E116: How Everyday Investors can Access Private Equity w/Pantheon ($70B AUM)

Victor Mayer, Managing Director, Head of Private Wealth at Pantheon sits down with David Weisburd to discuss why top GPs are rushing to evergreen funds, how Pantheon balances small-cap potential and large-cap stability, and the benefits of Pantheon’s no-cost co-investment deals.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  Large cap funds are just getting larger. And what it means is that you still have that very small number of companies where the amount of dollars chasing those companies just keeps on getting bigger. And so what you have there is GPs who struggle to differentiate versus each other and have to differentiate in pricing, which means that they typically use more leverage. And you can argue that some of the quality or the selectivity ratio is also diminishing. Because if you need to deploy capital as a large cap fund, you have three or four year investment period, you can't just sit around and wait for years to come your way. So the combination of higher pricing, pressure to deploy, higher leverage, we think is not necessarily the best place to be for private wealth investors.

• 0:39Speaker 01

  What are the characteristics across the 1.2 to 1.4% of buyout managers that are on your buy list?

• 0:45Speaker 00

  What we try to look for is a clear focus in terms of four key dimensions.

• 0:53Speaker 01

  Victor, I've been excited to chat since our friend Mikhail Bankovich from Unicorn Strategic Capital introduced us. Welcome to 10x Capital Podcast.

• 0:58Speaker 00

  Thank you, David.

• 0:59Speaker 01

  What is Penton?

• 1:00Speaker 00

  So Penton is a global integrated fund of funds platform. We were set up in 1982 and 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. And in every one of those franchises, we have primary, secondary and co-investment capabilities. Today, we manage around a little bit, very close to 70 billion of capital. And all of that, around seven billion is evergreen capital.

• 1:33Speaker 01

  Tell me about your evergreen fund franchise.

• 1:35Speaker 00

  Yeah, so Penton, you know, was set up in 1982 and five years later, in 1987, we launched a listed trust on the London Stock Exchange called Pip. And that vehicle today has been active for 37 years. It has a little bit shy of three billion dollars of AUM. And, you know, really acts as one of the first ever evergreen vehicles to be launched in the industry. And then back in 2014, on the back of that successful UK experience, we launched a 1940 Act fund in the US. Today, that fund is one of the largest in the industries. It's focused on secondaries and co-investments in the small cap and mid-cap segments of the industry.

• 2:19Speaker 00

  And, you know, has been active for around 10 years. And then after that, so from 2023 onwards, we started working on the international version of the US semi-liquid fund.

• 2:29Speaker 01

  What is the purpose of the Evergreen franchise and tell me why it exists?

• 2:32Speaker 00

  Penton has always, you know, been at the forefront of innovation. And our aim really was to bring that institutional experience, you know, where we work with some of the largest allocators globally, to give them access to small cap and mid-cap. And 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. And then also, I think in an evergreen format, another feature of the Penton DNA is creating long-term returns, maybe for individuals or, you know, wealth distributors or smaller institutions and all the way up to sovereign funds. And so with those vehicles, we have the ability to serve those investors in a format that makes sense to them.

• 3:11Speaker 01

  Break down the Evergreen structure, how does it work?

• 3:14Speaker 00

  So Evergreen means, first of all, that there is no expiry date on the vehicle. So if you compare that to a closed-end fund, you would be looking at a vehicle that instead of distributing capital as and when assets are sold, will effectively take those distributions and recycle them to the benefit of investors. So that's one different feature. The other one is, on a closed-end format, what you get is an administrative burden can be quite arcane. So in that arcane dimension, you have a multiplication of capitals, a multiplication of distribution notices. And, you know, a need to monitor and spend resources, you know, human resources and time and money to effectively monitor your portfolio. Not to mention that when you get those distributions, you have to figure out what's best to allocate at that point.

• 3:57Speaker 00

  And so with that comes, I think, one of the key barriers to entry for private equity, which is, you know, having a team in place that can take care and look after your capital. And then even if you're successful in building a closed-end program, it's going to take you years to achieve your target NAV. So if you have a target net asset value in your strategic asset allocation, it's going to take you years to effectively get to that level and then significant additional commitments to maintain it. And so those evergreen funds effectively achieve or solve all of those issues. Single capital call on day one, highly funded portfolio, which is typically diversified in a pent and format, whereby you can achieve your NAV target quickly. And then finally, if you bring that to the small cap and mid-cap segments of private equity,

• 4:42Speaker 00

  where Penton, we spend most of our time,

• 4:45Speaker 00

  it is even more difficult to get access to that segment because the GPs are smaller, they tend to be oversubscribed, or at least the good ones. And then you need to build relationships with them over a long period of time, even before you can access them. And so we bring on top of the ease of execution, you know, user experience, which is a little bit easier. We also bring that differentiated exposure that frankly, a lot of the wealth community hasn't been able to access historically.

