Chair's statement
Delivering an 18%
return for shareholders
“OCI continues to offer one of the most accessible ways to gain exposure to this asset class through one of Europe’s best performing private equity (“PE”) managers. As a Board we are proud of not only OCI’s consistent performance but the role it plays in democratising PE.”
Caroline Foulger Chair
2023 marks yet another year of market and macro-economic uncertainty. It is therefore testament to OCI’s resilience and the active management by its Investment Adviser Oakley Capital that, in spite of the unsettled nature of the global economy and investor sentiment, the Company continued to deliver. OCI’s underlying, diversified private equity portfolio of 28 companies collectively achieved another year of double-digit earnings growth, helping Net Asset Value (NAV) grow 4% to reach £1.2 billion. Most importantly, total shareholder return was 18%, taking OCI's annualised five-year total shareholder return to 24%. The gain this year is more than double the performance of the FTSE All-Share Index and OCI again ranks as one of the leading investment company performers.
With dysfunctional public equity markets and cost of debt remaining high, the importance of and opportunities for private equity (PE) has never been greater. OCI continues to offer one of the most accessible ways to gain exposure to this asset class through one of Europe’s best performing private equity (“PE”) managers. As a Board we are proud of not only OCI’s consistent performance but the role it plays in democratising PE. To this end our focus remains on strong governance, transparent communication, the optimisation of OCI’s performance through effective cash management and taking continued steps to rationalise the portfolio with the active management of the two direct investments, building on the progress we made in 2023.
Valuations
OCI’s 4% increase in NAV during the period is modest compared to its historic performance. It reflects a cautious approach to trading outlook and portfolio company valuation multiples. Performance across the portfolio was robust with around two thirds of the companies owned for more than 12 months increasing in value, thanks largely to growth in earnings.
The Board is focused on ensuring the integrity of valuations, strong governance and controls, and effective cash management to ensure we meet our commitments and are able to continue to invest for future growth. The Board remains confident that the Investment Adviser’s process for determining NAV continues to be robust and rigorous, underpinned by regular, quarterly assessments of the entire portfolio and validated by an annual review from an independent third party. The Board is further reassured by the historic trend for Oakley to exit businesses at or above their carrying value, which to date averages a premium of 35%.
Overall, the underlying, largely tech-enabled portfolio was held at an 16.4x EBITDA multiple. That compared with year-end multiples of c.28x for the Nasdaq and c.25x for the S&P 500.
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The Board continues to have full confidence in Oakley and its Fund strategy, with commitments at year end totalling just over £1 billion (£929 million at the beginning of the year), now spread across 8 Funds, including Origin II and Touring which were launched in 2023.
Caroline Foulger Chair
Portfolio Transactions
In a period when market-wide M&A activity slumped amid high borrowing costs and economic uncertainty, the Board is pleased to see the Investment Adviser continuing to deliver, with a string of new investments across its four core sectors. Market disruption can generate attractive opportunities as company founders look for alternative sources of finance as well as expert know-how on M&A, internationalisation and other growth levers, and situations like these favour highly experienced, focused investors such as Oakley.
Direct investments
The Board continues to work towards the resolution and value maximisation of OCI’s two direct investments of Time Out and North Sails. As explained in more detail in the Direct investments section, steps taken in 2023 included facilitating the closure of Fund I which rationalised OCI's Time Out holdings in a single direct stake, giving us greater autonomy over our holding and converting OCI’s outstanding North Sails loans and accrued interest into preferred equity. This was done in conjunction with a wider organisational and capital restructure of the North Sails Group which improves OCI’s overall security, creates an incentive for redemption and helps simplify the North Sails’ capital structure, enhancing the attraction of the business to future investors.
It is important to note that these two companies have emerged strongly from the pandemic. The organisational changes made by Oakley over the last few years have led to improved performance and profitability and we are encouraged by the prospects for both companies, which were two of the biggest contributors to NAV growth in the period.
