Summary

00:00 – Introduction: The role of private equity in diversified portfolios.
06:03 – AI & Private Markets: How AI is creating investment opportunities and driving value within portfolio companies.
10:43 – Deal Flow: Why private equity opportunities remain robust despite a tougher market backdrop.
14:15 – Embracing Complexity: How liquidity solutions, co-investments and GP-led transactions are creating new opportunities.
17:04 – Secondaries & Liquidity: The growing role of secondaries, continuation funds and other liquidity solutions as exits take longer.
22:58 – Fundraising & Consolidation: Why capital is concentrating among larger managers and how this is driving industry consolidation.
28:44 – The New Drivers of Returns: Why earnings growth, active ownership and strategic acquisitions are becoming increasingly important to private equity returns.
31:09 – Secondaries & Evergreen Funds: Pricing, discount opportunities and the rise of evergreen private equity structures.
37:20 – Conclusion: Key takeaways on the changing private equity playbook.

Paul O'Connor:
Good morning everyone, and thanks for joining us for the Netwealth Portfolio Construction Podcast series.

For new listeners, I'm Paul O'Connor, Head of Strategy and Development for Investment Choice at Netwealth.

Today we have Gabriel Ng from Neuberger Berman on the podcast. Gabriel is a Managing Director and Co-Portfolio Manager for the Global Private Equity Access Strategy.

We'll discuss global private equity with Gabriel, which in recent years has taken a back seat due to the exposure and focus on the growth of private credit. However, private equity, or PE, can play a key role in generating long-term growth in a diversified portfolio.

Neuberger Berman Australia is a wholly owned subsidiary of the Neuberger Berman Group, which was founded in 1939 as a privately held and employee-owned investment manager.

The Neuberger Berman Group offers capabilities across a range of asset classes including equities, fixed income, quantitative and multi-asset strategies, private equity and hedge funds.

The Neuberger Berman Group has over US$560 billion in assets under management, offices across various major regional locations, and a diversified client base that spans institutional investors, advisers and individual investors.

At present, the Neuberger Berman Group employs approximately 2,900 employees with 779 investment professionals globally.

As mentioned, Gabriel is a Managing Director at Neuberger Berman. Prior to joining Neuberger Berman Private Equity in 2018, he was part of the GIC private equity funds and co-investments group, where he focused on global secondary transactions.

Previously, he worked at Providence Equity Partners in Hong Kong, where he focused on buyout and growth transactions across the Asia-Pacific region. Gabriel also worked at Bank of America Merrill Lynch in the Asia M&A Group. He received a BS in economics with honours from the Wharton School at the University of Pennsylvania.

There are three Neuberger Berman funds on the Netwealth Super and IDPS menus: the Global High Yield Fund, the Strategic Income Fund and the Global Private Equity Access Fund, which Gabriel works on.

There is increasing choice for investors when it comes to private equity strategies, with more evergreen and open-ended options available to investors.

Private equity risk varies materially across the sector, with venture capital being the earliest-stage and highest-risk form of private equity investment. Other areas include growth equity, buyouts, distressed investments, special situations and secondaries.

Understanding what a private equity strategy actually invests in is key to understanding the risk-return characteristics of that strategy.

Investing in private equity can significantly increase the opportunity set for diversified portfolios. Equity exposure can be expanded materially, as most companies in the world are private. With the low number of IPOs on listed exchanges in recent years, it certainly makes sense to consider an allocation from a portfolio construction perspective.

However, it is also important to consider the illiquid nature of the sector, the use of leverage and diversification within a strategy before investing in private equity.

To start, Gabriel, for our listeners who may not be familiar, can you give us a brief introduction to the Neuberger Berman private equity platform?

Gabriel Ng:
Hi Paul. Good day to you, and thank you for having me on the podcast.

At the firm level, Neuberger Berman is a privately owned asset manager with over US$560 billion of assets under management across various asset classes, including public equities, fixed income and private markets.

Approximately one-third, or about US$180 billion, of the firm's assets under management is in private markets, spanning private equity, private credit and other alternative specialty strategies.

Within private equity itself, we have over 30 years of investment experience and have built strong relationships over a long period of time.

We also have a well-resourced global team across the US, Europe and Asia-Pacific markets. In private equity, we focus mainly on primary fund investments, direct co-investments and secondary transactions.

I would say we are active investors in this asset class, having committed over US$30 billion to private equity investments and funds in the past three years.

It is also worth noting that we are on the advisory boards of over 450 private equity funds, which is a testament to us being an important and strategic LP to our private equity fund managers.

