Why Pantheon private equity’s 12% annual returns is right for SIPPs


#1

Originally published at: https://whichinvestmenttrust.com/why-pantheon-private-equitys-12-annual-returns-is-right-for-sipps/

The long established private equity investment trust continues to trade on a huge discount despite delivering market beating returns. We look at why this type of investment is most suited to long term investors. Brief background and Meet the manager Pantheon is a global private equity fund investor that has been around for over…


#2

Agreed. This type of closed-end, fund-of-funds style private equity trust could well be a good and profitable long-term fit for some when sheltered inside the likes of a SIPP. However, Pantheon International Participations (PIN) is personally not for me and my SIPP. Being that back in January I moved 7.5% of my SIPP’s value, made up of accumulated income receipts and the sale of a 4% holding in the Miton run Diverse Income Trust (DIVI), into the Standard Life Private Equity Trust (SLPE). Though, before doing so, I did hold a ‘beauty parade’ that included, among others for consideration, Pantheon.

My decision to open a private equity position in my SIPP via SLPE was driven by a number of factors:
• Throughout the previous 12 months the double-digit discounts of several of these private equity trusts where noticeably beginning to shrink as economic prospects improved.
• I further reasoned that activist investor activity at two large UK quoted private equity trusts, Electra and SVG Capital, would ultimately result in substantial amounts of capital being returned to shareholders. Some of which would assuredly find its way into other private equity vehicles.
• Sight of the Chairman’s Statement contained in the Annual Report and Accounts for the period ending 30 September 2016 of the then named Standard Life “European” Private Equity Trust (which can be read by clicking on this link) informed me that changes to the trust were afoot - such as …
• Change of performance emphasis from one of capital appreciation to one of total return.
• Establishment of an initial 12p per share dividend to be funded out of both income and capital distributions that the trust receives and that would increase (at least) in-line with inflation over time. At the trust’s then stated NAV of 346p and share price of 267p this would represent a corresponding yield of 3.5% and 4.5%. The object of the exercise being a means of discount control in harness with the already existing share buy-back mechanism.
• A widening of the geographic investment mandate that previously limited the trust’s portfolio mix to 80% Pan-European and 20% elsewhere to one of an unconstrained approach. And, to be further indicated by the dropping of the word “European” from the trust’s previously registered title to one that now reads “Standard Life Private Equity Trust”. However, the Chairman makes the comment that shareholders should not expect a noticeable shift in regional weightings but rather a gradual one as positions unwind.
• A renegotiated annual management fee that replaces the previous performance fee structure with one of a fixed percentage of assets charge.

So there you have it. Both Pantheon and Standard Life trusts follow the same fund-of-funds approach of investing in secondary stage buy-out ventures where they take a back-seat and let the lead investors do the heavy lifting. Neither trust uses gearing, though SLPE does have the facility to borrow but has not done so for a number of years. As for size, Pantheon has some estimated £1bn worth of assets compared to SLPE’s estimated £485m. Pantheon’s emphasis is very much on the US while SLPE is, for time being, focused mainly on Europe (UK included).

Interestingly, data (correct at the time of this posting) on the UK Morningstar site shows that SLPE has apparently been the more popular with investors than Pantheon over the past 12 months. As indicated by SLPE’s 12-month averaged discount of 22.2% now standing at 11.8% while Pantheon’s likewise 12-month averaged discount of 21.7% currently weighs in at 17.3%. Obviously, when it comes to evaluating quoted private equity NAVs it pays to be somewhat circumspect as to the accuracy. But, nevertheless, it’s the only reliable form of measurement an investor has. Consequently, I always found that, barring accidents, valuations, when periodically made, of such illiquid assets always tend to be prudently on the conservative side when compared to what an asset is actually worth when realised.

