Enter the Pantheon

The Pantheon, of course, is one of Rome’s best-loved monuments. Countless tourists and residents have walked into that ancient temple for the gods and marvelled at the shaft of light beaming down from the occulus left open to the elements. They may have taken refuge from the bustling city amid the Pantheon’s cool, dark interior but they may not realise, however, that the structure dominating Piazza della Rotunda today is actually the building’s third incarnation, nor that the Pantheon’s purpose evolved over the ages in accordance with broader cultural change.

The parallels – well, save for the hole in the ceiling – are many to Pantheon Ventures, one of the world’s largest primary and secondary fund of funds managers. The 28-year-old firm, which is now led by a five-person executive committee as opposed to one or two individuals, recently underwent its third significant structural change and feels it must continually evolve with changing market dynamics to stay relevant to investors.

A recent visit to the firm’s London office found Pantheon’s leadership in unflappable spirits – even when badgered to defend some of the classic critiques of the fund of funds industry, like their ability to truly provide access to elite fund offerings and charging LPs an extra layer of fees.

Elly Livingstone and Susan Long McAndrews

The unwavering calm and positivity PEI detected is in part due to a pervasive firm culture that Elly Livingstone, Pantheon’s head of global secondaries, describes as somewhat “low key”, collegiate and considerate. “It’s never been a place for very aggressive, sharp elbowed behaviour, either internally or externally. It’s not to say we always agree with each other, but there’s a way of having a debate … without pushing and backstabbing,” he explains.

Indeed, polling market participants as to their perceptions of Pantheon paints a picture of a genteel group of executives well known for their professionalism.

But those unflappable spirits certainly also have a great deal to do with Pantheon’s current generation of leaders finally getting some skin in the game. In February, Pantheon’s parent agreed to sell the firm in a $775 million deal that will see its partners take a significant minority stake in the business and recycle management equity through to the next generations.

“We’re excited about it because it really gives us a long-term platform for buying our business back,” says Susan Long McAndrews, head of US primary investments and member of the executive management committee.

CHANGING SHAPE

Pantheon’s structure has changed four times in the past three decades. Its origins date to 1982 when it was the captive private equity arm of London-based GT Management.

A year before GT was absorbed by Lichtenstein’s LGT Group in 1989, Rhoddy Swire led the MBO of the division and formed Pantheon. In March 2004, Pantheon then became wholly owned by Russell Investments, a global investment division of US life insurance giant Northwestern Mutual.

“Being part of Russell allowed the firm to evolve its structure and separate management and ownership, if you think about the founding generation that started the business,” says Livingstone.

The firm’s management and ownership are now being fused back together with Russel’s sale of Pantheon to Affiliated Managers Group (AMG), a New York-listed asset management business.

AMG, originally a portfolio company of TA Associates (in whose funds Pantheon has invested), owns stakes in a number of investment management firms, including the UK’s BNP Paribas’ Artemis Investment Management. AMG pursues such acquisitions under a “partnership approach” whereby each subsidiary is part-owned by management and retains operational autonomy.

“What AMG has done is actually recreated a partnership structure,” says Livingstone. “What’s different in the AMG approach is the Pantheon partners are personally invested in the Pantheon organisation, and on top of that there’s also a mechanism for recycling equity for the next generation.”

Pantheon is very eclectic. I think part of that is having sprouted up through these three different geographies, but it means there’s a lot of room for people with different styles being accepted here.

Susan Long McAndrews

Livingstone and McAndrews delined to discuss any specific figures, however an analyst call with AMG executives in February revealed that Pantheon’s partners would initially own 15 percent of the business. In addition to the $775 million AMG is paying for its stake, it will also pay up to $225 million in potential earn-outs over the next five years.

Sean Healey, president and chief executive of AMG, said in a statement that AMG believes private equity will continue to produce “superior returns” and attract clients around the world. “We view the fund-of-funds structure as an especially attractive way to participate in this important asset class, given the stability and consistency of its revenue stream, as well as the scalability of its investment platform.”

For Pantheon, whose funds’ lives typically last around 12 years, the arrangement should help it to attract and motivate talent. “Businesses like ours … need a system of devolving equity to the next generation and the next generation beyond that,” says Livingstone. “That’s very important – it gives the next generation something to shoot for.”

It also better aligns interests with clients “who expect to see the same people around managing their money for a considerable period of time, which is very different to a hedge fund where’s there’s much higher and faster turnover”, he adds.

‘STEADY DOLLARS’

Long-termism is a concept Livingstone and McAndrews consistently raise.

McAndrews refuses to be drawn on whether Pantheon has been burned by certain types of investments or particular vintage years, instead noting that a well diversified portfolio should insulate investors from such issues. “And I think most of our clients, they are very long-term in nature, they understand the asset class and … commit reasonably steady dollars over time.”

Asked how the firm managed through the financial crisis, Livingstone acknowledges that, in late 2008 when there was real fear of a global financial system meltdown, the firm’s investment committee seriously considered whether it made sense to continue to deploy capital and then did so very cautiously. He also says the detail of reporting and disclosures from their GPs, and in turn their own reporting to LPs, was kicked up a notch, but he stresses repeatedly that there was no “knee-jerk reaction”.

