What characteristics do you look for in the managers of funds you put forward for your investment trust, Pantheon International Plc?
Top performing: absolutely essential. Top-performing ESG: incredibly important. They have to be managers that are in our top ratings for ESG because PIP is a public vehicle and we have to be very careful about the names that we put there. Some managers, frankly, wouldn’t make it because they don’t have a top ESG rating.
The name of the manager and their reputation is really important. The fact that there is access constraint and [a fund is] invitation-only is really important too, because we’re trying to offer shareholders something that is hard to get, essentially.
PIP doesn’t offer [to] all of those managers [that are on the Pantheon platform] because it would just be too many managers, [since PIP is] already well diversified. You don’t need to add a long tail of managers, so we just focused really on a select group of managers that meet those types of criteria.
Are some private equity managers scared off by the fact that PIP is a public vehicle?
That might have been the case a few years ago, but today we really don’t have too many problems with it. Everything’s [public], so anybody can look at what we’re putting in reports, what we disclose, and they [can] get comfortable with the fact that we do need to disclose the name of the manager – if a deal within a fund on the primary side gets very big, then we’ll want to disclose the name of the company, the percentage of NAV. But we don’t have to disclose all the operating metrics of the company or the return metrics.
PIP has increased its weighting towards direct company investments since 2015, comprising co-investments and single-asset secondaries. How do you go about weighting allocations from PIP to primaries, co-investments and secondaries?
PIP is now 45 percent companies and 55 percent funds. [The split for this coming financial year] in terms of new investments is one-third co-investments, one-third secondaries (predominantly single-asset deals) and one-third primaries. It’s a range that is approved by PIP’s independent board [every year] – very experienced private equity veterans [and] they’re all big shareholders as well, which is important. Alignment of interest; skin in the game.
We want to be quite flexible, because at any one point in time there might be opportunities that we want to take advantage of, and we want to be able to have the flexibility to do that. Having those three investment types is really important for a vehicle like PIP because it helps us to manage our maturity and our liquidity profile. We want to keep that maturity profile at an average of about five years, because that’s peak cash generation. We can adjust that maturity by doing more or less secondaries, primaries and co-investments.
Clearly, if you do a secondary – particularly an LP fund secondary – you’re adding past vintages, so you can make the portfolio a little bit older. If the portfolio looks like it’s getting a little bit too old (and it was, actually, a few years ago – it was looking a little bit long in the tooth) then you can add primaries, which are essentially current and future vintages, and you can do co-investments, which are current vintages. So it’s quite a fine balance.
PIP’s share price discount to NAV has widened and was 35 percent at the end of the 12 months to 31 May. How do you expect that particular trend to shift?
The discount comes in and out over time. In general, the share price and the NAV are correlated, which is what you would expect in most periods of time. In certain periods of time – the GFC, covid, now – there seems to be a de-correlation. We’ve already had the first two months of this financial year [and] the NAV has gone up, but the share price has gone down. It’s the same with our peers: it’s not PIP-specific, it’s a market phenomenon.
The market has gone ‘risk off’ – worried about technology, worried about growth assets – and has taken [a] view which has affected all the private equity stocks.
It’s unbelievably frustrating and baffling for us, because we can see the value in the portfolio. The market is basically saying, by putting a 40 percent discount on the NAV, we don’t believe in your valuations.
On average, there’s [been] about a 31 percent [weighted average uplift from fully realised exits] over the last 11 years. In the last financial year, it was 42 percent. What that says to me is that on average, our portfolios are conservatively valued, so there is a cushion there in terms of valuation. However, the market doesn’t seem to believe that or get that.
What’s going to happen to the discount? I wish I knew. I wish I had a crystal ball – but I think what’s going to happen is over the next few weeks and months [is that] more and more of the listed private equity sector is going to be reporting its Q2 valuations and then its Q3 valuations, and hopefully at some stage the market will say, “Oh well, maybe putting an extra discount on the NAV… was a bit excessive.”
Do you expect that as private equity opens up more to retail investors, those decorrelations will happen less frequently?
We think that [the investment trust is] an underappreciated way of getting access to private equity. We’ve got a couple of private equity veterans on the board who own very large numbers of shares… These people who understand private equity and know what they’re doing [have] chosen to put quite a lot of money into PIP. As long as you’re in it for the medium to long term – you’re not in it to buy this week and sell next week because you might hit a period where the market seems to decide that the discount should be wider – we think it’s a great way of owning private equity. There’s no reason why PIP couldn’t be a much bigger vehicle.
Helen Steers is senior manager of Pantheon International Plc, Pantheon’s listed global private equity investment trust, and a partner in Pantheon’s European investment team