NB Private Equity Partners

Value creation in a higher-rate environment

07 Mar 2024 / Corporate research

In this note, we explore how the sources of value creation have evolved and how NBPE’s 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. This note builds on the drivers of historical superior EBITDA (see 2023 CMD: value creation from growing companies). Investors should note that interest rates are just one of many factors that GPs manage. NB’s views on value creation were outlined in its piece, 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 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.
  • Incremental EBITDA growth options increasingly important due to rate environment: Organic options include market share gains, optimising revenue, and new tech-enablement. Alongside this is value-adding M&A. We expect greater GP return dispersion, but NB has a strong track record of partnering with high-quality managers in their core area of expertise.
  • Valuation: The 24% discount is in line with direct peers (average 25%), and it (like peers) widened sharply in 2022, to well above historical levels. In this note, we consider what may lead to a reversion to more historical levels of discount. 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, and the duration of the discount are the key issues for NBPE, as they are across the whole listed sector. Many of these sentiment issues do not reflect reality, as we see it. The benefits from the current strategy may not yet be fully appreciated.
  • Investment summary: With over 93% 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 ongoing 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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