Proving the pudding: a sustainable growth model

OCI’s full-year results were strong, with an annual total NAV return of 35% (three quarters of which was driven by underlying company EBITDA growth of 28%). This brings OCI’s five-year CAGR NAV total return to 19%, and is driven by i) high-growth companies/sector champions with structural tailwinds and often digital disruption benefits, ii) repeatable and proprietary sourcing, and post-acquisition support from its unique entrepreneur network, iii) recurring/subscription revenue streams, and iv) M&A-led value creation. The outlook is for more of the same. A £20m buyback has been announced, and quarterly reporting starts in April. The 23% discount to NAV appears anomalous with absolute and relative performance.

• Business model growth: The key message from these results is how sustainable growth is generated. The 28% EBITDA growth has not been generated by accident, or luck, but reflects how the model works, and the value added by Oakley Capital on an ongoing, repeatable, play-book basis. That is what investors are buying into.
• Outlook: OCI’s £336m commitment to Fund V evidences its confidence in near-term opportunities for new investments. The 2021 momentum in existing businesses appears strong, with limited exposure to inflation/interest rate/Russian-related risk. The model has proven resilience to broader economic downturns.
• Valuation: Against the December NAV, OCI trades at a 23% discount, despite its absolute (five-year CAGR 19% total NAV return) and relative performance. The 2021 total NAV return of 35% is significantly greater than the discount, with the latter reflecting the “icing on the cake”, rather than the reason to buy, we believe. OCI yields 1.1%.
• Risks: While OCI’s costs are slightly above-average, post-expense returns are still market-beating. Sentiment towards the global economic cycle is likely to be adverse, even though outperformance has been delivered in downturns. OCI’s portfolio is concentrated, and we believe its permanent capital is right for private assets
• Investment summary: OCI provides investors with liquid access to the attractive PE market, enhanced by Oakley’s incremental origination and active management skills. Oakley Funds focus on mid-market, tech-enabled European companies that operate in the technology, consumer and education sectors. This space provides structural growth, as well as opportunities for Oakley Capital to add operational, strategic and financial value to the business acquired. Accounting and governance appear conservative, with an average 50% uplift to carrying value in exit since inception. There are risks – primarily sentiment-driven – around costs and cyclicality, as well the liquidity and valuation of the underlying private assets.