Uncertainty is the only certainty

It is an understatement to say that the global economy has suffered a few shocks over the last few years, including a pandemic, geopolitical conflict and surging inflation. Some data points clearly illustrate the enormous challenges that governments, companies and investors have faced: the largest drop in US GDP in over 70 years in Q1 2020; the Nasdaq’s 150% rebound in the 18 months to October 2021; Eurozone inflation surging to 11% in 2022. This incredible volatility across economies and markets has hurt corporate earnings and valuations, and in turn impacted M&A: global dealmaking shrank 17% in 2023, according to data released by the London Stock Exchange Group.

Private equity has not escaped this turmoil as deals from financial sponsors fell 30% this year compared to the last. The industry and the companies it backs operate in the same global economy and are subject to the same macro and market pressures. Reliance on cheap debt to drive returns has led many to question whether private equity can continue to thrive in an era of higher borrowing costs. The challenge for the industry now is to demonstrate that its tools and USPs, including a focus on control investments, strong governance and long-term, patient capital, can continue to deliver strong outcomes for all stakeholders, including investors and founders, in spite of the economic backdrop. 

Oakley’s consistent performance

Like other investors, Oakley has not been immune to the macro and market turmoil of the last few years. Yet we believe the Firm has navigated this period well. Oakley’s portfolio of investments have consistently generated double digit earnings growth, including 14% in 2023, underpinning valuation uplifts. This growth is spread equally across our core sectors of Technology, Education, Consumer and now our recently created fourth core sector, Business Services. Indeed, it is this diversification that helps deliver downside protection as well as consistent performance and strong investment returns. Standout performers include IU Group, which saw further strong enrolments, reaching the milestone of 140,000 students during the period; North Sails, which generated strong growth led by its sails, masts and apparel business; testing, inspection, certification and compliance leader Phenna, which saw robust organic growth and continued to successfully deliver on its buy-and-build strategy with 10 new bolt-ons during the period; and online property portal idealista, which generated strong growth across its core markets in Southern Europe. All these businesses are benefitting from the enduring tailwinds we often talk about, including the shift to online solutions, business outsourcing and demand for quality education.

Meanwhile, Oakley’s businesses have remained highly attractive to other investors despite the wider drop-off in M&A, including IU Group, which welcomed new blue-chip investors alongside Oakley Fund V, including Goldman Sachs Asset Management, TPG GP Solutions, HarbourVest Partners, Glendower Capital and Pantheon.

How has this performance been sustained? Quite simply, by sticking to the same origination, investment and value creation strategies: focusing on repeatable playbooks where we can apply our track record and experience to new investments, pursuing repeat partnerships with successful entrepreneurs, and strengthening our position as partner of choice for exceptional founders and management teams. Furthermore, if you look at any Oakley investment, you will also find a common set of characteristics that define our businesses and provide an inbuilt resilience that helps them sustain their performance through economic cycles: mostly digital-first, asset-light businesses, with highly predictable cash flows, operating in non-cyclical markets and with low levels of debt. Looking ahead we are confident that this remains a recipe for future success. 

Avoiding a debt trap

The point about debt becomes especially important during periods of high inflation and borrowing costs. Over the last two years, central banks have hiked interest rates at pace. This has pushed up borrowing costs for consumers and businesses alike, in turn dampening spending, investment, earnings and valuations. It makes M&A harder. It creates problems for companies that are overleveraged. And interest rates may yet remain higher for longer, as renewed tensions in the Middle East interrupt global trade and higher deficits in Western economies push up bond yields. The good news for Oakley is we do not overleverage our companies, with average net debt/EBITDA of 4.2x times across the portfolio, offering a substantial equity cushion, and with appropriately flexible covenants. Our newly-appointed Capital Markets Director works closely with our chief financial officers to help them manage their capital structures efficiently and prudently. In short, instead of using debt to drive returns, we rely instead on value creation drivers such as M&A, digitalisation, internationalisation and talent acquisition. This means our companies and in turn our returns are less impacted by higher borrowing costs. 

The partner of choice for founders

Oakley closed a record €4.8 billion from investors in 2023. This success means we have ample capital to pursue attractive investment opportunities at a time when other investors may lack the necessary resources and when founders and management teams may be looking for alternative sources of capital to debt, as well as growth expertise to see them through an uncertain economic environment. In 2023 we signed six new deals. Thomas’s London Day Schools extends our track record as one of Europe’s leading investors in education assets, and adds to our existing K12 portfolio, including Affinitas and nursery group Bright Stars, both of which also continued to deliver on their successful M&A strategy, with Affinitas adding two schools in Spain taking its total to 16 private, English language schools with c.13,000 students. While Bright Stars added 10 early years sites during the year, taking the total since Oakley’s acquisition to 54. We are particularly attracted to education businesses given strong pricing power, the growing global demand for quality education and learning, and the fragmented nature of the underlying market. But it is also the unique nature of these businesses and the priorities of the founders leading them, who care deeply about brand reputation and quality teaching, that make Oakley the ideal partner: they appreciate our specialist education skill set and track record, as well as our own entrepreneurial ethos and empathetic approach to partnerships.

Other investments include a carve-out to create Liberty Dental Group, the start of a buy-and-build strategy to create a leading dental labs group in Europe; Alerce, a leading logistics software business in Spain, where we see the opportunity to pursue a similar consolidation strategy to enterprise software business Grupo Primavera (now part of Cegid); Webcentral, a web hosting business in Australia that will serve as the foundation for further add-ons; and our investment in UK auto repair chain Steer Automative Group, which we announced post-year end. All these investments have several important characteristics in common. They all operate in fragmented markets where we see the opportunity to pursue consolidation strategies, an effective method of deploying capital in which Oakley excels and has consistently demonstrated the ability to support management teams with building pipelines, as well as M&A execution and post-acquisition integration. During the period, we helped our companies with 22 bolt-ons, taking the total to 165+ since inception.

Just as importantly, our new portfolio companies are all founder-led, reinforcing our reputation as the partner of choice for entrepreneurs. In the case of Webcentral, this will be our fifth collaboration with veteran hosting entrepreneurs Jochen Berger and Tom Strohe, following our successful, repeat partnerships with Intergenia, HEG, WebPros and Contabo, and once again demonstrating Oakley’s ability to leverage its network for attractive deal opportunities.