Adopt This Unloved Lehman Offspring?

04/28/2009 12:01 am EST


Andrew McHattie

Editor, Investment Trust Newsletter

The private-equity offshoot of the bankrupted investment bank is too cheap to ignore, writes Investment Trust Newsletter editor Andrew McHattie.

NB Private Equity Partners (Amsterdam: LBPE.AS, London: LBPEUSD.Lp) was previously called Lehman Brothers Private Equity. Its name has been changed for obvious reasons.  This was the old investment management division of Lehman Brothers, now majority owned by its senior management. As an independent firm, NB has US$150 billion in total assets under management, and approximately 1,600 employees globally. In its private equity group, approximately $11 billion of commitments are managed by 185 professionals.

NB Private Equity Partners was launched (with its previous name) in July 2007. As we would expect, the net asset value per share has fallen, but not too drastically. The trust has a comparatively conservative capital structure, and the managers say that cash together with its available credit facility exceed the trust's unfunded private equity commitments by $52 million.

An important focus for the managers has been to take an overweight position in distressed private equity situations. Over half of the capital invested since the middle of 2008 has been directed to special situations and distressed funds. A lot of the trust's capital was only deployed in the second half of 2008 and in early 2009, so it has been able to catch some of the lower prices. The comparatively recent nature of its investments also means that the trust's valuations are reasonably up to date.

NB Private Equity Partners' net asset value per share has decreased by 22% in the 14 months since the end of 2007. This performance is not too bad in relative terms, and Peter von Lehe, the managing director of the new managers, Neuberger Berman, is optimistic for the future. He says "We believe the distressed funds will be the first ones to snap back once credit markets settle down."

Looking at the share price performance of the trust, it has been pretty dreadful, (but) the managers say, "We believe that NBPE shares are significantly undervalued. After subtracting the balance of our net cash, public equity securities, and credit-related fund investments at fair value, the shares are currently trading at an implied discount of 91% to the fair value of our other privately held investments."

At the end of March, the trust's net asset value was $8.17 per share, and the latest share price from Euronext is $2.08. That represents a discount of 77.8%, which seems anomalous against the background of a conservative capital structure. The trust is fully funded and has an uncalled credit facility that runs until 2014.

The fund has been buying back its shares, and it does not anticipate making any new private equity commitments at this time. We agree with the managers that the shares offer a compelling investment opportunity, and think the shares are worthy of consideration in spite of the obvious difficulties in the private equity sector at this time.

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