Pantheon International plc (LON:PIN) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: Your recent report sits behind a disclaimer. What can you tell us about that?
A1: It is just the standard disclaimer that many investment companies have. In essence, for regulatory reasons, there are some countries (like the US) where the report should not be read. In the UK, private equity (PE) is seen as a complex investment, and the report is targeted at professional/qualified investors.
Q2: So, you called your note Primary platform + active management = value add. What can you tell us about it?
A2: In this note, we demonstrate how the strength of Pantheon International’s primary platform and the active management of its portfolio add value in the attractive secondary (30% of the portfolio) and co-investment (33%) strategies. PIN’s key competitive advantages come from leveraging its often decades-long relationships with high-quality PE managers, its scale and expertise (including due diligence of managers and direct investments), a focus in the mid-market (where PE can add the most value to underlying companies) and a conservative approach to liquidity. The portfolio is now evenly split between direct/single asset holdings and funds.
Q3: You talk of platform strength and emphasise the importance of relationships with PE managers. What do you mean by that, and why is it important?
A3: PIN has an incredibly strong platform across all three strategies of primary investment, secondary investments and co-investments. They all build off each other – broadening, deepening, and strengthening close relationships with PE managers, known technically as general partners (GPs).
Pantheon has c.10k GPs in its database, has invested in around 2,000 funds, and screens around 300 funds each year. It sits on over 560 advisory boards of funds – roughly two thirds of funds in which it invests – and so is actively involved with the GPs, and it has been investing since 1982 (manager of PIN since 1987).
Why is this important? For the secondary market, GP-led deals now account for nearly half of the market, and GPs control who can invest in funds – on launch but also later on. This creates opportunities for Pantheon – a known and valued investor – as it can be a solution in bigger deals if specific assets need to be carved out. GPs are likely to be the first to know when another investor is wanting to sell and can be the source of introductions of deal flows. Given that 90% of Pantheon’s secondary purchases are funds with existing GPs, and that it knows the portfolio and underlying companies well, the risks in such transactions are lower. For co-investments, an investor has to be invited into a deal – so having the platform strength in GP relationships is key here.
Q4: Your note explores a range of other platform strengths, such as investment expertise and their active management. Can you tell us some more about them?
A4: As you say, PIN’s platform is about much more than just the strong GP relationships. It adds value to general partners by providing information/expertise where the PE house may not have a standalone entity. Pantheon is, after all, a global business with visibility across, and access to, the entire PE market, and it also provides GPs with flexibility of bite-size investments – on both original and follow-up deals, and its conservative approach to liquidity provides certainty to finance, through economic cycles, which is important to GPs.
It has built its investment process to service the needs of GPs, with, for example, some co-investment decisions provided within days, because of the ways in which it is resourced and structured to make decisions. It characterises its approach as providing the GP with solutions to get the deal done. The active management of the strong platform over the long term is important to Pantheon investors because it creates optionality. It means that Pantheon can invest across the whole range of PE investments, picking off the optimal investments at any given time. It can access, and increase positions in, over-subscribed, popular, high-performing funds. It can access strategies such as co-investments, which may offer low-fee investments. It can also diversify and manage risk across a range of measures.
Q5: And just to conclude, what can you tell us about the risks?
A5: Pantheon International operates in an attractive market, can pick the best part of that market, and has competitive operational advantages. Its manager and deal selection, and portfolio structuring, add value. To end-Oct21, this has delivered 12.1% annual NAV growth since inception in 1987. Corporate governance is strong, and the NAV is conservatively valued.
There are risks – we note i) sentiment to the economic cycle (noting that the NAV rose every year in the 1990s’ recession, and in FY20), ii) adverse sentiment to illiquid and unquoted investments (PIN has permanent capital and proven exit uplifts), iii) sentiment to the sustained discount could be an issue, and iv) short term, there could be forex volatility.
