NB Private Equity Partners Ltd (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 ‘Value creation in a higher-rate environment’, what can you tell us about it?
A2: In this note, we explore how the sources of value creation have evolved and how NB Private Equity Partners’ GP partners are expected to organically and inorganically generate incremental EBITDA growth to offset higher interest costs.
Long-term target returns for new deals on the NB platform are unchanged, despite the short-term interest rate noise. The key here is that the incremental changes offset the incremental higher interest costs. Investors should note that interest rates are just one of many factors that GPs manage.
This note builds on the drivers of historical superior EBITDA – see our note 2023 CMD: value creation from growing companies. Their views on value creation were outlined in its recent piece ‘Navigating value creation in private equity’, which is on its website.
Q3: You say the target returns are unchanged, what are they and how has the way they will be achieved changed?
A3: Across the platform, the net IRR target on new deals is still above 20%, in line with 2018. Looking at the 10 most recent co-investment deals on the NB platform, 93% of value is expected to come from organic growth, 17% from M&A and negative 14% from multiple contraction. The contribution from debt paydown is minimal. In 2006, 63% was expected from organic growth with nearly 40% from debt paydown.
The mix now is all about the value added to investee companies from NB’s PE manager partners. It means manager selection as well as asset selection are really, really important.
Q4: So, what are the options for incremental growth?
A4: Organic options include, first, market share gains, as non-PE backed businesses have to spend more time sorting out their finance and less time on externally hunting customers and investing for growth. Secondly, optimising revenue, where the GPs bring a scale well above the level of the standalone businesses; and, with that scale, comes specialist resourcing, networks, expertise, market knowledge and the ability to repeat playbooks with proven track records.
Additionally, the importance of the effectiveness of new tech-enablement has never been higher and PE-backed businesses have a record of implementing this well. A sustained higher-interest-rate environment is likely to present more operational challenges to businesses than just higher financing costs. This creates more inorganic M&A opportunities, as weaker competitors look for support/get carved out of larger groups.
We expect greater GP return dispersion, the good ones being even better than the poor ones, and NB has a strong track record of partnering with high-quality managers in their core area of expertise.
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.
