Oakley Capital Investments Limited

Good morning everyone and welcome to Oakley Capital Investments 2022 interim results webcast. My name is Andrew Honour, Managing Partner at Greenbrook and I'll be hosting today's session. Should you have any questions during the presentation, they can be submitted in writing throughout the session via the Q&A button.

at the top of the web page there'll be time at the end of the presentation uh to answer the questions so i'll now hand over to stephen treget oakley part capital partner to present the results stephen thank you andrew and a warm welcome to those joining us for a review of the oci interim results a six-month period of continued strong performance from oci and the underlying oakley funds We wanted to kick things off with this photo, not so that I can break the news of some unexpected investments in driveshafts, but because it touches on four key factors that have helped deliver growth for Oakley-backed companies to date and will continue to drive it going forward. The photo that you can hopefully see on your screen is of a testing and inspection engineer, one of the services provided by the newly signed investment in Fenner Group. a leading platform in testing, inspection, certification and compliance, the tick sector. Fenner was one of seven investments made so far this year, four of which were in new platform deals, backing proven business founders, demonstrating Oakley's ability to source attractive new entrepreneur-led opportunities, despite the wider fall-off in deal activity. Secondly, Fenner like the portfolio companies it joins, is a high growth profitable company. The average EBITDA growth of the portfolio to June was just under 20%. And encouraging the average growth of the new platform deals is more than twice that. Thirdly, one of Fenner's key features is that its growth and resilience is driven by regulatory trends. Customer demand, which is typically non-discretionary due to mandatory testing requirements. is another example of the mega trends that oakley invest behind like the continuing and enduring shift of consumers and businesses to online solutions and fourthly the equity value we expect to generate in this investment isn't predicated on a strong market backdrop fenner is to be the acquirer of choice for the best of breed specialist tech companies in what is a highly fragmented market. And so that ends a week after announcing Fenner, we have already signed a bolt on of CTS Group, a leading UK provider of testing and inspection services. Buy and build strategies like this are just one example of Oakley's value creation tools, which gives us the ability to impact outcomes. So turning to the headline numbers of a strong market-leading six-month performance. Based on the portfolio being fully revalued at the half year, the NAV per share has risen from 538 pence in December to 630 pence at the end of June. A total NAV return in the period of 17%, which continues OCI's long-term growth track record, with its five-year average annual return now standing at 23%. This sustained NAV growth is delivering scale for OCI with net assets now over the £1 billion mark. It's not for me to comment on the appropriateness of the current OCI valuation, but it currently trades on a 37% discount to this NAV. As the NAV per share bar chart shows here, performance momentum is building thanks to an established portfolio and a focused investment strategy. A performance we believe is repeatable in the years ahead. Now we take a look at what drove this recent NAV growth. In short, portfolio company financial performance was the key driver in the peer with 72% of portfolio company growth being driven by the increase in EBITDA over the year. The Oakley portfolio companies grew their EBITDA organically at an average 18%. This double digit growth comes after a very strong in part COVID boosted performance in the prior and comparable period, and is being delivered against the backdrop this year of economic disruption. Central to this growth is three irreversible long-term trends. One, business migration to the cloud. Two, the consumer shift to online. And three, the growing global demand for quality and accessible education. The largest contributor to OCI's NAV, which was based predominantly on their financial performance was IU Group, which added 38 pence to the NAV per share in the period. Germany's largest and fastest growing university offers accessible and affordable higher education to students around the world. Its scalable online platform is now delivering over 550 different learning offerings and saw enrollments increase 40% in the year so far, such that today, the university has around 100,000 students. In Grupo Puravera, we saw the addition of eight pence to NAV in the period as it fulfilled its mission to become the number one independent business software platform in the Iberian market. And in its leading market position, it's benefiting from the increased adoption of SaaS solutions among SMEs that are less digitized than their European peers. We recently announced the exciting strategic combination of the business with Sajid, one of the leading global providers of cloud-based management solutions. Whilst 28% of the portfolio value was due to multiple expansion, the vast majority of this, over 90%, was as a result of uplifts based on agreed exits. So in