Oakley Capital Investments H2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
March 13, 2025

There are 3 speakers on the call.

Operator

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 twenty twenty four 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 video, and as we tackle and we'll tackle as many of these as possible at the end of the session? You can download the presentation to view at your leisure by clicking on the Downloads button at the top of your screen.

Operator

In today's presentation, we'll examine the current asset breakdown, the drivers of performance despite some challenging conditions and the elements which have hindered NAV growth in the year. We'll speak to the prevailing favorable market for making investments and Oakley's record level of deployment, completing eight new deals in 2024. And with five of the eight deals being in the technology sector, we'll be joined by Oakley Managing Director, Lovis von Andrian, to discuss the investment strategy for this sector, the traits they have been targeting, and then introduce us to some of the newest additions to the portfolio, Assured Data Protection. As we turn our attention to cash and commitments, we reflect on realizations made in the year despite the slow environment for Exaxe. And finally, we'll look to the year ahead and the factors that we think will deliver stronger NAV growth in 2025 and beyond.

Operator

Before we look to the future, let's take stock of where we are today and to how the portfolio has been performing. The net asset value at the December reached £1,200,000,000 or $6.95 pence a share. That's an increase of 50p over the year, which when we include dividends represents a total NAV return of 2% or 6% before the impact of FX. It's a modest NAV growth by OCI standards, but a positive outcome all the same given the macro headwinds. Portfolio value increase was driven circa 75 by EBITDA growth, reflecting a retained cautious approach to valuation multiples.

Operator

In a couple of slides, we're also taught the factors which muted growth in 2024, which we expect to reverse in the year ahead. A review of the historic NAV growth emphasizes the muted performance of the last two years, reflecting most the mixed macro backdrop and the more conservative exit environment. However, as I'll make the case today, we expect 2025 to see a return to a more historic NAV CAGR of 15% to 20%. Let's take a look at the asset value and how it breaks down. At a high level, we have cash, North South's preference shares, and just under $1,000,000,000 of equity investments.

Operator

It's worth noting that of these assets, the £154,000,000 of preference shares were zero coupon and weren't growing in value in 2024. And alongside them, just over $450,000,000 of investments that were made in the last twenty four months, which made a limited contribution to NAV growth as expected for this stage in their ownership. We'll talk to this point in more detail shortly. But needless to say, whilst nearly 50% of the asset value was going to the bit of a no or muted growth in the prior period, the prospects are different this year, with 93,000,000 of the North Press converted to equity, whose value is anticipated to appreciate given trade and the impact of recent acquisitions, whilst a maturing portfolio will increase the contributors to OCI's performance as valuation uplift typically accelerates through the duration of an open investment, as we'll come on to discuss. Let's break down the equity investment first by sector and then geography.

Operator

We'll see, as it has been in the recent years, that the portfolio companies are reasonably evenly spread across our four focus sectors. All four sectors have grown in value since December 23, with the largest organic growth being from the technology sector. Most notably, the exposure to business services increased 78%, reflecting the addition of automotive repair group Steyr, life science compliance services provider Product Life Group and the strong organic and acquired growth of Fena, the UK's largest testing and inspection group. Breaking the portfolio down by geography exposure, the pie tells us a story where Oakley has has its longest standing track records, expertise, and founder networks. After many years of investment in activity in our geography of origin, The UK actually represents one of the largest proportions of the asset value, with nine companies headquarters here, reflecting the emergence of attractive deal flow and our building reputation amongst founders and advisers within region and the large opportunity set in The UK within business services.

Operator

Germany in a very close second with 10 of the portfolios domiciled here. Spain and Southern Europe remain a fast growing region for Oakley, reflecting a large pool of opportunities, less penetration and the opening of the Madrid office. One of the regions we have started to be more active in is France, falling to recent investments, which has been enabled by the appointment of an in country senior adviser. Based on the currency of investments, the offsetting underlying debt in the portfolio encompassing cash, the NAV currency exposure splits down 21% pounds fifty two % euros and 27% dollars. Very conscious that this is becoming even harder to read every year, and you can examine the slide, at, at your leisure in the in the deck.

Operator

But we now break the asset value down further by the 33 underlying portfolio companies. That, with the exception of Time Out, sit within the Oakley funds. The five largest of the investments with the near term potential for the biggest impact on NAVA are Sejid, Northsales, Fena, IU Group, and Steyr Automotive. Three of these were the top five drivers of growth in 2024, and we expect all five to be significant contributors to NAV growth in the current year. Within Venture, the black line at the bottom, Oakley Profounders and the Oakley Turing Fund made a further nine investments, five from Profounders and four from Turing, taking them to a combined 17 investing companies.

