Investment Policy

 

Our investment policy is to maximise capital growth with a carefully managed risk profile.

 

The Company's policy is to make unquoted investments. It does so by subscribing to investments in new private equity funds ("Primary Investment"), buying secondary interests in existing private equity funds ("Secondary Investment"), and acquiring direct holdings in unquoted companies ("Co-investments"), usually either where a vendor is seeking to sell a combined portfolio of fund interests and direct holdings or where there is a private equity manager, well known to the Company's Manager, investing on substantially the same terms.

 

The Company may, from time to time, hold quoted investments as a consequence of such investments being distributed to the Company from its fund investments as the result of an investment in an unquoted company becoming quoted. In addition, the Company may invest in private equity funds which are quoted. The Company will not otherwise normally invest in quoted securities, although it reserves the right to do so should this be deemed to be in the interests of the Company.

 

The Company may invest in any type of financial instrument, including equity and non-equity shares, debt securities, subscription and conversion rights and options in relation to such shares and securities, and interests in partnerships and limited partnerships and other forms of collective investment schemes. Investments in funds and companies may be made either directly or indirectly, through one or more holding, special purpose or investment vehicles in which one or more co-investors may also have an interest.

 

The Company employs a policy of over-commitment. This means that the Company may commit more than its available uninvested assets to investments in private equity funds on the basis that such commitments can be met from anticipated future cash flows to the Company and through the use of borrowings and capital raisings where necessary.

 

The Company's policy is to adopt a global investment approach. The Company's strategy is to mitigate investment risk through diversification of its underlying portfolio by geography, sector and investment stage. Since the Company's assets are invested globally on the basis, primarily, of the merits of individual investment opportunities, the Company does not adopt maximum or minimum exposures to specific geographic regions, industry sectors or the investment stage of underlying investments.

 

In addition, the Company adopts the following limitations for the purpose of diversifying investment risk:

-    No holding in a company will represent more than 15% by value of the Company's investments at the time of investment (in accordance with the requirement for approval as an investment trust which applied to the Company in relation to its accounting periods ended on and before 30 June 2012).

-    The aggregate of all the amounts invested by the Company (including commitments to or in respect of) in funds managed by a single management group may not, in consequence of any such investment being made, form more than 20% of the aggregate of the most recently determined gross asset value of the Company and the Company's aggregate outstanding commitments in respect of investments at the time such investment is made.

-    The Company will invest no more than 15% of its total assets in other UK-listed closed-ended investment funds (including UK-listed investment trusts).

 

The Company may invest in funds and other vehicles established and managed or advised by Pantheon or any Pantheon affiliate. In determining the diversification of its portfolio and applying the Manager's diversification requirement referred to above, the Company looks through vehicles established and managed or advised by Pantheon or any Pantheon affiliate.

 

The Company may enter into derivatives transactions for the purposes of efficient portfolio management and hedging (for example, hedging interest rate, currency or market exposures).

 

Surplus cash of the Company may be invested in fixed interest securities, bank deposits or other similar securities.

 

The Company may borrow to make investments and typically uses its borrowing facilities to manage its cash flows flexibly, enabling the Company to make investments as and when suitable opportunities arise, and to meet calls in relation to existing investments without having to retain significant cash balances for such purposes. Under the Company's Articles of Association, the Company's borrowings may not at any time exceed 100% of the Company's NAV. Typically, the Company does not expect its gearing to exceed 30% of gross assets. However, gearing may exceed this in the event that, for example, the Company's future cash flows alter.

 

The Company may invest in private equity funds, unquoted companies or special purpose or investment holding vehicles which are geared by loan facilities that rank ahead of the Company's investment. The Company does not adopt restrictions on the extent to which it is exposed to gearing in funds or companies in which it invests.

 

 

Financing Our Undrawn Commitments

 

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 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.

 

Managing our financing cover

PIP's undrawn commitments were £848m as at 30 November 2022 (31 May 2022: £755m). Of the £848m undrawn commitments as at the period end, £60m relate to funds that are more than 13 years old and therefore outside their investment periods.

 

As at 30 November 2022, PIP had net available cash¹ balances of £52m (31 May 2022: £227m). In addition to these cash balances, PIP also has access to a wholly undrawn £500m multi-currency revolving credit facility agreement ("loan facility") that expires in July 2027. Using exchange rates at 30 November 2022, the loan facility amounted to a sterling equivalent of £508m (31 May 2022: £301m).

