FINANCING OUR BUSINESS

 

Prudent balance sheet management supports PIP's long-term investment strategy.

 

We manage PIP to ensure that it has enough liquidity to finance its undrawn commitments, which represent capital committed to funds but yet to be drawn by the private equity managers, as well as to take advantage of new investment opportunities. We monitor and closely control the Company's level of undrawn commitments and its ability to finance future calls. A critical part of this exercise is ensuring that the undrawn commitments do not become excessive relative to PIP's private equity portfolio and available financing. We achieve this by managing PIP's investment pacing as well as constructing its portfolio so that it has the right balance of exposure to primaries, secondaries and co-investments.

 

As a result of this careful management, PIP entered the COVID-19 crisis well prepared for the expected volatility in market conditions. In the end, the spike in the call rate did not materialise and PIP's portfolio continued to distribute cash. This has left PIP in an even stronger financial position and allowed it to continue investing throughout the pandemic.

 

 

Managing our financing cover¹

PIP's undrawn commitments were £658m as at 30 November 2021 (31 May 2021: £528m).

 

At 30 November 2021, PIP had net available cash balances of £220m (31 May 2021: £198m).

 

In addition to these cash balances, PIP also has access to a wholly undrawn £300m multi-currency revolving credit facility agreement ("loan facility") that expires in May 2024. Using exchange rates at 30 November 2021, the loan facility amounted to a sterling equivalent of £290m (31 May 2021: £277m).

 

At 30 November 2021, the undrawn coverage ratio was 110% (31 May 2021: 122%). The undrawn coverage ratio is the ratio of available financing and 10% of private equity assets to undrawn commitments and is a key indicator of the Company's ability to meet outstanding commitments, even in the event of a market downturn.

 

Another important measure is the financing cover. The Company had £510m (31 May 2021: £475m) of available financing which, along with the value of the private equity portfolio, provides comfortable cover of 4.0 times (31 May 2021: 4.1 times) relative to its undrawn commitments.

 

Asset Linked Note (ALN)

As part of the share consolidation effected on 31 October 2017, PIP issued an ALN with an initial principal amount of £200m to a single holder (the "Investor"). Repayments under the ALN are made quarterly in arrears and are linked to the ALN share (approximately 75%) of the net cash flow from a reference portfolio that consists of interests held by PIP in over 300 of its oldest private equity funds, substantially 2006 and earlier vintages. PIP retains the net cash flow relating to the remaining c.25% of the reference portfolio.

 

The ALN is unlisted and subordinated to PIP's existing loan facility (and any refinancing), and is not transferable, other than to an affiliate of the Investor. The ALN is expected to mature on 31 August 2027, at which point the Company will make the final repayment under the ALN.

 

As at 30 November 2021, the ALN was valued at £54m (31 May 2021: £47m). See below for more information on the ALN.

 

¹Includes undrawn commitments attributable to the reference portfolio underlying the ALN.

 

Maturity¹

We actively manage PIP's maturity profile to maximise the potential for growth and generate cash. This is achieved through a mix of primaries, secondaries and co-investments.

 

As at 30 November 2021, PIP's portfolio had a weighted average fund age of 5.1 years.

 

 

Year	%
2021	9%
2020	6%
2019	13%
2018	14%
2017	15%
2016	13%
2015	12%
2014	4%
2011-2013	7%
2010 and earlier	7%

 

Undrawn commitments by vintage2

The continued rise in more recent vintages is a result of an increase in PIP's co-investment and primary commitment activity.

 

Approximately 22% of PIP's undrawn commitments are in funds with vintage years which are 2015 or older. Generally, when a fund is past its investment period, which is typically between five and six years, it cannot make any new investments and only draws capital to fund follow-on investments into existing portfolio companies, or to pay expenses. As a result, the rate of capital calls by these funds tends to slow dramatically.

 

Year	%
2021	37%
2020	8%
2019	13%
2018	11%
2017	5%
2016	4%
2015	4%
2014	1%
2011-2013	5%
2010 and earlier	12%

 

Undrawn commitments by region2

The largest share of undrawn commitments represents investments in the USA and Europe, which highlights the Company's investment focus on more developed private equity markets. PIP's undrawn loan facility is denominated in US dollars and euros to match the predominant currencies of its undrawn commitments.

