NB Private Equity Partners 13 November 2019

NB Private Equity Partners (NBPE) is unique in the listed private equity (LPE) sector, given that the portfolio consists primarily of co-investments. It is now almost entirely invested in the equity of private companies. Given the range and quality of managers that NBPE invests with, the portfolio can be seen as a good representation of the top tier of US and global private equity deals.

NBPE is currently invested in a total of 120 companies, accessed through over 55 different third party private equity sponsors. The team hopes to increasingly focus its investments, making fewer but somewhat larger investments. At the current stage, the portfolio’s top ten equity holdings represent 26% of the total portfolio – not dissimilar to a traditional (quoted) equity fund.

With so many companies and ‘sponsors’, it is unlikely that investors are exposed to significant specific or key man risk. Whilst being diversified, NBPE offers exposure to a number of key industries: including technology, media and telecoms [TMT] (27%), healthcare (16%), industrials (14%) and consumer (16%). NB focuses on partnering with high quality sponsors, looking for specialist and deep industry knowledge from its partners, and an ability to source differentiated investments as well as deliver operational ‘value-add’ to investments.

With a high deal-flow of potential deals, and no obligation to invest in any of them, NB should be able to better maintain a fully-invested position for the trust, thereby reducing cash drag with, importantly, no pressure to commit to deals in the future. This is reflected in the numbers: NBPE remains the most fully invested LPE trust in the peer group.

In September 2018, the company announced a clarified dividend pay-out policy of 3% per annum, or greater dividend yield on NAV. At the 30 September 2019 share price, NBPE’s dividend yield was 4.2%, which compares with a 3.8% weighted average dividend yield for the AIC Global Equity Income and 3.9% for the AIC UK Equity Income sectors.

NBPE stands out in the LPE sector in being more highly diversified than directly investing peers, but (in contrast to fund of funds) attracts only one layer of fees on the vast majority of the portfolio. In our view, it can be seen as being a diversified exposure to the top tier of US and global private equity deals.

The co-investment model also has other advantages, not least that the manager is in control of when/whether investments are made, which avoids the need to over-commit or hold significant amounts of cash on the balance sheet. As a result, NBPE’s ordinary shares are the most fully invested in the peer group. Being geared clearly adds risks for investors, but it should also help NBPE’s NAV perform strongly if the current strong realisation environment continues.

Performance so far this year has built on NBPE’s strong track record. Over five years, the trust has achieved outperformance relative to its peers and the wider equity market. We see no reason why returns shouldn’t continue to be strong, although clearly if sterling appreciates significantly against US dollar, this will present a headwind for returns.

The board has largely completed its structural initiatives for narrowing the discount, and the new chairman seems determined to ‘finish the job’. The current share price discount to 30 September 2019 NAV of c.22% remains wide in absolute terms, as well as relative to peers. We see no reason why NBPE should not at least trade in line with peers, yet the discount is at its widest point in five years relative to peers.

We continue to view this as a high-quality fund that has bent over backwards to position itself for UK investors. The wide discount means the current share price is a potentially attractive entry point for those who want US and global private equity exposure.