Chair's statement
Continuing to generate superior outcomes
“In the first half of 2024, OCI delivered another period of positive performance, with a total NAV per share return of almost 4% (net of foreign exchange impact), against a backdrop of weak global economic growth and continuing macro and geopolitical uncertainty.”
Caroline Foulger Chair
Looking back over the last decade, it would not be an overstatement to say that private equity has undergone a tremendous transformation. Back in 2014, private equity was still an emerging asset class: it was poorly understood, often mistrusted and inaccessible to all but deep-pocketed, sophisticated investors. However, it has consistently offered investors the opportunity for outsized returns, by investing longer-term capital in high-growth, high-potential private businesses, coupled with hands-on management that influences the investment outcome. It has also offered entrepreneurs an alternative source of capital to avoid the cost, restrictions, reporting requirements and often short termism of the public markets.
The challenge has always been to promote our asset class and its enormous benefits to a wider audience and to make it more accessible to other investors. I am proud that OCI has taken the lead in our sector to democratise access to private equity as a key strategic objective.
Ten years on, private equity has clearly flourished. Returns have outstripped the public markets and large amounts of capital have been injected into private markets, with assets under management now reported over $13 trillion. In contrast, the number of listed companies in the UK has almost halved over the last 10 years. There is still some apprehension about private equity, increasingly this is diminishing as the sector proves itself.
The listed private equity sector, and OCI in particular, has worked hard to increase the understanding of private equity and private equity investment companies, improving transparency, increasing accessibility and providing reassurance over the integrity of valuations. Specifically in OCI’s case, our retail shareholder base has increased from below 1% in 2014 to over 15% today and our share price has increased more than three-fold from 161p in June 2014 to 512p as at 30 June this year. We can always do more, however, these metrics show we have delivered on our two key strategic objectives of widening access and providing above market returns. Looking ahead, as Chair of OCI I am excited about the fortunes of private equity and OCI in particular. Clearly the industry is currently grappling with a new economic environment including the impact of higher interest rates on growth and M&A in particular. However, over the longer term, the asset class can only continue to grow in size and importance. I believe more founders and management teams will opt to partner with private capital over IPOs, in particular those in disruptive, high-growth sectors such as tech and AI which will provide exciting opportunities for our investors. OCI’s own report and accounts has doubled in size, and most of this is due to the Board’s own desire to provide greater transparency and disclosure including at the portfolio company level. But it is also down to the need to meet increasing regulatory disclosures: another advantage of OCI is that these requirements can be addressed at our level, leaving the founder-led investee companies to focus on growth.
In conclusion, I remain convinced that OCI is the ideal platform through which to access these tremendous investment opportunities, given our strong partnership with Oakley, and its consistent and successful focus on founder-led deals.
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The Board is optimistic about performance for the rest of the year and beyond given the quality of the underlying portfolio, and will maintain its focus on what it considers the three key drivers it can influence for that performance: valuation integrity, the management of direct investments, and capital allocation.
Caroline Foulger Chair
A positive first half performance
In the first half of 2024, OCI delivered another period of positive performance, with a Total NAV per share return of almost 4% (net of foreign exchange impact), against a backdrop of weak global economic growth and continuing macro and geopolitical uncertainty. The increase in NAV has helped deliver a Total Shareholder Return of 5% during the period, taking the five-year CAGR return to 18%, and sustaining OCI’s performance as one of the best performing in the sector.
The underlying portfolio of 32 private equity-owned businesses sustained their track record of average double-digit earnings growth, reflecting the consistent focus on founder-led, new economy businesses with a disruptive model. This robust performance also underlines the importance of active management in the value creation cycle which is expanded upon in the Investment Adviser’s report.
The foundations for future growth are also firmly in place, following a period of significant investment activity, reflecting not only the current market opportunity, but also the ongoing, demonstrated desire of founders to partner with Oakley. This was borne out during the period by the sale of Oakley’s investment in idealista at its carrying value, as well as the sale of its majority stake in Ocean Technologies Group, in a transaction announced post-period end that was broadly in line with its carrying value.
The Board is optimistic about performance for the rest of the year and beyond given the quality of the underlying portfolio, and will maintain its focus on what it considers the three key drivers it can influence for that performance: valuation integrity, the management of direct investments, and capital allocation.
Valuations bear out quality of asset base
The increase in NAV during the period was spread evenly across the four focus sectors and by geography with Germany, Iberia and the UK leading the way. At period-end, the Oakley Private Equity Portfolio was valued at a 16.4x EBITDA multiple, conservatively below major global indices including the NASDAQ and S&P 500, maintaining our consistent stance at a time when volatility remains. Looking ahead, the Board remains focused on assuring the integrity and robustness of the valuations process, reinforced by full quarterly portfolio valuations and an annual independent valuation. This was borne out during the period by the sale of Oakley’s investment in idealista at its carrying value.
