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 results piece “2021 Capital Markets day: proof of the pudding”. What can you tell us about that?
A2: OCI hosted its annual Capital Markets (CM) day on 18 May 2021. With presentations from Oakley Capital and investee companies, as well as Q&A, including the OCI board, it gave a clear view of the prospects of the organisation.
We have argued in previous notes that OCI’s outperformance (five-year CAGR NAV total return 16%) is driven by i) high-growth companies and sector champions enjoying structural tailwinds and often digital disruption benefits (2020 average 20% EBITDA growth), ii) repeatable and proprietary sourcing through the entrepreneur network, which also helps businesses post-acquisition, and iii) value creation through M&A.
All were reinforced during the CM day presentations.
Q3: And what other sound bites did you take away?
A3: First, the single most important message from the CM day is that the value created comes from earnings growth, driven by OCI’s stock selection, management post-acquisition and exit strategies. Core to the business is identifying and then improving the performance of structural-growth businesses, where the company and its network of entrepreneurs can add value.
Second, the total NAV return is among the best in the sector, but OCI trades at one of the highest discounts to NAV. The relative discount is likely to be understated, as OCI’s is based off December NAV, while others are more recent and have typically seen uplifts since then.
Third are the exit uplifts, with a weighted-average premium to carry value of 44% (2020: 89%). This shows that carrying valuation multiples are realistic and should give investor comfort that the reported NAV is “real”.
Fourth, in competitive markets for new investments, Oakley’s network of entrepreneurs remains a key advantage in sourcing new deals and, indeed, it creates potentially better exit opportunities.
Fifth, 76% of the portfolio by value has delivered products or services primarily via digital distribution. We believe that the 24% outside of this group, have a significant and growing online presence.
Q4: Your note goes into some detail on the entrepreneur network, which appears to be a major competitive advantage in both originating deals and managing businesses post-acquisition. What can you tell us about that?
A4: This network has been built up over a period of 14 years and includes businessmen who have been supported by Oakley in the past, as well as ones attracted by its reputation. The network has been growing over this time and appears to be providing a sustainable competitive advantage. The network helps originate deals with the identification of potential targets, the skill set to understand and structure deals, which may be complex, and a reputation of professionalism, which can be attractive to potential sellers.
As a consequence of these factors, 85% of Oakley deals are primary (i.e. bought from trade/family sellers, not other PE houses), and more than 75% are uncontested. Once acquired, the network generates compounding sector specialism, so that experiences from one company can be used to enhance others. The low turnover of management means that skills are used again and again. They also help identify new management, where it is appropriate to bring in incremental skills in things like digitising business models.
Q5: And your note also focused on Oakley Capital Investments’ tech-enabled businesses in structural growth markets. What can you tell us about them?
A5: Digitalised, B2B, subscription-based models, have been part of Oakley’s strategy (and so OCI’s portfolio) for many years, which is why it was so well positioned for COVID-19. The pandemic has accelerated many trends, but not the direction of travel. In recent funds, 76%-85% of new investments have been in digital business models, and one core competency of Oakley is transforming analogue ones into digitised ones.
As I said earlier, 76% of the portfolio by value delivered products or services primarily via digital distribution. Oakley has also focused on just three sectors, technology, consumer, and education, picking off the sub-sectors in each of the sub-sectors with structural growth. OCI drew comparisons with the healthcare industry in that education is highly fragmented, is a large industry, has sustainable underlying growth, is un-institutionalised, has high barriers to entry, and is seen as non-discretionary and so non-cyclical (OCI’s education investee companies averaged EBITDA growth of 30% in 2020).