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

Good morning. My name is Steven Tredget. I'm a partner Oakley Capital, and it's my pleasure to welcome you to Oakley Capital Investments 2026 Interim Results webcast. Thank you for joining us today. [Operator Instructions] In today's presentation as well as examining OCI's current asset breakdown the drivers of performance, we'll also be joined by senior partner [indiscernible] to discuss the strategy and progress of the Oakley Touring Venture Fund. We'll then cover an investment activity review in which we introduced you to some of the new members of the portfolio before concluding with a review of liquidity and capital allocation. But first, though, A reminder of where OCI sits today with H1 2026 headline numbers to the end of June. Net asset value stood at GBP 1.29 billion, which is equivalent to 78p per share. and has resulted in OCI generating a total NAV return of 6% over the first half. And over the longer term, our 10-year total NAV return CAGR is 15%. More importantly and not a coincidence is that the shareholder return over the same period has tracked NAV growth, with a matching 5% annual compound return in spite of a southern discount onapersisting over this time period. The chart here of annual NAV share performance helps give context to OCI's performance over the last decade. And while it's by no means scientific, we can see through performance phases. The first phase we see as the refinement of the equity strategy and the building of the portfolio, culminating the deployment of Funds III across 2017 and '18. We then move into a period of value creation and accelerated realizations as those investments mature with the average age of the portfolio moving from 2.4 years to just over 3 years, tracking up with the growth in NAV. From late 2022, the cycle shifted a game. Fund V represented a much larger bounce of capital, which alongside the launch of the origin strategy saw 2 years of significant new investments across '23 and '24. As a result, the portfolio became much more weighted towards new investments. which are typically held at cost for at least the first year of ownership. In addition, there were relatively few realizations in a more muted exit environment. We're now seeing that balance start to restore those investments are maturing and beginning to contribute more meaningfully to performance. Something we saw in the first half, where several of the more mature portfolio companies were important drivers of NAV growth. In that 6 months, NAV per share grew from 738p at the start of the year to 782p at the end of June. Currently, the principal driver of NAV growth over that period was underlying portfolio performance with 56p of unrealized gains from the portfolio. 80% of that gain was driven by earnings growth and the balance from multiple movement, but only on a small number of assets. That was partly offset by 5 of realized investment losses. That is -- there's a realized refinancing gain offset by expenses in the funds and 4p from FX, reflecting OCI's exposure across sterling, euros and dollars. Euro-denominated assets were adversely affected by the weakening of the euro against the pound. Share buybacks and a further 3p per share as shares were bought back and canceled a significant discount to NAV, a topic we'll return to later. We turn now to the investment breakdown by sector. OCI remains diversified across Oakley's 4 focus areas. Business Services is now the largest sector, thanks to both investment activity and a strong growth in platforms such [indiscernible] and Tech Intersight. This is closely followed by the technology sector, reflecting the new investments made in the first half of the year as we incorporating the touring of profounder investments from our fence strategy. Breaking the portfolio down by geographic exposure, the pie chart tells a story of what Oakley has built its longest-standing track record, expertise and founder networks. Of the 41 companies in the buyout funds, we have 7 and 10 portfolio companies domicile in the U.K. and German-speaking nations, respectively. These markets will remain important areas of exposure while Spain, Italy and France are becoming increasingly significant, reflecting the depth of founder-led opportunities in those regions and the lower levels of private equity penetration. Here, we see the asset value spread over those 41 underlying portfolio of companies as well as the constituents of the venture strategies. We cover many of the larger companies in the coming slides, and we'll talk separately to the new investments. We're optimized which of the portfolio are some of the smaller future Rockstar [indiscernible]. There merits to choose from, but it highlights strategic intelligence [indiscernible], discovery, a disaster recovery specialist, data protection and premium paddle equipment brand, NOX, all of which have earnings growth exceeding 40% and a large runway for expansion. I'll also highlight our homegrown platforms. K-12, is the premium private schools roll up, Artemis in [indiscernible] Assurance and Tiger previously NHC in Italy. There is much excitement around them and much more capital to be deployed in these strategies to expect them to feature more heavily in future NAVs. Here, we highlight the key portfolio drivers of NAV and it's helped the 3 biggest contributors were Fenner, North Sales and Tech Insights contributing a combined 30p per NAV per share. Phenna added 13p per share had a positive first half of the year with continued organic growth plus strong M&A momentum. 15 acquisitions signed year-to-date brings the total during ownership to 71, scaling the business from GBP 50 million of EBITDA at entry to over GBP 200 million today. North Falls added 9 per share in the first half. Performance was driven to mass and the premium segments performance sale-making. [indiscernible] is continuing to undergo its transition with clear operational focus and initiatives in place to support sustainable or profitable growth. Investment and new initiatives across the group are expected to bear through in the coming 12 months. Tech Insights contributed 8p in a very strong period for the semiconductor intelligence platform with significant subscription revenue growth supported by strong renewal growth from existing customers as well as a more buoyant semiconductor market. The business also signed the acquisition of Synergy Research Group in the period, adding further capabilities in cloud and data center market intelligence. Not on the screen here, but particularly