Anthony Tutrone, Neuberger Berman’s global head of alternative investments, has seen a lot of changes in private equity over his career, which has spanned more than three decades.
As the market emerges from the covid-19 lockdown, Tutrone believes what was once a fairly routine way to make strong returns – by riding a strong market – has changed.
For private equity, this means “the free lunch is over,” Tutrone tells Buyouts. “You can’t count on multiple expansion.”
“Across all asset classes, your ability to get yield has been highly compressed, and your ability to get returns has followed that,” Tutrone says. “In this zero-rate environment, with assets priced fairly high, there is good reason to be worried about how you’re going to meet return objectives in the future.”
Neuberger is adapting to this new reality at a time when it is also preparing for the departure of in-house GP stakes fund Dyal Capital Partners. Going forward, Tutrone says, PE outperformance will be driven by firms “who can add value to the investments they make and who can nimbly move to areas of value.”
These qualities recognize that there are “still unique opportunities in the market,” yet the most significant factor in returns is “what you’re going to do with companies after you buy them.”
Tutrone expects to see “a greater separation” between those general partners who invest in operating and strategic capabilities and those who do not.
For limited partners, this dichotomy will increase the importance of “making sure you’re identifying the best funds and the best opportunities out there,” he says.
A changing PE market does not faze Tutrone, who says it will encourage NB Alternatives to innovate in much the same way it has over the past two decades. “Our assumption is that every business we’re in today will not exist 10 years from now, and that if it does exist, it will be completely different.”
‘Tiny and no detailed plan’
Tutrone, 56, began his PE career in 1986. An MBA graduate of Harvard Business School, the Phoenix-born investor first worked at Lehman Brothers, rising to become an original member of the merchant banking unit. In 1994, he joined Cypress Group as a managing director and founding member.
Tutrone arrived at Neuberger in 2001. NB Alternatives then gave no sign of the multi-strategy private-markets giant it would become. “It was pretty tiny,” he says, with a few hundred million in assets, less than five employees and “no detailed plan” for growth.
GP stakes fund Dyal, which is spinning out of NB Alternatives to merge with direct lender Owl Rock Capital, has long been the New York manager’s highest-profile unit.
The LP capital that NB Alternatives collected in the first quarter of 2021
Why this is the case is perplexing. After all, “the rest” of the business – an amalgam of fund investing, co-investing, private debt, secondaries and other strategies – amounts to one of the world’s biggest private equity investors.
Consider these facts: NB Alternatives in 2020 secured a record $13.5 billion in non-Dyal commitments from LPs. It also made more than $9 billion in non-Dyal investments, which is mostly on par with activity in 2019, the health crisis notwithstanding, Tutrone says.
Of the $9 billion invested, roughly a third was committed to fund partners, a who’s who of general partner teams. Another $2 billion to $3 billion went into co-investments. These outlays are similar in heft to those usually made by the largest pension systems and sovereign wealth funds.
NB Alternatives has been quietly making deployments of this magnitude for years. In 2021, the firm appears poised to match or improve on last year’s results. NB Alternatives in the first quarter alone collected more than $2.1 billion of LP capital and invested more than $3.7 billion.
NB Alternatives was launched in 2001 with “a vision and a dream” to help LPs “accomplish their unique objectives,” Tutrone says. Starting out as a fund of funds business, it became, essentially, a concierge of private-market access for LPs through product innovations – such as customized accounts – some of them pioneered by NB Alternatives.
NB Alternatives’ non-Dyal LPs – among them pension plans, insurers and other institutions
“We grew along with our clients,” Tutrone says. Much of this growth followed Neuberger’s 2009 spinout from the bankrupt Lehman Brothers, coinciding with rapidly expanding LP allocations to private equity. NB Alternatives’ assets rose 7.5x to $90 billion, making it the global market’s sixth-largest firm, according to Private Equity International’s PEI 300.
Even with $20 billion or so removed with Dyal’s departure, NB Alternatives will still reside in that upper echelon. Moreover, Neuberger will hold a substantial piece of Blue Owl Capital, the $45 billion listed platform which combines Dyal and Owl Rock.
‘Doing business with the best’
A large share of NB Alternatives’ annual multi-billion-dollar investments are direct in nature. When doing such deals, NB Alternatives gives preference to fund partners, Tutrone says. “Whether it is co-investments, credit or secondaries, we’re going to our GPs and saying we know you have a lot of challenges and we have a lot of ways to help you.”
For their part, managers want “partners they trust, who are experienced and can demonstrate flexibility,” Tutrone says. Citing NB Alternatives’ role as lender, he notes “we’re going to be a better answer than a credit fund who doesn’t invest in their funds, doesn’t know who they are, doesn’t know what they’re about.”
