Activist investor Metage Capital has increased the pressure on private equity fund Pantheon International (PIN) to buck up its capital allocation programme, demanding it sell at least £500m, or 22%, of its portfolio to fund share buybacks. 

In an open letter to the investment trust’s board, London-based Metage, holder of 4.78m PIN shares, a 1.1% stake, lambasted its “interminable strategic process” that while it has almost halved what was a 50% share price discount over three years ago, still leaves the stock trailing 28% below net asset value (NAV). That reduces its market value to £1.6bn against net assets of £2.3bn in August.

Tom Sharp, Metage’s chief investment officer who took part in the unsuccessful investor rebellion at former hedge fund Third Point Investors this summer, said PIN’s board needed to launch a “step four” in its pledge to put shareholders first or take itself private like Apax Global Alpha did earlier this year.

“We recommend that the board takes advantage of the low discounts seen in the secondary private market to make a meaningful disposal of at least half-a-billion pounds of assets and uses the resulting monies to buy back PIN’s shares,” he wrote.

“In addition, the board should provide a detailed and transparent assessment of the company’s historical performance, the returns on the investments it has made and set out a clear strategy to address its performance issues, which amounts to more than trying to better time the market.

“If none of these actions can achieve a consistent single-digit discount, then it should bring forward a solution similar to Apax Global Alpha,” Sharp concluded. 

While Metage is a relatively small shareholder, its demand follows a similar intervention last month by US activist Saba Capital after it took a 5% stake in the company. That suggests an investor base that may believe Pantheon’s campaign to improve returns has faltered after a strong “step one” saw it buy back £200m of shares, mostly through a tender offer in 2023. 

PIN’s fact sheet shows its underlying net investment return has underperformed the MSCI World index over one, three, five and ten years up to 31 August. The performance gap is widest over three years with an annualised net asset value total return of 2.2% versus the benchmark’s 13.3%. 

Excluding the positive impact of buying back cheap stock, the actual investment return from its portfolio of funds and direct company stake only been 0.3% a year since 2022, Metage calculates.

This prompted Sharp to comment that “something fundamental” changed that year with a suspicion that higher interest rates had left Pantheon’s private companies unable to deliver sufficient earnings growth to cover increased finance costs, and that historic acquisitions to increase earnings had been too expensive in retrospect. 

The “step two” of a new capital allocation framework unveiled by outgoing chair John Singer had not lived up to expectations, with £57m of shares repurchased in the last financial year, with buybacks only made when the shares stand more than 20% below NAV.

He said PIN’s planned third phase of increased marketing lacked credibility given the chronic wide discounts that had persisted across the listed private equity fund sector for years.  

Analysts have pointed to rivals such as HarbourVest Global Private Equity (HVPE), which has done more than PIN in allocating 30% of the distributions it receives from investments to share buybacks. 

Sharp said the £500m buyback proposal was “the minimum which we believe will make a meaningful difference”.

Our view

James Carthew, head of investment company research at QuotedData, said: “There is a lot to unpick from Metage’s criticism of Pantheon International. “Something fundamental appears to have changed in 2022” feels bleeding obvious – the rise in interest rates hit valuations. We all know that a lack of exits from private equity has held back NAVs in recent years, and that has changed in the months since Liberation Day in April. We also know that much of the rise in listed markets has been driven by the AI-related US mega-caps and there is no way that a diversified private equity portfolio would be able to keep pace with that. The criticism of a capital allocation policy that results in the highest distributions to shareholders happening when exits are at their peak is odd. Surely this is also likely to be when exuberance in valuations is at its highest?

“There is another factor at work here. The cost disclosure debacle encouraged wealth managers and others to disinvest from listed private equity funds over the past few years, weighing on the discounts. The recent resolution of that problem could change that for the better.”