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Apax Global Alpha sterling NAV benefits from strong exposure to US

Apax Global Alpha (APAX) has announced its annual results for the year ended 31 December 2016. The company says that performance was largely flat during the first six months but improved during H2 2016 resulting in a NAV total return of 6.6% (after expenses) for the year as a whole. The Private Equity and Derived Investment portfolios contributed broadly equally to performance, with annual Total Returns of 6.6% and 6.0% respectively. APAX says that the majority of its portfolio’s positions are delivering robust performance; however, this has been partially offset by negative fair value movements relating to a small number of investments in both Private Equity and Derived Investments. AGA’s performance in 2016 also benefited from the portfolio’s exposure to investments denominated in US dollars. During the period, APAX’s adjusted NAV per share grew 1.6% to €1.91 but, in pound sterling terms, it increased 18.1% from £ 1.38 to £1.63 reflecting the substantial decline in sterling versus the euro.

APAX made two dividend payments during the year totalling 7.64p per share. The Board has approved a final dividend in respect of the financial period to 31 December 2016, of 4.13 pence per share (this is equivalent to 2.5% of AGA’s euro NAV at 31 December 2016, equivalent to 4.84 euro cents). The dividend will be paid on 4 April 2017 to members on the register on 17 March 2017.

In terms of portfolio activity, the Company committed approximately $350m to Apax IX (AIX) the new $9bn private equity fund launched by Apax Partners. AIX had its final close on 20 December 2016 and has already announced its first two investments.

On 15 June 2016, the first anniversary of the Company’s IPO, approximately 7.5% of AGA’s ordinary shares held by Future Fund, former Apax executives and the Apax Foundation were released from lock-up. This first tranche represented around 37m shares or 20% of the shares held by these investors at the time of the IPO. The staggered release of shares is designed to ensure former employees of AGA’s Investment Adviser remain committed to the success of AGA over the long term, whilst allowing the free float of AGA shares to increase over time. AGA and its corporate broker facilitated and offered a process for the market placement of shares to those shareholders coming out of lock-up. Of the 37m shares, the company says that only 2.5m shares were sold by shareholders through this placement process. It says that this is a clear indication that AGA continues to be regarded as an attractive value proposition by its pre-IPO shareholders.

In terms of outlook, the manager says that Brexit and the outcome of the US presidential election will distinctly change the investment landscape going forward. Looking at Brexit, it says that the UK government has become clearer on what strategies it wants to pursue, and it believes that a “hard Brexit” is now the base case scenario. In its view, Single Market participation has had significant advantages for the UK and losing these advantages will have negative economic impacts both in the EU and in the UK, but it believes that the UK will pay the (far) higher price that will likely require significant and costly adjustments in a variety of UK sectors (most notably in banking and auto). The macroeconomic consequences could be significant, and the political reaction to them will likely be “throwing money at the problem”, in turn causing budgetary and FX issues. In the manager’s view, UK equity and FX markets are not yet fully pricing in these consequences, opening up a scenario of a market correction in the next 12-18 months. Before such a correction happens, the manager says its approach to investment opportunities in the UK will remain cautious, focusing on opportunities that already provide clear value opportunities today.

Looking to the US, the manager says that, while not all elements of President Trump’s agenda are yet clear, the odds are that there will be quite a few surprises It also highlights that, as the Senate and the House of Representatives remain in Republican hands, whatever agenda materialises has a strong likelihood of being implemented. The manager expects there will be a shift from a monetary to a fiscal dominated economic strategy, including tax cuts and infrastructure spending programmes. Such policies will likely lead to a short to mid- term stimulus and an increase in the budget deficit. It says that an initial real GDP boost is to be expected, but then also is an increase in inflation. Additional sovereign borrowing will put further pressure on rates and an appreciation of the US dollar due to “hot money” flows, in particular from emerging markets. Second, more domestic oriented policies are likely. On the one hand, this could mean increases in tariffs and focus on domestic production in (core) industries, on the other hand it will put more limits on immigration. Limiting cheap imports and the labour supply will add to inflation, and a stronger US dollar will mean trouble for export oriented US businesses.

The manager says that a short-term boost to real GDP is a good thing for existing portfolio companies in the US (and elsewhere). From a private equity fund’s perspective, it says that the cost of inflation is limited but the benefits to headline returns are obvious and the current portfolio and future investments will benefit from lower corporate tax rates. The longer-term cost of inflation and increased sovereign debt are a few years out. Similarly, while mercantilist policies may appeal to parts of the current electorate, the long-term costs of trade restrictions are significant and are likely to be felt in a post-President Trump world. Furthermore, a lower corporate tax rate actually decreases the beneficial effect of interest deductibility and so in bidding for assets against strategic acquirers, private equity funds may actually experience a relative reduction in competitiveness. It also says that an increase in interest rates is also more of an issue for highly levered entities. Cash flow headroom of future buyouts are likely to decline, increasing the level of financial risk. After years of low interest rates when the margin for error was large, the future will require more diligence in determining the optimal financial structure. Overall, the manager believes that US policies in the coming years will favour cyclical and domestically-oriented businesses and that companies from Europe and the emerging markets selling into the US could suffer from a protectionist US administration.

Apax Global Alpha sterling NAV benefits from strong exposure to US : APAX

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