other words, not speculative increases in EV EBITDA multiples, but based on the price of agreed transactions, which included Factula, CTAG, and Contabo. The latter's performance added 26 pence to the NAV per share in H1, a combination of the company continuing to see the data super cycle drive demand for its high-quality web hosting services and the multiple uplift based on the agreed sale of a stake to KKR. The average EV EBITDA of the portfolio companies now stands at 13.7 times, which remains conservative when compared to the average earnings growth of the portfolio, and especially when compared to the listed growth tech companies. We've spoken in the past some of the factors which could give investors confidence in net asset values. These include independent valuations conducted on behalf of OCI, that the manager isn't incentivized to aggressively value the portfolio as it has no bearing on its management or performance fees. These performance fees are based on realizations and nothing else. And the current applied multiples more typically reflect the below market valuation paid at entry rather than, for example, a volatile public market peer group multiple should listed peers exist. Of course, The biggest proof point of the robustness of an NAV is how the portfolio company valuations compare to the price an acquirer is ultimately willing to pay for them. Since inception, Oakley has continued to demonstrate not only the appeal of the portfolio companies to larger PE sponsors, and these include in the recent last couple of years, the likes of EQT, CVC, KKR, Silver Lake and others. But on average, it has realized holdings at a 52% premium to the valuation on the book at the time. Despite the market backdrop, this trend has continued in 2022. Deals completed or signed year to date being an average 68% premium to book. One of the single biggest appeals of the portfolio are its business models being based on digital disruption. Whilst the investments sit within one of our three focus sectors, technology, consumer and education, the most common theme amongst them is that nearly three quarters deliver their products or services digitally. And of the remainder that sit outside of the technology subset, we are exploring the adoption of digital solutions as part of the investment thesis. We often highlight this, but it's all the more important on certain times that 75% of the portfolio or 20 of the now 26 companies enjoy an increasing level of subscription-based or recurring revenue. With this visibility attracting increasing valuations as Tech Insight demonstrated at the turn of the year. Here we break down the 1.1 billion of asset value into the exposure to the underlying portfolio companies. For those counting, there are 24 companies on this slide with Velex and Fenner yet to arrive in the portfolio at the 30th of June. As you can see, the asset value is fairly evenly split between the three focus sectors. It also is also reasonably evenly split by underlying companies. IU Group, which we spoke to earlier, is by far the largest equity look through holding with a nearly £200 million exposure to the online university. This is encouraging, given it's currently one of the top three fastest growing companies within the portfolio. OCI retains two direct holdings, one in the equity of Time Out and the other in the debt of NorthSouth, both the Sailing Manufacturing Division and the Apparel Division. It is pleasing to report improving and profitable growth in both companies after both suffered significantly at the hands of the pandemic and required additional support from OCI as a result. As this map shows, there has not been a sudden foray outside of our region of expertise with the portfolio largely residing in Western and Southern Europe. Based on our expertise and network, this will remain the fund's geographic footprint. I should note, however, that we are less geography-led in our origination, but primarily opportunity and sector-led. We're not oblivious to the rising threats to economic and geopolitical stability in Europe and globally. And in fact, we anticipate a very challenging global operating environment lies ahead. We certainly aren't impervious to this threat either, although we are in a far more resilient position than most. As we did at the fall year, we continue to gauge the impact of the prevailing macro issues. We have no investments in Russia, Belarus or Ukraine, so no or very little direct impact is possible as a result of the war in the region. As you may imagine, there is a largely digitally-led portfolio that supply chain disruption will modestly impact OCI. We have anticipated rising Asia-related input costs like shipping and raw materials for the consumer businesses like NorthSouth, Alessi and Globetrotter. As for interest rates, with an average net debt EBITDA across the portfolio of 3.9 times, the portfolio companies are conservatively levered, especially given their growth and when compared to the wider PE market. Rising rates are expected to have a near-term impact on demand for mortgages and loans, and this will in turn impact price comparison platforms, at home and factually, and online property portal, Idealista. Countering this, however, is the structural shift in demand for these platforms due to the relatively low internet and economic e-commerce penetration in Southern