The secrets behind 12% annualised growth from private equity

Pantheon International manager Helen Steers sits downs with ii’s Sam Benstead to discuss the advantages of owning private equity for retail investors.

She explains how an investment trust democratises access to private companies, and why their preference for mature but fast-growing businesses has led to 12% annualised net asset value growth and 11% share price growth since 1987.

Steers also discusses some of the largest companies in the portfolio, such as Dutch discounter Action.

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Sam Benstead, fixed income lead, interactive investor:Hello and welcome to the latest Insider Interview. Our guest today is Helen Steers, manager of Pantheon International (LSE:PIN) investment trust. Helen, thanks very much for coming in.

Helen Steers, manager of Pantheon International investment trust: It’s a pleasure, Sam. Thank you for inviting me.

Sam Benstead: So, this is a private equity investment trust. Can you explain what private equity actually means?

Helen Steers: Private equity is just investing in the equity of private companies. So, just as you would invest in a public company, these are private companies, so not quoted on any stock exchange.

Sam Benstead: And for retail investors at home this is often a hard-to-access part of the market. So why should they include it by a listed investment trust in their portfolios?

Helen Steers: It is difficult to access because these companies are private, so you can’t access them through a regular stock exchange. The reason why it’s interesting is that these private companies are often faster-growing, often in niches that are very difficult to access via the public markets. So, it’s a way of diversifying your portfolio and getting access to some of these really fast-growing, exciting industry sectors.

On average, if you look over the last 20 years, private equity has outperformed underlying public markets by about 2% to 3% per annum, and that’s one of the reasons, of course, why big institutional investors have large allocations to private equity. So, the large university endowments, but also many pension plans, both public pension plans and corporate pension plans.

What’s great about private equity investment trusts is that they provide the opportunity for anybody, for retail investors, independent investors, to have a slice of private equity, whereas in the past, it’s really been the preserve of some of these big institutional investors. So, it’s kind of democratising the asset class.

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Sam Benstead: How do you go about investing in private companies, and what sets your approach apart from some of your peers?

Helen Steers: We’ve been going since 1987, so we have an established portfolio of private companies that is renewed all the time as we sell companies, and then we acquire companies. As to when an investor buys into the trust, they just buy a share of Pantheon International and they get access to this ready-made portfolio of private companies.

The reason we’re different to some of the other private equity investment trusts is, well, first of all, we are globally diversified, so we’re not just focused on the UK or Europe. We cover all the different industry sectors, although we have a leaning towards information technology and healthcare. We’re basically buyout-focused. These are more mature companies, so this is not a venture portfolio.

And then the thing that really does differentiate us is that we invest, for the most part, directly into the opportunities which are shown to us by Pantheon, the manager. So, we’re not investing via Pantheon funder funds. These are direct holdings either in funds or directly into companies.

Sam Benstead: That’s been going since 1987, as you said, so looking at returns they’ve been fantastic. So, 12% compound annual growth in the net asset value (NAV) but 11% in the share price. What's been the secret to that success? Why have returns been so impressive?

Helen Steers: We’re very pleased with the performance of the trust, as you’ve said, 12% net of all fees in terms of the NAV. Over the last 10 years, that NAV performance has actually improved, so it's closer to 14%, It's 13.8% per annum net of all fees over the last 10 years.

I think the secret to the success of the trust is this global diversification and the fact that we really invest with the best private equity managers, either in the funds or in the companies. And what’s great about that is we get access to great private companies on a global scale.

Sam Benstead: And those private companies that you own; can you give some examples of some that have been foundational to that success over the past 30 odd years?

Helen Steers: Well, I can talk about some of our biggest companies in the portfolio. Our largest company is called Action. It's a private company, but it’s the largest discount retailer in Northern Europe. It’s based in the Netherlands and they don’t have any stores yet in the UK. Think of a kind of super-duper Poundland, but called Action. They’ve done incredibly well, and they’ve got more room to grow.

There’s a lot of white space in terms of more stores they can open and more types of products that they can sell through these discount stores.

That’s our biggest company, but also in the top 25, we’ve got the second-largest ice cream manufacturer in the world. They make private label ice cream for some of the big consumer brands.

And then we’ve got a company called Visma, which is one of the leaders in software for SMEs. It provides things such as accounting software, payroll software, human resources software. It was originally started in Oslo in Norway, but has really expanded.

