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Dear NGP Investors,

Now that the holiday frenzy, year-end mad dash and early-year planning is behind us, I want to share a quick look back at last year, and a look at what’s to come in the year ahead. Having some time to reflect over the holidays gave me a little time to breathe, think strategically, learn from the past, get excited about the future, and appreciate all of our valued partners. We’ve come a long way in a short time (though it doesn’t always feel short!). We owe a tremendous amount to our investors and partners. Thank you.

It is no secret we’re in a niche asset class that is evolving rapidly. The “micro” middle market, especially when operator-led and accessed through proprietary deal flow, has attracted a deservedly high level of attention due to the phenomenal risk-adjusted returns available to the smart, operations-focused investor. The good news is that these returns remain available, and will for the foreseeable future, despite what happens in the broader capital markets, interest rates or tax regimes. The world is FULL of small businesses and talented people who can be placed into leadership positions within those businesses. When we find both and put them together, special things happen, including outstanding returns. This was evidenced by the MHW deal, which I’ll get into more later.

With all the attention our model is getting, it would be easy to get distracted by shiny objects, raise too much money and be forced to go “upmarket.” It may lead us to get hasty or cut corners in our underwriting. But we are committed to avoiding these pitfalls. It is more important than ever to stay focused and stick to our vision.

We talk about it all the time, but sometimes it helps to put it down on paper:

  • We buy B2B service businesses that provide mission-critical, non-discretionary outsourced services to the business clients they serve. These businesses typically generate highly predictable streams of recurring revenue and represent a low share of their customers’ wallets. Think compliance functions, technical IT services, critical staffing needs, high-value facilities, and asset management/maintenance/servicing, etc.
  • At time of acquisition, these companies typically generate between $2m – $5m in annual EBITDA and we pay on average 4 – 6x EV/EBITDA for them. There is good value for these businesses at these prices in the levered free cash flow yield alone.
  • These businesses, bought at these valuations, with conservative capital structures, tend to do well in good economic environments and in challenging ones.
  • The U.S. supply of these businesses is HUGE, and growing as more and more baby boomer business owners retire. There is relatively limited sophisticated capital chasing after them, creating a very attractive supply/demand imbalance not seen in any other asset classes, as far as we’re aware.
  • Sourcing these businesses, however, is like trying to find a needle in a haystack. Therefore, we utilize our Entrepreneur-in-Residence (EIR) model and proprietary sourcing engine to seek them out – we avoid competitive auction processes.
  • Operating these businesses is even harder than finding them. This is where our highly-talented, hungry, hustling EIRs relocate and take full-time leadership positions in the businesses, carrying with them our playbook and portfolio operations support.
  • After growth and professionalization during our holding period, we endeavor to sell these businesses to an upmarket buyer. When that plan comes together, the return opportunity is extraordinary.

Looking back at 2022 gives us important perspective on what we need to focus on in 2023:

  • We bought four businesses that demonstrate the above characteristics: Robo6K, PMP, WestCoast (through Sunrise platform) and VPS (through DAWGS platform).
  • We sold two businesses that also demonstrated those same characteristics, but it was time to let them go for very different reasons:
    • At MHW, we achieved what we set out to do (and then some) under Gabe Barkley’s leadership. We found a buyer willing to pay a price we could no longer refuse. The buyer’s synergies and infrastructure would allow them to take MHW to new heights that were unobtainable to us. This investment returned the entirety of Fund I. That is what is possible when you buy a $4m EBITDA business at 5 times, grow it to $10m in EBITDA and sell it to an upmarket buyer for 12 times. We believe there are two more companies that remain in Fund I alone in which this rough math is achievable.
    • At Record Connect, the market for medical records/release of information services shifted dramatically almost overnight with the onset of COVID. Drew Daum did his best to weather the storm but ultimately, we again found a buyer willing to pay us a price that made it difficult to justify our continued ownership. The buyer has proven to be a far safer harbor for Record Connect than being out in open water alone amid continued turbulent waters. Achieving a modest return on our capital was a big save and was considered a good outcome by all, all things considered.
  • We partnered with two amazing new EIRs – Braeden Wilson and Adam Philpot. Braeden is already under LOI and set to close on an investment before the end of the first quarter.
  • We continued to build out the investments team. This team is humming and are the partners we need to ensure our EIRs are stepping into good businesses and good deals.
  • We partnered with Eric Wilson, marking the beginning of a Portfolio Operations function that is already creating a tremendous amount of value at our portfolio companies and with our leadership teams. This is a key function that will support our growth and scaling.
  • We held a final close on our Second Fund at $106m, above our $100m target, which was a major accomplishment and milestone for our firm.
  • In conjunction with the above, we navigated the SEC registration/compliance process for the first time ever.
  • Our talent pipeline and interest in NGP is stronger than it’s ever been.
  • Our deal pipeline is stronger than it’s ever been, with three businesses currently under LOI.
  • Our investor demand is stronger than it’s ever been.
  • Portfolio company earnings are higher than they’ve ever been.
  • Every day that we work at this, we create more in the way of process, best practices and institutional knowledge. The machine is getting stronger every day.

“We can’t possibly be the best at everything, so we’re going to focus on a few things this year and be the best at them.”

Now, let’s look forward. In 2023 we are going to:

  • Turn at least four of our current EIRs into CEOs by acquiring great businesses with them;
  • Create equity value across our entire portfolio as the number one portfolio operations priority;
  • Partner with and onboard another four EIRs, and ensure that our current EIRs have the necessary tools, systems, infrastructure, and support to help them source and advance better businesses quicker;
  • Hold a first close on a Fund III, a capital base that would support platform acquisitions, increased add-on activity across the portfolio and ETA “special situations,” as they arise;
  • Fly a flag and establish a footprint by partnering with talented people in Nashville to expand our geographic reach and secular depth;
  • Continue the great work we’ve started on our marketing, PR and social media strategies by investing more time and money into getting the NGP name out there for the world of business owners, intermediaries, potential partners and investors to see the amazing work we’re doing; and
  • Continue to add talented people in key functions of our business, specifically portfolio operations, accounting, finance, PR, marketing and recruitment.

We can’t possibly be the best at everything, so we’re going to focus on a few things this year and be the best at them. This focus will help us achieve the goals mentioned above:

  • We are going to attract the best talent to our portfolio companies, to partner with as EIRs, to join us for a short period of time as interns. Talent is what makes this all work.
  • We are going to stick to our knitting by buying businesses in the middle of our fairway, at good value. We will ensure all of our EIRs succeed and that we generate great returns. If we stray from this, we risk getting lost.
  • We’re going to “double down” on our best positions in the portfolio by making accretive add-on acquisitions where the market will support them. They have proven to create meaningful amounts of equity value in our portfolio companies when executed well.

There are great things ahead for NGP. Thank you all for being on the ride with us. We want to be THE partner of choice to entrepreneurs, businesses owners and investors in ETA/operator-led “micro” buyout. We are well on our way.

That’s all for now.  We came a LONG way in 2022.  We have a LONG way to go in 2023.  The only way we can get there is together.

Thank you for your continued support.



Brian O’Connor

Managing Partner

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