Update: Pantheon International (PIN ) has launched a £150m tender offer as the £1.5bn private equity fund ramps up on the delivery of last month’s ground-breaking promise to buy back £200m of its heavily discounted shares in the financial year to 31 May. 

Under a reverse auction, shareholders will be able to tender, or offer to sell back, their shares at prices of 2.5p increments between 280p and 315p. The company will set a strike price as the lowest it needs to pay to buy back all the shares on offer.

Analysts said reverse auctions had in recent years been regularly used by Tetragon Financial (TFG ) to return capital to shareholders, but added it was difficult to predict what the final strike price would be. 

Nevertheless, the news added further momentum to Pantheon’s undervalued share price. The stock gained 8p, or 2.7%, to 301p today, extending its advance to nearly 17% since 3 August when the board, chaired by John Singer, made its £200m buyback pledge.

That move has been widely hailed in the sector as throwing down the gauntlet to other investment companies, particularly in private equity and infrastructure, to do more to protect shareholder returns following a savage derating of share prices in response to surging inflation and interest rates. 

Excluding 3i Group (III ), the private equity giant trading on a double-digit premium due to its huge stake in Dutch discount retailer Action, the rest of the sector languishes on an average 27% discount to net asset value (NAV). However, more costly private equity fund of funds and riskier growth capital funds frequently languish on discounts over 40% below their investments.

Infrastructure funds, including renewables, stand on an average discount of 17%, though many funds trail on 25% or more below their underlying asset values. 

Buyback’s 88% return

Tom Treanor, head of research at Asset Value Investors, whose AVI Global Trust (AGT ) holds a 3.5% stake in Pantheon International, has applauded its ambitious plan to buy back 15% of the shares which he said would lift the trust’s NAV by a minimum of 7%.

Given the 43% discount Pantheon started with, Treanor calculated the £200m buyback could generate a total return on investment of 88%, making it by far the best available option.

‘The board’s framing of share buybacks as an investment decision gave us particular cheer. Far too much hot air is expended debating the impact of repurchases on discounts when the pertinent question is instead one of capital allocation, ie, whether buybacks or new investments will offer superior risk-adjusted returns. At the discount levels on which the listed private equity sector is trading, it is essentially inarguable that the former - which should be looked at as an investment in one’s existing portfolio at a price well below NAV - will be the answer,’ he said in the trust’s latest commentary.  

‘Effective’ return of capital

Pantheon’s shares closed on Friday at 294p, a 36% discount to their net asset value (NAV) of 458.7p per share on 31 August which gave the portfolio of private equity and unquoted company stakes a total value of around £2.5bn. 

Pantheon International’s board, which was struggling to buy back sufficient shares to hit the £200m target, having bought back £7.3m of shares since announcement last month, said the tender was an ‘effective’ way to invest in its own portfolio at scale, while giving shareholders the liquidity with which to sell all their holdings if they wished.

It said shareholders who did not participate in the tender offer would benefit from a boost to NAV caused by repurchasing its shares at a ‘material discount’. Numis Securities estimated if fully exercised, the tender would lift NAV by between 3.1%, or 14.3p per share, at a strike price of 315p; or by 4.4%, or 20.2p, at the lower end of the strike price range of 280p. 

The offer closes at 1pm on 17 October and will be followed by further share buybacks to achieve its £200m target. No director on the board is participating. A circular with details of the offer is available on the company’s website.

Despite their wide discount, the shares have risen 13% in the past year and by 41.6% in the past five years. However, that is far less than the underlying total investment return of 75.9% over five years, according to Numis data.

Peel Hunt analyst Anthony Leatham said: ‘Given the current run-rate of buyback activity, it was not clear how successful PIN would be in meeting its objective of “up to £200m” buyback in FY24. This tender offer potentially accelerates the buyback process. The upper end of the pricing range represents a c31% discount to the end-August 2023 NAV.’

Numis analyst Ewan Lovett-Turner said: ‘This can be an effective way of getting shareholders off the register and being left with a more stable and supportive shareholder register, which may make ongoing buybacks more impactful.’

‘We would expect buybacks will restart after the tender, which would give firepower of c£6m per month until May 2024, which compares to the £7.4m used in August,’ he added.

Stifel’s Iain Scouller was ‘very pleased’ to see Pantheon’s assertive action. ‘Whilst we think a tender at a strike price close to
latest NAV of 459p would probably have had the effect of driving-up the share price nearer to NAV at least in the short term, the board view the buyback programme as a means of allocating investment capital. Therefore, the attraction for the managers is the ability to invest in the portfolio on a wide discount, compared with other investment opportunities.’