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

- Link: https://www.directorstalkinterviews.com/pantheon-international-analyst-qa-consistency-in-delivery-lonpin/412809728
- Published: 2020-03-24T09:26:11+00:00
- Author: Amilia Stone

**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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