Apax Global Alpha (LON:APAX) is the topic of conversation when Hardman & 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, ‘CM day: further proof of value added by Apax’, what can you tell us about it?
A2: The key messages from Apax Global Alpha’s well-received 2024 CM day and related announcements were:
i) a new capital allocation policy with a set 11p dividend, current yield ca.7%, and creation of a distribution pool for future buybacks, if the discount is above 23%, €30m has been seeded into pool and buybacks started; ii) the value added by the four-sector “hidden gems” strategy of buying businesses with unrealised potential at discount to peers, average 24%, improving them, average 15% increase in EBITDA growth during Apax Funds ownership, then selling at a premium, 11%; and iii) the stock of exit-able businesses is rebuilding after above-normal exits in 2020-21.
Q3: The capital allocation policy and distribution pool were perhaps the new news on the day. What can you tell us about them?
A3: They did an extensive round of discussions with shareholders to establish what they wanted from the business.
The four key things investors wanted were: i) to grow AGA’s value over time through investments in the PE portfolio; ii) consequently, to deliver long-term compounding NAV returns; iii) to maintain dividends at attractive levels to return cash on a regular basis; and iv) to create flexibility to pursue buybacks if an investment in own shares is more attractive than an incremental portfolio investment.
The new distribution pool addresses the latter and, in our view, effectively segregates funds in good times to be used for buybacks in bad. It will be assessed annually and be funded by 100% of “excess cashflow”, total PE distributions and cash income from the debt portfolio, less PE calls paid, costs and expenses, repayment of RCF and dividends paid. €79m would have been added to the “Distribution Pool” since 2019.
As I said earlier, €30m has been set aside for immediate buybacks. Additionally, the dividend was fixed at 11p rather than being a variable 5% of NAV.
Q4: And the hidden gems strategy?
A4: Core to delivering shareholder value is adding value to investee companies and identifying targets whose performance can be improved. This has delivered, and should to continue to deliver, outperformance in all economic conditions. We have explored the execution of the strategy in multiple previous notes.
Q5: The stock of exit-able businesses is rebuilding, what can you tell us about that?
A5: Strong markets in 2020-2021 saw more realisations than usual, accelerating exits on uplift into those years and depressing 2022-2023. Residual listed holdings also suffered de-ratings as markets weakened. The effect has now largely worked through, so more exit-able businesses are emerging just as market appetite is increasing.
Q6: What about the risk?
A6: Sentiment to costs, the cycle, valuation, and over-commitment are sector issues. The Derived Investments portfolio generates income towards dividends, and has liquidity and capital benefits, but it complicates the story for Apax Global Alpha.
