NB Private Equity Partners — Key takeaways from the CMD 2022

NB Private Equity Partners (LSE: NBPE)

Last close As at 22/06/2024

1,560.00

4.00 (0.26%)

Market capitalisation

678m

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NB Private Equity Partners — Key takeaways from the CMD 2022

During NB Private Equity Partners’ (NBPE) capital markets day (CMD) on 5 October 2022, its management team highlighted that, despite the recent tough macro conditions, NBPE’s track record remains strong, as its direct co-investments delivered a gross IRR and multiple of invested capital (MOIC) at 18.5% pa and 2.6x over the five years to end-August 2022, respectively. With a sustained strong deal flow generated by the Neuberger Berman (NB) Private Markets platform (in which NBPE can invest on a case-by-case basis) and liquidity of US$281m at end-September 2022 (c 21% of current investment portfolio), NBPE is well-placed to seize new opportunities as they arise.

Milosz Papst

Written by

Milosz Papst

Director, Financials

NB Private Equity Partners

Key takeaways from 2022 capital markets day

Investment trusts
Private equity

24 October 2022

Price

1,580p

Market cap

£738.8m

NAV*

£1,141.0m

NAV*

US$1,273.9m

NAV per share*

£24.40

NAV per share*

US$27.24

Discount to NAV

35%

*As at end-August 2022.

Yield

5.3%

Shares in issue

46.8m

Code Ord/ISIN

NBPE/GG00B1ZBD492

Primary exchange

LSE

AIC sector

Private Equity

52-week high/low

US$26.18

US$15.61

US$31.65

US$27.70

Gearing

Net gearing at 30 September

6.8%

Fund objective

NB Private Equity Partners invests in direct private equity investments alongside market-leading private equity firms. NB Alternatives Advisers, an indirect wholly owned subsidiary of Neuberger Berman, is responsible for sourcing, execution and management of NBPE. Most direct investments are made with no management fee or carried interest to third-party general partners. NBPE seeks capital appreciation through growth in net asset value while paying a biannual dividend.

Analysts

Milosz Papst

+44 (0)20 3077 5700

Michal Mordel

+44 (0)20 3077 5700

NB Private Equity Partners is a research client of Edison Investment Research Limited

During NB Private Equity Partners’ (NBPE) capital markets day (CMD) on 5 October 2022, its management team highlighted that, despite the recent tough macro conditions, NBPE’s track record remains strong, as its direct co-investments delivered a gross IRR and multiple of invested capital (MOIC) at 18.5% pa and 2.6x over the five years to end-August 2022, respectively. With a sustained strong deal flow generated by the Neuberger Berman (NB) Private Markets platform (in which NBPE can invest on a case-by-case basis) and liquidity of US$281m at end-September 2022 (c 21% of current investment portfolio), NBPE is well-placed to seize new opportunities as they arise.

NBPE’s historical NAV TR vs MSCI World Index

Source: NBPE. Note: TR in US dollars to end-September 2022.

Earnings growth offsetting multiples contraction

NBPE’s NAV TR in US dollar terms over the last 12 months (LTM) to end-September 2022 was c -10% and the ytd decline c 11%. Private valuations remained resilient with a 2.7% ytd increase in local currencies to end-June 2022 due to a combination of portfolio resilience and some technical aspects of private equity (PE) valuations (see our previous note for details). This was offset by lower share prices of listed holdings amid a broader public markets downturn, as well as a negative FX impact from the US dollar appreciation as 75% of NBPE’s portfolio is in North America (NBPE’s LTM NAV TR in sterling terms was up 10%).

Portfolio results (including both organic growth and M&A) remain robust with LTM revenue and EBITDA growth to end-June 2022 of 27.2% and 20.1%, respectively (18.4% and 16.2% excluding a large acquisition by one holding). Growth has been broad-based, with over 95% and 80% of portfolio companies (by value) reporting top-line and EBITDA increases, respectively. Still, some holdings (especially in the industrial and consumer sectors) experienced margin pressure from cost inflation.

Overall, growth in private portfolio earnings offset the softening valuation multiples (average LTM EV/EBITDA down to 16.5x at end-June 2022 vs 17.4x at end-2021). Average net debt to EBITDA rose to 5.7x from 5.2x at end-2021, partially driven by M&A (most of the debt is floating rate). Importantly, 73% of NBPE’s investments by value have covenant-lite or no debt, 65% of the debt matures later than 2026 and overall debt represents on average c 35% of capital structures at present, providing a good degree of flexibility.

NB continues to see a healthy and growing deal flow

NBPE benefits from the deal origination network of the NB Private Markets platform, underpinned by NB’s extensive relationships with top general partners through positions as limited partners in more than 595 third-party funds and 260+ advisory board seats across multiple NB private equity/debt strategies, in particular the primary PE platform. This has been further supported by NB’s expertise in making both traditional co-investments (as part of a syndication process following deal closure by the lead sponsor), as well as more complex co-investments. The latter include deals in which NB works side-by-side with the lead sponsor on co-underwriting the transaction (45% of co-investments completed by NB between 2009 to Q122), as well as mid-life deals, ie investments in an existing portfolio company of a GP to provide additional capital for growth/add-on acquisitions, recapitalisations or partial exits of existing shareholders (22% of deals over the above period). All this has been driving a growing number of co-investment opportunities (see Exhibit 1).

