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In our note, Value creation in a higher-rate environment, we explored how the sources of value creation have evolved and how NBPE’s GPs are expected to 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. This note built on the drivers of historical superior EBITDA (see 2023 CMD: value creation from growing companies). NB’s own views are in Navigating value creation in private equity.

  • Target returns: Across the NB platform, the net IRR target on new deals is still above 20%, in line with 2018. Looking at the latest 10 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.
  • Incremental EBITDA growth options are increasingly important due to rate environment: Organic options include market share gains, optimising revenue, and new tech-enablement. Alongside this, inorganic options, such as M&A, are also drivers We expect greater GP return dispersion, but NB has a good record of partnering with high-quality PE managers, who have performed across cycles.
  • Valuation: The 26% discount is in line with direct peers (average 25%), and it (like peers) rose sharply in 2022, to well above historical levels. In the note, we considered what might prompt a reversion to more historical levels. The NAV appears resilient and conservatively valued, making the discount anomalous.
  • Risks: Sentiment to costs, the cycle, modest 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 PE sector. However, 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 94% of the portfolio invested in direct equity investments in companies, NBPE is uniquely focused on the 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 sector, GP and geography, but it has enough concentration for individual investments to add value.
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