In our initiation, we highlighted that NB Private Equity Partners Ltd (LON:NBPE) uniquely focused in the co-investment sector of PE. Our report underlined why this sector has especially appealing return, cashflow, asset selection, risk management, and GP access characteristics. In this note, we review how the manager, NB, adds value in this attractive market. Inter alia, NB has i) the resources to understand the investee company dynamics, ii) excellent GP relationships and iii) experience/skills that add value to the GPs. Its success is evidenced by the growing deal flow in a subdued PE market. Also, NB is focused on the mid-market, which, in our view, has more value creation options than large deals.
- Evidence of value added: We highlight NB Private Equity Partners’ i) growing number of co-investment opportunities (3x the level of 10 years ago, in a slowing market), ii) above-peer investee company revenue and EBITDA growth in 2023, iii) broad spread of this growth, and iv) above-average 5-/10-year shareholder returns.
- NB’s value added to co-investments: NB’s platform is large (NB Private Markets $115bn of active capital commitments, incl. $37bn in co-investments and over 400 PE staff), generating the scale to optimise the co-investment process. The deal completion rate (ca.8% of opportunities presented) shows great selectivity.
- Valuation: The 25% discount is slightly below most direct peers (average 28%, exc. HGT), but it rose sharply in 2022, to well above historical levels (10%-15%). In this note, we review what may lead to a reversion to these levels. The discount appears absolutely and relatively anomalous with a resilient, conservative NAV.
- 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. 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.
- Investment summary: With 97% of the portfolio invested in direct equity, co-investments, 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, geography and size, but it has enough concentration for individual investments to add value. The discount is anomalous with long-term, market-beating returns.
