Podcast Summary: The 10X Capital Podcast - Episode E116

Title: How Everyday Investors Can Access Private Equity w/Pantheon ($70B AUM)
Host: David Weisburd
Guest: Victor [Last Name], [Position] at Pantheon
Release Date: November 29, 2024

1. Introduction to Pantheon and Victor

David Weisburd welcomes Victor to the 10X Capital Podcast, highlighting Pantheon's stature in the private equity landscape. Pantheon, established in 1982, has evolved into a global integrated fund of funds platform managing nearly $70 billion in capital, including $7 billion in evergreen capital.

Notable Quote:
Victor (01:00): "Pantheon is a global integrated fund of funds platform. We were set up in 1982 and over a little bit more of 40 years we have effectively created multiple franchises within the firm across private equity infrastructure, private debt, and real estate."

2. Pantheon's Evergreen Fund Franchise

Victor delves into Pantheon's Evergreen Fund franchise, tracing its origins to the launch of the PIP listed trust on the London Stock Exchange in 1987. This vehicle, nearly $3 billion in AUM, stands as one of the industry's first evergreen funds. Building on this success, Pantheon introduced a similar fund in the U.S. in 2014, focusing on secondaries and co-investments in small to mid-cap segments.

Notable Quote:
Victor (02:32): "Our ambition was to provide that access to the wealth community or maybe some of the smaller institutions so that they can also benefit from what we think are compelling returns."

3. Understanding the Evergreen Structure

The Evergreen structure is characterized by its perpetual nature, lacking a fixed expiration date unlike traditional closed-end funds. This allows for the reinvestment of distributions, fostering continuous capital growth. Victor emphasizes the reduced administrative burden and enhanced capital efficiency that evergreen funds offer, making them particularly appealing to private wealth investors.

Notable Quote:
Victor (03:14): "Evergreen means first of all that there is no expiry date on the vehicle... those evergreen funds effectively achieve or solve all of those issues."

4. The Future of Evergreen Funds

Victor predicts a shift towards evergreen structures among top GP managers within the next five years. While he acknowledges the complexity and resource intensity of establishing such funds, he believes that top quartile managers will explore evergreen options to enhance user experience and maintain consistent returns.

Notable Quote:
Victor (05:15): "The user experience of evergreen funds is the future... top quartile small cap and mid cap GP... it just makes sense to at least explore that second option."

5. Tax Implications of Evergreen vs. Closed-End Funds

The conversation touches on the tax efficiencies of evergreen funds. Victor explains that unrealized capital gains remain at the vehicle level, allowing for potential tax deferral until redemption. However, he notes that tax implications vary based on jurisdiction.

Notable Quote:
Victor (06:26): "Your unrealized capital gains will effectively be held at the vehicle level... there is a scenario where if you don't redeem from the fund, you may not crystallize any form of capital tax events."

6. Target Audience for Evergreen Funds

Pantheon's evergreen funds cater to investors with substantial wealth, income, and investment knowledge. The target customers include Tier 1 institutions like major banks, Tier 2 smaller banks and large asset managers, as well as family offices and independent wealth advisors. Victor highlights the significant opportunity in expanding private markets allocations within the wealth community.

Notable Quote:
Victor (07:01): "We're looking at investors who understand public markets and private markets, have a certain amount of activity in terms of investing their assets and understand the illiquidity that comes with this type of exposure."

7. Addressing Adverse Selection in Evergreen Structures

David raises concerns about potential adverse selection, questioning how high-net-worth individuals can avoid being left with lower-quality investments. Victor counters by explaining Pantheon's selective approach, emphasizing their rigorous buy list of top 1.2-1.4% of buyout managers and highlighting their focus on small to mid-cap strategies that offer compelling returns without the pitfalls associated with large-cap funds.

Notable Quote:
Victor (08:31): "We bring that&inclusion; differentiated exposure that, frankly, a lot of the wealth community hasn't been able to access."

