Oakley Capital Investments Limited

Good morning. My name is Stephen Tredgett. I'm a partner at Oakley Capital, and it is my pleasure to welcome you to the Oakley Capital Investments 2023 Interim Results Webcast. In the next 30 minutes, we will cover one, the performance of OCI over the last six months of the year and analyze the composition of the portfolio. Secondly, we'll speak to the health of private equity as an asset class particularly funds being raised and deals being done and how this impacts Oakley. And thirdly, we'll look ahead considering the approach of the Oakley fund strategies, the current investment pipeline and the outlook of the portfolio. At the end of the presentation, we will conclude with a Q&A session and questions can be submitted in writing by the questions tab on the webcast page. Turning our attention to OCI's performance in the six months to June 2023 and as we will recount a focused portfolio of european tech-enabled private businesses has delivered another period of resilient performance the headlines are an nav per share of 663 pence and nav of close to 1.2 billion This is based on the portfolio being revalued at the end of June, and when including the dividend paid, amounts to a total NAV return of 0.5%. The shareholder return was just over 5%, double that of the FTSE All Share, and thanks to realisations in the period, cash has been significantly strengthened to now stand at £248 million. As the NAV per share bar chart shows, the 12-month performance is consistent with OCI's long-term returns. The five-year compounding average annual return currently standing at 22%. Arguably more importantly, OCI has one of the highest five-year total shareholder returns of any investment company. The six-month NAV return by our standards is relatively modest, but it's worth considering that cash, debt investments and investments valued based upon a transaction made within the last 12 months amounts to 63% of NAV, essentially resulting in two-thirds of the NAV, which was to remain static in the half. To explain this 12-month point, typically an investment made in the last 12 months will be held at that entry valuation given its proximity to that pricing event, regardless of its ongoing growth. This relates to new investments or reinvestments like Contabo, Velex, Fener, etc. And there are also those like Sajid that had a pricing event within the last 12 months and that valuation has naturally been retained in the recent period. Whilst the value of the remaining portfolio increased by 17 pence per share, the approach to multiples and trading outlook has been cautious, given the uncertain macroeconomic environment that persists. Dividing the NAV per sector, to run the NAV by sector, there are three things to note. Firstly, the portfolio is reasonably balanced across our four focus sectors. Secondly, we now have four focus sectors, up from three with the addition of business services. Not so much a new sector, but a more accurate segmentation of some of the investments that were previously categorised within technology. Those being data platforms like Velex and Tech Insights, and Testing Inspection Compliance and Certification Business , which has made incredible M&A progress in its first year investment. As you might imagine, it's a sector we have high hopes for. Thirdly, if we take you back to the sector split in December 2022, like so, and then advance again so we can see the change in the period, this reveals a decrease in the exposure to the education sector and an increase in the technology sector weighting. The combination of this move helps explain the average portfolio company multiple increase in the period from 15.9 times to 16.9 times with a mixed shift towards the higher rated technology sector investments. As is customary, we now break the 1.2 billion of asset value into OCI's look through exposure to each of the underlying portfolio companies, which now stands at 27. It gives an opportunity to see the investments that can have the biggest impact on future NAV growth. And as we run our winners, we see many of the largest holdings being our long-term flagship fund investments. Companies like Sajid, WebPro, Idealista and IU Group. As you'll be familiar, OCR retains two direct company holdings as a result of a legacy strategy and the aim at the appropriate time is to realise these positions. One is in the debt and equity of Time Out Group and the other in the debt of NorthSales. It is pleasing to report improving and profitable growth in both companies. This year, NorthSales is the fastest growing company in the portfolio as sales and masks both enjoy strong volumes and have successfully passed on high material costs. The apparel division is also delivering strong underlying trading driven by e-commerce and outlets. The combination see the group ahead of budget at this point in the year. Timeout reports its four-year results in the coming weeks and will be reporting profitable growth in both its media and markets divisions, with a further nine of their hugely popular food markets now signed and currently in development. The average organic weighted EBITDA growth of the 27 companies at the period end was 21%. This was achieved against economic headwinds and high inflation and reflects the founder-led, digitally-disruptive nature of the portfolio and the recurring or subscription nature to their revenues. To touch on some of the highlights by sector, within technology, the key long-term trend of the shift to cloud and hosting solutions continues to lift the portfolio, with companies like Contabo, the leading