Q2 2023 P10 Inc Earnings Call

Participants

Amanda Nethery Coussens; CFO & Chief Compliance Officer; P10, Inc.

Clayton Clark Webb; Co-CEO & Director; P10, Inc.

Mark C. Hood; Executive VP of Operations & IR; P10, Inc.

Robert Hudson Alpert; Chairman & Co-CEO; P10, Inc.

William Fritz Souder; COO; P10, Inc.

Benjamin Elliot Budish; Research Analyst; Barclays Bank PLC, Research Division

Kenneth Brooks Worthington; MD; JPMorgan Chase & Co, Research Division

Michael C. Brown; MD; Keefe, Bruyette, & Woods, Inc., Research Division

Michael J. Cyprys; Executive Director and Senior Research Analyst; Morgan Stanley, Research Division

Unidentified Analyst

Presentation

Operator

Hello, and welcome to the P10 Second Quarter 2023 Conference Call. My name is [Cole], and I will be coordinating your call today. (Operator Instructions)
I will now hand you over to your host, Mark Hood, EVP of Operations and Investor Relations. Mark, please go ahead.

Mark C. Hood

Good afternoon, and welcome to the P10 Second Quarter 2023 Conference Call. This is Mark Hood, EVP of Operations and Investor Relations. Today, we will be joined by Robert Alpert, Chairman and Co-CEO; Clark Webb, Co-CEO; Fritz Souder, Chief Operating Officer; and Amanda Coussens, Chief Financial Officer.
Before we begin, I'd like to remind everyone that this conference call as well as the presentation slides may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995.
Forward-looking statements reflect management's current plans, estimates and expectations and are inherently uncertain. Actual results for future periods may differ materially from those expressed or implied by these forward-looking statements due to a number of risk factors or other factors that are described in greater detail under Risk Factors in our annual report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 27, 2023, and in our subsequent reports filed from time to time with the SEC. The forward-looking statements included are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statements as a result of new information or future events, except as otherwise required by law.
I will now turn the call over to Robert.

Robert Hudson Alpert

Good afternoon, and thank you for joining the call. I'm pleased to report strong fundraising and deployment during the quarter against what continues to be a challenging macroeconomic backdrop. Despite current market headwinds, the trends in our business are positive for the short and long term with secular tailwinds driving private markets asset allocation by investors.
The second quarter marks our eighth financial report as a public company, and we believe the results we've consistently delivered make us a compelling business to own and they stand out among our peers in the alternative management asset industry. Our financial results demonstrate we are a resilient and durable business. We believe that we have a desirable product mix that clients value and possess a core competency at allocating capital in a way to optimize the shareholder returns.
P10 revenue is based on a long-term contractually locked up capital that generates robust margins and predictable earnings. We have unrivaled alignment with over 50% of our shares owned by insiders. Being added to the Russell indexes recently should promote a wider shareholder base. And as investors evaluate new index insurance, we think we screen well.
With that, I will hand it off to Fritz.

William Fritz Souder

Thank you, Robert. Fundraising and investment teams delivered a terrific quarter across all of our strategies with almost a dozen funds in the market. Our private equity strategies continued their strong 2023 performances with over $863 million added to fee-paying AUM during the quarter. After raising the hard cap to accept additional limited partners, RCP held a final close on Secondary Opportunities Fund IV at $797 million.
RCP's secondary fund strategy was recently recognized by Pittsburg in a top 10 fund family in the secondary strategies. Congratulations to the RCP team for the hard work. Under standout contributors for the quarter were Bonaccord Fund II, RCP multi-strat Fund II and 2 large SMAs from RCP. Also notable in the quarter was the Bonaccord announcement that it entered into a strategic agreement with Asia heritage, a Singapore-based asset manager and in conjunction with the agreement, appointed [Chris Lerner] as operating partner to lead Bonaccord's activities in Asia.
The Bonaccord-Asia heritage partnership will provide support to Bonaccord and its portfolio companies in crafting and executing capital formation initiatives in Asia, a critical growth market for private market allocations and P10. On the venture front, TrueBridge continue to demonstrate market leadership by raising $288 million across several funds. TrueBridge added over $100 million to their flagship Fund VIII and closed on 2 large SMAs that total about $160 million. We continue to see a flight of quality from institutional investors, and this plays to our strength as we provide access to elite access-constrained funds.
In the same pitch book report I mentioned a moment ago, TrueBridge are in the covenant spot as the #1 fund family in the fund to funds category. Well done to the TrueBridge team in the recognition and a leadership role in a highly competitive business. Our credit strategies added $71 million to fee-paying assets under management. We continue to see strong deployment demand across NAV lending in our venture debt business.
As it relates to WTI, we are still on track to launch Fund XI by Q1 2024. Our impact business continues its steady growth, having raised and deployed $49 million in the quarter. As the marketplace seeks investment vehicles with a track record of measurable impact, we believe enhanced capital is well positioned for continued growth. While we are pleased to count over 3,400 LPs as clients, we also recognize the vast opportunity we have to introduce our premier strategies to a large and growing global institutional and retail investment community.
Our goal is to increase awareness among the global LP community regarding the attractiveness of our platform as evidenced by our multi-decade track record in award-winning strategies. With steady secular industry growth, we believe there is an opportunity to take market share. Finally, thanks to our dedicated team for a job well done.
I will now hand it over to Clark.

