|Shares Out. (in M):||195||P/E||0||0|
|Market Cap (in $M):||418||P/FCF||0||0|
|Net Debt (in $M):||0||EBIT||0||0|
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Oakley Capital Investment (“OCI”) is a classic Ben Graham value play trading at its widest-ever discount to NAV (circa 40%). At £2.14 per share, 85% of the entry price is backed by cash and debt investments in portfolio companies (£1.27 per share and £0.53p per share respectively), leaving a circa 35% equity stake in Timeout (£0.42p per share) and a pro-rata £1.64 per share portfolio of high-quality, profitable and digital-orientated growth companies in the price for 15 cents on the proverbial dollar.
Portfolio companies that:
And a management team with a lot of skin in the game too: the partners of Oakley have over £120m of their own money in the funds they manage and have acquired more than £32.4m of OCI stock in the last 24 months, a near eight-fold increase in their ownership (from 1.2% to 9.5%).
Even assuming that the historic discount to NAV (25%) persists, the brave investor is looking at a capital return of between 23-40% depending on the haircut applied to the underlying portfolio companies and the assumptions around eventual recovery. But should management’s recent initiatives succeed in eliminating the historic discount to NAV from 25% to 10-15% (and pre-Covid it was starting to narrow) the total return leaps to 40-60%.
Considering the asset backing, the quality of the portfolio and the quality of the management team, I think that’s a good risk-adjusted return and if you do too, please read on.
Background to OCI
OCI is a listed investment vehicle that provides shareholders with access to a portfolio of high-quality middle-market private equity investments managed by Oakley Capital. It first listed on AIM in 2007 and has subsequently grown NAV to circa £706m or £3.55 per share (circa 11% compound for 12 years). OCI is treated like any other LP in the Oakley Capital funds; they’re charged a 2% management fee and grant the management co 20% of profits over an 8% hurdle rate.
Typically, its NAV composition has comprised of:
The mixture of cash, equity and debt exposure is one of the reasons why NAV has only compounded by 11% since 2007 despite the elevated performance of the Oakley Capital PE Funds. Despite this, OCI has still been the 3rd best performing listed private equity fund of the last ten years delivering NAV returns of over 172% vs the peer group average of 102%.
However, in the 3 years to Dec-19 NAV growth accelerated to 17% compound and in 2019 OCI was the best-performing UK listed PE vehicle delivering 25% NAV growth.
Background to Oakley Capital
Oakley Capital is a private equity company co-founded by British Entrepreneurs Peter Dubens and David Till in 2002 with a mid-market focus (£100-400m EV / £10-50m EBITDA). The team comprises 7 partners and 15 professionals and manages circa €3.1bn of AUM across four funds.
The performance across funds I to III has been exceptional;
Fund I (€288m, 2007 vintage)
Fund II (€524m, 2013 vintage)
Fund III (€800m, 2016 vintage)
Across Funds I to III, they have exited 16x investments and generated a gross IRR and MOIC of 48% and 3.6x respectively. Worth noting is that since inception the average valuation uplift to prevailing book value at exit has been 37%, demonstrating the conservative marks in the accounts. Indeed, in 2019 they made two realisations at a combined 97% premium to prevailing book value. And despite Covid-19, they sold a portfolio company (Inspired) in Q1 2020 at a 25% premium to Dec-19 NAV.
The strong returns reflect an edge that Oakley has over many of its peers: the entrepreneurial background of its founders which leads to a unique sourcing capability. For example, Peter has a long history of buying, building and selling companies. He founded his first (a hyper colour t-shirt business) aged 18 which he subsequently sold five years later for £8m netting him his first seven-figure payday. He was the ‘P’ in PJ Smoothies which he subsequently sold to Pepsi Co for £20m in 2005. He orchestrated the reverse takeover of Daisy which he subsequently grew via acquisition and later floated on AIM. He bought 365 Media (a Sports Betting company) and astutely pivoted towards Sports Information businesses before selling the entire company to Sky in 2006 for £100m. He bought Pipex in the dot.com bubble and, after a series of acquisitions, eventually sold it to Tiscali for £210m. He’s also the owner of the famous KX Gym in Chelsea and is the backer behind Alexa Chung’s fashion brand.
In addition, he’s a very active angel investor in the UK for promising start-ups via PROfounder Capital which counts other prominent British entrepreneurs amongst its alumni including Brent Hoberman (founder of lastminute.com) and Michael Birch (founder of Bebo).
So, his calling card is that he’s not your typical finance guy. Rather, he is part of the European VC / Entrepreneurial establishment. And that’s of huge advantage when negotiating with entrepreneurs to buy their business. He can speak their language and offer value-add beyond just equity capital.
