Oakley Capital Investments Limited (LON:OCI) 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 on Oakley Capital Investments 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, private equity (PE) is not a simple asset class, and it should only be looked at by professional/qualified investors. Page 2 of the report gives all the details.
Q2: You called your recent piece, 1H’22: results prove NAV real, resilient and growing. What can you tell us about that?
A2: We believe a significant driver to the whole listed PE sector trading at a large discount to NAV is investors’ concerns about whether the NAVs are real and conservative, and whether they can grow.
For OCI, the detail in its latest results disclosure should, yet again, abate any of those worries. In particular, we highlight i) realisations, on average, 52% above carrying value, ii) 18% growth in investee company EBITDA (which accounts for around three quarters of NAV growth), iii) a PEG ratio of 0.8x, iv) 93% of multiple expansion driven by exit uplifts, and v) average EV/EBITDA ratings below listed market levels, despite subsectors that attract high ratings.
The key point to remember is that Oakley adds value to companies in all economic environments, especially uncertain ones that it cannot get as standalone businesses.
Q3: Sounds to mean that it’s all about the results, perhaps you could give us a few key numbers?
A3: OCI had previously announced, in its July trading statement, the net asset value per share of 630p and the total NAV return per share of +17% since 31 December 2021. With the results, we learnt that the average portfolio company EBITDA growth was 18%, the average EV/EBITDA was up modestly, at 13.7x, or a PEG of 0.8x, the portfolio value increase was 72%, driven by EBITDA growth, and 28% by multiple expansion, 70% of portfolio companies deliver their products or services digitally, and debt/EBITDA has remained broadly stable, at 3.9x.
Q4: You say proving the current valuation is real is very important to investors and that OCI’s results did just that. How did they do it?
A4: The key points were i) firstly, realisations remaining above carrying value show that others are willing to pay more than the book value, ii) NAV growth is driven by investee company EBITDA growth, not multiple increases, iii) the PEG ratio of 0.8x is undemanding, and has been consistently so over time, iv) overall, the PE rating has been broadly stable over time, and well below current market ratings for growth sectors in which Oakley operates, v) there is a strong J curve effect, therefore, with ratings uplifts being seen only as exits approach, vi) there is no incentive for Oakley to inflate valuations, with performance fees only paid on exit.
It is only after all these factors that investors need to rely on the independent checks of auditors and the board oversight!
Q5: And resilience going forward in these very uncertain times?
A5: Understanding the EBITDA growth in underlying companies is core to understanding OCI’s resilience. It is focused in structural growth sectors with recurring income streams, where Oakley Capital provides active operational, strategic and financial support to its investee companies. OCI’s entrepreneurial-network, origination platform continues to grow, and its entrepreneurial ethos helps attract new deals. The inherent value created by Oakley Capital in its companies is then recognised by other (usually blue-chip, international, institutional investors) buyers who pay significant premiums above carrying values. The financial gearing has been very stable over the past five years, and OCI’s own liquidity and commitments are tightly controlled. Given that it is committed only to Oakley Funds (and Oakley management has direct control of its cashflows), its exposure appears to us very managed.
Q6: Your note also touched on the recent exit and re-investment deal?
A6: Yes – Oakley Capital Investments recently announced an exit from one fund and re-investment by another in Facile.it, and we thought investors might be interested to know why. We highlighted that investee companies can grow beyond Oakley’s core skill set, meaning that a new PE house may be better-placed to manage them, and so a new ownership structure may be appropriate. This change, which may also bring cost savings, needs to be put into the focus of the fixed lives of each Oakley Fund, in addition to when investors in that fund can expect to get their money back, what may be left on the table by an early exit, and the information advantages Oakley has in knowing its companies. Each sale and investment is made on its own merits, and we also highlighted how performance fees are only on returns and an early exit and re-investment only enhances Oakley’s aggregate fees if the overall performance justifies it.