Clayton Clark Webb

Thank you, Fritz. As shareholders evaluate our prospects for long-term growth, it is important to consider the structural advantages that help explain our consistent performance and uphold the confidence we have as we look to the future. Robert mentioned the first advantage, which is our business model. The stable construction of our model provides considerable visibility and predictability in our results. The second advantage is our specialized and unique knowledge of the middle and lower middle market, gained while operating in this space for over 2 decades. We've built recognizable and powerful brands with both GPs and LPs.
Another output of our strategic focus on the middle and lower middle markets is a data advantage that we believe is unmatched in the market. In what many considered to be one of the least efficient parts of the private equity and debt ecosystem, we have thousands of proprietary fund portfolio company and transaction data points that guide our investment decisions, and it's the data that gives us conviction to make an investment.
This very same data shows that our portfolio companies are generally better positioned than larger companies to endure interest rate increases because they carry a lot less leverage. Many of our holdings have pricing power with the ability to pass on higher input prices and they trade at reasonable multiples, making them attractive to larger sponsors looking for add-ons and tuck-ins. By staying focused on the middle and lower middle market, we can focus on the scenes of growth rather than the entire economy. We are not a levered play on the S&P 500.
And finally, we give LTEs an opportunity to invest in access-constrained elite investment strategies and funds. If you look at our website or earnings slides, you'll see the rendering of a bridge. The bridge is included because we consider P10 to be the bridge to our specific private market verticals. We do not compete in the large part of the market where most of our peers reside. In fact, we rarely see any publicly traded competitor in our markets nor do we have a private competitor that covers the verticals we do. In sum, we believe we are unique.
Turning now to the $5 billion fundraising target we provided last year. We are thrilled to hit that milestone 6 months ahead of schedule, which we believe is all the more impressive given the macro headwinds that have persisted since we set our target. Despite a record rise in interest rates, steep falls in equity markets and global instability, we managed to far exceed targets we laid out when the skies were blue. As noted last quarter, we still expect to lay out a new multiyear target alongside our Q4 2023 earnings call.
In the interim, we would note that we still have a few larger strategies in the market, namely our second flagship GP Stakes fund and 8th flagship venture equity fund. As a result, it is certainly possible we continue strong fundraising momentum this year, though perhaps not to the same degree we saw in our record second quarter. For the full year 2023, we continue to expect to deliver double-digit growth for revenue, adjusted EBITDA and ANI. Although interest rates and the resulting interest expense will make hitting the double-digit ANI growth target more of a challenge.
As we look out to 2024, we continue to expect our 11th flagship venture debt fund alongside continuous fundraising from over a dozen funds across our platform. One last thing I want to touch on is an update on our M&A and partnership opportunities. Our perspective is that we don't have to do a deal to grow the business. We have market-leading investment strategies in both debt and equity across middle and lower middle market private equity, venture and impact, rounded out by our leading middle-market GP stake strategy that fits perfectly alongside the other verticals. That said, we still see a lot of opportunities and are in constant dialogue. Our bar remains quite high.
I will now turn the call over to Amanda.