web hosting service provider, growing EBITDA at 30%, with its 27 data centers across four continents serving over 300,000 customers. The consumer sector will be forgiven for having a weaker period of performance. And while some of the companies like Windstar and Vice have experienced some short-term headwinds, Three of the top five fastest growing portfolio companies are consumer businesses. Companies like Edelista, Southern Europe's leading property portal, which continues to benefit from the rising demand of its solution. A solution which is still very much under-adopted in the region, compared to groups like Rightmove operating in the mature UK market. The megatrend of the growing global demand for high-quality, accessible education drives all areas of the industry, none more so than the demand for premium private schools, which Affinitas is proving to be a beneficiary of. The roll-up vehicle only launched last year and is already a group of 12 schools in Europe and America, with 10,000 students generating close to 20 million euros of EBITDA. In this fragmented market, there are few school groups of this scale. And finally, the newly segmented business services. We touched early on some of its constituents and their mission-critical roles in a data-driven economy. Legal data company Velex and its cloud-based online subscription platform was one such example, which following its acquisition of Fastcase has created the world's largest law firm subscriber base and a library with more than 1 billion legal documents from more than 100 countries. Finally, in this section of the presentation, the last of the portfolio company KPIs is that of leverage. The multiple has fallen to four times net debt EBITDA, demonstrating that in the current environment, we are allowing the portfolio companies to deliver. We would expect the level to drop further for 80 to 90% of the portfolio going forward, with the exceptions being those that are increasing driven by M&A. These levels of leverage are lower compared to a global PE average of seven times. And to underline the point that Overly does not rely upon investing company leverage to drive returns, we have broken down our realized returns to date by the four main contributing factors. As you can see in the pie chart, the use of debt only contributed to 1% of realised returns so far historically. M&A, a key value creation driver, stands at 10%. EBITDA, multiple expansion, 23%. But most importantly, organic growth, our principal focus with making investment, has delivered 66% of realised returns to date. As an aside, Oakley Fund's realised investments have generated 5.2 times money multiple and a 72% IRR, which underlines the OCI board's desire to maximise the balance sheet exposure to the funds and avoid cash drag where possible, a topic we'll return to. There are dangers in summarising the health of an entire asset class, but we can certainly touch on some of the themes that are most focused upon. After a 17% fall in 2022, global PE fundraising has continued to drop and is expected to retrench to its lowest level since 2016, with 2023 at a run rate 35% below that of last year. It will, however, be a year in which the second highest number of funds will raise capital. Our observations are that a high proportion of investors plan to actually up or maintain allocations over the next 12 months. Despite this improved sentiment, the fundraising market will continue to be tough. And as a result of recent years of oversupply and the abundance of funds attempting to now raise, For a more cautious investor base, a repeatable strategy and consistent past performance will be critical. So expect more divergence between managers who can successfully sustain their fundraising momentum and those who cannot. We would note three things. E-funding is not in any form of structural decline. It's still a relatively nascent asset class with significant scope for growth. As we've highlighted in the past, there is only circa $10 trillion of global PE managed assets versus the approximate 110 trillion in public markets. The large global PE funds are typically the acquirers of Oakley portfolio companies, and the firepower within these funds remains undiminished, with them representing the lion's share of over 1.1 trillion of PE dry powder. In spite of the backdrop, the Oakley funds by the end of September will have closed near to 4 billion euros of funding in the prior 12 months, reflecting the demand of the performing managers and leaving us well positioned to take advantage of an opportunity rich environment. For our deals being done, the global aggregate private equity exit values are down significantly this year and could finish as low as half the value of 2022. The trend, however, is an improving one with quarter on quarter growth, a market consensus regarding the peak of the rate of the rate hike cycle, helping to provide some certainty on deal financing. Anecdotally, we've seen a market bifurcate between large, scarce premium assets. And as the chart shows, with the number of deals closed being up year on year, the most active area for deals has been the mid-market and below, where debt is less of a driver and founders are looking to equity, not debt, and partners for support. These two trends, as you might imagine, have significantly benefited Oakley. Fund 3 SAD of IU Group, on the subject of premium high-quality scarce assets, realized a near 14 times return and generated proceeds of 240 million for OCI. The funds made two new platform investments in the half, including Fund 5's follow-on investment in IU Group, alongside 