Apax Global Alpha

“Hidden Gems” strategy: green shoots into live deals

23 Nov 2023 / Corporate research

In our view, the most interesting new information from AGA’s 3Q results was the comment “a further five investments post quarter end” with a further one announced since. This six-week performance compares with two investments in the whole previous quarter. Market wide, there are comments about encouraging green shoots of activity, but Apax is now completing deals. We explore, here, what is unique about the “Hidden Gems” strategy and why it is creating these opportunities. Interestingly, the deals have a broad range of EBITDA growth options, giving comfort that unchanged target returns remain realistic despite the higher interest rate environment.

  • Successful strategy: In our view, Apax’s recent new investment acceleration has been driven partially by market conditions but also its unique position. Focus is on improving the operational performance of investments, the mid-market, secular-growth, resilient sectors, and its scale, experience, brand and global offices.
  • New opportunities: Apax’s new investments come from carveout and public-to-private deals as well as purchases from other PE firms. Their operational improvement opportunities include using existing playbooks to enhance products, pricing, distribution, and geographical footprint as well as inorganic growth.
  • Valuation: Listed holdings and Derived Investments mean that ca.25% of Apax’s portfolio is marked to market. Adjusting for the debt portfolio at par, AGA’s discount to NAV (30%) rises to 40%, well above the peers’ range (17%-34%) on its PE portfolio alone. The NAV appears resilient, 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, income towards dividends, and has liquidity/capital benefits, but complicates the story.
  • Investment summary: Apax has delivered market-beating returns by selecting businesses that it can transform post-acquisition. Buying these companies at a discount to peers (ca.20%), accelerating their revenue growth and improving their margins, before selling the reinvigorated business at a premium to those same peers (ca.10%) is the playbook that has been used repeatedly. Investments focus in sectors with structural growth and resilience. Capital flexibility is enhanced by the Debt portfolio. The discount is the “icing on the cake”.
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