encouragingly, the fourth largest contributor is Exoforce, a constituent of the touring fund, the agentic cybersecurity solution whose AI agents, triage, investigate and respond to cyber threats just closed $125 million round at double the valuation we invested a year ago. Given the rapid pace of progress in AI native companies like Exa force, we could expect to see more of the touring portfolio appearing in the OCI headlines were cast by eye being the latest to report good news which is 1 of the reasons we have a same to speak with us as part of today's webinar. Underperformance in the portfolio was limited with the largest value reductions coming from Cegid, IU and POG. Starting with Cegid down 4p per share as the business' valuation reflects the recent contraction in software multiples. Notably yesterday, saw the announcement of the intention for Cegid to merge with [indiscernible], a leading French payroll and HR software provider, primarily serving SMEs. An exciting combination that would create a EUR 1.6 billion revenue European way leader with substantial synergies and growth potential. Turning to IU Group, where affordability pressures in Germany have softened B2C intake. Management is investing in marketing to drive conversion as the funnel still remains strong. International expansion continues with the action of SFU in Austria, taking international revenues to over EUR 100 million or AI study assistance, Syntia continues to show strong usage and retention. And finally, POG, a provider of regulatory and client services to the live service industry reduced NAV per share by 2%. Performance has been impacted by a challenging demand backdrop and integration issues following a rapid period of acquisitions. Management and systems have now been reset. We're focused on cost reduction, execution and restarting accretive M&A. Summarizing some of the portfolio average -- the average weighted EBITDA growth stands at 9%, lower than might be expected for Oakley. We'll look at this in more depth over the slide. Secondly, leverage remains conservative, net debt-to-EBITDA across tool is 4.4x, which remains prudent. Balance sheets are structured to absorb volatility while still support the investment. Of the portfolio of company debt, approximately 75% of it matures from 2030 onwards. We continue to hedge at least 50% of the principal on each debt transaction with a 2- to 3-year tenure. We continue to experience a deep and competitive credit market with recent refinancings receiving very attractive terms. Finally, valuations remained stable with the portfolio value of an average 16.4x EV to EBITDA, a strong foundation for future performance. So let's take a look at some of the main factors influencing the 9% organic EBITDA figure. We've broken this down into 4 buckets. Size and scale as a number of the portfolio companies that benefited from Oakley value creation and successfully grow to a significant scale. The maturity these assets has meant there is naturally more steady growth across those businesses. Companies like [indiscernible] fall into this category. Then as M&A, the 9% doesn't include the impact of M&A, including it takes growth grow closer to 17% to 18%. We are seeing increasing investments in scalable platforms by building from the bottom up and spotting the right thesis and seems to do it with [indiscernible] 2 great examples of scarce, valuable assets that we're creating that are building scale through M&A in highly fragmented markets. And whilst they're organically growing faster than our respective industries, budgeted organic growth this single digit. Thirdly, there are those businesses in the early years of ownership in which we're investing for growth as a cost of near-term reported EBITDA. Assured Data Protection is one example where to support their fast pace of growth and employee count has been doubled in the last year, giving them a near-term negative EBITDA, while sales were up over 40% in the first half. And then we have some underperformance with headwinds in the portfolio. As we've already mentioned, enrollments have been muted at IU group impacting top line growth and at Liberty costs have been higher post a period of expansion, but there is focus on optimizing the business over the next 12 months. No current corporate presentation can go over that reference to AI. It's a topic we covered in more depth at the full year results and the Capital Day. Through 4 years of investing through the length of AI, and thanks to the internal resource of the AI lab, we believe our AI adoption and use cases are well ahead of many of our PE peers. Internally, with wide AI adoption and a proprietary platform with improved deal sourcing and enhanced investment decision-making using a historic data while supporting our portfolio companies through their AI journey. In some cases, this has already led to significant AI-led transformation as we saw out prior to its acquisition by Clio. So there are many less revolutionary projects underway that are making meaningful enhancements. For example, hosting.com has launched its AI customer service solution, which now deals with at least 50% of all interactions and is achieving this at a higher customer satisfaction rating than the human solution and resulted in an annual cost saving of $3. Of course, no one knows the extent of the future our evolution nor it's likely impacts and no doubt there will be unexpected disruption within the Oakley portfolio. However, of comfort to shareholders should be the extent of defensibility within the portfolio. As is illustrated here in this breakdown of the portfolio delivery mode, 70% of the portfolio involves some form of physical delivery. These are AI insulated services that require a human in the loop, field services, education and branded goods name a few. And whilst we believe that our software and data assets like Cegid have defendable positions as systems of record, which are taking advantage of to enhance their customer position there are only 20% of asset value. Of course, when it comes to AI, the real excitement with in Oakley is the AI native investments that are being made in the touring fund. To give us an update on the fund strategy and progress within the portfolio, we filmed the catch-up with Samir Kumar, one of the leading touring fund partners. Since it's based on the West Coast, we felt this was more civilized than wake him up [indiscernible] to have the conversation live. Sameer, thank you for joining us today to give us an update on the Oakley Touring fund and its portfolio companies.