 

 

Region	%
USA	42%
Europe	31%
Global3	15%
Asia and EM4	12%

 

Undrawn commitments by stage2

PIP's undrawn commitments are diversified by stage with an emphasis on small and mid-market buyout managers, many of whom have experience of successfully investing across multiple economic cycles.

 

	%
Small/mid buyout	38%
Large/mega buyout	25%
Growth	23%
Special situations	7%
Venture	7%

 

¹ Maturity chart is based on underlying fund valuations and accounts for 100% of PIP's portfolio value. Excludes the  portion of the reference portfolio attributable to the ALN.

2 Includes undrawn commitments attributable to the reference portfolio underlying the ALN.

³ Global category contains funds with no target allocation to any particular region equal to or exceeding 60%.

⁴ EM: Emerging Markets.

 

 

MANAGER'S REVIEW

 

OUR MARKET

 

Our size, flexibility and agility allow us to take advantage of a disrupted environment

 

As the world emerges from the COVID-19 crisis, Helen Steers, Partner of Pantheon and manager of PIP, reflects on the outlook for PIP and the private equity sector.

 

The impact of the pandemic continued to dominate 2021 and, while the rollout of vaccination programmes has offered hope in most parts of the world, the economic, social and financial fallout from the crisis has been colossal. Nevertheless, economic activity bounced back from the lows of 2020, and market commentators estimate that global growth in 2021 increased at its strongest rate for more than half a century. The listed markets rose significantly in 2021, but many of those gains have fallen away at the beginning of 2022 as investors respond to the impact of rising inflation, the threat of intensifying geopolitical tensions and fears that the emergence of new variants of the virus may lead to further social restrictions in the future.

 

Despite the challenges wrought by the COVID-19 pandemic, global private equity had a highly successful year in terms of fundraising, investment and exit activity, and demonstrated robust performance across all stages and geographies. According to Preqin, global private equity-backed deals totalled US$603bn in 2021 to October, far exceeding the US$470bn that was achieved in 2020 as a whole. This was primarily driven by the USA, which has the deepest and most developed private equity market and is where just over half of PIP's portfolio is invested. Strong appetite for private equity looks set to continue, with 41% of respondents to an institutional investor survey suggesting that they plan to invest more in private equity over the next year while 47% indicated that they would maintain their current level of allocation¹.

 

Before the pandemic, many of the private equity managers, or General Partners ("GP"), in PIP's portfolio had already been investing in more resilient sectors, such as information technology, healthcare and consumer staples and services,  and many of the trends that were already under way  in those sectors - e.g. the shift to remote working, digitalisation of businesses, the switch to e-commerce,  the increasing need for online consumer services, shifting demographics and ageing populations - were accelerated by the crisis. This meant that there was very low negative impact from COVID-19 on PIP's portfolio, and indeed many portfolio companies experienced increased demand for their products and services. Healthcare products and services and businesses applying disruptive technology across multiple sectors form a significant part of PIP's portfolio and we expect them to continue to be attractive areas for investment.

 

There is now an estimated US$1.3tn⁵ of dry powder (capital raised and available to invest but not yet deployed) globally. As this capital is concentrated in larger global buyout funds, which often target secondary buyouts of smaller, but high-growth businesses, this points to a healthy exit environment for companies in PIP's portfolio, which is predominantly invested in the small/mid-market buyout and growth segments of the market.

 

We are able to capitalise on record deal flow in the private equity secondaries market

In 2021, deal flow in the global secondaries market hit a record high and volumes reached approximately US$134bn⁶, reflecting its growing importance as a method by which sellers are able to rebalance their portfolios and buyers can benefit from near-term cash generation. Market data suggests that sponsor- or "manager-led" sales, which are deals instigated by the private equity managers themselves with an aim to provide liquidity options for investors in their funds, accounted for around half of this activity. These types of deals comprise multi-asset GP liquidity solutions as well as single-asset GP GP liquidity solutions with the latter continuing to grow, forming 47%⁶ of the manager-led deals during the year, and we have seen individual deals of this type increase in both size and complexity. Single-asset secondary deals occur when the private equity manager carves one company out of an older fund that is coming to the end of its life and moves it into a continuation vehicle. Typically, these are highly prized companies which the private equity manager believes offer significant potential for further growth but require more time beyond the life of the fund or additional capital, which the existing fund does not have, to achieve it. These deals allow the existing investors in the fund to exit their position while offering an opportunity for the private equity manager's preferred investors to invest alongside knowledgeable owners and benefit from the continued success of the company.