Amanda Nethery Coussens

Thank you, Clark. Fee-paying assets under management were $22.2 billion, a 20% increase on a year-over-year basis. In the second quarter, $1.3 billion of fundraising and capital deployment was offset by $708 billion in step-downs and expirations. For the remainder of 2023, we expect $320 million in additional step-downs in expirations. This is about $170 million more for the remainder of the year than we previously expected. The variance is primarily attributable to the timing of certain impact deals that are concluding their fee paying period.
Revenue in the second quarter was $62.5 million, a 34% increase over the second quarter of 2022. Average fee rate in the quarter was 113 basis points, driven by continued expansion of our direct strategies, such as WTI, Bonaccord and Hark. In the quarter, approximately $300 million of fund raising was closed a quarter earlier than expected. Another contributor to record second quarter performance was $4.8 million as catch-up fees, most of which is attributable to RCP's final close on Secondary Opportunities Fund IV. The fee rate for the quarter, excluding catch-up fees was 104 basis points.
Operating expenses in the second quarter were $52.1 million, a 68% increase over the same period a year ago. The increase is primarily attributable to additional compensation, benefits and noncash stock-based compensation expenses related to the acquisitions of WTI, Bonaccord and Hark. GAAP net income in the quarter was $2.1 million, an 81% decrease year-over-year. Adjusted EBITDA in the second quarter was $34.8 million, a 35% increase over what we reported in the second quarter of 2022.
Adjusted EBITDA margin was 56%, with strength attributable to catch-up fees in the quarter. For the full year, we continue to expect margins to be in the range of 51% to 52%. For the second quarter, adjusted net income, or ANI, was $26.7 million, a 15% increase over the $23.2 million recorded in the second quarter of 2022. As Clark noted, rising interest rates have created a headwind on ANI growth. Though at 15% year-over-year, we are still pleased with the results. The good news is what is currently a headwind should become a tailwind as we generate cash and delever.
Cash taxes for the full year should be between $3 million and $4 million, and we continue to benefit from our tax assets. As a reminder, they are composed of 2 distinct assets, the $162 million net operating loss and $383 million in tax amortization. Cash and cash equivalents at the end of the second quarter were $23 million. As of today, we had an outstanding debt balance of $271.2 million and $98.5 million available on the revolver. No shares were repurchased in the quarter, and we have $18.9 million available on the buyback program.
We also continue to pay our quarterly dividend. We declared a dividend of (inaudible) 0:15:16 per share on August 10, 2023, to stockholders of record as of the close of business on August 31, 2023, and payable on September 20, 2023. Finally, at June 30, 2023, our Class A shares outstanding were 43,823,473 and Class B shares outstanding were 72,381,726 shares.
Thank you. Now, let's turn it over to the operator for a few questions.

Question and Answer Session

Operator

(Operator Instructions) Our first question is from Ken Worthington with JPM.

Kenneth Brooks Worthington

Maybe firstly, given the enthusiasm we're seeing for your investment capabilities and the greater breadth of products that you have today versus a couple of years ago, we've been thinking about P10 being able to attract bigger LPs, bigger checks and ultimately some bigger funds. How are you seeing the aggregation of your various investment capabilities leading to that thesis maybe even being correct? Or are we sort of outside the realm of reasonableness thinking that, that's sort of the direction that your business is going to head to?

