U.S. Markets closed

Edited Transcript of APAX.L earnings conference call or presentation 6-Nov-19 9:30am GMT

Q3 2019 Apax Global Alpha Ltd Earnings Call

ST PETER PORT Nov 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Apax Global Alpha Ltd earnings conference call or presentation Wednesday, November 6, 2019 at 9:30:00am GMT

TEXT version of Transcript


Corporate Participants


* Ralf Gruss

Apax Partners LLP - Partner & COO


Conference Call Participants


* Matthew Lloyd Hose

Jefferies LLC, Research Division - Equity Analyst




Operator [1]


Good morning, everyone, and welcome to Apax Global Alpha's 2019 Third Quarter Results Call. My name is Seth, and I'll be the operator on your call today.

I will now hand over to Ralf Gruss to begin the call. Please go ahead, Ralf.


Ralf Gruss, Apax Partners LLP - Partner & COO [2]


Thank you, and good morning, everyone. Thanks for joining today's AGA 2019 Third Quarter Results Call. My name is Ralf Gruss. I'm the Chief Operating Officer of Apax Partners and a member of AGA Investment Committee. I'll take you through the presentation today and also answer any questions at the end of the call.

Now let's start with the financial highlights in the presentation. AGA continued to perform very strongly over the last quarter. The total NAV return achieved by AGA was 4.9% in the quarter or 18.0% on a last 12-month basis.

Now the key points to highlight here are that the Private Equity portfolio continues to do very well. The total return of 28.8% on an LTM basis and the momentum that we've seen for some time now also continued into the third quarter. In the last 3 months to September, the equivalent total return in the Private Equity part of the portfolio was 6.9%.

Now moving on, derived Debt also generated strong returns. The returns over the last 12 months are now at 14.4% and 6.0% over the last 3 months. In these returns, we're happy to have been through a strong dollar, with foreign exchange having a positive effect of 5.6% over the last 12 months and 3.5% for the quarter. Now on Derived Equity, the performance over the last 12 months is still weak at negative 6.8%, but I'd like to note that this is now the smallest part of the portfolio with a smaller impact on overall returns of AGA.

In terms of the adjusted NAV, the fund's total value was EUR 1.056 billion at the 30th of September, and this translates into an adjusted NAV per share of EUR 2.15 or GBP 1.91. Now as usual, I'd like to give you a bit more detail on the adjusted NAV movement and performance on Page 4 before we go into the details of the portfolio.

Now on Page 4, I'd like to start with the top chart of this -- on the slide. The adjusted NAV increased by approximately EUR 24 million to EUR 1.056 billion, as just mentioned. Now what are the main drivers of the performance here? If you look at the bridge, I mean first of all, we continue to see positive valuation movements in both Private Equity and Derived Debt. The Derived Equity portfolio remained a distraction and had a negative impact. And the 2 other big items here are the dividend, which was paid in September, as well as the positive foreign exchange movement. Now the latter is mainly from an appreciation of the U.S. dollar.

At the bottom of the page, you can see the contribution of these drivers, again, in percentage terms. So I'm not going to go through this. But to recap, again, overall strong performance of the fund. The adjusted NAV grew to EUR 1.056 billion, despite the payment of the dividend, and the LTM total NAV return is now at 18%.

With that, let me cover the portfolio composition on the following page. Now the doughnut on this page shows you the structure of AGA's invested portfolio as of the 30th of September. The invested portfolio represented 96% of total NAV, meaning that the fund was again almost fully invested with only 4% of cash in the fund.

If you look at the portfolio mix, the Private Equity is the most important exposure AGA has. 63% of the invested portfolio was invested in Private Equity. Now worth highlighting here is the diversification of the Private Equity portfolio. In total, there are 57 underlying portfolio companies. And in terms of the underlying portfolio, it's all a very good mix now of portfolio companies in different stages of their development.

Most of these companies, in terms of value, are held through the investments made by the Apax VIII and Apax IX funds. Apax VIII portfolio companies have continued to grow in value, and we've already seen a number of attractive exits from this fund generation. Now Apax IX is getting closer to being fully invested, and the portfolio companies in this fund also show attractive valuation gains.

