Units discussed in Note 16. There was a $1.6 millionincrease associated with the build out of P10 back office to meet compliance needs of a public company. An additional $2.1 millionrelated to increases in headcount across all subsidiaries. Finally, Five Points made a $1.7 millionone-time payment to buyout the employment contracts for the prior partners during the first quarter of 2022. Professional fees increased by $0.4 million, or 4%, to $9.4 millionprimarily due to differences in the acquisition structures that were completed in 2021 as compared to 2022. General, administrative and other increased by $5.5 million, or 79% to $12.4 million. The acquisitions of Hark and Bonaccord added an additional $2.3 millionof expense for the nine months ended September 30, 2022as compared to the nine months ended September 30, 2021. As previously mentioned, D&O insurance added an additional $1.9 millionof expense related to the IPO transaction. Additional office space in New Yorkadded $0.8 millionof rent expense. The additional $0.5 millionof expense relates to increased costs associated with expanded headcount and increased travel expenses. Amortization of intangibles decreased by $4.0 million, or 18%, to $18.5 million, for the nine months ended September 30, 2022as compared to the nine months ended September 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. Contingent consideration increased by $1.2 millionto $1.4 millionfor the nine months ended September 30, 2022as compared to the nine months ended September 30, 2021. This increase is driven by the quarterly revaluations of Hark and Bonaccord contingent consideration, which was part of the acquisition in September 2021.
Bonaccord’s SAA has added another
Other income (expenses)
Three months completed
Other expenses decreased
$3.1 million, or 58%, to $2.2 millionfor the three months ended September 30, 2022compared to the three months ended September 30, 2021. This decrease was primarily due to a $2.9 milliondecrease 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 September 30 2022, as compared to the three months ended September 30, 2021is a function both of lower interest rates as well as $111.9 millionless in outstanding interest-bearing principal as of September 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.
Nine month period ended
Other expenses decreased by
$11.7 million, or 75%, to $4.0 millionfor the nine months ended September 30, 2022compared to the nine months ended September 30, 2021. This decrease was primarily due to a $10.5 milliondecrease in interest expense related to the debt refinance mentioned in the above paragraph that took place in December 2021. Other income increased by $0.5 milliondriven by ECG's increased income from unconsolidated subsidiaries in the first nine months of 2021. 38 --------------------------------------------------------------------------------
Income tax/benefit expenditure
Three months completed
Income tax expense increased by
Nine month period ended
Income tax expense increased by
$5.9 millionto $9.1 millionfor the nine months ended September 30, 2022compared to an expense of $3.2 millionfor the nine months ended September 30, 2021. The increase was primarily due to higher expected future net income during 2022.
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 For the Three For the Nine For the Nine Months Ended Months Ended Months Ended Months Ended September 30, September 30, September 30, September 30, 2022 2021 2022 2021 (in millions) (in millions) (in millions) (in millions) Balance, Beginning of Period $ 18,453$ 15,082 $ 17,263 $ 13,351 Add: Acquisitions - - - - Capital raised (1) 696 1,112 2,136 2,771 Capital deployed (2) 179 161 614 431 Net Asset Value Change (3) - 1 8 8 Less: Scheduled fee base stepdowns (353 ) (79 ) (462 ) (241 ) Expiration of fee period (19 ) (18 ) (603 ) (61 ) Balance, End of period $ 18,956$ 16,259 $ 18,956 $ 16,259 (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. 39 --------------------------------------------------------------------------------
The following table presents a period-to-period evolution of our remunerated assets under management on an actual basis.
For the Three For the Three For the Nine For the Nine Months Ended Months Ended Months Ended Months Ended September 30, September 30, September 30, September 30, 2022 2021 2022 2021 (in millions) (in millions) (in millions) (in millions)
Balance, Beginning of Period $ 18,453 $ 14,172
$ 17,263 $ 12,706Add: Acquisitions - 952 - 952 Capital raised (1) 696 1,077 2,136 2,443 Capital deployed (2) 179 175 614 394 Net Asset Value Change (3) - 1 8 8 Less: Scheduled fee base stepdowns (353 ) (73 ) (462 ) (183 ) Expiration of fee period (19 ) (45 ) (603 ) (61 ) Balance, End of period $ 18,956 $ 16,259 $ 18,956 $ 16,259(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.
$0.5 billion, or 2.7%, to $19.0 billionon a pro forma basis and actual basis for the three months ended September 30, 2022. This increase is due primarily to an increase in capital raised from our private equity and venture capital solutions. FPAUM increased $1.7 billion, or 9.8%, to $19.0 billionon a pro forma basis and $1.7 billionor 9.8% to $19.0 billionon an actual basis for the nine months ended September 30, 2022, due primarily to an increase in capital raised from our private 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 calculate Adjusted EBITDA, we adjust our GAAP net income for the following items:
Expenses that generally do not require us to pay 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 tax.
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 Nine Months Months Ended Ended September 30, September 30, 2022 2021 2022 2021 (in thousands) (in thousands) Net income
$ 5,617 $ 4,078 $ 24,563 $ 9,260Add back (subtract): Depreciation & amortization 6,284 7,553 18,824 22,654 Interest expense, net 2,358 5,484 5,268 16,418 Income tax expense 2,468 1,759 9,102 3,154 Non-recurring expenses 3,779 2,422 6,717 3,833 Non-cash stock based compensation 7,266 461 11,498 1,452 Adjusted EBITDA 27,772 21,757 75,972 56,771 Less: Cash interest expense (2,332 ) (4,555 ) (4,622 ) (13,712 ) Cash income taxes, net of taxes related to acquisitions (310 ) (1,046 ) (738 ) (2,192 ) Adjusted Net Income $ 25,130 $ 16,156 $ 70,612 $ 40,867
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