NB Private Equity Partners 03 November 2022
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by NB Private Equity Partners. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
NB Private Equity Partners (NBPE) offers a differentiated way to harness the strong return potential of private equity-investing. NBPE’s direct investment portfolio has been assembled through co-investments made alongside a range of private equity managers, resulting in a diversified portfolio of 94 companies, as at 30/09/2022. These companies have been chosen by the team at NB from their significant deal flow (see Management section) for the potential to deliver long-term growth and, specifically, for their attributes of low expected cyclicality and, therefore, defensiveness and/or their exposure to long-term secular growth trends.
NB have been focussing on five broad areas: technology, industrial/industrial technology, consumer & e-commerce and business and financial services, together constituting 82% of the portfolio, as at 30/09/2022 (see Portfolio section). This focus helped insulate underlying earnings during 2020 and delivered strong earnings’ growth as the global economy rebounded subsequently, and we think it might mean that earnings may prove resilient in the current economic climate. It goes without saying that this exposure is very different to most public equity indices.
The manager’s confidence about future prospects rests partly on the increasing maturity of the portfolio. The current average vintage is 3.9 years, so the portfolio may expect a healthy pace of realisations in future years once the current bout of market volatility subsides. Of particular note is the 45% of the portfolio invested in 2018 and 2019 vintages.
Co-investing enables NBPE to achieve a significant fee advantage over many peers. NBPE can invest in deals largely free of management and performance fees to the underlying private equity sponsors. The trust’s AIC OCF ex-performance fee, for the year to 31/12/2021, was 1.96%.
Private equity is a long-term investment asset class and LPE investors should also be taking a long-term view. 2021 was an extraordinary year for investment returns, with NBPE delivering NAV total returns of 45%. Realisations were a key driver of returns, but IPOs of holdings and febrile public equity markets meant that at the year-end, 20% of the portfolio was represented by public companies. NAV performance over 2022 needs to be seen in this context; NBPE’s NAV has declined by 11.2% on a total return-basis, based on the latest monthly factsheet, as at 30 September 2022, with private valuations as at Q2 2022. However, reflecting underlying valuations as at 30/06/2022, it is noteworthy that in constant currencies, private companies delivered a total return of 2.7% over the first half of the year. It is, therefore, public valuations which have dragged NBPE’s NAV USD-returns down.
As we note in the Performance and Discount sections, there is some uncertainty as to whether or how much public market falls, as well as the challenging macro-economic conditions we face, will lead to private company valuations being impacted. Certainly, as we heard at NBPE’s recent capital markets’ day, valuations of companies that require ongoing financing are being hit far harder than those that are profitable. We note that in this context, NBPE’s portfolio is not typically represented by early stage, pre-profitable companies. Rather, – like most buyout focussed funds – the majority of the portfolio is invested in EBITDA-positive companies, which don’t typically require further significant equity financing for continuing operations for the foreseeable future.
With the valuations typically lagging by two to three months, we would expect to start to see the full year earnings’ performance of the underlying companies being reflected in NBPE’s NAV in March/April 2023. With a share buyback potentially in prospect (see Discount), long-term investors may decide that a discount to NAV of 35% is an interesting entry point to harness the potential of NBPE’s differentiated portfolio of private companies.
- Unique investment strategy, with returns now driven by equity co-investments
- Manager has a high degree of control over the timing of new investments and, therefore, also over the balance sheet
- Wide discount in absolute terms
- Geared exposure to companies which are themselves often geared
- Underlying investments are illiquid
- Valuations of portfolio companies are performed relatively infrequently