FY’22 was a record year for Pantheon International plc (LON:PIN) in terms of NAV growth, cash generation and investment activity. The period saw valuation gains of 24.4%, nearly double the 10-year average. Combined with positive forex (7.2%) and a small buyback benefit, the 31% NAV growth was more than double the 10-year average, and this was achieved net of all fees. PIN saw its largest-ever single company exit, and uplifts on exit averaged 42%. This performance followed outperformance over the previous 34 years through multiple cycles. Despite this, PIN, and the rest of the PE sector, are trading at near-record discounts to NAV.
- Market’s perception of the discount: We believe that, after digging into the detail of the results, concerns that the current NAV may not be real/sustainable should abate. We look to the uplift on sale of the investments, a falling PEG ratio of 0.66x, the detailed verification processes, multiple evidence of PIN’s conservative culture and the absence of motivation to inflate valuations.
- Resilient outlook: We believe PE, and Pantheon International, should prove resilient to challenging economic conditions, highlighting the incremental operational, strategic and financial value PE adds to investee companies in downturns. PIN invests in resilient sectors and mature and profitable companies, with just 4% venture exposure. Underlying portfolio gearing is modest. We note the large NAV outperformance in previous downturns.
- Valuation: PIN shares trade at a 41% discount to NAV, despite their long-term outperformance. We note the double discount, as the “real” NAV is likely to be above the book value, given the consistent uplift to carrying value achieved on exits. The 11-year weighted average uplift achieved on exit has been 31%.
- Risks: We note i) sentiment to the economic cycle (NAV rose every year in the 1990s’ recession, and in FY’20), ii) adverse sentiment to illiquid and unquoted investments and their valuation (PIN has permanent capital and proven exit uplifts) and iii) sentiment to the sustained discount. Short term, there can be forex volatility.
- Investment summary: Pantheon International is in an attractive market, can pick the best part of that market, and has competitive operational advantages. Its manager, deal selection and portfolio structuring add value. To the end of June 2022, this delivered a 12.4% NAV CAGR since inception in 1987. Corporate governance is strong, and the NAV is conservatively valued. Investors get liquid access to the global PE market. There are risks around the cycle, and illiquid and unquoted underlying assets. The discount appears anomalous with risk-adjusted returns.