Cash and commitments
The Board continues to have full confidence in Oakley and its Fund strategy, with commitments at year end totalling just over £1 billion (£929 million at the end of December 2022), now spread across eight Funds, including Origin II and the new Touring strategy, which were launched in 2023. OCI is invested across the Oakley family of Funds which now spans the full life cycle of a business, from venture, growth and mid-market, providing diversified exposure to a broad range of businesses across four core sectors. As in prior years, our commitments are expected to be drawn over the next five years. OCI’s cash at 31 December 2023 was £207 million, which, together with a renewed and expanded credit facility of £175 million and proceeds from anticipated future realisations, provide OCI with sufficient liquidity to meet expected drawdowns over the next few years.
Responsible investing
The Board and Oakley remain firmly committed to delivering an investment strategy and process that generates financial returns in a sustainable way. During the period, we were pleased to see the Investment Adviser continuing to add skills and capabilities to further expand and professionalise the Oakley platform to better meet the needs of portfolio companies. Oakley has set itself – and its investee companies – ambitious targets to measure and ultimately reduce their carbon footprint and further develop their equity, diversity and inclusion. The Board both encourages and welcomes this focus as we are very conscious of the need to build resilience into the portfolio business models and that our retail and institutional investors pay close attention to climate risks and the measures that companies are taking to mitigate them. I recommend that you read Oakley’s second annual Sustainability Report, which lays out the Investment Adviser’s ambitions in greater detail.
Effective communications
In order to aid investment decision-making and attract a wider audience to listed PE, we continue to focus on and develop how and what we communicate. Our aim is to provide greater clarity on our process and the activities and prospects of the underlying Funds and in doing so fulfil our mission of democratising access to private equity.
This year saw the relaunch of our website and social media channels, a revised Factsheet and the publication of our inaugural digital first, web-based annual report. We are pleased to be one of the first investment companies adopting this digital format, which has allowed us to provide more detail and disclosure, in a dynamic and accessible format. These efforts are driving the Company’s growing appeal to private investors, who through the three largest retail trading platforms now own over 16% of OCI shares, a number that has trebled in the last three years. It is gratifying to see these communication initiatives receive external validation of our approach through awards and commendations, including Investment Company of the Year 2023 at the Investment Week awards.
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These efforts are driving the Company’s growing appeal to private investors, who through the three largest retail trading platforms now own over 16% of OCI shares, a number which has trebled in the last 3 years.
Caroline Foulger Chair
Discount
OCI’s share price ended the year trading on a 28% discount to its NAV per Share, narrower than the sector average and lower than 37% a year ago. While the continuing discount is disappointing, the Board is confident that our sustained focus on driving consistent performance, on strong governance, on transparency and communications, and on scale and liquidity will reduce and then eventually close this discount over time. A greater understanding of the strength of our underlying portfolio companies – their recurring revenues, their asset-light business models, their use of low leverage and their market-leading positions – will hopefully lead to greater confidence in their ability to perform and grow in value in spite of a prevailing market backdrop.
Capital allocation
OCI’s purpose is to deliver sustained and above market capital growth. To do so we prioritise new investments for future returns, taking advantage of Oakley’s pipeline of investment opportunities by consistently allocating capital to the Oakley Funds.
A share price discount of the current scale presents a secondary investment opportunity and the Board has demonstrated its commitment to buying back shares to enhance shareholder value. Since 2020, the Company has purchased £57m of its shares, the 2nd highest of any listed PE company and >20% of all shares bought back in the sector. While OCI’s current cash is required to meet commitments made over the last three years, we regularly review anticipated fund drawdowns and projected liquidity, to determine if cash is available for further buy-backs and will continue to do so as part of our active consideration of capital allocation to maximise value to shareholders.
Reflecting our capital growth model and in line with dividend payments over recent years, total dividends of 4.5 pence per share were paid during the period.
Outlook
The many sources of market uncertainty somewhat eased towards the end of 2023, but we believe will persist in some form in 2024 and beyond. The Board draws confidence from OCI’s sustained strong performance through this period, delivering NAV growth that is underpinned by a portfolio consistently delivering strong corporate earnings. It is an endorsement of OCI’s strategy of investing behind Oakley Funds, and an endorsement of the Investment Adviser’s 20 year track record and we are optimistic about the future.
Caroline Foulger Chair
13 March 2024