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NB Private Equity Partners: Co-investments generating superior performance

NB Private Equity Partners Ltd (LON:NBPE) private equity (PE) portfolio has co-investments, alongside 55 PE managers (GPs) in 90 high-secular-growth and downside-resilient private companies. PE provides access to a different universe of companies versus public markets, and, by adding value to investee companies, has generated superior returns. Co-investments with good cashflow characteristics and potentially higher returns are especially attractive. NB adds further value in GP and co-investment selection. NBPE’s 10-year share price total return is 4.2x the UK market. Exit uplifts prove a conservative NAV. Through multiple downturns, NBPE’s outperformance has proved its resilience.

  • Appeals of co-investment: Co-investment is appealing because it provides i) gross PE returns without the General Partners (GP’s) costs, delivering superior long-term returns, ii) control of pacing of new investments, and the potential for earlier realisations, iii) no blind-pool risk, iv) control of diversification, v) control over the investment process, and vi) double due diligence.
  • NB added value: To do co-investments well requires significant analytical resource, expertise and experience (to identify good investments and partners). It also needs good GP relationships, a track record of through-cycle investment, processes that respond rapidly and add value to GPs, and portfolio management. NB Private Equity Partners has them all.
  • Valuation: The 30% discount is above that of direct peers (average 24%), and it (like peers) rose sharply in 2022, to well above historical levels. Adjusting for the legacy income-investments (7% of portfolio), NBPE’s discount rises to 34%. The NAV appears resilient and conservatively valued, making the discount absolutely and relatively anomalous.
  • Risks: Sentiment to costs, the cycle, residual positions in highly rated listed companies following IPOs in 2020-21, the duration of the discount and valuation are the key issues for NBPE, as they are across the whole listed sector. As we detail, below, they are sentiment issues, and do not reflect reality, as we see it. The benefits from the current strategy may not yet be fully appreciated.
  • Investment summary: With over 92% of the portfolio invested in direct equity, NB Private Equity Partners is the most focused listed vehicle in the low-cost, attractive co-investment subsector of the market-beating PE sector. The company and GP selection have proved resilient in downturns, and consistent, large premiums on exit should give investors comfort in the NAV. Its portfolio is diversified by name, sector, GP and geographically, but it has enough concentration for individual investments to add value. The discount is anomalous with long-term, market-beating returns.
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    Q1: Your recent report sits behind a disclaimer, what can you tell us about that?

    A1: It is just the standard disclaimer that many investment companies have. In essence, for regulatory reasons, there are some countries (like the US) where the report should not be read. In the UK, because private equity (PE) is not a simple asset class, the report should be looked at only by professional/qualified investors.

    Q2: You called your recent piece ‘1H’23 results summary: continued growth’, can you tell us more your report?

    A2: We reviewed NB Private Equity Partners’ business model in our initiation, Co-investments generating superior performance. We noted the high-secular-growth and downside-resilient investee companies, the value added by partner GPs, the good co-investing cashflow and return profile and the value added by the manager, NB. The recent results confirmed all these trends.

    The key numbers were i) NAV p/sh $29.24 (£23.00) a substantial discount against the current share price of around £15.30, ii) 4.8% NAV TR at 30 June 2023, iii) portfolio company weighted average LTM 14.9% revenue and 15.4% EBITDA growth, iv) EV/LTM EBITDA 15.4x, v) debt/EBITDA 5.4x and vi) nearly $300m of liquidity, 6.6x its commitments (as a reminder, the co-investment model does not carry the same long-term commitments that investing in primary funds does).

    Taking a slightly longer-term view, the five-year gross IRR on direct investments has been 16.2%, with a 2.4x multiple to cost and an average uplift on exit of 38.2%.

    Q3: In previous interviews, you have discussed the attractions of the PE market as a whole. What is it about the co-investment sub-sector that makes it an especially attractive area?

    A3: With co-investments, an investor like this will not pay the General Partners (GPs) fees, but it still generates the gross PE return. This lower-cost model delivers superior long-term returns.

    Being focused on co-investments means NBPE has complete control over the pacing of new investments, which is also good for cashflow and liquidity management. There are no long-tail commitments and, in some cases, the potential for earlier realisations. There is no blind-pool risk as investments are made directly into known companies rather than making a commitment to a manager’s unallocated fund.

    The company has control over diversification and the investment process, and finally, investments are subject to the double due diligence of NBPE and the manager.

    Q4: NB Private Equity Partners recently held a capital markets day for investors, what were your key takeaways from that?

    A4: For us, it was all about EBITDA and earnings growth.

    The factors behind the historical outperformance in growth were outlined and, critically, going forward the levers NBPE’s partner managers have to grow EBITDA to offset higher interest costs.

    These include more opportunities to do bolt-on deals at attractive prices and secondly, many of NBPE investee companies have pricing power and so can pass on inflationary cost increase, and inflation is a key driver to a higher rates environment. To give just two examples, there are more opportunities for bolt-on deals.

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    Q6: We always conclude with any associated risks, what are the risks here?

    A6: Sentiment to costs, the cycle, residual positions in highly rated listed companies following IPOs in 2020-21, the duration of the discount and valuation are the key issues for NBPE, as they are across the whole listed sector. As we detail in our report, in our view, they are sentiment issues, and do not reflect reality, as we see it. The benefits from the current strategy may not yet be fully appreciated.

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