Operator

Whilst they are, as can be seen, comparatively small collectively, they are nonetheless an exciting possible driver of growth for OCI in the future and give OCI exposure to a highly attractive subset of generative AI powered software companies. The Oakley Touring Fund even delivered its first realization after only twelve months, the partial sale of SafeBase, delivering a gross 50% IRR. Performance across the portfolio is robust, with circa 80% of the companies owned for more than six months increasing in value. Looking now at the lead contributors to OCI's NAV growth in the period. Firstly, we have IU Group, which had 8p to the NAB per share.

Operator

IU continued to deliver double digit growth thanks to the mile for its online degree courses, student figures have now reached over under 50,000 with growth in both the b2c and on campus segments. Bayou Group continues to make progress with its acquired international units as well in The UK and Canada, achieving a combined revenue growth of 35% in 2024 versus the prior year. Dexter's a business particularly of those those of you living in the South Of London will be familiar with it's London's leading independent charter to bear an estate agent that is which added 7p to the NAF per share in the period. Dexter grew revenues and EBITDA 1922% respectively. Despite the hesitant consumer sentiment across The UK, the companies continue to achieve healthy sales income, the buying and selling of properties in the year, whilst the letting revenue, which accounts for over 60% of the opening revenue, continued to grow in the year, increasing by 23%.

Operator

And finally, Fena, the second largest investment in OCI's underlying portfolio with a look through value of just over £100,000,000 added 0.07p to the NAB per share. Fenner continues to perform well and is seeing meaningful end market diversification with the newly created food pharmaceutical division now representing 20% of revenues. The business has also been focused on international expansion during the year with roughly 75% of acquisitions made in '24 located outside of The UK. Fenner continued executing on its accretive bolt on pipeline with eight acquisitions completed at an average of under 6.5 times EVEBITDA multiple. So the negative drivers of performance, we have Vitesgolf, which decreased NAND per share by 3p, reflecting a soft performance driven by its main DTC channel, which suffered delays in product launches and the shop system migration to Shopify and a somewhat optimal marketing performance.

Operator

By the final quarter of the year, however, Vice Golf caught up on its product launches, including new golf ball models and its first generation of golf clubs, completed the Shopify migration, which together has led to a sustained uptick in performance and marketing efficiency. This allowed Vice Golf to significantly narrow but not fully close the gap that opens up during the high season. With a fully invested technology infrastructure and a significantly strengthened management, the team is driving improvements in operational excellence throughout the organization to carry the recovery into that high season this year. TechInsights declined 2p, reflecting the challenging year experienced by the semiconductor industry, with semiconductor volumes still down 14% versus the market peak in June 2022. The market has, however, started showing signs of recovery, with semiconductor volumes up 3% versus the prior year as at December 24.

Operator

Despite the difficult market conditions, TechInsights delivered positive revenue growth in the last twelve months, driven by growth in its subscription business and supported by healthy renewal rates from existing customers. Recurring revenues now make up to 84% of total revenues. And finally, private schools group, Thomas'. Though the impact was small, it had a 1p negative impact on the NAB per share. This reflects the focus and cost in the year of delivering two large CapEx projects.

Operator

And as part of the group's professionalization, Oakley made some adjustments to the EBITDA reporting in the group. In the meantime, the level of enrollment activity for the new Thomas's College in Richmond has been very encouraging. Looking to the average KPIs of the portfolio, earnings grew at an average organic 15% over the last twelve months, thanks to robust trading across the portfolio. This is up from 14% at the half year and reflects the improving prospects across much of the portfolio heading into 2025. This figure doesn't account for growth via M and A, which in companies like Fena, Styr, Liberty Dental, Affinitas, for example, played a large role in the value curation with their share of over 50 acquisitions during the year.

Operator

Weighted average EBITDA growth after M and A is 21%. At 4.1 times, the average net debt EBITDA remains modest compared to the wider PE market, which averages between five to six times, with no debt maturities in the next two and a half years. The typically asset light and strong cash generations in the portfolio are reflecting an averaging interest cost cover of three times. Although the pace of central bank interest rate cuts is expected to slow, we are helping portfolio companies to lock in lower borrowing costs now and have secured £130,000,000 of annualized interest savings in the year. Finally, the average valuation multiple stands at 16.4 times EVEBITDA, unchanged since last year with recent realizations of book value underlying the robustness of the valuation process even in a softer exit environment.

Operator

Returning to our previous theme, the chart here shows investments made over the last seven years, with the colors denoting which fund vintage they were made in. The orange shaded area covers the deals completed in the last two years, illustrating the high level of investment activity, making the portfolio the youngest it has been in the last ten years. This is predominantly thanks to the relatively fast deployment of flagship Fund five represented here by the dark purple bars. Why might this have impeded NAV performance? And the graph here is an illustrative funnel that shows the money multiple return over the life of the investment for these deals we have realized.

