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, 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 “Proving the pudding: a sustainable growth model”. What can you tell us about that?
A2: Some of the headlines were already known – the impressive total NAV return per share of 35%, the strong level of investments and realisations, and confidence in the future reflected in new commitments. There were, however, some key new messages.
Firstly, NAV growth was driven by earnings growth, with average portfolio company YoY EBITDA growth of 28% accelerating on last year’s 20%. This rate of growth reflects the choice of sector, the tech-enabled business models, and the value added by the Oakley Capital team and entrepreneur network. While this is an acceleration on FY’20, it is very consistent with five-year averages. Plus, the second half was up on the first half, so it is a sustainable business model story not a recovery from the pandemic one-off.
The second key highlight I would pick out is that the average portfolio company EV/EBITDA valuation was 13.9x, giving an undemanding average PEG of 0.5x (1H’21 0.6x). The PEG ratio is down on the interim stage, and the rating is well below listed market ratings in sectors achieving growth at such levels.
Finally, the outlook comment was “High earnings growth and a promising pipeline of investments and realisations position Oakley and OCI for strong NAV progression in the year ahead. To date, there has been no material impact on Oakley or on its portfolio companies from the war in Ukraine or from new sanctions imposed on Russia and Belarus”. A £20m buyback has also been announced.
Q3: So what are the key drivers behind that underlying company earnings growth story?
A3: We see three key factors: first, Oakley Capital has focused on areas with structural growth prospects, such as business migration to cloud, consumer shift online, and the growing demand for quality, accessible learning; secondly, having tech-enabled businesses, accessing superior growth with scalable models and downside resilience; and finally, the active operational, strategic and financial support that Oakley Capital provides to its investee companies. In particular, Oakley Capital sees value added in improving the quality of earnings, enhancing digitalisation capacity, leadership development, and facilitating and executing buy and build strategies.
The inherent value created by Oakley Capital is then recognised by other (usually trade/financial) buyers who pay significant premiums above carrying values when Oakley Capital chooses to exit. Oakley has a long and sustained track record of making sales at prices well above the carry cost of investments (on average since inception 50%). The sale of TechInsights at a 131% premium to NAV was completed post year-end. The exit generated a ca.19x return and a ca.82% IRR for Fund III. As part of the transaction, Fund IV reinvested in the business to benefit from its strong future growth potential. OCI’s share of proceeds was ca.£60m.
Q4: I saw the debt multiple had increased. What can you tell us about that?
A4: The average net debt/EBITDA rose to 4.2x from 3.9x at the end of the prior year. We would characterise this as broadly stable, something which it has actually been over the past four years. The modest tick up reflected some bolt-on deals in the year and normal financial restructuring in a period when markets were anticipating rising interest rates. We have seen similar trends elsewhere in listed PE and Oakley does not believe that there is any fundamental trend in the debt metrics.
Q5: What is the outlook?
A5: I mentioned the company outlook comment earlier. I would characterise it as more of the same: strong underlying company earnings growth delivering NAV growth. It is hard to be precise in any period on realisation, but Oakley Capital Investments is in the mid-market space and many of its companies are likely to be attractive to larger PE houses who have raised significant dry powder in recent years. Its commitment to Fund V indicated investment is likely to be strong too. Investors will no doubt note the recent multiple director purchases.
