January Monthly 2021

We reviewed OCI’s PE model in our notes, When it rains gold, put out the bucket, published on 1 September 2020, and NAV: conservative, robust and with growth upside, published on 3 December 2020. Over the 10 years to June OCI, has delivered a 156% total NAV return. A key unique competitive advantage is its manager’s relationship with an entrepreneur network that brings expertise, market knowledge and new opportunities. Looking to 2021, market conditions should see above-average returns on new investments, and OCI is uniquely positioned to take advantage of this, with cash of £240m, nearly half its market capitalisation.

• OCI unique origination: Oakley Capital has established a network of entrepreneurs, many of whom have been both investee company managers and investors in Oakley Funds. These partners have a broad network and proven track records in each of Oakley’s three chosen sectors.
• Above-average returns on 2021 new business: We see more willing sellers, reflecting, inter alia, weaker competition seeking stronger financial backers and non-core disposals to strengthen group balance sheets. Price expectations have also moderated. Post-crisis investments historically have yielded good returns.
• Valuation: Against the end-June NAV, OCI trades at a 22% discount, despite its absolute (10-year 156% total NAV return) and relative (Oakley Funds II & III top-quartile/5% by different measures) performance. OCI’s dividend yield is ca.2%. Relative to peers, the discount is unusually high.
• 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. 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 management skills. The Oakley Funds are focused on mid-market, tech-enabled Western European companies that operate in the consumer, education and technology sectors. Accounting and governance appear conservative. There are risks – primarily sentiment-driven – around costs and cyclicality, as well as the liquidity and valuation of the underlying private assets. Buying a business with a record of outperformance at a discount to NAV is an additional attraction, we believe.