NB Private Equity Partners (LON:NBPE) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: Your recent report sits behind a disclaimer. What can you tell us about that?
A1: It is just the standard disclaimer that many investment companies have. In essence, for regulatory reasons, there are some countries like the US where the report should not be read. In the UK, because private equity is not a simple asset class, the report should be looked at only by professional/qualified investors.
Q2: You called your recent piece ‘Co-investments generating superior performance, what can you tell us about it?
A2: NB Private Equity Partners’ portfolio has co-investments, alongside 55 PE managers (GPs) in 90 high-secular-growth and downside-resilient private companies.
PE provides access to a different universe of companies versus public markets, and, by adding value to investee companies, has generated superior returns. Co-investments with good cashflow characteristics, and potentially higher returns, are especially attractive.
The company adds further value in GP and co-investment selection. NBPE’s 10-year share price total return is 4.2x the UK market. Exit uplifts prove a conservative NAV. Through multiple downturns, their outperformance has proved its resilience.
Q3: In previous interviews, you have discussed the attractions of the PE market as a whole. What is it about the co-investment sub-sector that makes it an especially attractive area?
A3: Co-investment is appealing because i) with co-investments, an investor like NBPE does not pay the General Partners (GPs) fees, but it still generates the gross PE return. This lower-cost model thus delivers superior long-term returns and the independent research supports this conclusion, ii) being focused on co-investments means they have complete control over the pacing of new investments, which is also good for cashflow and liquidity management. There are no long-tail commitments and, in some cases, the potential for earlier realisations, iii) there is no blind-pool risk as investments are made directly into known companies rather than making a commitment to a manager’s unallocated fund, iv) the company has control over diversification and the investment process, and finally vi) investments are subject to the double due diligence of the company and the manager.
Q4: How does Neuberger Berman add value to this attractive sub-sector in an attractive market?
A4: To do co-investments well requires significant analytical resource, expertise, and experience, so it needs a scale manager. It also needs good GP relationships, a track record of through-cycle investment, and processes that respond rapidly and add value to GPs.
Investors need to be selective in co-investments, and the company is currently invested alongside just 55 GPs, which can be compared with the 320 GPs whose opportunities were considered in 2022 alone. NB’s model has generated strong growth in potential deals it originates, which are up from 4.4 per week in 2017 to 10.9 per week in 2022. It ensures a balanced portfolio by geography, sector and maturity.
The bottom line is that NB Private Equity Partners has seen five-year CAGR NAV growth of 14% in dollar terms (sterling 17%), driven by the strong EBITDA growth in the investee companies, which has averaged mid-teens over this period.
Q5: What about the risk?
A5: Sentiment to costs, the cycle, residual positions in highly rated listed companies following IPOs in 2020-21, the duration of the discount and valuation are the key issues for NB, as they are across the whole listed sector. As we detail in our report, in our view, they are sentiment issues, and do not reflect reality, as we see it. The benefits from the current strategy may not yet be fully appreciated.
