NB Private Equity Partners 28 May 2024

NB Private Equity Partners (NBPE) approach is distinct from peers, and in our view offers investors an interesting vehicle with which to harness the strengths of the private equity investment model.

In focussing only on their highest conviction co-investment opportunities, NB aims to tilt the odds for shareholders. The team favour companies that demonstrate a high degree of financial resilience. These characteristics show up in the NBPE portfolio’s impressive revenue and earnings growth. In particular, over 2022 and 2023 which might both be considered ‘tough’ years, as we show in the Portfolio section, NBPE’s portfolio has significantly outpaced the MSCI World Index in these years—proving more resilient and we understand at times surprising on the upside.

2023 was a relatively slow year for private equity exits, with industry-wide deal volumes about 30% lower than in 2022, and about 45% lower than 2021 levels. On the other hand, NBPE’s portfolio generated $171m of cash proceeds from 12 partial and full exits during 2023. As such, NBPE is bucking the industry trend, with 2023 representing a 42% increase relative to 2022. NBPE’s managers believe this is reflective of the high-quality, and the “in demand” nature of many of the companies in the portfolio. With almost 50% of the portfolio being pre-2020 investments, the ‘harvesting stage’ is getting closer.

Long-term NAV outperformance has been driven by direct private equity investments, which have achieved a gross IRR of 14.8% (five years to 31/12/2023). As we discuss in the Performance section, this has resulted in NBPE outperforming the peer group average and global indices in NAV and share price terms over five years. In 2023, the performance of public holdings weighed on NBPE’s NAV performance, masking the continued growth from the private companies (+5.5% in local currencies), so the outperformance gap over five years has narrowed.

With realisation activity having increased in H2 2023, NBPE has stepped up the pace of investment in 2024. NBPE has a number of competing options for its cash, including the Dividend, buybacks, or funding investments. Any option must further consider the maturity of the 2024 ZDPs in October, which the board have announced their intention to repay. As we discuss in the Gearing section, NBPE has a strong balance sheet which gives the managers and board plenty of flexibility to be opportunistic.

In our view, as we discuss in the Discount section, buybacks will continue to be opportunistic and tactical, and the dividend will remain the main way capital will be returned to shareholders. We think the board’s three pillars make sense over the longer term. Absent an aggressive buyback programme, lower interest rates, growth in the underlying private equity companies, and higher realisation activity may be catalysts for the discount to narrow.

Whilst realisation activity is arguably the most visible value driver for private equity portfolios, it is very far from being the only driver. As we discuss in the Portfolio section, private equity managers have plenty of other levers at their disposal to drive value creation within portfolios. NBPE’s underlying companies continue to deliver strong growth and are increasingly mature. This means that if interest rates start to fall, precipitating a rebound in deal activity, NBPE should be in a strong position to capitalise. Investors who are taking a long-term view may see the current discount to NAV as a potentially attractive entry point.