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Our note, 1H’24: deal activity coming back strongly, highlighted the key messages from AGA’s 1H’24 results, which were i) a strong rebound in deal activity both for investments and exits, 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%.

  • Buybacks: AGA has continued to be active with its buyback programme, purchasing shares on most trading days in October and reducing the shares in issue by ca.0.5 in the month. There are now 1.8m shares held in treasury. We expect further, regular purchase through the rest of FY’24 and into FY’25.
  • Rising stock of exit-able investments: 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 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 (4%-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 overcommitment are sector issues. The single writedown, in 1H’24, reminds investors of the potential volatility in PE returns. The Debt portfolio generates 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 (24%), accelerating their revenue 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”.
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