Clayton Clark Webb

Yes, Ken, this is Clark. It's a great question. I'll touch on part of it, and I'm sure the team can jump in as well. I think that -- I would say a couple of things. The first is we are thrilled by the fact that we hit our $5 billion of guidance that we set out in the fourth quarter of 2021 when the skies were blue and the markets were strong. Little did we know that we would have 6 quarters of record rises in interest rates and record drop in stock prices and here we are 6 quarters in, still 2 quarters ahead of time. And we've not just crossed the $5 billion, we've done it quite handily. So congratulations to the team. I think it is a testament to the power of the platform and not being reliant on any one vertical or any one strategy. I would say that's point 1.
Point 2, it's a great point. We should given our breadth of manufacturing and the fact that we are very unique. There is not another engine that looks like us in investment manufacturing, we should be able to attract larger LPs with larger check sizes over time. That is a long sales cycle, and it has certainly not been the easiest 6 quarters to be having a dialogue, but we are absolutely in dialogue. I still think we're in the bottom of the first inning with respect to what we think we can do over the next many years, but it's a long baseball game.
The good news is we are firing on all cylinders as we progress through that game. So the fact that we had to raise -- we were able to raise the hard cap twice for the secondaries fund, and we still had oversubscription at that point. And if you look at the fund size between Secondary Fund IV and Secondary Fund III, it was near doubling, that's very encouraging. When we look at our GP stake strategy, the target of $1.25 billion is nearly 2x what Fund I was, very encouraging.
We obviously have some well-known funds that will be in the market next year, and we fully expect to have success there. So I think we are doing the things that we need to do to grow at a strong double-digit rate. The thing that gives me excitement is when you ask the question, I am not yet ready to say, Ken, we're there, we're landing the $1 billion SMAs. I would like for us to get there. I think we can. It's still going to take time. But while we're planting seeds, we've got great things coming at the underlying verticals.

Kenneth Brooks Worthington

Brilliant. I want to follow up on step downs. Would you consider 2023 to be unusual from a fee step-down perspective? Maybe remind us where you see step-downs where you don't? And what -- assuming 2023 is not typical. What should normal look like each year from sort of the step-down perspective?

Amanda Nethery Coussens

Ken, so for step-downs for 2023, it is a bit unusual and that we had the WTI step down this year. And that step down is expected to occur only every 3 years. So that's where you're seeing a bit higher step down in exploration for 2023.

Mark C. Hood

Yes. And Ken, as we think about it on a normalized basis, we're managing north of $20 billion. We say our average duration is around 9 years at inception of the fund, and we are growing at a good clip. And so the idea of having step-downs and expirations of around $1.5 billion a year is not outrageous. Some years, it will be closer to 1. It is possible you can get north of 1.5 as well. As we get bigger, those step downs will grow, but that's a good problem to have.
And then the other thing is we do tell the vast majority of our fee paying AUM, we are receiving management fees on the committed dollars, which gives us a tremendous amount of visibility into our fees over time. There are some strategies where it's on deployed dollars. And then when you sell investments, you lose that fee-paying AUM. In the quarter we had some nice realizations in the impact business. And so we actually had more expirations than we expected, but that's always a good thing when you can realize a good investment.
So it will toggle between that low single-digit billion all the way up to 2. But again, as we grow over time or we lengthen -- as we go over time, it should grow, if we can lengthen the average duration that will help provide some ballast against it.

Operator

Our next question is from Michael Cyprys with MS.

Michael J. Cyprys

I want to come back to some of the commentary we're hearing from others across the industry, just on banks retrenching, creating opportunity for private lenders to step in. Maybe you could just give us a little bit of a flavor for the different parts of your platform where you guys could participate. Where do you see the biggest opportunity across your platform?
And maybe you could talk about some of the steps that you are and might take over the next 12 months to further capitalize on this opportunity set. And any thoughts on how meaningful this could be if you're able to quantify that for PTA?

Mark C. Hood

Yes, it's a great question. We are fortunate to be in the sweet spot in a couple of our markets where the opportunity set is better than it's ever been. Those verticals primarily are in our venture debt business. Obviously, with the news of the largest venture debt bank in the spring, having issues that has created a very unique competitive environment.
NAV lending, we really do dominate the lower middle market. And when you have high interest rates and a tougher realization market, drawing additional capital through a NAV long allows private equity GPs to continue to deploy capital into their portfolio to try to accelerate value growth over time. So we have an extraordinary pipeline there.
And then even in our impact business, our impact business is in 3 different verticals. Two of the verticals, we think we are extremely unique from the inflation Reduction Act the idea that there is a tremendous amount of capital going into renewable energy and then also impact real estate brown field and green field real estate projects to clean up the environment.
But then the third is actually small business lending. So we have a 20-year track record of originating small business loans to minority-owned businesses, veteran-owned businesses, women-owned businesses. I think we have a 20-year loss rate that you measure in the almost double-digit basis points cumulative. I think it's just over triple digits, but don't hold me to that. And so we are seeing extraordinary demand there as well.
I think the real challenge for us over the next 12 months is going to be raising capital to fifth the demand. In venture credit, we see a great opportunity, in NAV lending, we see a great opportunity, in impact credit, we see a great opportunity. We still continue to see a great opportunity in our SBIC credit vintage, which really does take the place of a bank. And so we might see an acceleration in the raise of Fund V there. Fund IV is currently deploying quite nicely.
The key for us in 2024 is going to be raising capital behind those strategies. These are niche strategies. We love that because we think they're protected most to generate great returns, but it also means there's more of an education on the LP front. And so we do believe the more conversations we have, we're convinced that we've got great manufacturing, and we hope to be landing wins over the next 12 months.

