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Investment Trust Insider: As LBOs return Oakley is the pick of pre-crash PE

Investment Trust Insider: As LBOs return Oakley is the pick of pre-crash PE

The past five years have not been an easy time to be a private equity investor. Investments made at the tail end of the credit boom, while often cushioned to some extent by covenant-lite debt, have often struggled and many did not survive in the long term.

One company’s five-year performance stands out however: Oakley Capital, whose net asset value (NAV) is up over 80% over the past five years, while the likes of 3i, Candover and SVG more than halved.

It is true that Oakley’s recent returns have been a bit dull by comparison to the rest of the sector (NAV up circa 5% over the past year) but this might be because the others are writing back up the investments they wrote down a few years ago.

Oakley started life in August 2007, raising £100 million to invest in a limited partnership (LP) vehicle with a 10-year life (this can be extended to facilitate disposals) managed by a team led by Peter Dubens. He had built up a formidable track record, with 365 (sold to BSkyB) and Pipex (sold, just after the fund launched, to Tiscali).

Cash pile

By the end of December 2007, very little of the LP had been invested and perhaps this was a saving grace. Oakley was sitting on a cash pile as valuations of its target investments were deteriorating.

The first big deal was struck in March 2008 with the acquisition of Freedom4’s (formerly known as Pipex) European hosting and network services business for £128 million.

Oakley renamed this business Host Europe. Oakley’s discount widened as the private equity sector fell out of favour but it took advantage of the situation to buy back some shares.

Then in March 2009, Oakley raised £18 million to take advantage of cheap valuations by issuing new shares at the prevailing market price. This was quite dilutive for existing investors so it was regrettable that the deal was structured as a placing.

The LP then made its first disposal, selling part of Host Europe back to Freedom4 for £42 million, booking a decent profit and getting cash and a stake in Daisy Group, an AIM-listed telecom services company. The share price began to recover and quickly hit the £1 mark again.

In December that year, they bought a stake in Verivox, a European price comparison website. Then in September 2010, they sold the rest of Host Europe for £222 million. The initial purchase of Host Europe had turned out to be a fantastic deal for the fund but the money they had raised at a discount had not been deployed.

They were quite busy over the next few months. In November 2010 they bought BDO Investment Management (later renamed Broadstone Pensions and Investments) and a 50% stake in Time Out.

They added to this by buying a majority stake in Time Out New York in May 2011. In March the same year they took a stake in Emesa, a European online auction site for leisure activities such as holidays, event tickets and restaurant bookings, and in November bought a web-hosting business, Intergenia.

Share price falls

In the summer of 2012 the share price began to fall again, hitting a low of around 114p –equivalent to a circa 35% discount. They tackled this by buying back a few shares.

Oakley is still at an attractive discount (over 20%) but anyone considering investing in it today has to make a judgement on the portfolio. The trouble is, as always when looking at private equity, getting up to date information on a bunch of unquoted companies is difficult.

Time Out was the largest holding at the interim stage, valued at £30 million (a small discount to Oakley’s purchase price). It has been in the headlines over the past few months as it replaced its paid-for magazine with a free but slimmed-down version. This has a much larger print run to make it more attractive to advertisers. The company is also trying to direct readers to its websites.

This was quite a big gamble to take with such an established brand. It is a model that has started to work for others (for example, Short List and Metro) but it is a crowded market and so far there does not seem to be much evidence of an uptick in the usage of its website.

Verivox has been trumpeting a big rise in German consumers switching electricity provider, which should be boosting its revenues – good news if it is true, as volumes had been depressed at Oakley’s H1 stage.

Daisy, a quoted company, is loss-making but says it is starting to generate free cash flow and hopes to pay its first dividend later this year. Its share price is up circa 5% since 30 June 2012.

Broadstone has been trimming costs and making a couple of bolt-on acquisitions. It was loss-making at Oakley’s H1 stage.

Otherwise, there is not much I can glean on Intergenia, and the other investments are probably too small to make a material difference. They have just made one large disposal however, selling Emesa, which added circa 3% to the NAV. The original LP still has a while to run and Oakley has undrawn commitments of £52 million. In October 2010, Oakley also made £100 million of commitments to a successor fund but none of this has been called to date.

In the short term, the main attraction seems to be the discount but it will be interesting to see how Time Out is faring when Oakley reports in April.

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