Snapshot: Pantheon talks co-investment

Pantheon partner Jeffrey Miller, who leads North America co-investments, spoke to PEI about deal flow, competition, LP due diligence and Pantheon’s approach.

Q. How would you describe co-investment deal flow?

A.For us, deal flow over the last 12 months has been at an all-time high. Buyout markets are generally doing well – not as well in terms of volume as '07 – '08 but still healthy.

But I also think our strong co-invest deal volume has been driven by our proactive sourcing and origination of co-investment opportunities across our platform, including leveraging our primary and secondary teams and the relationships they have built with GPs globally.
I also have to believe that part of the increase in deal flow is due to the valuation environment. Generally speaking, valuations are higher, so GPs need more equity in a given deal and therefore may need co-investment support more frequently in this type of market environment.
Q. And competition?
A. From a competition standpoint, it seems competition is more heightened at the large end of the market where there are very large LPs that want to write pretty sizeable checks, like sovereign wealth funds or pension funds. In the middle market, the syndicates are generally smaller; in a typical deal you might see three or four co-investors. The typical middle market fund manager probably has about six or seven LPs interested in co-investment and can reliably execute on co-investment so competition tends to be a bit less here.
Q. What have you noticed with LPs' due diligence?
A. We don't see LPs stepping back on due diligence. Most LPs we see are engaged in diligence, on the calls, asking good questions, reviewing the GP's and third-party diligence materials because this is more of a concentrated investment for them. Beyond getting comfortable with the business and valuation, LPs want to understand the GP's value creation plan and how that fits with that GP's skill set. LPs also want to understand how the co-investment fits their program and how it can be additive to their private equity exposure or provide exposure to an industry or stage of the market they may be under-exposed to.
Q. What are the opportunities you are seeing in co-investing?
A. We see all types of buyouts, small, medium and large, growth equity deals, special situation investments including distressed and energy opportunities, and new platform buildups. It's a pretty full range.

We will consider most any type of investment that our GPs are considering, except for venture capital. We think venture capital is more difficult to execute in a co-investment program unless you can do enough of these types of investments to achieve proper diversification.

Over the past year, given the higher valuation environment, we have seen a higher mix of non-buyout deals (growth equity, turnarounds, platform build-ups, etc.) as GPs have looked for other types of opportunities to invest in outside of traditional buyouts.
Q. How has Pantheon been executing co-investments?

A. From a funding perspective, Pantheon has a dedicated co-investment vehicle as well as other client vehicles that can participate in co-investments. We invest in managers across the globe in various sizes within the buyout market, as well as growth equity managers and groups focused on special situations and energy, and this influences the composition of the co-investment opportunities that we see.
In the US, we have tended to prioritize sector-focused fund managers or groups that invest across multiple sectors but have focused teams across each sector. In Europe, we have a high allocation to middle market managers as well as country specific managers. 
While we invest in co-investments globally, we set top-down geographic targets to help tilt our co-investment portfolio to regions we view as more attractive than others.