Operator

So it's unrealized money multiple return through until the end where you see, some examples of the realized outcome. It demonstrates how the return builds over the life of a typical Oakley investment. We've included on the graph five examples of deals with a variety of outcomes. But whether a two times money multiple realized outcome or a 13 times money multiple, the value accrues in a similar fashion. In the first year, modest or no growth in value is recorded, reflecting the proximity of the purchase and the obvious valuation proof points at that point in time.

Operator

The following years see some growth, almost entirely based on earnings growth. And then years three and four onwards, we see the combination of the impact of value creation, organization maturity and then the multiple expansion as the investment moves closer to an exit or more closer to reflecting the market comps. To illustrate the value potential within the current portfolio, we have plotted the anticipated growth of Fund five through to 2027 based on the base case investment returns for the 10 underlying companies. To remind you, Fund five is a 2022 vintage fund to which OCI has a look through exposures a day of about £400,000,000 On the basis of the expected outcomes, Fund five alone will be anticipated to contribute between 150 and 200p to OCI's NAV per share in the next three years. This will be driven by an anticipated annual average EBITDA growth of 28% from the Fund's underlying companies.

Operator

While still making in Europe remains below the multi year average, the opportunity set has never been greater. 96% of European companies with revenue in excess of €100,000,000 are private, and in the majority of cases found the lead. Oakley backed a record number of these businesses during the year. The eight deals all share many of the characteristics typically typical of an Oakley investment. They are all within our target sectors.

Operator

Our founder led companies with asset light business models, with each exploiting the long term megatrends we often talk about, including businesses shift to the cloud and the consumer shift to online solutions. Cybersecurity is one sector that Oakley has long sought to invest in as working from home and the proliferation of connected devices widens the network perimeter companies need to secure from cyber threats. In The UK alone, cyber attacks have tripled in the last three years and are expected to grow in frequency and severity as criminals leverage AI as well now to enhance their lines of attack. Eye tracing helps protect some of Europe's most successful businesses and the enterprise and mid market sectors. Meanwhile, Assured Data Protection is disrupting the managed backup and disaster recovery solution markets, and we'll hear more on them shortly.

Operator

To emphasize some of the deal characteristics they share seven of the eight of of these newly acquired businesses are led by their founders who wish to remain invested in the business and are choosing a partner to help grow and professionalize the companies they created alongside them, which explains why more than half were uncontested deals. These were deals that were the result of a bilateral discussion between ourselves and the founder outside of an auction process. Three of the deals had some kind of deal complexity to navigate, they were carve outs or some messy ownership structures to get through, factors which would deter most other investors and can contribute to contribute to the more favorable pricing that Oakley frequently enjoys. Given the high level of recent investment activity in technology led by led its technology led businesses and its consistent outperformance, we thought we'd invite LOVIS, a senior member of the investment team, to share Oakley's investment thesis for this sector and tell us more about the most recent addition to the fold.

Speaker 1

Thank you, Stephen. Before I dive into how Oakley tackled tech, let us recap why we invest in technology businesses in the first place. And put simply, technology businesses on average are simply better businesses than businesses in other sectors. Why do we think so? The revenues that they generate are highly predictable and recurring.

Speaker 1

The services that they provide are mission critical and non cyclical, meaning that in a downturn, it is really the last thing that you turn off. The business model is capital light and highly scalable with a high degree of operating leverage, so simply you build it once, you sell it many times. And finally, and perhaps most underappreciated is there is a huge amount of white space, particularly in SMEs. And we hear a lot about the impact of AI, but the reality is in most of most businesses operating in the SME space, Excel is by far the most common solution rather than dedicated software products. And extraordinarily 2023 was really the first year that cloud spend outstripped on prem spend amongst all businesses.

Speaker 1

And so the white space in these sectors is still huge. And so you have highly stable businesses with really favorable macro tailwinds across the whole sector. And the quality of these businesses, of course, means that they also command valuation premium. And so the critical challenge for Oakley is to think how do we gain exposure to these businesses without overpaying for them. And so in the next couple of slides, I'll talk about how we do that.

Speaker 1

And there's really two key tenants to giving us an edge in this sector. The first is really narrow and deep subsector specialization. We know that there are lots of attractive sectors and we've mapped out around 100 subsectors across tech. And we know that we can't cover. And so what we do is we focus on a very narrow subset.

