NAV: conservative, robust and with growth upside

In this note, we examine three aspects of OCI’s NAV: firstly, why investors can have confidence that it is conservatively calculated, evidenced by i) realisations above carry cost, ii) no incentive to inflate valuations, and iii) a tech-enabled business mix; second, NAV has been robust through COVID-19, a feature we expect to continue, driven by digitally delivering companies, largely defensive sectors and OCI’s large cash balances; third, upside from incorporating the market’s “vaccine” recovery in OCI’s NAV is compounded by underlying structural growth and a unique sourcing model in attractive markets. The 29% discount to NAV is an additional attraction.

• COVID-19 experience: Through the crisis, Oakley’s expertise/funding assisted its companies. Three quarters of investments benefit from having digital and subscription models, or both. 14 of 17 companies are expected to end the year at or near budget. The 1H’20 NAV total return was 4% (-1% constant currency).
• Growth: Oakley Funds’ companies delivered 17.5% annual EBITDA growth to end-June (30% to December 2019). Its deep entrepreneur relationships give it unique origination, and £250m+ cash means opportunities can be taken. Ratings may increase as value is added to businesses and with recent market rallies.
• Valuation: Against the end-June NAV, OCI trades at a 29% discount, despite its absolute (10-year 156% total NAV return) and relative (Oakley Funds II & III top-quartile/5% by different measures) performance. OCI yields ca.2%. Relative to both historical and peer levels, 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. Previously large shareholder overhangs have now been sold completely. Buying a business with a consistent record of outperformance at a material discount to NAV is an additional attraction, we believe.