NEA

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

NEA is an investment firm focused on investing in venture capital and growth equity, primarily within the healthcare and technology industries.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

NEA’s core business is providing capital to companies. This can be broken down into two main sections; investments into privately held companies (venture capital) and later stage investments in more mature companies (growth equity).

Business Overview and Revenue Distribution

NEA’s revenue model is primarily driven by carried interest, which is a share of the profits generated by the funds they manage, typically only realized after all investors have received their initial capital and a pre-determined hurdle rate. Other important sources of revenue include management fees, typically a percentage of assets under management, and realised gains from asset sales.

  • Venture Capital: This segment focuses on early-stage companies, mainly in technology and healthcare. These investments are higher-risk but provide the potential for very high returns. Returns are also generally long-dated, as they take multiple years before the investments come to fruition, through either an acquisition or an IPO.
  • Growth Equity: This segment invests in more mature companies, which are generating revenues and are in their scaling phase. While they are usually less volatile, growth equity investments offer lower potential returns than venture. However, they are generally shorter dated than venture investments.
  • Industry Concentration: NEA has had a significant exposure to healthcare companies over the past years, this concentration has brought an above-average risk and volatility to its returns due to uncertainty of government regulations, as well as high risk of failure in drug and medical development.

The current environment for venture capital and growth equity is challenging, due to the higher interest rates, which are limiting the inflow of funds to venture capital and high growth companies, as they are competing with safer investment instruments (bonds, CDs).

  • Increased Competition: The venture capital and private equity space has attracted a lot of capital and competitors over the past years and that is resulting in increasing competition for investments and deal opportunities. Some traditional players are starting to offer venture capital investments, further increasing the already high competition.
  • Valuation Pressure: The rising cost of capital has put downward pressure on valuations of growth companies, as investors seek safer investment instruments, and there has been a repricing of most companies to reflect this.
  • Technological Disruption: The pace of technology innovation can lead to rapid changes in market dynamics, making it difficult for investment firms to assess the sustainability of competitive advantages for companies.

Competitive Advantage and Moat Analysis

NEA’s moat is weak, relying mostly on an extensive network and experience, making it more akin to a brand moat. It has been given a moat rating of 2 out of 5. The company has shown great skill in sourcing good investments and a good historical return on invested capital, but has not demonstrated to posses an ability that can prevent others from replicating their strategy.

  • Network: NEA’s extensive network of relationships with entrepreneurs, industry leaders, and other investors gives them access to deal opportunities. However, this advantage isn’t unreplicable, and other large players have access to a similar network.
  • Experience: NEA has a lengthy history of successful investments in the tech and healthcare sectors. This history has allowed them to build expertise, credibility, and attract top-talent from the best universities. Although, the returns from their investments are not exclusively a reflection of their abilities, but can also be a result of being in the right sector at the right time.
  • Reputation: NEA has developed a solid reputation as a reliable investment partner for many entrepreneurs. In some sense they’ve created a small brand, by being seen as a trusted provider of capital.

Risks to the Moat and Business Resilience

NEA’s moat is vulnerable to significant risks, which could undermine their competitive advantage.

  • Fundraising Risk: Rising interest rates have reduced the funds going into private equity and venture capital as investors tend to choose safer alternatives, like bonds. Consequently, NEA could face difficulties raising new capital for new funds. It could also have trouble deploying capital due to inflated valuations.
  • Reliance on Key Personnel: The success of NEA is tied to the expertise of their personnel, in particular a few of their partners, which creates key-person risk. Any departure from key members of their team could severely impact the company’s capabilities to source and vet great investments.
  • Market Downturns: Economic downturns and changes in market sentiment can lead to dramatic decreases in NEA’s returns, and a higher risk of defaults from the investments it’s backing, reducing the carried interest it receives. It also makes it very hard to exit an investment via acquisitions or an IPO, and creates uncertainty on when the investments can be realised.
  • Technological Disruption: A technological shift could hurt the performance of its portfolio. Rapid technology development is hard to keep up with, and firms can quickly become obsolete or outmaneuvered by new competitors.
  • Governmental Regulations: For companies specializing in the biotech and health care industries, governmental regulations are extremely important. Any substantial changes can drastically impact the viability of companies and can even push them to fold.

Financial Analysis

NEA has a solid financial position and has been consistently profitable for more than 30 years, making it relatively stable. While the firm is profitable, the current market conditions are negatively affecting its returns.

  • Revenue Growth: Revenue growth is dependent on the performance of its investments, as such, revenue can be highly variable year to year, and have a wide range of profitability, as performance is dependent on external forces. Over the last few years revenue has been driven by acquisitions, as the tech market has cooled down.
  • Profit Margins: The profit margins are closely tied to the carried interest the company is receiving, and that depends entirely on performance. There isn’t much the company can do on improving them, as they are mostly outside their control. That being said, margins have been very high over the last decades due to a very bullish market environment. The company’s cost structure is rather low and stable, providing consistent profit levels in stable market conditions.
  • Free cash flow: The free cash flow available to owners depends significantly on realized carried interest, which means it’s not very reliable.
  • Leverage and Debt: The company usually uses debt to finance some of their operations, or to buy minority stakes in other companies. The company’s debt levels are relatively low compared to their equity.
  • Capital Structure and Financial Resources: NEA has ample cash, marketable securities, and a very low level of debt, giving them financial flexibility.
  • Recent Problems and Controversies
    • During their Q4 2022 earnings call, NEA announced that there has been a 20-30% reduction in the number of deals they’ve been able to source and close due to macroeconomic uncertainties. They’ve acknowledged that this problem may persist for the next few quarters, and there could be an effect on realized returns from the decrease in deal flow.
    • The company also acknowledged an increased risk of bankruptcy from the companies they’ve invested in due to economic downturn and high interest rates. This will inevitably affect carried interest and potential growth in valuations.

Understandability Rating: 3 / 5

While the general business model of an investment firm is easy to understand, the dynamics behind it are quite complex. While it is easy to grasp what carried interest is, it’s hard to understand how a company sources deals, or how they’re structured.

Balance Sheet Health Rating: 4 / 5

The balance sheet has a low level of debt and large amounts of cash and investment holdings. However, due to the uncertainty surrounding the current market and high risk associated with their investments, this rating can’t be 5 out of 5.