Speaker 1

You can see twelve, twelve or 13 on this page, and we focus very deeply on those. We spend a lot of time building deep sector expertise, building deep networks, allowing us to then really be a value add partner in those sectors, allowing us to uncover proprietary of market opportunities. And when those opportunities come around, we are ideally placed to move quickly. Now I have plus focus on this autumn row, this middleware sector. All of my time is dedicated on hosting, CTO suite, and DevOps.

Speaker 1

It's all the software and services that typically you don't see. These are the things that the IT manager buys and the work in this in this sector is also what uncovered the short data protection, which I will speak to in a little while. The second tenant of of our right to win in the technology sector, if you could go to the next slide, is our track record of partnering with with entrepreneurs and being a value add partner in a very specific way. And you can see here that the businesses that we typically focus on exhibit two key characteristics. The first is a high degree of organic growth.

Speaker 1

These businesses are already growing quickly, and that's because typically they've developed strong products and have developed a very clear product market fit. However, what they also exhibit is a very high degree of organizational immaturity. These are not well developed businesses. These are well developed products, but not well developed proper businesses. And what we do is we partner with the entrepreneurs.

Speaker 1

We provide them with the resources, the the skills, the experience to help them scale their businesses, which allows them to continue that organic growth. Now many instances, the growth, this simply enables them to continue to grow at the rates that they have done and building the framework structure processes around that growth to turn it from a young strong product into a really valuable business and the kind of valuable business that, for example, large cap, private equity and strategics really want to buy. How does that look in action? On the next slide, Let's talk about the short data protection and practically how that works. As Steve mentioned, the short data protection is the leading managed service provider in a very narrow niche backup disaster recovery and cyber resilience.

Speaker 1

And this this deal really came out of the past ten plus years of our expertise in hosting and cybersecurity. Now in hosting, we've, of course, been incredibly active in cybersecurity. We have been much less active until recently, but nonetheless, we've really laid the groundwork over the past seven years to be able to make these kind of investments. And so it really all starts with that sector expertise. Now secondly, it's about the founder.

Speaker 1

Assured is a founder owned business, and it's really about partnering with the founder, building that relationship and us investing over six plus months into building that relationship and that trust so that we were the preferred party. And the services that Assurant provides have been growing incredibly quickly because they're in a market that has really attractive characteristics. It's a billion we expect it to be a billion size market by 02/1930, a market that's growing five times over. And so while the market is relatively small today, Assured is really the leading player in this market and has a strong right to win to, at a minimum, grow at the rate of the market. Now they have been growing faster than the rates of the market, almost 50% over the past three years.

Speaker 1

In fact, we'd expect that growth rate to accelerate with resources we're providing them and the favorable market tailwinds. They have every chance to continue to grow at that rate and perhaps even accelerate. And as I mentioned earlier, the business has a wonderful product, but a high degree of organizational maturity. There is no finance function. There is no HR function.

Speaker 1

There is no strategic approach to pricing and many of the other business processes and the things that we apply in our playbook to businesses, they don't exist in this business, giving us a huge amount of opportunity to help them create value. Now while it's a very attractive market and a well placed business that's growing quickly, that degree of organizational immaturity carries risk with it because inherently, this is a younger, more immature business. And so a huge amount of effort goes into thinking about how we can derisk these opportunities while still having the opportunity to generate disproportionate outsized returns. And so there's really two things that we did onshore data protection to ensure we can derisk the business. The first is alignment.

Speaker 1

You can see here that the founders rolled over 80% of their investment into the business, so they continue to be heavily aligned and heavily incentivized. And secondly, the structure that we implemented really protects us on the downside. We have a liquidation preference, which means that in a downside scenario, our money would come out fast. And so really this gives us the certainty that if things don't go to plan, our capital is protected while being exposed to a really attractive high growth business with a huge amount of potential where we can really generate disproportionate returns. And so we made this investment early late last year and it's early days, but we remain we are incredibly bullish that this can generate really outside returns.

Speaker 1

I'll hand over back to Stephen to continue on North Sells.

Operator

Many thanks Lewis and we'll bring Lewis back for the Q and A later. We'll turn now, as Lovis mentioned, to the largest overall OCI investment and one of the two remaining direct investments, North South. As you recall, in 2023, OCI's direct debt state in North North South was converted into preferred equity, giving the asset the better security and the first step in the board's move to maximize the value of the investment. Following this and in response to positive trading momentum, OCI converted $107,000,000 of its preferred equity position into ordinary equity in the final quarter of twenty twenty four, a move which is expected to generate increased returns for OCI given the anticipated performance. After the conversion, OCI continues to hold 77,000,000 in preferred equity, which attracted a coupon of 5% from the 01/01/2025.

