Apax Global Alpha delievered a total return of -7.4% over 2022, driven by a -11.3% return on its private equity portfolio, offset by a +1.9% return on its portfolio of derived investments (see our notes on the company for an explanation of what this entails).
[Strangely, the chairman’s statement makes no reference to the trust’s share price, discount or return to shareholders. The discount widened considerably over the course of 2022, as did the discounts of many other private equity trusts.]
Dividends totalled 11.82p for 2022. These are based on 5% of the NAV and a significant proportion comes from capital. [Based on the year-end NAV, the dividend for 2023 would fall to 11.7p.]
The announcement says that the trust’s portfolio companies continued to deliver growth and operational improvements in 2022 (average EBITDA growth across the portfolio of 18.5%), which the chairman say reflects the resilience of their business models. However, this was not enough to fully offset negative movements in valuation multiples. The main driver was multiple contraction in the Apax Funds’ listed holdings, which contributed over three quarters of the overall downward valuation movement.
The majority of these listed holdings are from IPOs that took place in 2020 and 2021 and which, together with subsequent secondary sales, have already returned distributions totalling 3.4x initial costs to the trust. The chairman suggests that opportunities still exist to create further value in this part of the portfolio, as illustrated by the sale in January 2023 of the residual holding in Duck Creek at a 57% premium to its year-end market value.
There were several large capital calls during 2022, mainly from Apax X. New commitments were made to three new Apax funds: $700m to Apax XI, $60m to the Apax Global Impact Fund, and $40m to AMI Opportunities II.
Apax Global Alpha has had a €250m revolving credit facility with Credit Suisse AG, London Branch, since November 2018 which featured an evergreen term, with a rolling minimum notice period of two years. However, in early 2023, it received formal notice from the lenders that the facility will revert to a conventional fixed-term arrangement with an expiry date of 10 January 2025. The board and the investment manager remain confident that the company’s approach to balance sheet management provides comfort over existing and future planned commitments.
The €250m facility was undrawn at the year end and the trust also had net cash of €64m. Outstanding commitments to the Apax Funds totalled €1bn. The statement says that “as most of the Apax Funds operate capital call facilities to bridge capital calls from its investors for periods of up to 12 months, AGA has significant visibility on future calls resulting from these commitments, facilitating the company’s liquidity planning.” About €114m (13%) of the portfolio is invested in funds in the ‘harvesting phase’ – Apax VIII, Apax Europe VII, and Apax Europe VI. In addition, a further 46% of the portfolio is said to be mature. [This is likely to be a source of funds to meet commitments as they fall due, but for peace of mind, the board may look to secure a replacement rolling debt facility well ahead of the maturity of the Credit Suisse loan.]
Extract from the manager’s report
The Private Equity portfolio is well-diversified across the four core Apax sectors, with 37% in Tech & Digital, 31% in Services, 12% in Healthcare, and 20% in Internet/Consumer. Performance in 2022 differed by sub-sector and, sometimes, even within the same sub-sector.
In Software, there was some weakness in new bookings as 2022 progressed, however retention rates remain high overall due to the sticky nature of the products provided. While there has been a decline in valuation multiples of the public portfolio, private valuations remain robust – a fact reinforced by the successful sale of legal software company MyCase to AffiniPay, at a significant uplift of 49% to its previous fair market value. In tech-enabled services, good growth continued, despite some evidence of increased delays in projects. In telecoms, underlying performance has also been strong and valuations are stable given the defensive nature of this sub-sector.
In Services, the core sub-sectors are: route-based businesses, outsourced sales and marketing, and residential services. Companies in these sub-sectors saw strong earnings performance and demonstrated their resilience in a downturn given the largely non-discretionary nature of the services. Due to the strength of their business models, the Apax Funds’ portfolio companies were also largely able to pass on cost inflation.
In Healthcare, across medical technology, healthcare services, and pharma, underlying demand tends to be less cyclical, and the Private Equity portfolio is proving highly resilient, despite some inflationary pressures. The medical technology portfolio companies continue to grow, benefitting from strong demand although the focus remains on lingering supply chain issues which create a more complex operating environment. In healthcare services, despite increasing labour costs, portfolio companies are still seeing strong demand for services.
Portfolio companies in online marketplaces continued to experience strong performance in 2022. These companies are generally resilient given their market leadership positions, despite some exposure to the cycle. In consumer packaged goods, portfolio companies continue to see increasing distribution for their premium, branded consumables, and have so far largely been insulated from the slow-down with all existing investments delivering significant year-on-year growth.
APAX : Apax Global Alpha hit by falls in listed equities