• 5:08Speaker 01

  When we last chatted, you mentioned that in five years or so, you expect most of the top GPs to have evergreen structures. Why is that?

• 5:15Speaker 00

  I think the user experience of evergreen funds is going to be the future. If you are a top quartile, small cap and mid-cap GP and you have generated consistent returns across a number of cycles and you operate in a niche, typically an intersection of region, segment and sector, and you can provide your investors with both a closed-end experience and an evergreen experience, it just makes sense to at least explore that second option. Now, to be honest, to build an evergreen program, you need multiple years. It's nowhere near easy. You need to start from the back office all the way to the front office, build your distribution channel, understand how you service those clients, very different servicing between wealth and institutional channels.

• 5:59Speaker 00

  And then also you need to understand that compounding in an evergreen format is a very different sport to generating a good IR in a closed-end format. And so I think a lot of those investors with top D side, top quarter and track records will consider that option, I have no doubt. But the real question is, can they really achieve it and when? Because it's a very different and resource-heavy and complex undertaking.

• 6:21Speaker 01

  Are there tax consequences to evergreen funds versus traditional closed-end fund structures?

• 6:25Speaker 00

  In terms of how you compound in those funds. Your unrealized capital gains will effectively be held at the vehicle level and the GP will be recycling on your behalf. And so there is a scenario where if you don't redeem from the fund, you know, you don't use the semi-liquidity feature, you know, you may not crystallize any form of capital tax events. And so to some extent, you know, that's something that may be a little bit more efficient. But again, you know, that really depends on individual countries and jurisdictions.

• 6:54Speaker 01

  It's like a 10-year fund is a forced distribution at year 10 is another way to think about it. Who is your target customer for a product like this?

• 7:01Speaker 00

  We effectively want investors who have a minimum wealth level, but equally have a minimum income level and a minimum knowledge level. So we're looking at investors who understand, you know, public markets and private markets have a certain amount of activity in terms of investing their assets and understand the illiquidity that comes with, you know, this, this, this type of exposure and the risks associated to the semi-liquidity feature, you know, in an evergreen format. Tier one would be your typical wirehouse, you know, UBS, JB, CT, HSBC, et cetera. Tier two would be smaller banks with tier high scale or larger asset managers. And then tier three would be your family offices, multifamily offices, independent wealth advisors, registered independent agents.

• 7:45Speaker 00

  And so the opportunity set is huge. You can see that institutions typically would have 10 to 20% of private markets allocations when the wealth community is more 2% to 4%. Now, the premiums that you can potentially get depending on your asset selection, you know, for the wealth community is significant. And so what we see is a real tailwind here, you know, a, a real trend of the wealth community accessing those funds directly and or through, you know, the, the tier one or tier two banks.

• 8:10Speaker 01

  When it comes to typical private equity funds, there's a criticism in the industry that by the time they get into the large wirehouses, all the alpha has been, has been absorbed and institutional investors are getting the alpha. And then the high net worth clients will get the fund 15, 16 in a franchise. How do high net worth individuals know that they're not being adversely selected in an evergreen fund structure?

• 8:31Speaker 00

  Let's break it down, right? I mean, what are the different dimensions of adverse selection? I think the, the main bias is that the larger banks Are incentivized to effectively raise more capital more efficiently. And so there's been, I think, that overwhelming flavor of large cap, you know, in those kind of on those shelves. Historically, you know, bigger banks are, you know, more comfortable. And I think, you know, quite rightly, you know, raising more capital in one go with a large cap brand. So that their marketing is a little bit easier and also you can still generate very good returns. Now, if you think about, take a step back here, the large cap universe is much smaller than the mid cap one. And so in terms of generating that alpha, I think banks, a number of banks are already distributing small cap and mid cap funds, in particular mid cap.