Now in addition to that, and as a reminder, AGA has announced a commitment to Apax X in July of this year. Apax X is the successive fund to Apax IX and Apax VIII. It hasn't made any investments yet and, therefore, Apax IX -- X doesn't show up on this chart yet. So overall, the Private Equity portfolio is nicely diversified between companies that are getting ripe right for an exit, those that are in the value creation phase and through the Apax X commitment. AGA will also have access to new deals over the coming years.

Now on the Derived side, which is about 1/3, to be exact, 37% of the investment portfolio. Now those of you who have followed us throughout the year will know that AGA aims to reduce the return volatility in the fund by reducing its exposure to the Derived Equity investments. And in line with that, the exposure to Derived Equity has fallen throughout the year. And it is now the smallest part of the portfolio with 11% of the invested portfolio, which is down from 16% at the end of last year.

Derived Debt is 26% of the total invested portfolio. As already mentioned that overall returns have been strong here, but also realized returns on those positions that were exited over the last 9 months were attractive, generating an IRR of 13.8%.

Now with that overview on the portfolio, let me now turn to the Private Equity piece of the portfolio in more detail. And as a headline, again, the performance of the Private Equity portfolio in Q3 is a continuation of what we have seen in the first 6 months of the year, with strong operational performance driving further valuation gains. But let's look at the following Page 7 to go into a bit more detail.

Now on Page 7, you see a summary of the key highlights for the Private Equity part of the portfolio. I'd like to mention the key takeaways here. Overall, some excellent performance in terms of returns. Over the last 12 months, the Private Equity portfolio has delivered a total return of 28.8% and 6.9% during the quarter.

Now if you double-click on this number, it's in particular the Apax VIII and Apax IX portfolio companies, which were driving value during the quarter, which -- those 2 funds being the largest exposures in the fund. Behind this is continued strong operational performance of the portfolio companies. The LTM EBITDA growth was 20.8% on average and 16.1% if you adjust for M&A activity of the portfolio company. The average EBITDA multiple across the portfolio is at 15.4x, which is largely the same that we had at the end of June.

Now in terms of new investment activity, and you can see this on the right-hand side of the chart, there was one new deal made through Apax IX and 2 deals done by the Digital Fund. Let me just give you a little bit of background on those new transactions.

The Baltic Classifieds Group is the deal that was done through Apax IX. The Baltic Classifieds Group is a portfolio of leading online classified advertising platform in the Baltics, and they're covering automotive, real estate, jobs and general merchandise. And the investment thesis here is to back a business, which has market-leading positions in several verticals and also had an excellent management team. We've worked together for many, many years. Now if the Apax Fund IX deal in the digital marketplace subsector and, therefore, we believe we're uniquely positioned here to help grow the business going forward.

MetaMetrics was 1 of the 2 new deals in the Apax Digital Fund. Now the company provides reading and mathematics assessment scales. The thesis here is to invest in a category-defining player, which is operating in an expanding market, and to support and accelerate growth to new product development and an international expansion.

Signavio, which is the other new investment in the Apax Digital Fund, is a leading provider of business process management software. The Apax Digital Fund led an investment round here to drive international expansion and investment in its software suite. We were intrigued by the best-in-class product the company has and intend to further develop and integrate the suite and expand it globally.

Now moving on to the exit side, where, frankly, there isn't a lot to report for the third quarter. The funds have exited 2 quite small investments. Both were exits out of the Apax Europe VII fund. Electro Stocks is a distributor of electrical products in Spain, an investment which was made back in 2007, so very old investment and which had to weather the financial crisis. The investment generated proceeds of close to EUR 0.5 million for AGA, so it's a very small deal but had an uplift of 15% compared to the last unaffected valuation. And Neobpo is a very small spin-off from the fund's Brazilian IT services investment, Tivit. It's a very small transaction and proceeds, and AGA has been invested EUR 100,000.

So in summary, taking a step back again, however, a very strong performance for Private Equity with a 28.8% return over the last 12 months. Now, before I go into the Derived Investments part of the portfolio, I'd also like to talk you through the adjusted NAV movements for Private Equity first

and also discuss the return drivers again in a bit more detail.