Paul O'Connor:
The AI sector is investing heavily across all areas of the value chain at present, from hardware and infrastructure through to end-user applications.

This has been highlighted by Microsoft, Alphabet, Amazon and Meta, which are projected to invest US$725 billion this year, up 77% on last year.

Gabriel, do you have any concerns over that huge flood of capital pouring into the sector?

Gabriel Ng:
I would say this space is indeed rapidly evolving. But overall, if we take a step back, I think we are still relatively early in the AI technology build-out phase.

Many of the companies, or hyperscalers, that you mentioned also operate profitable business segments outside of AI. Together with some debt issuance, this provides them with the capital to continue building out AI infrastructure.

That being said, the long-term aggregate return on all this AI infrastructure investment still remains to be seen and needs to be closely monitored.

I think there are some parallels being drawn to the dot-com bubble, but so far, I do not think we are seeing potential red flags, warning signs or stresses in the system as yet.

In spite of the huge amounts of capital wanting to be deployed into AI, there could also be potential constraining factors that may put a natural speed bump in the build-out and AI spend. For example, the availability of electricity, chips and skilled labour to build new power plants and transmission lines, which are critical for this infrastructure build-out.

Paul O'Connor:
It is certainly significant, isn't it, that whole value chain?

We are starting to see more end-user application development, but there is also the land, power, electricity and water required. I can certainly appreciate your view that it is still early in the build-out phase.

I was concerned that, typically, when a lot of capital is directed into a sector, some of it may potentially not be productive. But I appreciate this is a long-term theme and trend that is likely to continue to grow over the next few years, given the pace of AI advancement, from more capable foundation models to accelerating enterprise adoption.

How are you thinking about the implications for private markets, both in terms of where capital is being deployed and how AI is reshaping the competitive dynamics and valuation frameworks of portfolio companies?

Gabriel Ng:
We continue to focus on investing behind traditional defensive sectors, but at the same time, we are also selectively investing behind some of these exciting long-term mega-growth trends, and AI is certainly one of the key themes at the forefront.

This includes AI foundational models, data infrastructure and AI enablement, which ranges from services to critical components, data centres, connectivity and many other areas.

To your point, we are starting to see many use cases across several areas. These include the automation of processes, customisation of solutions across products and services, enhancement of decision-making, improvement of employee productivity, discovery of new insights and cybersecurity.

Ultimately, for private market investors, we expect AI implementation should drive competitive advantages that lead to sustained top-line growth and profit margin improvement. In turn, that should hopefully translate into an increased valuation of the portfolio companies of private equity funds that implement AI into their day-to-day operations.

All this is easier said than done. It requires a very systematic and structured approach, starting first with leadership buy-in, recruiting the right talent, and ultimately, implementation and execution.

Given the pace of change and evolution, this is leading to increased competitive intensity, as companies need to be on the front foot in terms of leveraging AI in a way that helps them maintain an edge over their competitors.

Paul O'Connor:
A key component of better-performing private equity strategies is obviously deal flow.

How would you describe your current state of opportunities, and what are the most important factors you focus on when assessing an opportunity?

Gabriel Ng:
Taking a step back, in spite of the broader private equity market moderating in recent years from the peak levels we saw in 2021, our deal flow at Neuberger Berman continues to be very robust.

This is really a function of the broad ecosystem we have built over three decades of investing in the asset class, and perhaps more importantly, our GP-centric model.

We focus on partnering with our private equity GP partners and providing them with solutions, from backing fundraises, to working with them on co-investments, or providing liquidity through secondaries.

Ultimately, we want to keep the deal-sourcing funnel as broad as we can, so we can be highly selective in terms of backing the GPs or private equity funds we like, as well as investing in high-quality companies in the case of co-investments.

There are many factors we focus on when underwriting a deal or fund. The list is probably too long to name, but I think it really comes down to a few things.

Number one is the quality of the companies and the quality of the manager. We always ask whether a private equity fund is the right owner of the asset, and whether they have the relevant experience to win in that sector.

We also focus on the valuation of the assets, capital structure, value creation plan and exit pathways. These are all important factors that we focus on in our diligence, and we spend a lot of time evaluating them.

Where we stand today, we also benefit from a very large database of information, which is a data repository that we regularly leverage to help us make better decisions.

This allows us to draw parallels to investments we are currently seeing, conduct benchmarking, and ultimately rely on the pattern recognition of our investment committee, who have invested together through cycles, to guide our overall investment selection process.

Paul O'Connor:
Still on deal flow, has it become more competitive in markets in recent years? Are we seeing more participants investing in private equity?

