Oakley Capital Investments strong earnings growth delivering NAV growth (LON:OCI)

Hardman & Co

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 “Educating on Education”. What can you tell us about that?

A2: Following on from the strengths of education investments, as reported in OCI’s January trading statement, we note that the sector’s attractions include i) structural growth, ii) defensive revenue, iii) high barriers to entry, iv) strong ESG credentials and v) scarcity of scale assets.

The sector benefits from PE’s value-creation toolkit, with i) bolt-on strategies in highly fragmented markets, ii) tech-enablement and digitalisation skills, iii) transferability of expertise, and iv) increasing commercialisation of returns. 

The company was an early and active education investor, and now has proven case studies showing all these advantages. Education investments were 27% of OCI’s NAV as at June 2021. The most recent exit was at an IRR of 43%.

Q3: So what makes the education market so attractive to a PE player like Oakley?

A3: Private education is a large and growing market. In its 2021 Capital Markets Day presentation, OCI highlighted that the total spend on education in 2016 in OECD countries was over $3tr, close to the $4tr spend on food and $5tr on healthcare. Increasing wealth means that private education becomes an option for more people.  The demand appears to be fuelled by growing dissatisfaction with state-sponsored education and a desire for a more tailored, personalised education. The growth in the desire for self-education across all age groups is also a feature. Vocational training is also an area of demand. Additionally, there are high barriers to entry.

But perhaps more importantly, it is a market where PE skills add real value. First, it is a fragmented market, creating opportunities for M&A bolt-on strategies – both within education and into related areas. Secondly, and very importantly, digitalisation in education is in its infancy and its usage allows for better service to students with improved courses, globalisation of both university but also vocational training, and a quantum leap improvement in marketing. Thirdly, there is the professionalisation of practices and delivery often including delivery of services into people’s homes. With ever increasing focus on the economic returns from education PE is well placed.

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In many ways, private equity in education today is where it was in healthcare was some years ago. The market has many similar characteristics, but the number of listed companies with market capitalisations of more than $1bn is around one thirtieth and the number of PE deals done in 2020 is less than a quarter. It is, however, growing rapidly and those, like Oakley, who are active early in the process, are at a competitive advantage.

Q4: So, what type of education business is the company invested in?

A4: As I said earlier, education investments were 27% of OCI’s NAV as at June 2021. Nearly half of this was in the largest and fastest-growing university group, based in Germany. It has over 75,000 students (up from 17,000 in 2018) from 110 countries enrolled across four types of programme. It has global recognition for its degrees and is rolling out corporate training with 10,000 corporate training partners. Just under a quarter of the investment is in Schülerhilfe, which provides after-school tutoring to over 125,000 primary and secondary school students in 1,100 centres across Germany and Austria.

There are three smaller investments. First, ICP Education is a leading independent group of UK children’s nurseries, which provides both buy and build and knowledge sharing, professionalisation opportunities in a largely un-professionalised market. Secondly, Ocean Technologies Group (Ocean) serves almost 20,000 ships and installations with comprehensive and up-to-date compliance, risk and health & safety training, and software tools that ensure adherence to International Maritime Organisation requirements. Finally, ACE Education is a leading private vocational higher education platform in France and Spain in the sports and hospitality sectors.

So, it’s a mix of primary, higher and vocational education.

Q5: What do you expect from here?

A5: More of the same from Oakley Capital Investments; strong earnings growth delivering NAV growth and more acquisitions.

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