Good afternoon. Thank you very much for coming to our monthly private equity lunch today, and, good to see a number of you online as well. As many of you know, the company published the final results yesterday, so we thought it was a quite a good time just to get the team in, just a bit of an update on the portfolio, see what they can see coming out this year, and talk more generally about activity in the private equity sector. With us today, we've got, Paul Daggett, who has been managing the portfolio for many years, and also Luke Mason, who is a principal at NB. Many of you will know Luke from, Aberdeen days, when he joined, NB last year. Timing-wise, we're aiming to run until sort of 1:30 P.M., 1:40 P.M.-ish.
I'm gonna hand over to Luke, and he'll tell you how to ask questions, et cetera.
Well, thank you, thank you, and thank you all for coming in the room, and hopefully, you can all hear us well online. You should have the presentation in front of you, and I believe I sent it to you all yesterday. So yeah, so what we'll do, as Ian mentioned, we'll kind of give you a quick run-through. For those on the call, a number of on the call are maybe new to the strategy, so Paul's gonna just kind of give a bit of an overview to NB, the NB Private Markets platform, if that's all right. How we, you know, deal flow and a bit of the market, and then we'll jump into NBPE, if that's all right.
Talk a bit about the results 2023, and also the activity which we've been doing, or the activity that's occurred kind of since the end of year. As I said, it obviously, if you're online, the way. The easiest way probably to ask questions is if you wanna just send myself an email, that will, you should have my details. Please just ping that across, and I'll then at the appropriate time ask Paul when he's set free. He's currently just finishing his lunch very quickly. But, I'll hand over to you, Paul, and then, thank you.
Great. Thank you, Luke, and thanks to everyone for coming in. As Luke says, I know there's a broad selection of investors here, some who know us really well, some who are slightly newer to us. So I'll try to be brief with the overview, and then I'll move into the market and results. So if you have the presentation in front of you on slide three, just in terms of the background, obviously, what NBPE does is invest in private equity, and it does that through equity co-investments, and I think that is the real key differentiator of a strategy. It's a focus on co-investing alongside leading private equity firms in their areas of expertise.
We think there are a number of advantages to that strategy, and you see those in the bottom left of the slide. Because we invest through co-investments, we can be diversified across sectors, underlying private equity manager, so we're invested alongside 53 different private equity funds in our co-investments, as well as by enterprise value of companies, both small and mid-cap buyouts, as well as large-cap buyouts in the portfolio. We can also control the investment decision, by which we mean, we can control our pace of investments. We're on page three. Yeah. So we can control the pace of investment. Obviously, that's really important for balance sheet management. We don't invest through fund investments. We don't have large unfunded commitments. We can choose when we want to invest.
When we think the market is less certain or we don't see liquidity coming, we'll choose to invest at a slower pace, and that has been the case over the last two years. We've really prioritized that balance sheet management and existing portfolio. ESG, again, we have an A+ rating at Neuberger. ESG is integrated into what we do, and we can integrate that into our co-investment diligence, as opposed to just looking at the underlying manager. And then finally, fee efficiency. In the large majority of cases, we're investing on a no management fee and no carried interest basis. So, you are able to look at the vehicle level fees, and that's the vast majority of the fees you pay, which again, is quite different to many of the other funds out there.
You got Neuberger as a manager. You don't have to keep flipping around, but if you, if you want to, there's a slide on slide 35, which just gives an update on Neuberger. We manage $110 billion in private equity commitment. That's across a number of different strategies, but for NBPE, obviously, the co-investment portion of the pie, which is $34 billion, is the key. But also of importance is the fact that we manage $34 billion in primary commitments, and obviously, that is one of the drivers of co-investment deal flow, and helps us to keep the fund fully invested. On that note, maybe just on the management before I turn to the market on page 37.
One of the things that that's been, maybe surprising to people is the speed at which our co-investment deal flow has grown over the last few years. So if you went back pre-COVID, 2018, 2019, we saw about seven deals a week on average. Whereas in the last couple of years, 2022 and 2023, which the market has been significantly slower, with fewer deals completed in private equity, our deal flow has been significantly higher. And again, I think that's for a number of reasons. The 2 main ones are the fact that we are still committing to private equity firms, we have a significant institutional client base investing in private equity firms.
That helps to generate co-investment deal flow, but also the fact that, obviously debt has been more expensive, as well as being a smaller part of the capital structure and a lot of deals getting completed. That means more equity is needed, and while we have capital available for co-investment on the Neuberger platform, some others don't. So all of these factors combined mean that our deal flow has increased pretty significantly. And last year on our platform, this isn't NBPE specific, but on our platform, we completed 11% of the deals we were shown. So we're not doing about 90% of the co-investments that come our way as opportunities. So, you know, with that, that's the model and the platform.
I'll quickly touch on the market, and then I'll move into NBPE and the portfolio and performance. And really, I think with regards to the market, starting on slide 30, I'm sorry these slides are not in order for this particular meeting. You know, a key here is that private equity obviously has grown very, very significantly, that's no secret, over the last 10 or 15 years. Today it's about a $5 trillion asset class. But in the top right, what you'll see in that grey bar is there's $1.5 trillion of uninvested private equity capital. And so, you know, I think it's important because obviously it's the fact that private equity has slowed down in terms of fundraising, in terms of new investments, and in terms of realizations.
Institutional investors and others are still investing in the asset class. There still is fundraising going on at a reasonable pace, albeit a bit more bifurcated than it used to be. All of that said, there's still $1.5 trillion looking to be invested in private equity deals. On 31, you know, as I mentioned, you'll see a bar chart of deal activity. Clearly, 2021 was a particular outlier. What, again, may be surprising to some is that if you look at 2023, which has been broadly characterized as a slow market, it actually was still a bigger year than pre-COVID years, according to these statistics, so bigger than 2018 or 2019.
So private equity is still actually quite active, and that has continued this year, of course, at a slower rate than 2021 and 2022, though. In terms of distributions, which again, this is becoming key for NBPE and other listed private equity funds, in 2023, we look at distributions as a percentage of beginning of year NAV in private equity. So what we've typically seen over a normal period, which I'll say is kind of 2011 to about 2021, was a range of about 20%-30% of beginning of year capital invested coming back to investors.
