James Carthew: With patience NB Private Equity can have more brilliant years
Last week I had the chance to catch up with Paul Daggett, manager of NB Private Equity Partners (NBPE). I last wrote about the trust back in December 2023. At the time, my feeling was that private equity was overdue a rerating.
After a record period in 2020 and 2021, helped by low interest rates and optimism about the post-Covid recovery, the period from the first quarter of 2022 onwards had been more difficult. The pace of exits had slowed and fundraising by private equity firms had fallen markedly. However, there was ample dry powder (cash and commitments sitting around waiting to be invested in deals) and a sense that 2024 would mark a turning point.
Within the industry, that feeling appeared to strengthen over 2024. However, as I discussed a few weeks ago, the uncertainty created by Trump’s policies has stalled the initial public offering (IPO) market, put upward pressure on long-term borrowing costs, and knocked confidence generally, which means fewer exits.
Back at the beginning of December 2023, NBPE was trading on a 26% discount to net asset value (NAV). Today, that has widened to almost 30%. Its one-year and three-year NAV returns are now negative, not helped by the weakening dollar, as over three-quarters of its portfolio is in North America.
Co-investment focus
NBPE focuses on co-investments: direct, minority investments in private equity deals led by a third-party manager (a general partner or GP). Investing this way removes the complications of balancing long-term commitments to limited partnership funds with cash and debt facilities. It also means lower fees to third parties, but this involves a bit more work for NBPE’s management team.
In an environment where debt is not as freely or cheaply available as a few years ago, more equity is needed to get deals done, and NBPE can help supply that. The team is seeing a lot of deals, getting on for 12 per week, which is even more than it was seeing in 2023. The overwhelming majority of these are rejected. NBPE made just four new investments last year.
To earn a place in the portfolio, investee businesses need to operate in industries experiencing long-term structural growth (valuation uplifts come from growing revenues and profits, not financial engineering), and they need to bring something different to the portfolio – NBPE wants to avoid having a collection of similar businesses with overlapping risks.
To illustrate the importance of backing growing companies, last year NBPE published a breakdown of the expected valuation drivers for new investments. The target is to achieve net annualised returns in excess of 20%. Based on the average of 37 deals it did over a 20-month period ending on 1 August 2024, it was looking for organic revenue growth to provide 56% of that, margin expansion 28%, merger and acquisition benefits 22%, and the effect of paying down debt just 1%. That adds up to more than 100%, because – to illustrate how conservative the approach is – it was assuming a 7% hit from valuation multiple compression.
NBPE’s evergreen, closed-end structure makes it an attractive partner in an environment where companies are staying private for longer. In a majority of cases, the NBPE team is being brought into deals at an early stage and asked to co-underwrite them alongside the GPs. Often these deals end up being exclusive to Neuberger Berman.
Another increasingly important area for the trust is ‘mid-life’ deals. These are done to inject more capital into private equity-backed businesses held within limited partnership funds and could be transformational to a business’s prospects in a weak economic environment. The private equity-backed company is more likely to have the support to invest when others are retrenching, and can buy out struggling competitors, for example.
So what went wrong?
That all sounds great, but it does beg the question – what went wrong? Ironically, the main problem has been with NBPE’s listed equity exposure. The 2021 IPO boom contributed to a 45% NAV total return for NBPE in that year but left it with around 20% of its portfolio in listed companies, many of which were subject to lock-up arrangements. Share prices of positions such as AutoStore, which at end December 2021 was NBPE’s largest holding, are a long way off their peaks.
A conservative valuation policy means that the average uplift on exit over the past five years has been 35%, but if the pace of exits is depressed then so, too, are these NAV uplifts. At the end of April 2025, the average age of NBPE’s investments was 5.4 years. That contrasts with an expected holding period for mid-life deals of 2.4 years and 3.5 years for other co-investments. The implication might be that there is a lot of latent value within the NAV.
Daggett says that they have assessed the trust’s exposures to tariffs and pleasingly, just 1% of the portfolio was thought to be adversely affected, with 86% having no exposure at all. A US recession would not be great for sentiment, but the focus on good quality, growing businesses should help. Daggett is comfortable with the overall levels of underlying debt in the portfolio (an average of 5.1x EBITDA) but points out that most of the debt (84%) is covenant-lite – in other words, the rug is unlikely to be pulled from under companies in a downturn – and matures from 2028 onwards (77%).
I think then, that like many other opportunities in the trust sector, the watchword here is patience. While investors wait for sentiment to improve, there is a 5.3% dividend yield and an additional $120m share buyback programme (equivalent to about 15% of the market cap) that was announced in February. This should moderate the discount volatility and enhance the NAV.
James Carthew is head of investment company research at QuotedData.
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