Results analysis: NB Private Equity Partners

• NB Private Equity Partners (NBPE) has released its financial results for the year ending 31 December 2021. The trust had its best year on record, delivering NAV total returns of 44.8% in USD terms and share price total returns of 65.0% in GBP terms. This also marked the third consecutive year that NBPE has delivered double-digit NAV total returns for shareholders.
• Underpinning this record year of performance was continued strong operating performance, with revenue and EBITDA growth of 27% and 28% respectively and a record level of realisations. In total, 14 companies announced full or partial exits, at an 83% increase relative to prior year valuations and a 3.3x multiple of cost.
• Those exits and other portfolio realisations resulted in $389m of proceeds. NBPE now has $402m of available liquidity, with $102m in cash and $300m from an undrawn credit line. However, NBPE’s investment level currently sits at 107%, meaning the trust can afford to be selective when making new investments.
• NBPE has a policy to pay an annualised yield of 3.0% of NAV through semi-annual dividend payments to shareholders. NBPE’s dividends to shareholders in 2021 totalled $0.72 per share, an increase of 24%. In January, the first 2022 semi-annual dividend of $0.47 per share was announced, representing a further increase of 15% from the August 2021 dividend.
• The increase in volatility in public markets in YTD has impacted NBPE’s listed holdings, which make up about 17% of the portfolio. This has resulted in NAV total returns of -3% in Q1 2022. It is important to note that none of the Q1 2022 valuations of private companies have been incorporated yet.
• We understand the trust managers continue to evaluate prospective investments and believe there are plenty of opportunities that the trust is well-placed to take advantage of.
• Peter Von Lehe, Managing Director and Head of Investment Solutions & Strategy at Neuberger Berman said: “During the year, we saw continued strong operating performance across the portfolio. On average, the portfolio companies generated weighted average LTM revenue and EBITDA growth of 27% and 28%, respectively. We think this performance speaks to the quality of the companies in the portfolio and the benefits of its positioning around two core themes, long-term growth and/or low cyclicality.”

Kepler View

Realisations have been one of the driving forces behind much of NB Private Equity Partners' (NBPE) success over the past three years and 2021 was no exception. A raft of dealmaking helped drive strong returns, as well as valuation increases as a result of strong operating performance from the existing portfolio. On a weighted average basis, the companies in the underlying portfolio generated LTM revenue and EBITDA growth of 27% and 28%, respectively in 2021, well ahead of most listed equities. With an average age of private investments of 3.4 years, value creation is well-underway across the portfolio. In addition, value increases across the portfolio were driven from holdings which IPO’d and which NBPE continues to own shares in. At the year end, 17% of NAV was represented by public holdings, some of which are represented in the largest individual holdings in the portfolio. Given the falls in public markets since the financial year end, this has been the driving contributor to the fall in NAV we have seen since then.

The strong performance during the year reflects the rigorous process the team uses to assess potential investments, not to mention the underlying strength of the companies in the portfolio in terms of revenue and earnings growth. The team prefer companies and sectors backed by megatrends, with high-growth or secular tailwinds, and in many cases, high barriers to entry or the delivery of mission-critical products or services. Key sectors include technology, industrials and industrial technology, consumer/e-commerce and business and financial services.

NBPE’s goal is to invest in private companies and deliver long-term capital appreciation to shareholders and income through the semi-annual dividend. It attempts to do this by co-investing alongside private equity managers with whom NB has strong relationships. This means that it gets access to lots of deal flow, often on a management fee and performance fee-free basis.  Importantly, in this way the investment manager’s team can manage cashflows and deploy capital in a nimble and efficient manner, without the need to over-commit to funds or add more balance sheet risk.

The current macroeconomic environment continues to pose challenges making the outlook even harder to assess than usual. Keeping that caveat in mind, there are reasons to be optimistic about NBPE. The trust is diversified across multiple sectors and private equity managers leading each deal. In addition, speaking to NB, they believe their long-term focus on secular growth and low cyclicality has positioned the portfolio relatively well for an inflationary environment, with many companies in the portfolio able to pass on higher input costs. Energy is not a significant input cost across the portfolio and many of NBPE’s portfolio companies provide critical solutions to their clients.

NB believe that strong revenue and earnings growth alongside strong EBITDA and gross margin profile, with negligible margin compression across the portfolio in 2021 bode well for 2022. In terms of valuations, public market comparables have fallen so far during 2022, which perhaps implies that the NAV may have further to fall once these lower valuation multiples are factored in, although its important to note that private equity valuations have not historically been as volatile as public markets. The discount to NAV has widened significantly since the year end, from c. 17% to the current level of c. 34.7%, suggesting the market is already adjusting for the more difficult market conditions.

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