Oakley’s Gibson on its €2.85bn raise, leverage and good co-investors

Pan-European investor Oakley Capital held the final close on its largest ever fund last week, amassing almost double the amount of capital compared with its predecessor vehicle.

Oakley Capital V raised €2.85 billion, as Private Equity International reported, and the firm welcomed 25 new investors in the process. PEI caught up with partner Rebecca Gibson to discuss how the London-headquartered firm plans to invest its fund, how it is navigating a higher interest rate environment, and what it looks for in a co-investment partner.

Bringing on 25 new investors in an environment like today is pretty impressive. Can you walk us through how this came about?

There are some [LPs] that we had identified as key strategic investors that we would help the business grow, that we’ve been engaging with for the last few years, keeping them up to date, making sure we have a very proactive communication programme with them. We’re also fortunate that as Oakley has being able to demonstrate consistent success, we’re constantly approached by other institutions and funds that want to come and invest. In prior funds, we’ve been oversubscribed and so they have been proactive in reaching out to us to make sure that they get on the radar early.

The cost of debt has gone up. How has this affected your investment strategy?

It certainly has affected how we approach underwriting transactions, it’s obviously a key part of the capital structure, but we’ve never been a particularly significant user of leverage. It accounts for a very small amount of our value creation. The vast majority is from organic growth and driving organic EBITDA growth.

We typically, when we’re looking at the debt offers, are turning down the top layers of PIK because we want to keep [the capital base] as moderately levered. We’re often buying founder-led businesses where we want to go in cautiously at the beginning, really understand the business, and then maybe, over time add leverage in. It’s not uncommon for us to buy a business on equity and then over time bring leverage in. For us it’s only part of the capital structure – it’s one we need to be very thoughtful about.

Obviously it does affect the universe of potential acquirers. When we’re looking at exits, we’re often selling to the large-cap private equity [firms] who are much more impacted by those decisions. From a wider market perspective, that’s one of the reasons why you’re seeing a slowdown: the bigger funds can’t raise the same level of debt as they could in the past. You’re seeing some innovative approaches, whether it’s buying in as a minority, to avoid having a change of control in the existing capital structures of businesses that do have excessive debt.

How do you plan to deploy a fund that is almost twice the size its predecessor?

The starting point is very much about getting the strategic right-sizing of the fund. We are focused on doing the best deals for our investors and getting the best returns, not just raising as much capital as we can.

We have always felt there’s more capacity to both expand the number of portfolio companies as well as continue to put a little bit more capital in. We’ve been a very active pursuer of buy-and-build strategies, taking a platform and adding on other assets to it –  those can require additional capital. Having a larger fund enables us to follow those winners for longer and put more capital to work in them.

When we were talking to investors, it was a combination both of a few more deals, a little larger ticket sizes and a little more firepower to go after the buy-and-build stories and the consolidation.

What do you look for in a good co-investment partner?

The strategic angle is obviously very compelling if [an LP] can help you unlock a deal or have a particular insight into a company. A lot of it is about understanding the certainty and process of that investor. We recognise some of the larger investors have teams and therefore are much more capable to move quickly compared to a smaller investment that may not have a dedicated team.

The best investor is one that can be very quick to respond; often they’ll give us a reply in a couple of days and it could be a very quick phone call. Is this a sector you might be interested in? This is the kind of scale, scope and time frame. The best co-investors will give us a very quick and direct answer. Once you’re involved in the deal together, it’s about transparency so that there’s a regular communication flow: you don’t want a nasty surprise the night before you’re signing that one of your co investors has suddenly decided they can’t go through with it. Also [important is] being able to run alongside and…have people that can understand the diligence; LPs with sector teams can often be better placed because if you’re looking at a particular sector where expertise is valuable, having a team that understands the sector, the dynamics, the business drivers, is obviously an advantage.

Rebecca Gibson is a partner at Oakley Capital whose responsibilities include managing the investment committee and the investment team, as well as leading the stakeholder engagement team. Prior to joining the firm in 2014 she was a partner at Cinven.