NB Private Equity Partners plc (LON:NBPE) is the topic of conversation when Hardman & Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: Mark, your recent report, it sits behind a disclaimer. Can you just remind us why that’s there?
A1: It’s a very standard disclaimer that many investment companies have, in essence, for regulatory reasons, for some countries like the US, where the report should not be read. In the UK, because private equity is not seen as a simple asset class, the report should be looked at by qualified and professional investors. It’s a very standard disclaimer, and as I say, nothing to worry about.
Q2: Now, you’ve called your recent piece ‘Update on NAV, Capital, Trump and Interest Rates’, can you give us a brief overview of your report?
A2: Previously we’d highlighted in the Capital Markets Day 6 of the November Fireworks, a number of key trends. First of all, there were very positive market trends. Secondly, the unique benefits of NB’s platform. Thirdly, the multiple levers for value creation.
In this latest note, what we did was update investors on the latest NAV portfolio, NB Private Equity Partners’ pre-revised capital allocation framework, the potential impact of current Trump policies, and the impact of interest rate expectations, which admittedly seem to evolve daily, but which in our view have seen a trend for higher, for longer forecasts.
The underlying message across all of these is that PE and NBPE reacts dynamically to changing market conditions and has a track record of outperformance across a whole range of environments.
Q3: The changing capital allocation sounds significant, what are they doing there?
A3: In mid-February, they announced a revised capital allocation framework, which noted that over the long term, the board views new investment as the principal use of the company’s capital. Despite a relatively weak 2024, the latest five-year annualised sterling NAV return is 12.5%, which is, of course, post all expenses.
In our view, the compounding benefits from new investments is thus the key driver to long-term returns and hence having it as a principal use of capital appears sensible. The dividend policy, which is a dividend based on an annualised yield on NAV of 3% or greater, has proved progressive with the rising NAV. Now, looking forward, as new investments help the NAV grow, then the dividend will increase over the long term too. Finally, on buybacks, and this really was the new news, the Board has increased the capital available to the buyback pool to £120 million over the next three years. Maintaining the current dividend level and fully utilising the additional capital allocated to buybacks would see NBPE returning approximately £250 million to shareholders over the next three years. That’s a meaningful acceleration on the £445 million, which has been returned since inception in 2007.
Q4: What can you tell me about the impact of Trump 2.0?
A4: I think that despite the recent announcements, I think the exact policies, their duration and implementation, let alone their effects, still remains very uncertain. Accordingly, my comments should be taken as directional indicators rather than precise forecast.
Now, structurally, in our view, NB Private Equity Partners’ exposure to Trump appears to be a curate’s egg with both positive and negative impacts. The heavy North America rating, nearly 80% of the portfolio, is significantly US domestically focused and so should benefit from the America First policy.
Their own analysis shows 81% of NAV is completely unaffected by tariffs, with only a low single-digit percentage of NAV seeing a meaningful impact. The mix reflects a lot of service and intellectual property-driven businesses and limited simple manufacturers. This gives NBPE a much lower sensitivity than the overall economy and less than indicated by some other listed PE companies.
Q5: What did your report say about interest rate exposure?
A5: Across the NB platform, the net IRR target on new deals is still above 20%, and that is in line with the target returns in 2018. How the returns will be delivered has changed dramatically, with the value contribution from organic growth up significantly, and there is positive contribution expected from M&A, mainly bolt-on deals.
Our note goes into some detail on how and why organic growth may incrementally accelerate. In contrast, the contribution from multiple contraction is negative, and some debt paydown minimal.
Q6: Finally, Mark, what can you tell me about risks?
A6: All investments have risks. The sentiment to costs, the cycle, residual positions in highly rated listed companies following IPOs in 2020 and 2021, the duration of the discount, and valuation are the key issues for NBPE, as they are across the whole listed sector. As we detail in our reports, in our view, these are sentiment issues, and they do not reflect reality as we see it. The benefits from the current strategy may also not yet be fully appreciated.
