Apax Global Alpha Ltd (LON:APAX) is the topic of conversation when Hardman & Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: Mark, your report sits behind a disclaimer. Can you tell us why that’s there?
A1: Yes, it’s a very 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 is not seen as a simple asset class, the report should be looked at by professional and qualified investors. A very standard disclaimer and nothing to worry about.
Q2: Your report is titled ‘AGA: Past Inflection Point with Deal Activity Rising’, what can you tell us about the report?
A2: We’ve noted in our previous reports, “Capital Markets Day: Further Proof of Value Added by Apax,” and the second report of 1H24, “Deal Activity Coming Back Strongly,” that the stock of exitable businesses is rebuilding just at the time when market demand is returning. Apax funds thus appear to have turned the corner, with both exit and investment activity steadily rebuilding to more normal levels.
In this note, we analyse the likely impact of the exit trend on, firstly, the NAV, with an expected greater correlation between the EBITDA growth of the underlying companies and NAV growth, and EBITDA growth has been strong. Secondly, cash flows. Thirdly, the impact on sentiment. Finally, the likely impact on the discount to NAV.
In our view, the growing investment with the operational improvements that Apax Global Alpha then delivers to investee companies are really the key driver to long-term outperformance.
Q3: What can you tell us about the deal activity?
A3: In 2024, the funds have seen an increased pace of exits, with six full exits signed or closed at an average gross money on invested capital of 2.7 times in the third quarter alone. In that quarter, five new investments were signed or closed, with AGA deploying about €107 million, which is an amount greater than the whole of the financial year 2023, which was a total of €93 million.
Now, since the end of September, Apax has further announced the exit from Paycor, money on invested capital 3.3 times, a gross IRR of 26%, and an uplift on carrying value of 69%; an exit of AssuredPartners, money on invested capital 2.5 times, a gross IRR of 16%; and further new investments in Evelyn Partners, €28 million, and Altus Fire and Life Safety, €12 million.
So, a lot more activity, both on investments and on realisations.
Q4: Why then are exits rising now?
A4: The exits, which might have been expected in 2022 and 2023 with a normal typical life cycle of private equity, were actually accelerated into 2020 and 2021 because there were very high ratings available at the time. So, for most recent years, the stock of exitable businesses was very low and needed to be rebuilt. That has been happening, and businesses ready for sale have been rebuilt, with 37% of the portfolio in harvesting phase versus 17% at the end of 2021. So, we started from a low point because it accelerated previous exits.
Additionally, there were rising interest rates, potential funding constraints on some buyers, and macro uncertainties, all of which dented demand. But what we’ve seen is that rates have peaked, some of the uncertainties are reducing, and funding is much more freely available. So, both the demand for and the supply of exitable businesses are growing.
Now, inter alia, the growing number of exits is important, as it demonstrates the value added by Apax, and it’s likely to see incremental NAV accretion with exit uplifts, both of which are then likely to help sentiment.
Q5: Why do you also highlight the new investments?
A5: We detail in the portfolio section, which is on page 8 of the report, the latest fund, which is Fund 11, and that it’s still very early in the investment phase, but it represents by some margin Apax Global Alpha’s greatest commitment. The rapid deployment of this commitment should mean the earlier delivery of Apax-owned value creation, and so NAV accretion to the group, than if deal activity had been at its recent subdued level.
So, more new investments lead to a more rapid deployment of these commitments. The long-term growth of the business and shareholder NAV is really dependent on new investments. So, an acceleration here is very encouraging.
Q6: Obviously, there are always risks. What are the risks here that we should be aware of?
A6: As you say, there are always risks of investments. The key ones here are sentiment to the cost, the cycle, the valuation, and potential overcommitment. The derived investments portfolio generates income, which helps pay the dividend and has liquidity and capital benefits. But it also complicates the investment story.
