Oakley Capital Investments Limited (OCI) Earnings Call Transcript & Summary

Ladies and gentlemen, hello, and welcome to the Oakley Capital Investments OCI Interim Results Call. My name is Maxine, and I'll be coordinating the call today. [Operator Instructions] I will now hand you over to your host, Steven Tredget, Partner at Oakley Capital to begin. Steven, please go ahead when you're ready.

Good morning, and thank you for joining the Oakley Capital Investments Interim Results Webcast. It's another period of sustained performance from OCI, thanks to repeatable origination and strong EBITDA growth, growth which is a result of an investment portfolio focused on digital delivery of products and services. The key stats here are known. But to repeat the headlines, despite COVID and FX headwinds and some cash drag, the company recorded an 11% total NAV return in the first half of this year and 26% return for the last 12 months, exceeding an increasing 5-year CAGR that now stands at 11%. As the NAV per share bar chart shows, performance momentum is starting to build here, thanks to an established portfolio and a focused investment strategy. More importantly, whilst the share price may lag the current NAV per share, it is, however, reflecting the NAV growth with total shareholder return of 28% in the period. Driving 75% of portfolio value increase in the period was EBITDA growth. We've highlighted some examples here of those enjoying high-growth companies like Wishcard, who have seen sales of their German multi-retail gift voucher double over the last 12 months, or 7NXT whose fitness at Gymondo has seen a circa 70% increase in subscribers to its online gym classes. Multiple expansion, EV/EBITDA are increased essentially drove 25% of portfolio value increase in the first half. The most notable company, which enjoyed high EBITDA growth and a modest increase in EV/EBITDA, was IU Group, formerly known as Career Partner Group, which alone added 15p NAV per share. This ad tech platform can deliver multi-topic degrees now to people in work anywhere in the world. It will offer some 340 degree programs by the year-end. It now has 75,000 students, up from 17,000 in 2018 when we acquired it. And I think most notable is that 70% of those students are for nonacademic households. So it's democratizing access to education. And also 25% of the students are now international, but from some 110 different countries, and we expect that number to grow significantly over the next year or so. I mentioned IU Group in such detail because our target here is for IU Group to be the largest university in Europe within 3 years time. And we expect it to be, I guess, one of the key drivers of OCI's NAV as well in the coming years. As previously mentioned, there are some headwinds, 7 of the 21 portfolio companies are trading at or below pre-COVID budgets. And that has impacted NAV in the first half by 4p. FX headwinds have also reduced now by 14p. So let's now break down the NAV and the constituents of the investment portfolio. Accounted through a slicing and dicing of the assets, but based on June valuations, OCI currently has a look-through portfolio value of GBP 766 million, has GBP 172 million of cash at the period end, and both were offset by GBP 134 million of liabilities, which are largely from facilities within the Oakley funds. The net of these 3 numbers is GBP 804 million of net asset value. The cash compares to outstanding fund commitments of GBP 438 million. However, it's estimated that of this number, only GBP 243 million is likely to be drawn. This takes into consideration the use of facilities, refinancings and the final level of drawdown likely within Fund IV and the Origin Fund. The assets are split with GBP 615 million held via the funds and GBP 151 million of direct portfolio investments, which includes GBP 110 million of North Sails debt and the residual being a direct equity stake in Time Out. The Board have confirmed that the intention is to realize these direct positions within the next 12 to 24 months. As you can see on this slide, our equity positions are evenly split between the 3 focus sectors of technology, consumer and education. They're also reasonably evenly split by underlying companies with no pronounced single company exposure risk. A consistent theme across the portfolio and sectors is Oakley's investments in tech-enabled companies with 14 of 21 companies delivering their products or services digitally. And in the majority of the remainder, we're exploring the adoption of digital solutions as part of the investment thesis. Related to this theme is that 16 of 21 companies enjoy an increasing level of subscription-based recurring revenue with the benefit that the visibility this provides and the rising value multiple it attracts. Finally, as you would expect, with the portfolio positioned as ours is, the majority of the companies, 14 of 21 of them are trading at or above pre-COVID budgets. But there is some post-pandemic recovery we can look forward to from the remainder. Let's now look at how Oakley is approaching investing and its success sourcing so far this year. I'll attempt to summarize all Oakley does or at least how it differentiates itself in one slide. But I guess, firstly and most importantly is how I approach sourcing. It's got a relationship-led investment style, and that has helped them build a business founder network that provides repeated opportunities to back proven talent. It attracts entrepreneurs new to Oakley as well. And in turn, they have demonstrated their belief in Oakley by investing themselves in the Oakley funds. Nearly EUR 200 million of our assets under management are funds committed by the business founds with bank. The 2 most important outcomes of this approach are, one, quality of the management we are backing to make an obvious statement, but it's the single biggest driver of our investment success. We -- in 95% of the cases, we finished an investment with the management that we back to the start of investment. And the average [ NPE ] is something more like 50%. And secondly, by virtue of how many of the deals are off-market and often that we're the first private equity capital investing in the company, we see less or no competition for assets, and this is reflected in the below-market multiples that Oakley pays. Secondly here, and I think we often overlook at Oakley, is the real active management plays in the -- as a significant part in value creation. And our drivers or the specialist drivers for us include human capital management, [indiscernible] acceleration, improving the quality of earnings and marketing excellence. But I guess, we're both most known for that transformative M&A, buy and build that has proven to be a highly effective way for Oakley portfolio companies to scale up, adding new products and services and customers and entering new markets. The 40 platform companies that Oakley funds are invested in since inception have made over 100 bolt-on deals to date. And then there is the investment themes. I mean, in this case, I define them in terms of the significant global trends that we are investing behind. The most notable is the growth of global Internet users and the accelerating adoption of consumer and digital-led businesses, digital solutions. In terms of ways in which we play that, that is in direct-to-consumer, either in fast-growing or establishing new DTC channels, it's in SaaS solutions and also it's in repeat regional plays. So that is going into other countries where we are investing behind it is disruption curve, learning from more mature markets like the U.K. and to some extent Germany. And you'll see us, therefore, investing quite a lot in this particular area in Southern Europe and Spain, Italy and Portugal. On the subject of M&A, the Oakley funds have made 3 transformative bolt-ons in the period. The acquisition of Primavera alongside Ekon and the 4 other acquisitions has created Grupo Primavera and creates the largest independent provider of business software in Iberia. The acquisition of Compass, that's the leading crew management SaaS provider to the maritime industry by Ocean Technologies Group has brought the group to a stage where it's now the leading software provider to the maritime industry, serving around 20,000 vessels and over 1 million seafarers every year. The group includes the clear market leaders in e-learning, human capital management and fleet and information management software solutions. And finally, on this page, WindStar Medical, which acquired LAB Cosmetics. Now WindStar is Germany's leading over-the-counter consumer health care company. And the strategy here is to create and scale the business through continued product innovation, digitalization and accretive acquisitions. We're achieving all 3 with LAB Cosmetics. It's the leading provider of clean beauty products. And importantly, this is, one, a high-growth segment, the -- one of the highest growing segments within the broader beauty market. And it also had a fast-growing D2C channel, which in turn, WindStar can profit from. During the period, we made 4 new platform deals. There is idealista, Southern Europe's answer to kind of right move in [ Supla ]. Digital penetration amongst consumers in Italy and Spain is far lower than Northern Europe. So there's really exciting growth opportunities here. To give you some example, idealista is approximately 1/5 of the value of a right move, which obviously operates in a very mature market here in the U.K. But idealista is the number 1 provider, the number 1 online property marketplace in Spain, the number 2 in Italy, the number 1 in Portugal. You're talking about markets each of a similar scale to the U.K. But at the moment, there isn't the same level of real estate agent penetration nor the spend per agent at this time, but clearly, the trend is moving exactly that direction. Following our online real estate sector expertise, we've made an investment in Dexters, which takes us into the offline world for the first time. Now the business itself has performed incredibly consistently over the cycle growing at 15% per annum. The key for us was that 75% of the business is focused on lettings and the visibility that that brings. It's also sort of a highly fragmented sector, particularly London, the South East where Dexters is focused. So there is still the opportunity to buy single site strong operators in different kind of towns or villages without -- in that region. One of the clear opportunities for us that we've identified is to make Dexters multichannel and using an online approach -- digital approach to capture some of the services and spend in this area that is outside of the full-service lettings property. ICP Education is the third largest children's nursery group with nearly 6,000 children at 44 nurseries across England. Premise here is, I mean, one, the nursery sector is large, GBP 6.7 billion. There's an estimated 850,000 children now in nurseries across the U.K., some 15,000 nurseries, but most of which owns and operates on a single site basis. And so there's an opportunity to create one of the largest platforms here for nurseries in the U.K. and in time internationally. The market itself is attractive. I mean it's grown at nearly 5% CAGR for the last kind of 10 years, and it's being driven by I guess 2 things. I mean it's not just in early learning, but there is an increasing awareness of the importance of early years' education. And of course, there's a rising female labor market participation. And finally is e-commerce. The e-commerce -- sorry, ECOMMERCE ONE. It's an e-commerce software roll-up opportunity, and we've initially acquired 2 of the leading software solutions for German online merchants selling by marketplaces. So this group will provide the plumbing, if you like, for e-commerce backend operations for kind of merchants. It's everything from stock control, listing, logistics, et cetera. I guess the key thing to say about this group or even to put it in context of Fund IV is that these are clearly attractive opportunities that come in via our -- in many cases, via the network relationships we've had. But I guess the kind of most important kind of factor for many when they think about the drive harder in PE and also the kind of significant competition for assets in really attractive sectors like these is kind of what you're paying for them. If I take Fund IV, the fund we are currently invested in, which is now 60% invested and has 8 companies within it, roughly speaking, the average entry value of Fund IV to date has been about 12x. That compares to peer group multiples for those companies about 16x. And currently that fund -- the portfolio companies in that fund are growing their average EBITDA growth by over 40%. So something about how we're able to access great companies that