In late November, Neuberger Berman, a private, independent, employee-owned investment manager, announced the successful closing of its second private equity European Long-Term Investment Fund (NB ELTIF 2022).
The fund, which had its first closing in February 2022, closed after eight months on October 31, bringing the total size of the fund to €210 million, above the initial target of €150 million, with commitments from clients in 12 different jurisdictions.
José Luis González Pastor, CEO of Neuberger Berman details the fund’s approach, how they choose the sectors in which the fund invests, and what their relationship is like with the companies in which the fund invests.
– How do you receive the closing of this fund, which also exceeded size expectations?
We value very positively the amount achieved, exceeding the initial target by almost 50%, especially considering that this fund has only been available on the market for 7 months, from February 2022 to October 2022, where the minimum subscription was 25,000 euros and in a period of stock market turmoil, an adverse geopolitical environment and an environment of high inflation and rising interest rates.
– What is your 2023 outlook for the sectors in which the fund will invest such as private equity and growth capital and credit investments?
The fund has a co-investment strategy with top-tier managers primarily in the US and Europe. Sectorially it does not have any bias, but invests in the sectors of specialization of the managers with whom it co-invests. For example, the fund has invested with Veritas in the education sector, where they have extensive experience, as well as investing with THL in the Health Technologies sector.
Through our managers we receive, on average, approximately 10 co-investment opportunities per week, and in the first year of life, the fund has invested in 13 companies, with a focus on the information technology, health sciences, education and business services sectors.
– Do you have any acquisitions in your sights?
We have many acquisitions in our sights at the moment, more than ten. However, our Investment Committee is very selective resulting in historically only one in ten opportunities reviewed receiving approval. Therefore, I could not tell you which opportunity will be approved. In fact, we have recently announced another investment and it is likely that in the next three to four weeks we will have another investment in the portfolio bringing the number of investments to 15. This is a portfolio that is going to have a lot of companies. We are talking about almost 30 companies in just 2 years, so it is very different from other funds of similar size that tend to have portfolios with fewer investments, around 10, and where they require 3 to 5 years to complete that number of investments.
– How might the current inflationary environment and impending recession affect the sectors in which the fund will invest?
As we have just mentioned, we are very selective in the companies in which we invest. In the current macroeconomic environment, it is even more important to be selective with the business model of the companies, for example, that they are not intensive in energy or raw materials consumption, their competitive position is also important and that they offer critical services that are inelastic to price increases and are indispensable, regardless of the time of the cycle, such as our education company, top 3 in the USA, which provides educational content, both for compulsory subjects and for reinforcement and electives, for schools nationwide. Students will continue to need that content for their classes and it will be a priority for parents.
– How will direct private equity co-investments support fund diversification?
Co-investment portfolios provide diversification metrics that are difficult to achieve with traditional funds of a similar size. Through co-investments, the fund will be diversified by manager, by strategy (market consolidation projects, international expansion or product range expansion), by sector, by geography (mainly North America and Europe) and by company size, from growth capital to large companies, but always investing in companies with positive cash generation and EBITDA.
– What ESG risks and opportunities do you see in this portfolio?
For each investment, we perform an ESG analysis of both the company and the manager with which we are co-investing, identifying potential risks and opportunities for improvement. If the risks are high or not mitigable, it is reason enough not to invest, although in most situations the risks are limited and the opportunities for improvement are clear and with concrete measures, for example, the reduction of CO2 emissions and waste, the improvement of working conditions or the improvement of corporate governance, both in processes and in the composition of the governing bodies.
– Would it be a risk that would be considered high and what type of risk might it be?
I can give a couple of examples where we have rejected companies on ESG criteria. For example, an industrial company that has had toxic or uncontrolled discharges or has been sanctioned for uncontrolled discharges represents a high risk. It can also happen that a company receives inputs that come from certain geographies and companies where it is not very clear what the working conditions are or even employ child labor, even if it is a common practice in those countries. That for us is a very high risk. We as investors do not feel comfortable investing in those situations and therefore we have decided on all those occasions to reject the investment.
– How is your relationship with the companies in which the fund is investing?
We follow up at least quarterly. We have several points of contact with the managers of these companies and periodically we meet or have a call to follow up on the conversions we have with them and go over the various investment and ESG metrics. We provide our overall view of the markets and what we see in other conversions or from other managers in that regard on a subject-by-subject basis. But at the end of the day, let’s be very clear, it’s up to the managers we co-invest with to implement the business plan and ESG measures and deliver the results.
