Oakley Capital Investments (OCI) differs from other trusts in the AIC’s listed private-equity sector, as its investment adviser Oakley Capital typically aims to be the first institutional investor in the entrepreneurial businesses it backs, giving OCI’s portfolio a very different feel.
OCI has historically seen strong performance delivered from a portfolio focussed on the technology, education and consumer sectors. A number of profitable realisations made recently meant that OCI went into the market sell-off with net cash on the balance sheet of c. £250m, or 36% of estimated net assets. This fortunate position leaves OCI with a lot of liquidity as Oakley looks to invest funds during a period of significant opportunity.
Notwithstanding OCI’s strong cash position, the COVID-19 crisis left the shares trading on a very wide discount to NAV. Based on Numis’s adjusted 31 December NAV, the current discount is 37%. As an expression of how wide the discount is, balance-sheet cash equates to 58% of the current share price.
Within the portfolio there will be winners, and likely also losers, from the economic slowdown. We expect more colour at the upcoming virtual capital markets event (30 July – click here to register). At the end of March, Oakley Capital noted that 70% of portfolio companies operate a subscription-based or recurring-revenue business model, and 65% of portfolio companies either deliver products or services digitally, or have the ability to shift to digital delivery in a short time frame. As such, despite the uncertainty, many of the companies within the OCI portfolio may have benefitted from recent events, or are set to be in a position to bounce back strongly.
OCI has suffered a significant de-rating. The next potential catalyst for a reversal will come with the half-year NAV to June, due to be announced at the end of July. Adjusting for cash on the balance sheet, investors today are buying OCI’s investment portfolio on a discount of 57% to the 31 December 2019 valuation. We believe this represents a value opportunity – even if one takes a relatively pessimistic view on valuations post-COVID.
Longer term, Oakley’s track record is strong. For investors who want a focussed private-equity portfolio, OCI has delivered excellent returns – especially over the last three years, which we illustrate in Performance. At the same time, the shares trade on a significantly wider discount than those of peers. Should the strong relative performance continue, one might imagine that it will only be a matter of time before the discount differential is meaningfully reduced.
As we discuss in the Portfolio section, several of OCI’s companies are likely to have benefitted from the lockdown, although some were undoubtedly negatively affected. OCI’s virtual capital markets day (30 July – click here to register) should give more colour. We note that the OCI portfolio has the potential to provide resilience during the disruption.
In summary, OCI has the best liquidity position of the entire sector, yet trades on one of the widest discounts. We view this as an interesting value opportunity.
|Strong long-term NAV growth, driven by portfolio-company performance||Concentrated portfolio returns can be materially impacted by|
|Cash representing 58% of current share price (and 36% of estimated NAV) means manager has a lot of flexibility||Private companies offer limited liquidity, and returns can be lumpy|
|Shares trade on a 37% discount to NAV, with several potential catalysts on the horizon||Private-equity funds charge relatively high fees|