Pantheon International (PIN) has been getting serious about selling its assets in a bid to improve its performance.
The £2.3bn trust, which invests in private companies both directly and through other private equity houses, has embarked on a cull of its managers after a period of muted performance. While the share price has been strong, the trust returned just 4.3 per cent on a net asset value (NAV) basis in the year to 31 May.
This is better than some peers, but falls short of what investors expect from private equity. As Winterflood analyst Alex Trett put it: “While NAV performance improved modestly year on year, an annualised NAV return of 3.9 per cent over the past three years is unlikely to satisfy investors.”
The sector has struggled over the past few years. The basic mechanism by which private equity companies make money – selling assets at a premium – has been hindered by stubborn inflation, higher interest rates and global macroeconomic volatility. This has made it more difficult to do deals, and means private equity managers are holding on to companies for longer. The sector has been waiting for a sea change in exit activity, which has not been forthcoming.
Pantheon International has responded. Managers have been selling more assets on the secondary market, and secondary buyouts are currently the main exit route for the trust, accounting for 61 per cent of the total in the year to 31 May.
The trust intends to cut down the number of private equity managers it invests in as a fund of funds to 25, having already gone from around 90 to 62 between November and May. This was thanks to a £224mn secondary sale that saw the trust dispose of 10.7 per cent of its portfolio, at an average discount to NAV of 8.1 per cent.
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Pantheon says it aims to focus on ‘core’ managers that have performed well in the recent period of volatility and have particular expertise in their sector, avoiding those that have “disproportionately benefited from aggressive leverage strategies or simply a rising market”. The hope now is that a simplified portfolio of high-conviction managers will translate into stronger NAV growth.
However, secondary sales alone cannot fix everything. Some 32 per cent of the portfolio is invested in software, a sector that has been affected by a sell-off amid fears of disruption by AI. Any resulting valuation weakness will only be properly reflected in the trust’s NAV in September, when the underlying funds report their June valuations.
Disposals do free up capital for share buybacks, which help overall performance. Of the £224mn fund sale in May, £180mn was allocated for this purpose, and Pantheon International bought back £118.4mn of shares over the 12 months to May, which added 2.2 per cent to the NAV.
This was partly influenced by heat from activist investors Saba and Metage Capital, which put pressure on the trust to sell assets and return capital to investors.
The trust’s discount almost halved from 40 per cent in May last year to 21 per cent one year later (it stood at around 24 per cent at the time of writing), driven by strong share price growth of 37.5 per cent in the year to 31 May. Over the period, the trust’s shares outperformed the MSCI World and FTSE All-Share indices, which returned 28 per cent and 21.6 per cent, respectively.
But in the long term, discount narrowing can only do so much. Sustained shareholder returns will ultimately depend on portfolio performance improving.
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