Re: Diverse Income Trust (DIVI) – Reasons for disposal of my SIPP holding:
While I note that DIVI is a trust that features in the “Our Buy List” of Which Investment Trusts, since Brexit I’ve turned negative on this trust. Launched 6 years with a UK multi-cap equity income investment mandate, performance was impressive throughout the opening 3 years. So much so the share price consistently traded at a premium. However, during the last 3 years performance has begun to drop off markedly with the share price slipping to a discount as a result (see below).

Co-managed from the start by Martin Turner and Gervais Williams. Turner runs the large-to-mid cap side of the £360m portfolio that accounts for some 30% of the holdings. While Williams runs the small-and-micro side that makes up the remaining 70%. As far as I can tell, the problem is the way that the portfolio has been positioned. It’s been too domestically UK focused and is being unduly impacted by the on-going and as yet unknown outcome of the Brexit negotiations.

For me; the clincher is sight of the two managers’ rolling performance stats for the last 36 months as provided by FE Analytics below. The data firmly puts both Martin Turner and Gervais Williams in the bottom quartile of all fund managers when compared to others that inhabit the UK universe of UTs and OEICs.


#3

I think both the Standard Life Private Equity Trust and Pantheon are options for considering @forrado. They are very different beasts. Standard Life has a European focus, where as Pantheon has a USA bent.

I hold Pantheon or PIP in my SIPP, but it was a bit of a toss up between the two. I went for Pantheon in the end because of the access they had to the parent Pantheon funds.

I also considered Princess, which is also a good option in my view.


#4

I hold both SLPE and PIN in my SIPP, and PIN in my ISA - and have topped up both holdings last year. Both are rated as 4* trusts by Morningstar.

Its worth pointing out that the Pantheon trust has two share types - the normal (PIN) and redeemable (PINR) shares. Both have the same NAVs but the redeemable shares are on a higher discount. Worth checking the annual report to understand the differences - mainly the redeemable shares don’t have any voting rights. I hold both types but have bought the redeemable ones most recently for the much higher discount. Not sure why this wasn’t mentioned in @dicem article.

As a sector, I think Private Equity has been my most profitable and still has trusts with discounts - my asset allocation looks to have ~15% in the sector for its long term out performance. Though in the interests of balance, not all my holdings have turned out well (LMS capital was a dud which I bailed out of, and Dunedin Enterprise is going nowhere).

Other trusts worth considering in the fund of funds space are
Decent Yield

  • Foreign & Colonial Private Equity (FPEO)
  • Princess (PEY)
    No yield
  • Harbourvest Global Private Equity (HVPE)

It is also worth looking at British Empire Trusts (BTEM) reports and newsletters, as this trust looks to buy other undervalued trusts - and can often provide an opinion on trusts you might be considering. (This trust is also a good buy in its own right).


#5

The redeemable share class of PIN or PIP has always been on a larger discount. I don’t know why they keep it because it’s an extra layer of complication which I don’t think is necessary. Investments are complicated enough.

I have PIP and HgCapital, a direct investor and I am very happy with both.

I would like an update on DBAG if you could do one at some point @whichinvest @dicem I like its story but the last article you done on that one was a long time ago. It might be a little bit more difficult because the managers are in Germany.


#6

mikemoore

I hold DBAG in my HL SIPP - I like the story as it has a policy of no forceable takeovers and is low on debt. Dividend this year was 1.2 euros per share (but remember the 26% ish German withholding tax that you have to pay - and how hard is it to reclaim it.

What is your experience of HGT? I was looking at that - I prefer direct invest rather than the fund of funds as thats too opaque for my liking.


#7

I didn’t know you had to pay with holding tax on German shares, and from what you imply it’s a bugger to reclaim.

To get MikeMoore’s attention you have to include the @ symbol @andrew_mcmullinsme_com Then he’ll get an email telling him you’ve mentioned him.

I was looking at DBAG on here because it’s on the buy-list. the review is really old though. I asked WhicInvestmentTrust if they would update DBAG and they said they will when the managers are next in London.