Europe. And finally, rising inflation. Wage inflation, rising corporate energy bills and other cost inflation and the likely drop in consumer demand due to the steep increase in the rising cost of living will stand to impact some 40% of the portfolio companies. In our favor, however, is that one, many of the companies provide lower cost business or consumer solutions like, for example, 7NXT's fitness app, Jamondo. Two, in a rising cost environment, price comparison websites actually prosper. Three, many of the companies have been or can pass on price rises given the relatively low cost of a mission-critical service like, for example, that provided by web hosting software provider, web pros. And four, technologies tend to carry smaller asset bases and less input costs as a result. Whilst we are alive to these impacts and have forecasted accordingly, the most critical counter to these threats is our ability to impact outcomes. One of the key pillars of performance for Oakley since inception is value creation. We can impact value creation because in many cases we have a majority shareholding, we have seats on the board, and we have a very active and productive relationship with the founding partners and the managers of those businesses. We've outlined four of the strategies within value creation that we are most prolific at, all enable us to drive value regardless of the economic cycle or operating environment. In the interest of time, I'll touch on two of these. the improvement of quality of earnings. This is best illustrated through the work done with Tech Insights, the technical content platform for silicon microchips. The quality of the company's earnings was transformed from a 20% subscription revenue on acquisition in 2017, growing to over 65% today. This is one of the key drivers for the equity valuation increasing almost 18 times over this period. And secondly, digitization, taking offline companies or those with an early-stage digital solution and driving the growth of that channel. Alessi was a great example of this. It was loss-making in 2019, had very modest online sales, less than 5%. Thanks in part to a, although present, a dysfunctional third-party-provided website. Two years later, and despite of COVID, and with an entirely new management, sales are up 50%. And just as importantly, after a full revamp of its digital channels and marketing, 30% sales are e-commerce. And the EBITDA on the current year is growing over 30% this year and is expected to exceed 6 million euros. Changing tack to look at OCI's resources and outstanding commitments, the company The company has outstanding Oakley Fund commitments of $993 million as at the 30th of June. The majority of this is its commitments to the recently launched Fund 5. The second bar in the chart in gray breaks this down into the expected timing of the drawdowns, i.e., when will the Oakley Fund need cash committed to them? There is $160 million expected to be called in the next six months, 500 in the next 12 months, 575 million set to be called after 12 months and over a five-year period. And finally, 275 million is not expected to be called as a result of the use of fund facilities or the fact that funds are never or rarely 100% drawn, but closer to 80%. Set against these commitments are 307 million of liquid resources, which is 97 million of cash at 30th of June, 100 million unused credit facility and 110 million of proceeds expected from signed but not yet completed transactions. This provides a healthy level of cover should the Oakley funds not have any further exits or refinancings in the next couple of years. In reality though, distributions from the funds as a result of realizations, the orange bar on this chart, have consistently raw or broadly matched or exceeded the capital calls required to fund investments the purple bars 2022 will prove no different the 30th of june there has been 43 million of capital calls and 33 million of distributions and and significantly the level of activity that has been announced is and and anticipated going forward this year is expected to be on a similarly balanced basis Supporting this is the 470 million of value in the portfolio at the half year residing in investments that have been held for over three years. Given the average holding period of an investment is three and a half years, we can reasonably expect to see more realizations in the 12 months ahead. Before touching on some of the recent activity in the portfolio, we thought it was worth summarizing the status of the broader PE markets. Falling high levels of recent fundraising coupled with outperformance of PE has reduced the available allocation to the asset class in tandem with market uncertainty leading to significantly lower levels of fundraising activity in Europe in funds raised and fund count. The events in wider Europe have also prompted some caution in places from US and Asian investors. And from our experience, institutions have been less likely to automatically back managers whose funds have invested historically, a break from what has been quite a long-term trend. In contrast to this fundraising trend so far this year, and on the strength of Oakley's track record, Fund 5 has exceeded its 2.5 billion euro target in a very short timeframe. Despite this decline in funds raised, dry powder, i.e., the undeployed capital that sits