But let's go to the adjusted NAV movements first, which you can see on the following page. And again, here, I'd like to primarily look at the chart on the top of the page. You can see that the adjusted NAV in Private Equity grew by EUR 63.2 million to EUR 643.5 million, thanks primarily to unrealized gains of EUR 32.4 million, which are reflecting the strong performance of the Private Equity portfolio I've already talked about.

Now in total, calls of EUR 27.4 million were paid into Apax IX. As you know, the Apax Funds operate capital call facilities and, therefore, there are timing delays between when an investment is made to when it is called. So you can't tie this number back to the new investment number that you saw on the previous page. Now if you turn to the bottom chart briefly, you can see the total return of 6.9% for the quarter and the more meaningful LTM total return of 28.8%. So yes, 2019 is really shaping up to be a strong year for AGA's Private Equity portfolio.

Now, as a final point, I'd like to provide the usual breakdown of return drivers for the Private Equity part of the portfolio. Again, please turn to Page 9 for this. And those of you who are following us will be familiar with this page. You can see a bridge, which is breaking down the 28.8% LTM total return in Private Equity into its various return drivers.

Again, I'd like to key -- highlight the key ones for you. The growth in the underlying earnings metric was the strongest contributor during the last 12 months, with a 32.5% contribution to total returns, reflecting the operational performance of the underlying portfolio companies. Movements in net debt had a negative impact on returns of 5.1%. This is also because how -- the way we show contribution here is contribution to equity returns and, therefore, an upward movement in absolute debt numbers has a negative effect on returns the way it's shown on this chart.

Important to note, though, if you think about leverage here is that the average debt levels in the portfolio measured on a net debt-to-EBITDA basis remained largely the same at 4.0x, which is quite a modest level, largely the same if I compare it to where we were in June, which was 3.9x. Now the impact of valuation multiples on total return is 8.6x. Now given the strong exit activity we have witnessed in particular also during the first 6 months of the year, the premium valuations we achieved on those exits are also reflected in this number. Or put it differently, about 40% of this return contribution of 8.6% is driven by the exit uplift achieved and particularly on the realizations of Exact and AssuredPartners, 2 very successful exits that we had at the beginning of the year.

Now management fees and carried interest of the underlying Apax Funds decreased returns by 8.6%, and this is largely the flip side of the very strong performance of the Private Equity portfolio as the Apax Funds continued to improve for carried interest.

And the last point to highlight here on this page is that the movement in the valuation of the carried interest held by AGA added another 2.7% to returns. Apax Europe VII is now commencing carried interest payments following the completion of the Acelity exit from this portfolio. And obviously, if you take all of these and the other factors shown in the bridge together, you get to the total return of 28% -- sorry, 28.8% on the Private Equity portfolio.

So that's a summary for Private Equity. And with that, I'd like to turn to Page 11 and provide an update on the Derived Investments. Now before going through these return numbers, again, for context, the share of Derived Investments of -- in the portfolio is 37%, of which almost 70% is invested in Derived Debt, with the remaining investments being in Derived Equity.

And with this in mind, total returns in Derived Investments were positive 2.7% or negative 0.1% in constant currency. The picture for Derived Debt and Derived Equity, however, remains quite different. So I'd like to first run through the Derived Debt performance, which is the larger and growth -- part of the portfolio. The returns from Derived Debt has continued to be strong. Returns in the quarter were 6% or 2.5% constant currency, so in line with what AGA is trying to achieve with this portfolio. Also, all new investments, you can see here on the bottom of the page for investments in debt. In total, AGA invested EUR 23.4 million during the quarter. And all of these new investments were in subsectors, which we know well from our Private Equity activity and, therefore, we were able to leverage our insights during the due diligence.

Now in the middle box, we can see the 2 full exits, which came out of the Derived Debt portfolio during the quarter. Now both positions were repaid rather than sold, and AGA realized EUR 5.4 million from these exits. The gross IRR achieved on these transactions were 15.9%. So despite these positions having been small, it's a very, very pleasing result, obviously.

Now on to the partial exit, and this will then also take me into the Derived Equity portfolio. 2 out of the 3 partial exits were from the Derived Equity portfolio. But let me start with AmeriLife first, which is the only debt positions in the partial exits. It's effectively a transaction, where AGA rightsized its exposure in the position. AGA also exited part of its holdings in the Indian Company, DCB Bank, which is a retail bank; and CanFin Home (sic) [CanFin Homes], a nonbank financial institution. Actually, the CanFin Home deal shows up as a partial exit here, but was completed after quarter-end.