Michael J. Cyprys

And which of those strategies will you say is more scalable, just given your focus on the lower and middle market space? Question often comes up just around how do you sort of navigate any sort of potential constraints on growth given you're not looking at the larger part of the marketplace. Are there parts of your business where you are looking at the larger part of the marketplace? And how do you sort of navigate around such that this doesn't constrain your growth?

Mark C. Hood

Yes. We don't need to be in the larger part of the marketplace because we really dominate these 3 verticals, and they are very large verticals, if you just look at SVB and venture debt, they were tens of billions of dollars in terms of size. So there is a very large hole in that market. NAV lending is growing leaps and bounds and then look at the trillions that are coming through the inflation Reduction Act. So of all the things we're worried about scalability in those 3 verticals is the least of our concerns. It really is raising the capital to fund these strategies. These are such unique risk-adjusted returns.
Our NAV lending business really acts like an investment-grade bond despite having a return that's literally 2x what you get in an investment-grade bond. Our venture debt strategy has a loss rate that looks like a high-yield bond despite a return profile that is 2 to 3x what a high-yield bond returns. And then our impact credit, in many cases, we're lending against tax equity, which is basically government guaranteed and generating an 11% or 12% return. So again, 100 for a 2x increase on the risk-adjusted return relative to an underlying treasury. We feel like we have the product. There's plenty of room for us to grow. The key is going to be finding those large SMAs, finding those LPs that want to put real money to work, and that's what we're focused on.

Michael J. Cyprys

Great. And just a follow-up, if I could, on the fee rate. I think it was like 104 basis points in the quarter. I mean, is that the right one way to kind of think about on a go-forward basis here? Just any help on the (inaudible) 0:27:30 catch-ups.

Amanda Nethery Coussens

Yes, generally about $105 million is I believe what we've guided to.

Operator

Our next question is from Ben Budish with Barclays.

Benjamin Elliot Budish

I was wondering if you can kind of revisit the original $5 billion kind of maybe explain a little bit, like where did you surprise so much to the upside? And then kind of alongside that, I think last quarter, the guidance was a strong second half of the year. I think you indicated that maybe it wouldn't be quite as half in the second quarter, but is that still sort of your expectation if we look on maybe the average over the last couple of quarters, should the second half of this year still be like relatively strong?

Mark C. Hood

Yes. When you think about the original $5 billion target, we rarely -- I don't know if we ever in our projection models, have fund sizes that double intra fund. So when we talk about a secondary fund going from $400 million to $800 million, when we talk about a GP Stakes fund going from $650 million to $1.25 billion. Those are wins for the home team. So we had a -- we were just having a number of those happen across the board. And then we're also -- we are winning SMA business, especially in our private equity vertical, and that's something we don't really factor in when we think about cadence for fundraises. That is the -- that's the first question. Can you remind me of the second?

Benjamin Elliot Budish

It was the outlook for the back half of the year, the original guidance was a stronger back half than the first half, but then obviously, the second quarter surprised to the upside. So perhaps the second -- the back half is not going to be quite as strong. But to what extent was the second quarter as a result of maybe some funds from the third quarter being pulled in early? Or do you still expect the second half to be relatively strong, but perhaps not quite as strong as the second quarter.

