Pantheon sees rise in co-investments, private wealth demand

UK-based Pantheon is a private markets fund-of-funds manager focusing on private equity, infrastructure and real assets – not including real estate – via primary and secondary investment and co-investment. 

As of December, Pantheon had $33.3 billion under management, of which $3.5 billion is in Asia, and it has raised eight Asian commingled funds since 1994. The firm employs 13 staff in the region, including eight investment professionals, out of its global investment team of 71.

Brian Lim is Hong Kong-based partner and head of emerging markets investment. He joined the firm in July 2009 from PE fund-of-funds manager CDC Group, where he was a portfolio director.

Q Where have you seen interest from Asian clients?

Korean institutions have been interested across the board, including showing increasingly strong interest in secondaries, infrastructure and real assets. They have shown a lot of appetite for new investments and have increased allocations in these three areas over the past three years.

We also expect to see an opening up of the Japanese market. People have been waiting for quite a long time to see institutions there invest more in private equity. There’s certainly been a lot more public noise about many of these institutions – such as the Government Pension Investment Fund and Japan Post – wanting to build alternatives programmes, and in particular a PE programme.

Q How about on the private client side?

It has traditionally been harder for retail clients to access private equity because of a few hurdles. One is that the minimum size of investments has tended to be relatively higher than for other mutual fund products focusing on bonds or equities. Two, PE has traditionally been relatively illiquid with a longer-term horizon than many individuals are looking for. 

Q Have you seen private banks increasingly looking to take an allocation to your strategies and package it for their clients?

Yes we’ve seen more of that. There’s increasing interest from private banks to gain access to private equity, as their clients have been asking them more about this asset class. Pantheon has developed a capability to address this and has established a dedicated private wealth team. 

Q Are you seeing more demand for pre-identified assets and co-investments as opposed to blind pools?

Institutions still recognise that the PE model is suited to blind pools. The industry hasn’t become completely deconstructed so it’s just deal-by-deal. There is a logic to be able to raise a blind pool so that you have certainty of funding, so that you can go after deals.
We’re not seeing a rush from our investors to move away from blind pools. But we have seen more interest in direct strategies such as co-investments.

This trend started from a lower base, so the growth is quite substantial. But there is also increasing recognition [of this trend] from GPs, who now proactively offer co-investments. There was a time when they were a bit of an afterthought, when people offered them because a deal was too big [for them to do otherwise].

Now there is a whole structure around co-investments – they are often used as a strategy for building relationships.

However, a lot of people say they want to do co-investments, but they’re not necessarily equipped to do them in the way they’re structured and the way their internal decisions are made. Co-investment requires more company-specific due diligence than going into a fund.

Q Are more homegrown Asian PE managers getting up to the standard you’re looking for when you allocate to GPs?

Absolutely. The Asian PE market has changed dramatically from what it was 10, 15, 20 years ago. In the 1990s, there were the Asian tigers – Hong Kong, Taiwan, South Korea, Malaysia, Thailand etcetera. It was a different set of companies that were driving economic growth, via export-led business.

What we’ve seen in the years since is homegrown Asian teams grow in stature and experience, so you do have a number of very prominent private equity institutions. They would meet the standards you would expect from any top-tier global PE firm in the US or Europe. 

Q Which areas or sectors are you focusing on these days?

Post the Asian financial crisis and a lot more forcefully from mid-2000s onwards you’ve seen the onset of the consumption story; the growth of the middle class as an investment opportunity. We’ve been backing that theme since then, and that’s where most of our capital is going in Asia.

Q Can you be more specific about the types of assets you have been looking at recently?

There are two areas that have been attractive from a growth point of view, particularly in the past couple of years. 

Healthcare has been one of the stronger-performing sectors in the region. The base demographics are quite attractive. So the provision of various services has been coming from a low base, whether it’s private hospitals, maternity clinics, specialised tertiary care, GP clinics, cancer care, diagnostics, labs, contract research outsourcing. 

The other sector has been education. There has been a fair amount of investment into private schools, technical skills, English training, certification, private universities, kindergarten chains. There is a growing number of people who want something better for their children than they experienced. 

Q Do you have concerns about GPs’ funds being too large to deploy effectively without overpaying for assets?

When we’re looking to deploy capital with GPs, we look at the ability to responsibly and effectively deploy capital, and if it’s too much capital, we would say no. Our investors treat us in the same way.

Q There has been a trend for institutional investors to work with fewer asset managers but deepen those relationships. Have you seen this?

We’ve been noticing that and have been a beneficiary of that trend in the secondaries market. We’ve seen some institutional investors wanting to cut down on the number of relationships and offload some funds in the secondaries market. They’re not necessarily bad funds – it’s just that some institutions’ PE programmes have been so successful and grown so large that there is a consolidation exercise required to bring the portfolio to more manageable levels. 

The segment of the market that has lost out from this trend is some of the first-time funds; GPs that are early on in their life cycle.

So from a position a few years ago where money was being spread around more widely, there are now fewer relationships being built. Many want to focus on a core set of more established managers.