Taking a step back again and looking at this page, what you see is a consistent performance from Derived Debt, which is the larger part of the portfolio, and investment activity focused on reducing volatility coming out of the Derived Equity portfolio by putting more focus on credit investments.

Now on Page 12, I'd like to give you, though, a breakdown against -- you have the details both for Derived Debt and Derived Equity. And given the diverging performance of Derived Debt and Derived Equity, we've shown the bridges separately on this page.

Let me start with the Derived Debt, which is shown on the top chart. Again, returns have been good here over the last 12 months, generating a total return of 14.4% and 6% as you look at the quarter. The main driver of these returns is, as expected, income, which generated a contribution of 2.2% during the quarter, but Derived Debt returns also benefited from currency movements. As the portfolio remains exposed, mainly to the U.S. dollar, foreign exchange had a positive impact of 3.5% in the September quarter.

Now at the bottom of the page, you can see the performance bridge for Derived Equity. There was a drag on performance of negative 6.8% that came from unrealized losses, which was spread out across 9 equity positions in the portfolio, which had negative valuation movements during the quarter. However, if you look a little bit closer, the biggest ones amongst those are Airtel Africa, DCB Bank and Strides. The performance we're still not happy with, and we are focusing on the Derived Equity portfolio, both to improve its performance, but also to rightsize AGA's exposure to it.

Now that takes me to the end of the presentation. Just to quickly recap the key takeaways, September quarter saw AGA continuing its strong performance trajectory in our Q3 total NAV return of 4.9% or 18.0% on the last 12-month basis. The performance in the Private Equity portfolio remained very strong. Now, in particular, the 2 large exposures to portfolio companies in Apax VIII and IX are growing in value very nicely. The returns in Derived Debt are also very good. 14.4% total return over the last 12 months and 6% during the quarter, although, we had some tailwind from currency movements here. Derived Equity hasn't recovered yet but, by far, the smallest part in the portfolio now.

And also, a quick word on dividends. As the dividend was paid during September, in line with AGA's policy, and the second interim dividend was paid at a level of 2.5% of NAV and a total of EUR 26.7 million was distributed to shareholders. A little bit on outlook, first on the Private Equity portfolio. The one thing to remember is that the Private Equity portfolio is well diversified by sector and geography. It's delivering double-digit revenue and EBITDA growth.

In terms of our mindset, we're however conscious the macro environment likely looks late cycle. The investment strategy for the Apax Funds remains unchanged. Strategy continues to focus on transformational deals, good-to-great opportunities, where our subsector insights, operating capabilities and the global platform can really generate value even in a tougher environment.

On the Derived Investments, our perspective on Derived Investments hasn't really changed a lot, too, when we last spoke during the interims. Again, we believe we are likely looking at a late-cycle type of environment, which means the focus in Derived Debt will be on high-quality underlying credit exposures. And in addition, as we discussed, AGA continues to aim at reducing the return volatility, which is inherent in its Derived Equity investments.

So with this, I'm now happy to answer any questions you might have and hand it back to the operator.


Questions and Answers


Operator [1]


(Operator Instructions) We have a question from Matthew Hose from Jefferies.


Matthew Lloyd Hose, Jefferies LLC, Research Division - Equity Analyst [2]


On Apax X, I appreciate the fund hasn't closed yet. But given that Apax IX is about 3 quarters invested and committed, any idea when Apax X will begin investment?


Ralf Gruss, Apax Partners LLP - Partner & COO [3]


Thanks for the question. Look, Apax hasn't announced its final close date yet. When the call out is going to happen between Apax IX and Apax X really depends on pipeline and pace of new investments, so it's frankly difficult to pinpoint a time for it.


Operator [4]


(Operator Instructions) We do not have any further questions at this time, so I'll hand back to you.


Ralf Gruss, Apax Partners LLP - Partner & COO [5]


So if there are no further questions, then thanks, everybody, for dialing in this morning. And I wish you a good day. Thanks, everybody.


Operator [6]


Ladies and gentlemen, this concludes today's call. Thank you for dialing in, and you may now disconnect your lines.