Pantheon International (PIN ) threw down a gauntlet at its listed private equity rivals today pledging to buy up to £200m of its shares in the current financial year in a bid to eradicate their yawning 43% discount.

Shares in the £2.4bn portfolio, whose market value has been reduced to £1.4bn by the low rating of its stock, jumped 4.7% as investors applauded the bold move to shake up an investment trust sector where crippling, chronic discounts have become the norm.

John Singer, the private equity veteran and former Advent co-founder who was elevated to the trust’s chair last October, said: ‘I believe that the listed private equity (LPE) sector has not kept up with the changing needs of its stakeholders and that there is a real opportunity now to do more to put shareholders’ interests first.’

Announcing a significant change in Pantheon International’s capital allocation, Singer said the company’s brokers Investec and JP Morgan had been instructed to buy back up to 15% of the trust’s shares in the period to 31 May 2024, which, if fulfilled, will be ten times more than it repurchased in 2022/23.

He said this will be followed in future years by using a proportion of the company’s significant cash flow to mount consistent buybacks whenever the shares fall too far below net asset value (NAV). Further details of the new policy will follow.

‘Exceptional value’

Singer made clear that the decision by the trust (which he referred to as ‘PIP’) to invest £200m in its portfolio of third-party private equity funds and unquoted companies was designed to send a signal to the market.

He hoped investors would receive two important messages from the buyback pledge: firstly, the board’s faith in the valuation of its private equity investments, over which there has been much suspicion in general; and secondly, the historic opportunity before them.  

‘By committing up to £200m to buy back PIP’s shares, on behalf of shareholders we will capture the exceptional value offered by the company’s high-quality portfolio,’ he said.

‘Investors in PIP will also benefit from our intention to dedicate a proportion of future net cash flow to share buybacks while still making new investments with many of the best private equity managers in the world.’

Speaking to Citywire after the announcement in its annual results, Helen Steers (above), co-lead manager, spoke of her frustration at the discount which she said was ‘excessive’ and ‘makes no sense’ given the quality of the highly diversified portfolio which had grown its assets by 12% a year since launch in 1987 and by just over 13% a year in the past decade.

She said PIP had generated £1.7bn of net cash in the past 10 years and would have no problem funding share buybacks while making new investments.

Jie Gong, recently appointed co-manager with Steers, said ‘it’s a compelling buying opportunity’, adding that the company had £63m of cash and an unused £500m credit facility to finance share repurchases.

Exciting ‘secondaries’

Pantheon introduced the borrowing facility after the 2008 financial crisis to ensure it never faced a credit crunch again. Gong admitted that the company had become too ‘conservative’ and would now flex some of its fire power while preserving the strength of its balance sheet.

She was particularly excited by the opportunity in ‘GP-led secondaries’ where general partners, or private equity fund managers, launch follow-on funds to extend an investment in a single ‘trophy’ asset but allow other investors to exit.

Pantheon has found these maturing investments can be very lucrative. They have grown to 19% of assets and added to the third of the portfolio in co-investments means Pantheon is now 52% invested directly in unquoted companies, helping to shed its image as a more costly ‘fund of funds’.

Gie said 94% of its direct portfolio was ‘ebitda positive’ and making operating profits, underlining the managers’ argument that Pantheon invests in established businesses, largely through management buyouts, with just 3% in risky venture capital.

The annual results nevertheless showed a subdued year for PIP which generated a 3.5% return in the 12 months to 31 May, down from 26.2% in the previous year. Net asset value grew 2.4% to 462.4p per share but has since dipped to 454.9p at 30 June. 

Analysts enthusiastic

Analysts welcomed the buyback announcement. JPMorgan Cazenove’s Christopher Brown said: ‘This will have a powerful impact on NAV,’ adding, if the £200m was spent at the current price ‘we estimate the impact on NAV per share would be to add 6.6%.’

Stifel’s Iain Scouller said: ‘This is a significant move and we think the additional demand for shares this creates in the market should put some downward pressure on the discount from its current level of 43%.’

He added: ‘We do wonder if instead regular sizeable tender offers may be a more effective way of returning cash to shareholders, with all investors invited to participate at a set price, presumably at or close to net asset value (NAV).’

Jefferies’ Matthew Hose said: ‘We see this as a pragmatic move by the board in light of the persistent discount, with the initial £200m representing a material commitment, equivalent to around 15% of the shares in issue at the current price.’

However, Hose said a balance would need to be struck to ensure the trust retained its financial strength and the cash to make new investments.

Ewan Lovett-Turner of Numis Securities expected more private equity trusts would have to consider similar steps to ward off takeover bids. ‘We believe that the extremely wide discounts in listed private equity funds are unsustainable and we understand that boards have been coming under pressure from shareholders to take action.’

However, he added a lot of the ‘low hanging fruit’ had been taken out in mergers and acquisitions after the financial crisis.