Pantheon International: Getting in before the IPOs

“Safety in numbers” would be one way to describe the thinking behind some of the private equity trusts frequently included in our IC Top 100 Funds list. Names such as Harbourvest Global (HVPE) and Pantheon International (PIN) tend to make greater use of third-party funds than direct investments, resulting in a highly diversified spread of holdings. Pantheon International's financial report for the six months to 30 November 2020 noted that 70 fund managers and 425 companies accounted for approximately 80 per cent of its portfolio.

Big, diversified portfolios with a preference for funds are not always as easy to monitor as funds such as Oakley Capital Investments (OCI) which run fairly concentrated portfolios. Yet those more diversified funds have not sacrificed recent performance by widening the net: Pantheon International’s recent report noted a net asset value (NAV) return of 12.1 per cent in the year to the end of November. More generally those private equity trusts classified by broker Winterflood as “fund of fund” portfolios have tended to come out ahead of their peers, by share price total return, in the past year (see chart).

 

 

Pantheon International, for one, has benefited from similar leanings to the likes of Oakley. The team, like many other private equity investors, has favoured some of the sectors that have been flourishing most obviously during the pandemic: information technology made up 29 per cent of assets as of September 2020, with 19 per cent of the portfolio in healthcare. Helen Steers, senior manager for the trust's portfolio, notes that the team has also favoured “must-have” consumer products and sectors with structural growth stories that predated the pandemic.

“We already were in those sectors with secular tailwinds – areas such as ageing demographics, human health and digitalisation,” she says. “That helped. When we did an assessment of the portfolio, looking at the impact of Covid, we thought that about 74 per cent has had a limited or no impact. Only 2 per cent of the portfolio has been highly impacted.”

The developments of the past year have accelerated some developments in the portfolio in both a positive and negative sense. One big valuation gain for the portfolio came when Polish e-commerce company Allegro (POL:ALE) listed in late 2020, making it the biggest name on the Warsaw Stock Exchange. Steers notes that there “has probably been an acceleration with initial public offerings (IPOs)” in hot sectors such as e-commerce, also potentially speeding up the rate at which the team can exit its investments. Separately, other portfolio constituents such as Italian digital payments company Nexi have benefited from the rush to online of the past year. But the pandemic has brought disruption, too.

“On the exit side some of it has accelerated, but some companies you might have to hold for longer because they have been disrupted,” Steers notes. “We like healthcare but have an ophthalmology company, which is well-positioned because of ageing demographics and cataract surgery. Those clinics had to close at certain points.”

When it comes to the popular sectors favoured by the team, Steers adds that specialisation is a big part of the process with sectors such as health and tech. “Everyone is looking at these resilient sectors, so it’s important to look down at sub-sectors and particular positions in those sectors,” she notes. “Just looking top down you can make quite a lot of mistakes.” The sub-sectors in the portfolio range from cybersecurity names to a position in KD Pharma, which focuses on omega 3 concentrates.

This feeds into the case for investing with third-party private equity teams, who can employ sector specialists as well as experts in particular business needs, from navigating supply chains to rapidly taking companies digital. “It’s about investing alongside the best partners and private equity managers who have great sector teams, playbooks in similar situations and a good rationale for making the investment,” she says.

“I think the era of the generalist now is limited. Most of our partners have very specific sector skills. You find they have sector teams in tech, healthcare, industrials and financial services.”

 

Understanding the portfolio mix

Like many private equity trusts, Pantheon International takes different forms of exposure to unlisted companies. While the trust’s preference for funds separates it from some more concentrated portfolios, Steers notes: “We are not a fund of funds.” Like other fund-heavy trusts in the sector, it employs a hybrid approach.

The team tends to invest around a third of assets via co-investments, where a direct investment is made in a company alongside another private equity specialist. Another third of assets goes into secondaries, where the team is either buying a stake in an existing private equity fund from an investor who wants to sell, or setting up a continuation vehicle for a fund that is approaching the end of its life but may still hold promising assets. The final third is dedicated to primary funds, vehicles established by specialists that can be difficult to access outside of the private equity community.

Steers notes that more secondary opportunities have emerged recently. “In the past 12 to 18 months the general partners who have a lot of conviction in these assets want to hold them for longer, so there has been an increase.” However the fund tends to stick to its allocation of roughly a third of assets to each area.

“I think we would stick with that approach,” she says. “With primaries you go in with a top-rated manager because it gives you access to companies you can’t get via secondaries, as those funds never come to market and don’t always do co-investments. With co-investments you pick assets and the economics are better as you don’t pay a fee. With secondaries you buy a fund with mature assets where earlier management fees have been paid.”

The mix can be adjusted somewhat, especially if the team wants to moderate the maturity of the assets in the portfolio. Co-investments will tend to be less mature, for example, while buying secondary assets will “age the portfolio”. Steers tends to maintain a focus on the “sweet spot” of a five-year maturity.

“You want that sweet spot of five years because that’s where you get your cash generation," she says. "You get companies being sold so there’s a continuous rate of renewals. We monitor the rate of calls and exits. We keep that balance right.”

The fund has a mix of investments in other senses. Around half of its assets were in the US at the end of February, with 31 per cent in Europe and 12 per cent in Asia. In terms of the size and form of exposure, the fund has a bias to small and mid-sized buyouts.

 

Recent activity

Some relatively recent activity highlights some of the thinking behind the portfolio. In terms of specialisms, late last year the trust made a co-investment in Sovos, a tax software provider for small businesses, alongside software-as-a-service specialist Hg. “Tax is something you can’t escape from, even in a pandemic,” Steers notes.

The trust also tends to finance bolt-on acquisitions made for its underlying companies. Steers notes that this can be one way to overcome high prices in hot sectors.

“You can get around higher valuations if you buy a platform company of reasonable size, make add-on acquisitions at lower valuations and build it up through inorganic growth, and then it gets rerated,” she says. “We did own [care home facility operator] Colisee. It made something like 30 add-on acquisitions in two years of ownership. It attracted the attention of infrastructure funds, who bought it.”

Private equity funds are, of course, yet to attract the full attention of investors. Like many of its peers, Pantheon International has seen its shares trade at a deep discount to the portfolio’s net asset value (NAV) despite strong performance. This stood at 16.3 per cent on 22 March, although this marked an improvement on the 12-month average of 26.4 per cent.

Like some of her peers, Steers wonders about a lingering perception problem for the sector, describing the discount as “frustrating”. “Maybe the market has not caught up to what private equity is doing, maybe they think we are still buying pubs and restaurants,” she suggests.

“Retail investors complain that they are cut out of IPOs but we are in before the IPOs – think of Farfetch (US:FTCH), Spotify (US:SPOT) and Allegro. Some of these brand-name companies people have heard of or want to participate in.”