Steve, it's great to be with you this evening.

For those less familiar with the Oakley Touring Fund, could you start by outlining our strategy and how the team and its approach is differentiated?

Absolutely. So we started turning capital in 2023, and this was right after the big check GPT moment which is the start of the current AI wave that we're in. And we're investing in AI native software companies focused on B2B and focused on enterprise software. And what does it mean to be AI native. It means companies that have fundamentally transformed in terms of how they build software, but also the kinds of product experiences and services that they can offer their customers. So it's AI both in the product, but also in how it's been built. We are doing mostly Series A and Series B, and we're seeing companies getting to scale product market fit much earlier in this AI native arrow than we've seen in prior technology platform ships.

To give us a sense of the strategy in practice, could you give us an overview of the current portfolio and how it's positioned?

Absolutely. So I think it's useful to think about how we segment our portfolio in touring. And generally, we are thinking about 3 core segments, and let me give you a flavor of what those are. The largest 1 where we have the most number of our portfolio companies are what we call vertical systems of action. And this is really the evolution of vertical AI or vertical enterprise software in the AI and agent native era. And to give you 2 examples of companies that would be in this bucket, let's take Numa as an example. Numa is reinventing the front office car dealerships and how customers interact with the car dealer, whether it's to get the car serviced or buy new parts, and using AI native capabilities to be able to make that a much more efficient experience and a much more higher level of customer satisfaction. Another example is Dulopa, which is in AI for financial services, building a very large, highly coveted prized data set of very accurate historical financial data. and that has led to collaborations with OpenAI and Tropic and most recently with Google on Gemini because of how valuable that data is to these large frontier model companies. The second category is physical AI, where we think about how the online and digital world interfaces with the physical world that we all live in, and how software tools and agents are able to impact and modify workflows and activities in the physical world. So a good example is Netradine. Netradine is focused on building NVIDIA-powered and Qualcomm powered AI cameras that are used to then train drivers to behave more safely or become better drivers. But it's using the same technology as what goes into autonomous vehicles. But instead of driving the vehicle, it's being used to make the human driver safer. And then if we think about the last bucket, which is the next generation of AI infrastructure, the entire infrastructure stack, how we run AI, how do we secure it? How do we deploy it. That is all being currently defined and redefined from prior errors. So core horizontal capabilities like how we serve up models, how do we do what's called inference remodels. Parcel is a good example of a company that is in that space. and is a high-growth company that is serving up AI models and providing inference.

Samir, could you give us an example of kind of what current companies in the portfolio? And maybe why you invested how you source it? Give us a touring case study?

Absolutely. So let's take cost AI, which is based in Cambridge U.K. as an example of 1 of the companies that has really exceeded all expectations on performance in our portfolio. [indiscernible] is focused on applying AI to the hardest problems we face as a society and a civilization in material lands. Coming up with new materials to take on hard problems like carbon capture, water purification, the future of semiconductor fabrication and the exciting opportunity as an AI for science company is to take the current advance the eye and be able to search through the very large space of different kinds of materials different types of problems in a much more efficient way than it was ever possible in the past. The co-founder of [indiscernible], Professor Max Welling is someone I have known for many, many years, going on 10-plus years at this point. And as their seed round was coming together, it was already filled with some of the best VCs across Europe. But because of the relationship that we had with Max, we were able to get an allocation and joined their seed round at GBP 89 million post valuation, and I'm excited to say that just a little over 2 years later, they have closed a Series B at a $2.6 billion valuation and also notably Jeff Bezos joining the round with a $100 million check from his personal foundation.

