Investment Trust Insider: Pantheon PE - more than a punt

Returning to the theme of private equity, I thought it might be worth having another look at Pantheon International Participations.

I last wrote about this back in August 2011, and concluded that patient investors in the stock would make money and a week or two later decided to start buying the stock. I kept adding to my holding at regular intervals until February 2012 and I have been well rewarded so far, making more than a third on my investment. Pantheon has just published its interim results so it seems like a good time to decide whether to take some profits.

I explained Pantheon’s complicated history in the last article. It is a fund of private equity funds with gross assets of £880 million. When I wrote the article, Pantheon had managed to address its overcommitment problem and had just started to make new investments. The board recognised its discount was too wide and that they could accrete value for shareholders by buying back stock and cancelling it.

In August 2011 they instituted a programme of buybacks and have bought back more than £50 million worth of shares since then; in the second half of last year this added 0.8% to the net asset value (NAV). Today, Pantheon’s balance sheet is looking quite robust. In the second half of 2012 it received almost £80 million more in distributions than it paid out in capital calls, and it says assets and unused loan facilities cover outstanding commitments more than five times.

It has two loan facilities totalling just under £100 million (that expire in June 2015) but it is not using these at the moment and also had £70 million cash in the bank at the end of the year. Commitments were £183 million and a significant proportion of these are unlikely to be called as they relate to funds set up pre-2006. This gives Pantheon room to continue with the share buy-back programme and make new investments.

Principally, Pantheon is deploying money into secondary transactions. Various investors, including banks and insurance companies, are still trying to reduce their exposure to private equity. For the past couple of years and, Pantheon estimates, for the coming year, this market has averaged $25 billion and often it faces limited competition from other buyers.

Typically the funds it is acquiring are those raised six or seven years ago. By investing in these funds now, Pantheon hopes to avoid the j-curve effect (which puts many investors off private equity) and generate returns faster than it would in a primary transaction.

Uplift to NAV

The big uplifts to NAV tend to come when investments are sold – over H2 2012, Pantheon reckons the average uplift on disposal for its 25 largest distributions was 27%.

It is also looking at co-investing alongside other private equity specialists in primary deals. The opportunity exists as many private equity firms have struggled to raise new money in recent years and so can only tackle large transactions by bringing in third party investors.