So that makes sense because private equity holding periods are in the three- to five-year period, so obviously the inverse of that would get you to 20% or 25% if funds are turning over their investment portfolios. In 2021 and into 2022, that obviously spiked, but more recently has come down very significantly, and you can see we're kind of running at a 11%-12% kind of clip at the moment. So private equity exits absolutely have slowed down more recently. And because of that, if you look on slide 33, you'll see that the number of global private equity-backed companies, of course, has grown over time. But what I think is really interesting is more than half of those companies have now been held for four years or longer in their private equity portfolios.
So when we talk about NBPE and its 4.8-year average holding period, it sounds on the high side, the more mature side, but actually, compared to broader private equity markets, it's not all that high. And that's partly, I think, because there has been a trend to holding companies for longer. Private equity, you know, very often, if you own a good company, and you know that the market is competitive for good assets, then why not hold that company for longer before you consider selling it, and sort of giving the rest of the returns that might be available in that company to someone else? So that has been a prevailing theme, but of course, at the same time, then we had 2022 and 2023 come along, which has been a time where activity has been somewhat slower.
So there has been a bit of that trend going on, and as I say, that definitely feeds into, I think, the story around NBPE, which I'll now transition to, unless anyone here has any questions.
Quick question on the dry powder. Any kind of particular themes developing as to where that is being potentially Where is- Where is it going sector-wide?
Yeah, I mean, I think, If I did it. S o far this year, the market feels similar to the second half of last year. It hasn't been a big inflection. There've been a lot of people I speak to predicting that there will be an inflection, and I hear stories about a lot of companies ready to be sold. But I think there is still a bit of a stagnation in the market and a bit of a disconnect between buyers and sellers on prices. Some of that arguably is due to interest rates and what that means in terms of capital structure. But I think there's also just that slight disconnect. Why would I sell my company to you at a time where markets aren't highest on private?
I can be private, I'm not gonna negotiate on price, and of course, buyers feel the same way. So, so far, I think it's not clear, where it's going. I think it's broad-based, though. I think obviously, a lot of private equity funds are sector-focused, or, and/or geographically focused. But I think across sector and across geography, it feels to me that it's, pretty broadly spread. It's not all focused on one thing. It's not all large cap, it's not all technology, for example. I think it's pretty diverse in terms of the, types of investments they're looking for. So if we go all the way back to the beginning, which, I'll start with the results, then I'll talk about the portfolio.
On slide four, this is performance highlights, in the top left for 2023, and in the bottom left for the first quarter, as well as some other statistics. First of all, we released our annual financials yesterday, as well as our Q1 estimate. That shows a 2.3% NAV return for 2023, which was driven by private returns within the portfolio, which produced a 5.3% gross return within that portfolio. So, you know, obviously, a year where returns were slower than our long-term average, and I think that's, you know, very much in line with what we've seen in the market, as well as, you know, what I just described around activity in the market.
Importantly, though, when you look at the underlying portfolio, we had an 11% weighted average revenue growth in the portfolio, 15% EBITDA growth within the portfolio. So, you know, we feel the portfolio is, is well positioned, you know, that the companies underlying that data generally performing very well. So we feel really good about where the portfolio is, the maturity of the portfolio, the performance of the portfolio. But of course, the big question on a look-forward basis is, more around the, the private equity market and how that activity picks up over time. You know, I think the other thing, which is, is worth noting on this page is around distributions, and realizations last year. We actually ended up having, a pretty good year, in terms of liquidity back to the fund.
We had $170 million of cash returned to us during last year, and so far this year, we've either received cash or expect to receive cash from announced realizations of another $100 million. So you know, the good news there is we have seen liquidity in our portfolio despite, the difficult market, and that's been through, strategic exits, private equity exits, as well as some sell downs of public stock that we held from older IPOs. But, you know, again, I think obviously liquidity, is important for a number of reasons. It can drive an uplift, and we did have an 11% uplift on our exits last year, but it also allows us to make new investments, which we've made 2, so far this year, which I can talk about, a little bit later.
The 11% uplift, is that pretty typical of what you'd expect on the realization for a private company? Given that.
It's.
Private and public.
Yeah, no, it's lower than our historic average. So the historic average, which again, is probably helped by 2021 in particular. Nevertheless, the historic average would be higher, would be the 39%.
Yeah.
So, you know, I think that's a function of some of the individual companies that were sold. Obviously, it's also a bit of a function of where the market is. I don't think it necessarily is a predictor of where things will be in future, but we'll have to see.
So it's sort of fair to say somewhere in the middle is probably a sort of a long term.
I think that's a fair guess.
Not, not a guess actually.
Yeah. Yeah. I mean, again, I think private equity valuations over time have become quite efficient. So, obviously, this has been a subject that's been discussed a lot. In 2022, when public markets were down, private equity markets were much less so. Last year, the reverse was true. Publics were up, and private equity markets didn't follow. So you got back to a similar starting point, but I think the, in general, the markets have become, you know, quite, quite fair and quite fluid. And that probably has a little bit of an impact over time in terms of uplift, but nevertheless, there is no liquidity discount that is typically built into private equity valuations, and the monetization of that accounts for the uplift.
In terms of the portfolio on slide six, it is a well-diversified portfolio. We have $1.3 billion in direct equity investments.
That's in 85 companies, although the top 30 that you see on this page accounts for almost three-quarters of those, and that's alongside 53 different managers. So again, one of the value propositions we bring is we're diversified across private equity managers and invested alongside a really good portfolio of managers focused on what we think are their areas of expertise. And of course, I mentioned the average holding period now being quite immature, 4.8 years. So, that together with the underlying performance of the portfolio make us feel good about the prospects of liquidity, obviously, market dependent, going forward. Just to mention also in terms of diversification, I mean, Action's the biggest position, which is as big as it is because it's performed as well as it has.
We typically size investments in the 2%-3% of our portfolio, so that obviously tells you that we're looking to have roughly 50 core positions. We have a little bit more than that at the moment because there are some smaller tail positions. But around 50 is kind of the number that is implied by our bite size. Action is 6.6%, which is because, despite it sending dividends back and a small amount of liquidity that we took, it has just grown extraordinarily well over the last four years. So.
What would you be happy letting that rise up to?
Yeah, it's a good question. Now, typically in private equity, you don't have really an option in terms of trimming positions, so it's different to a public portfolio. With Action, there was a liquidity offering last year where we did take a small amount off the table, but we do think that there's still a really good story there, and obviously they had a phenomenal year last year. And we think there's still a lot of room for growth in terms of white space. So the question is whether there is another opportunity, and obviously we will look to prudently manage the portfolio, but there's not a set number that we have in place. It really just depends on the specifics of whatever offering and when it comes.
