You recently closed your second co-investment fund on its $500 million target. What did you learn, if anything, from that fundraising process?
The first thing we’ve learned is that clients value the more transactional parts of what we do. So co-investments and secondaries, that’s where clients feel they can’t really do it themselves. The concern for most clients is they only ever see one or two co-investments and that makes it hard for them to develop a diversified portfolio. There are some groups – generally the bigger groups – who look at co-investing with their managers as a way of averaging down their costs. They’ll commit $100 million to a fund but they’ll do a couple of $20 million or $50 million [co-investments] so that their total cost has come down. The problem with that approach is you build enormous concentration with an individual asset. Doing it through us, they can become more diversified and obtain cheaper access to these opportunities when compared to doing it themselves.
What do you like specifically about the strategy for your new co-investment fund?
The vast majority of the capital is mid-market, [and] we have a global approach to it. We look across the world with all of our different offices and figure out where the best opportunity is at any particular time, because with co-investments it’s immediate. You can deploy the capital in a certain sector and a certain country there and then. It’s all deployed pretty much in one go. So we’ve favoured healthcare, energy and education, all of which have been pretty good bets.
Where do you anticipate deploying the most capital geographically?
You’d expect a fund like this to have 40 percent to 50 percent in the US, partly because, from a macro perspective, that’s an area we prefer. But also because that’s where the majority of private equity deals are done. We have a fairly equal rating with the rest between Asia, emerging markets more broadly, and Europe. Right now we are seeing pockets of Europe looking very interesting, like Spain for example, but it’s still not going to be the majority of what we do. In Europe we’ve invested mostly in Germany and the Scandinavian regions, [and] those countries that are export focused.
What’s the opportunity behind Pantheon’s efforts to bring private equity products to the defined contribution community?
We’re all aware that defined benefit plan assets are not growing as much as they once did. In the US and Western Europe, the majority of capital going into pension plans is defined contribution. As defined benefit employees retire, the pool of capital available is also gradually diminishing. It’s not disappearing off a cliff, but it’s gradually diminishing. So we need to find a way to include private equity in DC pension plans. It will open up a new source of capital for the industry and it will be beneficial to the DC pension plan participants. Private equity already has proven its ability to outperform over the last 30 years for the DB pension plan community and now this asset class will hopefully deliver the same for the DC community. We need an auditable way of measuring the value of private equity on a daily basis, so we’ve developed that technology. We also need sufficient liquidity, and we have a solution here too. Over time we think that defined contribution plans will become very important investors in the asset class, not next week or even this year necessarily, but in the years to come.