NB Private Equity Partners 28 October 2020
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) is a London-listed private equity investment company. It has a unique approach to investment – through direct equity co-investments. However, the shares have de-rated dramatically (along with the entire sector), and in share price terms remain behind equity markets despite the portfolio having shown marked operational resilience to COVID-19.
A lack of liquidity during the crisis, perceptions of NBPE being more highly geared than peers (as discussed elsewhere, we believe this worry is overdone) and general uncertainty on what is an illiquid asset class have all weighed on sentiment. The result is that the discount to NAV is currently c. 25%.
The recent NBPE capital markets event showed that the underlying businesses in the portfolio have largely been resilient, with few companies giving particular cause for concern. Part of the reason for this is down to the investments having been selected for the ‘late cycle’. EBITDA growth supports claims of defensiveness: for 77 private companies (representing 84% of the direct portfolio), EBITDA growth over the 12 months to 30 June 2020 was 2.4% on average.
Realisation activity is a key area of attention for investors, providing liquidity with which NBPE pays Dividends (yield of 4.3% p.a.) and also driving NAV growth. The average age of NBPE’s portfolio has been increasing, and YTD (31 August 2020) 10% of the portfolio has been realised. On a run-rate basis, this is in line with 2019. Neuberger Berman indicated that many private equity managers are working on achieving exit transactions before the end of the year (not specific to NBPE), which could result in some activity within NBPE’s Portfolio.
The managers approach differentiate NBPE from all other LPE funds. However, this year’s sell-off has hit NBPE’s share price more than most. In our view this is an opportunity for long-term investors who want exposure to the excellent returns from private equity, but who also stand to benefit if the discount to NAV narrows.
In our view this discount is unwarranted. Identifying catalysts for the discount to narrow are not necessarily easy, but realisation activity would be a positive given that it will bring down gearing as well as itself likely being a driver of NAV growth. The end-of-December valuations for the portfolio will also potentially demonstrate resilience. Certainly, a recent update showed the portfolio was performing in line with expectations given the manager’s ‘late cycle’ positioning in sectors typically less impacted by COVID-19, such as technology, healthcare and certain consumer sectors.
Overall, we believe that the market is overly focussed on NBPE’s gearing level. By investing through direct equity co-investments, the managers are making investment decisions in ‘real time’ – that is, without the need for significant long-term unfunded commitments. This represents a significant advantage relative to peers, given the managers have proper control of their balance sheet. As such, in our view the higher gearing doesn’t necessarily mean that NBPE is the riskiest. We believe the current discount potentially represents an attractive entry point, particularly if the board soon finds itself in a position to resume buybacks.
|Unique investment strategy, historically having delivered sector-leading returns
|Geared exposure to companies which are themselves often geared
|Manager has a high degree of control over investments, and therefore also over the balance sheet
|Illiquid underlying investments mean liquidity needs to be managed
|Wider discount to historical NAV
|Valuations on portfolio companies are performed relatively infrequently