Orlando Bravo, managing partner of Thoma Bravo, reinforced this point, calling NB Alternatives “a value-added partner.” He tells Buyouts the firm is “very creative and supportive in their direct investments alongside us.”
By investing with fund partners, NB Alternatives ensures better returns, Tutrone says. “Doing business with the best private equity firms is the way we’re going to deliver great results to our investors.”
‘A whole spectrum’
Shops like NB Alternatives help LPs make allocations to asset classes, markets and strategies that might otherwise be barred to them. Many requiring cost-effective solutions are institutions with meager in-house resources. Others are investors who are new to private equity.
NB Alternatives’ non-Dyal LPs – among them more than 650 pension plans, insurers and other institutions – reflect “a whole spectrum,” Tutrone says. They include “even the most sophisticated, most well-staffed investors” seeking exposure they “don’t want to build out internally.” For some LPs, the answer is commingled or dedicated pools, for others, a custom choice.
Due to the scope of LP demand, NB Alternatives has developed the capacity “to tailor solutions to our clients’ specific needs,” Tutrone says.
In practice, this means operating as “an extended member of our client’s staff,” Tutrone says, providing everything from à la carte services to advice on asset-allocation policies to managing entire portfolios. “We can’t do everything for people, but we can do more than most.”
A menu option of increasing relevance is guidance on topics like ESG and impact investing. Tutrone estimates nine in 10 LP clients bring up ESG concerns. “ESG will be one of most important issues and challenges that LPs will have to face,” he says. Because of this, investors are turning to Neuberger to “provide a roadmap.”
In dollar terms, the largest fraction of NB Alternatives’ client base is strategic partners – or users of separately managed accounts. It is also by far the fastest growing, Tutrone says.
NB Alternatives was one of the earliest SMA managers and influenced the concept’s evolution. Customized investment programs emerged in the early 2000s, becoming popular with LPs because of their many advantages, such as lower fees, greater transparency and exposure to diverse opportunities. SMAs also lend flexibility to the allocation process.
Today, the firm manages about $30 billion of SMA assets for 73 LPs, 15x the amount in 2009. This owes mostly to re-ups by long-standing institutional clients, including New Jersey Division of Investment, New York State Common Retirement Fund and Texas Permanent School Fund.
NB Alternatives’ history with SMAs allows it to handle increasing levels of customization, Tutrone says. This is typically the result of new and emerging private-market opportunities and more extensive LP reporting requirements on issues like ESG.
Along with institutions, NB Alternatives focuses on smaller LPs like families and high-net-worth individuals. As these investors are “under-served,” Tutrone says, they represent a “huge growth area.”
In January, NB Crossroads Private Markets Access Fund was unveiled to target ‘Main Street’ retail investors. The vehicle, which began with $208 million of initial capital, is intended to add to the more than $12 billion already raised on the retail side.
How NB Alternatives invests
The platform of NB Alternatives is made up of five post-Dyal strategies. The largest, primaries ($25 billion), features fund investments diversified by focus – mainly buyout, growth equity, special situations and venture capital funds active across markets in North America, Europe and Asia.
The strategy is important to LPs, Tutrone says, because “access to the best funds is still a very big challenge.”
NB Alternatives partners with more than 530 funds, sponsored by established managers as well as a selection of first-timers. Some of the major GP names are BC Partners, Carlyle, EQT, KKR, Francisco Partners, PAI Partners, Platinum Equity, Silver Lake, Thoma Bravo and Thomas H Lee.
The second largest strategy is co-investments ($20 billion). Neuberger in the early 2000s anticipated LP interest in direct investing, a trend that has since intensified. A survey by Private Equity International found 71 percent of LPs this year aim to participate in deals alongside managers to achieve fee savings and other benefits.
NB Strategic Co-Investment Partners IV closed in January on $2.1 billion. The vehicle will vet hundreds of sponsor-backed buyout and growth-equity prospects annually, usually doing about 10 percent, Tutrone says. Up to $100 million will be invested per deal on average, with larger stakes acquired using other pools.
A key differentiator of the strategy is an emphasis on co-underwriting deals early in the process. In addition, priority is given to “mid-life” opportunities – where the target is a portfolio company already owned by a lead sponsor. These two categories account for 75 percent of recent co-investing.
Over time, some 340 businesses have sold a minority equity stake to NB Alternatives.
One example is IT services provider Engineering Group, acquired last year by Bain Capital from Apax Partners. Another is flexible packaging maker ProAmpac, which in January received a new investment from its five-year owner Pritzker Private Capital, GIC and others.
NB Alternatives is an active secondaries player, giving it a profile that often rivals that of Dyal. Under the strategy ($12 billion), the firm has shown a particular appetite for GP-led transactions – which gained traction in pandemic-roiled 2020 as private equity sponsors looked for options to extend investment runways, raise money for portfolios or create liquidity for LPs.
