Fund Review: NB Private Equity Partners

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The NB Private Equity Partners (NBPE) trust was listed on the London Stock Exchange in 2009 having already been admitted to the Euronext exchange two years earlier. It seeks to provide shareholders with the opportunity for both capital appreciation and income “through an attractive portfolio of private equity and income investments”. The investment company had a net asset value of $699m (£536m) as of July 31 2016, with ordinary shares trading at a 27.4 per cent discount. 

Peter Von Lehe, portfolio manager and a director of NBPE, points out the vehicle’s strategy is to “invest directly into private equity-backed companies, taking positions across their capital structure to access the best relative value opportunities”. The vehicle’s investment manager is NB Alternatives Advisers, part of Neuberger Berman, with Mr Von Lehe explaining the sourcing and evaluation of NBPE’s investments is conducted by a team of more than 110 specialist private equity investment professionals in seven offices across four continents. 

In terms of the investment process, Mr Von Lehe notes: “In order to reduce the fund’s effective expense ratio and portfolio duration, maintain a conservative overcommitment level relative to certain other private equity strategies and increase shareholder transparency, NBPE has exclusively invested directly into private equity companies since 2011. At this point, NBPE ceased making private equity fund commitments and the remaining holdings of this nature are in liquidation mode. At the end of July NBPE’s portfolio was 47 per cent invested in direct private equity, 32 per cent in income yielding assets and 21 per cent in private equity funds.” 

Meanwhile, macroeconomic factors form an inherent part of investment decisions, with Mr Von Lehe pointing out that macroeconomic conditions are integrated into each investment case. 

He explains the investment team “analyses the key drivers of a company’s revenue and models the effect of different revenue cases on the ultimate returns of the investment. Capital structure, flexibility and the contractual nature of a company’s revenue are the essential determinants of resilience of an investment in an adverse economic environment.” The team also seeks downside protection by investing in “high-quality, defensible businesses with strong growth profiles, favourable cashflow dynamics and attractive capital structures”. 

For the five years to September 7 2016, NBPE has delivered 93.3 per cent in sterling terms, compared with the AIC Private Equity sector average return of 58 per cent, data from FE Analytics shows. It has also outperformed the sector across one and three years and in five of the six years since it was listed on the London Stock Exchange. 

Mr Von Lehe points out recent changes to the portfolio have been “organic” with strong realisation proceeds being reinvested into new income and equity investments. 

“In the year to date NBPE has had six full realisations of equity co-investment exits at an average multiple of invested capital of 2.3 times, and six income investment exits have generated total proceeds of $49m. [The trust] has also received $24m of distributions from fund investments. NBPE has funded $79m of new investments, including $52m in 10 new equity investments across six different sectors, the largest of which was a $10m investment in UK-based life sciences measurement and testing firm LGC.” 

Contributors to performance include NBPE’s direct equity portfolio, where Mr Von Lehe says 94 per cent of investments are held at or above cost, with 27 per cent considered to be strong performers trading at more than two times their cost. He adds: “Since 2014 through to the end of July 2016, the average valuation uplift for all of NBPE’s exited investments [both full and partial] averaged 18.9 per cent relative to their carrying value three quarters prior.” 

Looking ahead the manager says: “NBPE’s holdings have solid fundamentals that will enable [the vehicle] to deliver strong long-term returns with reasonable downside protection against any deterioration in market conditions. Even in the current low-growth environment, [we are] optimistic the high-quality private equity sponsors that manage and control the investments in the portfolio will be able to create value and position their companies for successful outcomes.”