within PE funds sits at record highs with circa 2 trillion in PE buyout funds. This dry powder predominantly sits in the large global PE funds and encouragingly for the Oakley funds and OCI, these are the sponsors that continue to pursue investments in the Oakley portfolio companies. In times of rising uncertainty, it becomes harder to forecast performance and price risk. The disparity between buyers and sellers and their target pricing kind of widens. Again, record levels of activity. And sorry, this is reflected in the drop in the levels of activity, significant drop that we have seen in the year so far. However, again, looking at Oakley, Record levels of activity demonstrates the quality and visibility of the investments realized and the desire for business founders to continue to partner with us. With the set-off in consumer cyclicals and technology growth stocks, The average EV of it does in which European P firms are acquiring businesses in the year so far has significantly dropped, dropped down to 11 times. It reflects that smaller pool of target companies. It reflects the fact that there are less deals happening in some of the higher rated businesses because of that disparity between what buyers and sellers want to achieve for their companies. But against this backdrop, Oakley has continued to realise companies and realise companies at an average realisation about 18 times, demonstrating the strength and appeal once again of the Oakley portfolio companies. On this subject of deal activity, I'll close by talking to Oakley's origination and the new investment sourced in the year to date. Those that know OCI and Oakley well will know that central to our success is origination of off-market opportunities through our business founder network. As a result, we are in 90% of cases the first institutional investor in these businesses in a process which is in 80% of cases uncontested. Given their ownership and being the first PE investors into these businesses, there tends to be some mess to navigate. If you can deal with this complexity, this risk, then you can unearth some attractive entry multiples as a result. The knowledge gained from these deals leads to deepening industry insights and the identification of further adjacent opportunities. That sector mapping and that knowledge of the industry and the wider industry that we've been developing through our work in business services led us to identify the opportunity of Fenner recently. Oakley's origination has on earth four attractive new platform investments in the year so far. They include Vice, the digital first golf brand, selling its premium golf balls direct to consumers at 40% below competing brands. Velex, Spain's fastest growing cloud-based legal information platform. Affinitas, a roll-up in the fragmented premium private schools group, a sector we know incredibly well with historic and successful roll-ups in private schools and also ongoing roll-ups in other areas of education currently. And finally, Fenner, back where we started at the beginning of this presentation, one of the fastest growing tech groups globally with a revenue growth of circa 100% CAGR over the last three years, providing specialist testing and inspection services across infrastructure, the built environment, needs, industrial, pharmaceutical and certification and compliance division. The business operates across 12 countries in four continents. These are not only high growth, profitable companies that can sit within our focus sectors, but as importantly, they are typically deals by virtue of them being both disruptive business models and being led by impressive founders. Ingo, Rainer and Gail, Victor and Paul are all founders of their businesses who have chosen Oakley to partner with on the next stage of their growth. We highlight here the three companies we have reinvested in, selling out of one fund and reinvesting into another. In these three examples, we are reinvesting for a number of reasons, not only because we think there is a good runway, existing runway of growth, and we have the information advantage gained from the kind of intellectual capital, the monetary capital that we've invested in these businesses going forward, but also we see new opportunities as a result of the incoming large global PE sponsors that we've brought on site. And a number of these opportunities There are also the opportunity for consolidation with significant large players to create not only a very dominant position throughout a much larger footprint in Europe, but also create some significant synergies and for some growth for the growth potential as products are shared across a kind of wider footprint. Finally, closing the discounts. you pour i'm just going to pause for a second um as i can no longer see um the presentation on the screen um the as as you know we we there's an element of control we can never close the discount but much is at the whim of the market um we've always also maintained that share price performance in listed P and investment trusts is much closer tracks NAV growth, which is something we can have some control over. However, we have always stated and the board has maintained that we will do anything that's possible to continue to help the closing of this discount. We've separated this into four categories. The first being the broader listed P point of kind of