As noted in our reports, ‘CM day: further proof of value added by Apax’ and ‘1H’24: deal activity coming back strongly‘, the stock of exit-able businesses is rebuilding at a time when market demand is returning. Apax Funds appear to have turned the corner, and both exit and investment activity is steadily rebuilding to more normal levels. In this note, we analyse the likely impact of the exit trend on i) NAV, with an expected greater correlation between EBITDA growth and NAV growth, ii) cashflows, iii) sentiment, and iv) the discount to NAV. In our view, the growing investment, with the operational improvements that Apax then delivers, are key drivers to long-term outperformance.
- Rising stock of exit-able investments: Apax Global Alpha Ltd (LON:APAX) 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 17% at end-2021. Uplifts on exits continue (3Q’24: 10%). We expect further exits to help the NAV grow.
- Sentiment: In our view, AGA’s sustained high discount is significantly driven by concerns that the PE story is over in a higher-rate environment. None of the market practitioners espouse this view, and delivery by Apax of accelerated exits and resulting NAV growth could be key factors in convincing investors too.
- Valuation: Apax Global Alpha’s discount to NAV (34%) is at the upper end of the peers’ range (1%-30% discount) and rises further by excluding the market value of the Debt portfolio. Apax Funds continue to see exit uplifts 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 listed positions is just 4% of NAV. 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; Apax’s mining the hidden gems strategy, 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”.