 

Effective 30 November 2022, the Company revised the methodology used for calculating its coverage ratios to exclude undrawn commitments that are unlikely to be called.

 

The Company had £560m of available financing as at the period end (31 May 2022: £528m) which, along with the value of the private equity portfolio, provides comfortable cover of 3.9 times (31 May 2022: 3.7 times) relative to undrawn commitments for funds within their investment periods.

 

Another important measure is the undrawn coverage ratio, which is the ratio of available financing and 10% of private equity assets to undrawn commitments. The undrawn coverage ratio is a key indicator of the Company's ability to meet outstanding commitments, even in the event of a market downturn, and was 102% as at 30 November 2022 (31 May2022: 108%).²

 

¹The available cash and loan figure excludes the current portion payable under the ALN, which amounted to £0.6m as at 30 November 2022.

²Excludes outstanding commitments relating to funds outside their investment period (>13 years old), amounting to £59.7m as at 30 November 2022 and £57.1m as at 31 May 2022.

 

Undrawn commitments by region¹

The largest share of undrawn commitments is represented by 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	44%
Europe	34%
Global	13%
Asia and EM2	9%

 

 

Undrawn commitments by stage¹

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.

 

Stage	%
Small/mid buyout	49%
Large/mega buyout	19%
Growth	18%
Venture	9%
Special situations	5%

 

 

Undrawn commitments by vintage¹

The rise in more recent vintages is a result of PIP's increased allocation to direct investments in recent years. Approximately 8% of PIP's undrawn commitments are in funds with vintage years which are 2010 or older. Generally, when a fund is past its investment period, 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.

 

Vintage	%
2023	8%
2022	38%
2021	18%
2020	4%
2019	7%
2018	5%
2017	2%
2016	3%
2015	3%
2014	1%
2011-2013	3%
2010 and earlier	8%

 

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

² EM is Emerging Markets

 

MANAGER'S REVIEW

 

PORTFOLIO AS AT 30 NOVEMBER 2022

Since its inception, PIP has been able to generate excellent returns while at the same time structuring its portfolio to minimise the risks typically associated with private equity investments. Our established portfolio of assets has been carefully selected, based on the strengths of our appointed private equity managers, actively monitored and diversified to reduce specific timing, regional and sector risks; and managed to maximise growth and liquidity over time.

 

Type and region

Flexible approach to portfolio construction increases potential for outperformance.

 

Investment type1
Co-investments	34%
Primary	33%
Secondary	33%

 

Weighted towards the more developed private equity markets in the USA and Europe while Asia and EM provide access to faster-growing economies.

 

Fund region1
USA	55%
Europe	28%
Asia and EM2	10%
Global 3	7%

 

1 Fund investment type and region charts are based upon underlying fund and company valuations. The charts exclude the portion of the reference portfolio attributable to the ALN.

2 EM is Emerging Markets.

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

 

Maturity and stage

 

PIP's portfolio has a weighted average fund age of 4.8 years.

 

Fund maturity1
2021 and later	25%
2020	7%
2019	12%
2018	13%
2017	12%
2016	10%
2015	8%
2014	3%
2011-2013	5%
2010 and earlier	5%

 

Well-diversified with an emphasis on the buyout stages.

 

Fund stage1
Small/mid buyout	43%
Large/mega buyout	26%
Growth	21%
Special situations	7%
Venture	3%

 

¹Fund stage and maturity charts are based upon underlying fund and company valuations. The charts exclude the portion of the reference portfolio attributable to the ALN.

 

PERFORMANCE

 

PIP's portfolio value has remained relatively stable. Access to top-performing managers and a tilt towards resilient and high-growth sectors has helped PIP to withstand the current macro environment.

 

Private equity portfolio movements

PIP's portfolio generated returns of 0.9% during the half year.¹

 

Portfolio value 31 May 2022	£2,200m
Valuation gains	+£19m
FX impact	+£74m
Distributions	(£112m)
Calls	+£78m
New investments2	+£183m
Portfolio value 20 Nov 2022	£2,442m

 

¹ Excluding returns attributable to the ALN share of the portfolio.

² Amount drawn down at the time of commitment.

 

Valuation movement by type¹

The portfolio is proving to be resilient through the current macroeconomic environment, despite modest valuation losses in the co-investment and primary strategies.