1.1 billion euros of third-party investment. We retain high conviction in the long-term potential for IU, which remains the largest and fastest growing university in Germany and a global leader in online, in education technology. And we believe there is an opportunity to leverage AI, M&A, internationalization in order to continue to drive this impressive growth. And secondly, Thomas's, one of the top-rated co-educational independent school groups in the country, where we see the opportunity to partner with the founders to further develop current facilities across the schools and invest in new opportunities to expand Thomas's offerings and sites. In addition, and post-period end, Fund 5 signed the carve-out of dental laboratory operations within the European Dental Group. which, led by its founder, Peter Hove, will form one of the leading oral care and services provider groups in Europe and launch the start of a new roll-up strategy in a largely unconsolidated market. It's been a busy period for Boltons by the existing portfolio companies, with over 15 completed in the first half. The largest was Velex's acquisition of Fastcase and Afinitas's acquisition of Spanish premium school, XIC. The other particularly active companies include Fenner, Ecommerce One and Brightstars. Historically, distributions from the funds as a result of realisations, the purple bars on the chart on slide 25, have broadly matched the capital cause required to fund investments, the black bars. The high level of proceeds in the first half of the year have provided a timely boost to the OCI balance sheet. Cash has grown nearly 126% in the first half of the year to 248 million as at the end of June. And post-period end, OCI renewed and expanded its revolving credit facility, raising total committed lending to £175 million, a significant vote of confidence in OCI from its lenders in what is a tight debt market. This brings total available liquid resources to £423 million. And it compares to OCI's outstanding Oakley fund commitments of £893 million. We show this number in the gray bar to the right-hand side, broken down by the commitments in each Oakley fund, with a significant majority of the commitment being in the mid-cap buyout flagship fund five, which was launched in 2022. The middle bar in purple 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 £308 million expected to be called in the next 12 months, £360 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. So current liquor resources can be reasonably expected to provide two years of drawdown cover if the funds were not to generate further proceeds during this time and the funds continue to invest at their current high levels. As we consider future fund activity level, it's useful to consider the current holding periods of the underlying portfolio companies. Oakley's job is not to time the market, but to deploy capital evenly over the cycle, and the chart demonstrates that. The average holding period of realized Oakley investment to date is about 3.7 years, and the average holding period of the current portfolio is 3.2 years. This is, however, skewed by the longer hold periods of north sales and timeouts. If we remove them from the calculation, the weighted average hold period is closer to 2.5 years. This reflects the recent years of investment activity and takes us back to early in the presentation when we touched on the amount of NAV which was priced by transaction in the last 12 months. Despite this average age of investment, we still anticipate a number of possible realisations within the next year. And in the third, final section, we look ahead to the prospects of OCI and the Oakley funds. As you'll be aware, the underlying OCI portfolio companies sit within a number of Oakley funds and strategies. It started with the mid-market flagship buyout fund, now Fund 5, then came the lower mid-market Origin fund, with Origin 2 expected to be announced shortly, and then the venture capital strategy, Profounders 3. Rather than moving up the size 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 proven founders. To this end, the identified gap in the Oakley fund strategies was a growth technology solution, a strategy that would invest in the series B and C rounds of fast-growing software companies. Oakley Touring Venture Fund was launched in June to do just that. Oakley has partnered with a team that has built three global venture investing franchises, including Qualcomm and N12, Microsoft's venture fund. Over this time, they were the early backers of companies like Zoom, Kahoot, and Waze. The fund's focus and the team's particular expertise is in identifying investment opportunities in proven next-generation software businesses for the modern worker, powered most importantly by generative AI. Encouragingly, over 25 founders that have been previously backed by Oakley and the Turing Partners have already committed to the fund. Oakley has positioned itself well around prior generational shifts like the smartphone and cloud computing. And we believe that generative AI represents the next paradigm shift. Oakley Touring will, we hope, not only enable us to capitalize on this opportunity, but the team is also helping us, helping our current portfolio companies navigate the adoption of this technology. In the last couple of slides, we look at the health of the deal origination, which remains one of Oakley's key differentiators. The funnel here represents the relatively near-term pipeline of opportunities, which is in very good health. This has been driven by a number of factors. There's those that are