Apax Global Alpha (LON:APAX) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: Your recent report sits behind a disclaimer. What can you tell us about that?
A1: It is just the standard disclaimer that many investment companies have. In essence, for regulatory reasons, there are some countries (like the US) where the report should not be read. In the UK, because private equity (PE) is not a simple asset class, the report should be looked at only by professional/qualified investors.
Q2: You called your recent piece ‘Resilience in face of rising interest rates’, what can you tell us about it?
A2: The interim results to June 2023 reconfirmed Apax Global Alpha’s core strengths, notably i) Apax enhances the operational performance of the funds’ investments ‒ LTM revenue and EBITDA growth of 16.0% and 14.1%, respectively, are, we believe, ahead of the market, albeit slowing in 2Q, ii) a 24% uplift on exits, proving conservative accounting and that the NAV is realistic, iii) a 2.4% NAV return, with the five-year 12.4% annualised return, and iv) the Debt portfolio proved its worth, with diversified, more stable returns, and generating cash to pay the dividend.
Despite rising interest rates, the investee companies, Apax Funds, and the trust itself have shown great resilience.
Q3: In a few words, could you summarise the strategy that has delivered this performance?
A3: Theirstrategy is “mining hidden gems”. It focuses on four high-quality subsectors that can deliver secular growth, identifying companies within those sectors that have the potential to improve. The key is then executing operational improvements.
Over the long term, during Apax’s ownership, investee companies have seen revenue growth accelerate by 700bp, EBITDA growth by 1,5000bp and the EBITDA margin improve by 700bp.
In 1H’23, this strategy has again delivered positive returns and net cash generation, despite challenging markets.
Q4: Interest rate sensitivity is a key theme for many PE investors. What did the results tell us about AGA’s exposure here?
A4: We note the investee companies’ below-average gearing; 4.4x, vs. PE industry average 6x-7x, their strong cash generation, reducing leverage in 1H’23; 4.4x EBITDA, vs. 4.8x end-2022, 75% of debt being fixed and swaps mainly maturing post mid-2024.
Apax-backed companies are generally in areas where there is some pricing power, allowing them to raise prices in inflationary periods, and the market uncertainty offers opportunity for bolt-on deals at more attractive prices, both of which help EBITDA growth to offset rising interest costs. In the note, we cover these issues in much more detail, as well as the trust’s own, and PE market, sensitivities.
The bottom line is that, despite all the challenges, Apax Global Alpha saw a positive NAV return in 1H’23.
Q5: What about the risk?
A5: 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 Derived Investments portfolio generates income towards dividends, and has liquidity and capital benefits, but it complicates the story.
