Oakley Capital Investments Limited (LON:OCI) is the topic of conversation when Hardman & 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 results piece “1H’21: 35% EBITDA growth drives 26% NAV return”. What can you tell us about that?
A2: OCI’s results were strong, with i) an annual total NAV return of 26% (11% in six months), ii) average annual portfolio company EBITDA growth of 35% (20% FY’20), 12.3x EV/EBITDA (FY’20 11.8x) and 3.5x net debt/EBITDA (FY’20 3.9x), iii) £95m investment and £51m realisations in six months, and iv) year-end cash of £172m. This performance, and OCI’s 17% five-year CAGR NAV total return, has not happened by accident. It reflects a business model driven by i) high-growth companies/sector champions with structural tailwinds and often digital disruption benefits, ii) repeatable and proprietary sourcing, and post-acquisition support from its unique entrepreneur network, iii) 75% recurring/subscription revenue streams, and iv) M&A-led value creation.
Q3: There appears to be a strong alignment between the growth in investee company EBITDA and the growth in NAV. So, it is the underlying growth in business not re-ratings that is driving OCI’s strong performance?
A3: In a word, yes. 75% of the NAV total return was ascribed by the company to EBITDA growth and just 25% to changes in ratings. The average rating of 12.3x thus appears undemanding relative to peers (OCI advises that, on its acquisitions, peer multiples were generally 16x), the overall stock market rating and the growth rates in EBITDA. Oakley and so OCI is investing in tech-enabled businesses (over 70% delivering digitally), with around three quarters of portfolio company revenue from recurring or subscription services.
All of that gives strong growth and the 35% delivered over the past twelve months is very much in line the record pre-pandemic. The EV/EBITDA rating has been remarkably stable over time despite OCI being invested in many companies which benefitted from changes in behaviour following COVID-19 and the value added under Oakley control. OCI’s valuations do generally appear conservative with a long-term average 44% uplift to carrying value when they achieve an exit.
Q4: You have touched on the unique entrepreneur network in our previous calls. Can you just remind us what it is and how it works?
A4: Embedded in Oakley’s DNA are the sustainable, growing, competitive advantages from its 14-year-old, 20-strong, entrepreneur network, the managers of the businesses of which Oakley has supported in the past. These partners help find/manage acquisitions through their broad range of contacts, they use their expertise to structure what can be complex deals and then help manage the businesses, so providing Oakley investee companies with really experienced management teams.
We believe the network is hard to duplicate; it is driven by culture (being engaged but not over-bearing), its proven track record and direct financial alignment. These entrepreneurs have now been backed by Oakley, many on repeated occasions, with some now on their fourth deal, and they have invested €170m in Oakley Funds, further evidencing their alignment with Oakley.
Q5: What is the outlook?
A5: More of the same. The pipeline looks strong, new deals both acquisitions and realisations are being announced regularly and the entrepreneur network is very active.
Q6: And a few words on the valuation of the trust?
A6: In our report, we show the premium/discount ratings of Oakley Capital Investments’ closest competitors, together with their five-year total NAV returns. Despite having one of the best five-year returns among its peers, OCI has the highest discount at around 20%. 3i has broadly comparable returns but is trading on a material premium to NAV. To have such a discount also appears anomalous in absolute terms given the historical performance (five-year annual average mid-teens total returns) and where Fund III is in the top 5% by peer benchmarking.
We note the directors have continued to build their shareholdings, which tells you what they think about the valuation.