 

This is a highly specialised area of the market, which requires significant investment and deal origination experience, as well as the resources to carry out the necessary detailed due diligence. As a result, there tends to be less competition than in other areas of the secondaries market. Pantheon has been investing in the secondaries market for over three decades and, with its flexible and selective approach, has established itself as a partner of choice for many private equity managers seeking to execute on these types of deals. Market commentators are predicting that 2022 will be another positive year of growth for the secondaries market with single-asset secondaries in particular expected to retain significant market share. PIP's total commitment of US$225.0m to the Pantheon Secondary Opportunities Fund ("PSOF") allows it to access and deploy capital efficiently to these high-quality assets on favourable terms. During the period, PIP invested in three single-asset secondaries, and has subsequently closed on another two transactions.

 

 

⁵ As at September 2021. Source: 2022 Prequin Global Private Equity Report.
⁶ Source: Evercore Private Capital Advisory, Secondary Market Survey Results, January 2022.

 

We are a preferred co-investor, accessing deals through our vast network of high-quality private

equity managers

Since 2013, PIP has been steadily increasing its exposure to co-investments and they now account for around a third of PIP's portfolio. Co-investments, which are typically free of management and performance fees, enable PIP to invest directly in portfolio companies on the same terms and conditions as the private equity manager, ensuring that there is a strong alignment of interests. PIP benefits from Pantheon's ability to source significant co-investment deal-flow from its managers, due to its very large installed base of primary and secondary relationships across the world. Our GPs regard Pantheon as an attractive partner and invite us to co-invest alongside them because we do not compete against them, we are reliable, responsive and have the scale to deploy capital quickly and efficiently, and we have the flexibility to co-underwrite transactions alongside our private equity managers if appropriate. We believe that these characteristics mean that we are able to see a large proportion of the best quality co-investment opportunities around the world in a variety of sectors,and execute them skillfully. In effect, each co-investment effectively passes through a "double quality filter" since each opportunity has first been evaluated by one of our best private equity managers, who themselves have already passed our rigorous manager selection hurdles, before being subjected to our own detailed due diligence process, carried out by our dedicated co-investment team.

 

We are concentrating on deals where the private equity manager:

 

·      Has high conviction in the target company, taking into account how it has performed in the past, through the pandemic and its positioning for the future;

 

·      can apply specialist sector experience and drive significant value by implementing operating capabilities;

 

·      has  a convincing ultimate realisation strategy, ideally with multiple exit routes; and

 

·      is not faced with factors that are out of their control such as the impact of wider macroeconomic conditions, regulatory uncertainty or market segments where private equity has historically had challenges.

 

Each co-investment is assessed on its own merits, but our main investment themes and selection criteria are:

 

·      Focus on the most compelling opportunities presented by our highest quality managers, which meet our exacting return expectations.

 

·      Only invest where the targeted business is a good fit for the manager in terms of their sector, stage and geographic expertise.

 

·      Target attractive, resilient sectors offering clear prospects for high organic growth through differentiated product or service offerings and which have low exposure to macroeconomic factors.

 

·      Concentrate on businesses which are benefiting from long-term tailwinds, such as digitalisation and the move to the cloud, which are occurring across multiple sectors; and

 

·      Seek strong platform companies that can pursue add-on acquisitions to build scale in existing businesses and consolidate fragmented end-markets. 

 

Pantheon benefited from the scale and confidence to keep investing through the pandemic and fund follow-on commitments with our private equity managers, further enhancing our reputation as a reliable investor through the economic cycle. During the period, PIP committed £71.3m to 18 co-investments, and new co-investment deals form a significant part of our deal pipeline.

 

Outlook

 

Notwithstanding inflationary concerns, the assets under management in the global private equity and venture market are forecasted to reach US$11.1tn by 2026.7 This compares to the private equity market being worth an estimated US$5.3tn8 at the end of 2021.