This edge can be seen in the numbers. For example, since 2007;
The result is much lower execution and valuation risk. The uncontested nature of the acquisitions means that Oakley has a much longer period of time to undertake due diligence and has a much lower entry multiple than peers (10x EBITDA vs 13.5x EBITDA).
Oakley have three distinct strategies;
Which they apply to three distinct sectors;
In TMT their themes include web hosting - particularly the VPS hosting market which has been largely insulated from the advent of public cloud and has continued to grow – and software as a service. They have focused on Southern Europe which lags the US and Northern Europe when it comes to SaaS adoption and gives rise to opportunities to support software businesses in developing product offerings.
In the consumer sector, their themes include online price comparison, online dating and online classifieds in countries at an early stage of online adoption (Italy and Spain, for example) as well as market-leading brands in niche sectors with growth potential.
They have emerged as one of the leading investors in the education sector in Europe through five investments spanning after-school tutoring, higher education, K-12 (kindergarten to year 12) and marine e-learning. They like the non-cyclical nature of the industry and themes include consolidation, the application of technology to education and the increased role of private providers.
Breakdown of NAV
Dec 2019 year-end NAV was £686m or £3.55 per share. However, a number of events have taken place since then which has made the ‘real-time’ NAV figure a little uncertain. New companies have been acquired. Others have been sold. Debt ‘assets’ have been returned as cash. Shares have been purchased. And the portfolio has yet to be marked up or down post Covid-19.
Investor relations have confirmed that OCI has circa £250m in cash. That represents £1.28 per share. OCI is also owed £103.9m by some of the portfolio companies which represents £0.53 per share. IR also confirmed that none of the debt is expected to be written down.
So, we have £353.9m (£1.81 per share) of cash and debt assets vs a market cap of £415m. What do we get for our £61.1m?
Let’s look at these more closely.
There are 14 portfolio companies spanning consumer (45%), education (42%) and TMT (14%). No single company represents more than 18% of Dec-19 ‘Portfolio NAV’ and the top five total 62% of Portfolio NAV. I estimate that at least 65% of the portfolio companies ought to fare well post Covid-19 considering their digital-friendly business models.
Career Partner Group (18% of ‘Portfolio NAV’)
CPG is a follow-on from Oakley’s successful investment in Inspired which was a buy and build strategy to create a global portfolio of premium private schools. The company was acquired in 2017 as part of a management-backed corporate carve-out from Apollo Education Group.
The market for online and dual studies degree is growing rapidly and CPG is the fastest-growing private university group in Germany with over 23,000 students enrolled across four types of programme; online degree courses, dual studies, part-time studies and corporate training. Last year, student registrations were up 70% and over the last three years CPG has recorded a student intake CAGR of 50% leading to strong EBITDA growth.
In the last twenty years, private universities have exploded in popularity in Germany despite the fact that public universities are tuition-free. Their popularity is because they’re more nimble and have adapted better to change. For example; the schedules are more flexible; the classes are smaller and more intimate; the courses are more specialised and tailor-made for the needs of the labour market; the career offices tend to be better and more helpful; and the drop-out rate is significantly lower (7% vs 20% for public universities).
Degrees and courses that can be delivered online are CPGs primary growth driver. And for several years, online study programmes – particularly those delivered by private universities – have been the fastest-growing segment of German Higher Education more broadly. Even before Covid-19, many universities were seeing a decline in enrolment for campus-based programmes and the runway for online higher education is massive: only 2% of the global $2.2 trillion global education market is currently online and whilst I can’t see demand dimming for campus-based programmes for bulge bracket universities considering their brand and heritage I can see greater scope for a pivot towards online learning in a post-Covid-19 world.
So, I think CPG – as the market leader – is well-placed to capitalise on this secular demand for more remote teaching and learning. There could be a temporary markdown in valuation, but my gut feel is that it will be just that – temporary.
Schulerhilfe (14% of Portfolio NAV)
Schulerhilfe is a little more difficult.
It was established in 1974 and is the leading provider of after-school small-group tutoring to over 125,000 primary and secondary school students in 1,000 branches across Germany and Austria. Oakley acquired a majority stake in July 2017 partnering with the CEO who also invested into the new structure. In 2019, the company generated 13% enrolment growth vs the prior year which resulted in strong revenue growth of 15%.
I like the non-cyclicality of the business model and I like that the service can be delivered remotely. However, there is clearly a question mark over the short-term viability of the branch-based approach to teaching post-Covid-19. So, I would expect to see a markdown of some sort here.
