The power of private markets

Andrew van Sickle: Perhaps we should start by clarifying exactly what private equity (PE) is; people often get confused about what it covers.

Helen Steers: PE is simply investment in the equity of privately-held companies. These can be companies at various stages of growth – everything from start-ups to mega-caps. People often get a bit mixed up with the term “venture capital”, which is part of the spectrum of PE. It tends to focus on the early stages of investing in a company, when there are usually no profits and frequently no revenue. Once the firm reaches a certain stage of growth, later-stage investors may take a stake.

Andrew van Sickle: Would you tell us about your fund and how it works?

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Helen Steers: We are one of the oldest established private equity vehicles on the London Stock Exchange and a component of the FTSE 250. The trust was floated in 1987 with a value of £12 million and now its net asset value (NAV) is £2.3 billion.

Andrew van Sickle: And it’s always been a closed-ended fund?

Helen Steers: Yes. It invests directly in private companies, but also in private-equity funds. It doesn’t go via other Pantheon-managed vehicles. Over time, it has evolved from being what we call a secondary investor (buying stakes from other investors) to having a majority of its assets in directly held private companies. Now 55% of the fund comprises direct stakes in companies and 45% is in PE funds managed by others.

We aim to provide access to top-quality PE on a global basis and across the size spectrum – from venture capital (which tends to feature very young companies), through to small- and mid-caps, our bread and butter, and large caps.

It’s worth underlining at this stage that private equity is an illiquid asset, and that investment trusts are ideal for holding illiquid assets, as there is no prospect of being a forced seller. Thanks to the closed-ended nature of the fund, you don’t have to sell assets to cover redemptions, as is the case with open-ended funds – remember that panic with commercial property funds and unit trusts a few years ago. So we can focus on the long term.

Furthermore, investment trusts are easily available to everyone; they can be put in Isas and Sipps. They give the average person access to a fascinating and fast-growing sector. Without them, it’s usually only the very wealthiest individuals that can gain access to PE. Why should that be? At Pantheon, we are on a mission to democratise PE.

Andrew van Sickle: What are the key growth areas you are currently interested in?

Helen Steers: About half the trust is invested in two key sectors: information technology (IT) is 33%, healthcare 20%. Each of those sectors is enjoying structural growth owing to trends that we don’t think are going away in the short term. IT is profiting from digitalisation and automation, and we are still in the early stages of those two developments. Healthcare is interesting, too, thanks to ageing populations and the pressing need in all developed countries for better-quality, more efficiently delivered healthcare products and services.

We have steered away from the consumer discretionary sector, which tends to be very cyclical. We tend more towards defensive investments when it comes to households. Our third-biggest sector holding is consumer staples. That includes Action, the Dutch discount retailer. It’s one of our top-three holdings.

Within the consumer sector, education is a big area for us: tertiary education businesses, essentially. So for example, we own a stake in a chain of private universities. We’ve been in private schools in Asia. Those are growing very strongly.

Note that our holdings are growing profits faster than the companies in the MSCI World index. The Ebitda growth in our mature businesses was 17% a year in 2024, and over the past five years, the annualised Ebitda growth has averaged 19%. So these are fast-growing firms. Nor are they overly leveraged, as we tend to focus on small- and medium-sized firms. You don’t put a lot of leverage on growth businesses. So high interest rates, often considered a problem for PE, wouldn’t be much of a hindrance here. Rates also look more likely to moderate from here.

Andrew van Sickle: So it’s a global spread with a skew towards secular growth. What’s the geographic spread?

Helen Steers: The US accounts for 54% of our assets. We’ve been orientated towards America from the very beginning. The US is the biggest market for private equity, not just at the venture-capital end, but all the way to the buyout end. And it’s where you’ve got some of the best managers in the world, with some very exciting companies. Around 31% of the fund is in Europe, mostly northern Europe. We especially like Scandinavia and the Nordic region more generally.

Andrew van Sickle: Europe always has this sleepy reputation, but there’s plenty going on beneath the surface, and many companies take a global perspective and derive most of their sales from outside Europe.

