Pantheon International • Newsletter August 2023
Pantheon International (PIN) announced a revised capital allocation policy at the beginning of the month, the significance of which should be far-reaching across the listed private equity (LPE) sector.
For readers unfamiliar with the company, PIN is one of the oldest listed private equity vehicles and has built up a strong NAV performance record over several decades. The discount on the company’s shares began to widen dramatically in early-2022 amidst the broad market sell-off, with the shares at their nadir trading at less than half of NAV. We hold a ~3.5% stake in PIN acquired over 2022 and 2023 at an average discount of 45%. For context, current discounts on buy-out funds in private secondary market trades are reportedly averaging 10-15%.
As a matter of arithmetic, returns from share repurchases (i.e., NAV per share accretion) compound with returns from the existing portfolio. For companies trading at the extreme discount levels of PIN and its peers to favour new investments over buybacks relies on either implausibly heroic return assumptions on these new investments or a very pessimistic outlook for the existing portfolio.
We were therefore delighted to see PIN announce a large share buyback programme of up to £200m to be completed by the end of May-24. At the prevailing share price and discount on the day prior to the announcement, this equates to 15% of shares outstanding and would generate an uplift to NAV per share in excess of +7%. This translates to an ROI on these repurchases of almost +90%. Furthermore, the Board also disclosed their intent to allocate a proportion of net positive cashflow to share repurchases from the next financial year onwards, the quantum of which will be determined by the discount level.
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, i.e., 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.
We applaud PIN’s Chairman John Singer for engaging in what proved to be an extensive and genuine shareholder consultation exercise, and for having the fortitude to steer these changes through when it may have been easier to hide behind the relative lack of action from many of the company’s peers. The Chairman’s Statement from PIN’s annual results should be required reading for all investment trust directors.
Notwithstanding that capital calls tend to slow down at the same time as distributions in times of economic uncertainty, the current market backdrop must of course mean that companies holding illiquid assets ensure they can meet their existing commitments. The extent to which listed private equity companies can match PIN’s approach will vary depending on their levels of leverage, outstanding commitments, cash-flow projections, and the exact
structure through which they hold their investments. But balance sheets in general are in far better shape than they were during the 2008-09 financial crisis, meaning that the current wide discounts present an extraordinary opportunity to create material value for shareholders through discounted repurchases.
PIN has net cash and a large undrawn credit facility. This provides the company with more than sufficient headroom to embark on the £200m share repurchase programme. But PIN also has a relatively low level of commitments, which is in substantial part due to its shift over the last decade towards making direct investments (co-investments and single-asset secondaries) which now form just over half of its portfolio. This ensures far greater flexibility when making capital allocation decisions around buybacks. Boards should, in our view, be mindful of the risk of missing high-return opportunities to acquire their own shares at significant discounts over a cycle and thus should make efforts to structure investments accordingly. For direct LPE funds investing in single managers, that may mean negotiating opt-outs for a portion of commitments; for fund-of-funds, being mindful of the additional flexibility afforded by co-investments as opposed to primary commitments (we note that this has, in fairness, been a growing trend for the latter group albeit not necessarily for this specific reason).
More broadly, many of the alternative asset funds outside of the LPE sector had grown used to regularly raising equity to fund new investments. With discounts where they are today (for example, the infrastructure fund peer group currently trades on an average 20% discount with many funds at considerably wider levels), the burden of proof now lies with Boards when it comes to justifying new investments over share repurchases. In that respect, Pantheon have thrown down the gauntlet.
PIN’s share price has increased by +9% since the 3-Aug-23 announcement, which still leaves the shares on a 38% discount to NAV (or a 42% implied discount on the unlisted portfolio). We see considerable scope for further upside given the presence of a new ongoing buyer in the market in the form of the company itself; the buyback demonstrating confidence in the NAV; the substantial degree of NAV accretion now baked into future returns; the high-quality portfolio still demonstrating robust earnings growth and sizable uplifts over carrying values upon exits; and some recent signs of a thawing of transaction activity.
