Pantheon, a private equity fund-of-funds, reckons private equity groups should tap into changes in the pension fund industry. The days of defined pensions are steadily coming to an end with almost no new policies of this type issued now. Pensions are now based on performance models. “The pensions industry is a good source of funding for private equity, but that industry is changing and private equity groups should adapt to that,” says Andrew Lebus, Managing Partner at Pantheon. Indeed, the two should remain ideal partners. Both have long-term outlooks and neither is generally susceptible to short-term market movements.
The UK has been encouraging individuals to take out stakeholder pensions or Self Invested Pension Plans (SIPPs), which allow them to select their own investments. Pantheon, which in 1987 launched its stock market listed private equity investment trust, Pantheon International Participations (PIP), is keen to take advantage of this growing source of pension money. “PIP is an important vehicle for attracting these types of investors,” says Lebus.
The British government has passed legislation to ensure these self-managed pension schemes flourish and incentivises tax-payers to invest in them. Typically a provider of stakeholder pension plans such as Legal & General or Halifax Bank of Scotland (HBOS) will allow investors to choose from a range of up to 20 funds to invest in. Lebus says Pantheon would certainly seek to get PIP included within the fund selection. With SIPPs, investors can invest in any listed product and in some cases non-listed ones as well.
Another benefit of bringing stock market money into private equity is that it more closely aligns the interests of the investing public with the industry, which might help address some of the criticism from trades unions that private equity sometimes operates against the interests of the wider public. In terms of opportunities, Pantheon sees potential in distressed debt, mezzanine finance and growth capital and in assets at distressed prices, due to the credit crisis.
For example, Dallas-based private equity group, Lone Star Funds, bought Collateralised Debt Obligations (CDO) backed by Mortgaged Backed Securities (MBS) from Merrill Lynch with a face value of US$30.6bn, but only paid US$6.7bn, a mere 22 cents on the dollar. Not only that, but Lone Star only committed US$1.67bn with Merrill Lynch putting up the balance as debt. Although, some of the mortgages supporting these securities are expected to default, the rate should never get anywhere near 78%.
In terms of regions, Pantheon expects increasing deal flow in Central & Eastern Europe (CEE) and also the Nordics over the long term, which benefit from advanced private equity markets. “The Scandinavian countries have escaped the worst of the credit crunch,” says Helen Steers, Partner with Pantheon. “Our own investments in the region have performed extremely well.”
Another trend suggested by Pantheon could be a gradual reduction in the number of private equity funds. “We don’t see them merging as such. What’s more likely is that underperformers will gradually fade away as their portfolios are wound up,” says Steers. “However, the steadily developing secondary market could in future speed up the liquidation of underperforming funds.” On the other hand, she notes that new funds also get started up all the time as people spin out from existing GP firms. “It’s a sort of creative destruction,” she says.