FX dents Pantheon International's returns

"Because one of the share classes was non-voting it was not included in the index, so by consolidating the two we increased the trust's market cap in terms of its position in the index," explains Andrew Lebus, lead manager of Pantheon International. "The trust's shares are now part of the FTSE 250 index and that was helpful in increasing the demand for the trust's shares, which has already had a positive impact on the share price performance."

Mr Lebus says a roadshow has recently been run on the trust, which helps to create buying interest, so this too could have helped tighten the discount.

However, the trust has recently lagged the cumulative returns of other listed private equity funds of funds (FOFs), in part due to foreign exchange movements. Its NAV per share increased by 55.1p, or 2.5 per cent, between 31 May 2017 and 28 February 2018 to 2,245p, and underlying portfolio gains contributed 186.6p (8.5 per cent), investment income 19.6p (0.9 per cent) and share buybacks 1.3p (0.1 per cent). But foreign exchange movements detracted 112.6p (5.1 per cent), expenses and taxes 36.4p (1.7 per cent), and an asset-linked note financing 3.4p (0.2 per cent).

However, its managers don't feel the need to hedge currency. "For the long-term investor currency effects don't have a significant impact on the overall return, and this is an asset class that is only appropriate for the long term," says Mr Lebus.

As at the end of February, the fund had 75 per cent of its assets in funds that report values in US dollars, 20 per cent in euros, 2 per cent in sterling and 3 per cent in other currencies.

But the trust's managers do not have maximum or minimum exposures to specific geographic regions. "We are investing where we think the opportunity to find managers that can generate good returns is best," says Mr Lebus. "And the majority of that happens to be in America where there is a vastly larger pool of quite specialised managers, which is why over half our assets are in the US."

And Mr Lebus argues that returns could improve because in the past few months they have reduced exposure to some of the more mature investments, which have lower growth prospects. Historically, younger funds in the trust's portfolio have outperformed those aged 10 years and older. When the trust consolidated its two share classes it issued an unlisted asset-linked note to the largest holder of the redeemable shares in exchange for part of its shareholding. The asset-linked note is linked to the performance of a portfolio of more than 300 interests in the trust's oldest private equity fund investments, mainly from 2006 and earlier.

At the end of its last half year at 30 November 2017 secondary (existing) funds accounted for 45 per cent of its assets and primary (new) funds 24 per cent. This is in contrast to five years ago when primary funds accounted for about 60 per cent of its assets, and direct co-investments 3 per cent.

The trust's managers consider secondary funds to be a growing opportunity as secondary transactions account for an increasing share of private equity assets under management.

"We can buy into funds through the secondaries market, and as we have very strong relationships with certain managers we know a lot of private information in relation to the funds that they are investing in," explains Mr Lebus. "We can use that information as we decide whether or not to buy into those funds – we have access to good information on them but not everybody does. [With secondaries] we can also see how the assets themselves are performing. [And with a] secondary interest we are also much nearer to the point at which an asset is sold, and nearer to the point of a good uplift is potentially a better time to be buying into an asset."

The trust invests directly in private companies alongside some of the managers that run the funds it invests in, and these accounted for 31 per cent of assets at the end of November. "We can put money to work alongside [these managers] in a way that continues to be managed by them but where we're not paying a management fee on that capital," says Mr Lebus. "That helps us keep the overall cost of our approach to investment down and makes it a very competitive way of investing in this asset class."

During February 2018 Pantheon International invested £1.7m alongside private equity firm KKR in an IT service management provider, and £1.5m alongside Essex Woodlands Healthcare Partners in Encore Dermatology, a dermatology-focused pharmaceutical company. 

See the personal finance podcast of 6 April for our interview with Andrew Lebus.

PANTHEON INTERNATIONAL (PIN)

Source: Winterflood as at 18 April 2018, *Morningstar, **Association of Investment Companies

How Pantheon has performed

Source: Winterflood as at 18 April 2018

Sector breakdown as at 28 February 2018  (%)

Source: Pantheon International