Oakley Capital Investments Limited

Good morning. My name is Stephen Tredgett. I'm a partner at Oakley Capital, and it's my pleasure to welcome you to the Oakley Capital Investments 2022 four-year results webcast. Before we start the presentation, can I remind you that questions can be submitted in writing during the webcast by following the questions tab at the top of this broadcast window, and we will tackle as many of these as possible at the end of the session. Turning our attention to OCI's performance in the 12 months December 2022, and as we will recount, a forecast portfolio of European tech-enabled businesses has delivered another year of performance. You'll be familiar with the 2022 headline numbers. The strong portfolio value growth delivered a 128 pence increase in the NAT per share, taking us to 662 pence, and NAT assets are now over the £1 billion mark. This is based on the portfolio being independently fully revalued to the end of December. And when including the dividends paid, it amounts to a total NAV return of 24%. As this NAB per share bar chart shows, last year's performance is consistent with OCI's long-term returns, with a five-year compounding average annual return standing at 23%. Arguably, most importantly, OCI has the highest five-year total shareholder return of any investment company, standing at 216%. As we look at this chart, it's worth reminding ourselves that the current Oakley strategy and investment team were fully formed around 2015-16 onwards. And from this point, OCI cash was deployed at a much higher level and earlier Oakley investments began to mature and produce significant returns. setting the momentum for the performance that followed. The NAV growth we have already highlighted was the result of a £214 million increase in the portfolio value. Of this value uplift, 65% was created by the increase in EBITDA generation of the portfolio companies, and 35% was as a result of an increased multiple being applied to that EBITDA. Let's look at this in more detail, starting with the earnings. The key stat is the portfolio company's average organic weighted EBITDA growth in the year of 22%. This was achieved against economic headwinds, high inflation and supply chain disruption, the most notable comparable period with average EBITDA in 2021 growing by COVID-boosted 30%. There are four characteristics which are most responsible for this enduring performance despite the macro environment. And these are the characteristics which are most commonly shared by a locally portfolio company. They are firstly, digitally disruptive companies, which means they take market share and do not rely on market growth. Secondly, they are founder-owned. We are backing proven business leaders with the same long-term alignment as ourselves. Thirdly, they typically have a recurring or subscription nature to their revenues. So their earnings and cash flows are highly predictable. And fourthly, each will be benefiting from a clear, enduring megatrend, such as the shift of businesses and consumers to online solutions or the global demand for quality and accessible education. Two portfolio companies, examples of that high EBITDA growth and in turn significant NAV contribution. IU group, which added 64 pence to the NAV for sharing the period. This is a university with a mission to democratize education by offering high quality, flexible and affordable online degree tuition to adults around the world. It's a scalable platform that is now delivering over 550 different learning offerings and saw enrollments increase 20% in the last 12 months, such that today the university has over 100,000 paying students and EBITDA growth of 40%. And secondly, in Germany, Wishcard Technologies Group added eight pence to NAV. The company is a leading consumer technology company in the gift voucher and employee incentive solution sector. And it continued to do that strong performance in 2022, achieving 20% growth in both voucher sales and earnings. Those that have had a chance to read the results released this morning will note we have moved our KPIs, like the average EBITDA growth, to a weighted average from a simple straight average. Some will naturally assume that our averages were already weighted. For others, this will be a long overdue change. And for those suspicious of any change, we provide a link in results, which gives a simple averages and the recent history of both. The reason for switching now is, as we'll see in a few slides time, there is a growing range of exposure to each of the investing companies. For example, we have two with a look through exposure of over 100 million. We have 10 that have between 30 and 70 million pounds of exposure and seven under 10 million. with 35% of the portfolio value growth was due to multiple expansion. The vast majority of this, over 90%, was as a result of uplifts based on agreed exits. So the weighted average multiple increase from 15.3 times to 15.9 times in the year was down to five exits in the period, which were completed at an average 70% above the prevailing book value. The two companies that contributed the most to NAV as a result of multiple expansions where one Contabo, a web hosting service provider, added 26 pence to NAV per share as a result of Fund 4 selling its stake at a 105% premium to the previous carrying value. The leading cloud hosting platform used by SMEs and developers continues to perform well, with 24 data centers across four continents serving over 300,000 customers. On5 has acquired a minority stake in Contabo to benefit from the anticipated future performance, which is currently tracking EBITDA growth of 40%. And secondly, Oakley agreed the strategic combination of portfolio company Grupo Primavera with software provider Sajid. Group Hope Rivera is Iberia's leading independent business service software provider, while Sajid is a global leading provider of cloud-based management solutions. The combination establishes Sajid's leadership in Iberia and offers exciting expansion