Buy private equity at a good price via Oakley Capital

Private equity investments can lack transparency and the industry has a reputation for loading companies with debt. But as many firms are staying private for longer to reduce their costs of business and avoid onerous regulatory requirements, it is an increasingly important sector for growth investors. 

And market volatility this year has presented what look like buying opportunities. During the sell-off earlier this year, private equity trusts experienced some of the sharpest price movements, and their average discount to net asset value (NAV) widened to 49.4 per cent in March. Although many private equity trusts' discounts have subsequently tightened substantially, Oakley Capital Investments (OCI) still looks attractively priced. The trust was trading at a discount of 27 per cent as of 1 December, even though over five years it had made a NAV total return of 112.6 per cent.

“On a total return basis, it has more than doubled your money over the past five years,” says James Carthew, head of investment company research at QuotedData.

Oakley Capital Investments holds 15 mainly unquoted companies in the technology, consumer and education sectors. Its managers like to invest in businesses that are founder-led, and have an element of technology that enables them to deliver their product or service digitally. And at the end of June, over 70 per cent of its holdings had a subscription-based or recurring revenue business model, a reason why many of them survived the first half of the year relatively unscathed. 

Over the first half of the year, the trust’s assets grew 4 per cent. Its investment team reported that 12 out of its 15 holdings were forecast to meet or beat their budget for 2020, or have returned to budgeted run rates in the second half of the year.  

Research firm Kepler said in October: “The fact that the majority of the companies in the portfolio seem to be putting in a strong operating performance – despite the current circumstances – shows the portfolio to be of a high quality.” 

Kepler says that four out of the five investee companies that outperformed in the first half of the year were acquired in the past 12 months, and Oakley’s policy is that its valuations remain at cost for the first 12 months. These companies are WebPros, Ocean Technologies Group, Seven Miles and Contabo.

“As such, any performance from these companies above budget has not been reflected in the NAV at this stage," adds Kepler. "Should the reassuring trends referred to by Oakley Capital Investments’ manager continue, further NAV progress may be reported at the end of January.” 

The trust also had a strong cash position of 38 per cent of NAV at the end of June, so was well placed to make new investments at low prices. And in October, Oakley Capital Investments announced the purchase of stakes in 7NXT, a German online fitness and nutrition platform, and Windstar Medical, a German over-the-counter medical company. 

Three of Oakley Capital Investment's holdings – Time Out (TMO), North Sails and Iconic Brand Co – have been severely impacted this year. Time Out, for example, which accounted for 7 per cent of the fund’s NAV in June, experienced a share price fall of 68 per cent in the first half. Subsequent second lockdowns are likely to have affected the company further. 

Oakley Capital Investments only publishes its NAV twice a year, so for a lot of the time you do not have an up-to-date valuation of its holdings. The trust has traded at wider discounts, to which it could return. Its ongoing charge plus performance fee add up to a relatively high 2.72 per cent. And private equity funds can experience extreme volatility, particularly in uncertain times.

However, when conditions for economic improvement such as the deployment of Covid-19 vaccines emerge, Oakley Capital’s most severely impacted holdings could begin to recover. And its other investments have defensive qualities so also look well placed for growth, meaning that in time its discount could tighten. And while funds focused on illiquid assets in specialist areas often have higher charges, if they perform well their investors are more than compensated for them.

So if you are looking for growth over the long term and can tolerate some volatility along the way, it could be worth investing in Oakley Capital Investments while it is still on a fairly wide discount to NAV. Buy. MM