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P10: Shorted & Distorted

Eric J Bokota

Given the muted market reaction to the short report, it seems most have seen through it but whatever I'll throw my thoughts on the blog just for funzies.

The crux of the 'Friendly Bear's' (to be referred to as FB) short report on P10 is that FB believes that founders/holding company execs of PX engaged in PPP related fraud (via CrossRoads) and that this will cause clients to leave the firm. I have no idea IF Alpert committed the alleged infractions. However even IF he did, FB's report really misses the mark- consider the following:

  • P10 is not an investment firm. P10 is a holding company which has acquired GP stakes in private equity firms (TrueBridge/WTI/etc) and a private equity fund of funds firm (RCP). P10 holding company execs (i.e. Alpert) DO NOT MANAGE FUNDS. The clients entrusted their funds to fund managers at RCP Advisors, TrueBridge, Enhanced, etc. These funds have decade + track records of success. These managers are the ones in charge of meeting their fiduciary duty to clients NOT holding company execs. As I understand it, there is no clause in the asset management agreements that RCP/TrueBridge/WTI which stipulates that 'if one of your holding company executives engages in fraud, we can pull our investment'. Investment contracts are long duration (discussed in next bullet). In realty, I doubt more than a few clients even know who Alpert is.
  • Private equity funds are buying whole businesses which are illiquid. Anyone who has studied the alternative asset business knows that it is a convention of the private equity marketplace that clients investing in a fund are contractually committed to be invested in the fund for a long period of time (usually a decade). Based on contractual agreements with individual firms (RCP, TrueBridge, etc) NOT P10, clients are locked in for many years. Clients are bound to RCP/TrueBridge/WTI, etc and are simply not able to leave.
  • Well won't this cause the managers to leave and start their own funds? I'll say no. P10 is unique amongst the public alt managers in that it ONLY RECEIVES MANAGEMENT FEES. The carry (incentive fees) remains with the fund managers and is a powerful incentive for the retention of key personnel. Incentive fees/compensation (which are deferred until the investment gains are actually realized - most often years into the future) basically serve as golden handcuffs that ensure the retention of key employees.
  • Further, P10 used stock as a currency for many of these deals (received by principals /fund managers) creating another incentive for the retention of critical employees.

P10 already transitioned to a new, non-founder CEO in 3Q23. Might we see the founders exit their BOD positions completely? Sure. But I don't see that as a huge deal at this point. Meanwhile we have a business generating gobs of contractually guaranteed free cash flow with a strong balance sheet. Given the large ownership stakes of the founders/principals, liquidity in the stock isn't the best. With the short interest having crept up on the back of what I believe to be an erroneous conclusion (at best), should PX turn on the buyback machine, shares could move sharply higher in the near term.

Dislcaimer: This report is NOT investment advice and should not be read by anyone. It's entirely possible that I'm wrong about absolutely everything in this post.

I remain LONG PX shares and have increased my position following FB's report.