Operator

The target is to liquidate the remaining Bref in the next twelve to eighteen months. OCI retains a further £61,000,000 in an indirect position in North South via its stake in Fund two. The group delivered another year of positive performance with healthy order volumes, improving gross margins and significant trading momentum aided by the America's Cup. Most notably during the year, North Sells completed two strategic acquisitions buying Quantum Sells and Dorf Sells, both leading designers and manufacturers of high performance sailing products with presence globally much like North. The potential value creation from these acquisitions is expected to be significant.

Operator

The combination of strong underlying performance and the recent deals is set to lead North to be one of the leading contributors of NAV growth in 2025. The third section of this presentation analyzes the liquidity of OCI, its outstanding commitments, the corresponding cash available to meet commitments and the prospects for near term proceeds. Realizations during 2024 delivered million to OCI, a positive outcome given the subdued M and A market and highlights the appeal of the equity portfolio. The three assets shown on the slide, Idyllista, Ocean Technologies and Schulehilfe, were all realized close to the prevailing NAV, underscoring the robustness of the underlying valuations. The Oakley Funds have a growing reputation for the timely realization of assets and the subsequent return of capital to its investors.

Operator

We have shown the look through proceeds to OCI of annual realizations over the last twelve years. We anticipate this consistency to continue, aided by the early signs of a strengthening exit environment, with M and A Advisors reporting a rise in Q1 activity levels. We'd observe this to be driven by the improving performance of underlying companies more generally, pragmatism on pricing by both buyers and sellers, and the need for large sponsors to deploy capital. Turning our attention to outstanding Oakley Fund commitments, which realizations allowed us to meet, at the year end, commitments across all Oakley Funds totaled £646,000,000 compared with approximately 1,000,000,000 of commitments at the twenty twenty three year end. If we break this down by Fund Strategy and Vintage, the darker section of each bars represents the look through value invested in the funds and the purple, the outstanding commitments, showing us that the majority of the committed funds that have yet to be drawn from OCI are the youngest vintages, and Oakley's biggest funds to date being Flagship five, which is circa 70% invested, and Origin two.

Operator

Oakley's lower mid market buyout strategy, which is 10% deployed. As a reminder, these are funds which can which can take up to five or more years to invest. To give us a better indication of what we can expect, where we can expect the £646,000,000 to be called, these bars break down if and when the commitments will be called. Starting at the left, there is over circa £200,000,000 that is not expected to be called, 300,000,000 that is set to be called after twelve months and over a four or five year period, and circa 150,000,000 that is expected to be called in the next twelve months. This compares to $225,000,000 of liquidity from cash and available credit facilities, implying that OCI has current liquidity for approximately two years of deployment, which is an appropriate and target level of cover.

Operator

Of course, we can expect cash inflows over the coming years, which leads us over the slide to the sources of that liquidity, which naturally include further realizations, the increase in an OCI loan or revolving credit facilities, and secondary sell downs of existing fund positions. We'd expect the first two of these to be sources of inflows in the year, with buybacks and fund commitments being the likely allocations. With some progress on the former, you can expect a more explicit update on capital allocation from OCI between now and the April. And for the final couple of slides and prospects for asset value growth and an improved rating for the shares. Starting with that rating point,

Speaker 1

as

Operator

we know, discounts proliferate across the sector and there are no silver bullets, And some of the reasons that discounts exist are structural, at least for the time being. However, the three most likely positive impacts that we as OCI can control in the near term are, one, accelerating NAV growth and realizations at or above NAV to continue to build the confidence and the quality and conservatism in the NAF. Two, the Board has initiated a process to transfer OCI's listing to the main market within the Stock Exchange, a move which would expand access to a wider range of investors and should help to further boost liquidity. We hope to confirm the timing of this at the H1NAN update. Three, it's open debate whether it closed at a discount but increased liquidity and therefore capital return should be possible this year and would, I'm sure, be a welcome a well received outcome.

Operator

To bring us to the end of the presentation element of this webinar, we'll leave you with four factors that will drive OCI share performance in 2025 and beyond. One is the result of the persist the persistence of structural trends, an improved macro backdrop, or whether it's the impact of value creation measures. Although, at an early stage, we are seeing an uptick in trading across the portfolio and expect the 15% organic average weighted earnings growth to rise, driving NAV growth as it does. Expect the large number of deals secondly. Expect the large number of deals in the last two years to become bigger contributors to NAV growth as the positions mature.

Operator

Three, continued realizations will provide further NAV confidence and liquidity. And fourthly, we remain confident in the overall and eventual closure of OCI share price discount to NAV per share as the board takes measures to address it and investor confidence in OCI's near term outperformance growth. And whilst I'm here, some dates for the diary. April 30 is the q one NAB update, and on the May 14 is the Capital Markets Day. Please contact OCI investor relations team via the website should you wish to dial into this event.