Gabriel Ng:
I would say yes and no.

Take co-investments, for example. In a more choppy and less benign macro environment, we have seen some participants step back from the space, but others have also come in to fill the gap.

What is important in the current environment is the ability to embrace complexity, and to have a sophisticated team on the ground that is responsive to our private equity fund managers, particularly in live situations or due diligence situations that are large.

The investors who have stepped up are typically more experienced private equity investors, with the ability to write larger cheques, participate in these transactions and provide liquidity where it is most needed.

So, we have seen some market participants retreat, but at the same time, firms like ours have become a lot more active.

Paul O'Connor:
Do current market conditions provide a headwind or tailwind to opportunity creation?

Given the wider dispersion of outcomes that private equity investments have exhibited over the years, how is complexity being rewarded?

Gabriel Ng:
The private equity asset class has had a great run for the decade-plus period following the GFC, when interest rates were low and valuation multiples were generally on an upward trajectory, helping ultimate exit outcomes.

Today, we are facing a very different macro environment. Rates are likely to be higher for longer. We have heightened geopolitical tensions and conflicts, and also a more muted and difficult exit environment.

But in spite of these challenges, we believe private equity as an asset class still has the ability to deliver a return premium over public markets.

However, in a more choppy environment, return dispersion is likely to be wider.

In a market with greater dislocations and a lack of liquidity, we believe providers of liquidity solutions like ourselves could potentially unlock compelling investment opportunities across the various strategies we focus on.

We are seeing a lot of opportunities in the co-investment space, both in larger co-investment transactions and what we call mid-life transactions.

This is where our capital goes into a private equity portfolio company to provide a very specific solution, typically to help the company and our private equity fund managers execute on a transformative M&A transaction, or in other instances, to provide a partial equity recapitalisation for some of the portfolio companies in the funds.

We also see an ample and growing opportunity set in GP-led secondaries, with the rise of continuation funds and more GPs wanting to hold their winning assets for longer.

These are complex transactions that are not easy to underwrite, but we expect investors with the ability to embrace this complexity and step up to these deals to be rewarded.

Paul O'Connor:
Further on that, with hold periods extending and traditional exit routes being slower to materialise, which are both impacting distributions, how are GPs and LPs using tools to manage liquidity today?

Gabriel Ng:
Exits, or the lack thereof, are certainly a challenge that the private equity industry has been facing in recent years.

If you look at annual distributions relative to private equity NAV, that metric has been below the long-term average for the past few years.

In terms of navigating this environment, secondaries are certainly one of the strategies LPs undertake to generate distributions.

Over the past few years, we have seen many large institutional investors in private equity decide to sell sizeable portfolios of private equity funds.

To put some numbers around it, last year LP secondaries accounted for over US$120 billion in transaction volume. This compares with roughly US$25 billion of LP secondary deal volume annually around 10 years ago.

If you look at the numbers 10 years ago versus today, from US$25 billion to US$120 billion, that is a meaningful step up.

LPs are actively reviewing their portfolios and coming to market to sell some of these private equity fund holdings.

If we switch gears and look at GPs, they are also adapting to current market conditions.

As I mentioned earlier, we have seen a meaningful step up in GP-led continuation fund transactions, which now account for just under 50% of total global secondaries volume.

This is where a GP looks for a secondary buyer to lift out either a single asset or multiple assets from existing funds into a new continuation vehicle.

This type of transaction provides existing LPs with the option to either take liquidity, roll over into the continuation fund, or take partial liquidity and roll a partial stake into the continuation fund.

For GPs, the thesis is that they are able to continue holding a familiar asset for a longer period, and continue compounding returns over an additional four to six years.

At the same time, these GP-led transactions are not easy to underwrite. The bar is quite high.

First, you have to ensure alignment with the GP. You also have to be sure it is a high-quality asset, and that an actual or eventual exit route can come to fruition over the next four to five years.

The terms, structure and economics are all important factors to take into account before getting comfortable with these GP-led transactions.

In addition to secondaries, there are a few other ways GPs are looking to generate distributions, including NAV financing and partial minority recapitalisations of their portfolio companies.

It is a more muted and challenging exit environment, but we see both LPs and GPs evolving their strategies to adapt to it.

Paul O'Connor:
It is interesting that, in your comments around secondaries, you did not mention IPOs.

Probably 10 years ago, that would have been a traditional route to receive a distribution and unlock liquidity.

It seems to have been a global trend that there has been a reduction in private equity seeking listings on exchanges around the world.

Gabriel Ng:
You are exactly right.

We track the breakdown of exit routes by year and how that changes and evolves over time.