 

	Closing portfolio NAV%	Return
Secondary	33%	4.0%
Co-investments	34%	(0.5%)
Primary	33%	(0.7%)

 

Valuation movement by stage¹

Gains in the buyout and special situations stages offset valuation losses in the venture and growth segments of the portfolio.

	Closing portfolio NAV%	Return
Special situations	7%	6.8%
Small/mid buyout	43%	3.7%
Large/mega buyout	26%	1.0%
Growth	21%	(4.3%)
Venture	3%	(15.9%)

 

Valuation movement by region¹

PIP's portfolio is weighted towards US investments, which generated positive returns during the period.

	Closing portfolio NAV%	Return
USA	55%	2.3%
Asia and EM	10%	0.4%
Europe	28%	(0.3%)
Global	7%	(3.5%)

 

¹ Portfolio returns include income, exclude gains and losses from foreign exchange movements, and look through underlying vehicle structures to the underlying funds. Portfolio returns exclude returns generated by the portion of the reference portfolio attributable to the ALN, and are calculated by dividing valuation gains by opening portfolio values.

 

OUR MARKET

 

Long-term investing through unsettled times.

 

Helen Steers, Partner at Pantheon and lead manager of PIP, reflects on the impact on private equity of a turbulent year for the world economy and how PIP is well positioned to navigate the challenges ahead.

 

The year 2022 was characterised by the continued uncertainty caused by the COVID-19 pandemic, building inflationary pressures and the humanitarian and energy crises triggered by the conflict between Russia and Ukraine. All of these events have rocked the global economy and inflation is now running at or near 40-year highs in most major economies. At the same time, central banks have been raising interest rates at their fastest pace in decades. This is leaving many households to grapple with the sharp rise in the cost of living, particularly in Europe which has felt the brunt of energy shortages and increased fuel costs. The combined impact of higher inflation, rising interest rates and geopolitical uncertainty has already affected global GDP growth and, as we head into 2023, economists are predicting recessions in many major advanced economies, although there is some debate about the depth and length of these.

 

It also brings challenges for private equity investors who must analyse how existing portfolio companies may be impacted by an economic downturn and how to navigate a changed environment for new investments in which buyers and sellers are having to find a new equilibrium on pricing. However, our experience during four decades of investing in private equity has shown that this asset class particularly comes to the fore in difficult times, since it can provide not only the capital, which is invested with a long-term investment horizon, but also much needed operational expertise and strategic guidance for portfolio companies. Other benefits include the strong governance model and the alignment of interests between the private equity manager and investee company, both of which are inherent features of private equity. On behalf of PIP, we aim to back managers who have built portfolios that are able to withstand uncertainty and to select portfolio companies that are resilient and exhibit defensive characteristics. In fact, market cycles and dislocations like those that we are currently experiencing can bring opportunities for seasoned investors like us and the PE managers that we invest alongside.

 

Following an all-time high in 2021, new deal activity remained robust in the first quarter of 2022, levelled off in the second quarter and decelerated in the third quarter as the macroeconomic conditions started to impact overall investor sentiment. In addition, for some investors the reduction in public market valuations relative to private market valuations has resulted in them becoming over allocated to private equity as a proportion of their overall assets. This is the so-called "denominator effect" which is likely to make fundraising more challenging for many private equity managers in the foreseeable future. Nevertheless, we expect that the top-rated, access-constrained private equity managers will still be able to raise capital quickly via oversubscribed funds regardless of what is happening in the world around them. Although fundraising may be under pressure this year, it should be noted that private equity mangers have enjoyed record fundraising years previously and dry powder, which consists of capital raised but not yet invested, stood at $2.5 trillion as at 31 December 2022¹. This puts private equity managers in a strong position to take advantage of deal flow over the coming months.

 

We believe that looking at opportunities through a long-term investment lens is essential to tap into the ongoing megatrends that we believe are here to stay. For example, the two largest sectors in PIP's portfolio - information technology and healthcare - are being propelled by underlying themes such as digitisation and automation; ageing demographics in developed markets; and the increasing demand for high-quality healthcare products and services. Spending on mission-critical software tends to continue through market cycles and historically has been resilient to recessions. According to a recent press article, IT consultancy Gartner estimated that spending on business software and IT services would remain steady year-on-year, together accounting for more than US$2.16tn in projected spending in 2023. Within IT services, Gartner projected that spending on consulting services alone would reach US$264bn, up 6.7% from 2022². In the USA, where over half of PIP's portfolio is invested, healthcare spending could grow by 7.1% in the next five years to 2027³. Financial services, which may have been neglected by investors recently, as well as sustainability and energy efficiency, are also interesting investment areas for private equity.