Operator

That brings the presentation element of the webinar to a close. Thank you for remaining with us. And at this point, I'll hand over to Rosanna to take us into the Q and A section, and we'll bring Lourdes back on the screen.

Speaker 2

Thank you, Stephen, and thank you to everyone who have asked questions already on the portal. We're going to try our best to get through as many as possible. For those of you who would still like to ask questions, it is still possible that the question function is at the the top of your web page. So we're going to start, Stephen, on the topic of the pipeline. Do you expect to see a similar level of new deals in 2025?

Speaker 2

And what sectors and regions are you specifically looking at?

Operator

We don't expect quite as high level of executed deals. It's not something we have perfect clarity over, as you might imagine, given the way we source. The guidance we're giving is kind of some of the reason of half of the level. So it was 300,000,000 deployed last year and maybe something brought more in the region of 150,000,000, but this is but this is a guide. If we look to the pipeline, currently, it it really mimics kind of the experience of the last year in terms of there's a slight bias towards tech, and to some extent business services.

Operator

And, you know, it it's across it's across the regions that we that we know well with a with a bias more towards kind of UK and Southern Europe. I don't know, Lois, if you want to talk to, to your expectations around tech. Yeah.

Speaker 1

I mean, as you said, the pipeline is very full, but given how we source and reach the deals, it's inherently lumpy and unpredictable. We're not waiting for a banker to send us an I'm in a clear process, which makes it much more predictable. We're trying to uncover proprietary opportunities. And so while the pipeline is very full and there's a there's a real chance that many of these opportunities come to fruition, there's also a realistic prospect that they don't and they take slightly longer to develop.

Speaker 2

Thank you both. Now on the question, the topic of cybersecurity, we've had a few questions in on this, perhaps one for both Stephen and Lovis. Why now for cybersecurity? And if it's been a target for a while, why has it taken so long to invest in it?

Operator

I'm going to hand over pretty swiftly to to Lovas on this, except to say there's a lot of subsectors that we that we map and have mapped for many, many years, and it kinda reflects the very specific nature of the deals we make and high conviction, you know, kind of focus bets. I mean, maybe, Lovis, you'll you'll talk to, you know, why it's maybe taken seven years to, you know, to find our first deal in this space.

Speaker 1

Yeah. Yeah. I mean, it's exactly the sort of the narrative I try to outline in the tech sector. Cybersecurity is an incredibly attractive sector that's growing incredibly quickly and will continue to grow incredibly quickly. But of course, everybody knows this and so it's a hotly contested, very expensive sector.

Speaker 1

And so for us, it's important to do the right deal, not just to do any deal that gives us exposure that's unpredictable and takes a long time sometimes to to uncover. And so within cybersecurity, we had a very narrow focus of the type of opportunities that we thought we wanted to pay for, and those took a long time to uncover and to develop and to build that that relationship. And now that we have started that, we're hopeful that this again deepens our network in that sector and uncovers more opportunities as has been the case, for example, in hosting, which started in a similar way and then there's been this snowball effect of new opportunities.

Speaker 2

Thank you. We've had a few questions picking up on the average EBITDA growth. So could we could you give us some more granularity on that average EBITDA growth of 15%? And also touching on the fact that the NAV grew pre FX only 6%?

Operator

Well, let's just let's just initially define that growth there. There is a range. So first of all, that is a weighted organic figure. So it doesn't reflect, as I kind of mentioned earlier, kind of M and A. And, you know, whilst all the businesses are growing, you know, there are single digit growers in there.

Operator

I mean, as a good example, Federal Steel, one of the largest contributors to NAV, well, actually, their organic growth is single digit. You know? We expect it to be in the region of, you know, kind of over its life, five to 10%. It reflects that it's growing faster than the market. The real investment thesis here is that we can grow a business of size, make it international, expand the not just the geographies, but the solution it provides, with it and also get the great multiple arbitrage of buying businesses sub six, seven times for a platform that we think if sold could be worth anywhere between 18 to 21 times.

Operator

But from an average EBITDA growth perspective, you know, it's it would only be contributing 4% over the period. So it gives you some sense, and the highest growers, you know, we've got some, although small, doubling their EBITDA, you know, kind of year on year. So it's a reasonably kind of blunt measure that is that is hiding a kind of, bigger range of outcomes. The the very the the very interesting and valid question is how does 15% EBITDA growth not map to something similar in a way of of NAV growth? And there's kind of a couple of points here.