 

The signs are that the ongoing trend which has seen the number of public companies globally reducing, while the number of private equity-backed companies has increased, is set to continue. It is our belief that private equity is able to deliver to investors what public markets cannot:

 

·      Access to exciting companies in high-growth sectors that are not available on the public markets: PIP's focus on small/mid-market buyout and growth allows it to invest in family-owned or founder-led firms where our private equity managers can help with formalising organisational structures in addition to helping them grow internationally or into new markets.

 

·      Ability to tap into the growth phase of a company's development before it goes public, if indeed it does IPO at all: The majority of exits in PIP's portfolio are to trade buyers, executing on their M&A strategies, or to other private equity managers with the skills and networks to take the companies to their next stage of growth.

 

·      Opportunities to gain exposure to companies benefiting from the long-term value creation strategies of private equity managers, which can be implemented out of the public spotlight and are achieved through their sector-specific and operational expertise. Over the long term, the hands-on approach of our private equity managers to managing their investee companies has consistently resulted in significantly stronger revenue and earnings growth in the underlying companies in PIP's portfolio when compared to those of the MSCI World index.

 

·      Exposure to many private equity managers who increasingly see the opportunities that sustainable investment offers for value creation over the long term. The consideration of sound ESG principles is fully embedded in Pantheon's investment processes, which we apply to the investments that we make on behalf of PIP, and we actively engage with our managers to improve standards and accountability in ESG governance.

 

Looking ahead, we expect the current strong deal flow to continue but, at the same time, we are cognisant of the continued high valuation environment; and therefore, we will remain very selective about where we invest. We will stay alert to the potential impacts that rising inflation could have on PIP's underlying portfolio companies; however, the characteristics of private equity are such that high quality managers are able to manage their existing assets actively and take advantage of challenging market conditions to make exciting new investments. Our experience of managing PIP for more than 34 years, during which time it has outperformed the public market benchmarks, underpins our positive view of PIP's prospects.

 

 

7 Source: 2022 Prequin Global Private Equity Report.

8 Source: 2022 Prequin Global Private Equity Report. 2021 figure is annualised based on data to March 2021.

 

 

DISTRIBUTIONS

 

PIP received close to 1,000¹ distributions during the half year period, with many reflecting realisations at significant uplifts to carrying value. PIP's mature portfolio is expected to continue to generate significant distributions.

 

 

Distributions by region and stage

PIP received £198m in proceeds from the Company's portfolio in the half year to 30 November 2021 equivalent to 24%² of opening private equity assets on an annualised basis.

 

The USA accounted for the majority of PIP's distributions, where market conditions supported a good level of exits, particularly from buyouts.

 

DISTRIBUTIONS BY REGION
USA	62%
Europe	19%
Global	10%
Asia and EM	9%
DISTRIBUTIONS BY STAGE
Small/mid buyout	45%
Large/mega buyout	27%
Growth	22%
Special situations	4%
Venture	2%

 

 

Quarterly distribution rates

 

·      Distribution rate equals distributions in the period (annualised) divided by opening portfolio value.

·      Strong quarterly distribution rates reflect the maturity of PIP's portfolio.

·      PIP's portfolio has remained cash generative throughout the COVID-19 pandemic.

 

 

Distribution rates by vintage

With a weighted average fund maturity of 5.1 years³ (31 May 2021: 5.2 years), PIP's portfolio should continue to generate significant levels of cash.

 

¹This figure looks through feeders and funds-of-funds.

 

²Including distributions attributable to the ALN, the distribution rate for the half year was 24%.

 

³Calculation for weighted average age excludes the portion of the reference portfolio attributable to the ALN.  Fund age refers to the year in which a fund makes its first call or, in the case of a co-investment, the year in which the co-investment was made.

 

 

Cost multiples on exit realisations for the half year to 30 November 2021¹

A significant majority of exits during the period resulted in cost multiples in excess of 2.0 times.

This resulted in an average cost multiple on exit realisations of 3.3 times, highlighting value creation over an

average holding period of around five years.

 

Uplifts on exit realisations for the half year to 30 November 2021¹

The value-weighted average uplift on exit realisations in the year was 43%, consistent with our view that realisations can be significantly incremental to returns. This is the highest average uplift achieved since tracking of the metric began in 2011.

 

The method used to calculate the average uplift is to compare the value at exit with the value 12 months prior to exit.

