Most fund managers are keen to downplay the amount they charge investors, often stressing how competitive their prices are relative to peers, or hiding details of performance fees in the small print.
However, Steven Tredget of Oakley Capital Investments takes a different approach. His trust, a private equity vehicle, has the typical ‘two and 20’ charging structure, with an annual management charge of about 2% and a performance fee of 20% of any outperformance of its benchmark. According to data from FE Analytics, this means Oakley’s ongoing charges figure stands at a hefty 2.46%.
Yet Tredget said investors who baulk at paying this amount to a fund manager are looking at it the wrong way.
“You have to get over an 8% hurdle [to charge the performance fee] so you've got to deliver performance,” he said.
“I've always had the view that you want to be in a fund where you're paying a lot of performance fees, because that means it has delivered the highest performance.
“The highest gross amount of performance fees that anyone is paying [in the IT Private Equity sector] by NAV is ourselves and Hg Capital, because we’re the best performers in the asset class.”
Tredget also pointed out it can take years for the trust to complete acquisitions, requiring large teams of investment professionals, while its management approach is hands-on. Yet he said that although this means costs for private equity trusts tend to be higher than those that focus on public markets, so too are returns.
Aside from the high charges, another reason why some investors avoid the private equity sector is a lack of transparency.
This came to a head in the financial crisis when many private equity vehicles turned out to be 'over levered and over committed'.
Yet Tredget said the sector has come a long way since then.
“The Covid year is going to be a defining year for private equity, because up until now I think there were all kinds of concerns around it, but we have been slowly delivering against them,” the manager continued.
“I think the chief fear is ‘are they over levered again and can they perform when we go into a difficult period?’
“The vehicles that remain are of really high quality, they are managed conservatively, and they've all just delivered really strong performance over the past 12 to 18 months, particularly because a lot of them are tech biased.
“As people get to understand that, then you'll start to see the discounts close in.”
He added that despite the turmoil of the past year, the trust’s NAV grew 26%, an upgrade which is based on earnings growth rather than a movement in share price multiples – its holdings trade at a relatively modest 12x EBITDA (earnings before interest, taxes, depreciation and amortisation).
Source: Oakley Capital Investments
Some investors may be sceptical of these valuations, seeing as they are calculated by Oakley rather than independent analysts. However, Tredget said that if anything, they are too conservative.
“What you tend to find is you get this price discovery and a big multiple uplift at the point of sale,” he continued.
“Since inception in 2007, whenever we've exited a company, we've done so on average at a 44% premium to what we held it in the books at.
“But we don't make an investment assuming we get a multiple uplift.”
For example, Tredget recalled a premium schools business that Oakley built up over a number of years, adding additional sites trading on single-digit or low double-digit multiples. The trust ended up selling the business for “north of 20x” in 2019.
“The average premium we achieved that year was 89%,” the manager continued. “We’ve got a really robust NAV which is growing annually somewhere between 18 to 25% at the moment. Plus, the more realisations you do, the more additional growth there is in that.”
Oakley typically buys western or southern Europe-based companies in three main sectors: technology, consumer and education.
Regardless of which sector these companies operate in, the trust has a heavy bias to digitalisation – with 70% of holdings deploying their products or services in this way – and recurring or subscription-based revenues accounting for 75% of holdings.
The manager likes price-comparison websites and online property portals, saying that with much of Europe behind the UK in these areas, the trust has a head start.
One example is idealista, which performs a similar role to Rightmove or Zoopla, being the dominant online property portal in Spain and Portugal, and number two in Italy.
“The estate agents obviously now rely upon these portals, but the average spend isn't at the same level as in the UK, so you've got top-line growth and margin growth still to come through,” Tredget continued.
“To give you a sense of the comparison, though idealista is the number one across Spain and Portugal by a big margin, it is roughly a fifth of the value of Rightmove.
“We've got lots of these really exciting vehicles that are in a really strong sector, champions in their particular nations, and there is the opportunity to roll up because the market is fragmented and you can buy lots of smaller peers on lower multiples.
He added: “There's such a long runway to continue to take advantage of these trends. I don't think it's any leap of imagination that there is going to continue to be a greater adoption of digital models like these in the regions that we're invested in.”
Data from FE Analytics shows Oakley Capital Investments has made 284.5% since launch in August 2007, compared with 132.9% from the IT Private Equity sector and 108.4% from the FTSE All Share.
Performance of trust vs sector and index since launch
Source: FE Analytics
The trust is on a discount of 20.7%, compared with 24.9 and 27.9% from its one- and three-year averages.