NB Alternatives’ deals include last year’s single-asset process that moved Thomas H Lee-backed wealth manager HighTower Advisors into a continuation pool. The firm, Coller Capital and Goldman Sachs were the lead investors. Earlier in 2021, NB Alternatives also invested in a $500 million Riverside-led process centered on a portfolio of healthcare and tech assets.
Neuberger is in the market with a fifth flagship secondaries offering, Secondaries Investor reported. NB Secondary Opportunities Fund V is targeting $3 billion.
A fourth strategy ($6 billion) is direct private debt, consisting mostly of senior secured loans and opportunistic credit earmarked for US mid-market companies owned by PE firms. Investments, averaging $25 million to $100 million-plus, are made in businesses with EBITDA of $25 million to $250 million or more.
NB Alternatives ramped up credit investing over 2020-21, deploying $1.6 billion in the past six months alone. Among its recent deals is a unitranche financing led in support of Gryphon Investors’ December acquisition of Meazure Learning, an exam proctoring solutions provider.
Neuberger launched a fourth credit offering last year with a $3 billion target, Buyouts reported. NB Private Debt Fund IV held a first close in February, bringing in $1.2 billion.
Finally, NB Alternatives oversees a hodgepodge of direct specialty strategies ($7 billion). These run the gamut, from structured investing in healthcare (Athyrium) to buyouts in Italy’s mid-market (NB Renaissance Partners).
One of the strategies, Marquee Brands, a brand acquisition and licensing platform, in 2019 grabbed headlines with its purchase of iconic lifestyle business Martha Stewart for $175 million.
Relying on Neuberger
NB Alternatives is supported in its work by Neuberger, a $405 billion asset manager. “It is a massive asset,” Tutrone says, whose organizational resources include 24-hour intelligence about a complex global market. “If you don’t know what’s going on globally, you are operating at a disadvantage.”
Employee-owned Neuberger prides itself on talent management. Its nearly 100 percent retention of senior investment professionals in recent years is mirrored at NB Alternatives, Tutrone says, facilitating long-term relationships with LPs.
Tutrone leads a team of 245 PE investment professionals operating from New York, Dallas, London and other global offices.
Top executives include Jonathan Shofet, head of primaries; David Morse and David Stonberg, co-heads of co-investments; Brian Talbot, chairman, and Tristram Perkins, head of secondaries; Susan Kasser and David Lyon, co-heads of private credit; Joana Rocha Scaff, head of Europe, private equity; Patricia Miller Zollar, head of NorthBound Equity Partners; and Kent Chen, head of Asia, private equity.
Neuberger GP stakes fund Dyal leaves the nest for Blue Owl
Before striking a deal to merge with Owl Rock Capital, GP stakes fund Dyal Capital Partners was a top investor in a market that is revolutionizing the private equity industry.
Launched in 2011, Dyal has been a prodigious investor of minority capital in general partners. In recent years, when scores of PE and hedge fund managers sold pieces of themselves to GP stakes funds, Dyal built an especially large portfolio of more than 40 firms.
Dyal, led by founder Michael Rees, has been an equally active fundraiser, amassing roughly $20 billion in assets. Two years ago, it collected a record $9 billion-plus for Fund IV and appears set to raise at least as much for its successor. In the process, Dyal and other GP stakes funds gave PE firms altogether new capabilities. GPs got a hands-off, value-adding partner with a long investment horizon as well as capital to invest in everything from fund commitments to strategic growth initiatives.
The deal with Owl Rock, which creates Blue Owl Capital, an NYSE-listed business with a $12.5 billion market cap and $45 billion in assets, is intended to build on Dyal’s legacy. It is also meant to reinforce Owl Rock’s position in the direct lending space and enable new product development.
The Dyal-Owl Rock hook-up is something of a family affair. Owl Rock is a portfolio investment of Dyal’s. So is HPS Investment Partners, sponsor of Altimar, the blank-check company facilitating the merger. In addition, holders of Dyal-Owl Rock equity – including Neuberger Berman, Dyal’s parent organization since inception – will own 85 percent of Blue Owl.
If family ties put the deal together, they are also getting in the way. Golub Capital and Sixth Street, both Dyal portfolio investments and Owl Rock rivals, are suing to block the merger on competitive grounds. The deal, they allege, violates contracts with Dyal as it did not obtain their consent.
Dyal cleared one of the legal hurdles in April, when a court denied Golub’s request for a preliminary injunction. New York State Supreme Court Justice Joel Cohen said Golub was unlikely to succeed and that its arguments seemed “wildly implausible,” according to documents viewed by Buyouts.
Golub also initiated an arbitration, which was pending at the time of publication.