Adding value in all three phases: buy, hold, and sell

Note: This interview was taped on Wednesday 19 February 2025.

Just like investing in a company, an investment in private equity has three distinct phases - the buy, the hold, and the sell. Unlike buying a stock, however, private equity fund managers have the ability to generate value throughout all three phases, according to Neuberger Berman's Gabriel Ng. 

Ng emphasises the importance of active ownership and management throughout the three stages, highlighting how private equity managers must be skilled not only in acquiring assets but also in driving their growth. 

“Buying is only a small part of the equation. The real heavy lifting comes post-closing,” said Ng. 

He explains that after an asset is acquired, the focus shifts to boosting sales, entering new markets, and improving management, ultimately positioning the asset for a successful sale.

Ng also discusses the current exit environment, noting that after a surge in activity in 2021, exits have slowed, with distributions down to about 12% in recent years compared to the typical 20%. 

Despite this, he remains cautiously optimistic about the future, pointing to the resurgence of IPOs and improved M&A activity as potential signs of recovery. Ng also points to two creative exit strategies that have emerged during this challenging period: partial stake sales and GP-led continuation funds. These strategies allow general partners (GPs) to provide liquidity to limited partners (LPs) while maintaining control over assets. 

“GPs have been resourceful and creative in thinking of other ways to return capital to the LPs,” said Ng.

Ng further explains the evolving role of co-investments in the current landscape. In a higher interest rate environment, GPs seek co-investors to secure necessary equity for large transactions, and Ng's firm, Neuberger Berman, plays a key role in this process. By working with a select group of LPs who can contribute sizable equity, GPs can confidently move forward with deals.

As private equity continues to adapt to market shifts, Ng’s insights reveal a market that is evolving with a focus on creativity, strategic exits, and collaborative partnerships between GPs and LPs.

Edited Transcript

Chris Conway: Hello and welcome to Livewire Markets, my name is Chris Conway. Today I'm sitting down with Gabriel Ng. Gabriel is going to be talking to us about what's happening in the private equity market and how he looks at the different phases, the buy, the hold, and the sell. Gabriel, it's really nice to see you again. Thanks for sitting down with Livewire.

Gabriel Ng: Thanks for having me, Chris. It is a pleasure to be here.

Chris Conway: Before we talk about what's going on in the PE space, can you just share with the audience how you characterise PE through the lens of the investment cycle? So the buy, the hold and the sell?

Gabriel Ng: Sure, absolutely. I would say that, taking a step back, the overarching philosophy of the private equity approach is really one of active ownership and management. And you see that take place through the different processes, through the buy, the hold, and the sell. Starting first with the buy, I think private equity managers have the ability to take advantage of information asymmetry. The ability to source, to originate the deal flow, and ultimately negotiate with the seller for an optimal transaction structure as well as entry price. So there's a lot of active elements in the process of buying, and a lot of GPs have a way of creating their own differentiated deal flow and sectors of focus. But equally important, it is what you do with the asset after you own it. Buying it is only a small part of the equation. The real heavy lifting comes post-closing and that's where you see that the full suite of skill sets being put into play.

The end goal is to increase the top line as well as the profits of the company that you buy, and to reposition it as a more attractive asset ultimately. So things like driving sales growth, entering a new market, pursuing accretive, bolt-on M&A, hiring the right management team and incentivising them. So all these are tools in the toolkit during the buying phase, and ultimately it's about selling right as well. And private equity managers have the ability to position an asset for a sale, and there are many options for them to do so. They could exit via an IPO through the capital markets. They could also sell the asset onto the next private equity sponsor, and that could also be a sale to a strategic player. And these days we’ve seen other options become available; GP led continuation funds - that's another interesting area. So I would say that throughout the whole investment holding and exit process, you see that there is active management and ownership and that's important.

Chris Conway: Gabriel, a little follow up question if I may. Do you have a favourite part of the process? Is it the buy, the hold or the sell, or do you love it all?

Gabriel Ng: I think all parts are important. For everything to come together. You can't just get one part right. Sitting as an LP I think, and very topical in today's market, the exit becomes important. DPI (Distributions to Paid-In Capital) is becoming another more important metric that LPs track. But I would say that every stage is important.

Chris Conway: Nice segue there. Let's focus in on exits and distributions. Since 2021, activity has come down and really meaningfully slowed in the last few years. What are we expecting for 2025 and beyond?