 

PIP's portfolio is tilted towards small/mid-market buyouts, which are attractive because there are a number of techniques that our managers can implement to help the companies in this stage to grow. These are smaller businesses that are often in the process of scaling up and investments in this sector typically benefit from multiple exit routes. Mid-market deals can often be overlooked as they are more complex transactions requiring significant expertise in sourcing, due diligence and monitoring, and originating these opportunities requires the kind of deep relationships that Pantheon has developed with many mid-market private equity managers. One characteristic that is especially relevant in the current market is that they are typically valued more conservatively and may be purchased with less debt financing and therefore are less exposed to rising interest rates and a slowdown in growth.

 

An important part of our due diligence process focuses on understanding how our managers plan to exit their portfolio companies once their value creation strategies have been achieved. Following a record year in 2021 for exits, both in terms of number and value, these slowed significantly in 2022 and we expect this to continue through 2023. An important feature of private equity is that our managers are not under pressure to sell their portfolio companies therefore they can afford to wait for more accommodative market conditions to realise the full potential of their investments. Despite this, deals are still taking place with the highest quality companies being sold at attractive valuations. During the six months to 30 November 2022, just 4% of PIP's portfolio companies were sold as a result of them being taken public, while over half of exits were to trade buyers. Therefore, there is limited impact on PIP's portfolio from the slowdown in the global IPO markets.

 

¹Preqin, downloaded February 2023.

² Global IT Spending Decreased in 2022, Wall Street Journal, 18 January 2023.

³ Source: McKinsey & Company.

 

Private equity secondary opportunities have increased, driven by manager-led deals

In an environment where growth is slowing and inflation is rising, institutional investors often experience a need for liquidity in order to meet liabilities elsewhere. This, coupled with the denominator effect described earlier, can drive investors to look for ways to derive cash from their existing investments. The global secondaries market had already been establishing itself as an active portfolio management tool for a wide range of investors in private equity funds but in unsettled markets, such as we are experiencing currently, an effective and growing secondary market creates interesting opportunities for investors like PIP to take advantage of dislocation and access high quality private equity assets at attractive valuations and at a discount to their fair market values.

 

Despite the challenging macroeconomic backdrop, the secondaries market recorded its second largest year ever in2022 with transaction volumes of more than US$103bn⁴. Manager-led deals, which is when the private equity managers themselves instigate deals in order to provide liquidity options for the investors in their funds, are a fast-growing part of the secondaries market and they accounted for under half (46%⁴) of all secondary transactions. With the remainder being traditional fund secondary transactions, which is when an investor in a fund initiates a sales process with aim of selling to another investor. Manager-led deals can consist of either multi-asset portfolios or single-asset secondaries.

 

A single-asset secondary is an investment in an individual company owned by an existing private equity fund. The private equity manager may be under pressure to sell the company to provide liquidity to existing investors or is looking to secure further capital to support growth which may not be available in the current structure. However, the company in question could be a highly prized asset that the fund manager believes has significant further potential for growth. These competing priorities can be resolved by bringing in new investment, typically from specialised secondary firms such as Pantheon, and carving the company out into a new structure typically called a "continuation" fund. When successful, and with the correct alignment of interest between existing investors, the private equity manager, company management and the new investors, these types of transaction tend to have an attractive risk/return profile and can be of significant value to all parties involved:

 

-    They are appealing to the existing investors who have the option to take the liquidity or to roll their interests into the new vehicle and remain exposed to the asset going forwards.

 

-    They allow the private equity manager to continue to hold on to and keep control of what they might see as one of their highest-quality assets, which they would otherwise have been required to sell. The employees of the company are often in favour of these types of transactions as they do not have to experience a change in ownership or management, and the disruption this could bring.

 

-    Meanwhile, new investors have the opportunity to invest in otherwise "not-for-sale" assets, alongside proven PE managers who know the company well, and experienced company management teams.

 

All of this makes these investments at their best a real "win-win-win" for everyone involved. In a market environment where there are fewer exit routes for companies, this option is likely to become even more compelling.

