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Investment Trust Insider: Pantheon PE - more than a punt
by James Carthew on Mar 12, 2013 at 00:01
For Pantheon this is a cheaper option than investing in LPs (where you typically pay fees on money you have committed before it is put to work). Better still, it allows access to primary deals without the worry of a future over commitment problem and reduces the cash drag on returns.
The primary market in the US seems to be returning to normal after the boom and bust of the credit bubble. There is also hope that M&A will pick up, allowing more exits from mature private equity investments.
Pantheon’s performance in H2 2012 was not all that exciting as its NAV rose by just over 1% (almost unchanged if you strip out the enhancement from buybacks). Underlying growth of 3.8% was offset by adverse exchange rate movements and dull markets in Asia held back overall returns. Over 50% of Pantheon’s portfolio is invested in the US, which still dominates the global private equity market, and one third in Europe.
Sterling’s recent bout of weakness should be good news for Pantheon’s NAV therefore as the pound is down by 6.6% against the dollar and 5.9% against the euro.
For the Asian portion of the portfolio (12%), improving stock markets should be helping but Pantheon cautions that there are now more registered private equity managers than listed companies in China – a scary statistic and one that suggests decent returns will be hard to come by for most.
The good news is that the underlying companies across the whole portfolio seem, on average, to be growing their earnings faster than equivalent quoted companies.
Pantheon’s portfolio is very well diversified. The largest 20 holdings (on a look-through basis) represent 11% of the portfolio. Buyouts represent around half the fund and there is a bias to small/mid-size deals in the portfolio. Venture and growth funds were 32% of the fund at the end of December.
Returns from this area appeared disappointing when I looked at the fund in 2011 but there seems to have been some improvement in recent times. Primary deals are still 62% of the portfolio but the portfolio is maturing as it acquires secondary positions and more than half of the fund now represents investments made in 2006 or earlier.
Pantheon’s discount is now around 28% which compares to an average of 24% for other private equity funds of funds. Share repurchases should prevent it widening much from here. While the NAV would be impacted if markets retreat, on the whole I am comfortable hanging on to my stake.
James Carthew is director of Sapient Research
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