One of the most important yardsticks to measure the health of private equity is M&A: buying and selling businesses. With an estimated $2.6 trillion of so-called ‘dry powder’ to deploy, private equity investors are constantly looking for new investments, planting the seeds to generate future returns for their investors. At the same time, they are looking to sell existing investments to realise returns and return cash, often to those same investors, creating a strong track record that will encourage them to back future funds. This constant cycle of new commitments, investments and realisations has essentially slowed down in the last few years. Higher interest rates make debt more expensive, in turn making it harder to finance deals. The same higher rates can increase costs for businesses and consumers alike, hurting corporate earnings and making private equity-owned companies less valuable.

Some central banks have only just begun to cut rates, while others have yet to act. That means economic growth remains lacklustre as higher borrowing costs and inflation eat into confidence and earnings. M&A also remains muted. While global deal value increased by almost a fifth to $1.5 trillion in the first half of this year, deal volumes fell 25% over the same period. And this recovery is set against a very weak 2023 when M&A activity slid to a 10-year low. How is private equity faring within this context? Private equity-backed M&A increased 40% in the first half of this year, but again this was from a low base. There remains a large backlog to clear: according to Pitchbook, the global inventory of private equity portfolio companies now stands at 27,000. This is the new reality for the private equity industry. It must rise to the challenge and demonstrate it can continue to generate strong returns for investors, relying less on leverage and more on traditional value creation and earnings growth, all against a weaker, more uncertain macroeconomic environment. I have no doubt that the industry can continue to thrive in this new reality, given its adaptability, innovation and hands-on approach to actively managing companies.

A tried and tested investment strategy

Oakley is already rising to the challenge, which I will cover in more detail further on. We have never depended on excessive leverage to drive returns. Indeed, our average portfolio company net debt-to-EBITDA ratio stood at 3.9x at period-end, below the private equity market average, making our portfolio companies less exposed to higher borrowing costs. We are also deploying more equity in our buy-and-build strategies, providing a greater equity ‘cushion’ during a period of sustained macro and market uncertainty.

Investing for future growth

The first half of 2024 has been a period of significant deal activity for Oakley with six new investments either announced or completed during the period. They include transport and logistics software business Alerce (announced in Q4 2023, completed in Q1 2024), automotive services platform Steer Automotive Group, medical software provider Horizons Optical, and ProductLife Group, which provides regulatory and compliance services to the life sciences industry. During the period, OCI also announced an investment in broadband open access platform Vitroconnect. Oakley was also granted exclusivity with a view to acquiring a co-controlling stake in cybersecurity firm I-TRACING, which would be Oakley’s first investment in a high-priority sector for the firm.

All of these businesses have one important trait in common: they are all led by exceptional founders, or in the case of ProductLife Group ('PLG'), an exceptional CEO. To date, 72% of our investments have been in founder-led businesses. We believe this is an important differentiator for Oakley and a key driver of our success to date. Successful founders are the ideal partner of choice either because they have a strong track record of building highly successful businesses, or because they have a compelling business plan in place. Our job is to ensure they consider us as their partner of choice to help deliver on their strategic goals. Often, these are businesses which are scaling up and are looking for a partner with a strong track record in areas where they may have less experience such as M&A, internationalisation, or shifting their business model to recurring revenues. They could be looking for financial support to continue an established value creation plan, particularly if this involves consolidation in a fragmented market; for instance, Steer was established in 2018 and has already made 18 bolt-on acquisitions. Other bolt-on acquisitions include North Technology Group's investments in Quantum Sails and Doyle Sails, both announced post period-end, and which will increase North's ability to grow and diversify earnings. 

Our new deals also demonstrate our ability to identify opportunities in regions that are comparatively underpenetrated by private equity, in part by leveraging our strong reputation established through prior transactions. With Alerce and Horizons Optical, we are backing two tech founders in Spain, building on our previous track record with Seedtag, vLex, idealista and Grupo Primavera, and demonstrating once again our ability to tap an emerging, rich ecosystem of ambitious founders and tech or tech-enabled business in Iberia. Meanwhile, PLG and I-TRACING represent our second and third deals in France following our investment in ACE Education.

During the period we also completed our investment in hosting business Webcentral, now rebranded as World Hosting Group or WHG after its strategic merger with that business. In our last update, we told you how this represented our fifth deal with veteran hosting entrepreneurs Tom Strohe and Jochen Berger. This demonstrates the repeatability of Oakley’s investment strategy in particular sub-sectors, where lessons learned and experience gained can be applied to follow-on investments in the same or adjacent sectors. It also demonstrates the enduring permanence of our relationships with successful founders, to the benefit of our investors. It also shows the remarkable opportunities in the global hosting market, a market that has been consolidating for 20 years, and yet still presents highly attractive roll-up opportunities for nimble entrepreneurs and their partners. With Tom and Jochen’s support, WHG has already built a rich pipeline of bolt-on opportunities across the world and the Oakley team is now working closely with WHG CEO Seb de Lemos to execute on this strategy. During the period, the Touring team continued to deploy at pace, backing three new AI-powered businesses including Daloopa, which trains AI to automate financial analysts’ workflows, and Safebase, which provides friction-free security reviews.

Realising exits in a slow market

During the period, Oakley also agreed its exit from southern European property portal idealista. This successful exit in a difficult market reinforces the firm’s track record in growing digital marketplaces and platforms in Europe that began with German energy switching website Verivox and continues with Facile today. Oakley first invested in Italian property portal Casa.it in 2018, before combining the business with idealista. This was a highly strategic combination where Oakley executed on the founder’s vision to reshape the Italian market by joining forces with idealista to create the leading property portal across southern Europe including Spain, Italy and Portugal. The exit generated a 2.1x gross money multiple return for investors in a slow market for realisations.

Post period-end, Oakley announced the sale of its majority stake in Ocean Technologies Group (‘OTG’), in a transaction that was broadly in line with OTG's carrying value as at 31 March 2024. Under Oakley's ownership, OTG has generated strong revenue and EBITDA growth and has been transformed from an e-learning specialist to become a leading global provider of human capital management and operational software to the maritime industry.