A busy period for new deals and a bright future for realisations
The most significant driver of long-term returns for OCI has always been its investment in Oakley’s deal flow and in particular the focus on founder-led businesses, which offer greater opportunities to unlock value. This is particularly the case during periods of macro and market uncertainty when founders and management teams look for alternative sources of capital and the ideal partner to support their strategic goals, at a time when public markets are highly inefficient and debt finance is expensive. The Board is pleased to see Oakley continuing to leverage these opportunities in what has been a very busy period for new deals and add-ons. The current maturity of some of the underlying portfolio companies also augurs well for potential realisations coming down the track.
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The most significant driver of long-term returns for OCI has always been its investment in Oakley’s deal flow and in particular the focus on founder-led businesses, which offer greater opportunities to unlock value.
Caroline Foulger Chair
Direct investments performing well
OCI’s direct investments, North Sails and Time Out, continued to perform well during the period, sustaining their post-Covid growth. The Board notes Time Out’s recent Trading Update reporting trading ahead of expectations and highlighting the continued rollout of Time Out’s Markets and media strategies with the opening of two new markets and new advertising contracts with big brands. North Sails also continues to trade ahead of budget with strong demand in its core sailing business. Post period end, North announced two highly synergistic strategic acquisitions in the sail making sector which will strengthen North’s market position as well as being incremental to returns.
Looking ahead, the Board remains confident about the outlook for both businesses and the positive performance and value creation expected from these two investments in the foreseeable future, all supporting the ultimate resolution of the holdings.
Capital allocation and cash management
OCI’s strategy is to invest in the funds managed by Oakley Capital, a strategy that has delivered strong returns over the years (five-year CAGR return of 18%) and now spans eight funds ranging from venture through to growth and buyout. Through a continuous cycle of fresh commitments, new investments and realisations, OCI has significantly grown NAV and generated attractive shareholder returns. At the period end, OCI's outstanding commitments totalled £805 million, which are expected to be drawn over the next five years. The Board is very much focused on ensuring prudent cash management that enables OCI to meet those commitments and fully participate in the attractive opportunities that Oakley originates. Cash and undrawn credit facilities at period-end totalled £184 million and this, together with anticipated proceeds from future realisations, provides OCI with sufficient liquidity to continue to do so.
Addressing the discount and consideration of buybacks
Our share price continues to trade below NAV per share which is a consistent focus for the Board; we remain committed to significantly reducing or removing it completely, driven by a consistent delivery of performance, transparency and governance. It is worth remembering, however, that such discounts are common across private equity entities, where investors remain sceptical around valuations and liquidity, especially during periods of macro and stock market volatility. Whilst we believe OCI manages these risks very robustly, private equity remains a relatively new asset class. We hope that our commitment to boosting transparency and communication, in particular digital communications, contributes to breaking down barriers for investors.
A stubborn discount naturally leads to a consideration of share buybacks as a way to deliver returns to shareholders. The Board reiterates its commitment to a buy-back strategy as one way to maximise shareholder value. Whilst we have not bought back shares since 2022, unlike some of our peer group who have been very active in the last two years, we have transacted £72 million in share buybacks since 2019 which is one of the largest in OCI’s peer group. We will instigate further buy backs when we believe we have the appropriate liquidity to do so, taking into consideration outstanding investment commitments, the anticipated cadence of capital calls and future fund opportunities.
Commitment to Responsible Investment
The Board is fully aligned with the Investment Adviser on responsible investing. Both are committed to an investment strategy that generates superior returns in a sustainable way as well as building resilience into the portfolio businesses. Oakley and its portfolio companies have progressed across its three core sustainability goals, namely carbon footprint measurement and mitigation; cyber resilience and governance; and Equality, Diversity and Inclusion (‘EDI’). During the period, Oakley published its third annual Responsible Investing report and I encourage you to read the promising case studies that demonstrate ESG in action across the portfolio.
Positive outlook
The prospects for private equity and of the Oakley Funds (and by extension OCI) look positive. Having demonstrated the ability to deliver growth in turbulent times and in a high interest rate environment, many of the myths associated with private equity and its reliance on financial engineering are being dispelled. We look ahead to continued performance from the 32 strong portfolio of companies, in combination with a strong pipeline of new opportunities and the possibility of further realisations all driving the delivery of outperformance for OCI shareholders in the rest of 2024 and beyond.
Caroline Foulger Chair
11 September 2024