Oakley specific that you'll know well. They are our unique founder-led network. that not only we continue to be able to back on numerous occasions, some of which we back three or four times, but they endorse us to other entrepreneurs throughout Europe who present other opportunities to us. We are... consistently and increasingly considered to be the partner of choice of founders, founders that want to continue to work within and own the businesses they've operated in, but they want help kind of professionalising, growing those businesses, internationalising those businesses and with M&A, areas that we have considerable track record in demonstrating. There is also the deep sector mapping and scoping that we do within these focus sectors that drive and reveal opportunities for us. There's also levels of disruption in the current market that are providing us with opportunities. Disruption that maybe lower, middle, mid-market companies want to take advantage of. They see the opportunity to get a backer at this point in time in order to take advantage of that disruption, or there are companies that are currently overcapitalised in a high-cost debt environment and they need to restructure their balance sheet, all of which is driving a large pool of opportunities towards Oakley. As the funnel shows, there are, in the more immediately considered pipeline, 18 companies which are in due diligence. They are spread across the four sectors, with education and business services accounting for two-thirds of those in due diligence. Most notably, three companies have received recent offer letters are companies based within Southern Europe, and the region has been an increasingly attractive area for us. Why is Southern Europe proving such a a region that is delivering a significant number of attracting opportunities. There's three kind of key reasons for that. One is the lower current adoption of digital solutions within this marketplace. We have the ability to repeat what we've achieved in now mature geographies like the UK and Germany, in countries like Germany, Spain and Italy. I mean, Spain's cloud adoption is significantly below that of the EU adoption, with 31% of SMEs using cloud computing in Spain versus 41% of the EU on average. And then there's Italy and e-commerce. Only 40% of Italians, the entirety of the Italian population, have executed any kind of e-commerce. We often talk about it in terms of price comparison website, and the fact that even after COVID, online car insurance only accounts for less than 20% of the market. I mean, here in the UK, it's closer to 80, 90% of the market. And so consequently, there are plenty of market leaders that we can invest in that are growing in these regions, not thanks to their underlying markets, but thanks to the digital disruption, the adoption of digital solutions. Secondly, there's low PE penetration. Compared to the UK market, for example, Spain has less than a quarter of the PE investment by GDP. And finally, it's a large addressable market. Spain is increasingly at the centre of the Spanish-speaking world, which is estimated to be a populace of some 600 million people. In closing, the outlook is bright for a resilient, well-positioned portfolio of companies. Whilst Oakley, in the meantime, an innovative investment manager, is uncovering the next generation of opportunities in pioneering areas such as generative AI. As a result, we are confident in the continued delivery of our performance of OCI and for OCI shareholders in the rest of 2023 and beyond. Thank you very much for listening to the presentation stage of the webcast. And I'll now hand over to Rosanna, who will lead us through the Q&A.

Thank you, Stephen. And thank you to those who've submitted questions so far. As a reminder, for anyone who'd like to raise a question, please use the question tab at the top of the webcast page. And we'll do our best to get through as many questions as possible in the remaining time. With that said, let's kick off with a question on portfolio performance. So, Stephen, which have been the best performing companies from an EBITDA growth perspective? And are there any common themes between them?

We've kind of teased out some of the names across the presentation. If I take the top five performers by EBITDA growth, they are North Sails, IU Group, Dexter's, Contabo and Idealista. In terms of commodity, I mean, they're across three of the four sectors, so there's no real common thread other than demonstrating the typical kind of characteristics that you would imagine of Oakley companies in that, you know, characteristics that you'd be particularly familiar with. They're digital disruptors, so they don't rely necessarily on market growth. They're all founder-owned. And anyway, we've backed those business leaders on the same terms as us. They've got the same long-term alignments. They've got a level of recurring revenue to all of them. And I guess most importantly, they've all got those big megatrends behind them. What's noticeable, and probably, as I said earlier in the presentation, and probably unexpected, is the consumer weighting of those five companies, which you wouldn't instinctively have expected, given the macro environment. But that does, again, speak to that disruptive nature of these businesses. We talked about Idilista and DEX. They're both taking market share for their own respective regions. I mean, we talked about underpenetration. roughly speaking, Iliadista kind of represents, you know, with 60% of the, of the Asian market versus mature right move, probably representing 90% of the Asian market.