Exhibit 1: Co-investment opportunities originated by NB Private Markets platform

Source: NBPE; Note: ytd figure to end-September 2022

In the current environment, certain groups of limited partners refrain from new co-investments due to portfolio allocation constraints, often arising from the so-called denominator effect (ie increasing portfolio share of PE investments due to a less significant de-rating compared to listed equities exposure). This represents an opportunity for NBPE as an experienced co-investor to gain market share. Nevertheless, we note that for now fundraising and deal volume in the PE space has slowed down after the record-high levels last year (according to Preqin and Pitchbook, respectively, as cited by NBPE). Moreover, we believe buyers’ and sellers’ expectations are yet to fully converge, and current deal activity is largely focused on quality assets which are not subject to material downward price adjustments.

Together with the macro uncertainties, this led NBPE to remain highly selective in terms of new investments. So far in 2022, the company completed two new co-investments: a US$26m investment in True Potential (a wealth management technology platform for advisors and retail clients) and another US$15m investment in an undisclosed (due to confidentiality provisions) company. Having said that, NBPE maintains its focus on companies exposed to long-term secular growth trends and/or low expected cyclicality and NB remains positive on the long-term outlook of its portfolio despite the multiple macroeconomic and geopolitical challenges at present.

Ample firepower for new investments and buybacks

We note that NBPE is in no rush to step up its new investments, as it maintained an investment level (defined as total investments to NAV) of 107% at end-September 2022 and following the redemption of its 2022 zero dividend preference (ZDP) shares on 30 September 2022, it held only a minor cash balance of US$6m. Still, it has sufficient dry powder with liquid resources of US$281m at end-September 2022 (c 21% of current investment portfolio), including US$275m of available credit facility (which matures in 2029), as well as US$39m of net proceeds expected in 2022 from announced (and not yet closed) realisations. Due to the above and its flexible co-investment model, NBPE does not have any significant unfunded commitments. Overall, NBPE said during the CMD that it expects the realisations announced and closed so far this year to generate US$114m in proceeds (US$119m indicated in the subsequent September NAV release, ie c 8% of portfolio value at end-2021) at an uplift of 26% (vs carrying value three quarters prior) and a strong MOIC of 2.7x. NB acknowledges though that near-term exit volume may be below the record-high level seen in recent years.

Exhibit 2: NBPE’s current liquidity position at end-September 2022

Source: NBPE. Note: outstanding commitments exclude US$49.8m of commitments unlikely to be drawn.

Amid the wide discount to NAV of 35% (versus five-year average of 26%), NBPE recently announced that it has entered into a new buyback agreement with Jefferies. Share repurchases may be executed at the discretion of Jefferies, subject to the criteria set by NBPE’s board including, among others, the absolute level of discount, NBPE’s discount compared with a peer group as well as broader equity market movements. The NAV accretion coming from prospective share repurchases is an additional benefit to shareholders on top of NBPE’s attractive dividend yield of c 5.3% at present (based on a policy assuming an annualised dividend at 3% of opening NAV, paid semi-annually). NBPE’s LTM dividend payment of US$0.94 per share represents a healthy 30% y-o-y increase and we note that the company maintained the latest interim payment at a level in line with the previous one despite the decline in NAV (the LTM dividend is 2.6x covered by realisations announced so far in 2022).

Case studies from Thoma Bravo and Platinum Equity

During the CMD, representatives of two of the lead private equity firms NBPE invested alongside presented case studies of two of NBPE’s underlying portfolio companies, which was a good opportunity to hear first-hand from these leading private equity firms.

Tara Gadgil (partner) from Thoma Bravo, a leading specialist investor in software companies with whom NB has a relationship of over 20 years, discussed the investment in RealPage, a cloud-based platform provider for the multi-family rental industry. Thoma Bravo and its co-investors took the company private in April 2021 and facilitated the company’s succession planning process, leading to the appointment of a new CEO. The lead sponsor also facilitated a cost optimisation programme which resulted in US$83.3m cost savings by end-2021 (targeting 2022 run-rate cost savings at US$93m). Moreover, since the take-private deal completion, RealPage completed four acquisitions with a total enterprise value of c US$800m (with further M&A in the pipeline). As a result, the company’s EBITDA target for 2022 is US$551.2m vs US$324.7m posted in 2020. NBPE’s investment in RealPage was valued at US$13.8m at end-August 2022, or c 1% of its NAV.

Jacob Kotzubei (partner) from Platinum Equity presented the case study of Solenis, a provider of specialty chemicals and mission-critical services focused on solving environmental and sustainability challenges of water-intensive businesses in sectors such as pools, packaging, consumer products, municipals and industrials. The company has over 1,700 patents and targets 2022 sales and pro forma adjusted EBITDA of US$4.4bn and US$675m, respectively, which implies a significant increase in profits from the moment of being acquired by Platinum Equity in November 2021, driven by a combination of operational improvements and add-on acquisitions.


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This report has been commissioned by NB Private Equity Partners and prepared and issued by Edison, in consideration of a fee payable by NB Private Equity Partners. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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60325 Frankfurt

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London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by NB Private Equity Partners and prepared and issued by Edison, in consideration of a fee payable by NB Private Equity Partners. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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