Apax Global Alpha — Transaction activity picked up in Q324

Apax Global Alpha (APAX)

Last close As at 03/12/2024

GBP1.39

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Research: Investment Companies

Apax Global Alpha — Transaction activity picked up in Q324

Apax Global Alpha (AGA) reported a Q324 NAV total return (TR) of 1.7% in euro terms on a constant currency basis (-0.2% including fx changes), with a 3.2pp positive contribution from earnings momentum across its private equity (PE) investments. The company experienced a pick-up in new investments, and also saw some positive trends on the realisation front. Following recent exits and accounting for the take-private transaction of Thoughtworks, AGA’s pro-forma exposure to listed holdings has been reduced to 4%, limiting the impact on AGA’s returns. While these investments have already yielded a realised return of 3x investment cost, their de-rating post IPO has been one of the contributors to AGA’s weaker performance lately. Within its recently updated capital allocation framework, AGA now offers a stable dividend of 11p per share (which implies an attractive 7.5% dividend yield) as well as buybacks funded with excess cash flow from realisations.

Milosz Papst

Written by

Milosz Papst

Head of Content, Investment Trusts

Investment Companies

Apax Global Alpha

Transaction activity picked up in Q324

Investment trusts
Private equity

15 November 2024

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Price ord

£1.466

Market cap

£717m

NAV*

€1,199m

NAV per share

€2.45/£2.04

Discount to NAV

28.1%

Yield (last 12 months)

7.5%

Shares in issue (ex-treasury shares)

489.1m

Code

APAX

Primary exchange

LSE

AIC sector

Private equity

52-week high/low

£1.678

£1.362

£2.27

£2.04

*As at end-September 2024.

Gearing

Net gearing at end-September 2024

0.0%

Fund objective

Apax Global Alpha (AGA) provides exposure to a global diversified portfolio of private equity investments by investing in funds advised by Apax. Capital not invested in private equity is deployed into private debt investments for additional sources of income to fund dividend payments and the distribution pool for buybacks.

Bull points

Clear sector focus: tech (47% of end-Q324 portfolio), services (27%) and internet/consumer (19%).

A well-defined capital allocation framework offering at present a 7%+ dividend yield and share buybacks.

Solid balance sheet, supported by AGA’s debt investments.

Bear points

NAV total return performance below AGA’s 12–15% pa target over the last five years.

Interest rate normalisation may reduce prospective private equity returns, put pressure on interest coverage ratios and/or lead to refinancing issues across private equity-backed companies in the medium term.

A persistently weak exit environment could affect the company’s returns, new investment activity and liquidity.

Analyst

Milosz Papst

+44 (0)20 3077 5700

EDISON QUICKVIEWS ARE NORMALLY ONE-OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.

Apax Global Alpha (AGA) reported a Q324 NAV total return (TR) of 1.7% in euro terms on a constant currency basis (-0.2% including fx changes), with a 3.2pp positive contribution from earnings momentum across its private equity (PE) investments. The company experienced a pick-up in new investments, and also saw some positive trends on the realisation front. Following recent exits and accounting for the take-private transaction of Thoughtworks, AGA’s pro-forma exposure to listed holdings has been reduced to 4%, limiting the impact on AGA’s returns. While these investments have already yielded a realised return of 3x investment cost, their de-rating post IPO has been one of the contributors to AGA’s weaker performance lately. Within its recently updated capital allocation framework, AGA now offers a stable dividend of 11p per share (which implies an attractive 7.5% dividend yield) as well as buybacks funded with excess cash flow from realisations.

Earnings growth supporting valuations

AGA’s portfolio valuations benefited from revenue and EBITDA growth across its PE holdings in the 12 months to end-September 2024 of 7.1% and 16.3%, respectively (of which 5.5% and 13.4% was organic growth, respectively). A further 1.6pp NAV per share accretion came from slightly higher valuation multiples (including the revaluation of Thoughtworks following its take-private deal), with average EV/EBITDA of 17.6x at end-September 2024 (vs 17.1x at end-June 2024), though this was offset by higher net debt across AGA’s holdings (mostly to fund M&A, with average net debt to EBITDA of 4.6x vs 4.3x at end-June 2024).

AGA’s debt portfolio (making up 17% of portfolio value at end-Q324) posted a 0.3% return excluding fx impact, due to negative movements across a limited number of positions. Its debt investments include primarily first (63% share) and second lien (22%) term loans in sectors where AGA has experience from its PE investments and give the company additional balance sheet robustness and flexibility for its capital allocation, while seeking to generate enhanced risk-adjusted returns. Its income yield and yield to maturity stood at 9.1% and 11.1%, respectively, at end-September 2024.

Share buybacks initiated in June

In June 2024, AGA announced the creation of a distribution pool for share buybacks, which it seeded with €30m (2.4% of end-March 2024 NAV) and to which it will allocate 100% of its excess cash flow from realisations until the pool reaches 5% of NAV. AGA’s board will consider the attractiveness of share buybacks versus reinvestments in its portfolio when the company’s shares trade at a discount to NAV of over 23%. With the current discount wider than this threshold, AGA started repurchasing shares at the end of June 2024 (which to end-September 2024 represented 0.3% of opening share capital). Overall, AGA has returned €67m to shareholders through dividends and buybacks since the start of 2024.

Five new investments and six exits in Q324

PE has established itself as an important asset class for institutional investors globally, as it provides access to actively managed, attractive companies not accessible through public markets, and which increasingly tend to stay private for longer. PE transaction activity has been stabilising and gradually improving throughout 2024 (with the gap in buyers’ and sellers’ price expectations narrowing), and the public market environment has become more welcoming for IPOs. Accordingly, AGA experienced an increase in transaction activity with five investments signed or closed in Q324 into which it deployed €107m (or c 9% of opening NAV). This includes Zellis (payroll and HR software), Altus Fire & Life Safety (regulation-mandated fire and life safety services), GreytHR (human resources management software), Veriforce (supply chain risk management) and the take-private of global software development and digital transformation consulting company Thoughtworks (carried out by the Apax XI fund). AGA initially made a private equity investment in Thoughtworks through the APAX IX fund in 2017. This fund remained a significant shareholder of Thoughtworks post IPO in 2021, but has already realised c 3x the investment cost to date. The objective of the recent take-private transaction is to initiate a business transformation as Thoughtworks has been affected by the post-COVID shifts of spending by large corporations.

AGA also saw an uptick in terms of realisations and made six full exits in Q324 (of which five closed) at an attractive 2.7x average gross multiple on invested capital (MOIC), with only one exit (Guotai Junan Securities) below investment cost. These exits (excluding listed holdings) were completed at an average 10% uplift to the previous carrying value. We note that two of these exits (Baltic Classifieds Group and Genius Sports) were disposals of remaining stakes of listed holdings following their earlier IPOs. AGA received total distributions of €34m (or c 2.7% of opening NAV) from Apax funds in Q324 (vs €5m in H124).

AGA’s available liquid resources at end-September 2024 included €83m in cash and a €250m revolving credit facility (fully undrawn), further supported by the €194m debt portfolio. This translates into a safe 63% coverage ratio of AGA’s €838m outstanding commitments (including a 3x coverage of the €178m commitments expected to be called within 12 months).

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General disclaimer and copyright

This report has been prepared and issued by Edison. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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