A lot has been written about the trillions of dollars of ‘dry powder’ the private equity industry is currently sitting on and waiting to deploy.
That’s a promising situation for Oakley Capital Investments (LON: OCI) for two reasons, says Steven Tredget, a partner at Oakley Capital, which manages the private equity funds into which OCI invests.
The first is that Oakley is focused on the mid-market and the lower mid-market segments, which are less crowded and generally out of the purview of the larger private equity players, given the size and complexity of the deals in these areas.
The second is that these piles of dry powder are very useful when the Oakley funds are looking to exit their investments because the high-quality, high-growth companies that Oakley’s funds back and help drive forward often become attractive acquisition targets for larger private equity funds.
Oakley Capital was founded in 2002 and launched its first private equity fund in 2007, the same year that OCI, the London-listed private equity investment trust, was floated to provide private investors access to the long-term returns of the Oakley funds. The funds focus on investing in, and adding value to, high-quality businesses in Western Europe across the Technology, Consumer, and Education sectors, with a bias towards companies that deliver products or services digitally, which make up 75% of the portfolio.
OCI has generated strong returns since inception, with a five-year total net asset value (NAV) return of 106% at June 30, 2020, putting it comfortably in the top three in the listed private equity sector. This year, despite the impact of the pandemic, in the six months to June OCI generated a total NAV return of 4%.
Oakley Capital’s flagship private equity strategy has raised four funds to date, and has an average company holding period of three and a half years.
Funds I and II are almost at the end of their 10-year lives, the norm for a private equity fund, while Fund III is fully invested and has made the first of several realisations expected in the coming months. Fund IV remains under 50% invested.
As each fund raises cash, OCI is one of a number of investors, or ‘limited partners’, that commit a certain amount of capital to the fund, capital which is then drawn by the funds as it is invested in acquisitions. Alongside OCI, other investors include global pension funds and other major institutions, along with a network of business founders that Oakley has built over time.
The entrepreneur network
This strong and growing entrepreneur network is one of the most unique differentiators of Oakley’s model, says Tredget, which stems from the founding idea that drove Peter Dubens, a serial and successful entrepreneur, to establish Oakley in the first place.
“As a business founder, one of his main frustrations was that financial backers like banks never quite understood what a business really needed from an operational point of view, so he started a private equity company to be the sort of financial partner he wished he’d always had,” Tredget says.
“In the majority of cases we’re the first private equity or institutional investor in these companies. The founders are not necessarily looking for an exit at that point, but are looking for financial support and for a partner with vast experience in their sector to come in and help them with the next leg of their business development.”
It is often the case that business founders have had the nucleus of the idea and successfully grown their company to a certain size, but with growth comes increased distraction as they are caught up in the weeds of the administration of the business, so they are sometimes forced to step away from where they create real value.
“The hope is that they look into our eyes and see someone who understands what owning and managing a business involves, and someone who is not there to kick them out or be heavy-handed with the business but to help them – be that through recruiting a new mid-level of management, or digital marketing or with M&A,” Tredget says.
Oakley currently has more than 20 business founders with which it has developed relationships over the past decade and a half.
“In many cases we are backing some of these business founders for the third or fourth time, and with the success they’ve had with us many of them have invested that money back into the Oakley funds.
“For one, it validates the model. And the great thing about entrepreneurs like these is that after one success they’re not looking to pack up and head for the beach, but remain hungry to do something else. Either they will get involved in other Oakley businesses, or else they know their sector so well that they lead us to other opportunities where we can leverage their expertise throughout the investment cycle.”
Little and large
Oakley is a predominantly a private equity buyout fund, looking for companies with an enterprise value of up to around GBP400mn. But as the size of its funds has grown over the years – from EUR288mn for Fund I to EUR1.5bn for Fund IV last year – its requirements have also evolved.
Alongside Oakley’s flagship fund family is the Origin fund, which focuses on smaller companies in the lower mid-market, the area where Oakley started.
“It’s called the Origin fund because we typically put 10 -12 investments in a fund, but naturally as the size of the funds grows, your average deal size also increases and it becomes more difficult to do smaller deals inside a bigger fund,” says Tredget.
“But we’ve had a lot of success in the lower mid-market since we started and so we wanted to keep doing these kinds of deals. Of the 32 deals Oakley has done to date, 14 of those fit into that segment and have been enormously successful for us,” he adds.
One brings two, three and more
The nature of the network of business founders means many of Oakley’s current successes spring from earlier triumphs.
For example, Career Partner Group (CPG), the largest and fastest-growing private university in Germany, is experiencing exceptional growth in student intake and revenues and has been a key driver of OCI’s net asset value, which has grown at 16% per year for the past five years.
The investment in CPG, which Oakley made via its Fund III in 2018, follows others in the education space including premium schools group Inspired, which was realised this year, as well as current investments in Ocean Technologies Group, Schulerhilfe and ACE Education.
Some of these successes have also been repeated in several geographies. Oakley invested in Verivox, Germany’s leading consumer energy and household services price comparison website, in 2009. This was then followed by Facile, the leading online price comparison platform in Italy, alongside online classifieds portals Casa and atHome, “the Rightmoves of Italy and Luxembourg”.
The expertise of Oakley’s founder and his connections in telecoms have meant that this area, alongside web hosting and business services software, has been a particular area of interest for Oakley.
The focus on technology-driven businesses that have recurring or subscription revenue models has given OCI a solid cushion during the coronavirus pandemic, particularly as the impact of COVID-19 has accelerated technology trends and increased the adoption of consumer and business tech solutions.
OCI’s June half-year results showed that the 15 portfolio companies held at the time were still generating an average year-on-year EBITDA growth of 17.5%, compared to 25-30% in recent years.
In addition, the pandemic has brought more buying opportunities for Oakley.
“We’re looking at around 150 prospects, of which around 60 are from our network,” says Tredget. “Our pipeline of new investment opportunities has never been bigger.”