Pantheon International (PIN) plans to offload more fund holdings as it repositions its £2.1bn private equity portfolio towards direct investments and continues to return capital to shareholders.

In annual results today Pantheon partner and PIN’s lead manager Charlotte Morris indicated that the £224m ($300m) of fund stakes sold in May was the first of a series of disposals the investment trust will make as it focuses on around 25 of the world’s best private equity managers.

The disposal of 10.7% of PIN’s portfolio at the end of its financial year reduced the number of fund managers by 32% to 62, Morris said, adding “we will continue to reduce this number through a combination of strategic asset sales and by not committing to new funds being raised by managers that are no longer considered as core”.

Out of the 28 managers included in the portfolio sale, 24 were identified as “non-core” meaning Pantheon’s analysis showed their investments were either not high quality and / or relied too much on borrowing and rising markets to make them work. 

She said to make the cut going forward, private equity fund managers needed to prove they had the specialist operational expertise to improve company performance, or a record of helping businesses buy and build with value-adding acquisitions.

Rebalancing PIN’s portfolio

The portfolio sale will reduce PIN’s allocation to funds from 47% to 42% and increase the weightings of “secondaries” (fund stakes bought in the market rather than at launch) to 21%, with direct co-investments alongside fund managers in private companies up to 37%.

In another sign that further fund disposals were needed, Morris said: “PIN’s aim is to rebalance the portfolio towards an equal weighing of funds and direct investments over time, reflecting our view that this offers the optimal balance of risk, growth potential and diversification.”

The annual report showed a continuation of the disappointing returns PIN, along with other private equity funds, has made from its investments at peak valuations from 2021-2025. 

More recently, this year’s sell-off of public software companies on fears of disruption form artificial intelligence, had knocked the valuation of unquoted software providers that make up 35% of PIN’s portfolio. Pantheon’s analysis of its application software companies that account for a quarter of assets shows that 75% have lower-risk business models and are more insulated from AI risks.

As a result, PIN’s net asset value (NAV) grew just 4.3% in the year to 31 May, 23.7% below the 28% return of listed global equities as measured by the MSCI World index. 

Share price bounce

However, the shareholder return was much better, rebounding 37.5% as the gap, or discount, between PIN’s share price and NAV almost halved from 40% to 21%. 

The re-rating reflected the pressure from activist investors Saba and Metage Capital, with the latter issuing two open letters demanding portfolio sales and a greater return of capital.

The activists are getting what they want with £180m from the funds sale lifting a distribution pool for share buybacks to £199m at 31 May. This had reduced to £140.5m at 30 June as the company continues to buy back its shares now trading at a 24% discount. 

The company recognises buying back shares at this level makes “compelling” sense for shareholders but also knows it needs to balance this with new investments to ensure a supply of future growth. 

On buybacks, it repurchased £118.4m of its cheap shares over the 12 months, adding 2.2% to NAV per share. Through buybacks PIN has returned £400m to shareholders since 2022, which will rise to £580m once proceeds from the funds portfolio are distributed.

On the investment side, it put £227m into new funds and direct company investments. 

Chair Tony Morgan was “pleased” with PIN’s “resilient performance … against a challenging macroeconomic backdrop” and that it had made significant progress on its strategic goals. 

PIN shares were unchanged at 397p. Over five years they have returned 50%.

Our view

Richard Williams, senior analyst at QuotedData, said: “Good progress is being made by PIN on repositioning its portfolio, having reduced the number of underlying manager relationships from around 90 to 62 and on its way to cutting that to 25. The hope is this will translate into stronger underlying NAV growth. The discount has narrowed materially as confidence has improved, but with NAV returns still modest, sustained operational execution and a more supportive exit environment will be needed if that rerating is to continue.”

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