Helen Steers: That’s true, and especially in the sectors we’re involved in. You can’t really have an IT company that’s just focused on one particular geography, for instance. There are some very intriguing European firms that are rapidly growing their export markets. Our second biggest holding is Visma, an Oslo-based software-as-a-service business, which caters for (mostly European) small and medium-sized businesses. It developed and distributes accounting, HR and payroll software – mission-critical stuff that firms can’t do without.

Andrew van Sickle: How are things looking in Asia?

Helen Steers: The development of the PE market is quite a long way behind that of the USA and Europe. There are fewer leading managers than in Europe or North America. We keep an eye on Asia, and have been active there, largely in developed Asia, but it’s not a key focus for the fund.

Andrew van Sickle: What about Japan? One hears about PE helping to shake up corporate governance.

Helen Steers: That’s still the beginning of a long process, I think. More broadly, so far, the PE market hasn’t really taken off, although there have been several false dawns. So we don’t have much invested in Japan.

Andrew van Sickle: Zooming out a bit now, PE has been in the spotlight because of a listings drought, and investors are increasingly realising that some of the fastest-growing companies aren’t on stockmarkets.

Helen Steers: The number of public companies has been shrinking for around 20 years, and it is a global phenomenon. One key reason is that regulations have become increasingly onerous, and short-termism (companies focusing on earnings presentations every three months) plays a part, too. PE fundamentally takes a long-term view. Moreover, private companies don’t feel the need to go public as much these days. Private markets have developed to the point where it’s now possible to raise a great deal of money privately; firms often needn’t go public at all.

Also, consider this. Amazon, Alphabet and Meta were all private companies that went public. Amazon did so in 1997, when it was only three years old; Alphabet in 2004, when it was just six. Then in 2012 it was Meta’s turn, and it had been around for eight years. So companies heading for the stock market are doing so later and later.

And that means the key phases of strong growth, innovation and value creation are increasingly occurring when the company is unlisted. If you wait for an eventual listing, you will have missed a lot of value creation. So this is another reason why investors are realising they need access to PE.

Andrew van Sickle: Let’s move on now to the major discounts in PE investment trusts. We always tell readers that one of the best things about investment trusts is that we can often get them on a discount to NAV; in other words, we can buy a pound’s worth of assets for less than that. In the PE sector, the discounts have been very wide following all the market dislocations of the past few years.

It seems investors think the PE trusts’ holdings won’t be worth the figure at which the trust values them on its books. Yet you said a few months ago that when your fund comes to sell firms, the valuations are much higher.

Helen Steers: Yes, that’s absolutely true. The discounts reflect excessive pessimism. We measure something called the uplift on exit. Every time one of our companies is sold, we compare its last undisturbed valuation with the cash we receive for the sale. Cash doesn’t lie.

When we do that comparison, we invariably get an uplift. And over the last ten years or so, the uplift has been roughly 30% above the last valuation. Even in the last year, when there were fewer exits, there was a 20% uplift on exit.

We also look at the exit multiple we get – a comparison of the sale price with what we paid for the firm. In the last few years, our average exit multiple has been three times. So we made three times the money on the companies that have been realised.

All this is perfectly clear from our reports and accounts, but people often don’t look closely. There is this pervasive idea that valuations in PE are always murky and practically invented off the cuff. But we kick the tyres very thoroughly, while funds and fund managers are also subject to audits.

Andrew van Sickle: Let’s finish up by delving into your top holding. Action and Visma, which you have already mentioned, are your third- and second-biggest ones respectively. What’s no.1?

Helen Steers: It’s Switzerland’s Kaseya. It’s an IT outfit specialising in cybersecurity packages for IT departments. There is plenty of secular growth in cybersecurity, especially as we all get more and more connected devices. And the cost of breaches climbs ever higher.

The other two we’ve talked about, but I thought I’d highlight our fourth-biggest firm, too. Smile Doctors, an American company, specialises in orthodontics. That’s another interesting secular trend.

When I was growing up, it was largely a case of children being the main source of demand. Now adults, often prompted to a large extent by Zoom and Teams meetings, increasingly want their teeth to look perfect.

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