8. Portfolio Construction and Diversification Strategies

Victor outlines Pantheon's portfolio construction principles, emphasizing diversification across geography, sector, vintage, and GP relationships. By maintaining a balanced mix of small, mid, and some large-cap exposures, Pantheon ensures resilience and optimized compounding within their evergreen funds.

Notable Quote:
Victor (16:56): "We pay attention to different vectors across geographies, sectors, vintage as well GPTs and all the way down to the actual idiosyncratic factors of the deals."

9. Fee Structures: Primary vs. Secondary vs. Co-Investments

The discussion shifts to the fee structures of various private equity access methods. Victor compares the traditional primary program fees (1.5-2% management fee plus 20% carry) with secondary market purchases and co-investments, which typically offer lower fees or even no fees. Pantheon's approach allows clients to benefit from immediate capital gains and reduced fee burdens through strategic secondary purchases and co-investment opportunities.

Notable Quote:
Victor (17:52): "With that discount, I think comes an ability for Pantheon and typically the secondary market to price in the fee load of those primary commitments into your purchase price on day one."

10. Co-Investment Strategy and Benefits

Victor elaborates on Pantheon's co-investment strategy, highlighting its selective nature—closing approximately one deal out of seven. This meticulous approach ensures alignment with top-performing GPs and maximizes net performance by minimizing fees. Co-investments allow investors to participate in high-potential deals without the usual fee structures, enhancing overall returns.

Notable Quote:
Victor (21:11): "For every dollar that you invest in that co-investment bucket, you effectively write off a dollar of full fees that you would pay somewhere else or you balance it out."

11. Evergreen Structures in the Venture Capital Ecosystem

When questioned about the applicability of evergreen structures in venture capital, Victor expresses caution. He notes the inherent volatility and unpredictable distribution patterns in venture, which pose challenges for the deterministic reinvestment model of evergreen funds. Despite these challenges, he acknowledges the potential for evergreen models in later-stage venture but emphasizes the significant differences from private buyouts.

Notable Quote:
Victor (26:20): "Venture can go all the way to early stage growth... evergreen funds need some form of predictable distributions so that you can recycle those distributions and compound them to the benefit of your investors."

12. Small Buyouts vs. Venture Capital: An LP’s Perspective

David poses a critical comparison between small buyouts and venture capital, questioning the allocation of limited partner (LP) capital. Victor argues in favor of small buyouts, asserting that they offer better risk-adjusted returns, alignment with managers, and lower fee structures. He debunks the myth of volatility in small-cap private investments, emphasizing their profitability and growth potential compared to large-cap funds.

Notable Quote:
Victor (29:06): "If you go into small cap and mid cap GPS or small cap GPS, you're going to be buying smaller assets... better alignment... you're investing with the principal."

13. Final Remarks and Pantheon's Vision

In closing, Victor underscores Pantheon's commitment to client-centric solutions, innovation, and cost efficiency. He highlights Pantheon's pioneering role in the semi-liquid private equity space and their dedication to providing access to small and mid-cap opportunities for the wealth community. Victor expresses enthusiasm for Pantheon's future endeavors in delivering differentiated risk-reward profiles and fostering enduring client relationships.

Notable Quote:
Victor (32:48): "Pantheon is really a firm that has the interest of the clients at heart... what matters here is the risk spectrum is not size. It's actually how much you pay, what's the leverage and how much the asset will grow."

Conclusion

This episode of The 10X Capital Podcast offers an in-depth exploration of Pantheon's innovative approaches to making private equity accessible to everyday investors through evergreen fund structures. Victor provides valuable insights into the advantages of small to mid-cap investments, strategic portfolio construction, and cost-efficient fee models, positioning Pantheon as a trailblazer in democratizing private market access.

For listeners seeking to understand the nuances of private equity investment opportunities beyond traditional institutional confines, this episode serves as a comprehensive guide, enriched with expert perspectives and actionable strategies.

Listen to the full episode here to gain deeper insights into making private equity accessible and maximizing your investment potential with Pantheon.