 

 

 

 

Exit realisations by sector and type

The portfolio benefited from significantly strong realisation activity, particularly in the industrials, information technology, communication services and consumer sectors.

Trade sales and secondary buyouts represented the most significant source of exit activity during the year. The data in the sample provides coverage for 100% (for exit realisations by sector) and 77% (for exit realisations by type) of proceeds from exit realisations received during the period.

 

EXIT REALISATIONS BY SECTOR
Industrials	27%
Information technology	22%
Communication services	18%
Consumer	15%
Healthcare	11%
Financials	3%
Materials	3%
Real estate	1%
EXIT REALISATIONS BY TYPE
Trade Sale	55%
Secondary buyout	36%
Public market sale	9%

 

¹See page 71 of the Alternative Performance Measures section within the full Interim Report for sample calculations and disclosures.

 

CALLS

Calls during the half year were used to finance investments in businesses such as software providers, specialty pharmaceuticals and business outsourcing companies, In addition, our managers sought to make attractively priced add-on acquisitions for existing platform companies.

 

Calls by region and stage

During the year, PIP paid £77m to finance calls on undrawn commitments.

 

Calls were predominantly made by private equity managers in the buyout and growth segments.

 

 

CALLS BY REGION
Europe	41%
USA	32%
Global	20%
Asia and EM	7%

 

CALLS BY STAGE
Small/ mid buyout	38%
Growth	31%
Large/ mega buyout	17%
Special situations	7%
Venture	7%

 

Calls by sector

More than half of the calls were for investments made in the information technology and healthcare sectors.

 

CALLS BY SECTOR
Information Technology	31%
Healthcare	25%
Industrials	12%
Communication services	12%
Consumer	7%
Financials	6%
Energy	4%
Others	3%

 

Quarterly call rate¹

The annualised call rate for the six months to 30 November 2021 was equivalent to 29% of opening undrawn commitments.

 

¹Call rate equals calls in the period (annualised) divided by opening undrawn commitments. All call figures exclude the acquisition cost of new secondary and co-investment transactions.

 

NEW COMMITMENTS

PIP committed £264m to 37 new investments during the half year. Of the total commitments made, £81m was drawn at the time of purchase. Since the period end, PIP has committed a further £75.6m to 15 new investments.

 

Our investment process

Investment opportunities in funds and companies are originated via Pantheon's well-established platform.

 

Within our diversified portfolio, we back the best managers globally that are able to identify and create value in growing companies.

 

Cash is generated when those companies are sold, and is returned to PIP to be redeployed into new

investment opportunities.

 

New commitments by region

The majority of commitments made in the six month period were to US private equity opportunities.

 

Global	37%
USA	32%
Asia and EM	18%
Europe	13%

 

New commitments by stage

The majority of new commitments made in the half year were in the buyout and growth segments. Generalist investment activity reflects the commitment to PSOF.

 

Small/mid buyout	36%
Growth	24%
Generalist	22%
Venture	12%
Large/ mega buyout	6%

 

New commitments by investment type

New commitments during the half year reflected the attractiveness of opportunities across the spectrum of PIP's investment activity.

 

PIP committed a further £56m to manager-led, single-asset secondaries via the Pantheon Secondary Opportunities Fund ("PSOF").

 

Co-investments	44%
Secondary	29%
Primary	27%

 

New commitments by vintage

Primaries, co-investments and manager-led secondaries, which accounted for 74% of the total commitments during the last six months offer exposure to current vintages.

 

2021	92%
2020 and earlier	8%

 

Primary Commitments

£117 committed to twelve primaries during the half year

 

Investing in primary funds allows PIP to gain exposure to top-tier, well-recognised private equity managers including smaller niche funds that might not typically be traded on the secondary market.

 

Our focus remains on investing with high quality, access-constrained managers who have the proven ability to drive value at the underlying company level, and generate strong returns across market cycles. In addition, we target funds with strong ESG credentials and market-leading specialisms in high-growth sectors such as healthcare and information technology.

