Oakley Capital’s Steven Tredget: Higher rates ‘may be healthier’ in long run for PE

In the latest of PE Hub Europe’s interviews with dealmakers on the outlook for the second half of 2023, we spoke to Steven Tredget, a partner at Oakley Capital. Oakley is a private equity firm with offices in London, Milan, Munich and Luxembourg, which has raised six funds and has €9 billion in assets under management.

As Tredget touches on in the interview, Oakley has been involved in a variety of deal types over the last few months, including a triple carve-out from Nordic Capital-backed European Dental Group, an add-on by its SaaS portfolio company ECOMMERCE ONE and a continuation fund for private university IU Group.

What is your forecast for the economy? What are you expecting in terms of dealflow in the second half of the year?

We do not expect immediate improvement to the macroeconomic environment and industry-wide dealflow. Our view is that this period of adjustment where GPs must adapt to a new high interest rate environment may be healthier for the industry in the long run, prompting heightened and justified caution from both buyers and sellers.

Oakley has a 20-year track record of investing through economic cycles, and we have drawn from this experience to cautiously deploy capital throughout the first half of the year, investing in both new platform deals and bolt-ons for existing portfolio companies. Key to our success so far has been a flexible and innovative approach to dealmaking across multiple European geographies. We do not see this changing in the next six months.

Market uncertainty and dislocation can create new kinds of opportunities. More founders are looking for alternative financial partners to support their businesses and expand as conventional debt is less readily available. As a result, we have a strong and growing pipeline and expect to be active in the second half of the year.

As for the industry itself, private equity is a resilient asset class with a significant amount of investment dry powder available, so we anticipate a steady dealflow across the market in H2.

What kind of deals can get done today? Are there subsectors – or types of companies – that are recession-resilient?

The Oakley team has had a busy start to the year, completing a variety of deals ranging from a continuation fund, acquisitions, carve outs, bolt-ons and a minority stake investment undertaken across multiple regions in Europe. We continue to be innovative in the way we are structuring deals to ensure we are thoughtfully deploying capital on behalf of our LPs.

The challenging macro-environment has not deterred our signature strategy of buying and building companies in early-stage development, often with a high degree of potential for digitalisation and consolidation within a fragmented market. Our investments aim to accelerate these two processes and create market leaders and disruptors who can seize market share rather than relying on an expanding market for their growth.

Often undertaken bilaterally, these investments are the result of long-term, continuing collaboration and engagement with our extensive network of founders and entrepreneurs. This origination process has allowed us to access investments outside of competitive auction processes, with founders more focused on the future partnership, available expertise and value creation, rather than price maximisation.

Additionally, many of our add-ons and platform-building deals are funded through equity rather than debt financing, which has helped us reduce some of the impact being felt in the market by the high interest rate environment.

Our investment approach of targeting mission-critical and non-discretionary services with sticky revenue streams and an abundant opportunity for digitalisation has also helped our portfolio companies mitigate the negative effects of the current economic environment.

What are the opportunities for technology investing in H2? Is Generative AI on your dealmaking radar?

We invest behind enduring megatrends that we believe have many more years to run and will continue to deliver growth over the medium term and through economic cycles.

Across Europe, a remarkable amount of small- and medium-sized businesses are digitally immature, and in turn there are many regions in Europe where adoption of digital solutions remains low. Both present Oakley with the opportunity to repeat its success of taking advantage of the market disruption caused by digital solutions as they establish in a geography or industry for the first time.

There is no doubt that Generative AI represents the next generation platform shift, in the wake of the internet, smartphones and cloud computing. The investment opportunity will be significant, as will the impact on existing businesses. To navigate this paradigm shift, we have recruited deep expertise in this space, helping us identify both opportunities and threats and providing our current portfolio companies with the insight and guidance to take advantage of the technology.

The scope for leveraging Generative AI is vast, with areas of value creation including content creation, data infrastructure, process automation, predictive analytics and customer insights. One area of particular interest to Oakley is the opportunity within education and the personalised support AI can provide students. An example being Oakley-backed IU Group, Germany’s largest and fastest growing university, which has introduced an AI teaching assistant, Syntea, to help students to achieve better education outcomes.

Each successful application will become a case study to educate other portfolio companies on how to leverage the technology, and consequently to help identify potential transformational AI-related bolt-ons. We are also looking to invest in companies whose generative AI services can contribute to elevate the performance of other portfolio businesses.

Editor’s note: PE Hub Europe’s interviews with private equity professionals will appear throughout August and early September. Read our interview with Ardian’s Thibault Basquin here.