Gabriel Ng: After the frenzy in 2021, exit activity has really moderated over the last few years. If you put some numbers around it, exits or distributions as a percentage of beginning NAV for the private equity asset class has typically been about 20%+ year on year. But over the last few years, it's been 12%. So exits have definitely been quite challenged. It's a function of public markets, geopolitical uncertainty, buyer seller gaps and Bid/Ask spreads. But looking ahead, we're quite encouraged with some cautious optimism that exits will come back. We see that in the performance of the public markets and we have really seen a few IPOs take place off private equity owned companies just late last year and this year. So we expect some more to come. I guess a more reduced interest rate environment, that should also bode well for M&A activity, and with a more pro-business administration we do see some of those bottlenecks coming through. So I think it's certainly not one where we see the flood gates opening. I think it will be more gradual, but certainly we expect more exits to come this year.

Chris Conway: Gabriel, we're about to dive into talking about GPs (general partners) and LPs (limited partners). I just wanted to make sure we're bringing the audience along as we have this conversation. So it's my understanding – a very base understanding – that LPs provide the capital and GPs are the active managers of the opportunity. Is that about right?

Gabriel Ng: I think you captured it very well. Essentially, general partners or GPs, they raise vehicles that are typically close ended. There's a 10-year fund life and the fund gets raised at the point of inception and LPs provide the capital for the GPs to deploy over a period of four to five years. And the last four to five years of the fund is really spent harvesting, driving exits, driving outcomes. So I think you captured it well. Essentially that's the relationship between LPs and GPs. And ultimately GPs have a target return that they've communicated to their investors and it's their key role to deliver those outcomes during the period of fund life.

Chris Conway: So Gabriel, in the challenging exit environment, which we've just been talking about, GPs have generated distributions via partial stake sales and GP led continuation funds. Why has there been this need for liquidity and do you see those activities continuing?

Gabriel Ng: Given a backdrop of a more challenging exit environment, particularly the IPO markets being quite shut over the last couple of years, I think GPs have been, I would say, resourceful and creative in thinking of other ways to return capital to the LPs. And I think you hit the nail on the head. So these two are the methods that you mentioned. We certainly see a lot more activity in that space. So in the case of a partial realisation, the GP gets to generate some DPI typically, they'll sell a minority stake in a top performing asset in the fund, and they still get to control the asset while sending some distributions back to the LPs. And this is important because LPs typically like to see some distributions before they re-up to the next fund that the GP is looking to raise. So we at Neuberger Berman, we’re active participants in this partial recap type transactions. I think it creates a lot of opportunities for us to invest in the companies that we might not have had the chance to co-invest in previously. So we do believe that we're quite well positioned to create some win-win situations with our GP partners. And of course you have the secondary exit route as well, and we see a lot more GP led continuation funds taking place. If I looked at the secondary deal of volumes last year, depending on which source you reference, it's somewhere between $150-160 billion globally and it's roughly split half and half between GP leds and LP type secondary deals. So these GP led continuation funds provide the opportunity for the GPs to move one, two, or maybe sometimes multiple assets from an older fund to a new vehicle. It gives the LPs and the older fund the option of liquidity, or they could also roll over if they see continued upside. And for the GPs, they continue to own the assets that they have, high conviction over the next four to five years and potentially positioning these assets for a more optimal exit outcome if the current environment is not that conducive. So once again, that that's another active area that we've been tracking and actively participating in.

Chris Conway: Gabriel you talked there a little bit about the relationship between LPs and GPs when it comes to larger transactions. How important is that relationship between LP co-investors and GPs?

Gabriel Ng: Co-investments have been more important these days, both for LPs and GPs. I think from the GPs perspective, in higher rates environment they tend to take on less leverage, and as a result they might need more equity to get the same deal across the line as they would have before the rate hikes came through. And there's also less willingness to depend on post deal syndication. So they want to have the equity fully spoken for, or the vast majority of it spoken for, before they sign the transaction. So they tend to look for co investors who can provide the capital, and we play such a role. And what do GPs look for in an LP? Number one is really that level of sophistication that you bring to the table, the ability to appreciate the deal situation, the setup, and to move at the same pace with the GPs. The second factor that's also very important is the ability to speak for scale. Particularly for these large transactions, the GPs probably want to work with a small handful of LPs that can provide a sizable equity cheque, and we fit into that category. So very practical considerations, but ultimately it's creating a win-win situation. We help our GPs get a deal across the line and we get to double down in a high conviction asset that we like in addition to our exposure to fund.

Chris Conway: Fantastic. Gabriel, thanks for sitting down with Livewire today.

Gabriel Ng: Thanks for having me. Chris.

Chris Conway: If you enjoyed that video as much as I did, make sure to give it a like and don't forget to follow our YouTube channel because we're adding lots of great content every single week.

Managed Fund

Neuberger Berman Global Private Equity Access Fund (AUD)

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