• 9:16Speaker 00

  But in terms of the evergreen wave, tier one landscape is dominated by those large cap, single GP branded evergreen funds. Now, going forward, you know, those funds will have significant deployment pressure because of the commercial success. And you may argue that some of them may experience some lower, you know, performance as a result. And so to your point, what's important there is that the banks themselves start diversifying their shelves. So incorporate more of that mid cap and lower mid cap alpha. And evergreen funds can play a key role there, because they bring that, you know, easy to sell, easy to understand and easily manageable format to the, to the clients. If you look at, you know, the wealth community is not only through banks, it's not only intermediated. A large part of wealth is direct access with no family offices, multifamily offices, asset managers.

• 10:01Speaker 00

  We can be a little bit more entrepreneurial, they have less inertia maybe than a tier one bank. And those groups are already all over small cap and mid cap, that's what we've experienced. Now that's why our US fund has been scaling so quickly. And our international fund is also on that same trajectory of scaling. And those investors who have more of that entrepreneurial mindset and understand the benefits of going away from large cap. You know, we really, I think, create momentum and scale those small cap and mid cap managers so they become eligible, you know, in terms of scale for that tier one distribution. Now, David, the second point, which is very important here, beyond the potential selection bias, ease of distribution, et cetera, is really the fees. And it's only natural that the more intermediaries you have between a client and a product, perhaps the more, you know, layers of fees you're going to have.

• 10:44Speaker 00

  And at Penton, we've, we've paid particular attention to this and there are multiple models emerging in the evergreen space.

• 10:50Speaker 01

  And how does it functionally work?

• 10:51Speaker 00

  Generally, allocation policies are based on, on the pro rata approach. So let's say you invest into a GP's program, you're going to have an allocation waterfall, as it's called. And more often than not, GPs would have what is called a pro rata approach, following a principle of fairness. And so you would effectively have a number of clients potentially participating in every single deal in that waterfall. And every one of those clients will have portfolio guidelines and concentration guidance. And so based on that, you can determine the actual bike sizes per type of deal that you want to bring to the, to the, to the vehicle or to the client. And then if there is over allocation in one of the deals and the capacity is constrained, at that point, you prorate everyone back based on their bike sizes.

• 11:34Speaker 00

  Um, I mean, Penton is, is, um, is, you know, you, you have to also keep in mind, most GPs are, you know, regulated, so there is a duty of fairness to, you know, transparency, fairness, and, you know, uh, following that, that prorate, prorata approach that, you know, most GPs will effectively be implementing.

• 11:50Speaker 01

  Tell me about Pantheon's thesis on small and middle market biofunds.

• 11:54Speaker 00

  The small cap and mid cap market is very compelling for a number of reasons. First of all, the universe of companies in the mid cap and small cap segments is way bigger than large cap. So you have more potential companies, companies to look at and buy and grow and, you know, in different sectors. And that typically really represents the, the, the reality of the economy, right? I mean, large cap and mid cap is the economy. Now, in the large cap space, the number of companies is much lower. They are worth a lot more, but you have less of them. So that's the, the supply part. In terms of demands, what we also like is that, you know, large cap funds are just getting larger. I think it's a feature of, of private markets these days and for the last five years, really. And what it means is that you still have the very small number of companies where the

• 12:37Speaker 00

  number of dollars or the amount of dollars chasing those companies just keeps on getting bigger. And so what you have there is GPs who struggle to differentiate versus each other and have to differentiate on pricing, which means that they typically use more leverage. And you can argue that some of the quality or the selectivity ratio is also diminishing because if you need to deploy capital as a large cap fund, you have, you know, three or four year investment period, you can't just sit, sit around and wait for, for years to come your way. So the combination of higher pricing, pressure to deploy, higher leverage, we think is not necessarily the best place to be in for, for private wealth investors. So that's the first part. The second part is, you know, we've looked at, um, a number of companies that we have invested in over a little bit more than 20 years. And what we have seen is a few key metrics.

• 13:21Speaker 00

  The first one is that in the small cap and mid cap segment of that population of companies, the top line growth on an annualized basis is a little bit higher. Every year, it's a little bit higher, but every year. So over time, that compounding power of annualized top line growth is actually quite powerful. Second, on the earning side, EBITDA, EBITDA side, what we've seen is that the actual delta between midcap and large cap is also higher, but a little bit more than the top line. And so what you see there is effectively some form of compelling signs that as we buy those smaller businesses, they can grow faster, but most importantly, they can grow profitably. You know, you have 10,000 GPs globally that we track and we only invest with 120 to 140 of them. We call that the buy list.