Facile (11% of Portfolio NAV)
I think this is a pretty defensive business and one that’s on the right side of history: I expect any markdowns to be temporary. Facile has built a strong position in Italy’s fast-growing online price comparison market. After broadening its offer, it now offers price comparisons on gas and electricity, broadband, bank accounts, loans and mortgages as well as its core car insurance comparison service.
The Italian price comparison market is relatively undeveloped versus other markets such as the UK and Germany. For example, at the time of acquisition (2014), online penetration of the car insurance market was 10% versus 80% in the UK, providing substantial growth potential. They sold a majority stake to EQT in June 2018 but remain investors through Fund III.
North Sails (10% of Portfolio NAV)
North Sails manufactures high-performance sailing and sportswear products. Its focus is on innovation, and it's renowned for the 3Di model, the sail of choice in the America’s Cup, in the Grand Prix, and on most ocean race boats and superyachts. North Sails also produces and distributes branded sportswear across the world, partnering with over 700 chain and independent retailers across Europe and Asia.
Oakley invested in North Sails in 2014 and is helping the business grow on a global scale by leveraging the heritage of its sail brand and developing its sportswear offering internationally.
This business is less defensive, so I anticipate a markdown here.
Casa (8% of Portfolio NAV)
Casa is a popular online property group with a portfolio of real estate websites and apps based in Italy. It was established in 1996 and is the number two player in the online real estate advertising market. The Italian residential property market is estimated to be worth over €75 billion annually, and the penetration of online property portals is expected to grow strongly as the market develops. The thesis here is that Casa ought to replicate the success of leading property portal players in more mature markets such as the UK, Germany and Australia.
AtHome was established in 2001 and is one of the leading online classifieds and mortgage broking businesses in Luxembourg.
Oakley acquired a majority stake in both in January 2017, backing the existing management team to acquire the group in a carve-out from its parent company (REA Group). It recently (February 2020) sold a majority stake in the ‘atHome’ segment to Mayfair Equity Partners, keeping its full investment in ‘Casa’ and netting proceeds of £15m which I have deducted from portfolio NAV.
It did that because Italy is less developed than most western European markets and has significant headroom for growth. The professionalisation of the real estate market is set to spark a significant increase in the use of online property portals.
Seven Miles (7% of Portfolio NAV)
Seven Miles is a leading consumer technology company in multi-brand gift cards. Since it was founded in 2014, the business has grown rapidly to become one of the leading physical and digital gift card networks in Germany.
In August 2019, Oakley acquired a majority stake in the business, partnering with its founders, Tom Schröder and Valentin Schütt to continue the company’s strong growth and leadership in product innovation.
The multi-brand gift card market in Germany is expected to grow at circa 15% per year as consumers increasingly value the convenience and flexibility of gift cards. In 2019, revenues exceeded €100M for the first time and total voucher sales grew 88% year-on-year. This has resulted in significant uplifts to both revenue and EBITDA.
Seagull & Videotel (6% of Portfolio NAV)
Over the past 40 years, Seagull & Videotel have established themselves as best-in-class providers of e-learning to the maritime sector globally. Every year they provide 20,000 ships and other installations with comprehensive and up-to-date compliance, risk and safety training that ensures adherence to International Maritime Organisation requirements. The investment represented a continuation of Oakley’s successful track record in the education, software and maritime sectors. In 2019, the Group also progressed its M&A strategy by completing the acquisitions of Tero Marine and COEX (a fleet management and document management software businesses).
Ekon (5% of Portfolio NAV)
I like Ekon and can see this being a major winner for Oakley.
Founded in 1963, Ekon provides Enterprise Resource Planning (ERP) software to over 1,000 SME businesses in Spain. Oakley acquired the company in June 2019, partnering with management in a carve-out / buyout from its parent co, Unit4. The company generates revenues c.€20m from sales of its integrated software suite, which includes solutions for finance, payroll and CRM, as well as dedicated vertical modules for manufacturing, wholesale, health, retail and construction. The service is available in on-premise and hosted deployments, or via Ekon’s Cloud, which offers ERP solutions via a SaaS delivery model.
Compared to Northern Europe and North America, Spain has lower ERP adoption amongst SMEs and has been slower to move to the cloud, offering significant headroom for growth as Spain moves in-line with international benchmarks. With a leading cloud product and positioning as a Spanish champion – the software is developed exclusively in Spain - Ekon is well placed to benefit from the structural shift to the cloud in a market dominated by legacy technology and international vendors.
