Apax Global Alpha

CM day: further proof of value added by Apax

10 Jul 2024 / Corporate research

The key messages from APAX’s well-received 2024 CM day and related announcements were: i) a new capital allocation policy with a set 11p dividend (current yield ca.7%) and creation of a distribution pool for future buybacks (if the discount is above 23%) (€30m has been seeded into pool and buybacks started); ii) the value added by the four-sector “hidden gems” strategy of buying businesses with unrealised potential at discount to peers (average 24%), improving them (average 15% increase in EBITDA growth during Apax Funds ownership), then selling at a premium (11%); and iii) the stock of exit-able businesses is rebuilding after above-normal exits in 2020-21.

  • Distribution pool: The pool will be assessed annually and be funded by 100% of “excess cashflow” (total PE distributions and cash income from the debt portfolio, less PE calls paid, costs and expenses, repayment of RCF and dividends paid). €79m would have been added to the “Distribution Pool” since 2019.
  • Stock of exit-able investments: Apax used the high valuations of 2020-21 to exit a higher proportion of its investments than usual. In essence, it brought forward sales from future years. The effect now broadly worked through, there are more exit-able businesses just as market appetite appears to be growing.
  • Valuation: AGA’s discount to NAV (29%) is at the upper end of the peers’ range (5%-25%) 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 over-commitment are sector issues. Residual risk on the 2020-21 IPO positions appears to be modest. The Debt portfolio generates additional returns, and 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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