Mark C. Hood

Yes, well, we definitely wanted to call out. The second quarter was a record quarter, which I don't know many folks who are able to produce that in the second quarter, a record fundraising quarter. So we're certainly proud of that. We would not anticipate continuing to eclipse our record quarters in the third and fourth quarter. We did call out in the script, we have 2 decent-sized strategies in the market, one being GP stakes and the other being our TrueBridge Fund VIII. We are very excited about those strategies, whether that capital comes in, in the third quarter or the fourth quarter or the first quarter or even the second quarter, we are less focused on. We'll obviously recoup all of those management fees with catch-up.
So we certainly have the potential to keep showing growth in Q3 and Q4 that is just fine. But a lot of it's going to come down to those 2 strategies. And we are -- we see very strong demand in those strategies. So we feel good about them. Whether they're in Q3 or Q4 or maybe Q1, we're less focused on.

Benjamin Elliot Budish

Got it. That's helpful. Maybe one follow-up on the secondary strategy. Is there any -- so with RCP, obviously, with the fund of funds, we see you coming to the market every year. Any thought on the secondary funds piece of that speeding up? Or is what we've been seeing the last couple of funds sort of the right cadence? And then along the same lines, maybe except for RCP, in secondaries in general, I think right now you're only in private equity. And we're starting to see some of your kind of larger publicly traded peers launch secondary funds and incremental sort of asset classes. So any thoughts in terms of expanding the secondaries to real estate infrastructure or credit anywhere else like that?

William Fritz Souder

Yes. This is Fritz. I can take all back to working with the teams directly on this. Proud to say that we actually just started doing secondaries of the venture world. It's a first-time fund, which is always a little bit harder to do. But early indications are that we should be able to reach our target on that fund. So we're starting to launch that certainly in that area. We continue to see a lot of interest in secondaries. And so both from the fundraising side, you would just see in the deployment side.
Whether that will come up quicker, I think the average pace on secondaries, I think through the history has been about every 3-ish years. That's probably where we would see this from when we started deploying capital, which was about a year ago. So I could -- don't hold me to this in a (inaudible) 0:32:07, but I could see that strategy coming back to market here in 2025, most likely.

Operator

Our next question is from Mike Brown with KBW.

Michael C. Brown

Okay. Great. So I appreciate the -- that you certainly have a very compelling strategic mix today. So M&A is certainly not necessary for your strategy going forward here. But I'd just like to hear a little bit about what you're seeing in the M&A environment, how you think about your strategy now that you do have a diversified scale business? And then if something does come across that's transformational. How would you approach that from a leverage perspective? What's kind of your constraints there?

Clayton Clark Webb

Yes. If you -- we talk about this all the time. If you think about where we are today, we really are in 3 verticals: lower middle market private equity, venture capital and lower middle market impact. Within those verticals, we cover the capital stack, all the way from the junior most equity to the senior most debt, and we like to think we dominate those verticals with track records that are measured in decades, not years or quarters. And then beyond that, we have our GP Stakes business that we think is very synergistic because as we live in these lower middle market verticals and see GPs that we believe are going to be the next 3-letter name on the New York Stock Exchange, we love the opportunity to take a stake in those.
So the ecosystem today is very unique, and we think, works really, really well and produces investment returns that are truly differentiated. We also believe having now been in these verticals now for a while that we don't need to do another acquisition to be a much larger business than we are today. The markets are big enough. Our manufacturing, we think is good enough. We are constantly trying to innovate, launching new strategies within the same vertical. Fritz mentioned it going into secondaries on the venture side. Obviously, some of our peers have had a lot of success there.
So we're constantly trying to innovate and do more in the things we do well. All that being said, it is a very high bar for us at this point to bring on a new strategy or a new vertical, but we are constantly in discussion. We are not the type of firm that is jumping at every banker-led process. Frankly, if a GP is looking to sell, we're probably not the right partner. Most of our deals, the vast majority are unbanked and they're really based on relationships and marriages. And that's the way we think about it. And so we have dialogue right now, seeds that we planted years ago that we still reach out to and talk to folks that we just met in the last handful of months. Those conversations are always ongoing. We have no idea when one will strike. We'd be surprised if nothing strikes over the next couple of years. And we would not be surprised at multiple things strike. But it really is -- it's a relationship building. These are not bank deals.
And given our track record at this point and the asset classes that we're in, I would just reiterate, it's a high bar. We would love for it to be both of confirmation and excellence when GPs actually elect to join our platform because they're in a good crowd.

