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NB Private Equity Partners

2023 CMD: value creation from growing companies

23 Oct 2023 / Corporate research

We reviewed NBPE’s differentiated strategy, strong outperformance and good market positioning in our initiation, Co-investments generating superior performance, and 1H’23 results summary: continued growth. The key theme running through NBPE’s 5 October capital markets day was the superior EBITDA growth of its investee companies. Across the NB co-investment platform, in 2006, EBITDA growth was expected to produce 63% of total value creation, but it has risen to 93% in recent deals. Critically, target IRRs (20%+ net) are unchanged as higher-interest-rate impacts are offset by GP actions to grow EBITDA. As GPs look for greater equity support, the NB platform’s co-investment pipeline has seen more opportunities, despite the slower PE market activity.

  • Generating EBITDA growth: NB has focused co-investments in sectors and subsectors with sustained, secular growth and market-disruptive models, which may be less sensitive to the macro environment. Many of its companies have pricing power in a higher-inflation environment. 70% of its top 30 holdings have completed M&A during NBPE’s ownership.
  • Outperformance for investors: Over 10 years, NBPE’s total share return is ca.4x the UK whole market, and ca.3x the world benchmark. This is despite the discount widening by ca.10% compared with pre-pandemic levels. Investors are being rewarded with capital growth, buybacks and a dividend.
  • Valuation: The 29% discount is in line with direct peers (average 30%), and it (like peers) rose sharply in 2022, to well above historical levels. Adjusting for the legacy income-investments (7% of portfolio), NBPE’s discount rises to 33%. The NAV appears resilient and conservatively valued, making the discount absolutely and relatively anomalous.
  • Risks: Sentiment to costs, the cycle, residual positions in 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, many of these 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 92% of the portfolio invested in direct equity, NBPE is the only listed vehicle focused on the attractive co-investment strategy within 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.
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