Apax Global Alpha Ltd (LON:APAX) 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 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, ‘Hidden Gems” strategy: green shoots into live deals’, what can you tell us about it?
A2: In our view, the most interesting new information from Apax Global Alpha’s 3Q results was the comment “a further five investments post quarter end” with a further one announced since. This six-week performance compares with two investments in the whole previous quarter. Market wide, there are comments about encouraging green shoots of activity, but they are now completing deals.
We explore, here, what is unique about the “Hidden Gems” strategy and why it is creating these opportunities. Interestingly, the deals have a broad range of EBITDA growth options, giving comfort that unchanged target returns remain realistic despite the higher interest rate environment.
Q3: Where are market drivers to their new investments coming from?
A3: The company has identified three sources for its recent deals.
Sustained low public share prices mean that boards have more constructive approaches to selling their whole businesses, public to private deals, and also the carveout, non-core operations at prices acceptable to the company. On the private side, some GPs have faced liquidity requirements from investors (e.g., on the maturity of their funds) and are willing to sell at a known, acceptable price now, rather than waiting for potentially better returns at an unknown date in the future.
The latter is very fund-specific and, to a degree, is one-off, while the first two factors represent a market trend with sustainable opportunities for new investments by Apax Funds.
Q4: What are they doing uniquely to unlock these opportunities?
A4: These improving market conditions have been reported as early green shoots by many listed PE companies. What is converting them into deals in 4Q’23 for Apax Funds is its unique profile including the benefits of their “Hidden Gems” strategy. The key to the latter is creating value by the operational improvement of investee companies.
As a consequence, Apax Global Alpha is focused on the mid-market where PE activity has been more resilient than large deals. It is concentrated in secular growth, resilient sectors which have been much more robust than, for example, venture. The model has lower leverage and so less sensitivity to debt markets; and the manager brings scale, experience, brand, and global footprint.
The company’s strategy has thus put it in a really good place to exploit opportunities now.
Q5: What about the risk?
A5: Sentiment to costs, the cycle, valuation, and over-commitment are sector issues. Residual risk on the 2020-21 IPO positions appears to be modest. The Derived Investments portfolio generates income towards dividends, and has liquidity and capital benefits, but it complicates the story.