Active risk management
PIP has a robust approach to managing risk at all stages of the investment process.
The best private equity managers are able to deliver market-beating returns over the long term, but the performance of individual private equity managers can vary more widely than the performance of other types of asset managers. PIP provides access to many of the best private equity managers in the world through a well-diversified portfolio of funds and underlying company investments. The construction of PIP’s portfolio is managed by Pantheon, one of the world’s leading private equity investors, and is overseen by a strong, experienced and independent Board of Directors.
Four pillars of active risk management
1. Portfolio construction & diversification
Flexible investment approach and diversification across investment type, stage, private equity manager, vintage year, geography and sector.
2. Manager selection
Selecting the right private equity managers globally based on deep relationships, experience and rigorous analysis.
3. Strong financial position
Managing PIP’s balance sheet prudently so it can comfortably finance its undrawn commitments and make new investments.
4. Independent Board of Directors
PIP is overseen by an experienced Board of Directors that is accountable to shareholders.
We believe that the diversification of investments by type, stage, sector, private equity manager, geography and vintage year is fundamental to managing risk as it ensures that the portfolio is not overexposed to any one segment of the private equity market. It also reduces the risk of any single company or fund that happens to underperform having an adverse impact on overall performance. PIP invests with a range of high quality managers across the world offering different investment strategies. At the same time, PIP seeks to manage the level of diversification in its portfolio so that over time, outperformance of individual investments can boost the overall return of the portfolio.
Find out more about PIP’s portfolio here.
By investing across funds of different ages, known as vintages, PIP is able to manage its cash flow, balancing investments into new funds with cash generated from the sale of portfolio companies. At the end of May 2020, the weighted average fund age was 5.1 years. This has been achieved by managing PIP’s investment pace to balance new investments across primaries, secondaries and co-investments. Primaries and co-investments provide exposure to younger vintages – which are typically in the value creation period – and secondaries provide exposure to funds which are typically in the “harvest” period.
PIP is offered the opportunity to invest in the full range of private equity investments sourced for it by Pantheon. PIP invests alongside other Pantheon-managed funds directly into third party funds and underlying companies. This offers a number of benefits including:
- Being able to remain nimble and in control of investment strategy; overseen by the Board.
- Reduction of financing risk – PIP is able to accept or decline investments according to its financial resources at the time.
- The flexibility to vary the size of its commitments as appropriate and in line with any adjustments to its investment strategy. It can also respond to the opportunities and challenges presented by prevailing market conditions.
- Lower cost due to the elimination of expenses that can arise in intermediate vehicles.
Our ability to construct and maintain a resilient and well-balanced portfolio reflects the strengths of Pantheon’s relationships, experience and expertise.
We believe that private equity manager selection is critical to generating healthy risk-adjusted returns in PIP’s portfolio over the long term. A manager’s likely future performance can be assessed by analysing their organisation, detailed past track record, investment strategy and competitive positioning.
However, selecting and investing with the best managers requires skill and experience. Through its access to Pantheon’s platform, PIP benefits from the powerful blend of market-leading intelligence to identify and monitor the best managers, as well as the longstanding and deep relationships to secure access to them.
Our private equity manager selection is underpinned by a rigorous and thorough due diligence process. This entails deep scrutiny of the organisation, track record and strategy of the manager. The impact on the overall blend of PIP’s investments, including a sharp focus on diversification, is also assessed on a case by case basis.
PIP benefits from Pantheon’s bespoke portfolio analysis tool for evaluating a manager’s underlying assets. Highly valuable information and insight is drawn from this, including performance analysis of current and past investments, as well as key portfolio metrics.
Identify key capabilities and drivers of success:
- Decision making dynamics
- Robustness of systems and processes
- Business culture
- Manager life cycle
Detailed assessment of the manager’s track record, applying propriety tools:
- Understand value creation mechanisms
- Identify contribution of key individuals and sector, stage and geography exposures
- Cross-reference track record with proposed strategy
Develop a view on effectiveness and relevance of the private equity manager’s strategy:
- Evaluate manager’s skill-set and assess ability to deliver strategy according to plan
- Benchmark manager against relevant peer group
- Identify threats to successful execution of stated strategy
Assess investment fit with portfolio and impact on diversification by:
- Vintage year
- Evaluate alternative private equity managers to ensure optimal portfolio fit
Find out more about Pantheon’s detailed investment process here.
Pantheon’s scrutiny of our private equity managers does not stop after the initial investment. The same rigour and detailed analysis takes place throughout the investment cycle with performance at a fund and portfolio company level continuously monitored.
One of the key benefits of this active and thorough approach is that it highlights emerging issues allowing for pre-emptive action. The action taken by Pantheon in response will vary according to the circumstances, but will typically include engaging with the manager to understand and agree how a specific issue is to be addressed. Pantheon’s position on 415 advisory boards (as at 30 November 2019) of its private equity managers offers an additional level of scrutiny and access to information.
PIP’s systematic approach to manager selection and ongoing scrutiny is based on years of experience and expertise. One of PIP’s key strengths is our ability to mitigate risk while maximising capital growth over the long term.
PIP also focuses on managing environmental, social and governance (“ESG”) risks within its portfolio. Pantheon is committed to the integration of sound ESG principles in its pre-investment due diligence and post-investment monitoring processes.
Find out more about our approach to responsible investing here.
PIP maintains a prudent financial position to ensure that it is able to finance its undrawn commitments as well as invest in new opportunities. Undrawn commitments are investments that PIP has committed to but for which the capital is yet to be collected by the private equity manager. PIP is contractually obliged to finance these undrawn commitments. PIP’s balance sheet is managed to ensure that committed future payments are proportional to assets and available financing. Available financing is defined as a combination of net available cash and an undrawn multi-currency revolving credit facility which remains in place until June 2022.
The diagram below demonstrates that PIP is able to meet its future commitments.
PIP’s undrawn commitments according to vintage are shown in the chart below. As at 31 May 2020, approximately 23% of PIP’s undrawn commitments are in fund vintages which are 2013 or older. Generally, when a fund is past its investment period, which is typically between five and six years, it cannot make any new investments and only draws capital to fund follow-on investments into existing portfolio companies, or to pay expenses. As a result, the rate of capital calls by these funds tends to slow dramatically.
This disciplined approach to managing its balance sheet enables PIP to withstand periods of volatility and to take advantage of any compelling investment opportunities that may arise during a market downturn.
PIP is overseen by an independent and highly engaged Board of Directors. The Board, which is comprised of industry leaders with significant experience and expertise, is responsible for ensuring that PIP is managed in a way that achieves the best outcome for its shareholders.
The Board works actively with the team from Pantheon to review the appropriateness of PIP’s strategy, and monitors performance and market conditions to ensure that PIP’s long-term goals are met. The Board also conducts regular reviews of the balance sheet and long-term cash flow projections.
The high calibre and true independence of the Board, which is led by Chairman Sir Laurie Magnus, provides an additional level of rigour in managing risk and protecting shareholders’ interests.
Find out more about PIP’s independent Board here.
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