Fund profile: Pantheon International Participations

Private equity (PE) funds provide targeted exposure to privately owned companies with the potential to grow rapidly; PE fund managers invest not just money but also time and expertise on the board, in order to achieve their aims and sell the holding on.

Because these businesses are unlisted, their value is not directly affected by the fortunes of the stock market, making private equity also an attractive diversifier within a portfolio.

However, their unlisted status also means they can be difficult to buy and sell. The closed-ended nature of investment trusts makes them an ideal vehicle for investment into such illiquid assets.

Money Observer Rated Fund Pantheon International Participations (PIP) is the oldest listed fund of funds PE investment trust, having been running for 27 years; and over that time it has performed remarkably. The trust's ordinary shares have returned an average 11.5% annually since launch, and 69% over the three years to 1 May.

Complicated structure

Moreover, as manager Andrew Lebus explains: 'If we aggregate all capital committed by PIP to investments in a single financial year, the investment outcome for each such year of PIP's history has been positive.

"This reflects the benefit of dollar cost averaging both on the way into investments and even more on the way out, which is an important risk control for long-term investors such as PIP."

PIP operates as part of a somewhat complicated structure. It was set up by Pantheon, a huge PE manager running $30 billion (£19.37 billion) of pension fund money, and its management is contracted back to Pantheon by the board, so it is invested in the Pantheon package. In effect, PIP provides a retail route into Pantheon's institutional investment arena.

Pantheon itself is actually a fund of PE funds manager, a step removed from the individual company selection process. As Lebus explains: "We are picking the best managers whose view of the world is similar to ours; their skill is in picking target companies within their specialist sectors, and we certainly can't match them in that."

So how many PE fund managers are there to choose from? Around 5,000 worldwide (which is Pantheon's remit), says Lebus. "Many are not suitable at all, for one reason or another, but we pick around 100, focusing on different countries, and different strategies within those countries."

PIP holds a mixture of primary investments (made into new PE funds when they are initially raised), secondary holdings (in existing PE funds bought from another investor) and co-investments (made directly into a specific company, alongside a manager it is already backing, to enable that manager to diversify its resources across other holdings).

Secondary investments

But the trust majors on secondary and co-investments, rather than primary. "There's less financing risk this way - in primaries, 'undrawn' cash has to be held for up to five years [to enable a steady flow of investment through the life of the fund], or else we'd have to use debt to finance it. We are trying to limit the risks involved in investing in PE, so we don't want to add risk through debt."

Lebus is clearly seeing plenty of opportunities for the right managers in the current environment. In part, he says, it's a cyclical thing.

"We have expected the global economic climate to improve in due course, so the investments of the last few years have anticipated recovery, particularly in the US, our biggest market, which we felt would see an earlier, stronger recovery than Europe or Asia," he explains.

But the US economy has also benefited from other trends such as the falling oil price and rising wages. Moreover, from a PE point of view it's the easiest market in which to operate, helped by the benign regulatory environment and well-established access to finance.

The PIP portfolio is split between consumer and IT-focused businesses (25% each), and healthcare and industrials (15% each), with the balance in energy, financial services and "other bits and bobs".

Which sectors are proving most interesting in the current climate? "Consumer-focused businesses are good for private equity," says Lebus. He points out that certain types of business have the capacity to grow independently of wider economic growth, as a consequence of shifts in consumer taste - offering numerous potential openings for PE investments.

Not only can successful enterprises grow very rapidly but they and the "copycat" businesses that spring up in their wake tend to be operating on the same kind of timescale as PE investment.

Niche players

One example is the refocusing of the fast food industry away from blockbuster burger joints and towards more quirky, specialist alternatives. "PE is backing the niche players," he says. Pantheon has also benefited from trends in the music business. "10 years ago there was an HMV in every shopping centre; now everyone uses Spotify, which we backed."

Lebus makes the point that the right consumer-focused businesses can prove surprisingly resilient to economic ups and downs. "For example, we owned Vue Cinemas going into the financial crisis; it had a good cost structure and expanded strategically, and as a consequence it showed good growth even in the crisis."

More generally, he continues, there are also opportunities for private equity in any industry facing significant long-term structural issues - US healthcare being a prime example. "There is growing alarm about the costs of health and the demographic trends that mean rising demand for support in the face of dementia, alzheimers and general frailty," says Lebus.

"But the US healthcare system is hidebound by entrenched attitudes and a very inefficient system. The pressures on the system create great opportunities for businesses operating more cheaply; it's going to throw off bags of opportunity once there's the political and regulatory impetus to bring down the costs of care provision."

One focus for Pantheon is investment in businesses that provide good care more efficiently and therefore more cheaply - for example specialist care providers who are able to help insurers reduce the cost of insurance for particular clients.

"We're also backing companies focused on improvements in healthcare technology, whether that's disease detection or the development of better surgical instruments," adds Lebus.

Where does he see PIP fitting into the portfolios of private investors? "They should see it as a way to access institutional quality global private equity on a long-term basis, at an attractive price - our ongoing charges figure is around 1.1%, which is similar to the institutional price," he explains.

PIP is currently trading on a discount of around 14%.

Which share class should I consider?

PIP offers two share classes, Ordinary (O) and Redeemable (R). Money Observer Rated Fund status applies to O shares.

O shares provide more liquidity, and shareholders can vote at AGMs. R shares can be redeemed at NAV at the behest of the company; they are less liquid and don't allow holders to vote. They are, however, cheaper than O shares.

It's likely that most private investors would be better off with the more liquid Ordinary share class.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.