NB Private Equity Partners — Strong NAV contribution from exits

NBPE’s one-year NAV total return (TR) in US$ terms to end-October 2021 was 57.8%, significantly ahead of the broader private equity (PE) market (LPX50) posting 29.4% in NAV TR, its direct peers (see Exhibit 2) and its historical returns (five-year annual average at 18.8%). The NAV uplift was supported by 13 portfolio exit transactions (described below) carried out in 2021 to date, which drove the year-to-date NAV TR in US$ to 39%. This performance, above NBPE’s historical returns, is partially a result of portfolio repositioning from lower-yielding income and fund investments into direct co-investments (see our initiation note for details). Nevertheless, taking into account direct co-investments alone, their one-year IRR (to end-August 2021) is also strongly ahead of the 10-year average of 21.0%.

NBPE coinvests alongside general partners (GP) and mostly relies on valuations provided by them, which translates into an inherent lag in the NAV estimate. Having said that, the agreed transactions are already mostly reflected in NBPE’s NAV estimate. Overall, the portfolio has performed well, with average revenue and EBITDA growth of 17.7% and 15.6% y-o-y respectively at end-H121 (last 12 months (LTM) calculation based on c 75% of portfolio) compared to 6.2% and 6.1% respectively in 2020 versus 2019. This indicates a strong underlying performance, although comparison is somewhat distorted by the low base effect from the initial lockdowns in H120 in some cases.

Favourable NAV performance, newsflow and exits have supported an 85.8% share price rally over the year to end-October in dollar terms (compared to 43.5% in dollar terms by the FTSE All-Share index), narrowing the discount to NAV to 23.1% from 36.7%. Despite the continued share price rallies since after the early 2020 pandemic-induced sell-off, NBPE’s discount to NAV is still wider than the end-2019 level of 16.1% due to the significant NAV expansion.

NBPE’s long-term NAV TR performance (18.8% pa over five years in US$) is well ahead of the LPX 50 NAV Index (10.5% pa), despite the period capturing returns before the abovementioned portfolio transition. In this context, we also consider a comparison to the end-2019 discount to be more appropriate than NBPE’s long-term average (23.8% in the five-year period).

In Exhibit 2, we present a peer group comparison of listed PE funds in two subgroups: direct investors and funds of funds. The recent strong valuation uplifts in NBPE’s portfolio have placed the company among the top performers in both groups (despite some adverse currency effects because, unlike most peers, the majority of NBPE’s assets are denominated in dollars). Because NBPE coinvests directly in private companies, we deem that direct PE investors are more suitable comparators. That said, due to NBPE’s unique business model focused on co-investments (which partially relies on third-party expertise and allows for higher diversification) and the above-mentioned portfolio composition change, we also present a PE fund-of-funds peer subgroup. Over longer periods (three and five years) NBPE’s NAV development is broadly aligned with the average returns of both subgroups and significantly outperforms them over the 10-year period (despite lower-yielding income and fund investments being a significant part of NBPE’s portfolio in the past). Despite the strong performance and one of the highest dividend yields, NBPE continues to trade at an above-average discount, aligned much closer to funds-of-funds than direct peers. We should highlight that while NBPE’s ongoing charge ratio may seem high (the second highest in the group), the ongoing charges of the fund-of-funds structures do not capture management fees (typically at 1–2%) and carried interest charges (around 20%) paid at the underlying fund level (which NBPE does not incur, like the direct PE investors).

NBPE invests primarily as a coinvestor alongside other PE managers (direct equity investments made up over 90% of its portfolio at end-October 2021) and is well diversified by PE sponsor with its largest exposure at 12% (THL, as at end-August 2021). The remaining portfolio was held in legacy income and fund investments (with their exposure gradually diminishing). The portfolio is also well diversified by individual private investments with over 100 positions and the top 10 holdings represent 36% of NBPE’s portfolio value at end-October 2021. In terms of the industries, NBPE has the largest exposures to TMT (25% of portfolio value), industrials (17%) and consumer (17%), with a number of industrials and consumer investments having a significant industrial technology or e-commerce profile, respectively. The focus is on software and other mission-critical applications (TMT), automation and sensing technologies (industrials), strong brands in the consumer sector with low cyclicality products and a focus on e-commerce channels (consumer) and healthcare companies.