Amos (4% of Portfolio NAV)
This is a similar thesis to CPG. Amos is a leading international business school focused exclusively on sport. Founded in 2005 by Patrick Touati, AMOS educates over 1,800 students each year across eight campuses in France and one in the UK. Oakley acquired a majority stake in August 2017 and the deal is another ‘roll-up’ strategy in the higher education sector which is still very fragmented. Since acquisition, they have opened four new campuses in France including one in Rennes (2019), one in Toulouse (2018) and one in Aix-Marseilles (2018).
The group also own the Centre Européen de management Hotelier International (CMH) a leading business school in Paris focused on hotel management and tourism, as well as ESDAC, a group of design and commination schools based in South-East France.
In 2019, AMOS enrolled 2,288 students for the academic year, representing enrolment growth of 25% versus the prior year.
Tech Insights (4% of Portfolio NAV)
TechInsights is a global leader in intellectual property services and technology intelligence, in particular semiconductor reverse engineering which is used to prove patent infringement and to better understand the technology behind everyday consumer electronics. In 2016 the business was combined with Chipworks before being acquired by Oakley in May 2017. The group benefits from high barriers to entry due to its patented processes, proprietary equipment, specialised workforce and unique database. Its customers include the top 10 semiconductor companies globally.
The investment thesis includes leveraging TechInsights’ extensive, proprietary technology database to accelerate growth in its subscription business, whilst maintaining its position in project-based patent licensing work. In 2019, the company generated significant growth in recurring revenues with the subscriptions segment up 30% vs the prior year.
Other portfolio companies
These are all sub 3% positions and include investments in Alessi, Contabo and Globe-Trotter which were acquired in 2019/20. And an investment in Daisy which was acquired in 2015.
Time Out is listed on AIM under the ticker (TMO.L) and has a market cap of circa £107m. The group has two divisions - Time Out Media and Time Out Market – across which it distributes curated content around the best food, drink, music, theatre, art, travel and entertainment events across 315 cities in 58 countries. Five new markets opened across North America in 2019 which have replicated, with a strong local focus, the concept of the first market launched in Lisbon in 2014. The global roll-out of the market concept was set to continue with planned launches in Dubai (2020), London (2021) and Prague (2023).
I love the Lisbon market which I have visited a few times and I think the desire for local, artisan and ‘experience-based’ food is secular. I also regularly use Time Out online when faced with a free weekend.
However, it’s hard to value what Time Out is worth because there are so many variables. When will travel return to pre-Covid levels? Will people want to visit food markets considering how densely occupied they are? And even if they want to, will they be allowed to? I don’t know. And neither does the market which is why the shares have declined by 70% since the start of the year.
Historic discount to NAV
OCI has always traded at a discount to NAV which has ranged from 15% to circa 40% (2008) and has averaged out at circa 25%. Prior to Covid-19, the discount was narrowing to 20% but I think we have to assume that this discount will persist. However, in the last 18-months management have initiated a number of changes to bridge the gap to NAV.
I think that bodes well for OCI and increases the probability of the discount narrowing over time. The main comp (HG Capital Trust) has broadly traded in line with NAV over the same time period and boasts similar NAV returns (13% compound).
I have analysed a number of sensitivities around haircuts, recovery rates and NAV discounts.
I think it’s fair to assume 1x book on the cash and debt investments albeit the sceptic could argue that since the cash will eventually be invested in fund IV it should also be discounted by 25% to reflect the historic disconnect between the share price and NAV. The sceptic won’t get a rebuttal from me because I think that’s a perfectly valid counter. However, whilst the past is a guide, it’s the future that matters and I think that cash will be well allocated.
So, I am assuming a value of £1.81 per share for it and the debt investments.
I have also assumed the current share price for Time Out (70% markdown since Dec-19).
So, that’s circa £0.41 per share.
And I have assumed a write-down of 30% across the portfolio which – considering its quality – I think is pretty harsh. (It’s worth noting that many were acquired in 2019 and are therefore still marked at entry pricing.)
So, that’s £1.15 per share.
If you apply a further 25% haircut to the value of Time Out and the PE portfolio – to reflect the historic discount to NAV - that gets you to circa £3 per share NAV or 29% upside. But should the portfolio stabilise and merely rebound to its Dec-19 valuation, the total return increases to circa 37%.
However, considering the quality of the underlying businesses and the track record of the Oakley team, I think that in the coming 18-36 months NAV will accelerate to circa £4 plus. And should the discount to NAV tighten, the total return jumps to circa 80-90%.
So, with strong cash support, an excellent and incentivised management team, a portfolio of mostly digital-friendly companies, the recent implementation of a number of shareholder-friendly initiatives and a potential return ranging from 29% to 90% over a one to three year period, I really like the risk-reward and see little probability of capital impairment.
Stabilisation of NAV and then growth.
Historic discount to NAV tightening.
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