William Heathcoat Amory
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Updated 30 Sep 2022
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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.

  • Declines in the value of NBPE’s quoted holdings drove a fall in NAV of -8.1% on a total return basis to $1.3 billion ($28.67 per share) as at 30/06/2022, which compares to the MSCI World Index ($) return of -20.3%. Against this, and including the negative impact of foreign exchange movements on non-US$ investments, the valuations of NBPE’s private companies, as a whole, were broadly unchanged. In constant currencies, these companies delivered a return of 2.7% over the first half.
  • At 30/06/2022, the portfolio of 95 companies was valued at $1.4 billion, of which 88% was invested in private companies. Many of the companies have continued to perform well, and in some cases, have been written-up. However, these write-ups have been partially offset by private companies that have declined in value, reflecting a more difficult operating environment or lower public comparables, which declined from 17.4x to 16.5x, in aggregate, in the six months.
  • The Chairman said “We believe the portfolio is well positioned to navigate the current macro-economic headwinds. While NAV was impacted by a decline in value of our quoted holdings and negative foreign exchange movements in the first half, overall underlying operating performance remains positive, with companies growing revenue and earnings, despite the challenging backdrop.”

Kepler View

During the first half of the year, impacted as it was by macro-economic shocks that we are still grappling with, it is unsurprising that investment activity was muted, with the NB Private Equity Partners (NBPE) team investing in one opportunity (a $26 million investment in True Potential, a leading UK based wealth manager). That said, the team continue to see realisations from investments, with $114 million of announced transactions at an average 26% uplift to value three quarters prior to an exit announcement (to 31/08/2022).

Of more relevance in our view is the underlying earnings of the portfolio. Neuberger Berman (NB) generally aim to invest in companies which exhibit one or both of our two key themes: long term secular growth and businesses with lower cyclicality. The managers report that during the first half of the year their “private companies grew weighted average LTM revenue and EBITDA by 27% and 20%, respectively. Energy is not a significant input cost across the portfolio, and while we have seen some margin pressure in certain parts of the portfolio, we believe the portfolio is well positioned to navigate the current environment and deliver value over the long term”. Reflecting this, valuations have fallen only slightly through Q2 2022, with the managers commenting that private equity valuations in general hadn’t risen that much on the way up relative to public markets, and all else being equal, would not expect private equity valuations to fall as far on the way down, relative to public markets, provided earnings do not also fall significantly.

NBPE is currently 106% invested, which means the team is not under pressure to invest over the short term. The balance sheet remains strong, with total available liquidity of $371 million at 30/06/2022, represented by $71 million of cash and $300 million of available undrawn credit line. The company expects an additional $39 million of cash proceeds from announced realisations by year end and the final capital entitlement of £63.4 million ($76.4 million equivalent) for the 2022 ZDPs was repaid at the maturity date at the end of September.

The board state in the interims that they recognise the importance of income to shareholders, and so have maintained the dividend, despite the decline in NAV over the first half. Total dividends for the year so far represent a 30% increase relative to 2021, and an annual dividend yield of approximately 3.4% of NAV and 5.0% on the share price at 31/08/2022.

NBPE’s discount has widened significantly this year, as have investment trusts generally, and the listed private equity sector. JPMorgan Cazenove estimate that NBPE’s discount (adjusting the latest NAV for subsequent FX moves and share price changes of the c 12% of NAV exposed to quoted holdings) is c. 39%. One might reasonably expect that if the world tips into recession, then earnings growth will be impacted. However, NB point out that the private equity managers who NBPE invests alongside are high quality private equity managers with the skills and expertise to navigate challenging environments. They are also experienced at quickly getting onto the front foot to help investee companies benefit from competitors’ weakness. Certainly, NBPE’s portfolio underlying leverage of 5.7x on a net debt to EBITDA basis is higher than public markets, but we think it is a fair expectation that the resilience of the earnings and dynamism of the management teams mean these companies should outperform public market competitors. As such, a discount of 39% seems a more than adequate margin for error.

NBPE is holding a capital markets event on Thursday 6 October 2022 at 2pm.
Participants may 
register for the event here

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