 

Single-asset secondaries are complex transactions which require significant expertise and resources, and are frequently sourced on a proprietary basis through deep manager relationships. Pantheon has a decades-long track record in the secondaries market and our dedicated and experienced team gives us global scale and reach. The Partners in Pantheon's secondary team have on average 23 years' investment experience and the average length of relationships with the private managers that we have invested with is 21 years. Furthermore, Pantheon secondary team benefits from the wider Pantheon investment platform, with its extensive global manager coverage and close relationships, including through the 589⁵ advisory boards seats held.

 

Despite extraordinary growth in the secondaries market and in single-asset deals in particular, Pantheon has maintained its discipline and selectivity. When assessing these kinds of deals on behalf of PIP, we are looking to invest alongside high-quality managers with whom we usually have an existing relationship, which allows us to start from a foundation of trust. This also means that we are often investing in companies that we have either already backed in some way, or that we have followed for some time. As with secondary deals more generally, the key is in aligning interests and finding consensus around valuations. For Pantheon that means independently pricing the asset and undertaking a thorough analysis of the underlying business. We conduct a full bottom-up assessment to develop our conviction around the resilience and potential of the assets that we are underwriting. This includes understanding:

 

-    Defensive characteristics around current earnings and customer base;

 

-    Macro and structural tailwinds behind the markets the company operates in and company's market-leading position;

 

-    Exposure of cash flows to inflationary pressures;

 

-    Exposure of company to financing or refinancing risk;

 

-    The fundamental drivers of future revenue growth and

 

-    Avoiding deals where leverage has been aggressively used.

 

In the current market environment, we expect secondary momentum to continue and to capitalise on this, PIP committed US$112.5m (£93.5m) to the Pantheon Secondary Opportunity Fund II (PSOF II), which is focused on single-asset secondaries, following the period end. PIP's commitment is expected to be deployed over a three-year investment period.

 

⁴ Source: Evercore Private Capital Advisory, 2022 Secondary Market Synopsis, January 2023.

⁵ As at 31 December 2022

 

PIP continues to benefit from Pantheon's established and scaled co-investment platform

 

Co-investments are attractive for PIP as they enable the Company to invest directly in exciting high-growth companies on the same terms and conditions as the private equity manager. They are also typically free of management and performance fees. PIP benefits from Pantheon's large global network of primary and secondary relationships from which we are able to source co-investment opportunities. In many cases, the strength of our relationships has resulted in us being offered proprietary deals whereby we are the only party to be invited to co-invest alongside a manager.

 

The co-investment market has become increasingly competitive, however we believe that Pantheon has a distinct advantage and is an attractive co-investor for our private equity managers because:

 

-    We do not compete against them and are viewed as a desirable investment partner; as a result, we believe that we see a large proportion of co-investments on offer from our core managers around the world;

 

-    Our consistent reliability in co-underwriting transactions means that we have become a "go to" partner for many of our private equity managers;

 

-    We have the scale to deploy substantial capital quickly into new deals and follow-on investments; and

 

-    We have proven our willingness to step in at an early stage to help our managers to secure and execute upon exciting opportunities through co-underwriting transactions.

 

Pantheon continues to assess each co-investment opportunity on its own merits with each co-investment passing 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. The opportunity is then subjected to our own detailed due diligence process, carried out by our dedicated co-investment team.

 

In the current environment we have remained cautious, disciplined and selective and, as a result, our already stringent approval rate dropped over the course of 2022 to around half of what it was at the beginning of the year. This is mainly attributable to, among other things, our cautious approach in evaluating deal pricing and company growth prospects against an increasingly challenging macroeconomic environment. Having said that, we have seen more reasonable valuations as we head into 2023. Although deal flow volume has moderated in the current environment, co-investments in companies that command a leading or differentiated market position, have a sticky revenue base and are benefitting from secular growth, will continue to attract strong interest.

 

Typically, we will only co-invest in companies that display the following attributes:

 

-    We focus only on compelling opportunities with the highest-quality managers that we believe are able to meet our return expectations;

 

-    The business must be a good fit for the manager's geographical, sectoral and stage expertise and experience;

 

-    There are multiple and clear value creation levers that our managers can pull;

 

-    Structured deals or businesses that have reasonable entry valuations;

 

-    We focus on attractive, resilient sectors that are experiencing long-term tailwinds and have the potential for strong organic growth through the launch of additional products and services;

 

-    Defensive businesses that have the ability to maintain revenue and margin stability even in an economic downturn; and

 

-    There is the potential for add-on acquisitions that can help the business to build scale and grow its market share.

