NB Private Equity Partners (LON:NBPE) is the topic of conversation when Hardman & 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 ‘Wider operating company EBITDA margins in 2023’, what can you tell us about it?
A2: We reviewed NB Private Equity’s business model in our initiation ‘Co-investments generating superior performance’, noting the high-secular-growth and downside-resilient investee companies, the value added by GPs, the good co-investing cashflow and return profile and the value added by the NB. The 2023 results, which we reviewed in the most recent note, confirmed all these trends.
In particular, we note the portfolio company weighted average last 12-month growth in revenue and EBITDA was 11.4% and 15.2%, respectively. Margins widened despite market challenges, going some way to offsetting higher interest costs.
The key numbers were i) NAV p/sh $28.07 (£22.02), the current share price is $21, or £16.30, or trading at a 25% discount to NAV, ii) private portfolio +5.3% in 2023 on a constant currency basis, iii) EV/LTM EBITDA 14.9x, and iv) debt/EBITDA 5.3x.
Q3. You say the widening EBITDA margin particularly caught your attention. Why is that so important?
A3: In our note, ‘Value creation in a higher-rate environment’, we examined how their GPs’ unchanged target returns could be achieved despite a higher-rate environment. Across the NB platform, the net IRR target on new deals is still above 20%, in line with 2018. In essence, the GPs have to deliver superior EBITDA growth through organic and inorganic means.
In this recent note, we detailed 2023 progress in expanding EBITDA margins and delivering such growth. The 15.2% EBITDA growth is an acceleration on the 11.9% seen in 2021 and is ca.2% ahead of the 2017-21 reported average level (noting the 2022 methodology change, which stripped out extreme outliers). With EBITDA growth of 15.2% against revenue growth of 11.4% in 2023, margins were expanded. The strong cash conversion of EBITDA meant that, across the whole portfolio, there has been a fall in overall gearing to 5.3x, with strong operating company cash generation more than offsetting the incremental debt for bolt-on and a limited number of transformational deals.
Q4: Is NBPE different from other listed PE houses in this regard?
A4: We have seen, in a number of names, growing EBITDA and widening EBITDA margins to offset higher interest costs. In our note, we examine why their business model and expertise make it so well placed to deliver this.
In particular, we note the company’s track record of identifying opportunities with value drivers ‒ manager selection is more critical than ever and returns suggest they are good at picking managers, the active M&A by its companies to take advantage of the inorganic opportunities, NB’s record of re-investing with winners, and its sector and sub-sector choices.
The bottom line is that, despite slower market activity, their platform has seen acceleration in deal opportunities and activity.
Q5: What about the risk?
A5: 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 NB Private Equity Partners 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.
