Hardman & Co reviewed NB Private Equity Partners Ltd (LON:NBPE) 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 GPs, the good co-investing cashflow and return profile and the value added by the NB. The 2023 results confirmed all these trends. The key numbers were i) NAV p/sh $28.07 (£22.02), ii) private portfolio +5.3% in 2023 on a constant currency basis, iii) EV/LTM EBITDA 14.9x, and iv) debt/EBITDA 5.3x. The portfolio company weighted average LTM growth in revenue and EBITDA was 11.4% and 15.2%, respectively, with margins widening despite market challenges.
- Model offsetting rate pressure: In our note, Value creation in a higher-rate environment, we examined how NB Private Equity Partners’ GPs’ unchanged target returns could be achieved despite a higher-rate environment. In essence, the GPs have to deliver superior EBITDA growth through organic and inorganic means. In this note, we detail 2023 progress in expanding EBITDA margins and delivering such growth.
- Positive NAV return despite market challenges: In our view, the core driver to long-term outperformance is improving underlying companies’ performances. Exit premiums indicate the current NAV is conservative but, for returns, provide icing on the cake. 2023 NAV growth, despite slower exits, supports our view.
- Valuation: The 25% discount is narrower than most direct peers (average 28% exc. HGT), but it rose sharply in 2022, to well above historical levels (10%-15%). In this note, we consider 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. 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 93% 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 and geographically, but it has enough concentration for individual investments to add value. The discount is anomalous with long-term, market-beating returns.