In 2021 to end-October, there were 11 full and partial exits within NBPE’s portfolio performed at a healthy average 3.7x expected multiple of invested capital (multiple excludes the Agiliti IPO) and c 100% average estimated uplift to end-2020 carrying value. In total, realisations (including dividends and other) amounted to c US$365m (of which US$284m had been received at end-October 2021), which is visibly above the 2016–20 average of c US$240m. This also implies a realisation of 32% of the opening portfolio value (ie at end-2020), compared to an average full year realisation of 22% in 2016–20. Ten of the transactions were announced earlier this year, highlighted in our previous note.

The most recent transaction is growth financing provided to Renaissance Learning by Blackstone. The company produces education software used by more than a third of the schools in the United States, and NBPE invested in the company in June 2018 alongside Francisco Partners. According to Blackstone’s press release the new capital will support both its organic growth and targeted acquisition strategy following two significant acquisitions earlier this year (research-based foundational literacy programme Lalilo and teacher-facilitated instructional delivery Nearpod) and the transaction resulted in an estimated 93% valuation uplift from its prior carrying value to US$36.6m (as at end-September 2021, 2.4% of portfolio value).

We also highlight the case of AutoStore. In April 2021 SoftBank acquired 40% of the company (THL remained the majority shareholder), and Autostore recently performed a successful IPO on the Oslo Børs. The IPO valuation of US$12.4bn was the largest IPO in Norway in two decades and resulted in a 72% uplift to the carrying value in NBPE’s portfolio (since the IPO to 26 November, AutoStore’s share price has risen by a further c 10%). According to our calculations, the transaction increased NBPE’s NAV per share by US$1.00 net of the performance fee and contributed 3.5pp to the September 2021 NAV return of 4.8%. NBPE sold only a small part of its exposure to AutoStore in the IPO and as a result at the end of October 2021 it became the largest holding, making up 6.6% of the portfolio. Consequently, NBPE’s exposure to quoted assets increased to 21% at end-October 2021. The companies within the private portfolio were valued at 15.2x EV/EBITDA (LTM basis) on average at end-June 2021 (c 55% of the portfolio valued with the multiple; the remainder are predominantly public assets and new investments held at cost), which compares to 15.5x at end-2020.

So far in 2021 (to the end of October), NBPE has invested US$110m in seven new investments (markedly less than it received from disposals). Around 60% of investments in 2021 in terms of value were allocated to IT/software companies – US$30m was invested in Stamps.com, a software provider for e-commerce shipping; US$15m in the business platform for app developers IronSource; US$12.2m in Realpage, a software provider for rental housing; and US$10m in Perspecta (recently acquired by Peraton), the provider of IT services for the US government. The remaining three investments were not disclosed in detail due to confidentiality provisions but were made alongside sponsors with significant experience in corresponding industries according to NBPE: a direct to consumer automotive products business was provided with US$21.2m; a specialty chemicals and services provider with US$19.5m; and US$2.5m was allocated to a fintech company.

The net proceeds allowed NBPE to fully pay down its credit facility and it only retains its structural leverage through its ZDPs maturing in 2022 and 2024 (US$162.8m at end-October 2021). NBPE has a 111% investment level, which is at the lower end of its target range of 110–120%, and can be viewed as prudent, in our view, given nearing maturity of approximately US$85m ZDPs in September 2022. NBPE calculates that including the available credit lines, it has US$319m at its disposal to invest at end-October 2021. While the post-pandemic financial market recovery has significantly increased valuation multiples, the NB platform continues to see investment opportunities where it believes it can unlock further value. In the current environment, NBPE plans to continue its investment strategy focused on high-quality companies with a resilient customer base and/or high entry barriers and investments alongside sponsors in their respective areas of expertise, while seeking to maintain a prudent capital structure.