In the grip of an economic downturn, if not outright recession, Pantheon’s various products are facing challenges both common to the industry at large, but also specific to the way the firm operates.
Here, EVCJ speaks to Colin Wimsett, a managing partner and Pantheon’s chief investment officer, over how his organisation is dealing with the present market malaise, and where he thinks private equity is headed.
What is Pantheon Ventures’ investment strategy?
Pantheon focuses on creating a portfolio of high-quality private equity funds that can deliver compelling returns for our investors. These funds are diversified by manager, geographic region, fund stage, vintage year and industry sector to manage risk, but also to incorporate significant allocations to the market segments that Pantheon believes will be attractive in the future.
We have focused on securing access to top-tier private equity managers, and are often a preferred investor due to our experience, reputation and significant commitment size. Our aim is to maximise risk-adjusted returns on investment through complementary primary and secondary fund investments, as well as through Pantheon International Participations, our publicly traded investment vehicle. With offices in London, San Francisco, New York, Brussels and Hong Kong, our global reach underpins our ability to carry out effective due diligence and portfolio management on all our investments.
How many funds do you look at per year and how many do you invest in?
Our investment teams look closely at over 350 global private equity funds each year, and expect to commit to approximately 30 to 35 managers in Europe, 45 to 50 managers in the US and around 25 managers in Asia. However, we place a strong emphasis on analysing most private equity groups active in the market – even those that aren’t currently raising a new fund – to enable us to screen funds from the overall deal flow that we see.
Our bottom-up investment process helps us identify the managers who we believe have the greatest potential to deliver superior performance. We expect our managers to meet a number of criteria, which include:
• A knowledgeable, experienced and committed management team
• A consistent investment philosophy and strategy
• Potential to deliver compelling absolute and relative returns
• Rigorous due diligence
• Alignment of interests
• Highly professional and ethical reputation and behaviour
How is your asset allocation split?
We invest across the full spectrum of private equity strategies. Around 80% of our capital under management is currently allocated to primary investments, and 20% to secondary. On the primary side, our target allocation globally is approximately 20% venture, 70% buyout, with the remaining 10% dedicated to special situations and direct investments.
We currently recommend that our clients have an equal weighting to the US and Europe, which is a relative overweight position to Europe because the US market is larger in terms of capital commitments to private equity. We also recommend a weighting of 5% to 10% to Asia, depending on our investors’ risk appetite.
What is your view on the European venture capital market?
European venture has been a tough market, but there are some positive trends and a few good, stable teams. While some industry players have shied away from venture capital in Europe, we have consistently continued to back a small number of venture managers over the years, and have recently increased that number. In the US, the deeper and more established pool of managers gives us greater exposure to venture capital.
How much contact do you have with your GPs and what form of contact does this take?
Our formal contact with potential new managers begins at an early stage. Our due diligence policy is to meet face to face with managers, rather than relying on questionnaires.
We foster close working relationships with all GPs through the networks that we have built over our 26 years in the private equity business. These relationships are not restricted to the GPs that run the funds in which we invest. Our deep knowledge and networks in the industry means that we are also in close contact with all GPs in the private equity universe, many who we meet regularly on an informal basis. With over 100 advisory board seats, we are privileged to be very close to the GPs who run our funds.
What areas of investor relations do you think need to improve?
Most of the larger private equity firms now employ IR specialists who are dedicated to responding to investors, and not just when they are fundraising. We find that this process usually works well, but we firmly believe that we also have a responsibility to meet the senior investment professionals on a regular basis.
Overall, we feel that standards are improving with regard to investor relations, with growing levels of responsiveness and professionalism across the private equity industry. Much depends on the investor relations professionals themselves: a good IR person can act as a facilitator, while a less effective one could actually hamper access.
In light of the economic downturn, how do you think the private equity industry will cope? Are you preparing for lower returns?