 

PIP committed £130.4m to 10 co-investments during the six months to 30 November 2022 and, at the end of the period, co-investments accounted for 34% of PIP's portfolio.

 

Private equity versus public equity performance

There is no doubt that 2022 was a bumpy ride for public markets albeit some recovery was observed towards the end of the year. Private equity valuations have not tracked the declines seen in the public markets and some of the main reasons for this are because private equity managers generally take a more conservative approach when valuing their portfolio companies, usually have control positions which means that they can manage their portfolio companies more actively, and they are not under any pressure to sell. As a result, the pressures that the current environment places on the public markets are generally not reflected in the private markets, and private equity performance has historically been less volatile overall. For example, the chart in the Half Year Report shows that the dips in private equity performance during the Global Financial Crisis and in the first quarters of the COVID-19 crisis were far less marked than those seen in the public markets and the recovery has been far stronger.

 

Our managers' generally conservative approach to valuing their assets means that PIP has consistently seen exits in its portfolio being achieved at attractive uplifts. This has continued in this reporting period with a weighted average uplift achieved on exit of 33% being achieved during the six months to 30 November 2022. The weighted average uplift since 2012, which is when we started tracking this metric for PIP, has been 31%. This demonstrates the embedded value in PIP's buyout portfolio and the resilience of the underlying companies.

 

Outperformance through economic cycles

The best private equity managers are able to outperform public markets consistently and especially during times of economic stress. The graphic below shows that between 2002 and 2022, upper quartile private equity managers outperformed the Dow Jones Industrial Average ("DJIA") index by 890 basis points in bull markets, while this widened to 1940 basis points in bear markets. The private equity average also performed strongly in the latter scenario.¹

 

Both these statistics and the chart within the interim report which shows the wide dispersion of returns in private equity, indicate that investing with top-quality managers, whose funds are often oversubscribed and invitation-only, is crucial. PIP, through Pantheon's extensive network of deep relationships, has access to many of the best private equity managers in the world.

 

¹ DJIA , Capital IQ as at 30 October 30 2022. ThomsonOne PE Buyout and Growth funds Index as at Q2 2022. Bull markets are defined as 2004-2006 and 2010-2019 and 2021. Bear markets are defined as 2002-2003; 2007-2009, 2020 and YTD 2022.

 

Outlook

The world has changed substantially over the past 12 months and it is difficult to predict what is yet to come. But what we can say is that, while the last 10 years have been good for all asset classes, private equity has outperformed the public markets and the evidence suggests that private equity outperformance tends to be even greater during lower public market return periods. This is a testament to the "super active" private equity model and we expect the hands-on approach of our managers to become more important than ever through 2023 and beyond. There are clearly challenges which will impact private equity, as is the case for many other industries, but, perhaps thanks to its unique attributes, the assets under management ("AUM") in the global private equity market is still forecasted to grow by 10.2% CAGR from 2021 to reach US$7.6tn in 2027¹.

 

We believe that private equity investment can add real value to companies and this can be seen especially in the sectors that PIP focuses on, which are being propelled by positive long-term secular trends. The advantages of being backed by a private equity manager who has sector expertise and can implement active professional management, as well as being a capital partner who can support their portfolio companies when the going gets tough, should not be underestimated.

 

Those same managers are experienced at being able to buy good assets at lower valuations during periods of volatility. As a global private markets investor with a 40-year history, Pantheon is well positioned to take advantage of these potential opportunities on behalf of PIP. Pantheon has managed PIP through multiple economic cycles and, since it was launched over 35 years ago, the Company has significantly outperformed the public market benchmarks. PIP's balance sheet is resilient and the underlying companies in its portfolio are performing well, delivering revenue and earnings growth in excess of the MSCI World index. While we must not become complacent, all of this gives us confidence that PIP is in good shape and ready to face whatever the future holds.

 

DISTRIBUTIONS

 

PIP's mature portfolio continued to generate distributions despite a challenging exit environment. Distributions have been incremental to returns, with many reflecting realisations at significant uplifts to carrying value.

 

Distributions by region and stage

PIP received £112m in proceeds from PIP's portfolio in the half year to 30 November 2022 (year to 31 May 2022: £419m), equivalent to an annualised distribution rate of 10% relative to opening private equity assets (31 May 2022: 25%). US and European buyouts accounted for the majority of the distributions.

