Nearly 90% of companies share this trait - and it's creating an unmissable investment opportunity

Note: This interview was taped on Friday 18 October 2024.

For investors who are attached to stocks, it can be easy to forget that so many fantastic businesses are: a) not publicly listed and b) have no plans to do so. In fact, nearly 90% of companies that make more than $100 million in revenue and are based in the US alone are privately held. There is simply no way to access these investment ideas and returns without an expert in your corner.

Enter David Stonberg, Neuberger Berman's Deputy Head of Alternatives and the firm's Global Co-Head of Private Equity Co-Investments. Stonberg has spent the bulk of his career analysing, investing, and closing private market deals - including over 20 years at Neuberger Berman. And while this investing environment is the toughest it's been for some asset classes for decades, Stonberg admits he actually likes the current environment.

"There's good discipline in the market from both buyers and sellers. Transactions are taking a little longer, and as a buyer, I think that extra bit of time benefits the buyer," he says. 

Macroeconomically, Stonberg says the situation has improved. In the back half of 2022, deal flow in the private markets reduced by anywhere between 25% and 40%. Today, deal flow is more considered and LPs/GPs [leading partners and general partners] are now demanding more value and distributions out of their investments, fostering what should be a healthier environment for this asset class.

"It starts with having relationships with the leading private equity firms. After that, you need a team that is able to do the due diligence efficiently. You need to be able to come to the table with the right amount of capital. Finally, you need to be a good partner. It means being responsive and acting quickly with them. It doesn't mean saying yes quickly but quick with guiding them as to the things you are working on within that transaction," says Stonberg.

As you might expect, this process filters out almost all (+90%) of the investment ideas that come across Neuberger Berman's desk. As Stonberg puts it, you have to be dedicated to make it work. 

On leverage and value accretion

Press coverage of private equity suggests it used to be an asset class where financial engineering, through dividend recaps and boosting leverage, was the easiest and most profitable way to accentuate investor returns. 

"There's no question that was true. 20 years ago, what was the mantra? Buy low, sell high and do it with a lot of leverage. Capital structures would often be 60, 70, and sometimes even 80% debt as a percentage of the overall structure," Stonberg recalls.

But over the last 20 years, and especially more recently, that psyche has been replaced with one focused on value accretion - or in his words, "buy good companies and make them great."

So what makes for a high quality investment?

Put simply, some of it is manager skill (as is the case with all private markets investments), but a lot of it has to come down to the manager's evaluation of the business itself.

"Is it in a good industry, is it growing faster than GDP, is it low commodity exposure and generating free cash flow? But then, it's also about how do they implement that value creation plan to accelerate earnings and make it more valuable to the next owner of this asset?", Stonberg says.

In addition to our broad conversation around private equity and the landscape for that asset class, Stonberg is also a recognised expert in the co-investments niche that falls under the private equity asset class. To find out what co-investments are and why they are an attractive opportunity, you can watch this interview which forms part of Livewire's Alternatives in Focus series.

Timecodes

• 0:00 - Intro
• 0:44 - Why should investors consider private equity?
• 1:56 - How has the macro environment impacted your opportunity set and corporate activity?
• 3:29 - How private equity has evolved over the last 20 years
• 4:32 - What makes for a high quality private markets investment?
• 5:44 - How do you gain access to good quality deal flow?
• 7:32 - What are co-investments, what are the different types of co-investments, and why do you like them?
• 10:55 - Talk us through the life cycle of a previous investment you made and what caused the exit?
• 12:21 - What sectors and themes are the most appealing right now?

Access to institutional-quality private equity

Neuberger Berman believe that private equity is an all-weather asset class: Strategies derive their returns from buying high-quality businesses, putting in great management, and implementing strategic and operating plans to create value. To learn more, please visit their website or fund profile below.

Managed Fund

Neuberger Berman Global Private Equity Access Fund (AUD)

Alternative Assets

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