Oakley Capital Investments Analyst Q&A “sustained NAV growth” (LON:OCI)

Hardman & Co

Oakley Capital Investments plc (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, because private equity is not a simple asset class, and it should only be looked at by professional / qualified investors. P2 of the report gives all the details.

Q2: Now, as mentioned, you called your recent report on OCI 2020 results: sustained and sustainable NAV growth. Can you give a brief summary of your findings?

: OCI’s 2020 results were strong. Through this challenging year: i) the total NAV return reached 18%, actually ahead of the 16% five-year average, ii) 10 companies representing 44% of NAV met or exceeded pre-COVID-19 expectations, and only three (13% of NAV) were significantly impacted, iii) both investments and realisations continued strongly (£152m and £341m, respectively), iv) year-end cash was £223m, giving huge firepower to take current opportunities, and v) potentially disruptive large share overhangs have been sold out.

The digital focus, concentration on structural growth markets and their unique repeatable origination from its network of entrepreneurs bode well for the future.

Q3: So tell us a bit more about how and why OCI delivered sustained returns in 2020?

A3: The reasons OCI was able to deliver a total NAV return of 18% in 2020 – above the five-year (2016-20) CAGR of 16% – include: i) The company having focused on areas with structural growth prospects; ii) having tech-enabled businesses, many of which saw stable/improved business through the COVID-19 crisis and whose valuation rose accordingly; iii) stable overall valuation ratings, despite the market rise in tech stocks; iv) the expertise, business model, supply chain management and financial support that OCI provided to its investee companies; v) continued strong realisations at values well above carrying costs; and, finally, 18m shares bought back at an average 34% discount to prevalent NAV, which enhanced the NAV by 12.6p (4% uplift on opening NAV).

Q4: Private equity can get a bad name, but you say OCI provided its investee companies with a lot of support.  What did they actually do?

A4: In our initiation, we highlighted why their investments outperformed throughout the COVID-19 pandemic. At the OCI level, there is the liquidity to support commitments to Oakley Funds and direct investments, should capital injections be necessary/desirable for M&A or to strengthen balance sheets. Oakley Funds’ committed capital structure gives much more certain access to capital than a non-PE-backed company.

For investee companies, there is operational support that is simply not available to standalone entities to assist in the assessment, management and mitigation of risks as conditions evolve. With interests in a range of countries at varying stages of the virus development, lessons learnt in one country may be useful in preparing others for the effects of both lockdowns and re-openings. What this means, in practice, is that they have has provided expertise and best-practice advice on ensuring financial resilience, improving supply-chain robustness (including using the entrepreneur network to identify other suppliers), preparing for operational disruption, and providing advice and best-practice transfers to protect employees and customers.

Q5: And looking to the sustainability of returns in the future?

: Many of the features that sustained NAV growth through the COVID-19 crisis position Oakley Capital Investments well for the future, most notably the focus on tech-enabled businesses and being in businesses with structural growth. In addition, we note: i) its unique origination platform through entrepreneurs; ii) that 2021 is likely to be a good year for investment opportunities; iii) the value added to new and recently acquired businesses; iv) the non-recurrence of the drags on 2021 performance; v) continued realisations from the historical portfolio; and vi) the fact that part of OCI’s cash pile will fund deals already done by Oakley Funds – initially financed with debt. The early 2021 multiple director buying of shares in the market is indicative of directors’ confidence in OCI’s future returns to investors.

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