We believe that problems are the ‘mother of opportunity’ and many firms in the industry have relatively full war chests, which we expect to see invested at attractive prices and without a great deal of haste. Clearly, a number of sectors will be affected by the downturn, particularly those related to the consumer.
With the decline in equity values since the start of last year, fair market valuations will lead to a dip in short-term performance numbers. Given the lag in private equity valuations, it is too early to see an impact on the bulk of the portfolios, but the slowdown has already affected some investments in those sectors that tend to be hit first in economic downturn: retail, media, and semi-conductors.
We expect to see a return to longer holding periods for buyouts, in particular. We anticipate seeing a more pronounced J-curve, which – together with lower fair market valuations – will bring returns down from the extraordinarily high levels of recent years. Nevertheless, private equity investing is about the long term and this downturn has been predicted for some time: our private equity managers have therefore been tracking their portfolios very closely with greater attention to value-building and longer holding periods.
Has your strategy changed in light of the credit crunch?
Our strategy is unchanged. We believe in consistent investment over time and building a diversified portfolio for clients by geography, stage, sector and timing. Return expectations have been lower for some time because they are intrinsically related to macro factors such as the outlook for stock markets and inflation. As a long-term investor over the last 25 years, Pantheon has invested through many cycles. The liquidity crunch is highlighting the importance of manager selection, risk management and monitoring skills. We believe we have put together well-diversified portfolios and selected managers with sustainable franchises, strong investment discipline and portfolio management skills. The depth and breadth of our team, together with the Advisory Board seats that we hold at the vast majority of the funds in which we invest, means that we are well placed to track our managers closely and monitor developments within portfolios. While the scale and complexity of private equity has changed, every so often the market is subject to corrections that prompt a re-evaluation of core principles and values. Such periods offer rich opportunities for premium private equity managers who, as an agent of change, are well positioned to thrive in these times of change.
Last year was not a good year for private equity’s image as it was attacked by trade unions, the media and certain politicians. What was your take on this and what can private equity do to improve its image?
Good news does not sell newspapers and the unions, media and some politicians targeted an inadequately prepared and very ‘private’ industry that was not used to the media spotlight. The industry has now recognised the importance of communications, as demonstrated by the appointment of high-profile spokespeople like Simon Walker at the BVCA and Jonathan Russell as chairman of EVCA. The private equity industry needs to ‘de-mystify’ itself, explaining what it does and how it does it in layman’s terms. Private equity is now a mainstream part of the global investment landscape and individual firms need to continuously provide information on what they are doing at the local level and show themselves to be responsible investors. Any downturn will spawn some less positive stories for the media to pick up on, so we need to ensure that our industry can call upon an armoury of positive stories.
What issues do you think the private equity industry needs to be most wary about in the future?
The most important issues for the industry are to recognise that the market moves in cycles, and that history has a habit of repeating itself. At times like these, the old adage that one prepares for the worst and hopes for the best has never been more pertinent. It is also vital to remember that private equity is a long-term asset class and needs a long-term approach. You cannot dip in and out of these markets. The tougher times can provide some of most lucrative opportunities; the times when everything looks rosy are when investors should be careful.
Colin Wimsett is Pantheon’s chief investment officer. He chairs the Investment Management Committee and the International Investment Committee, and is a member of the European Investment Committee, the Global Infrastructure Committee and Pantheon’s Management Committee. He joined Pantheon in 1997 from the West Midlands Pension Fund, where he spent nine years focusing on private equity investments. He received a BA in Economics from the University of Reading and is a Chartered Banker (ACIB). He is based in London.
Originally formed in 1982 as the private equity investment division of GT Management in London, Pantheon’s management, led by Rhoddy Swire, acquired the private equity division in 1988 through a management buyout.
In 2004 the firm was bought by Russell Investment Group, and now has 136 employees with over US$24bn in assets under management, and offices in London, San Francisco, Hong Kong, Brussels and New York.
The firm is run by four managing partners, Alastair Bruce, Andrew Lebus, Jay Pierrepont and Colin Wimsett.