Oakley Capital Investments 14 March 2023

Oakley Capital Investments (LON:OCI) are one of a select group of private equity managers who have a listed fund (Oakley Capital Investments, or OCI) as a cornerstone investor of their limited partner (LP) funds. OCI has been a strong performer amongst its listed peers (see Performance), and is now the leader of the LPE peer group in NAV terms over the five years to 31/12/2022.

Oakley tends to target companies which are digitally disruptive, are founder-led, get an increasing proportion of their revenues from a subscription or recurring revenue base, and finally, that the team believe are exposed to a clear or enduring megatrend. OCI’s portfolio consists of 26 underlying companies, most of which are invested through Oakley funds, with a roughly even split across the three industry sectors.

Over time, and reflecting new commitments to different Oakley funds which target different deal sizes, the number of companies within OCI’s portfolio has increased. That said, it still has a relatively highly-concentrated exposure to the top ten companies, at 79%, as we illustrate in the Portfolio section.

Underpinning NAV growth in recent years has been the strong earnings’ growth across the portfolio. This impressive growth trajectory is enabled by the focus on digital businesses, which have been able to transcend many issues which traditional business models have had to contend with, such as rises in inflation or supply chain issues. OCI has an adjusted commitment cover of 29%, which is relatively thin compared to the wider LPE peer group. The current discount to NAV is c. 30%.

We think that Oakley’s focus and expertise in specific sectors, its proven ability to source investments (platform or bolt-on) through its proprietary network of entrepreneurs and its discipline in terms of pricing and valuations means OCI is highly differentiated from peers. This differentiated approach has paid off for investors, given the strong performance in NAV terms and share price over the five years to 31/12/2022 (see Performance).

OCI’s commitment cover presents potential risks, but Oakley believe that they have plenty of immediate headroom and that, in practice, distributions have broadly matched capital calls over time, even during 2022.

2022 saw a significant widening of discounts across all sectors, but most especially for the listed private equity sector. Starting in 2022, OCI now publishes its NAV every three months, which we view as another positive step towards narrowing the discount. As we discuss in Performance, OCI has been amongst the best performers compared to its peers over many time periods, so there appears little left for the board or manager to do to achieve a narrower discount. Certainly, the very high KID RIY figures will be hard for some investors to stomach, potentially limiting the appetite of investors. However, assuming performance continues to impress, we think the shares justify a narrower discount in absolute terms, and most certainly in relative terms, when compared to peers, as is the case with HgCapital Trust. Any narrowing of the discount will serve as an accelerant for NAV returns.