Pantheon promises more buybacks after shareholders miss out on record 31% return

Undervalued shares in Pantheon International perk up after private equity fund posts record annual investment return and promises to step up buybacks to narrow trust’s yawning discount.

Undervalued shares in Pantheon International (PIN ) have perked up after the private equity fund posted a record annual investment return and promised to step up buybacks to narrow the trust’s yawning discount.

Sir Laurie Magnus, who will step down as chair in October, said the board was ‘disappointed’ that the shares, which have fallen around a fifth this year, had started the financial year to 31 May at 21% below net asset value and seen the discount widen to 35% over the 12-month period.

The lagging share price meant shareholders saw a total return in the year of just 8.6%, way below the total 31% return on assets the £2.4bn portfolio achieved through investments in private equity funds and direct stakes in unquoted companies. Excluding currency gains, the underlying return was 24%.

Like most of its rivals, Pantheon has seen the discount balloon further to 43% since May as investors have worried about the impact of an impending recession on an asset class that routinely reports its companies’ results months after their counterparts on public stock markets. That has reduced its market value to £1.4bn.

Discount ‘unwarranted’

Magnus, who authorised the repurchase of 3.4m shares at a cost of £10m during the year, said the board considered the huge discount to be ‘unwarranted’. He promised the board ‘intends to buy shares actively to enhance shareholder returns, while optimising long-term capital growth within a balanced portfolio in line with its investment policy.’

The commitment impressed Numis Securities analysts who said it was a ‘significant positive’ to hear the board being vocal on share buybacks. ‘Buybacks are not a solution to all problems, but we believe they can be significant in tackling short-term supply/demand imbalances and limited discount volatility.’

Shares in the global fund, which is 51% invested in North America, 28% Europe and 11% in Asia and emerging markets, rose over 3% in response to a three-week high of 272p on Thursday. 

Launched 35 years ago, Pantheon, like most of its private equity peers, has defied investor scepticism over excessive fees and bonuses to beat the returns from UK and global public markets. 

According to figures from the company, between 1987 and 31 May the trust’s net asset value (NAV) grew by 12.4% a year after fees, underpinning an 11.3% annual return to shareholders that exceeds the 7.6% and 8.4% annual returns in sterling from the FTSE All-Share and MSCI World indices.

While that outperformance is maintained over 10 years, it has reversed over shorter periods. Despite delivering an impressive 17.7% annual investment return from the world’s top private equity fund managers, in the three years to 31 May the share price has trailed with shareholders only receiving 9.9% a year. While that beat the All Share’s 5.8% annual return since 2019, it failed to match the 13.2% annual return of the MSCI World benchmark.

Helen Steers (above), lead fund manager and partner at Pantheon Ventures, told Citywire it was ‘extremely frustrating’ the market was not rewarding the trust for consistent outperformance over three decades.

Record distributions

Steers, who took over the trust two years ago after the retirement of her predecessor Andrew Lebus, added the recent worsening of the chronic discount was ‘baffling’. She said Pantheon had delivered not just a record annual return, but also its highest ever level of distributions in the year of £419m. This came from selling investments at over three times their original cost and at an average 42% above their previous valuation.

This included the £49.5m it made last year from the €750m (£632m) sale of EUSA Pharma, the Luton-based oncology specialist sold to Italian drugs company Recordati, which is also backed by private equity. 

After funding £187m of calls from its panel of over 50 fund managers, which include Insight Ventures and Index Ventures in the US and 3i Group (III ) and HgCapital in the UK, Pantheon received a record £232m of cash in the financial year.

Pantheon said its pipeline remained strong with its global team of 115-staff committing £496m to 70 new investments, £160m of which were made upfront.

Steers said while Pantheon liked to invest in IT companies, it did so in established, cash-generative companies with stable recurring revenues. Despite the ‘ventures’ in her employer’s name, only 4% of the portfolio was invested in early-stage startups, she said.

Pantheon had avoided the bubble in tech flotations in the past two years and on average had exited only 10% of its investments when they went public, preferring to sell to trade buyers, Steers explained.

High charges

Like other private equity ‘fund of funds’, Pantheon has high costs with a key information document showing its fees and those of they third party fund managers reduced investors returns by nearly 4% in 2021. That’s a figure that makes many professional and private investors blanch.

Pantheon points out that its returns - which despite the depressing effect of the discount currently stand at an impressive 256% over 10 years - have been generated after costs.

Pantheon has responded to cost concerns by increasing the number of co-investments it makes in companies to 45% of the portfolio. These direct investments are made alongside the fund managers it favours, but outside their funds, thereby avoiding their fees.

Pantheon has the resources to chuck a lot of money at buybacks to improve the share price performance, should it wish to do so. Including a new £500m multi-currency credit facility, the results show the trust has around £700m in cash and borrowings that provide 26% more than it needs to meet its investment commitments. 

Analysts say Pantheon’s problem is the lag in private equity reporting. Even after a positive post-year-end June update, which lifted NAV per share by a further 2.5% from 451.6p to 462.7p, most of its investments remain valued at 31 March. Analysts said references to the earnings growth of its underlying companies refer to last year rather than the first half of 2022 investors would rather hear about.

JPMorgan Cazenove analyst Christopher Brown said investors had noted US-listed private equity groups Blackstone and KKR had recently disclosed second quarter fund declines of 6.7% and 7% and used those as a guide to what was going on with London-listed funds like Pantheon.

Nevertheless, Brown said given Pantheon’s ‘excellent’ long-term performance, ‘a 40% and implied 49% discount on the unlisted investments for PIN looks too wide in our view,’ adding, ‘we remain “overweight”.’

Pantheon divides its portfolio into roughly three equal parts: ‘primary’ investments made in private equity funds at launch. This was the best performing segment, generating a 34.8% return in the financial year, followed by ‘secondary’, second-hand stakes in private equity funds which provided 22.3%, and 20.4% from co-investments in unquoted companies with fund managers sold by other investors.

The fund investments are mainly allocated to funds buying out small and mid-sized firms (39%) or large and ‘mega cap’ firms (26%) and growth capital funds (24%) financing early-stage companies but not startups. Investments are staggered over time with some dating back before 2010 and others made this year, but the average age is 4.9 years. 


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