I suppose put into context across our broader platform, nearly $1 billion across all of the platform in Action, for example. We were the only company—Yes, because of the structure allowed us to, 'cause of, you know, the evergreen structure allowing us to recycle, but we were the only vehicle that actually took money off the table. Everyone else kind of held their position and was very comfortable with the overall, with how Action's performing. Clearly, the results are strong.
What do you see in the game?
It's-
Do you have an idea?
[audio distortion]. No, I mean,
Yeah.
I mean, I think 3i, 3i, I get asked that all the time, obviously, and, and, I mean, it's just, it's just a huge company at this point. And what is it? Almost.
62% of their NAV.
Yeah, 72% of their.
Of their NAV.
So, I mean, the choice is either let it continue as it is, and it becomes a larger and larger part of that current listing as a separate IPO. I mean, a trade sale is not probably possible, but I think it's really IPO seems like the logical part. But I think, 3i doesn't generally, you know, answer that question. They, they're more focused on the prospects of the business and that they wanna keep holding it.
Yeah, you want.
Yeah.
Yeah.
So, spin-off 3i's non-Action investments, and then you effectively got a list of Action.
Mm-hmm. Yeah. I mean, as I said.
That's completely the wrong show, surely, Action, wouldn't it?
I think the base of 3i has changed a lot, so I'm sure. I mean, so there's a lot of just mainstream institutions as a retail.
Yeah. I spoke to someone who said that they were holding it as a retail stock at this point.
I think it brings it, I suppose, into the bigger question when we're doing our underwriting, actually exits and how. And very much as a focus for us. Because clearly, you know, you know, in the, where we're looking to fish, ultimately, kind of in the mid-market, you know, not having just one sole route of exit is incredibly important. So, and I think that's been, despite it, what everyone's been saying about the IPO market's been shut, but actually, our realizations last year were pretty strong because it's either selling to strategic or selling to other private equity buyers.
I think that's really important and something that we're very cognizant of, you know, and ultimately, you know, we had a very strong year in 2021 with IPOs, but subsequently, as a result of that, that's hampered our performance somewhat for the last couple of years. Then obviously, the investments we made were many, they've been good investments, and they still are good investments, but because of that lockup of, and we are beholden to the GPs until when they're selling, you know, it's not our decision. We'd much prefer to have the money back and be able to invest it on our terms, rather than being held on something else. So.
Is it a surprise that, I mean, the public markets have obviously had a pretty strong run over the last 4-5 months? Are you surprised that there haven't been more realizations from the public portfolio?
I mean, I think it's ongoing, but generally, it requires block sales, and obviously, you can only do so many of those in a given period of time, so you're limited in your pacing. So within our portfolio, we've seen, I think every position but one, which is being taken private, has been sold down in some way. And I think in the broader private equity markets, you have what you said, but there's also, what I didn't talk about earlier, which obviously is that there's a lot of pressure from LPs for liquidity, and the first place to look there in the right market is the publics. So I think it's sort of careful and systematic, but I think it is ongoing across a lot of public positions that private equity firms hold.
So I think it's just that pacing, that if you do a block sale, then you can't do another one the next day. You know, there needs to be time to let that be digested by the market before you can come back and, and do that again, and obviously, the price has to cooperate in the meantime.
I suppose from our side.
[audio distortion].
Do you get a better price out there? Would you get a better price by trends?
So I think the good news is that we're, you know, we'll generally look for exit optionality, companies that can be exited, ideally all three ways: trade buyers, private equity, and IPO. But, you know, we'll generally look to, at least in the portfolio, underweight companies that will really require an IPO. And obviously, we're not doing start-ups, so we're not doing the sort of technology companies that really kind of need an IPO, with mature, cashflow-generative businesses. But the one place that an IPO market unquestionably is helpful is it gives another option. So, you know, if you're running a trade sale process, then running a dual track with an IPO at the same time is a good way to maximize prices.
So it's good to have there, but I wouldn't say NBPE is dependent on it, and most of our portfolio is mid-market focused. Obviously, Action is one, that would be a little bit different. But the majority of our companies are more in the mid-market and could exit through M&A of some form.
Well, well, I think typically, you know, over the several last few years have been about 5% private equity exit value.
It sounds.
A lot less than it is.
Yeah. No, I think it is. It is, I mean, obviously, the very big funds, the giants private equity managers are gonna have a lot of companies that do need to IPO, but I think it is a very small minority of exits. And so it's much more of a feature for venture capital. That's where the big money is made in venture capital, particularly now, there's more of an antitrust focus in that area. But within private equity, and particularly where we're positioned, it's. It's definitely a nice to have. It's definitely beneficial to have that tailwind in 2011.
It was, it was very strong for our portfolio, but of course, that also meant we held a lot of public stock going into, sorry, 2021, I should have said, going into 2022. So yeah, it's, it's a nice to have, and, hopefully, it does come back, but it's not something we're depending on. So just in terms of positioning, and again, many of you will have, will have heard this. The, the portfolio, on, this is on slide nine, is, is really generally positioned around two themes.
One is companies that we think will be less cyclical, either because of the end market they operate in is less cyclical, or because of the business model that they employ, in terms of the stickiness of customers and revenue, or companies, really, and/or companies, which have more of a long-term secular growth driver. Obviously, there can be cyclical slowdowns within that story, as long as you believe that is a long-term trend. And the vast majority of our portfolio is built around those two themes, which you see at the bottom of the page. That leads to the industry diversification in the middle of the page, which again, we monitor.
But I think importantly, as you look at, and this is within the top 30 companies, but if you look as a whole, within our portfolio, consumer is the biggest sector, but obviously, importantly, things like Action, StubHub, other companies which aren't your traditional bricks and mortar retail, are a big part of that. But we do monitor by industry. At the moment, tech, media, telecom, consumer, industrials are the biggest areas within the fund. The healthcare area has been one where we've had a lot of realizations, so it's a little bit lower at this point in time, which again, given the right opportunities, may go up, but obviously, it really depends on us seeing the right opportunities, and our deal flow really is more bottom up than top down.
