Apax Global Alpha

Outperformance by adding value to companies

14 Mar 2023 / Corporate research

The full-year results to Dec’22 reconfirmed the core strengths of AGA, notably i) Apax enhances the operational performance of its investments ‒ revenue and EBITDA growth of 21.5% and 18.5%, respectively, are well ahead of the market, ii) a 15% uplift on exits, proving conservative accounting and that the NAV is realistic, iii) a -7.4% NAV return, driven largely by the listed holdings’ rating multiples fall (these companies have already delivered 3.4x money on invested capital return), and iv) the Derived Investments portfolio proved its worth, with diversified, more stable returns, and generating cash to pay the dividend. The NAV should be resilient in uncertain times.

  • 2022 victim of 2020-21 success: Volatility is to be expected in any period. In 2020-21, Apax sold multiple companies at high ratings and crystallising good returns. As the market appetite for growth companies waned, their valuation multiples fell, reducing the value of Apax’s residual holdings in 2022. The sale of Duck Creek Technologies, at a 57% premium, shows the value in these holdings.
  • Other 2022 highlights include: i) the EV/EBITDA ratio was 17.2x, in line with the underlying average for 2017-21, and results in a PEG ratio of just 0.9x, ii) a dividend yield of 7.0% makes AGA attractive to both capital and income funds, iii) the debt/EBITDA ratio is 4.8x, and iv) over-commitment remains very modest.
  • Valuation: Listed holdings and Derived Investments mean that ca.40% of Apax’s portfolio is marked to market. Adjusting for the debt portfolio at par, AGA’s discount to NAV (28%) rises to 41%, well above the peers’ range (25%-33%) 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 risk on the 2020-21 IPO positions appears to be modest. 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 Derived Investments portfolio. The discount is the “icing on the cake”.
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