are interesting and attractive valuations. If we take ECOMMERCE ONE as an example of how we secured that business and it's one -- or our ability to secure business, it's one the fact, let's say incredibly hot sector. It's digital, it's software and it's focused on e-commerce. We still sit via the Oakley network. Valentin Schutt was one of the founders and owners of one of the business and he introduced that opportunity to us. And we've already backed Valentin in Wishcard in one of our earlier investments. And then finally, it's about everything I've just said about this company, we've managed to acquire a single-digit EV/EBITDA multiple. To bring the presentation to a close, we'll touch on ESG and also closing the discount. So look, I think there's always a danger to anyone overstates their ESG credentials and that you lose credibility as a result. And Oakley has always been fortunately focused on asset-light low-impact companies by virtue of our kind of background of expertise. It would be easy for us to kind of claim kind of great green or ESG credentials as a result. However, I think there's always been a strong ethos of where we're willing to invest and not invest in the kind of other's misery. I think what we've seen, particularly in terms of ESG progression over the last year is how it's become more formally integrated in the approach of the operations of the business. Actually, in a way that I think, in general, I think private equity industry leads across all asset classes versus the public markets despite a reputation in the media to the contrary. It's now very much part of our investment process. We now have set up a reporting platform that all portfolio companies now report into. And at this point in time, 70% of the portfolio comes onboard on this process. We are in the process of developing a cybersecurity road map, which has been developed for 80% of the portfolio. And ahead in the rest of the year and beyond, we have a diversity and inclusion committee, which has just launched its review of first inclusion within the Oakley group. And we're undertaking a carbon footprint assessment with the aim of developing a net 0 strategy for Oakley. I think 2 stats here that kind of strike me is, one, in 2020, we don't have the stats for the first half of this year. Oakley portfolio companies created 331 kind of new jobs. And we now have North Sails Apparel has joined a lessee as being the second B Corp certified company within the portfolio. And then the discount, it's a slide that many of you have seen before in terms of in kind of green are areas that need to be addressed or as we think would add advantage to the -- to Oakley's kind of governance [indiscernible] accessibility and those that we still think still need to be addressed. I won't touch on those that have been addressed, but I will touch on where I think we can do more, and I think will hopefully in time help the discount close. ESG, as I discussed, I think the more we can develop ESG as part of our investment process and I think the more sustainability we can create within our companies will create more value for those companies. And also there's the -- I think one of the key issues, there's a monetizing of direct investments under the kind of governance umbrella, which is something the Board has clearly set out and I think would take away some of the uncertainties around past conflicts of interest. Liquidity is improving and notably, I think with the increasing investment of retail wealth and private wealth managers, which is encouraging. I think share trading volume can continue to increase. We moved from the [ AIM ] to the SFS. And I think -- but ultimately, it will be an advantage for us to be a main list company, a premium list, main list company. And that's something that the group would endeavor to achieve within the next 12 months or so. It's certainly a process that is currently under review. And then there's accessibility. Our investor materials, our full year results were awarded the best in the alternative asset class by the AIC, which is a really mark of the progress OCI has made in this area. I still think OCI is the lesser of the known listed PE, particularly amongst the direct investment peers. And look, we're younger, and we're slightly smaller. And I think with the increase of our profile and awareness of our kind of consistent performance over time, I think that will kind of help. And then there's also reporting quarterly. At the moment, we report on a half-yearly basis. That leads to a kind of sustained period where we haven't updated on the NAV, and we've committed to the latest introducing NAV reporting, quarterly reporting with a full revaluation of the fund on a quarterly basis from Q1 of next year. I would say, and I say consistently that anyone should acquire the shares of OCI for the growth in the NAV. Discount may close, we have less control over that. But the shares, as we highlighted earlier track that -- the NAV growth. And the more consistently we perform at the levels that we're doing, the more scale we create, and then the more likely that the share price will meet or exceed the NAV per share. And bringing this section of the webcast to a close. We've got a lot of confidence in the performance of OCI in the second half and beyond. I talked about the digital, the tech focus of the portfolio and the other accelerating megatrends that we invest behind, and those are very firmly in place for the years ahead. There's the cash, an encouraging level of cash to have, but it also means that we can really benefit from the new investments or the Oakley funds we're making. And also, it enables us to further commit to new Oakley funds as and when those opportunities arrive. I think as well in terms of -- as we think about news flow from here on, particularly news flow that may or may not kind of drive the NAV in between reporting periods, we expect activity to continue at relatively high levels. And there are strong prospects for further investments and for realizations. I guess to give some context, the average holding period of our realized investments to date is about 4 years. I think the average holding period of our current investments, unrealized investments is about 3.5 years. So you'd expect those as funds like Fund III mature, that there will be opportunity or, if not realizations, maybe for refinancings. I'm now ready to take any questions.