What we wanna do is pick the best deals, subject to that top-down monitoring, to make sure we're not over-concentrated anywhere. Yeah, no, it's a very fair question. I mean, yeah, look, I think in one or two spots, there's places that we would look and say that there was a function of the market being higher. But I think broadly speaking, I mean, if you turn to slide 11, then this has our top 10 companies in here, and three of them come from that era, and actually really four, because True Potential was a deal we mostly did the work in, in 2021. So Action, Solenis, True Potential and Monroe all fall into that time period.
So these four, you know, I won't go through every one unless anyone wants me to, but, you know, are four companies that are doing really, really well. You know, we're happy with all of them, both in terms of organic growth, some of them have done some pretty significant M&A as well. And so I think the thing that's really interesting about the private equity market at the moment is that there's a slide at the back. I won't keep moving around to go to it, but prices really haven't mitigated as much as some people might think, and the reason for that is the highest quality businesses, the most predictable businesses, are still trading at very competitive multiples.
There's still a lot of capital out there, and that's exactly the same kind of company they're looking for. So compared to 2020, 2021, a lot of business types actually haven't gotten a lot cheaper. Some have, particularly more cyclical types of businesses have either gotten cheaper or just not traded. But I think for the most part, we feel pretty good about this business, the deals we did, and those four would be good examples. Because again, just thinking, I don't know that any of them would've been in the top 10 without the growth they've had since we've owned them. So they've progressed very well and, you know, grown and justified the valuations that we and the lead sponsors paid. Yeah.
So that, that really is around balance sheet management and the fact that we, we don't invest through unfunded commitments, so, I think a lot of funds, listed or otherwise, are gonna have capital calls and deals done across markets because they don't control the pace that they invest at. For us, sitting in, in 2022, we, you know, were two years removed from COVID and, and, a market where things dried up very quickly. And we, we felt that it was a prudent thing to do, to really just prioritize the long-term strength of our balance sheet. So we, we did slow down our pace in 2021, and we continued that in 2022. We did a couple of follow-ons that we chose to do, but we didn't make any new investments during those two years.
But for True Potential, which is, as I mentioned, really was a 2021 deal that actually closed in 2022. And, and, you know, we, we feel that that was the right decision. During the second half of last year, the liquidity within the portfolio picked up a reasonable amount, and at that point in time, we started looking at new deals again for NBPE. Obviously, the NB platform for private funds, which are typical three- or four-year LP funds, continued to invest. The deal flow has been there, but NBPE was not participating for want of a choice. But, obviously, we've done two deals so far this year, which again, I can talk about.
So, that work in the second, 'cause you didn't deploy a lot of capital last year, right? But basically, what you're saying is the work done in the back end of last year is now starting to flow through into actual deal flow this 'Cause you've done more this year in the first 4 months than you did all of last year. Is that right?
Yeah, one deal was more than we did in all of last year.
Right, you said you did 20 or 25 last year.
22 last year.
Yeah.
Into two pre-existing deals that we knew already, so we re-upped in some existing deals, and we've done two deals this year. Announced, we've got another deal that's gonna, hopefully, it's gonna close pretty soon. So we'll be almost tripled in amount of deals. And as Paul said, towards the back end, as we got greater visibility of realizations kind of in H2, that was the point that we then started kind of thinking about end price. We're looking at, Okay, what are the deals coming down from the-- you know, the way it works in new programs, you know, deals get approved at the investment committee level, and then the underlying accounts, it's prorated across those accounts.
If you're able to invest, you will, and it's very much once it's approved, it's the program, just for Peter's responsibility. It's very much, you know, unless they can't say no to the deal 'cause they don't like it, it's very much a portfolio construction. Where are we in terms of our healthcare? Where are we in terms of. And kind of from a top-down view. No, no broad sector, you know, overlays we're trying to hit. So it's kind of deal by deal. Does it fit the portfolio for a number of different reasons, GP diversification, all those kinds of things. And these are a couple of deals that we that we, yeah, we invested—we have invested in, and, you know, they've been quite a.
So kind of when I sort of started joining, they were in conversation back in October. We were looking at those deals then and kind of signed them.
Yeah. So again, it's we obviously do look at vintage year diversification, and I want to stay diversified, but the most important thing is that balance sheet strength. We have the zero which matures in October that we are gonna repay.
That's what, 90, 80, 90 it is?
$80 , yeah.
So you'll repay that?
We're repaying that.
That cash from excess cash from last year's realizations of over commitments will fund that?
Yeah. I mean, essentially, yes. We have a credit facility of $300 million.
Yeah.
The goal of the credit facility is mostly, you know, as I think about it, more insurance to make sure we have capital for a rainy day.
Yeah.
But again, we can use it, especially to do things like invest ahead of a realization we know is going on, but hasn't actually sent the cash back to us. But we do want to be 100% or slightly more invested. So, you know, the goal is to have a small amount of leverage, which comes from that credit facility, but only a small amount. So again, we're 102% invested at the moment. That's a little bit lower than we were historically. We used to have those two zeros, but we've chosen to run with a little bit less gearing on a go-forward basis.
Well, NAV loans that you have any direct interest with?
Yeah. So there has been a lot of talk about it, and it's—I think it's, you know, another thing there's been a lot of talk about is continuation funds. In my opinion, continuation fund is something which is a much bigger trend in private equity. NAV loan is a bit more, it's a little less common. So they exist, and essentially, what matters is why they're being done and how. So they can make sense, again, in a portfolio where a GP is trying to essentially accelerate liquidity for LPs because they know they're in the process of selling some companies. Then, you know, that kind of situation would make sense. Just adding leverage, to make your sort of core sales look good, might make less sense.
So I think we see it occasionally, but I don't think it's common, and I think it is also something which advisory boards—so funds will have LPACs, limited partner advisory committees, which are made up of five-ten or so of their biggest investors. You know, LPACs don't necessarily need to approve them, but they are. They're certainly gonna be discussed. And look, I think it's something that LPs have different opinions about, but mostly they're strong opinions. So for that reason, I think it's been sort of kept in check. In terms of NBPE, again, that's not something that is sort of relevant to us because we're a portfolio of co-investments as opposed to a portfolio of funds.
If it was a fund of funds, it could be an issue for specific funds in the portfolio, but it's not directly relevant to our portfolio. And again, I think the NAV loan and the continuation fund themes are very much a function of a market where liquidity has been lower. And so we've seen a market that has maybe half the liquidity levels that we saw in prior years. So GPs are trying to find creative ways to send capital back to LPs, and those are two of the things that have come about because of that.