 

Distributions by stage
For the half year to 30 November 2022
Small/mid buyout	43%
Large/mega buyout	26%
Growth	18%
Special situations	8%
Venture	5%

 

Distributions by region
For the half year to 30 November 2022
USA	45%
Europe	30%
Global	13%
Asia and EM	12%

 

Quarterly distribution rates¹

Although PIP's portfolio has continued to generate cash, there has been a slowdown in distributions during the period due to the challenging economic environment which has impacted exit activity.

 

Distribution rates by vintage¹

With a weighted average fund maturity of 4.8 years² at the end of the period (31 May 2022: 4.9 years), PIP's portfolio should continue to generate significant levels of cash.

 

Cost multiples on exit realisations³

The average cost multiple on exit realisations of the sample was 3.1 times, demonstrating value creation over the course of PIP's investment.

 

Uplifts on exit realisations¹

The value-weighted incremental average uplift on exit realisations in the half year was 33%, consistent with our view that realisations can be significantly incremental to returns.

 

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

 

Exit realisations by sector and type

Realisation activity was strongest in the financials and information technology sectors. Trade sales and secondary buyouts represented the most significant sources of exit activity during the half year. The data in the sample provide coverage for 100% (for exit realisations by sector) and 100% (for exit realisations by type) of proceeds from exit realisations received during the period.

 

¹Distribution rate equals distributions in the period (annualised) divided by opening portfolio value.

² Calculation for weighted average age excludes the portion of the reference portfolio attributable to the Asset Linked Note. 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.

³See page 111 of the Alternative Performance Measures section within the full Interim Report for sample calculations and disclosures.

 

Exit realisations by sector
For the half year to 30 November 2022
Financials	28%
Information technology	26%
Consumer	12%
Industrials	10%
Healthcare	8%
Energy	7%
Communication services	5%
Real estate	3%
Materials	1%
Exit realisations by type
For the half year to 30 November 2022
Trade Sale	55%
Secondary buyout	39%
Public market sale	4%
Refinancing and recapitalisation	2%

 

CALLS

Calls during the half year were used to finance investments in high-quality businesses globally.

 

Calls by region and stage

PIP paid £78m to finance calls on undrawn commitments during the half year (year to 31 May 2022: £187m). Calls were predominantly made by US-based private equity managers in the growth and buyout segments.

 

Calls by region
USA	56%
Europe	19%
Global	17%
Asia and EM	8%

 

Calls by stage
Large/ mega buyout	33%
Growth	30%
Small/ mid buyout	28%
Venture	8%
Special situations	1%

 

Calls by sector

A large proportion of calls were for investments made in the information technology sector.

 

Information Technology	52%
Industrials	12%
Healthcare	10%
Communication services	9%
Consumer	6%
Financials	5%
Energy	3%
Others	2%
Materials	1%

 

Quarterly call rate¹

The annualised call rate for the half year to 30 November 2022 was equivalent to 21% of opening undrawn commitments (31 May 2022: 35%).

 

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 £303m to 21 new investments during the half year (year to 31 May 2022: £496m, 70 new investments). Of the total commitments made, £183m was drawn at the time of purchase. Since the period end, PIP has committed a further £113.0m to two new investments, the majority of which is a US$112.5m (£93.5m) commitment to the Pantheon Secondary Opportunity Fund II (PSOF II), which is focused on single-asset secondaries.

 

Our investment process

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

 

We invest with many of the best private equity managers who are able to identify and create value in their businesses.

 

Cash generated from the sale of those companies is returned to PIP and redeployed into new investment opportunities.

 

New commitments by investment type

New commitments during the half year were to all three types of investment which make up PIP's portfolio, with each demonstrating attractive characteristics for overall portfolio construction.

 

Co-investment	43%
Primary	37%
Secondary	20%

 

New commitments by region

All of the commitments made in the half year were opportunities in the developed US and European private equity markets.

 

USA	56%
Europe	44%

 

New commitments by stage

Buyout investment activity was robust during the period.

 

Small/mid buyout	72%
Large/ mega buyout	24%
Venture	4%

 

New commitments by vintage

Primaries, co-investments and manager-led secondaries, which accounted for 100% of total commitments during the half year, offer exposure to current vintages.

 

2022	82%
2023	18%

 

Primary Commitments

£111 committed to six primaries during the half year.

