By Helen Steers, Partner, Pantheon International PLC
The $5.3 trillion global private equity market has been growing steadily and, according to research by Preqin, is expected to almost double by 2025. With its inherent ability to be nimble, flexible and respond quickly to changing market dynamics, we believe that private equity (“PE”) will emerge strongly from the COVID-19 crisis.
We believe that private equity will continue to benefit from the observed shrinkage of the public markets which has seen the number of public companies reduce by c.2% per year while the number of private equity-backed companies has been increasing by c.6% per year[1]. We believe that this structural trend, along with the increasing recognition of the benefits that PE managers can bring to their investee businesses, is fuelling the future growth of the private equity industry as predicted by Preqin.
Capital in the private equity industry (which covers a range of stages in a company’s life from venture capital and growth equity through to buyouts, and also includes take-private transactions) is managed predominantly in illiquid, difficult to access non-listed fund structures which require sizeable minimum investments and are mainly directed towards large institutional investors such as pension funds and insurance companies. These investors are able to dedicate considerable resources and expertise to handling the complex nature of investing in private equity funds.
While therecan be significant barriers to entry to participating in this exciting and growing asset class for smaller investors, there is an alternative route – investing in a listed private equity company. Through buying just one share in Pantheon International Plc (“PIP”), investors can easily participate in an actively managed, diversified portfolio of high quality, hand-picked private assets which themselves are managed by many of the best private equity managers in the world.
PIP is one of the longest established private equity companies on the London Stock Exchange and is managed by Pantheon – an experienced and prominent global investor in private markets – who does all the hard work of managing PIP’s portfolio on shareholders’ behalf. As at 30 September 2021, PIP had net assets of £2.1bn and had generated average NAV growth of 12.2% per year since it was launched over 34 years ago in 1987. Research carried out by us – and available on PIP’s website[2]– showed that benchmark alternative allocations in private wealth portfolios could have benefited on a risk-adjusted basis from the inclusion of a listed PE company such as PIP.Of course, investors should always consider the risks and the respective advantages or disadvantages of investing in private equity and remember that, as with any investment, past performance does not indicate future results.
PIP invests across the full spectrum of private equity with a particular focus on small to medium sized buyouts and growth: those businesses typically have multiple levers that a PE manager can pull to create value and help those businesses to realise their growth plan, the entry valuations are often more attractive than in other parts of the private equity market, and there are several routes to exit such as selling the business to another private equity manager, to a trade buyer or exiting via an IPO.
The best PE managers focus on long-term value creation through providing hands-on operational and strategic support and they are typically sector experts who bring significant expertise, knowledge, networks and contacts to companies that are often in niche sectors and demonstrate real growth potential. In general, private equity managers are nimble and able to spot long-term trends, enabling them to back future “winners” that become well-known success stories. Recent examples of this in Europe are Spotify and Just Eat – both companies benefited from rounds of venture capital and growth equity, and were in PIP’s portfolio at the time that they went public.
The deep experience of the private equity managers in PIP’s portfolio has also served them well through the COVID-19 crisis. Although our PE managers could not have predicted the trigger for the current crisis, they had been expecting an economic downturn and were prepared to support their portfolio companies with both capital and operational expertise when times became difficult. In addition, prior to the onset of the crisis many of PIP’s underlying managers were investing already in sectors focused on the rapid digitalisation of the economy, process automation and data management, and others had backed segments in the healthcare and consumer services areas that were benefiting from secular trends driven by demographics and lifestyle shifts. All these sectors have shown resilience over the past several months, and have weathered the storm well.
PIP’s portfolio is truly global – it is tilted towards the USA, which has the deepest, most developed PE market, but also offers exposure to private equity investments in Europe, Asia and Emerging Markets. PIP’s direct investment approach into the third party funds and co-investment opportunities that are sourced for it by Pantheon means that it has the flexibility to increase and decrease its weighting to the different investment types according to what it regards as the best fit for PIP’s portfolio, and to vary the rate at which it makes investments.
Increasingly, PE managers are well-positioned to assess risks related to Environment, Social & Governance (“ESG”) effectively and to manage potential ESG issues and opportunities at both the portfolio level and the underlying companies. The interests of the ultimate investors, the PE manager and the business’ management are well aligned and the tight governance in private equity ensures that action can be taken if a portfolio company is not achieving its plan.
As one of the first private equity signatories to the United Nations-backed Principles for Responsible Investment (UNPRI), the world’s leading proponent of responsible investment, in 2007, the core principles of responsible investment are embedded in Pantheon’s due diligence processes when assessing an investment opportunity as well as through the proactive monitoring of the businesses in PIP’s underlying portfolio for the duration of the investment. This continual assessment continues right until the investment is exited. Pantheon is also a leader in promoting diversity and inclusion, and that is also reflected on PIP’s Board of which three directors out of seven are female.
Investors must assess carefully what is suitable for them and their investment objectives and tolerance/appetite for risk, however it is our belief that an investment trust such as PIP, which Pantheon has managed successfully through multiple economic cycles, provides straightforward access to the attractive and growing private equity opportunity, and the potential to achieve healthy returns over the long term.
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The information and any views contained in this article are provided for general information only. Nothing in this article constitutes an offer, recommendation, invitation, inducement or solicitation to invest in PIP. Nothing in this article is intended to constitute legal, tax, securities or investment advice. You should seek individual advice from an appropriate independent financial and/or other professional adviser before making any investment or financial decision.Investors should always consider the risks and remember that past performance does not indicate future results. PIP’s share price can go down as well as up, loss of principal invested may occur and the price at which PIP’s shares trade may not reflect its prevailing net asset value per share.
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[1]As at March 2021 reflecting YE 2020 data, including North America and Western & Northern Europe. PE-backed company data provided by Pitchbook. Publicly traded data sourced from World Federation of Exchanges database.
[2]PIP’s website: www.piplc.com. “Mind the Allocation Gap” research can be found within Media & Insights/Research.