Operator

Let's go to my original point, which is well, actually, it points down 50% of the NAV didn't show much growth for all the reasons we discussed earlier. Cash, a pref, young companies where we typically, but not exclusively, where we typically hold them at least in the first year of ownership or first six months of ownership close to their NAVFAC. So there's your, you know, kind of first first point, which might go some way to, you know, comparing 6% NAV pre FX to 15%. The other thing is the 15% EBITDA growth is a historic number. It is the average growth over the last twelve months, and the NAV is typically based on a, forecast of the budgeted growth over the next twelve months.

Operator

So to to illustrate to you, if that forecast for last year was based on an average 20% EBITDA growth, but you've only delivered 15%, then your NAV wouldn't grow as much as you might anticipate by the time you get to the end of the year, given the difference between the outcome and the budgeting. And that kind of reflects the last couple of years. You know, the companies have performed, you know, I think about interim, I talked about a third have performed above budget, a third on, a third below. The difference we're we're noticing this year is not just that kind of maturity of the businesses, but we're seeing, although it's early in the year, anecdotally, a kind of a greater tailwind to the performance of those businesses, which hopefully should be more in line with budgets and therefore we should hopefully see that EBITDA growth that we report this year being a kind of a more of a key driver to NAV growth.

Speaker 2

Thank you for that answer. And picking up there on performance going forward, which companies do you expect to lead performance this year, so 2025?

Operator

I mentioned this earlier. I mean, the biggest investments are naturally going to have the biggest impact sorry, the biggest look through, investments right, so are clearly going to have some of the biggest impact on NAV growth. And to kind of repeat those in order, it's like, you know, North South, Fenner, Sajid, IU Group, Steyr. And so I'll be very surprised if they weren't up there in the kind of the, the the big drivers this year. Now although there's smaller companies in the portfolio, there's some really fast growers in the portfolio.

Operator

And, of course, we don't know the outcome of the year, but I suspect we'll start to see some of those some of those earlier investments come through. I don't know if you want to comment on any particular in the tech sector there.

Speaker 1

Yeah. I think in tech overall, we're we're bullish on the portfolio for different reasons, frankly. There are some like iTracing and Assured that have strong tailwinds that are growing very quickly organically, which of course drives performance. There are some which are really driven by M and A that are growing much slower, but you have a multiple accretive M and A like World Health Group, for example, in a low growth sector, but you continue to buy very accretive businesses. And then finally, you have much more mature businesses like WebPros, which are growing nearly as quickly.

Speaker 1

They're growing high single digits, low double digits, but they continue to be to continue to grow. They are very large, and they are highly cash generative. So, as I said, we're bullish across the portfolio, but for very different reasons.

Speaker 2

Thank you for that. Switching tact slightly to exits, can you comment on the fact that recent exits have been realized close to NAV or value versus a premium on previous exits historically?

Operator

Yes, absolutely. So the average, even after the recent exits is the average premium since inception is kind of 25, 30 percent premium exit. And naturally, I've got a lot of focus on that because it's an obvious driver to NAV, the positive surprise at exit. And if we look back at our prior years, you know, we were getting a lot of, unsolicited approaches for our businesses, and they were offering us the value, you know, maybe we've held the business for three or four years and they're offering us the value as if we held it for five. And so you were getting that, you know, that that quite big pop, at Exeter.

Operator

And auctions as well were highly contested. And, although and twenty twenty end of twenty twenty two was the kind of last year when that was the case. We should know IU Group was sold at NAV, but we increased the NAV 83% or the value 83% in the prior twelve years because we knew the book value was gonna be the, the focus for the, for the realization. So to the question, you know, kind of what are we seeing in M and A now, is the recent deals that have been do you know, been done at or closer to NAV a reflection of what we anticipate going forward. I think and I'll get Lewis to comment on this as well.

Operator

I I think that 2024 and 2023 was an improving environment. We certainly saw more approaches, but I'd say there was still a low number of participants within auctions. And as a result, there wasn't maybe the pricing tension, an initial approach, you know, which may have been above NAV, actually, the outcome was slightly below. And, you know, pricing expectations were relatively tight. Now the fact that we managed to sell three businesses in that environment, sell morale, book value, and record, you know, an average close to two and a half times money multiple on those three businesses.

Operator

And and we should also say they weren't necessarily, you know, the three or far from the three best performing assets in the portfolio, which I think is encouraging that you can still sell those businesses at that level. Now the hope is is that as we see with more participant you know, with better performance of companies, more participants returning to the M and A market this year, there is early optimism in the amount of deals. And, you know, clearly, some hope that that's gonna be reflected in in takeout values. I don't I don't know if you if you'd add to that, Lewis.

