International Pantheon: Prioritizing Shareholders, Minimizing Risks - Preserving Trust Without Daring Ventures
Pantheon International, a private equity trust operating at the lower-risk end of the spectrum, has been making headlines due to a significant discount between the price of its liquid shares and the value of its illiquid assets. This disparity, primarily attributed to the liquidity mismatch and market sentiment factors inherent to listed private equity funds, has been a topic of discussion among investors.
The trust, which invests in stable, "boring" businesses and collaborates with other private equity specialists, boasts a portfolio consisting of 80% stakes in 500 companies, with the remaining 20% being 'smaller positions'. However, Pantheon does not disclose the total number of individual stakes it holds.
The liquidity discount, a key reason for the gap, arises due to the illiquid nature of the private companies in which Pantheon invests. Although the fund’s Net Asset Value (NAV) reflects the estimated value of these private holdings, the shares trade on the public market where investors factor in the difficulty and time required to realise these private assets. This drives a discount between the share price and NAV.
Discounts tend to widen when market sentiment is weak, interest rates rise, or uncertainty prevails. Despite strong NAV performance, discounts have widened for Pantheon International, leading the trust's board to consider radical actions to reduce discounts.
The NAV is based on valuations of private companies, which often use internal models and assumptions. These valuations are not marked-to-market daily and involve less transparency, causing market participants to apply a discount when buying liquid shares in listed entities.
Some trusts engage in buybacks, tender offers, or structural changes to combat persistent discounts. However, discounts may persist until investors are more confident in liquidity and valuation transparency.
If the discount decreases, shareholders of Pantheon International could benefit from a performance uplift. It's important to note that the trust does not pay shareholders a dividend.
Charlotte Morris, co-lead fund manager of Pantheon, acknowledges skepticism about the value of private equity investment trusts. Despite this, Morris expresses comfort about the valuation of Pantheon International's assets, suggesting that the discount may eventually decrease.
An example of a trust holding is Dutch discount retailer Action, in which Pantheon initially invested in 2020 and has not sold its stake. The value of Pantheon International's shares stands at a 36% discount compared to the value of its underlying assets.
The trust has generated returns of 2.8% over the past year and 59.8% over the past five years, all from the share price. The fund's annual charges total 1.31%, with an additional performance fee that kicks in during good years, but did not do so in the financial year ending May 31, 2024.
Morris believes that an increase in private equity activity is necessary to validate current valuations. Pantheon International aims to prioritize shareholders, committing a sum to a round of fundraising organized by private companies.
In conclusion, the discount exists because publicly traded shares in Pantheon International offer liquidity in exchange for a discount to the NAV, which reflects illiquid private company holdings. Market conditions, valuation uncertainty, and investor sentiment further contribute to this gap. However, with the right strategies and market conditions, the discount could potentially decrease, benefiting shareholders.
Investors discussing the discount between Pantheon International's share price and its illiquid assets'value find it relevant, as the trust invests in businesses and collaborates with other private equity specialists, holding stakes in various companies. The liquidity discount, arising due to the illiquid nature of the private companies, causes the shares to trade at a discount compared to the NAV, and discounts may persist until investors are more confident in liquidity and valuation transparency.