Again, as I mentioned earlier, co-investment has grown for us, and another one of those reasons is midlife deals, where we are able to come in and invest in a company that has been held by an underlying private equity fund for a few years already. We can identify companies we like, approach private equity funds, and offer some liquidity so they can maintain their control ownership, but sell a certain amount of their liquidity. There's been a number of similar cases to that that we've executed recently, and it's been, again, a trend that has been very beneficial to our platform actually. So covered a lot of things without flipping the slides, which is a good thing.
Maybe I'll just talk quickly about the two new deals we did on slides 12 and 13. So the two deals we've done so far this year are both in the healthcare space, both U.S.-based companies. Benecon is a really interesting one. It is a midlife deal alongside TA Associates, which is a really high quality GP. We actually didn't have a co-investment in NBPE alongside them, so it adds to the number of funds we're invested alongside. It's a midlife deal. Took a long time for it to come about, really by us identifying the company as a company of particular interest to us, and working with TA for a long time.
Ultimately, they chose not to sell the company, but to hold it and invest out of a new fund in that company, and we came in alongside.
It was a continuation deal?
So it's not actually a continuation in that it's in one of their, you know, broader funds. So it's not a single asset continuation. It's their new private equity fund investing in a deal. So it's a fund-to-fund deal in private equity terms, which again, you see occasionally, and it's the same exact thing that it's a company which they've owned for four years now, nearly. But as in their opinion, and ours, got a long way to go because of the secular trends in that market. So why sell a really good company to one of your competitors when you think it's got more to run? But it was in an older fund where a lot of their LPs might have wanted liquidity. So they sold it from one fund to another. We came in at the same time.
We obviously independently verified the price. We had our own market study. You know, in many ways, we acted as a direct private equity fund in this particular deal, as opposed to just a syndicated co-investor. Ultimately, we came into the deal in January of this year, and it's a big platform deal for us again. And again, the importance of the size of our platform is clear there, because if we were just writing the $25 million check for NBPE, that wouldn't have been interesting to TA. We needed to be big enough to be significant to them, and meaningful enough to their LPs in terms of actually also agreeing the price. So what the company does is it's in the healthcare insurance space, and typically, U.S. companies provide healthcare insurance to their employees.
And the way that has historically been done is to go out to one of the big healthcare insurers, and to fully underwrite the healthcare costs of their, all of their employee base. Now, over time, big companies have moved to self-insuring, because over time, there's a savings, which estimate is about 10%. You know, that's the margin you're paying the healthcare insurance company to insure you over the long term. But over the long term, if you don't mind a little bit of volatility, then it's much cheaper to self-insure. And if you've got 1,000 employees, that has become. Actually, the vast majority of U.S. companies now self-insure, but in so doing, they have what's called backstop insurance. So beyond a certain level, they have insurance. They're only taking a certain amount of risk.
If costs are particularly bad, then they have a backstop insurer in place to make sure that they don't, you know, really have their healthcare costs spiked. As you go down-market, it becomes harder to do that. You know, the average is within a 50-person company, you could easily have a few people have particularly high costs that would really spike your healthcare costs. That would be very bad for a small business. And so the trend in smaller businesses moving to self-insurance has been much slower. The market is less than 20% penetrated, compared to, I think, almost 90% for 1,000-person companies. So what this company does is it helps smaller companies act in a consortium, so that they can actually underwrite a group of companies as a package.
They have their own team in-house of actuaries who can price a group of people, and then take that to a stop-loss insurer and allow smaller companies to self-insure with that stop-loss insurance in place. So that's the long-term secular trend. Benecon is one of the market leaders. It's, I think, the second-biggest player in the market at the moment. Has grown very dramatically over the last four years, and, and again, we think that market trend will continue, and this company is really well-positioned within our market. So it's one we're really excited about, partly 'cause the dynamics of how the deal came together, and more importantly, because of the fundamentals of the deal, the sponsor, the management team, and, and that secular trend that I talked about. So that was the first thing we did.
Again, I mentioned earlier, we're a little bit lighter on healthcare. It was not that we, you know, did the first healthcare deal that came along, or wouldn't have done anything but healthcare, but we are very pleased that it is in the healthcare space, because we would like to have a little bit larger exposure there.
I think it's, as Paul said, it's a great example of the power of the platform. It was an 18-month process, one of the team going, who knew TA incredibly well, going to them saying, "Look, we love this business. We, we looked at." The blessing of having multiple relationships across multiple managers is that we're able to see the best healthcare businesses in different people's funds and go, "Actually, that's a business that we would probably like to target, 'cause we like it." And so that was part of the process. We do that on a monthly basis. We look, try, try and actually go out and source deals rather than just wait for GPs to come to us.
So I think that's, you know, 'cause more traditional co-investment is GP will price deals, say, "I need equity," or, "I need to do X, Y, Z," and go then, you know, price the deal and come to the market and go right out of my LPs and my fund, who's going to take a portion of this? But so this midlife and co-underwrite, which we do a lot of, and actually last year particularly, they increased hugely across the portfolio. And so 18-month process, you know, they. TA said no, originally. They went, "No, thanks. You know, we're quite happy with how the business is." We went away, continued to do the work on the sector, on the company. You know, they then were thinking about that.
Through our secondaries team, we were talking to TA on something else, I believe it was. They heard, "Oh, potentially, I'm thinking about doing an auction process for Benecon." The team then got Mike Smith, who kind of sourced the deal, got back in touch and said, "Look, we've continued to do the work. You know, we're here if you guys, you know, wanna think about, rather than going through a process, actually, it's already done." And they went, "Yeah. Okay, cool. If you could get your work done alongside us, you know, by the end of the year, we'll choose you as the." You know, and obviously, as Paul mentioned, the nuances of the deal. So it was a really interesting...
Just shows the power of our sourcing capability, which I think is quite nuanced and everyone says, "I would love doing co-invest," but I think very few people are able to do this type of co-invest.
Two questions on that. Firstly, were there other co-investors alongside you? And secondly, you made the comment that the NBPE component of that was 25—what was the overall ticket? Was that disclosed that the broader NB platform did.
Just give me a sense as to how material NBPE was in the overall ticket?
Yeah, so first of all, no, there was no other co-investor.
Got it.
So, you know, everything Luke said in terms of background, it was just us doing that. And, obviously, you're dealing with a very sophisticated counterparty in TA, but it was an idea that we worked with them on developing directly, just us. In terms of the platform, I think it's just under $300 million.
