The key messages from Apax Global Alpha Ltd (LON:APAX) 1H’24 results were i) a strong rebound in deal activity both for investments and exits (the regular announcements mean this trend was expected), ii) strong growth in investee company EBITDA growth (organic 12.6%, up from 12.2% in FY’23) ‒ widening margins reflect the value added by Apax, iii) buybacks utilising the distribution pool started at end-June, and iv) continued diversification and liquidity benefits from the debt portfolio. As noted in our July note, CM day: further proof of value added by Apax, the stock of exit-able businesses is rebuilding. The as-expected interim dividend (5.5p) generates an annual yield of 7.7%.
- Fall in NAV: The 1H’24 total NAV return was -1.4% (-3.3% constant currency). The fall was significantly driven by one investment (Vyaire impact -2.9%) and the drag from the listed holdings (-2.7%, and now just 7% of NAV). Excluding these, the total NAV return would have been 4.2% (2.4% constant currency).
- Rising stock of exit-able investments: Apax Global Alpha used the 2020-21 high valuations to exit a lot of its investments. Businesses ready for sale have been rebuilt and now 37% of the portfolio is in harvesting phase versus 13% at end-2022. Uplifts on exits continue (1H’24: 11%). We expect further exits to help the NAV grow.
- Valuation: AGA’s discount to NAV (33%) is at the upper end of the peers’ range (6%-29%) and rises further by excluding the Debt portfolio at its market value. Apax Funds continue to see exit uplifts (see recent idealista exit), and the NAV is resilient to economic downturns, making the discount absolutely and relatively anomalous.
- Risks: Sentiment to costs, the cycle, valuation and over-commitment are sector issues. Residual risk on the 2020-21 IPO positions appears to be modest. The Debt portfolio generates additional returns and income towards dividends, and has liquidity/capital benefits, but complicates the story.
- Investment summary: Apax Global Alpha has delivered market-beating returns by selecting businesses that it can transform post-acquisition. Buying these companies at a discount to peers (24%), accelerating their EBITDA growth and improving their margins, and then selling the reinvigorated business at a premium to those same peers (11% premium), is the playbook that has been repeated again and again. Investments are focused in sectors with structural growth and resilience. Capital flexibility is enhanced by the Debt portfolio. The discount is the “icing on the cake”.