[Operator Instructions] Our first question comes from Conor Finn from Liberum.

I just had a couple of questions really. The -- across the 4 platform acquisitions that you made in the first half, can you give -- I mean, you've obviously mentioned ECOMMERCE ONE, but can you give color on maybe like an average acquisition multiple versus kind of what the existing portfolio volume ratio multiple of that? And then secondly, you touched on the whole period, and there's a reasonable degree of the portfolio within that kind of typical range now of around about 4 years. But is there any -- I mean, how much of the portfolio is there a situation where you'd actually be working to hold on to these for longer than the typical hold period because of the kind of growth pathway that you can see ahead for some of these companies in the business plan?

Yes. Hi, Conor, thanks for the question. I mean, I guess on the subject of average investment multiple for the new platform deals in the year so far, we haven't published a specific number, but it's kind of in the region of 10x to 12x EV/EBITDA. So particularly attractive given the nature of those investments. Yes, it's a good question as far as kind of our intentions as regards kind of continuing or to lengthen our holding period for some companies. I think it's worth giving the 3.5 years in context, I think when you're a younger PE firm manager, I think there is greater pressure to make realized returns in order to kind of have a demonstratable track record that enables you to raise fund after fund. Now they're in a position where mature established for [indiscernible] this fund with the Origin Fund launched recently. I think there's less pressure to do that, firstly. So I think -- and when we look to the analysis of the companies that we've sold, I think there was a real sense that kind of our best performers, there was a lot of value, a lot of growth that we left on the table by exiting at the point we did. I think as well, we're increasingly proving that follow-on investments, taking investment in, even in a sort of a minority stake into a kind of latter vintage funds is proving a successful strategy for us. And it's now being done and inspired the schools business, factually where pros recently now -- that's recently done an A certification. And I think there's a sense that there should be no shame in doing exactly that, but your new funds as they launch should feature the kind of greatest hits of your previous funds, companies that you invested not only a lot of capital, but a lot of intellectual capital in, you know them incredibly well and you would want to participate in their growth for many years on. I suspect obviously when the company starts to emerge like this, that IU Group is a great example of that. A company has not just become a potential unicorn under our ownership, and it's something that could be worth multibillions of euros in kind of years ahead. So look, it's very possible that we'll see some holding periods kind of stretch out. We look to participate in growth for a longer period. I also think that -- I also think that there is the opportunity that we're not -- we're less afraid to kind of realize when our expertise passes and it's fine for us to retain a kind of minority investment alongside some of the bigger global kind of PE firms.

[Operator Instructions] We have no further questions. So I'll hand it back to you, Steven.

Thank you, Maxine. Thank you very much for those that joined us today. Appreciate your attendance. And look, in summary, I think hopefully our optimism for the quality of the portfolio and the future growth prospects of the portfolio companies kind of shines through in the last 30 minutes of presentation. And I think it's clear that we feel that kind of OCI is one of the leading ways to profit from fast-growing, high-quality kind of unlisted companies. And we're very optimistic about the rest of the year ahead.