Pantheon International: The real costs of public vs. PE ownership

Pantheon International plc (PIN) In this note, we use some high-profile, mainly hostile, bid situations to illustrate the “agency” costs that can be a material drag on the performance of a listed equities portfolio. The strong corporate governance embedded in PE limits such costs, allowing i) a long-term focus (with a through-cycle perspective), ii) shorter periods of operational underperformance, iii) reduced risk of non-financially motivated acquisitions, and iv) aligned managers’ and shareholders’ interests. While PE is resource-intensive, we demonstrate how PIP avoids agency costs – a material factor in it delivering market-beating, post-cost returns since inception.

• Agency costs: In addition to the issues above, we believe that, by investing in PE, PIP avoids the other agency costs that listed portfolios may incur, notably i) higher debt expense and worse covenants, ii) monitoring and reporting costs, especially management time and focus, and iii) less certain, and higher-cost equity raises.
• PE costs: PE has come in for criticism for its high-cost model. We believe doing in-depth due diligence and research, working alongside investor companies, and aligning management with investors require costly resource to execute well ‒ all core to the model delivering long-term, market-beating returns.
• Valuation: PIP shares trade at a 23% discount to NAV, despite their long-term outperformance. We believe the “real” NAV is likely to be above the book value on the accounting date, given the consistent uplift to carrying value achieved on exits. PIP reinvests returns for superior capital growth and pays no dividend.
• Risks: We note i) sentiment to the economic cycle (NAV rose every year in the 1990s’ recession, and in FY’20), ii) adverse sentiment to illiquid and unquoted investments (PIP has permanent capital and proven exit uplifts), and iii) sentiment to the sustained discount could be an issue. Short term, there can be forex volatility.
• Investment summary: Pantheon International is in an attractive market, can pick the best part of that market and has competitive operational advantages. Its manager selection, deal selection and portfolio structuring have added value. This has delivered 11.7% annual NAV growth since inception. Corporate governance is strong, and the NAV is conservatively valued. Investors get liquid access to the whole PE market. There are risks around the cycle, and illiquid and unquoted underlying assets, but the current discount appears an anomaly against historical returns.

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