T hat, that we have in the deal. On our platform, we can actually go larger than that, and again, that's just where the strategic nature comes into account. That, if you're $25 million, then you're not really providing a solution for them. You can still be interesting as a co-investor as part of a consortium, but, can you go and lead a deal? And can you be... The second deal we did with EQT, a co-underwriter. So can you, in a co-underwrite... they need a certain amount of equity to do a deal.
Yeah.
They need someone who's professional enough to do the work, to make their decisions quickly, and to be there at the close. But they also really need you to be reasonably large-
Yeah
Because they don't want to work with 20 co-underwriters. They want to work with 2 or 3, and I'm not sure how many is at Zeus, but there's more than one in Zeus. But again, scale is important to that.
I think it's around two, so two-thirds are in the kind of midlife and co-underwrite. Paul's been talking around in terms of what we do. I think that and that's, I think we had an 83% increase in midlife last year, for example, and about 43% in co-underwrite last year. So that it's materially gone up because of the environment, equity is a large proportion of deal sizes therefore. And we've got, you know, the equity, but also we've got the capability.
So hence why that partnership is there going, actually, you know, they'd rather use us as a sounding board because of our overall market knowledge and experience, rather than them doing all the work then going to market, and then looking silly, but then, you know, going on, actually, there isn't a market for this, or we've priced it incorrectly. So I can see it's about two-thirds are co-underwrite. but I suppose that's been skewed by the kind of what we saw last year particularly as.
That 13 was also a small component of a much larger NB ticket. Yeah.
Yeah. Scaled back.
Typically, NB would look after our ticket size, about $30 million.
Yeah and so that was to scale back. And you know, I'm sure Paul might have mentioned it, but actually there might become a point where actually us taking, say, GBP 13 million or GBP 10 million might not, we think, actually is not worthwhile for us from a portfolio diversification perspective. So we'd rather take, you know, have not, you know, 72% of our NAV is the top 30 investments. So we want to have, you know, larger positions in, you know, diversification is really important to us, so having a long tail of, you know, GBP 5 million, GBP 10 million actually investments doesn't really make sense.
There comes a point where we have to do the work to think actually from a portfolio construction, we might love this deal, but actually, are we getting a bigger bite size to allow it to be, if it does incredibly well, material for the portfolio, but also, you know, from a risk management perspective.
Just remind me how, so by the time you knock on the door of TA, how long does it take to deploy the $25?
An 18-month process.
Eighteen months.
But actually
Yeah, which is unusual. It's not usually that long.
Seems long.
But they gave us. So when we were first, say, 18-month process in terms of relationship, but it was, you know, back end of last year, I think we started. They said, gave us the go ahead October, November time, and the deal was closed before Christmas.
So it was a shorter.
It was a.
two-three months.
Crash timeline at the end. Once they decided to do it, then, that they required you-
Go, go, go, go. Yes.
Yeah, exactly. The writing is done by year-end because we wanna, you know, have this done and documented and tell our LPs. But, I mean, deal flow generation is really proactive. I mean, it has to be. There's situations where we know a company is being sold by a private equity firm, we think there's gonna be a private equity buyer. We'll try and get smart on that, so that if it's someone that we know, we can step in and say, "Hey, we already know the company. You should include us in your co-invest syndicate." We are, you know, whenever we hear a big deal announced by a firm or an investor and, the person who's a lead professional on that fund is expected to give them a call and say, "Hey, looks like an interesting deal.
Looks like you probably need some co-invest there." So it is generally very proactive. And then there's these midlife cases where we'll sit down with a small group of our senior team on co-invest and just go through portfolios. You know, we'll go through different portfolios and identify companies that we should be thinking about, and this is how [audio distortion] came up in the first place.
[audio distortion].
Yeah, I wish we had. We should have, we have a slide which looks at our underwriting, which looks at on our platform. It's not just NBPE, but looks at deals over a different time period and what the base case underwriting was for those deals. And it's certainly in our C apital Markets Day presentation. But what it shows is that, you know, and you can look at this how you choose to, but it shows that that base case really hasn't come down over time. But the way.
I mean, theoretically, it should come down, too.
It should come down because of the cost of debt being higher, yes. But actually, it's not as large an impact as you might think on the IRR. It's sort of two or three percentage points of IRR, according to the modeling we've done. So it does definitely have an impact, and it also increases risk because if you don't execute, if a company doesn't grow, then usually if you put a capital structure in place, that's expecting the EBITDA to grow. So you're not gonna grow into a certain debt load. So that's something we look for very carefully, to make sure we don't step into the wrong situation there. But, I mean, it does have an impact. In the last six months, banks have become more involved again in the debt markets.
That has obviously affected the base interest rate, but spreads have come down a reasonable amount. They've come down from something like 650-625 to more like 550-525. So, you know, that saves 100 basis points. But ultimately, yes, the cost of debt is higher than it was. That does have an effect around the edges, but what is still more important, I think, is execution on the business plan, how you're gonna grow a business. And that in itself has become more difficult because markets are priced efficiently. So I think our feeling on that is that there is going to be a greater difference between first and fourth quartile, meaning that investment selection is even more important, and you have to be investing alongside the best sponsors in some of their best deals.
You know, I think that it will be hard for the private equity market as a whole to maintain the averages they've been doing. But I do think that good firms and, and good deals, will, will still exist. But it's less around, it's less around debt. It is, it is a factor, but it's maybe not as large a factor as you might think.
I mean, should we worry generally, the question earlier? In sense that they're being stayed behind because broadly there is too much money chasing too few deals. Because the returns have been very good in the past.
Yeah. I mean, the first thing I always point out is, people are sometimes suspicious of private equity, 'cause private equity often sells to each other and so on, but that's how the public market functions. You know, for every buyer, there's a seller. And so in a way, you know, there's some similarities on a much smaller scale. At the same time, we worry about that. We worry about that with every deal we go into. And more often than not, we're modeling multiple contraction in the case that we design ourselves. So, you know, we'll always look at our own modeling. In the case of Benecon, obviously, that's not just our modeling, but also our own market study from a consultant, and trying to decide what the growth will be like.
