In this series of short profiles, we ask leading fund managers to defend their investment strategies, reveal their views on cryptocurrency, and tell us what they'd never buy.
This week our interviewee 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 Biggest Promise in 2022?
We believe that central to private equity investing is the importance of partnering with the right private equity manager for the right opportunity and the operational value add that a high-quality private equity manager can bring to its companies. We consider this on a case-by-case basis following a detailed due diligence process and are highly selective in what we choose to invest in from our deal flow.
Portfolio construction is both top down and bottom up based on our dealflow, and we monitor sector exposures in our portfolio with the aim of prudent diversification. Moreover, we focus on key themes - our long-term focus has been investing in businesses expected to benefit from long term secular growth trends and / or businesses with low expected cyclicality and these themes remain our core focus today. The result is that NBPE’s portfolio is well diversified, but the largest industry sector is currently technology, media and telecom.
What's the Biggest Economic Risk Today?
Not surprisingly our concerns continue to be inflation, high interest rates and the likelihood of a downturn. In the years immediately prior to Covid-19, we took the view that we may be coming to the end of a 10-year period of expansion and positioned our portfolio accordingly. The resulting portfolio’s resilience 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, higher interest rates and an economic downturn, we believe the portfolio is reasonably positioned to weather the current macro headwinds too and that’s so far what we’ve seen in most of our portfolio companies’ underlying operating performance.
Describe Your Investment Strategy
We invest in private companies, by co-investing alongside top-tier private equity managers in their core areas of expertise, weighted to investments in the US, which is the largest and deepest private equity market. We focus on companies that are expected to benefit from long-term structural growth trends and/or low cyclicality underpinned by a selective and responsible investment approach. We aim 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 hands-on investment model. To generate real value in today’s private equity market, the capabilities of the manager in driving operational and strategic change are fundamental to the model. It’s not only about investment selection, but also about identifying the levers that can drive value creation and performance at a company. Good private equity managers produce strong performance partly through investment selection and partly as operators – I admire those investors that excel in both of these areas and we believe NBPE’s portfolio includes investments led by many such managers.
Name Your Favourite "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 finite timeline before seeking an exit. The goal is to present buyers with an attractive growth opportunity and there is often a logical progression of owners in the private markets as a company grows. Occasionally, where possible, NBPE has re-invested in a portfolio company following an exit event and we expect similar situations to occur from time to time in future too. Within NBPE’s portfolio there are many investments that we believe would be attractive to hold for the long term, but exits do provide an important validation of value.
What Would You Never Invest In?
ESG is incredibly important to Neuberger Berman, and NBPE has its own responsible and sustainable investment policy, so there are plenty of areas in which we would never invest. For example, we avoid new investments in coal, and oil and gas producers. Neuberger Berman has longstanding experience in responsible investing, considering environmental, social and governance factors as important drivers of long-term investment returns from both an opportunity and a 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 focused on aggressive growth or early stage investments; I think you could say that the public market equivalent of what we look for is probably growth at a reasonable price.
House or Pension?
In addition to the former and as a component of the latter, I think private equity should be part of the answer!
Crypto: Brilliant or Bad?
NBPE doesn’t focus on venture capital stage investments and investing in crypto is far from what we do as private equity / buyout managers. In other words, crypto is not within NBPE’s scope 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 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 to promote from within. Focusing on the needs of individuals and creating the right workplace environment for all has allowed us to retain our best people, which results in higher diversity across all levels.
53% of our senior leadership team were promoted from within and over time this approach has helped to increase diversity. For example, 30% of the senior leadership are women. Of course, we are continuously focused on improving our diversity both in our hiring practices and in the workplace environment we create. Our hope is that we can build on the success we have had in fostering diversity in our team and that our diversity levels will continue to increase. We do not take the diversity of our team for granted; but we hope that success will help to breed further success.
Have you Ever Engaged with a Company and Been Particularly Proud (or Disappointed) in the Outcome?
Active engagement is inherent in the private equity model. Private equity funds, together with the management teams they employ, regularly dictate and control the strategic direction and operations of each portfolio company. As such there are many examples of active ownership creating significant value in NBPE’s portfolio. NBPE has had many successful exits in its history and in 2021 NBPE had 15 exit or IPO events and in 2022 year to date we’ve had five full or partial exits. Active ownership and engagement has been a part of all of these successful outcomes.
What’s the Best Advice You’ve Ever Been Given?
One of the best pieces of advice I’ve been given is to never underestimate or overlook the ability to learn from others, of all levels. I am fortunate to work with a global team from different cultures and backgrounds with a diverse set of viewpoints – this creates a great opportunity to learn from others and to explore different ways of thinking about issues and challenges.
What Would You be if You Weren’t a Fund Manager?
Since private equity was in its infancy when I grew up, I couldn’t aspire to be a private equity fund manager! I studied aeronautical engineering at university, and one thing I thought about was being a pilot.