Speaker 1

I honestly don't have much more to say other than to agree that it's been as tough an environment to exit businesses as it's probably ever been, also in parts driven by the high cost of debt of course and so as Stephen said the competitive dynamics in the processes has been different to what it was in prior years. If we think back to the WebPros exit or the Contabo exit it was just a very different environment that I mean a much more challenging time to exit businesses. And nonetheless, as Stephen said, the fact that we have managed to exit these businesses at a premium is something we're pretty proud of.

Speaker 2

Thanks both. Finally, well actually we'll maybe get through two more questions. Whilst the discount remains persistent, what criteria is needed for OCI to initiate buybacks?

Operator

It needs the available liquidity. I think there has been, as the OCR board has demonstrated you know, over over the last years, you know, it it had a kind of a active buyback program long before any of its peers, you know, it's bought back, you know, somewhere between 100 to £200,000,000 worth of stock over a kind of last three, four year period. However, particularly based on the realisation environment that we've just been discussing in combination with the fast deployment of the funds, we haven't had that kind of excess level of cash and automate buybacks. So I guess in short, with with liquidity will come the opportunity for us to take advantage of that, persistent discounts. And as as I highlighted, towards the end of the presentation, we hope we'll have some more visibility around that liquidity and the company would take the opportunity to kind of update on its capital allocation sometime between now and the Q1 NAV update at the April.

Speaker 2

Thanks very much, Stephen. And final question now, I think that's all we've got time for is a question on the macro. So there's been a few things on this, but to wrap them into one, how do you think about a trade war? And how would you think that a U. S.

Speaker 2

Recession could impact the portfolio?

Operator

I'm always hesitant to kind of give views on direction of macro geopolitical situations, etcetera, simply because when we make an investment, we do so assuming that we're gonna be in a recessionary environment. There's going to be high interest rates, that there's gonna be, you know, no there's little way of macro tailwinds, and we have to demonstrate that each investment can make a gross two times money multiple in that environment, and that's around value creation and hopefully businesses that could continue to grow regardless of the market backdrop. And and that's what although this is a muted NAV growth period for the reasons we've discussed, actually, you can tell from, like, you know, businesses growing on average of 15%, you know, these are businesses that are doing kind of just that. There's obviously a lot of focus on The US and and its kind of economic prospects and the trade wars. I think I think that the two things to point out that in terms of revenue exposure to The US, it's about 14% of total revenues.

Operator

So so we have some, determining whether that's that's gonna be a a positive or a negative driver. Europe is really the the kind of jurisdiction that we are, you know, most, dialed into. And if I think about the kind of businesses that would be impacted, you know, it's a small it's a small percentage of total revenues. It's 1%, two % of revenues, oh, goods sold into The US. As you can imagine, it's time.

Operator

And it's and so if you're gonna be subject to tariffs, you'll vice North Globe Trotter a, a lessee. So I I don't necessarily see that as a threat. I mean it's a very service heavy portfolio so I don't expect us to see much friction in this area, I don't know if you want to comment.

Speaker 1

Yeah I mean as as Steve said it's very difficult, not impossible to predict, what might be going on. But as Stephen said, our direct exposure to tariffs, for example, is minimal. We do have revenues in The US and internationally, of course, and what we're very acutely aware of is trying to naturally hedge those revenues. And so in most instances where we do have international revenues, we try to match those with international costs in that in that basis to cancel out any adverse effects. And while there's certainly some risk around The U.

Speaker 1

S. In particular, there's also a huge amount of opportunity. And so as we think our investments, we as I mentioned, we try to derisk these both structurally in the in the sort of capital structure that we use to protect us, but also frankly going back to the sort of macro tailwinds. And if we think about cybersecurity, for example, in disaster recovery, this is such as underpenetrated market that even in a downturn, we expect the penetration of this market to continue. Now, of course, it may hamper growth and it may slow growth.

Speaker 1

That's, of course, a lightning prospect, But fundamentally, we think there remains a business need in most of our sectors that should somewhat protect it in the downside.

Speaker 2

Thank you, Stephen and Loves. I think that's all we've got time for in terms of questions. For For those of you who've submitted questions and we've not quite got to them, we will catch up with you separately to address those. Thank you very much. Back to you Steve.

Operator

Thank you, Rosanna, and thank you once again for those that have joined us today. As Rosanna said, we will get in contact with those that whose questions we didn't reach. Hopefully, it's a presentation that has helped better understand the performance of 2024 but also outline our kind of increasing optimism for shareholder performance in 2025. Many thanks for joining us today, and goodbye.

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Earnings Conference Call
Oakley Capital Investments H2 2024
00:00 / 00:00