opportunities for Group Hope Rivera by delivering Sajid's presence in Latin America. As we consider the ability of the portfolio companies to continue increasing in value despite the backdrop, it is worth reminding ourselves that the Oakley funds hold a majority investment in 17 of the portfolio companies. Controlled investments combined with 20 years of experience allows Oakley to influence outcomes and create value. We've outlined four of the strategies we are most prolific at. all enable us to drive value regardless of the economic cycle or operating environment. To touch on two of these, firstly is the improvement in the quality of earnings. This is best illustrated through the work done with Tech Insights, which is a technical content platform for silicon microchips. The quality of the company's earnings has been transformed. With circa 20% of revenue subscription based at acquisition in 2017, growing to circa 70% today. One of the key drivers of the equity valuation increase since we've owned it. And secondly, buy and build. Of the 40 platform investments the Oakley funds have made to date, they have acquired between them over 125 company bolt-ons, deals which have been responsible for a quarter of realized returns to date. I'm often asked, about our NAV and its robustness. And there is not much written about PE valuations and whether they've been kept artificially high and still lag the public markets even after its recent recovery. I can't speak for all of PE, but I can point out the following with regards to the Oakley portfolio. 11 of the portfolio companies, so 42% of the companies have been priced by a third party investment or a corporate action that took place within the year. And to clarify, when I talk about investment on action, this is something that would have taken months of due diligence on behalf of us or another PE sponsor, and would involve a level of detail that is not available in the public markets when considering the value of business. Those 11, And the remainder of the portfolio have all been independently valued and audited as of December. Thirdly, we have a long-standing track record of selling assets above the book value. That premium on exit stands at 54% since inception, and it's been high in recent years. And fourthly, Oakley has arranged recent secondary sales of Oakley fund positions for some of its investors in the year. These have been sold at between a 10% to 0% discount to the fund NAV. When comparing PE valuations to the public market, I would also highlight the following. There's the disparity between the new economy, typically digital portfolios of ourselves and our direct list of PE peers compared with, say, the FTSE All-Share constituents, which in many cases won't include comparable companies. Two, the public market typically demands a 20% to 30% control premium to take a company private. So in theory, peer holding should rate above public peers, although they don't. A point I've made in previous presentations is that an investment advisor like Oakley is not incentivized by unrealized gains. So it's not motivated to overstate the value of a holding. And finally, with quasi-permanent capital, he is unlikely to face the untimely selling pressure that can befall a mid-cap listed company. We've always maintained that we are relatively modest in our use of debt and that with asset-like companies enjoying high cash conversion, we have companies which can comfortably support debt and quickly deliver. At the year end, the average portfolio company net debt to EBITDA stood up 4.3 times, changing little in the course of the year, which compares to a PE industry average of circa seven times. Adam Rule locally tends to use a majority of equity at the point of making an investment and then refinances latterly following performance. To illustrate the relatively low reliance on debt, the pie chart here shows the four contributing factors to realise returns to date. With the largest by far at 48% being organic growth, as we discussed earlier, M&A has been 24% of the value created. A multiple expansion of 15% is a contributing factor, but not relied upon for returns. But most notable, the use of debt at 2% of realized returns is nominal. Here we break down the 1.2 billion of asset value into the exposure to the underlying portfolio companies, which now stand at 26. You can see the asset value is fairly evenly split between the three focus sectors of technology, consumer and education, with education being the largest. As touched on earlier, as we run our winners, there's increasing disparity between the look through exposure to the larger flagship fund holdings, and say recent investments in lower mid-market companies. IU Group, which we spoke to earlier, is by far the largest equity look through holding with a 243 million exposure to the online university. This is encouraging, given it remains one of the top three fastest growing companies within the portfolio. OCI retains two direct holdings, one in the debt and equity of Time Out, and the other in the debt of North Sales, both the Sales Manufacturing Division and the Empower 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. To put that into context with North Sales, it went from a nominal level of EBITDA in 2021 to producing something in the region of 28 million of EBITDA are exceeding our expectations in 2022. Timeout is listed, so there's little we can give you that's additional to what's in the public markets, except to say that the business is emerging strongly. There's been a significant announced pipeline of new markets that are opening. Profitability has returned to the group. And on the 30th of March, the company will be announcing its interim results. Here we have taken the 26 companies and analysed them for potential impact from the most notable macro risks, acknowledging that no portfolio is unscathed in these circumstances. For example, the small number of consumer companies with manufactured goods bear the threat of continued