Alpha Global Alpha Ltd (LON:APAX) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: Your recent report sits behind a disclaimer. What can you tell us about that?
A1: It is just the standard disclaimer that many investment companies have. In essence, for regulatory reasons, there are some countries (like the US) where the report should not be read. In the UK, because private equity (PE) is not a simple asset class, the report should be looked at only by professional/qualified investors.
Q2: You called your recent piece ‘2023 Capital Markets Day: accessing hidden gems, what can you tell us about it?
A1: The key takeaway from Apax Global Alpha’s 27 June Capital Markets Day (CMD) was that 84% of value creation comes from operational improvements that APAX makes in the investee companies. On average, under APAX’s ownership, revenue growth accelerates by 700bps, EBITDA growth 1,500bps and the EBITDA margin 700bps.
Additionally, the day highlighted that i) AGA gives access to companies unavailable elsewhere, ii) its companies are growing and performing well, iii) it is an All Weather Investment, with 84% of value creation under the manager’s control, iv) it has a robust balance sheet, and v) the 5%-of-NAV dividend has more value when the shares are at a big discount. Given the long-term NAV outperformance, the discount appears anomalous.
The presentation really reviewed what sets AGA apart from its peers (portfolio construction and balance sheet), the debt investment benefits, how the portfolio is valued and why this is conservative, the fee structure, and what AGA is doing (and how it thinks) about addressing the discount.
Q3: I gather the CMD addressed a number of investor comments head-on, what were the key ones?
A3: In autumn last year, the company commissioned an investor perception study, and it used the CMD to address key issues emerging from that. The company responses were detailed in slides 9-15 of the CMD presentation, and in our note.
The five key issues were, firstly, what sets APAX apart, with the company highlighting the access to its hidden-gems strategy and its resilience, as well as the strong balance sheet. The second question was what the benefits are of the derived investments portfolio, with APAX highlighting its capital absorption, strengthening of the balance sheet and source of returns. Third was the approach to valuation, with APAX giving a detailed methodology breakdown, and highlighting consistent uplifts on exits as proof of the conservatism. Fourth, APAX outlined its fee structure. Fifth, it highlighted the multiple actions it is taking to address the discount.
Q4: Your report also highlighted Apax Global Alpha’s thoughts on the PE financing market. What can you tell us about that?
A4: The presentation reviewed the financing conditions for the whole PE market, and also how it applies to APAX specifically. With 82% of portfolio debt maturities beyond 2027, ca.75% of debt at fixed rates (and 90% of swaps maturing post mid-2024) and average net debt at 4.7x EBITDA, APAX appears well-positioned to weather market disruption.
Q5: What about the risk?
A5: Sentiment to costs, the cycle, valuation and over-commitment are sector issues. Residual risk on the 2020-21 IPO positions appears to be modest. The Derived Investments portfolio generates income towards dividends, and has liquidity and capital benefits, but it complicates the story.