I would say IPO activity post-2022 almost came to a grinding halt. It was in the single digits as a percentage of private equity exit routes.

But I think we have been cautiously optimistic and encouraged by the IPO markets seeing some recovery over the last two to three years. Last I checked, it was in the teens as a percentage of exit routes for private equity investments.

The good news is that there are multiple options that a private equity investor can undertake.

Often, when seeking an exit, managers might consider dual-track exit processes. On one hand, they may evaluate the appropriateness of a public markets exit, while at the same time running a trade sale process or a sponsor-to-sponsor transaction.

That is one of the benefits of private equity investments: the manager is able to find an optimised way to maximise value at the time of exit.

IPOs continue to play a part, but the vast majority of exits have really been sales to trade buyers as well as sales to other private equity funds.

Paul O'Connor:
Moving to the fundraising environment, how is that currently?

And with the tougher macro landscape, how are GPs navigating this challenge?

Gabriel Ng:
That is a very topical question, Paul.

In terms of fundraising, the broader market continues to be challenged.

If you look at fundraising volumes, at least on a headline basis for the overall industry, that has been on a downward trend in the past few years.

At the same time, if you compare that to pre-2021 peak levels, I think it is in line with the longer-term average.

If you peel back the onion further, you realise fundraising is actually fairly bifurcated.

Established GPs are accounting for a disproportionate amount of capital raised. These are the GPs with extensive and strong track records.

On the other hand, where we see challenges is with emerging managers. They are taking much longer to raise their target fund sizes, and some may not be able to hit those target fund sizes.

To share one other statistic, the average time it takes to raise a private equity fund has gone from 14 months prior to 2022 to approximately two years currently.

That fundraising horizon has lengthened.

Ultimately, a key consideration is that many LPs need to see distributions in order to make subsequent commitments to private equity funds.

As mentioned earlier, GP-led transactions, NAV financing and partial equity recapitalisations are all ways that GPs are managing DPI to enable them to raise subsequent vehicles with more certainty.

GPs are also being more tactical in the current environment.

For example, they are building dialogue with both existing and prospective LPs much earlier ahead of a fundraise. They may also wait for certain exit events to crystallise before formally launching funds, or offer first-close discounts or size-related discounts.

From an LP lens, where we sit at Neuberger Berman, given the longer fundraising cycle, we are seeing opportunities to invest in what we call late primaries or partially funded primaries.

This is where a GP has already started to invest the fund prior to the final close.

Coming in at a later stage of the fundraise sometimes gives us the opportunity to review the first few transactions in a fund. Some of the early investments may have also been written up prior to the final close of the fund.

We are seeing the ability to invest in some of these funded primaries increase, particularly over the past few years.

Paul O'Connor:
In terms of consolidation across the industry, what is happening at present?

Gabriel Ng:
Very much related to your earlier question, in a more challenged fundraising environment, and an environment where scale and greater platform resources may be required for capital formation, deal sourcing and post-deal value creation, we do see a wave of consolidation taking place in the industry.

If we look at M&A transactions involving private market firms, they doubled in 2024 compared with 2019.

There are many reasons underpinning these transactions. They include acquiring capabilities in a new asset class.

For example, we see many private equity buyout firms acquiring secondaries-focused managers.

Another rationale would be to enter a new geographical market.

Rather than building these capabilities organically, which would take longer, acquirers have chosen to acquire a platform and onboard a new team.

But therein also lies the risk of integration and culture.

The acquirer also has to be cognisant of how to manage conflicts and ensure a smooth integration process creates net value for investors.

All of this needs to be carefully navigated in these M&A transactions.

Paul O'Connor:
It seems to me like it is a natural evolution and maturing of the industry, which I think is positive for investors, creating more liquidity across the sector.

Private equity investing uses leverage to varying degrees, and higher bond yields increase the cost of capital.

Is the outlook for returns more subdued today?

And as a second question, what makes for an attractive opportunity set in the current market?

Gabriel Ng:
Sure, Paul.

I would say that the target returns we underwrite to in private equity transactions have not changed today versus five or 10 years ago.

But the components that contribute to that return are very different today compared with the low interest rate environment we benefited from post-GFC.

What do we underwrite to today, and where is the vast majority of returns coming from?

It is really based on fundamental growth in both top-line revenues and earnings. That is driving the return outcome in our underwriting in the current environment.

In addition to organic fundamentals and earnings growth, another lever is bolt-on acquisitions.

This is where a private equity fund manager may use one of its portfolio companies to acquire competitors at a lower valuation multiple than the entry valuation multiple of the original investment.

