Newsletters

Our Aug-23 newsletter discussed (and praised) Pantheon International (“PIN”)’s new capital allocation policy and associated large share buyback programme, and its wider implications for the listed private equity and broader alternatives sectors. We await the finer details of the policy, set to be announced within the next few weeks, with interest.

One of our other large positions in the listed private equity sector, Princess Private Equity (“PEY”), recently followed suit with a clearly defined capital allocation policy of its own that was met with a warm reception from industry participants. One prominent sell-side analyst correctly identified it as “the most structured capital allocation policy…in the listed PE space” and “reflect[ing] the inconvenient truth for many managers that buying back shares when the shares are on wide discounts is likely to be considerably more accretive for shareholders than making new investments.”

PEY is a London-listed closed-end fund that offers access to direct private equity investments made by Partners’ Group, the Swiss-listed private capital manager with $150bn of assets under management. PEY’s new policy will see 75% of free cash flow steered to buybacks when PEY’s discount is wider than 30%; 50% when the discount is between 20% and 30%; and with the Board emphasising that they reserve the right to buy back shares at discounts below 20%. This share repurchase programme is additive to the existing high dividend policy that targets a total annual pay-out (paid in two semi-annual instalments) equivalent to 5% of the previous year’s closing NAV. At the current share price, this not only represents an attractive yield on share price of 6.7% but is materially accretive for shareholders given it represents a return of capital at a zero discount (versus PEY’s current 25% discount). Recognising their importance to shareholders, the buyback programme ranks behind these dividend payments (i.e., the free cash flow metric used to determine the allocation to buybacks is net of dividends).

PEY’s dividend yield had helped keep its discount relatively narrow until cash outflows from their FX-hedging programme forced a suspension of the dividend in late-2022. We built our position – reaching a 10% stake – in the wake of the sell-off that followed, sensing an opportunity to engage with the Board and Manager to resolve various governance issues we believed to be the underlying root cause of the dividend suspension and the botched shareholder communications surrounding it.

Although the dividend was soon restored, the then-Chairman and the Partners Group representative on the Board resigned on the eve of the AGM that followed these events, thus avoiding their public defenestration at the hands of shareholders. Following further engagement with the remaining directors, we were pleased with the appointment of private equity veteran Peter McKellar as Chairman in Nov-23 and were confident his vast experience of the listed private equity market would be of huge benefit to the company. While the new capital allocation policy is a critically important development (and we also welcome the strengthening of the Board with further appointments, and the proposed renaming of the Company to capitalise on the Manager’s profile), there remains more work to be done to better align fees with shareholder outcomes, improve disclosure, and re-invigorate investment returns.

As with our investment in SONG described above, we believe the changes at PEY demonstrate the value that can be added through shareholder engagement and further emphasise the importance of a strong Board. While there are several reported exit processes under away at some of PEY’s larger investments, we were pleased to see one that had not previously been flagged come through when it was announced in early-April that the company’s second-largest holding, building products specialist SRS Distribution, is to be acquired by home improvement behemoth Home Depot at a valuation almost +30% above where it was carried in PEY’s previous NAV.