Pantheon International Analyst Q&A with Hardman & Co (LON:PIN)

Hardman & Co

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

Q1: You called your recent piece on the private equity investor Pantheon International “2020 results: positioned for sustained growth”. What can you tell us about it?

A1: The key results message was the outlook, where PIP is “well placed to withstand and, in certain cases, to benefit during a period of significant economic and market turmoil”. The key statistics were i) 11.6% average annual NAV growth since inception, ii) +4.0% NAV per share growth in the year, despite valuations being based off March 2020 market lows, and iii) £228m distributions vs. £118m calls => net cashflow £110m. PIP has £121m of net available cash and £310m of undrawn borrowing facilities. A large discount to NAV appears anomalous with its performance.

Q2: So, tell us a bit more about how it has become positioned for sustained growth

A2: PIP’s outlook confidence is driven by a number of factors including: i) The Manager’s more than 40 years’ PE experience, so it has been through many economic cycles, ii) it adopted a conservative stance before the crisis, including limiting debt, so its commitments over the next five to six years are already covered by cash and committed credit lines. We believe gearing is a key investor sensitivity and the company is much better positioned than most listed PE companies.  iii) its portfolio has a bias to IT/healthcare, especially in newer investments, iv) it has permanent capital structure and good liquidity so it will never be in a position of being a forced seller of assets at distressed prices, v) it has a collegiate culture both internally and also with its managers for whom it is a valued partner, not a distant impersonal investor. We highlight in this report, and previous ones, how private equity outperforms in downturns with its investee companies benefitting from committed capital and operational expertise. The bottom line, though, is look at its track record of outperformance through different cycles.

Q3: It sounds as if the company was relatively well positioned going into the COVID-19 crisis. What has been going on to manage the risks during the pandemic?

A3: The PE managers with whom PIP invests increased contact with underlying portfolio company management and conducted a rapid assessment of portfolio company issues, challenges, and opportunities, which resulted in a detailed classification of investments into low-/medium-/high-impact categories. 1Q’20, portfolio valuations were down, as PE managers took account of lower public market comparables. New deal activity has, as expected, slowed (secondary market volumes are back to 2016 levels), as buyers and sellers try to work out what the real risks are and new valuation levels.

The company itself has increased the dialogue with managers, shareholders, and the PIP board. It carried out a detailed assessment of the impact, uniquely introducing a Manager’s Provision, so that its monthly NAV announcements gave a truer impression of the real value of the investments. It is typical of the conservative nature of the company that, when actual valuations were received, they were above the level PIP had used.

Q4: What do see as the key attractions and risks of investing in Pantheon International now?

A4: PIP’s post-cost returns are ca.1.5x post-cost MSCI World or the FTSE All-Share returns since inception in 1987, so long-term returns are a key attraction. These returns did not happen by accident but are generated from being in the very attractive PE market, picking the best bits of that market, from being part of the bigger PIP family, and a structured, proven underlying manager selection process. It gives investors liquid access to illiquid market, capital growth and a managed controlled downside, and the track record shows the accounting NAV is likely to be conservative. On the downside, there is some, limited business sensitivity to economic cycle and we believe investors are sensitive to this issue. We put this risk into perspective by noting, the company still grew NAV every year throughout early 1990s’ recession, and its recent strong performance through the COVID-19 crisis to date. Second, the NAV is based off premium ratings for its underlying companies but they are delivering premium growth. Third, while the assets are illiquid and unquoted, not the most popular investment types post Woodford, we note PIP, unlike that business, will not be a forced seller at distressed prices. In terms of valuation, the discount is in line with peers, which suggests some market-wide concerns, but this is anomalous with the company’s historical performance.

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