Apax Global Alpha says that its NAV return for the year ended 31 December 2023 was 4.1%. This is a long way behind the return on the MSCI World Index for the year of almost 20%. The chairman notes that deal activity in private equity was more muted during the first half of 2023, but activity increased across the portfolio in the second half of the year.
Performance was driven by a mix of earnings growth in private equity and strong returns from the debt portfolio, partially offset by lower valuation multiples and negative currency movements.
Average EBITDA growth across portfolio companies in the twelve months to 31 December 2023 was 18%, broadly in line with the prior year. Valuation multiples were up during Q4 2023 but fell slightly from 17.2x to 16.6x year-on-year, with negative movements from previously IPO’d portfolio companies in the private equity portfolio, particularly Thoughtworks, Viasat, and Paycor.
The board looked at the company’s capital allocation policy in the light of the persistently wide discount on the shares (currently 32.7%). It resolved to continue to return capital via dividends rather than buybacks. The full-year dividend was 11.34p, which puts it on a yield of 7.4% at the current time.
The company faces a discontinuation vote at this year’s AGM. The chairman says that the fund “has, to date, provided shareholders with capital appreciation and a consistent dividend stream, and the quality of the invested portfolio means the company is well-positioned to continue to create value for shareholders going forward.”
Extracts from the Q&A with the managers
Q What about exits? Some suggest there is pressure from investors for private equity firms to exit investments?
A It is true that private equity deal activity remained relatively subdued in 2023 and with the IPO window remaining closed, larger deals were particularly challenging to exit. However, the Apax Funds focus on investments in the upper mid-market where there is good exit optionality, and the funds actually returned more capital than they called in 2023. The Funds also sought to exit investments during the ‘good times’ and have therefore felt less pressure to sell.
The portfolio is generally in good shape and when companies reach maturity, we think there will be exit options in our part of the market.
Q Equity markets recovered strongly in 2023, yet the listed holdings in your private equity portfolio have been a drag on performance. Why is that?
A It is true that markets have rallied. However, drivers of US market performance have been narrow, with the seven largest stocks leading the market higher rather than the whole market, with AI being a significant catalyst. In Europe and the UK, markets trade well below the median.
Looking at the underperformance in Apax Funds listed private equity holdings, this is particularly driven by Thoughtworks, Paycor, and Viasat, which faced challenges in the year. Thoughtworks saw a slowdown in demand whilst Viasat experienced a satellite failure impacting share price performance.
Taking a step back, most of the listed holdings in AGA’s look-through Private Equity portfolio are positions in previously IPO’d portfolio companies where significant value has already been extracted. At 31 December 2023 these holdings represented c. 6% of Adjusted NAV, down from 10% at the end of 2022 following the successful sale of Duck Creek in January 2023 at a 53% uplift, and further secondary sales in some of the other holdings.
Q How are credit markets performing and what does this mean for Apax Global Alpha?
A European and North American broadly traded secondary loan markets have seen a tightening of spreads through 2023. Three-year spreads for trading US first lien loans tightened by c.141bps to an average of 474bps over Libor and EU loans tightened by c.170bps to c.535bps over Euribor.
Tightening of a similar magnitude has been observed in the public and private primary issuance markets AGA has been active in. Simultaneously private equity deal activity remained relatively subdued in 2023.
What this means is that, in the current market context of low volumes and tight returns, credit investors that have differentiated investment capabilities will deliver better returns as they can access opportunities with excess spreads through differentiated sourcing, and avoid losses through sector expertise and private equity style diligence. Apax’s integrated approach, where there are no barriers between Private Equity and Credit teams, positions AGA well to access better risk adjusted credit returns and the debt portfolio outperformed in the year, delivering a total return of 11.8% in the twelve months to 31 December 2023.
Q Finally, how do you think about the market environment in the next 10 years vs the last 10 years?
A The tide has definitely turned and the era of ‘levered beta’, where it was possible to generate strong returns by riding the markets, is gone. Instead, we’re back to a similar reality to the one we saw post the global financial crisis, where alpha generation through business improvement is required to generate superior returns.
For those players with experience and the right operating capabilities geared towards alpha generation, this is an exciting time and we think there are good opportunities and fund vintages to come.
Apax Global Alpha pleads case for continuation as vote looms : APAX