LP Profile: Pantheon Bullish on Buzzing PE Market

Scores of private equity firms have recently discoverd the virutes of expanding their reach geographically. Several others have begun raising money in the public markets. Well, Pantheon Ventures did these things before they were cool.

Nearly 20 years ago, in 1987, the London-based global private equity giant, a limited partner and secondary investor for the last 25 years, introduced the first publicly-traded fund of funds, Pantheon International Participations (PIP). Since then the fund has operated in both the primary market, in which it commits money directly to new funds, and the secondary market, in which it buys interests in funds already closed. (Pantheon raises its other funds in the traditional private equity model.) Recent results for PIP have been impressive.

PIP received about $294 million (£156.8 million) in cash from distributions in its last fiscal year, a 74% increase over its previous year. (Its fisccal year ended at the close of the second quarter.) The firm’s consistent returns have added up and now account for a sizable portion – as much as 50% – of PIP’s overall private equity net value. Distributions from PIP’s primary portfolio accounted for about $112 million (£59.8 million) of the total, while those from its secondary portfolio accounted for about $182 million (£97 million). On the output side, PIP’s general partners invested approximately $246 million (£131.2 million) in underlying private equity assets during the fiscal year. About $111 million (£59.5 million) of that was doled out in capital calls for the primary portfolio, and $134 million (£71.7 million) in capital calls for its secondary portfolio.

Pantheon says that as it ramps up its investment pace it’s keeping a close eye on the state of the private equity market. Executives there see some signs of danger. However, they also believe the private equity market remains fundamentally healthy, and the firm is prepared to weather any oncoming storms

The Bigger They Are, the Harder They Invest

Partner Andrew Lebus says that the growth of the buyout market in part reflects the rise in the level of experienced management in the industry. Lebus also points to the increased pressures on public companies, such as Sarbanes-Oxley, as well as growing pressures on businesses of every stripe to restructure and focus on growth and international development. “We think it’s a very natural growth,” says Lebus, who joined Pantheon in 1994 and oversees its Asia investments.

But along with industry growth has come a growing sense of caution. “There are a lot of bullets flying around at the moment,” says Alex Scott, vice president of primary investments. “The excitement and interest around private equity has inevitably led to questions about whether we’re in a bubble,” Scott says. “There’s no trigger at the moment,” he adds. “But with so many moving parts in the world economy, at some point European private equity will face some challenges.” Among the qualities Pantheon looks for in potential GPs, Scott says, is whether they have experience surviving down-turned economies and the capability to handle poor market conditions.

Pantheon is also looking beyond the economic cycles to macro-trends likely to define the private equity market in the years ahead. “How [GPs] deal with globalization and the international market and how they’ve organized their own company to deal with those issues is important,” says Scott. In addition, he says, “succession continues to be a big issue we always discuss with managers. We’ve been [in] a bull market and a lot of managers made a lot of money. We have to be sure to discuss their ongoing motivation and how they’ll pass on ownership and leadership to their successors.”

The rise of mega-funds, Scott says, has also created new opportunities. “We’re certainly seeing deals being done that would have never been contemplated before, because of the amount of capital being raised,” says Scott. The ocean of money being raised for these funds, Scott adds, has also caught the attention of executives at public companies. Managers and former management teams from public companies are teaming up with private equity firms to do deals that were impossible just a few years ago. Private equity “is attracting the highest caliber of people now,” says Scott. “It’s not the niche industry it was. It’s a mainstream choice.”

Pantheon believes that sufficient deal flow is available to sustain the record-sized funds being raised. Among the large deals that Pantheon believes stands up to scrutiny is the the $14.5 billion acquisition of TDC by Apax Partners WorldWide, KKR, Providence Equity Partners, Permira Advisors and The Blackstone Group, Europe’s largest buyout deal ever so far. If there is a cause for concern, says Scott, it “is that we are seeing a period of rapid change, and there may be instability arising from that.”

