A number of investment trusts have made a big name for themselves in recent years off the back of the explosive growth of big tech companies in the US and China.
However, due to the trend for ‘de-equitisation’, where fast-growth companies are eschewing public stock markets for venture capital and other private equity backing instead, access to the next generation of potential winners in tech, healthcare and other sectors is becoming more and more limited to the average investor.
Even if you have a few spare million, gaining access to the top private equity funds is difficult.
But there are alternatives – for investors of all means. Pantheon International Plc (LON:PIN), which has been going since 1987, is a FTSE 250-listed investment trust that provides access to the exclusive world of private equity.
What PIP does is “make private equity public,” says Helen Steers, a partner of the trust’s investment manager, Pantheon Ventures.
“Private equity owned businesses tend to grow faster and are often in segments or sub-segments of industries that are badly represented on public markets,” says Steers.
“Often the businesses that are on public markets tend to be older, larger and slower growing.”
Because of the de-equitisation trend, private companies are staying away from public markets for longer as not only can they access plenty of funding, but private equity and venture capital funds also provide them with expertise and networks to help accelerate their growth.
“When they do eventually IPO most of that explosive growth has already happened,” says Steers.
PIP has an extensive portfolio of private companies from various sectors and geographies, built up by Pantheon in three different ways.
Roughly one third of the portfolio is invested directly into private companies, as a co-investment alongside some of the leading venture capitalists and private equity managers in the world.
The other two thirds of the portfolio is invested through private equity funds run by leading private equity managers, including venture capitalist Index Ventures (an early investor in Discord, Etsy, Funding Circle, Revolut, Roblox, Transferwise and scores of others) and buyout investor Advent International (backer of Cobham, Hermes International, Laird, LuLuLemon, Worldpay) for access to the mid-market. Pantheon invests either as part of the ‘blind pool’ committed when the funds are launched, with each investor committing to invest a specified amount and generally holding for around 10 to 12 years, or it buys in via the secondary market from an existing investor who wants to exit, usually at a discount to net asset value (NAV).
“Secondaries inject a bit more maturity into the portfolio and when you buy into an established fund you’ve already got a set of assets and almost all of the value creation is yet to come,” says Steers.
Top quality venture capital and private equity funds are very difficult for even institutional and high net worth investors to access, with many managers operating by invitation only.
As an investor in this area for over 30 years, with deep networks spanning the USA, Asia and Europe, Pantheon Ventures proves its real value to retail investors by getting PIP into these funds.
“Relationships are really important in the private equity and venture capital business,” stresses Steers, who is on the advisory boards of many leading funds that operate on both sides of the Atlantic.
Also important is being structured as a listed investment trust. For investors this is a liquid way to invest in what is an illiquid asset class, with the average private equity investment fund tying you in for at least 10 years, while the closed-end structure does not suffer from redemption issues as have befallen some open-ended unit trusts in recent years.
Drilling down into the portfolio’s £1.7bn of NAV, there is a definite skewing towards sectors such as IT, healthcare and consumer companies with durable demand, which have proved their resilience in the past year.
Recent interim results showed NAV per share of 3,139.2p, up 8.9% over the half-year to 30 November 2020, with strong valuation gains during the period, and 12.8% on an annualised basis over the past decade. There was further progression to the end of February 2021 with NAV per share growth of 9.4% for the nine-month period since May 2020.
A share price of 2,610p offers a discount of roughly 17% to NAV, and on top of this, Steers says there’s more value in the portfolio that people don’t see.
“If you track the proceeds we get from the sale of each individual company and compare that with how the manager valued the company 12 months before.”
“Looking at the ratio between the two, on average during the six months to November 2020 we exited with an uplift of 20%. So you could say that on average, the companies are 20% undervalued.”
“So, if you think about that, and then you think that we’re trading at a circa 17% discount, then it’s kind of a discount on a discount.”
As well as a healthy cash balance of £121m at the end of February 2021, PIP also had a £300m unused borrowing facility that means it has 4.7 times financing cover for its current undrawn commitments. In addition, PIP’s financial strength means that it has been able to continue investing through the pandemic and is well-positioned to take advantage of the opportunities that are in its full deal pipeline.
With ESG factors increasingly valuable to investor decision-making, it is worth noting that PIP promotes equal opportunity, diversity and inclusion in its portfolio, with these principles fully integrated into its investment due diligence processes.
As highlighted in the Hampton-Alexander review of FTSE women leaders published recently, PIP does not just talk the talk, with three women on its board of directors, exceeding the target set for boards to consist of 33% women by 2020.