PRINT THIS PAGE Institutional Investor Profile: Colin Wimsett, Managing Partner, Pantheon Ventures09/04/2008. Source: AltAssets. 
Colin Wimsett on mega funds and venture capital, on Pantheon's due diligence process, on avoiding the tick-box approach, on emerging markets and on investment opportunities following the credit crunch. 
Pantheon Ventures, part of Russell Investments, is a London-headquartered private equity primary and secondary fund of funds manager with offices in San Francisco, New York, Hong Kong and Brussels. The firm, originally established in 1982 as the private equity investment division of GT Management, has a long history in private equity investing. In addition to its US, European and Asian fund of funds programmes and special mandates, it also runs a listed vehicle, Pantheon International Participations.
Pantheon has $22.6bn in assets under management (31 December 2007) and employs 130 staff, including 60 investment professionals.
The firm closed both its fifth European fund of funds, the €1.2bn Pantheon Europe Fund V, and its seventh US fund of funds, the $2.25bn Pantheon USA Fund VII, in June 2007. Its fourth Asian fund of funds, Pantheon Asia Fund IV, closed on $595m in June 2006. Pantheon is currently also investing its third secondaries fund, Pantheon Global Secondary Fund III, which closed on $2bn in December 2006.
Wimsett joined Pantheon in 1997 from the West Midlands Pension Fund, where he spent nine years focusing on its private equity investments.
Having been in the private equity business for over 25 years, what have been the major changes at Pantheon?
'One thing we have always been proud of is that right from the start Pantheon viewed private equity as a global business and established itself as a truly global firm. Nowadays everything is global, but back in the early 1980s players in our industry tended to have a national or regional focus.
Throughout the years, we have expanded our office network. Last year we opened a new office in New York to have an East Coast presence. We are happy with our office network now and do not want to have more locations than we need to because we believe it makes the business harder to manage.'
What type of investments do you look for?
'Of our capital under management, currently we have about 80 per cent allocated to primary and 20 per cent to secondary investment. On the primary side, our target allocation is approximately 20 per cent venture, 70 per cent buy-out and ten per cent other, which covers special situations and directs.
Currently, we recommend to our clients that they have an equal weighting to the US and Europe, which is an overweight position to Europe because the US market is larger in terms of capital commitments to private equity. We also recommend a weighting of between five and ten per cent to Asia, depending on our investors' risk appetite. We review those weightings regularly.
When we look at Europe we look at the region as a whole. CEE is rapidly developing and we have made a few investments there. You have to distinguish between CEE and Russia. Pantheon has made small commitments in Russia, for a number of years, having started in the late 1990s investing in secondaries after the financial crisis. This has been a very successful strategy for us and as the market develops we are putting increasing amounts of capital into CEE. We have top-down weightings to the various regions.
In Europe, our venture weighting is between five and ten per cent. European venture has been a tough market and you would not do European venture on the basis of historic returns. You have to be a believer in the future. There are some positive trends and a few good, stable teams. What we look for in a European venture capital firm is that they have networks in the US to take their portfolio companies to the US, where, ultimately, they still need to go to develop and find an exit.
In the US, we have the largest venture component, with between 25 and 30 per cent.
Within our private equity programmes we would also look at mezzanine and distressed debt strategies. We have done distressed debt funds in the US but not in Europe yet because the distressed debt market is less mature in Europe. We are fairly cautious on mezzanine funds. Historically, the returns that mezzanine funds have generated are just not as good as the buy-out returns and in many cases experienced comparable if not higher loss rates. There are still a few buy-out managers around in Europe that have never lost money on a deal! '
Among the geographies in which we see great future potential is Asia, a growing market, but still a region with high risk.'
How much of a role do co-investment play in your portfolio?
'We have started to increase our co-investment activity and believe the environment will be right to step this up over the next couple of years. In fact, over the past 18 months we have done 12 co-investments in Europe. We have just recruited Erik Wong, our first investment professional dedicated solely to European co-investments. He joined us last year from Abu Dhabi Investment Authority, where he was a co-investment manager. We are in the process of hiring a dedicated co-investment professional in the US as well.'
What is your view on today's secondaries market?
'Over the past 12 months it was a very challenging environment because pricing was very high and we were reluctant to pay the level of pricing that was prevailing in the market. Now there is a bit of a stand-off in the secondary market as normally happens at this point in the cycle because vendors do not quickly adjust their expectations to the changing market values, and that may well go on for another few months. Ultimately we see it being a very attractive environment going forward for the secondaries side.
With asset pricing going down, transactions should look more attractive. We have already seen a number of people who are doing a risk analysis of their portfolio and wanting to offload some of their private equity investments. Over the past four of five years many people have not seen a J-Curve and people new to the asset class sometimes do not expect to see a J-Curve, but the J-Curve is going to come back now because the pace of primary investments and of realisations is going to decline. You are not going to be able to re-cap investments within 12 to 18 months of making them and get your cost back. For us as a long-term investor private equity is just going back to what it always was.