• 14:06Speaker 00

  So that's 1.2 to 1.4% of the private markets universe. And these GPs tend to have an intersection of factors that we like. So segment focus, sector focus, regional focus.

• 14:19Speaker 01

  What are the characteristics across the 1.2 to 1.4% of buyout managers that are on your buy list?

• 14:24Speaker 00

  In private equity, in the midcap segment, you want to be a local, speaking to locals. And so that buy list would be split between the US, Europe and Asia. And what we try to look for is a clear focus in terms of four key dimensions. A stable partnership and team where the culture is healthy, there's no succession issue. And we're looking for, you know, also a team that has a, a culture of grooming and developing the younger professionals. That's quite key to everything we're on the right. Second, performance, we, we aim for first and second quarter GPs who have a proven track record. So now typically second generation funds at the very least. And where we can track to some depth in terms of realized track record.

• 15:05Speaker 00

  So we want to make sure that those GPs have demonstrated that they can exit companies because buying them is the easy part, selling them is the hard part. With the control of downside risks or a lower loss rate than the industry. So that's all the way down to the GPs we work with. And then you have the process part where a lot of the value creation in private equity is about the process. So having an operating team that can implement a repeatable playbook to effectively take those smaller businesses and, you know, build them up on the way to the large cap exit. Through operational improvement, you know, improving the processes, supply chain management, CRM, digitalization, go to market, you know, the technology stack. So, you know, really kind of bringing that value to, you know, entrepreneurs who don't necessarily have that muscle memory all the time, to be honest,

• 15:49Speaker 00

  to really kind of build the institutionalization of their platforms. And then finally, the philosophy, and that's where you know, small cap and mid cap is very important to us. So the way we think about this is our sweet spot fund size range on the buy list is half a billion to 2.5 billion. And then we spend most of the time at half a billion to 1.5 billion. So in terms of enterprise value range, you're going to be looking at 50 million to 400 million or thereabout. And those companies are real small cap and mid cap. And David, to be honest, the buy list is always work in progress. We have churn, we let some funds go, you know, for a variety of reasons, but mostly performance related or fund size getting too big or team issues.

• 16:31Speaker 00

  You know, like strategy drift, where you know, we feel that this is not called to the pension DNA. And you know, the GP is effectively moving into those large cap segments where we spend less of our time.

• 16:40Speaker 01

  How do you construct a portfolio of small to middle market buyout?

• 16:44Speaker 00

  The strategy is driven by a few key requirements. First of all, building the diversification of the portfolio is key. Second, the maturity profile, because with that maturity comes sometimes a better forecasting ability for distributions. Which can then be recycled into the evergreen program and create a certain form of predictability of compounding. And then you have obviously the unfunded capital core portion, so making sure your deployment is efficient. And with that, you really have the trifecta of, you know, what makes an efficient compounding engine. Now, in terms of general house view on the market, what we have is 70% of our deployment into small cap and mid cap and growth. And then we inevitably pick up some of that large cap exposure as well, because the LP diversified trades that we buy, you know, big portfolios coming to market on the secondary market.

• 17:30Speaker 00

  What we have is sometimes we can just handpick the assets that we want, but most of the time we have to buy, you know, a number of funds. And some of those will have some large cap exposure. So we always have that frictional amount, you know, typically a quarter or maybe a third of that large cap exposure.

• 17:43Speaker 01

  You mentioned GP let continuation vehicles, secondaries, co-invest. Talk to me about the fees on those and also the blended fees for Pantheon's funds.

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• 18:40Speaker 00

  So if you look at this from the most expensive to the cheapest,

• 18:46Speaker 00

  the most expensive way to access private markets is a primary program. You're going to pay full stack to the GP. So typically 1.5 to 2% management fee based on commitments for five years. And then stepping down as the fund comes out of its investment period. And then you're going to have a 20% over 8% hurdle on an IR basis. So that's always the most expensive way to access private markets. Now, what we do is we effectively buy diversified portfolios of those primary commitments four to seven years into their lifecycle. So they are deployed. We have a high level of visibility on the assets. The funded ratio is high. And most importantly, we have a good ability to forecast distributions and buy them at a discount.

