In this series of short profiles, we ask top fund managers to defend their investment strategies, reveal their views on cryptocurrency, and tell us what they would never buy.
Our interviewer this week is Paul Daggett, managing director of Neuberger Berman Private Equity Partners (NBPE) and a senior member of the Private Investment Portfolios and Co-investments team.
Which sector shows the greatest promise in 2022?
We believe that the importance of partnering with the right private equity manager for the right opportunity and the operational value that a high quality private equity manager can bring to their businesses is at the heart of investing in investment capital. We review this on a case-by-case basis following a detailed due diligence process and are very selective in what we choose to invest in our deal flow.
Portfolio construction is both top-down and bottom-up depending on our deal flow, and we monitor our portfolio’s sector exposures with the aim of prudent diversification. Additionally, we focus on key themes – our long-term objective has been to invest in companies expected to benefit from long-term secular growth trends and/or companies with expected low cyclicality and these themes remain our primary focus today. The result is that NBPE’s portfolio is well-diversified, but the largest industry sector currently is technology, media and telecommunications.
What is the greatest economic risk today?
Not surprisingly, our concerns continue to be inflation, high interest rates and the likelihood of a downturn. In the years immediately leading up to Covid-19, we felt that we were perhaps coming to the end of a 10-year expansion period and positioned our portfolio accordingly. The resulting resilience of the portfolio meant that during Covid-19 the portfolio held up very well. While no company or private equity portfolio is immune to the impact of inflation, rising interest rates and an economic downturn, we believe the portfolio is reasonably positioned for also weather the current macroeconomic headwinds and this is what we have seen so far in most of our underlying operating performance of portfolio companies.
Describe your investment strategy
We invest in private companies, co-investing alongside leading private equity managers in their core areas of expertise, weighted by investments in the United States, which is the largest private equity market and the deepest. We focus on companies that should benefit from long-term structural growth trends and/or low cyclicality supported by a selective and responsible investment approach. Our goal is to leverage the strength of Neuberger Berman’s platform, relationships, deal flow and expertise to access attractive long-term investment opportunities.
Which famous investor do you admire?
Private equity is a practical investment model. To generate real value in today’s private equity market, the manager’s abilities to drive operational and strategic change are fundamental to the model. It is not only a question of selecting investments, but also of identifying the levers that can stimulate the creation of value and the performance of a company. Good private equity managers produce strong performance partly through investment selection and partly as traders – I admire investors who excel in both areas and we believe NBPE’s portfolio includes investments led by many managers of this type.
Name your favorite “Forever Stock”
While private equity is a long-term asset class, funds make investments with the aim of achieving certain operational and investment objectives within a specified time frame before seeking an exit. The goal is to present buyers with an attractive growth opportunity and there is often a logical progression of owners through private markets as a business grows. Sometimes, where possible, NBPE has reinvested in a portfolio company following an exit event and we expect similar situations to occur from time to time in the future. Within the NBPE portfolio, there are many investments that we believe would be attractive to hold over the long term, but exits provide important validation of value.
What would you never invest in?
ESG is hugely important to Neuberger Berman, and NBPE has its own responsible and sustainable investment policy, so there are many areas we would never invest in. For example, we avoid new investment in coal, oil and gas producers. Neuberger Berman has a long track record in responsible investing, seeing environmental, social and governance factors as important drivers of long-term investment returns, both from an opportunity and risk mitigation perspective.
Growth or value?
We seek to invest in profitable businesses that have the potential to generate consistent earnings growth. NBPE’s portfolio is not geared towards aggressive growth or early-stage investments; I think you could say that the public market equivalent of what we’re looking for is probably growth at a reasonable price.
House or Pension?
In addition to the first and as a component of the second, I think private equity should be part of the answer!
Crypto: Brilliant or bad?
NBPE does not focus on venture stage investments and investing in crypto is a far cry from what we do as private equity/buyout managers. In other words, crypto falls outside the scope of NBPE and we try to avoid speculative investment areas.
What can be done to improve diversity in finance?
Diversity is very important to Neuberger Berman and we are proud of the equity, diversity and inclusion initiatives that Neuberger Berman, which is an employee-owned company, has put in place to create an equitable and inclusive environment. Within the private equity group, our approach has been to focus on diversity at all levels and promote from within. Focusing on the needs of individuals and creating the right work environment for everyone has allowed us to retain our best employees, which translates into greater diversity at all levels.
53% of our leadership team were promoted from within and over time this approach has helped to increase diversity. For example, 30% of senior managers are women. Of course, we continually focus on improving our diversity, both in our hiring practices and in the work environment we create. We hope that we can build on the success we have had in fostering diversity within our team and that our diversity levels will continue to increase. We don’t take the diversity of our team for granted; but we hope that success will help to generate other successes.
Have you ever engaged with a company and been particularly proud (or disappointed) of the outcome?
Active engagement is inherent in the private equity model. Private equity funds, and the management teams they employ, regularly dictate and monitor the strategic direction and operations of each portfolio company. As such, there are many examples of active ownership creating significant value in the NBPE portfolio. NBPE has had many successful exits in its history and in 2021 NBPE has had 15 exit or IPO events and in 2022 year to date we have had five full or partial exits. Active ownership and engagement have been part of all these positive results.
What’s the best advice you’ve ever received?
One of the best pieces of advice I’ve ever received is to never underestimate or overlook the ability to learn from others, at any level. I am fortunate to work with a global team of different cultures and backgrounds with a diverse set of viewpoints – this creates a great opportunity to learn from others and explore different ways of thinking about issues and challenges .
What would you be if you weren’t a fund manager?
With private equity being in its infancy when I was growing up, I couldn’t aspire to become a private equity fund manager! I studied aeronautical engineering in college, and one thing I thought about was being a pilot.