 

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

 

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

 

Investment	Stage	Description	Commitment
ECI 12	Small/mid buyout	UK buyout fund investing in the small-mid market segment, focusing on the information technology, telecommunications, business services and leisure sectors	£22.0m
Altor Fund VI	Small/mid buyout	Nordic buyout fund targeting growth-orientated mid market companies in a range of sectors	£21.9m
Chequers Capital XVIII	Small/mid buyout	European buyout fund focused on the industrials, healthcare and business services sectors	£20.9m
Sentinel Capital Partners VII	Small/mid buyout	North American buyout fund focused on management buyouts and acquisitions of family businesses	£19.3m
Ambienta IV	Small/mid buyout	European buyout fund focused on resource efficiency and pollution control	£14.9m
Accel Leaders Fund IV	Venture	North American venture fund focused on late stage venture and growth deals	£12.4m

 

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

£61m 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-asset secondaries. By holding companies for longer, private equity managers are able to participate in the companies' next phase of growth.

 

Investment	Private equity manager	Stage	Description	Geography	Commitments	Funded %
ShiftKey	Lorient Capital	Small/mid buyout	A leading tech-enabled, healthcare staffing marketplace platform	USA	£12.5m	100%
JSI	Stone-Goff Partners	Small/mid buyout	Provider of services to Telecommunications industry	USA	£9.3m	85%
Smile Doctors	Linden Partners	Small/mid buyout	Orthodontic treatment and services provider	USA	£8.5m	100%
Valantic	Deutsche Private Equity		Leading digital consulting and software company based in Germany	Europe	£18.2m	77%
AWK Group	Deutsche Private Equity		An independent management and technology consulting firm based in Switzerland	Europe

 

Since the period end, PIP has committed US$112.5m to the Pantheon Secondary Opportunity Fund II (PSOF II), which is focused on single-asset secondaries. PIP's commitment, which is expected to be deployed over a three-year investment period, forms part of the Company's strategy to capitalise on attractive opportunities in this fast-growing segment of the secondaries market.

 

CO-INVESTMENTS

 

£130m committed to 10 co-investments during the half year

 

PIP's co-investment programme benefits from Pantheon's extensive primary investment platform which has enabled PIP to participate in proprietary deals that would otherwise be difficult to access.

 

PIP invests directly into companies alongside private equity managers who have the sector expertise to source and acquire attractively priced businesses and build value through operational enhancements, organic growth and buy-and-build strategies.

 

New co-investments by region
USA	68%
Europe	32%

                       

New co-investments by sector
Information Technology	60%
Consumer	17%
Industrials	16%
Communication services	7%

 

New co-investments by stage
Large/ mega buyout	56%
Small/ mid buyout	44%

 

Investment	Sector	Geography	Private equity manager	Description	Commitments
Kaseya	Information Technology	Europe	Insight Partners	Provider of IT management and monitoring software services	£21.0m
Anaplan	Information Technology	USA	Thoma Bravo	Developer of a cloud-based modeling and planning platform	£20.0m
Access	Information Technology	Europe	Hg Capital	Developer of business management software	£13.8m
IOI	Industrials	USA	Altamont Capital Partners	Provider of food processing services	£12.3m
SailPoint	Information Technology	USA	Thoma Bravo	Provider of enterprise identity governance solutions	£12.0m
Elevation	Consumer	USA	Know Lane Capital	Manufacturer of premium beauty products	£11.8m

 

BUYOUT ANALYSIS¹

 

Revenue and EBITDA growth

Weighted average revenue and EBITDA growth of 23.0% and 10.6% respectively, for PIP's sample buyout companies have consistently exceeded growth rates seen among companies that constitute the MSCI World index. Strong top-line performance, disciplined cost control, operational expertise and good earnings growth, together with an efficient use of capital, underpin the investment thesis of many private equity managers.

 

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 17.3 times compared to 14.7 times for the MSCI World index and this should be considered in the context of the underlying growth rates for each.

 

PIP invests proportionately more in high-growth sectors such as mission-critical B2B 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/mid 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 portfolios have little or no reliance on leverage.

 

	% of PIP's portfolio	Debt multiple
Large/mega buyout	26%	6.2x
Small/mid buyout	43%	4.9x
LBO2 (Market Data)		5.9x

 

1 The sample buyout figures for the 12 months to 30 June 2022 were calculated using all the information available to the Company. The figures are based on unaudited data. MSCI data was sourced from Bloomberg. See page 111 of the Alternative Performance Measures section for sample calculations and disclosures.

2 Leveraged buyout.