creating further confidence in valuations, further confidence in NAV. How do we do this? I think from an Oakley perspective and from an OCI perspective, we continue this by proving that we have a fair market methodologies, that we follow very strict guidelines and that we have what can be considered to be pretty conservative valuations applied to our underlying portfolio companies. And those that know us well know we track more the entry valuation of a business rather than kind of live market potential pricing of a business. The integrity of those valuations will continue to be borne out by the price in which we sell assets at, and particularly achieving those premiums despite the public market sell-off. This year, I think, is incredibly important, not just for OCI, but for listed P in general. If we can outperform public markets, can prove that we can continue to perform in spite of the market backdrop, and continue to be active and sell assets at or above NAV, then I think we should see a re-rating of, if not at the least, OCI, the kind of broader sector, over the coming year. Now turning to slightly more OCI-specific points, one of the key things for people to have faith in an NAV and therefore for shares to close to trade closer to it is reporting quality the availability of information and the frequency of which that available that information is available in the last two years OCI's reporting and reporting accounts and fact sheets have improved enormously in quality, and this has been endorsed by industry awards, naming OCI's reports as being best in class throughout the investment trust, alternative investment trust universe. We will continue to strive to be exactly that, best in class. We've also adopted quarterly NAVs, the first of which we implemented at the end of Q1, and that will continue going forward. that impact should be felt immediately, but the more consistent that we do it, the more likely it's going to have an impact. Performance and scale, frankly, I think performance over the last kind of five years in a relatively strong bull market has been taken for granted. It's been offset against the fact that a lot of asset classes have performed well, and there's been a rising tide, particularly within private equity. If we can continue in a disruptive market to perform in line with our five-year NAV return CAGR, that 23%. The more consistently we deliver that despite disruption, then the more confidence there will be in our NAV and our share price should reflect that. SCAD also helps. Some of the highest rated listed PE opportunities are the likes of A3i, HG. They happen to be some of the largest. The fact that our NASA asset value is now over a billion and continuing to grow, I think will be helpful to the business and the liquidity of the shares and therefore the rating. I think we've got to consistently deliver this over the next year or two to really see that kind of play out potentially in the impact to the NAV. Great if it happens sooner, but it may not. Finally, there's the direct impacts and cash returns. The board authorized a 20 million share buyback at the start of the year, and we have continued to progressively deploy that buyback over the first half. We'll continue to do that. It signals a number of things. One, when we have available cash, we'll be efficient with it and we'll return it. Two, it endorses the confidence that the OCI board has in the NAV And then when it's trading at a discount, that's one of the best uses of its cash, essentially a 35, 40% return if you're buying shares at this particular level. We know the direct investments cause rise for concerns around conflict of interest. We, the board, have confirmed that there is an intention no longer to make direct investments of that kind. And whilst we can't be specific, as those investments performance kind of continues, we'll anticipate realizing them over the short to medium term. Again, consistent delivery in those areas over the next year to three should see a closing of that discount. So let's close with a comment on the outlook. We are not complacent as we look ahead to the rest of 2022 and beyond. much in the world is uncertain however three factors continue to underpin the resilience of the oakley funds and oci's performance one is the focus on those counter-cyclical megatrends such as the rising global demand for higher education two is our ability to impact outcomes regardless of the wider economy thanks to that value creation toolkit that we referred to earlier And lastly, the fact that institutional investors want to buy our businesses. So far this year, we've sold three companies at significant premiums to book value and more are expected. We believe that these factors in combination with Oakley's unique deal origination will continue to deliver our performance for OCI investors in 2022 and beyond. At this point, I'll hand back to Andrew.

Great, Stephen. Thank you very much. Now we've got some time for Q&A. Obviously, as before, if you want to ask a question, please type it out in the Q&A box at the top of the web page. You spoke a lot, Stephen, about discount to NAV. We've had a few questions on that, which I'll sort of group together. I mean, along the lines of, do you think the share price will completely close discount to NAV? And is that expectation unreasonable over, say, a five-year view?