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Why Pantheon is investing directly

The specialist private equity trust is upping its exposure to direct private stocks rather than funds
December 3, 2015

Pantheon International (PIN) manager Andrew Lebus is still adjusting to a move from serene Mayfair to the heart of Old Street. Folded into a small meeting room he agrees that the firm's new home is certainly "different" to the rather quieter atmosphere of Mayfair.

The private equity fund of funds, an IC Top 100 Fund, outgrew its hub in London's private equity capital and is now rubbing shoulders with the City's bankers. And location isn't the only thing changing. Mr Lebus is loath to offer bold sound bites, but quietly acknowledges that the fund's exposure to direct investments - putting money into private companies rather than funds - is ratcheting up. Co-investments have almost doubled in a year from 7 to 13 per cent of the portfolio at the end of the 2015 financial year, up from 3 per cent in 2013.

"Up to 30 per cent of the fund can be invested in co-investments and, yes, the level will increase," he says firmly. He adds that the fund house's relationship with more than 125 private equity funds gives Pantheon "a window" into private investment opportunities out of bounds to other investors. "Then we go out and shake the cages," he says with a smile, in order to find good opportunities for investment.

Two of those new investments include Singapore-based hearing-aid manufacturer Sivantos and French medical group Sebia. Sivantos is a buy-out from Siemens backed by (Swedish private equity group) EQT. "It is a market leader in audiology and we think that - backed by EQT, which has considerable expertise in the global healthcare sector - management are going to be able to restore the company's market position which means becoming a more dominant player," he says.

Although riskier than a diverse investment through a fund, co-investing has a clear benefit for Pantheon because they don't pay any fees. The availability of investments has grown in recent years too. With less bank funding going spare after the crisis, private companies turned to other sources of finance. Today the private market is gaining more and more attention as a playground for successful companies who have less need for public markets.

"For many businesses it's more natural to be private for longer," says Mr Lebus. He says the hyped valuations surrounding tech unicorns are probably a "feature of the tech market," but adds: "If you can get that level of support in the private market why would you go public?"

Private investing is a hotly contested world, and one based on long-term relationships with private equity houses. "These are the best investors in the world in their niches," says Mr Lebus, of his private equity contacts.

And outside the frenetic manias and panics of the public markets, Mr Lebus says private equity offers the chance for cool-headed conservatism, patience, and the chance to realise much higher returns than on the public market.

"I think we can demonstrate a tendency for realisations to happen above the holding value," he says, unfolding an arm to point to the fund's annual report. He remarks that his assets are more conservatively valued than their listed peers and often surprise on the upside when they exit the portfolio. According to the annual report, in the 2014/15 financial year the average uplift on exit valuation is 31 per cent.

That has helped the fund generate strong returns far higher than the listed market over the long term. In five years it has returned 116 per cent compared with just 61 per cent for the MSCI World and 42 per cent for the FTSE All-Share.

"For a long-term investors, I don't think this is a significantly different in risk to ordinary equity for a long-term saver," he says. "Where this works really well is long term savings plan."

Pantheon invests in private equity through co-investments and primary and secondary investments. Primary investing means committing a large chunk of capital to a new private equity fund, which will call down that capital as and when they make investments in private companies over a five-year period.

That means keeping a large amount of capital on Pantheon's books. The fund has a credit facility for this which remains unused. But secondary investments, where Pantheon buys out another investor, tend to be their favoured method. It currently accounts for 44 per cent of the fund's assets. Spreading investment between those three types enables Pantheon to hold assets set to realise at different times.

The key risk of private equity is holding assets which are very illiquid and which take a long time to get ready for a sale. The fund's maturity of 6-8 years and 11 per cent weighting to fund vintages (the date the private equity fund started paying out investments) of pre-2003 means that it can expect a solid stream of income from realisations.

Mr Lebus remains sanguine. He is determined that his cool, collected approach to the private markets will win out over the public market mania any day.

Fund manager CV

Prior to joining Pantheon, Mr Lebus worked for a number of years in corporate finance with special emphasis on the private equity market, latterly at Credit Lyonnais Securities, and prior to that at its affiliate, Castleforth. He also spent eight years in Pantheon's Hong Kong office and participates in Asian investment including determining investment strategy and overseeing the selection and monitoring of investments.