Ultimately, what you've got to believe is, when it comes time to sell, if you think you're selling to private equity, then there's got to be another return on the table over the next holding period for the next buyer to want to buy it. You've got to think, if you're trying to make 2-2.5 times your money in three-five years, that at the end of that period, you can do that again. I think we worry about multiples contracting, and we try to model that in, but we also worry about businesses where we think, you know, there's a runway, but maybe it's seven or eight years, because the next buyer is then gonna not want to pay that multiple.
So there's a sort of macro and a micro part of that equation, but it's absolutely something we look at, we worry about, and we model that into maybe not always our base case, but certainly we look at a case with a downside around that.
Seems as well, the holding period is getting longer, which is the returns to learning. Just hang on, don't you?
Yeah, I.
So that's lucky to.
I think that's.
Three years' time to start.
But I think that's for a good reason. As in, that's because the company has that amount of growth, and you think it. I mean, again, Action's a great example, that if you think it's gonna keep continuing, why would you, why would you consider exiting? But ultimately, you do have to exit at a time where there's still plenty of growth for the next owner. If that's the public market for Action, you can't IPO when growth is trailing off, which is why that's such a pertinent question.
Can you spend a minute just talking about sort of capital returns, share buybacks, where the board's mind is at with that? It's obviously a hot topic.
Yeah.
Some people have done a lot, you've not done that much. Just maybe talk about that.
Yeah. Yeah, absolutely. So again, just as background, slide 17. So again, the primary mechanism for capital return for us for 10 years now has been the dividend. We've returned almost $340 million through dividends over our history. That's $44 million a year at the current level, which is 3.2% of NAV. We have also done buybacks over time, $65 million in our history, $10 million of which was in the last six months. So true, we haven't, we haven't made the, the sort of very big, buyback announcements that some of our peers have. Equally, we'd argue that we've been returning capital in a much more meaningful way for a lot longer than many of our peers.
I think it also comes down to how the board balances returning capital to investors through dividends and buybacks, as well as new investments. You know, thinking of NBPE as a vehicle that is designed to generate long-term returns, you also need to make new investments. So it's really striking that balance, and it's where you think the risk-free return that you're gonna make on a buyback is attractive relative to the types of returns that we have made historically, and obviously are hoping to make going forward. So it's striking that balance, and I will say the board has allocated capital for buybacks.
The board is open to buybacks, but it's really about what level and, you know, ultimately looking at to have a vehicle that does grow over time, in terms of reinvesting, making new deals, and, and continuing to do that.
My read of that is, you've done a lot of work in the back end of last year and the first half of this year, but started to deploy more capital.
You think there's probably more to deploy in the core business, which is new investments rather than buyback your stock. Is that a fair read of that?
I think that's a fair read of that, and I think the board would agree with that. I mean, I think it's important that the board is quite involved. We just did a portfolio review going through the top 20 positions with all of our different deal teams, with the board two weeks ago. However, our new director came over to New York to sort of see the whole team for two days earlier this year. The entire board has done that about every two years. So the board sees what we're doing pretty intimately in terms of the inner workings of our operation, as well as the portfolio.
Obviously, it's a board decision, but I think that directionally, you know, the fact that we've done the two new investments and an additional one that hasn't closed but is in process, relative to the buyback, shows you where we are today. But I think really importantly, it's also, you know, through the statements and the fact that there is capital allocated, but obviously you don't know the parameters, but there are parameters in place, and the board is flexible and does think that buybacks are a good use of capital to make that risk-free return at certain levels. It's just not specified what those levels are.
Are you saying, really saying that these two new investments are gonna achieve a return that exceeds?
Well. You know. Yeah, I mean, ultimately, the return from a buyback is. Yeah, but the difficulty there is it's a clearly. If you believe our base cases, and we do, in those deals, then it's not risk-free, but the return would be significantly higher than buybacks, and you can reinvest that. And we've got a long-term record that's very good in co-investments. So you're comparing a risk-taking return of, let's call it 2x, and hopefully you can compound that over time, versus a risk-free return of one over 0.25, rather than sort of one over 0.75. So, you know, it's a relatively low return, albeit risk-free, and that's the comparison you're making. And, you know, I think there's also a signaling aspect.
It's not a low return. It's just, I think.
Yeah.
25%, rather than investing in shares.
Yes. Yeah, I mean.
But the other side of that argument is that it says, doesn't affect existing portfolio that you think you're gonna get.
Well, I think there's also the, I mean, first of all, you know, you know, you think the new deals can make 2x or 2.5x is something that we obviously do have more information than you, and we believe it. The existing portfolio, again, we think is in very good shape, but ultimately, the purpose of the vehicle is to create returns and to grow over time, as opposed to, you know,
Is it to grow? Make returns, yes, but to grow. Shareholders really want it to grow. They want returns on it.
I think, I mean, we met with two investors yesterday, who would have made the point that, you know, a larger flow to more liquidity is a good thing. And I don't think that's unique in terms of larger groups looking at us, and needing that liquidity to be able to buy enough of us and to be able to obviously have the optionality to sell when they want to. So I think it is a factor, actually. So yeah, I mean, it's something which is a difficult decision. And as I say, I think there's, I know there's capital with parameters around it, available for buybacks. It's just you don't necessarily see what those parameters are, unfortunately.
Sorry. I get your point, and I think it's a broader sectoral issue as well as, you know, specifically for us. If we had not returned GBP 40 million or GBP 360 million ever since we introduced the dividend to shareholders, no return at all, it'd be a very different conversation we're having at this table now. But the way. The balance, as Paul said, you know, balancing dividends, you know, by buying back shares and new investments is a difficult thing, particularly in this environment, and we fully appreciate that. I know there's an awful lot said in the media at the moment about others coming out with big plans and bits of which is fine.
Yeah, but then, you know, I think we are the, you know, probably in the sector, we've returned the most capital to shareholders over the last 10 years. I appreciate that doesn't, that doesn't change your question, and I appreciate it's a, it's a fair question.
I accept that.
Mm-hmm. Yeah. But I think, I think it's.
How does that thinking get?
Mm-hmm. It's a great question, and as you know, and if we were thinking about that today, maybe the decision would be slightly different from if we're thinking about it ten years ago. And I think that's, you know, being very open. Now, that's, you know, if we had the lovely thing of hindsight, you know, being able to say, you know, if putting in place a dividend policy ten years ago to today, we still think actually we've generated a great amount of return for shareholders and pass it back to them. So it's been incredibly positive, we feel. You know, these are capital appreciation vehicles in their very nature. One of the blessings of the structure allows us to pay a yield to people.