Think Globally, Act Globally

Joint ventures with other money management firms play an important part in Pantheon’s strategy. Last month, for example, the firm joined with Société Générale’s alternative investment unit, SGAM Alternative Investments, to form the SGAM Private Value Fund.

Like PIP, the fund-of-funds is to be allocated to both primary and secondary funds. The new fund, which announced a first closing last month, expects to hold a final closing before the end of the year, to reach $190 million (€150 million). As the investment advisor for the fund Pantheon intends to make recommendations and provide deal flow. The two money managers expect the joint fund to be diversified across private equity markets, and to be balanced equally between primary and secondary funds. It is earmarked for funds in both Europe and the United States.

Pantheon declined to discuss its program with Paris-based SGAM or any of the funds it has in the market. However, Lebus says that the firm is very strategic in its investments and continues to examine future opportunities similar to the SGAM initiative. “As we look at any of those types of initiatives, we’re looking at what has strategic value to us,” says Lebus. “We’re never going to raise capital because it’s there. We’re only interested in capital that has strategic value to us and the groups that we’re investing in.”

A First-Rate View of Secondary…

Meantime, Pantheon continues to raise money for its own family of funds. Pantheon USA Fund II, a U.S.-focused private equity fund-of-funds with a target of $2 billion, has closed on about $1.1 billion of that goal so far, according to Buyouts data.

Pantheon is also in the market with Pantheon Global Secondaries Fund III, its latest dedicated secondaries fund, The partnership, with $2 billion goal, has held one small closing on $10 million, according to Buyouts data.

Needless to say, the secondary market has become incredibly liquid. Lexington Partners recently closed a record-setting $3.5 billion dedicated secondary fund, while rival Coller Capital launched a $3.75 billion fund. But as with the buyouts market, Pantheon remains bullish on secondaries. Lebus says that while there is a lot more money being raised for secondary deals, the funds are “more in the hands of incumbent operators than with new entrants,” says Lebus. “That gives us a strong belief in the ability of sanity to prevail.”

Pantheon closed its last dedicated secondary fund, Pantheon Global Secondary Fund II, a $900 million just over two years ago (see Buyouts, Aug. 9, 2004). Limited partners in that fund included Bullshead D, the Federal Express Corp. Employees Pension Plan Trust and the University Retirement System of Illinois. Bullshead was represented by JPMorgan Chase Bank. In that earlier fund, approximately 50% of the capital came from LPs in Europe, 30% from North America and the rest from investors in Asia and Australia. More than 80% of the funding came from pension plans both public and private, with endowments and foundations making up most of the remaining 20 percent.

…and Special Funds

Overall, PIP invests 63% of its investments in buyout funds and 27% of its capital in venture capital funds. As for the rest, 4% of PIP is dedicated to “generalist” funds, while “special situations” funds account for 5% of PIP’s capital. Within the buyout and venture capital categories, the firm is particularly excited about opportunities to invest in specialized funds dedicated to just a single industry, such as energy.

Lebus points out that Pantheon was investing in the U.S. energy sector five years ago, before it became fashionable. He says that the United States, being a more mature private equity marketplace than Europe, holds greater potential for specialized funds. “There is greater scope to specialization in a market that has the depth of the U.S. market,” Lebus says. By contrast, European firms specialize by region, or by country, he says, but they haven’t begun concentrating on single industries.

Underlying companies in services and manufacturing ultimately account for the largest slice of the PIP pie, at 27%. Consumer-related companies account for 18% of PIP’s capital, followed by communications, computer-related companies and medical and healthcare companies, which each tied for 11 percent.

PIP has a geographic spread that heavily favors the United States. By the end of 2005, PIP’s U.S. fund investments comprised almost 61% of the PIP portfolio. Pan-European funds made up 27% of the portfolio. U.K.-based investments accounted for about 7% of PIP investments, and Asia accounted for about 4 percent. — M.S.