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We reviewed AGA’s recent interim results in our note, Resilience in face of rising interest rates, published 25 September. The results reconfirmed AGA’s core strengths, notably i) Apax enhances the operational performance of the funds’ investments ‒ LTM revenue and EBITDA growth of 16.0% and 14.1%, respectively, are, we believe, ahead of the market, albeit slowing in 2Q, ii) a 24% uplift on exits, proving conservative accounting and that the NAV is realistic, iii) a 2.4% NAV return, with the five-year 12.4% annualised return, and iv) the Debt portfolio proved its worth, with diversified, more stable returns, and generating cash to pay the dividend. Despite rising interest rates, the investee companies, Apax Funds and the trust itself have shown great resilience.

  • Successful strategy: Apax’s strategy of “mining hidden gems”, focusing on chosen high-quality subsectors, identifying companies within that space that have the potential to improve and then executing operational improvements, has delivered positive returns and cash generation, despite challenging markets.
  • Interest rate sensitivity: Investee companies’ gearing is below-average (4.4x, vs. PE industry average 6x-7x), their strong cash generation has reduced leverage in 1H’23 (4.4x EBITDA, vs. 4.8x end-2022), 75% of debt is fixed and swaps mainly mature post mid-2024. Our note detailed the trust’s and PE sensitivities.
  • Valuation: Listed holdings and Derived debt mean that ca.25% of Apax’s portfolio is marked to market. Adjusting for the debt portfolio at par, AGA’s discount to NAV (27%) rises to 40%, well above the peers’ range (17%-31%) 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 positions in highly rated stocks, following 2020-21 IPOs, saw exposures to underperforming 2022 names, recognising that value was extracted on the IPOs. The Derived Investments 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 (ca.20%), accelerating their revenue growth and improving their margins, and then selling the reinvigorated business at a premium to those same peers (ca.10% 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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