What this effectively does is buy down the entry multiple over time by acquiring and completing these tuck-in acquisitions and growing inorganically.

You may have seen a much-referenced term recently: in the current rate environment, low double-digit earnings growth may be required to generate similar private equity-style returns, compared with mid-single-digit earnings CAGR previously, when there was a lower cost of leverage and rising multiples.

What all this really means is that it highlights the importance of private equity fund managers taking an active ownership approach.

Managers need to build functional in-house expertise in areas ranging from procurement and talent recruitment to technology and M&A.

They need to work together with the management teams of their portfolio companies to drive fundamental organic growth as well as M&A-led growth.

That is what we believe will be the drivers of returns in the current environment.

Paul O'Connor:
There has been demand for discount capture in recent times.

Is this something the team looks for, and where is pricing at present?

Gabriel Ng:
Discounted LP secondaries are always welcome as a buyer, but at the same time, we have to balance that with quality.

At Neuberger Berman, we are focused on acquiring secondary LP interests in high-quality funds where we have strong conviction.

We aim to unlock discounts through our sourcing networks, our ability to deliver deal certainty and our position as a preferred buyer.

From a GP perspective, GPs typically need to approve these secondary sales. Being an important LP in the ecosystem means that, more often than not, we are on the approved buyer list for these secondary LP transactions.

In terms of pricing, discounts for buyouts are currently in the mid to high single-digit range.

Through the sourcing networks we have built over decades, we have been able to buy at wider discounts than what is generally observed in the market.

These are some of the moats and unique positioning we have built after many decades of operating in the ecosystem.

Interestingly, if we think about fund structures, our belief is that discounted LP secondaries are more suited to a closed-ended fund structure.

This is because all LPs in the fund benefit equally from the discount capture.

If you look at open-ended funds or evergreen funds, LP secondaries that are acquired at a discount arguably only benefit the investors who are in the fund at that point in time, and not future investors. So that discount capture is not equally shared between current and future investors.

Just to complete the picture, if you look at GP-led secondaries, from our perspective at Neuberger Berman, because we are focusing on the winning assets of the GP’s portfolio, they typically do not trade at wide discounts to NAV.

In these GP-led situations, an important metric we pay attention to is the implied earnings multiple we are paying for the asset or assets.

So far, we have been able to maintain our discipline and buy well.

Where you might see very wide discounts in the GP-led space is probably in tail-end fund restructurings involving lower-quality assets that are not as sought after.

That is not a space we play in. We do not really take part in these more challenged-quality, tail-end fund restructurings.

Paul O'Connor:
To finish on the questions, Gabriel, from what you are seeing, are evergreen funds mainly being used by retail investors, or are you seeing increasing interest from institutional and ultra-high-net-worth investors looking for evergreen and more liquid private equity solutions?

Gabriel Ng:
Evergreen funds have grown meaningfully over the past few years.

I do not think it is limited just to retail participation.

For instance, in our own evergreen private equity fund offering, we have seen participation from a range of investor types. That includes retail investors, but also private bank distribution channels, high-net-worth individuals, family offices and institutional clients.

Ultimately, it is about what works for the end investor.

The structure, underlying strategy, level of diversification, targeted returns, liquidity mechanisms and manager capability all need to resonate with the end investor before they commit capital to these evergreen funds.

I would also emphasise the importance of the overall education process, and the importance of investors, whether retail or large institutions, really understanding what they are stepping into.

If I look at the current offerings out there, there is a broad range of different funds available for investors.

Some are more weighted towards secondaries. Some have primary investments. Others may be more focused on co-investments.

Some offerings are multi-manager, while others are single-manager.

So, I think it really comes down to understanding the merits, and importantly, the limitations and risks before making a final investment decision on whether to invest in one of these funds.

Paul O'Connor:
Gabriel, we will draw the podcast to a close.

Thank you very much for joining us today and talking through the Neuberger Berman global private equity platform, as well as the trends and themes you are seeing in the market, particularly around AI.

Your comments that deal flow remains robust are certainly positive.

The increasing use of secondaries and liquidity solutions across the sector was also interesting, as was your view that target returns remain unchanged, but the drivers of those returns have shifted.

I am very appreciative of your time and the insights you have provided today.

Gabriel Ng:
Thank you very much, Paul.

Thank you for all your insightful questions as well. I greatly enjoyed our conversation. Thanks for having me.

Paul O'Connor:
And to the listeners, thank you again for joining us on the Netwealth Portfolio Construction Podcast series.

I look forward to you joining us on the next instalment of the podcast.

Have a great day, everyone. Thank you.