And then maybe for something completely different. We have a company called Smile Doctors, which is a chain of orthodontics clinics in the US. It started out as a platform business and they keep buying smaller orthodontics businesses run by single practitioners, and the idea is that there’s a lot of buying synergies. So, if you’re buying your Invisalign and things like that, it’s much better to buy it as a bigger business than as a single practitioner.

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Sam Benstead: And what kind of sectors and companies do you like to own?

Helen Steers: We particularly like the more resilient and robust areas. So, particularly software, enterprise software, because it’s very resilient and withstands a number of different macroeconomic environments. What’s great about things such as accounting software, payroll software, human resources software, and cybersecurity, is that the customers for those types of software packages, the SMEs, even medium-sized enterprises, really can’t do without this type of software to run their businesses.

It’s basically the last thing anybody would cancel after turning the light switch off. So, it’s really important for companies, and the other interesting thing is that we’ve got great visibility into the revenues and earnings of those businesses because they’re often software-as-a-service type businesses. Same with healthcare, we're really tapping into the trend there in terms of ageing demographics. A lot of the healthcare services and products companies we invest in are catering to that ageing population.

Sam Benstead: This is a listed vehicle, so the share price can diverge from the NAV, and at the moment it's a 33% discount on the investment trust. Is that typical? And what explains this quite wide discount at the moment?

Helen Steers: It is a wide discount at the moment, and usually the share price tracks the NAV fairly closely, but there's been a divergence over the last two or three years. I think that's really because of the macroeconomic environment, and there's been concern in general about M&A activity, and about private equity sector.

So, we’ve traded at this relatively large discount in common with other private equity investment trusts.

What's happened over the last of 12 months is that we've shown that our valuations are quite reasonable. When we exit businesses, even over the last six months, we've been exiting companies, and selling them at a higher valuation, on average, than the last holding value.

Over the last 10 years our average exit valuation is about 30% on average, in excess of the holding valuation. So I think we’ve proven that the valuations are fine. The portfolio is doing well. There’s a tilt towards these more mature businesses, where there's a very low loss ratio as well [and this] has really stood us in good stead.

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Sam Benstead: So, that discount could be a buying opportunity then for people at home?

Helen Steers: Well, we’re always a bit reluctant to make any sort of recommendations, but certainly we think that the portfolio is probably undervalued at the moment.

Sam Benstead: And so the NAV over the past couple of years, has that been relatively stable, or has that ticked a bit lower as public-listed shares have fallen as well?

Helen Steers: No, our NAV has been ticking up steadily. Part of that is to do with the fact that we are invested more in the buyout part of the industry. So, these are more mature businesses. I probably should stress again, that these are not venture businesses.

We’ve got about 3% of the portfolio in venture. That’s a lot more volatile. We saw that perform incredibly well during the pandemic and then not so well coming out of the pandemic, but it’s only 3% of the portfolio.

About 71% of the portfolio is buyout, and there we see steady valuation gains and have done over the last two years.

Sam Benstead: And what happens when companies leave the portfolio? Are they listing on public markets? And what’s the typical uplift to the NAV that you have marked down for that company?

Helen Steers: Companies typically are sold to strategic buyers. So, corporate buyers that are looking for growth and, as I’ve said, these companies are growth-orientated. The average revenue growth over the last five years has been about 18%. And the average EBITDA growth, earnings growth, has been about 19%. So, these are fast-growing companies.

Corporates buy them because they’re trying to extend their product lines, or their geographic coverage, and they need more growth. So, that’s the biggest exit route for us.

The second-biggest exit route is selling to other private equity funds, and our smallest exit route is IPOs. It’s only about 10% of our exits, historically. The average uplift over the last 10 years has been 30%, and the average exit multiple, so the multiple of cost that we sell these companies for, is about three times.

Sam Benstead: So, investing in successful businesses that then go on...

Helen Steers: ...to be even more successful actually, yes.

Sam Benstead: Fantastic. Helen, that’s been very interesting. Thank you very much for coming in.

Helen Steers: Sam, thank you very much. Pleasure to be here.

Sam Benstead: And that’s all we’ve got time for. You can check out more Insider Interviews on our YouTube channelwhere you can like, comment, and subscribe. See you next time