NB Private Equity Partners 13 November 2023

NB Private Equity Partners (NBPE) is differentiated from its peers in the sector because of the sole focus on co-investments, made on a deal-by-deal basis alongside third-party private equity managers, often free of underlying management fees (see Charges).

NBPE’s portfolio of 88 private companies benefit from two core themes – long-term secular growth and/or lower expected cyclicality. The portfolio is predominantly US focused (74%) and is well diversified; key sectors are technology, consumer and e-commerce, industrial technology and financial / business services.

NBPE’s portfolio represents exposure that traditional equity investors cannot otherwise access. As majority owners of businesses, private equity managers are in control of the strategy, and focus on improving the operating performance of businesses, generally taking a longer-term view than publicly owned companies. As we highlight in the Performance section, this is showing up in the underlying operating metrics of the portfolio, with double-digit revenue and earnings growth despite the significantly changed economic landscape.

Over the last five financial years, NBPE has been a strong performer relative to the MSCI World Index. The private company portfolio continues to perform, increasing by 3.8% on a constant-currency basis in H1 2023. In our view, this is a result of the strong deal origination and company selection of the team at Neuberger Berman (NB). Long-term NAV outperformance has been driven by the direct private equity investments, which have achieved a gross IRR of 16.2% (five years to 30/09/2023).

As at 30/08/2023, NBPE is 8% geared. As we discuss in the Gearing section, this is relatively low compared to its history and the target range. It reflects not just an element of caution from the managers, but also a desire to be in a position to take advantage of opportunities as they arise. NBPE has plenty of firepower to take advantage of opportunities.

NBPE held a capital-markets event recently, discussing the changes that the higher interest rate environment brought, and what this means for the private equity market and portfolio. One important aspect is underlying companies are increasingly performing add-on M&A transactions. When achieved, these sorts of transactions can be transformational in gaining scale or efficiencies, and therefore in helping to drive value. In NBPE’s Top 30 companies, 70% have completed M&A during ownership. NB believe that M&A transactions allow NBPE to put capital to work in companies that are performing and well known to the private equity sponsors.

For a number of reasons that we discuss in the Portfolio section, private capital is currently more constrained. As a result, the managers are seeing a significantly higher level of potential co-investment deal activity this year. NB note that sponsors are generally not lowering their expected IRR’s for new investment, nor expecting valuation increases to drive holding-period returns. Instead, earnings growth and M&A are the main drivers underwritten for value growth.

Elsewhere NBPE’s long-term capital allows it to participate in reinvestment opportunities, allowing shareholders to continue to benefit from backing proven winners. Private equity managers, such as those whom NBPE co-invests with, have historically proved adept at driving value creation within their investments. Whilst the economic backdrop remains challenging, investors who are taking a long-term view may see the current discount (see Discount section) to NAV as a potentially attractive entry point.