Touching on the themes of capital allocation, governance and valuations in investment management, in the following Q&A we talk to Neuberger Berman Private Equity partners (NBPE) Chairman, William Maltby.
William, in your view, what are the keys to success for an investment company?
WM: When it comes to NBPE, our Board has consistently referred to three key strands for delivering long-term success for our shareholders – strong investment performance, good governance, and an effective investor relations programme. Investment performance is obviously of prime importance and the board’s role here is to ensure the manager is meeting its objectives to deliver strong returns and manage risk. Fortunately, the manager has performed incredibly well over a sustained period. Over 10 years to 30th April 2024 NBPE has delivered a net asset value total return of 189.9%.
Could you briefly explain your capital allocation process?
The overall aim of NBPE is to invest in private companies to generate long-term growth. Alongside allocating capital to new investments, the board is committed to NBPE’s long-term dividend policy and regularly reviews the capital allocated to the company’s share buyback. When thinking about capital allocation, the Board continually balances other elements – such as the financial position of the company, vintage year diversification, use and cost of leverage, and the company’s investment level relative to its target.
The long-term dividend policy is to pay back 3% of NAV annually – which underpins shareholder total return. This has delivered a significant and progressive dividend, one of the highest and fastest-growing in the sector, over the past 5 years, which is a major differentiating factor between NBPE and its sector peers. In fact, the capital returned since we introduced the dividend in 2013 is now $338m.
While the board believes buybacks can be an attractive tactical use of capital in certain market environments, in most conditions the best way of generating meaningful returns is through allocation to new investments. Over the long term, new investments generated about 2.5 times return on investment. ,
You mentioned governance, what do you view as the key elements of good governance?
WM: We believe good corporate governance is a fundamental driver of NBPE’s long-term success. As Chairman, I am responsible for ensuring our board upholds a high standard of corporate governance, which is why we have instilled a strong culture of openness and debate.
The board needs to attract and maintain high-quality directors with a broad range of skill sets. Importantly, each member of the NBPE board has extensive knowledge of private equity, with some members spending the majority of their careers in the industry. Pleasingly, we have been fortunate to be able to strengthen the Board’s investor engagement expertise in recent years by appointing an experienced former sell-side analyst with direct experience engaging with private equity investment trust . One common strand across the board is the ability to focus on the major issues and avoid being lost in the details.
As mentioned, developing and retaining a strong culture has been an extremely important element of the board. A strong culture is particularly key as the underlying committees – such as the audit and nomination committees – are led by different chairpersons. It is also paramount to ensuring there is constructive challenge, where all voices and opinions can be aired. An additional crucial aspect of governance is the need to stay ahead of ever-increasing rules and regulations.
What is your view of ESG in the private equity world, and how does NBPE approach this?
WM: Private equity investors are much better placed in relation to ESG than public market peers, in my view. This means private equity investors potentially have more ability to influence strategic and operational change
than many public equity investors. The advantage of the private equity model in general is that private equity managers are present in corporate boardrooms, which strengthens the ability to make a positive impact.
Fortunately, our investment manager Neuberger Berman is at the forefront of ESG and is regularly cited as a global leader. For NBPE, ESG is embedded throughout the manager’s investment and reporting process. As a board, we have access to reporting concerning aspects of ESG within the portfolio, which forms part of our overall monitoring process.
You mentioned the strengthening of your investor relations capability. Why was this?
WM: Investor relations is incredibly important. You can have great investment performance and the highest quality of governance, but it does not mean much if your compelling proposition remains hidden from the wider market. Elevating our investor relations was crucial to adequately communicate NBPE’s unique co-investment proposition. While it is quite common for private equity portfolios to have co-investment exposures of just 10-15%, NBPE takes an almost entirely co-investment approach with 87 investments in private companies alongside 53 PE managers
It is simply impossible to construct a co-investment capability overnight. We are fortunate to be able to tap into the power of Neuberger Berman’s $115bn private equity platform, where the team has the relationships necessary to be able to successfully operate in this sphere.
Ultimately, the Board wanted to make sure NBPE’s broader profile matched how highly we thought of our unique proposition. We are extremely pleased with the outcome of many of our investor relations endeavours in recent years – including the revamping of the website, enhancements to our company literature, and the Manager has recently hired a head of IR based in the UK.
PE valuations are regularly discussed in the media. What is the board’s process in terms of valuations?
WM: NBPE has a strict valuations methodology and audit process, and given that it is a listed company, it must adhere to numerous rules and disclosure practices – from monthly NAVs, to annual reports. While valuations in the PE industry have come under regulatory scrutiny, we believe NBPE’s co-investment model is far more transparent than various other structures, given direct holdings in companies.
From the Board’s perspective, while we review the NB valuation committee documentation, we also conduct our own independent reviews of the portfolio. Finally, the independent auditors review and test valuation processes Additionally, given the experience our Board has in the private equity space, we have the required knowledge to hold our manager to account, should this need ever arise. Finally, the proof of the pudding is the price obtained on exit. Over the last 5 year we have exited investments on average at a valuation increase of 36.8% above the valuation that the investments were held at three quarters prior to an announced exit – known as an exit valuation uplift.
Finally, are you optimistic about private equity in general over the coming years?
WM: We continue to be extremely confident in private equity over the medium to long term and expect it to both outperform public equities and generate solid absolute returns. However, we are not in an environment where a rising tide is going to lift all boats, so generating these returns will require more skill from private equity managers and we expect to see a wider dispersion of performance across the industry.
Despite continued broader economic challenges, private equity managers still have a number of tools they can employ to generate returns – including investment selection, selecting and incentivising company management, supporting growth with capital and/or resources, improving operational efficiencies, and supporting M&A.
Fortunately, we firmly believe NBPE’s co-investment model is exactly the right strategy for this environment.
