NB Private Equity Partners (LON:NBPE) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.

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.

The bottom line is that target returns on recent deals have been the same as, or even marginally higher than, ones considered five years ago, but the way they will be achieved has changed.

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.