supply chain constraints. One of those companies most notably affected by this has been Windstar in Germany. And then we've got the two companies serving the web hosting industry. It's unavoidable for them to avoid the exposure to high energy costs, for example. The most notable and unavoidable impact, though, is that of inflation. Cost and wage inflation and the possible reduced demand as a result of the rising cost of living will stand to impact some 60% of the portfolio companies. But in our favor, it's factors like, one, many of those companies provide lower cost business or consumer solutions, like for example, Fitness App Germondo. And that's simply because 70% of them deploy those products or services digitally. Two, in a rising cost environment, consumer marketplaces like price comparison websites can prosper. And three, with pricing power, many of these 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, Webprose. The analysis also demonstrates that the portfolio offers a fair degree of resilience to external factors like these, as it did in 2022. With OCI's commitment to a third Oakley Fund strategy in 2022, it's worth highlighting the overriding strategy of Oakley and its medium-term plans. It started with the mid-market flagship buyout funds, now up to fund five, then came the lower mid-market origin funds, and then the VC pro-founders. Rather than moving up the scale to raise much larger funds to invest in much larger companies, Oakley has looked to invest across the company lifecycle, partnering as it always has done with ambitious and improving founders. Possible next step include a growth tech strategy and a continuation fund to allow clients to have larger exposure to outperforming companies that have become too large for the funds. Although the OCI exposure to profound is very limited at this stage, reflecting the size of the VC fund, it's worth providing some background. The strategy was launched in 2009, and now on the third and larger funds, the team has built a track record and scale that warranted an OCI commitment. 9.5 times realized return is thanks to 12 successful exits from 50 investments that have been made to date. Such successes have included get your guide and pack help. In short, they seed fund high growth startups that leverage technology to transform those broken customer experiences. Fund 3 has made three investments to date, which include a platform that provides CFO and reporting solutions to SMEs and a B2B mental health solutions for employees. Following the addition of ProFounders 3, let's look where this leaves us with regards to total commitments. OCI has outstanding equity fund commitments of 929 million as of the 31st of December. The majority of this is its commitment to the recently launched Fund 5. The second bar in the chart in grey breaks this down into the expected timing of the drawdowns, i.e., when will the Oakley funds need the cash committed to them? There is 210 million expected to be drawn in the next 12 months, 519 million set to be called after 12 months, and over a five-year period, and finally, over 200 million that is not expected to be called. Set against these commitments are 210 million of liquid resources, which is 110 million of cash and 100 million of unused credit facility. Whilst this gives us ample near-term cover, we expect exits, refinancings and the repayment of direct debt over the next 12 to 18 months to generate further proceeds. And whilst it's hard to specifically forecast activity and over the prior page, you know, that assumes that, you know, normal business, it kind of continues in the market. In reality, distributions from the funds as a result of realizations that the purple bars in this chart have consistently broadly matched or exceeded the capital calls required to fund investments, the black bars. 2022 proved no different with, 200, broadly 200 million of capital calls and 200 million of distributions. The high activity level came in a year when P activity in general were lower. So we're demonstrating here the quality and the visibility of the investments realized. And two, when it comes to origination, we continue to unlock opportunities by being the partner of choice for business founders. On the subject of future exits, the average hold period of a realised investment in the Oakley funds is 3.6 years, and the weighted average of the portfolio is 3.3 years. So whilst the exact timing of exits is unknown, there are plenty of maturing assets within the portfolio. To add to this, we continue to attract more attention from the larger PE sponsors who currently sit on record levels of dry powder within their funds. over 3 trillion, according to the recent Bain report. Turning to new investments and the foundation for the future OCI NAV growth, Oakley unearthed four attractive new platform investments in the year and made following investments in three companies we wish to continue to back, deploying a total of 271 million. The new founder-led arrivals included Velex, Spain's fastest growing legal data company led by its founding brothers, and it offers a cloud-based online subscription platform, giving easy access to legal and regulatory information to over 2 million users. Affinitas, a roll-up vehicle in the fragmented premium private school space in a sector that we obviously know well, and Fenner, one of the fastest growing ticker business testing and inspection groups globally, with revenue growth of circa 100% CAGR over the last three years. It provides specialist testing and inspection services across infrastructure, built environment, niche industrial, pharmaceutical, and certification and compliance divisions. The business operates across 12 companies countries in four continents. Since signing that deal halfway through the last year, the group has completed 13 acquisitions, reducing its entry multiple by three turns and increasing its EBITDA run rate by circa 50%. To close the presentation, rather than summarising in bullets what we've