So I suppose, you know, at the moment in time, we're very fortunate. Actually, the register we have, there are individuals on there that like the yield, like the income, like the dividend, and people that don't like it so much. But actually, for us, you know, we now have it, and it's something that, you know, you've seen what happens if people go renege or don't pay. You know, it's a difficult.
I was gonna say, what's.
It's a difficult.
It's quite difficult to do and increase the share price.
Correct. It doesn't.
Drops everyone's.
Yeah, I think.
What they're looking for.
Yeah, and ultimately, I think one of the reasons why the board were keen for me to come on board is to help support, you know, to generate hopefully, along with the brokers, hopefully generate new buyers and be more of a presence here to try. And it's been to be more to help support, you know, both educate but also diversify the shareholder register and generate buyer demand. Ultimately, performance and generating buyer demand is what's gonna close the discount. Us buying shares back around the edges, you know, it-
It's not the.
No.
You know, buying shares back at a 40% discount. Is what? Yeah. It's not around the edge.
No, no, because.
[audio distortion].
Incremental advancement.
We have to. We've done.
Also, by the way, capital position applied everything I said about balance sheet security applied to everything. We didn't invest, but we kept paying the dividend, and obviously, that was something we planned for over the long term because that's a long-term policy. But over the last two years, we hadn't made a lot of new investments until realizations came along. And the discount really, you know, started to close towards the end of last year to the point it is at today, over 25%. So it's not quite a comparison directly sort of apples to apples there in terms of when we've chosen to make new investments versus when we've chosen to do buybacks, versus when the capital has been available to do either. I presume when you make...
One of the benchmarks you look at is whether it would be better to buy shares back. I would assume that probably fairly fundamental. Yeah, I mean, I think the board does that. So again, you know, obviously, quarterly board meetings and these other meetings I mentioned outside of that, then yes. You know, I think that's something we think about as a manager, and I think it's something the board thinks about as the oversight of the manager. And so absolutely, it is. And, you know, if we were at a 40% discount today, maybe things would be different, but the discount today is at 25%. Not that we're pleased with that, but obviously relative to some peers, that's not the worst place to be. It's not where we want to be.
We think in the long term, there's a lot more value. So again, I think the other thing around buybacks, obviously, is there is some signaling to it, and we on the board appreciate that as well.
I think just.
One very flat answer. Obviously, one fairly small again. Many would appreciate in the past that buyback structure is very clear. It's not buying function. I think it would be helpful, probably, if more share, a bit more structure in terms of where, and what is that? As well, you know, generally where, well, obviously, we can pass question along to the board. I mean, in terms of whether the board has thought about that, the dividend obviously is progressive in itself, so it grows according to NAV. And again, I think historic returns have been good. So the question is about relative use of capital and what, what we think our investor base is looking for. So, you know, all options are considered, but,
Yeah, well.
That's not something that's been.
Possible. That's a fair point. I think, you know, we do appreciate, you know, so we're happy to get your guys' feedback and understanding of where you are and where we are, so, you know, that's.
What's the range of the discount been?
So it's been out, well, last 10 years, it's been as wide as.
I mean, so I'd say before COVID, we, if you went back 10 years, we traded more in the fund of funds sort of range, which at the time was more like 20%-25%. Before COVID, we got down to kind of low to mid-teens, and appeared to be moving in the right direction. And then COVID, obviously, it gapped out very briefly to a very high level. And then since then, again, we got down at the end of 2021 to, again, sort of mid-teens and so it's sort of very hard to say what our natural level is, 'cause our- 15-25 seems like a.
Yeah, if you think more.
The trading range.
Exactly. So the way I kind of think about it is the fund of funds typically in a, you know, long over long-term trade between, say, 25 and 35, and the directs trade between, you know, 15 and, you know, maybe even tight issues at 5 today, but they kind of trade within that 15%-20% band, maybe a bit tighter. And I think the one evolution that's happened since we launched in 2007 as a fund of funds, we stopped making fund of fund investments in 2008 just after that, and started co-investing in 2010, 2011. Yes, we were investing in debt and co-investments for a bit of time, but now we are, what, 93%, co-investment. Co-investments are soon to be a lot higher.
So it's taking time for people to kind of mentally kind of get, you know, and I think now we're trying... You know, so other than the likes of HG and 3i, we're the—I think we're the tightest in terms of the directs and things.
That's the function of, it's confidence in markets, confidence in the economy. Confidence in the returns, or it's a sort of-
It could be.
It's a confidence-driven business.
I think it is. It could be, and I think volumes have been, we all know this, obviously, the listed space has been low more recently in the last, you know, last year. It seems like an awful long time. But I think, you know, being on a positive, you know, of course, everyone's time, but also, you know, there are. I think we are seeing investing having ball over.
But there are, you know, I think there are definitely green shoots of people actually thinking about, about the asset class and about going actually, you know, and maybe it's a bit of confidence, you know, certain other sectors, should we say, you know, raised an awful lot of money in 2021, and, and, you know, and, and deployed that at, you know, I was saying, peak of the market, and now kind of going, and were particularly perceived as bond proxies, and all of a sudden now that, you know, that, that is not the case.
Therefore, but people are again going: "Right, okay, when sitting on cash is no longer a viable option for me, what is a sector or asset class that, you know, has performed very, very well over a very long period of time and is differentiated from what I, my existing investment?" You know, and so I think that's why, you know, listed products might be an area that people go actually from. And, you know, I'm very, very aware of this. No, no, actually, the quality of the managers in the sector is very good. The longer-term returns across the piece is a pretty not a broad spectrum of returns. It's pretty, you know, everyone's pretty decent and done pretty well.
So, it's, you know, we're very fortunate to have this differentiated co-investment approach, you know, so you get the direct exposure to kind of a multi GP. You know, so we're not like the true directs, you know, very sector specific, but also we're not fund of funds model either. So it's differentiated. But again, message, explain to people how we are differentiated and the benefits of the structure, and also the sector is important, and it's more of a challenge when certain media outlets in the U.K. seem to be constantly bashing the sector, but, hey,
Okay. Let's stay a bit close.
Of course.
I was thinking, do you want to see if there are any questions online?
Any questions? Thoughts from anyone online, or? I think so.
Well, thank you all for coming along. It's a really good question.
Yeah, thank you everyone. I appreciate your time.
Thank you.
Thank you very much.
Thanks.