 

EXAMPLES OF PRIMARY COMMITMENTS MADE DURING THE HALF YEAR:

INVESTMENT	STAGE	Description	COMMITMENTS £M
Index Venture Growth VI     Summa Equity III   ChrysCapital IX Sentinel Continuation Fund I	Growth     Growth and small/bid buyout   Growth Small/ Mid buyout	Global growth fund focusing on disruptive technology companies.   European growth equity and small/ mid buyout fund Indian growth equity fund North American mid-market buyout fund	20.6     14.5   14.0 13.7

Secondary commitments

The private equity secondary market has grown significantly over the last 10 years, both in scale and complexity. Despite strong competition, PIP continues to originate compelling opportunities derived from Pantheon's global platform and its market-leading expertise in sourcing and executing complex secondary transactions over which it may have proprietary access.

 

Manager-led secondary commitments

 

£71m committed to five manager-led secondary transactions during the half year

 

Top-tier private equity managers are increasingly transferring some of their most attractive portfolio companies into continuation vehicles, mainly in the form of single company secondaries, known as single-asset secondaries. By holding companies for longer, managers are able to participate in the companies' next phase of growth.

 

 

EXAMPLES OF MANAGER-LED SECONDARY COMMITMENTS MADE DURING THE HALF YEAR:

 

 

Region	Stage	Description	COMMITMENTS £M	Funded %
Global     USA   Europe	Generalist     Small/ mid buyout   Small/ mid buyout	Pantheon fund (PSOF) focused on single-asset secondary transactions The deal involved two companies in the healthcare sector Leading integrated healthcare provider in Romania	55.6     6.4     4.0	0%     7.1%     75%

 

 

 

Secondary fund commitments

 

£6m committed to two secondary fund transactions during the half year

 

Secondary fund investments allow the Company to invest in funds at a stage when the underlying companies are ready to be sold to generate cash distributions.

 

EXAMPLES OF SECONDARY FUND COMMITMENTS MADE DURING THE HALF YEAR¹

 

Region	Stage	Description	COMMITMENTS £M	Funded %2
USA	Small/ mid buyout	Portfolio of 22 high quality middle market assets	5.7	52%

¹ Companies and funds acquired in secondary transactions are not named due to non-disclosure agreements.

² Funding level does not include deferred payments.

 

 

Co-investments

 

£71m committed to 18 co-investments during the half year

 

PIP's co-investment programme benefits from Pantheon's extensive primary investment platform and dedicated co-investment team, which have enabled PIP to participate in proprietary deals that would otherwise be difficult to access. PIP invests alongside private equity managers who have the sector expertise to source and acquire attractively priced companies and build value through operational enhancements, organic growth and buy-and-build strategies. The information technology sector offered compelling investment opportunities during the period.

 

NEW CO-INVESTMENTS BY REGION
USA	61%
Asia and EM	22%
Europe	14%
Global	3%

 

NEW CO-INVESTMENTS BY STAGE
Small/ mid buyout	66%
Growth	26%

Large/ mega buyout                         8%

 

NEW CO-INVESTMENTS BY SECTOR
Information Technology	23%
Healthcare	23%
Consumer	22%
Financials Industrials	14% 10%

Communication services                    8%

 

BUYOUT ANALYSIS²

 

Revenue and EBITDA growth

Weighted average revenue growth of 18.8% for PIP's sample buyout companies continued to exceed growth rates seen among companies that constitute the MSCI World Index.

 

In contrast to the MSCI World, PIP's portfolio has demonstrated consistent year-on-year revenue and EBITDA growth. MSCI EBITDA growth for the 12 months to June reflects a rebound following periods of low, or negative, growth.

 

Valuation multiple

Accounting standards require private equity managers to value their portfolios at fair value. Public market movements can be reflected in valuations. PIP's sample-weighted average Enterprise Value (EV)/EBITDA was 17.6 times, compared to 9.9 times and 14.7 times for the FTSE All-Share and MSCI World indices respectively. PIP invests proportionately more in high-growth sectors such as information technology and healthcare, and these sectors tend to trade at a premium to other sectors.

 

Debt multiples

Venture, growth and buyout investments have differing leverage characteristics. Average debt multiples for small/medium buyout investments, which represent the largest segment of PIP's buyout portfolio, are typically lower than debt levels in the large/mega buyout segment. The venture and growth portfolio has little or no reliance on leverage.

 

 

² The sample buyout figures for the 12 months to June 2021 were calculated using all the information available to the Company. The figures are based on unaudited data. MSCI and FTSE data was sourced from Bloomberg. See the Alternative Performance Measures section for sample calculations and disclosures.