Pantheon International Analyst Q&A “Consistency in delivery” (LON:PIN)

Hardman & Co

Pantheon International Plc (LON:PIP) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.

Q1: You called your recent report on Pantheon International’s interim results Consistency in delivery. What can you tell us about it?

A1: The key message from the results was “more of the same”, including i) market-beating core NAV growth (this was known, given previous disclosures), ii) strong EBITDA growth in underlying companies, iii) good cash generation, iv) strong uplift to carry costs from realisations (giving valuation confidence), and iv) a conservative over-commitment policy. In our initiation report,  11.9% average annual NAV growth since 1987, we noted i) that private equity (PE) funds outperform quoted companies, ii) that PIP is in the right parts of the PE market, iii) the Pantheon family benefits, and iv) a value-added fund selection process. PIP gives access to the whole PE market, with strong corporate governance.

Q2: What is your quick summary of the numbers?

A2: While valuation gains and income (+5.2% NAV) and expenses (-0.8%) were consistent with 2013-19 averages, the period saw an adverse forex effect (-3.4%), reducing NAV growth to 1%. We believe the consistent underlying delivery by the business bodes well for the future.

Q3: And what were the key themes?

A3: First, PE and PIP add value to the underlying businesses, and this is evidenced by consistent superior revenue and EBITDA growth. In these results, PIP reported average underlying company revenue growth of 18% (against MSCI of 7%) and EBITDA growth of 22% (against market 8%).

Second, PIP’s diversified portfolio delivered valuation gains in large and mega buy-outs, small and medium buyouts, growth and venture. There was a weaker performance from special situation investments, driven by a small number of markdowns in the energy sector. Overall gains were, as I said, around historical averages.

Third, the exit multiple remained high – around 3.6x costs in the first half – and well above the carry value in the books. Fourth, debt multiples are stable. Fifth, despite the much faster EBITDA growth, the average valuation multiple is just 4% above the market.

Q4: How will Pantheon International fare in the market turmoil and economic downturn?

A4: We went into potential downsides in great detail in our initiation note late last year. Sentiment is that PE must suffer more than the market because of high financial gearing, but the facts actually show the opposite. The academic research all shows continued outperformance by PE companies through a recession, partially because they have access to committed capital and partially because of the improved professionalism with which they are managed. Additionally, this time around, banking cov-lite documentation is very prevalent, and this is likely to see fewer default events triggered.  This academic view is supported by PIP’s own experience. In the early 1990s, its NAV rose every year through the recession. In the depth of the financial crisis, there was just one year of negative NAV performance. 

Of course, the business will be affected – there will be fewer realisations, less investment, and the valuation multiples of the underlying companies are likely to fall, but the key point is that relative to the rest of the market, historical experience has been continued outperformance. How share prices react will, of course, also be affected by sentiment and whether this is different this time around, having seen what PE did last time, remains uncertain. As a technicality, it is worth noting that there is a time lag between market movements and PIP’s monthly valuations – the recent market falls will take a little time to come through to the NAV. As the share price anticipates these falls, the discount to the NAV looks unusually large. The discount will reduce as the NAV catches up to the falling market. The same effect is seen in reverse in rising markets.

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