already told you or repeating what we have said consistently about Outlook for the last few years. We thought we'd leave you with a photo depicting portfolio company Vice Golf. Why? Well, let's take a consumer business that could be on the sharp end of recession. On the surface, it's hard to be optimistic about golf ball sales in 2023. Cost of balls are up. It's a product that can be easily replaced. There is large dominant players. There's low barriers to entry. E-commerce is suffering softness post its COVID spike. And yes, a consumer recession could dent further discretionary spend. So it's not too dissimilar to the challenges facing any consumer company. And yet, Vice has a D2C big box solution that is disrupting the golf ball market. selling a premium product at 40% discount to alternative balls. It maintains that high margins avoids the cost of the pro golf shops, with a brand that shuns the traditional golf image and appeals to a young emerging player. The company drives awareness with an expertise in influencer marketing, much like a number of our consumer brands. And when it comes to value creation, products expansion is enabling them to leverage the brand across equipment and apparel. And then to add a bit of luck, Netflix has given golf the drive to survive F1 treatment with its PGA Tour series, Golf Swing, which is proving incredibly popular and attracting new players to the game. All this means that Vice Golf is currently growing its revenues by over 30%. So yes, we will encounter further headwinds, but like VICE, we have a portfolio of resilient, well-positioned companies with robust valuations, and we're confident that they will continue to deliver outperformance for OCI shareholders in 2023 and beyond. And we've only just released the full year results, but it won't be long until we give you another NAV update in April, when the portfolio will be revalued to the end of March. And the spirit of transparency and communication We have an online capital markets day, which is scheduled in May. So that brings us to the formal part of the presentation. And we'd like to open up the webcast to Q&A. My colleague, James Isola, has been monitoring your questions as they come in. And James, over to you.

Thanks, Steve. And as a reminder to all attendees, you can submit your questions by typing them into the question box at the top of the screen on the webinar page. So many thanks for those of you who've already sent some questions in. We've had quite a few on the current landscape for private equity. So let's start there. Steve, could you speak about the current PE or private equity environment for investment opportunities, pricing and likely exits?

Certainly, I mean, there's always a danger just giving, you know, kind of Oakley's perspective of the broader kind of PE market, because obviously we don't see every deal and we don't compete, you know, typically in auctions. But I think one, let's talk about fundraising activity. Yes, it has declined year on year, but it's still at kind of relatively record levels. And I think it's like, you know, one of the second or third highest in history. So there's capital still being drawn to PE. Secondly, on activity levels and pricing, I mean, I think we'd observe activity levels have fallen, but pricing hasn't. And I think that those two points are related. So why no multiple contraction? I think there's premium assets we are seeing. And when I say premium, these are high quality revenues, hugely differentiated market leaders. The kind of characteristics we might associate with an Oakley portfolio company those deals are still happening. Debt is totally available for them. There may be, you know, 25 pips more of cost, but there's scarcity in those assets. The market is still, you know, got high demand for those. There's no multiple contraction. And I guess also, you know, it talks to the kind of still record dry powder for those kinds of assets. So we're seeing no multiple contraction. So there's premium assets of which there's relative scarcity. And then we speak to second tier assets. And here I'm talking about most of the companies. We're talking here about decent assets, but the trading is still performing for these companies. But in those second tier assets, you get uncertainty in debt. Buyers want a discount. Sellers don't want to sell and won't sell, won't accept discounts. So we're sitting back. And so we're either seeing those companies not come to auction or failing at auction. And so that's why you're seeing uncertainty Ratings held relatively high, but activity levels falling. And if you speak to advisors, and I suspect the same as advisors in the public markets, there is a brewing kind of pipeline of opportunities being prepared for H2 2023. And if you talk to the big four accountants, they are very busy, you know, kind of doing preparatory work. So when it comes to that slightly more competitive, intermediated part of the market, we've not sourced a lot through that avenue. It obviously serves us in terms of where we exit companies. But as far as that competitive part of the market, we're still being patient and waiting for further value to come when it comes to origination. But origination for us still remains the same. It's about founder-owned bilateral agreements being the first institutional capital into businesses that are profitable, fast-growing, but with founders not looking to price maximize, looking to bring on a kind of partner to help them kind of professionalize. Interestingly, when it comes to kind of bolt-on activity, there we've You know, as you've seen, we've been quite active. And that, again, is because it's the founder and lower end of the market. Interestingly, where the market is throwing opportunities for us is that where debt has been cheap and widely available to all, now it's not. And so private equity becomes an alternative solution. Plus, of course, many of these companies will have the wrong balance sheet structure now and are looking to restructure.