Listed in 2007, the $817.1m (£510m) Guernsey-domiciled Neuberger Berman Private Equity (NBPE) investment trust – which was known as Lehman Brothers Private Equity until March 2009 – aims to deliver both capital gains and income through investing in the equity and debt of private equity-backed companies.
It adopts a diversified approach within the asset class, combining both funds and direct investments.
Peter Von Lehe, managing director of NBPE, notes the vehicle benefits from the integrated private equity platform of Neuberger Berman, which includes a dedicated, 70-strong private equity team.
The investment process itself has evolved over time, as Mr Von Lehe explains: “The portfolio originally had a higher percentage of fund investments. However, we made the decision four years ago to focus the vehicle on Neuberger Berman’s direct investment capabilities. We think this provides several benefits to NBPE, including greater transparency for investors and it reduces our overall effective expense ratio.”
The portfolio invests in a wide range of private equity opportunities, including equity co-investments, corporate private debt and healthcare credit investments.
The manager points out this broad remit “allows us to go where we find the best opportunities and to populate NBPE with the best investments across geographies and sectors. Though we are influenced by macroeconomic factors, we primarily use a bottom-up approach and evaluate each investment opportunity rather than taking a macro sector or geographical view”.
Given the specialist focus of the trust and the decision to refocus the portfolio on direct investment, Mr Von Lehe notes that as prices are now higher than a few years ago “we have to be that much more disciplined in the investments we choose and have had to work that much harder from a sourcing perspective”.
He explains: “We focus on high-quality transactions in market-leading businesses with strong free cashflow characteristics, [then] buy them at reasonable prices and employ reasonable capital structures. We are making longer-term illiquid investments so if the macro environment changes, it’s not easy to trade out of the investment.”
The trust has delivered a return of 159.64 per cent between November 4 2009 and October 30 2014, which significantly outperformed the AIC IT Private Equity sector average of 84 per cent, according to data from FE Analytics.
Mr Von Lehe adds that rather than being attracted to a particular sector, the team seeks investments that have an attractive risk-versus-return opportunity. For example, he notes the team has found a number of opportunities within enterprise software. “This is due to attractive fundamental characteristics of these businesses including strong free cashflow generation, recurring revenues, and downside protection, as well as the potential for upside,” he notes.
The manager adds that each of the portfolio segments – equity co-investments, direct-yielding investments and fund investments – have all performed well in 2014, with “meaningful liquidity” coming from its direct investment allocation.
“Recently, we’ve seen increased volatility in the public markets. Approximately 9 per cent of our private equity fair value is invested in public securities. These are private equity-backed companies that were private but which have since been taken public and the private equity firms leading the transactions have not yet sold their shares. As a result, this part of our portfolio is subject to public market risk – in both directions,” says Mr Von Lehe.
Looking ahead, however, he suggests that as pricing moves higher and debt markets become more robust, “investment sourcing is a strong advantage to have”. Although he adds: “We think the biggest risks today are the exogenous factors such as large macroeconomic or political events to the financial system. In addition, we think another large macro risk is rising interest rates.”
EXPERT VIEW
Ben Willis, head of research, Whitechurch Securities
This is an established private equity trust that has recently passed its fifth year London listing anniversary. If you had been shrewd enough to see the trust’s opportunity back then, you would be looking at more than a 150 per cent total return. The trust provides a yield of around 4 per cent from a portfolio broken down 60/40 into co-investments and direct-yielding opportunities. One thing to note for those looking to invest is that the trust is priced in US dollars.