William Fritz Souder

Okay. This is Fritz. Add one thing to that what Clark just said, which we're seeing, these are marriages, right? And most of the deals we're looking at are not banked at all. So we take our time getting to know the teams and the strategies. And one of the things we're seeing in the private equity a little bit is people not -- other firms now being successful in the fundraising that we've seen inside our own verticals. So it's one of the reasons we're very proud of our group that they're outperforming right now and raising a lot of capital where we have seen others that have not maybe hit some of their numbers. So we just continue to hang around and continue to port them and date them, and we're move when the time is right.

Amanda Nethery Coussens

In terms -- you also asked about funding acquisitions. So I just wanted to add that the acquisition would be funded with a mix of cash, stock and earn-outs as we have in the past. And we have about $98.5 million available on our credit facility currently.

Operator

Our last question is from John Campbell with Stephens Inc.

Unidentified Analyst

This is (inaudible) 0:37:23 stepping on for John. Congrats on the quarter. For WTI, the goal is obviously to raise the next fund in 2024. And I think generally, it has been expected by us and maybe some investors to see that fund size jump up maybe $40 million to $50 million like we've seen over the last couple of the fund raises, just incremental step-ups there. So, question on that, given the macro, obviously, WTI now being part of P10 and maybe some other factors such as (inaudible) 0:37:55 failure.
The question is, is roughly like a $550 million fundraising goal for Fund XI now is somewhat on the conservative side of things. Additionally, can you maybe size up the potential impact of this WTI fundraising on overall P10 average fee rates and EBITDA margins maybe next year?

Clayton Clark Webb

Yes. So I would say it's too early to tell on the fund size. We certainly would prefer not to go backwards in terms of fund size. And the good news in terms of how WTI deploys capital, they will turn on their next fund and still be deploying from their predecessor funds. And so in some ways, if we raised a little more, maybe we turn on the fund after that Fund XII a little later, if we raise a little less, than a much bigger number than we just turned on Fund XII earlier. So there's a cadence in terms of deployment. Our fundraising is really driven by deployment.
As we noted, we feel like the deployment environment today is better than it's ever been. And so that would lead us to certainly hope that the fund size can grow Fund X to Fund XI. We are having a dialogue at this point, and we have talked about that Q1 as a first close. So I would say it's a little too soon to tell. We do not believe there's another venture debt player out there that looks like us. We are excited about introducing WTI to a number of new LPs. It is not an easy time to raise money in venture. It really is extraordinary what TrueBridge has been able to do, and we think WTI will do as well.
But venture allocations have gone down a lot this year in terms of net new commitments. But we are aligning WTI up to be as successful as they can be. Certainly feel like we can deploy more money in this next month than we had in the prior fund.

Unidentified Analyst

Great. And then, obviously, there's no M&A in the quarter or buyback if we did pay down a bit of the revolver. And I know you guys just kind of talked through M&A a bit there, but can you talk perhaps to your preferred capital allocation avenue here, how you're thinking about balancing all 3 of those options?

Clayton Clark Webb

Sure. Great question. When we look at our -- with interest rates going up so much, our cost of debt is up near 7.7%. When we think about capital allocation, when we don't have any imminent M&A, we obviously have all this free cash flow and a dividend that's easily covered. So our choice is to buy back stock or pay down debt. When we think about valuations and return on incremental capital, even today, it's probably accretive to buy back stock. But the optionality, given that rates are -- interest rates are so high relative to where they were that incremental return on capital by buying back stock (inaudible) 0:40:56 liquidity, which we hear loud and clear from investors that we need more liquidity in the marketplace.
And secondly, by being able to pay down debt, that continues to give us optionality as we see opportunities on the M&A front to relever and take that back up to make an accretive acquisition. So that's how we think about it.

Operator

There are no additional questions waiting. So I'll pass the conference back to the management team for any closing remarks.

Clayton Clark Webb

Thank you, everyone, for joining us. We look forward to seeing you at the -- at any of your conferences. Obviously, we're around to take questions. As you can tell, we're very excited about the opportunities ahead of us, and we look forward to speaking with you all or seeing you next quarter. Thanks.

Operator

That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.