“Any shock causes you to look again at the way in which you do things like diligence, governance, decision-making and ask yourself ‘Is it appropriate for the new world?’” But, he adds, “At the end of the day we are a business where the short term for us is about five years … We’ve been here through cycles and ups and downs before, but we’re always looking at governance, investment process, diligence, whether we’re equipped for the world ahead.”

Those firm management issues are considered in good times and bad, he says, as are whether Pantheon ought to be adapting its product offerings. Both Livingstone and McAndrews flag this latter issue as crucial to the firm’s ability to maintain and enhance its market position as the private equity industry evolves.

“We’ve typically had the house mix product of primaries and secondaries globally, which is very appealing for a certain type of client and institution. We do consider taking our experience and track record in certain areas and tailoring that to something that a client would like even though they may invest some parts of their private equity allocation directly,” says McAndrews. That may translate to separate accounts, or specialised co-mingled funds of funds.

Livingstone: not a 'product proliferater'

The firm’s most recent addition to its product line was a global infrastructure-focused fund of funds that will make both primary and secondary fund investments. Sister news site InfrastructureInvestor.com revealed in September 2009 that Pantheon had held a $150 million first close on its debut infrastructure vehicle, reportedly aiming to raise between $300 million and $500 million. McAndrews and Livingstone declined to comment on fundraising issues, but noted that Pantheon studied the sector for around two years before setting up the division in 2008. Devoting a couple years of study before embracing a new initiative is typical for the firm.

“We’ve never really been a product proliferater,” Livingstone says, noting Pantheon continues to look at what offerings would make sense for Pantheon’s skill set pursuant to illiquid assets. “We tend to proceed thoughtfully and considerately in terms of roll out.”

APPROPRIATE FEES

Talk to LPs and GPs associated with Pantheon – as well as the firm itself – and they’re quick to counter any stereotpyical criticisms of fund of funds.

You might think asking Pantheon executives to respond to the allegation that fund of funds are “a cancer”, as Yale endowment chief investment officer David Swenson infamously remarked last year, would be an upleasant task. But Livingstone and McAndrews took the question – which at its core, relates to the extra layer of fees fund of funds charge – in stride.

“You really have to look at the type of client and what they’re trying to do with their private equity programme,” she says, noting that fund of funds make sense for some LPs but not others. “A number of our largest clients have very small staffs but a very large allocation to private equity and want a trusted outsourcing partner for that part of their portfolio. For them, the fees they view as appropriate and good value versus what they would have to do to implement that same programme in-house.”

In some cases, she adds, an LP may decide to invest directly in their home market, but will invest with a fund of funds for exposure to other geographies or strategies, such as secondaries.

Pantheon’s fees are also pretty fair, she adds, though does not give specifics. “We scale in our fees on the front end, to try not to add to the J-curve problem, so we don’t charge the full fee day one. We also have a lower upfront fee than industry standard and a highly back ended carry component.”

The State Universities Retirement System of Illinois (SURS) hired Pantheon in 2002 as one of two private equity fund of funds managers to make all its investments in the asset class, according to chief investment officer Daniel Allen. “We have a small staff and so we don’t have the private equity knowledge in-house to oversee a direct programme,” he says, noting how pleased he’s been with Pantheon for both its performance (see table on performance) and strong client focus. “And acess has become more of an issue with some of the challenges that Illinois public funds have experienced [related to state legislation around Sudan investments].”

While the specific situation in Illinois is not being faced by all LPs, the issue of restricted access has not gone away, despite fundraising having got tougher, says Livingstone. There will continue to be LPs shut out on the primary and secondary sides by exclusive GPs who only take on one or two new LPs per fundraise or limit the number of pre-approved buyers of secondary stakes.

Boston-based ABRY Partners – in which Pantheon has been investing for 16 years – is one of those managers, says co-founder and chairman Royce Yudkoff. “Our funds have been fortunate and done well over the years, so we don’t add a lot of LPs from fund to fund.” Pantheon tends to be one of a few fund of funds in each vehicle, and overall is one of the firm’s core investors.

Yudkoff adds that from a GP perspective, Pantheon stands out from other fund of funds because they work “very hard to have an unusually detailed knoweldge of our investment approach and all the investments we have in our portfolio. I can start talking to Susan about a company and she knows the business and exactly what the strategic issues in that sector are because they folow us very closely.”

He also points to fair and professional negotiations over terms and conditions, straightforwardness and a stable management team as key attributes. Asked if engaging with a firm that is led by committee rather than one individual can be a detriment, Yudkoff praises the Pantheon approach. “I typically have three relationships among senior executives there, and I like that,” he says. “The reality is if there’s one person who totally, supremely leads a firm, and if it’s a sizeable firm, you rarely interact with them.”

McAndrews says having that collegiate ‘”team culture” opposed to a “star culture” is part of what gives the firm a low level of staff turnover – only three senior professionals have left in the past five years – and encourages diverse backgrounds and views.

“We’re not a cookie cutter culture,” she says. “Pantheon is very eclectic. I think part of that is having sprouted up through these three different geographies, but it means there’s a lot of room for people with different styles being accepted here.”