Apax goes for gold in Brazil

CIO Nico Hansen says he expects the firm to ‘add one or two Brazilian portfolio companies’ in the second half of the year.

Apax Partners is likely to seal “one or two” investments in Brazil this year, according to Nico Hansen, the firm’s chief investment officer. Hansen spoke during an update to public investors in London-listed Apax Global Alpha (AGA), which invests in Apax’s funds.

Hansen said that as “valuations generally are elevated and deal-doing is anything but trivial”, Apax intends to continue to focus on exits in the next six months.

“We believe that in the second half of 2016 there are a few political risks ahead, which could eventually lead to lower valuations in the capital markets overall,” he said.

However, Hansen said the firm was seeing “reasonably attractive” corporate carve-out opportunities.

“It’s mostly around revitalising what previously were corporate orphans,” he said of the attraction of such transactions.

“There are some attractions around carve-out processes also because they’re very complex, which effectively makes it harder for a seller to engage with multiple, for example, private equity houses. Most of these discussions are actually on a one-on-one basis, which doesn’t necessarily make it cheaper but it allows you actually [to do] more in-depth due diligence and also to plan for the future in more detail.”

Lower valuations in Europe make the region more attractive than North America, while Brazil and India are eclipsing China in emerging markets, Hansen said.

“I wouldn’t be surprised if in the second half of 2016 we were adding one or two Brazilian portfolio companies,” he said.

“I think China is somewhat more difficult to invest in because of macro concerns than India. However unfortunately other investors seem to be perceiving the same and so Indian valuations have gone up quite considerably.”

The listed entity (AGA) reported a total return for the first half of 2016 of -0.6 percent as market volatility and foreign exchange movements took their toll.

“AGA had a stable performance in what has been a continually volatile market environment,” Nico Hansen, chief investment officer of Apax Partners and a member of AGA’s investment committee, said in an earnings call.

AGA reported an adjusted NAV of €894.4 million, down from €923.6 million at 31 December 2015 which, it said, was due to payment of a semi-annual dividend of 3.95 pence per share, fair value declines in its derived debt portfolio, and foreign exchange losses of €11 million for the half.

Apax funds returned €38.7 million to the listed investor, the majority of which came from the 2011-vintage $7.5 billion Apax VIII.

“Despite a pretty weak exit environment due to ongoing market volatility, the Apax private equity funds managed to successfully execute 10 realisations in the period,” Hansen said.

Of those 10, four have completed, generating an average internal rate of return of 36 percent. These include the sale of New York-listed King Digital Entertainment, which generated gross money on invested capital of 93x and an internal rate of return of 55 percent.

“The attractive returns that were achieved came from a nice mix of public market transactions and disposals to private acquirers,” Hansen added.

Three more portfolio companies were partially realised, one – Nordic IT services provider Evry – was refinanced, and two further exits were announced.

Hansen said Apax funds have “a good track record of under-promising and over-delivering” on exits.

“The average uplift between realisation values and prior book values was 25 percent on exits since the beginning of last year, and I believe this speaks to both how we conservatively value the portfolio companies and also how we intelligently manage exit processes to maximise value.”

On the acquisition side, Apax funds closed just one investment – the take private of Italian IT services provider Engineering – and announced three more, including the acquisitions of two European pharmaceuticals companies, neuraxapharm in Germany and Invent Farma in Spain, which it will combine.

AGA also finalised its $350 million commitment to Apax IX, which is currently in market. The firm has already raised more than its $7.5 billion initial target, and has set a hard-cap of $9 billion, as reported by Private Equity International.