That's fantastic. And congratulations on such early progress.

Thank you.

Then many of the portfolio companies are pre-profits or pre positive cash flow. How confident can we be around valuations? And are these much longer holds and have a higher failure rate by a virtue of them being venture investments?

Yes. So I think it's a great question. And I think maybe what we should start is by looking at the current health of the portfolio. So I'm proud to say we've had 8 markups in the portfolio and on very early exit that was completely unanticipated in SafeBase. And I think these are representative of where things are going when it comes to how companies will grow and evolve as well as a new exit landscape that's emerging. Companies are achieving scale much quicker. They are getting to demonstrations of product market fit quicker. It also means that their capital intensity is getting pulled in is happening earlier in the life cycle of the company. But at the same time, we're seeing a new exit landscape, a new set of acquirers that are going to acquire early-stage companies. And what we're also seeing is that their willingness and ability to pay up is also greater than what we would have expected, let's say, in the cloud SaaS era. And so I think all of these things combined come together to support going earlier and making investments, let's say, more at the Series A stage than at the Series B stage. And I think we'll see this in our portfolio. I think we'll see more consolidation, a vibrant M&A ecosystem of acquirers that people would not traditionally associate with paying heavy premiums for acquiring early-stage software companies.

It's all very well, talking about the base business, but I suspect there's a lot of competition for the kind of businesses you describe and that only intensified right now. Plus, in addition to that, there must be a lot of imposter companies in the world of kind of AI opportunities. How are you able to source these deals and in turn back the right ones?

Now that's exactly the right thing to focus on, which is the best companies are going to have a lot of interest, heavy competition from lots of funds. We rely on the history of our relationships, especially with founders and I think part of the excitement in collaborating with Oakley is the shared view on betting on founders and being able to assess founders, have long-standing relationships with them, ideally, we bet on them in [indiscernible]. That's one of the ways we get access is founders from our past track record in something new we have the history, we have the relationship and that allows us to get in. But also because we've been in venture for 25 plus years long-standing relationships with both early-stage firms, growth-stage firms that send us a lot of deals that are vetted that are part of their portfolio. Now to your point about noise, in this era, every company has a AI in their name and so consider themselves to be AI native. But it's upon us to be able to separate what is hype for who has something real and credible that we can bet on. And that is just the ability to diligence these deals in I'll say, a full stack manner. Everything from the cities that they're making, the core of their business, being able to reference check their customers. But ultimately, having been in the AI space for so many years, we built a heuristic to be able to sense out what is truly novel and innovative versus potentially a rebranding exercise or something that has been just wrapped in a light layer of AI, but really, the core is not something very lighting.

And a final question, if I may. It's obviously an incredibly fast-moving area of technology and faster than many of us have experienced. What are the trends in AI at the moment that you're most focused on? And how is that impacting what you are targeting and the kind of opportunities that are in your pipeline?

Yes. So as we've gone through and given the pace at which AI is evolving, even since the start of the fund, we've had to fine-tune how we segment the portfolio, what are the areas that we're leading into. And I'll call out 3 core areas. The first one is this idea of vertical systems of action -- this is really the evolution of vertical enterprise software. And what vertical systems of action is implying is that in this AI native era, software is not just a tool for human productivity. Software is now doing the work. Software is going to take a piece of the overall labor TAM in different industries. And if you look at the TAM for software versus labor, it's a 2 order of magnitude difference. So I think this massively expands the opportunity for AI native software in vertical industries. So this is an area where, in fact, most of our portfolio is today, and we will continue to add to this. The new emerging area of physical AI, which I alluded to earlier, this is the interface between the online and digital world and AI agents and tools being able to affect change and processes in the physical world. And so right now, we have a handful of companies that are in this area. I would actually argue [indiscernible] is a physical AI company, given they're using AI to design new materials and those materials exist in the physical world. And then the third category, which is next-generation AI infrastructure. As I alluded to earlier, the entire software stack of how we build software, how we deploy software, how we secure it, is evolving, it's changing. And all of it is becoming AI native. And that means there's a huge opportunity in the next-generation infrastructure stack that companies will deploy to be able to get the benefits of AI. And so we're going to be refocusing on this area as well and adding more investments in this sector.