Partners Group - Deep Philosophical Analysis

The Core Question: Why Does Private Equity Exist?

Before analyzing Partners Group, we must understand why the private equity model creates value. The cynical view: PE is financial engineering - buy companies with leverage, cut costs, sell to a greater fool.

The Buffett view: Private ownership enables long-term thinking. Public markets force quarterly earnings management. Private ownership allows investments that sacrifice short-term profits for durable competitive advantages.

Partners Group sits in this tension. They manage $152 billion in private markets assets. Are they creating value or extracting fees?

The evidence suggests value creation:

• 25+ year track record of returns exceeding public markets
• Direct investing approach (not fund-of-funds) gives control
• Industry expertise in 5 verticals (healthcare, technology, services, infrastructure, real estate)
• Operational improvement teams, not just financial engineering

But the honest answer: Some deals create value, some don't. Partners Group's moat isn't in creating value per se - it's in attracting the capital that allows them to participate in the private markets opportunity set.

Moat Meditation: The Institutionalization of Private Markets

Partners Group's moat is best understood through the lens of institutionalization.

In the 1980s, private equity was a cottage industry. Pension funds allocated 0-2% to alternatives. Today, major institutions target 20-30% alternatives allocations. This secular shift created enormous demand for private markets exposure.

Partners Group rode this wave with advantages that compound:

1. First-mover in direct investing: While competitors ran fund-of-funds, Partners Group built direct investment capabilities in the 2000s. This gives them access to deals that fund-of-funds cannot touch.

2. Swiss institutional DNA: Founded by ex-bankers, Partners Group operates with Swiss precision and discretion. Institutional investors trust them with large mandates.

3. Scale begets scale: At $152B AUM, Partners Group sees more deals, builds more relationships, and attracts better talent than subscale competitors.

4. Sticky capital: Private equity fund life is 10-12 years. Once committed, capital stays. Even if performance disappoints in one vintage, institutions rarely fire managers mid-fund.

The key question: Is this moat widening or narrowing?

Widening forces:

• Institutional allocations still growing
• Direct investing expertise is hard to replicate
• Proprietary deal flow network strengthens with scale

Narrowing forces:

• Competition from mega-managers (Blackstone, Apollo)
• Private credit competition from direct lenders
• Fee pressure from large LPs

On balance, the moat is stable. Partners Group won't become dominant like Blackstone, but their pure-play positioning protects them from commoditization.

The Owner's Mindset: Asset Manager Economics

Asset management is the best business model in the world (after reinsurance). You collect fees on other people's money. No inventory, no factories, no supply chains. Just talent and relationships.

Partners Group exemplifies this:

• Revenue margin: 1.64% of AUM (management + performance fees)
• Operating margin: ~55%
• Capital requirements: Minimal (employees and office space)
• ROE: ~25% despite no leverage

Would Buffett own this for 20 years?

Yes, because:

• Capital-light, high-margin business
• Recurring management fee base (76% of revenue)
• No debt, massive FCF generation
• Insider ownership at ~15%

He might hesitate because:

• Performance fees (24% of revenue) are cyclical
• P/E 29x leaves no margin of safety
• Private markets could face a prolonged downturn
• Regulatory risk (tax treatment of carried interest)

The honest answer: Partners Group is exactly the type of quality business Buffett loves, but the price offers no discount to intrinsic value.

Risk Inversion: How Could This Investment Lose 50%?

Inverting - what would need to happen for Partners Group to trade at CHF 600?

1. Private markets winter: A prolonged period (5+ years) of poor returns that destroys the asset class's reputation and stops institutional inflows

   • Probability: 10%
   • Similar to venture capital after 2000

2. Fee compression: Large LPs demand 50%+ fee cuts, compressing revenue margin from 1.64% to 0.80%

   • Probability: 15%
   • Already happening gradually

3. Key person departures: Senior partners leave to start competing firms

   • Probability: 10%
   • Mitigated by partnership structure

4. Regulatory regime change: Carried interest taxed as ordinary income + new private fund regulations

   • Probability: 20%
   • Political risk in US, UK

Combined probability of severe impairment: 15-20%

This is higher risk than Swiss Re's 3% permanent impairment probability. Asset managers face more competitive dynamics than reinsurers.

Valuation Philosophy: Paying Up for Quality

At CHF 1,233, Partners Group trades at:

• P/E: 29x
• EV/AUM: 0.22x
• FCF yield: 3.5%
• Dividend yield: 3.4%

For a 25% ROE business with no leverage, is P/E 29x reasonable?

Applying the Buffett/Klarman framework:

Fair value calculation:

• Normalized EPS: CHF 48
• Quality multiple: 22-28x (for a 25% ROE, capital-light business)
• Fair value range: CHF 1,056 - 1,344

Current price is at the top of fair value. No margin of safety.

The Klarman question: "Where's the catalyst to close the value gap?"

There is no gap to close. Partners Group trades at fair value.

The opportunity exists when:

• Market panics (COVID, March 2020 low was CHF 580)
• Rate fears peak (H1 2022 low was CHF 800)
• PE exit activity stalls (2023 low was CHF 900)

Wait for these moments. Do not pay P/E 29x.

The Patient Investor's Decision

What Partners Group Is:

• The premier independent private markets manager
• A capital-light, high-margin compounder
• A 25-year track record of institutional trust
• A 3.4% dividend yield growing 8% annually

What Partners Group Is Not:

• A bargain at current prices
• Immune to private markets cycles
• A monopoly (faces Blackstone, KKR, Apollo competition)
• A low-volatility holding (stock dropped 40%+ in 2022)

The Verdict:

Partners Group is a T1 Fortress business trading at full fair value. The correct action is WAIT.

The optimal strategy:

1. Add to watchlist with alert at CHF 1,100 (Accumulate) and CHF 950 (Strong Buy)
2. Monitor quarterly for signs of prolonged PE exit drought
3. Be ready to act aggressively when fear creates opportunity
4. Accept that you may miss 5-10% upside while waiting

The Philosophical Anchor:

"Partners Group's business model - collecting fees on long-duration committed capital - is inherently valuable. But intrinsic value and stock price are not the same. Today, they are equal. Wait for the market to offer a discount."

Lessons for the Investment Framework

1. Asset management is wonderful economics, terrible entry prices. Quality asset managers rarely trade at discounts because everyone knows the model is capital-light.

2. Sticky capital is real moat. 10-year fund commitments create durability that subscription services can only dream of.

3. Performance fee cyclicality matters. 24% of revenue from performance fees means double-digit earnings volatility.

4. Wait for the 40% drawdown. Partners Group has traded 40%+ below its highs multiple times this decade. Patient capital gets rewarded.

5. Swiss institutional quality is real. There's a reason global pension funds trust Swiss managers. Discretion, precision, and long-term thinking.

"The best businesses are simple: they collect money and invest it wisely. Partners Group does this. The question is only price."