NB Private Equity Partners (NBPE) focuses on direct equity and debt investments in private equity-backed companies, with investments made alongside a wide range of third party private equity managers. As such, the portfolio is more highly diversified than directly investing peers, but (in contrast to a fund of funds) attracts only one layer of fees.
In the past year, the board has largely completed its wide-ranging initiatives for narrowing the discount. The most recent of which – concentrating liquidity in the shares by delisting from Euronext, as well as initiating a buyback programme - both provide good foundations for future shareholders to get involved. Following a secondary sale, NBPE now only has a small number of legacy fund positions (amounting to 4% of the portfolio) and with the company’s gearing, shareholders have more than 100% exposure to the direct equity portfolio.
This gearing differentiates the trust to competitors, the majority of which have net cash on their balance sheets. Whilst it won’t always, being geared has contributed to performance over the last year. 2018 NAV performance was strong on an absolute basis, as well as relative to public markets. Over the past five years, as of 31 March 2019, NBPE delivered NAV cumulative total returns (in sterling) of 106% compared to a simple average return of 71% from directly investing LPE trusts, and 88% from fund of funds. Indeed, only HG Capital trust has outperformed NBPE over five years across the entire LPE sector. This strong performance compares to 75% for the MSCI ACWI Index in Sterling, and 32% for the FTSE All Share Index.
NBPE has been an attractive option for those who want to add greater diversification to their portfolio as it has produced a correlation to the MSCI ACWI of just 0.17 in NAV terms over the past five years, the lowest of the peer group. One might argue that NBPE increases diversification, and reduces manager risk because their investments are led by a range of other third-party PE managers, and because they don’t have the concentration risk (in terms of diversification of portfolio) that other direct funds have.
In terms of “vintage” (the year in which deals are made), the portfolio is relatively immature, with 74% of the portfolio invested in 2016 or later. It is worth remembering that NB invests both in “new deals” brought to it by managers, but also invests in “mid-life” deals which help an existing company’s growth or M&A strategy. These latter types of deal might be expected to have a shorter investment time-frame than new deals.
Going forward, it is the managers' intention to focus the portfolio, making somewhat fewer but larger investments. Wherever possible, they will be looking to invest “bite-sizes” of up to $25m per equity investment. Currently the average equity investment is valued at $8m, so if the managers are successful, making larger initial investments will markedly change the shape of the portfolio. As of 31 March 2019, the top 10 investments by fair value represent approximately 29.5% of NAV.
In September 2018, the company announced a new dividend policy, targeting an annualised yield of 3.0% or greater on the year end NAV. The board further noted that should a short-term decline in NAV occur, it is not its intention to reduce dividends. With fewer investments being made in the income portfolio, the company will be paying the majority of the dividend from capital for the foreseeable future. NBPE’s dividend yield of 4% compares with a 3.9% weighted average dividend yield for the AIC Global Equity Income and 3.8% for the AIC UK Equity Income sectors.