Oakley Capital Investments 26 March 2019

Oakley Capital Investments (OCI) is an AIM listed investment company and is one of the few remaining directly investing listed private equity funds. It makes the majority of its investments through the Oakley Capital Funds, but on a case by case basis has latitude to invest directly in equity or debt in the portfolio companies.

Oakley Capital aims to deliver long term capital appreciation by backing business operators to grow their companies in three main sectors: Consumer, Education and TMT. The team typically target majority stakes in profitable companies with an EBITDA range of £10m to £50m. They are often the first institutional capital in a business, helping proven entrepreneurs professionalise their companies and achieve the next leg of growth.

The basic ethos of backing proven operators, introduced through Oakley Capital’s extended network, has a different feel to a traditional LBO (leveraged buyout) private equity strategy. Certainly, the way Oakley source investments, in complex transactions often without having to participate in auctions (26 of 27 investments have been primary deals), means they are not usually competing with other private equity players. The benefits of this are that the manager controls its own sustainable investment sourcing model, which enables them to transact at attractive entry multiples.

Demonstrating Oakley’s unique relationships with management teams, in 90% of cases the management/business owners they back remain with their companies for the life of the investment, whereas the average for the private equity industry is c. 50%. Many of these business owners invest their subsequent returns with Oakley. To date they have committed over €80m to the Oakley Funds, demonstrating the level of trust and confidence that has been established. Overall, the portfolio currently represents investments in eleven high quality growth opportunities. In the recent trading update, the company reported that average EBITDA growth from the portfolio had been 39% for 2018, considerably faster than wider listed equity indices.

Over ten years, OCI has been the third best performer of the remaining listed private equity funds (i.e. excluding Electra) on a NAV total return basis, according to data from Numis. Over this period, the company has delivered NAV total returns of 172% against Numis’ average for the LPE peer group of 102%, representing strong outperformance over the longer term. Returns of 46% over the past three years have also been good in absolute terms and relative to the FTSE All Share over the same period.

In 2016 the board introduced a dividend, paying 4.5p per year, equivalent to a yield on the current share price of 2.3%. In the last financial year (to 31^st December 2018), the company received gross interest income of £6.8m, against which the dividend cost around £9.2m. As such, the dividend can be seen to be 74% covered by current income.

A material discount has not always been a feature of OCI. However, the discount widened to historically wide levels in 2016, resulting in the shares trading 40% below NAV. Recognising that the discount may be down to other factors, the board have focused on closing the discount and have undertaken a number of initiatives, including a commitment to never issues shares at a discount to NAV, greater disclosure of the economics of the company and the performance of the underlying portfolio companies, investor meetings and capital markets days, and retaining a share buy-back policy. We understand they are also reviewing the AIM listing. At the current time, the shares trade on 33% discount to the 281p NAV per share, which remains considerably wider than listed private equity peers.

OCI is a differentiated growth opportunity, although with a highly concentrated portfolio of private investments, it is not without risks. On the other hand, the team have demonstrated their approach delivers impressive NAV growth.

Dilutive share issuance is not something that we like to see from boards, which may explain the very wide discount that was seen at the time. They have committed never to do it again, which means investors can focus on the fundamentals. As such, the strong NAV performance delivered over recent years has meant that OCI is increasingly difficult to ignore, and the impressive results in 2018, set against a declining equity market, can be seen as a result of both strong fundamental profit growth from the underlying businesses and the uplifts achieved from successful realisations.

The discount of 33% (to the 2018 year-end NAV) remains considerably wider than listed private equity peers. As we touch on in the performance section, the historic NAV progression has been amongst the strongest in the sector, and therefore on a performance basis, this seems unwarranted.