Some people are going to have to shave part of their portfolios to be able to continue to invest and maintain access. Once their overall asset values go down, their private equity portfolios will be a larger percentage of their assets and they will have to manage their private equity portfolios more actively.'
How do you conduct your due diligence?
'Our aim is to know the entire manager universe. This is a people industry and we are keen to have a relationship with every manager at some level so that we have an opportunity to invest in every manger's fund. We categorise managers from A to D, with A being the managers in our portfolio and D being managers that we regard as non-institutional quality. We target our resources towards the A's and B's, essentially, but we would also be meeting the C's on a regular basis.
Typically, we would be talking to managers and negotiating our allocation well before their next fund is launched. That is the best way to get influence over terms and our allocation. Managers like to have some transparency about where the money is going to come from and they want to manage their investor base and have investors who provide them with constructive feedback.
Our formal due diligence starts with a New Investment Meeting Note, which would go to the weekly investment team meeting. At this stage, at least two investment professionals would have met the manager. If we know that it is very unlikely that we do the fund, we let them know quite soon and give them a constructive response.
If we decide that this looks interesting, we would appoint a team of at least two people who would explore the opportunties and risks involved with this investment. We not use questionaire'as is common in the industry as we believe we obtain a better understanding of the firm gaining information by discussion and dialogue. Our due diligence emphasises fact time with the fund management team preferably in their offices because there is no substitute for actually seeing the organisation. Their due diligence would lead to a Preliminary Investment Recommendation, which would need to be approved by the local investment committee and our investment management committee.
During the next and final phase all the issues and concerns that the committees have - they could include issues relating to how a fund would fit into our international strategy and the consistency of our strategy across the globe - should be addressed.'
What are the qualities of a good GP?
'We look for a group of seasoned, experienced investment professionals that are highly motivated and have deep respect for each other. We need to see that they are forward-looking, evolving their own business and investment strategies. Often when issues arise it is because managers have not evolved their organisation and their strategy as appropriate as time moves on.
The performance analysis is also very important and the numbers speak for themselves in a way, but the tough things are the qualitative judgements that you make about that performance: is the performance actually repeatable, with the organisation and with the people that they have.
Succession issues are very common reasons why we would reject a fund. Private equity managers are very entrepreneurially-minded, they like to be in charge of their own destiny, and those are the people that, naturally, do not deal with succession very well. Dealing with succession is evolution, not revolution.
Essentially, there is no perfect fund - every firm has its issues. You need to know a firm very well to identify those issues and to manage the risks associated with those issues. Many investors have their tick-box approaches and if they see any issues they run away from the fund. That is quite naïve because there are always issues. Clearly, managers will have tried to hide them, but often there are issues that become more obvious in some firms than in others and people run a mile. We find that those firms can be good firms with good qualities and they are just struggling with one particular problem. You can get great access to those firms and often they are very open and honest with you. We would do those funds if we think the problems are fixable and we can work together to fix them. We have done that type of investment a number of times and have had great success with our approach. Obviously, you have got the loyalty of those firms for life, having supported them and helped them continue their business.'
Do you invest in first-time funds?
'Yes, we did a couple in Europe last year, and we have done a few more elsewhere in the world as well. First-time funds are something Pantheon has always done and something we believe in. When we started out in the early 1980s, pretty much everything was a new fund.
Investing in first-time funds also helps address access issues as you can usually get quite a significant stake in the fund and maintain that over time.
People just starting out often have that extra incentive and drive that people who have been at an established firm for a long time do not necessarily have any more. The challenge for a first-time fund is to have the right collection of people. It is unlikely that we would invest with a team that has never worked together before and has no private equity investment experience.'
How would you describe the private equity market at the moment?
'On both the primary and the secondary side we are actually very positive about the environment we are going into now. If you look at the historic returns that have been generated by primary private equity activity in Europe, really the foundations of the private equity performance were in the early 1990s, when we went through a very bad recession and it was very difficult to raise money for private equity. The people who have benefited from the good performance of private equity funds globally over the past two to three years are those who invested in the funds in the early 2000s.
Much has recently been said about the large buy-out segment, but we will continue to do mega funds and I think the timing of individual investments is best left in the mangers' hands because they are the ones that see the deals in the market. If we do not deploy the capital in mega funds now, our investors will not have any capital to work with when good deals come along. It is all about selecting managers that are evolving their business models appropriately, applying new strategies, finding new markets and the growth areas, and are well positioned to take advantage of growth geographic markets such as Asia and CEE.'
What advice would you give to a new private equity investor?
'Private equity is a long-term asset class and you have to take a long-term approach to it. You cannot dip in and out of these markets. Times when it looks tough and difficult are often the times when you are making the money and you look back on with pride in the years to come. It is when everything looks wonderful that you have to be careful.
Another vital thing to remember is diversification. You will need a well-diversified portfolio - by geography, by sector, by vintage and by stage.'
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