• 19:27Speaker 00

  So 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 in the future, but into your purchase price on day one.

• 19:40Speaker 00

  And so although you keep on paying those fees, you can effectively price them in into your purchase price. And so that benefits our clients in terms of you're still paying the fees, but you get that immediate capital gain on your discount. So that's the second most expensive. The third one is continuation vehicle already way more cheaper. So on these funds, you typically have a management fee, which is 50 to 75 pips of the assets in that continuation vehicle. And then your carried interest would be tiered. And so the way it works is you would have a combination of IR hurdle, sometimes TVPI hurdle in one or two or three tiers. And depending on the final performance of the asset, you pay less or more performance fee depending on the TVPI or the IR. And so that protects your downside and alignment of interest. And we like that. And then finally,

• 20:26Speaker 00

  You have the co-investment piece and co-investment is really a function of the strength of your primary platform. When you have, you know, those hundred and twenty, hundred and forty relationships opening and you commit the vast majority of your primary capital with them. Those GPs effectively would come to you and treat you as a partner. Because primary capital is the life and blood of a relationship in the private markets. I mean, GPs need to raise a recruit for years and so if you are a predictable source of commitments, you know, they will be working with you in between fundraisings.

• 20:54Speaker 01

  Do you track the co-investments that you get per manager? Is that a part of your selection criteria for future commitments?

• 21:00Speaker 00

  Our priority always is to back the best managers. I mean, that comes always first. Now, it happens to us that a lot of the best managers in market are also some of our longest standing relationships. And as part of building those relationships over a number of years and committing time and time again to their primary funds, we've built those pretty accretive no co-investment relationships with them. Where they see the benefit on their end of having access to a pool of capital which is sophisticated. It can help them close deals. And our end, we can get access to those them deals typically with no fee and no carry. So what it means is that, you know, we are in a position where we generate a net performance which is almost equal to gross performance. And on the topic of, you know, we discussed earlier how, you know,

• 21:43Speaker 00

  the ANFA comes from obviously the upside, but also the fees. Having a quarter or third of your evergreen program allocated to assets with no fees or almost zero fees is extremely powerful over the long term.

• 21:55Speaker 01

  So double click on that, you said that your gross and your net performance is essentially the same. What did you mean by that?

• 22:00Speaker 00

  So if you co-invest with a GP, let's say GP A brings you a co-investment opportunity. GPA will invest a hundred million from their flagship fund. But that's the maximum they can invest into that asset according to their concentration guidelines. But the deal is a hundred and fifty million, so they have fifty million of extra capacity that they need to syndicate. At this stage, a GP will call our co-investment or primary team and say, you know, I have that fifty million stop. Would you like to participate into it? And in exchange for getting access to your co-investment capital, we won't charge you any management fee or any carried interest. That's what I mean by it's almost the same. The only difference between the gross and net is really the expenses of the co-investment vehicle itself. That would be, you know, the ongoing expenses of the vehicle, admin, custodian, you know, ongoing expenses.

• 22:44Speaker 00

  But it's much lower than you would get from paying a full stack 2% and 20 over 8 on the primary fund. And so that's why, you know, it's quite powerful for us in an evergreen format to bring those deals to the wealth community in a format where they pay no fees. So 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 know, you artist, you balance it out. And so overall, your total expense ratio is, you know, a little bit more compelling.

• 23:12Speaker 01

  Talk to me on your co-invest strategy. So if one of these 120 managers bring to you a fully aligned co-invest, so you mentioned they invested 100 million, they're offering 50 million co-invest, is that an automatic guess? Talk to me about the process.

• 23:25Speaker 00

  Typically, we would close one deal out of seven that we receive on the co-investment side. The way it works is we have obviously the primary knowledge of the GP, so we know exactly what they're good at. So we have that notion of GP fit. So is that a deal that fits the GP's kind of strength and, you know, positioning? So that's always the, you know, the first step is are they within scope of their, you know, strategy and process and, you know, what they're good at? And then we can also effectively underwrite the asset directly. So we have a team internally of dedicated co-investment professionals who typically would have M and A backgrounds or direct investing backgrounds. You know, most of them would have been with the firm for a long time and they have deep track records and they've been working with a spectrum of GPs.

• 24:06Speaker 00

  So they have effectively refined and finessed, you know, their deal selection skills, looking at different underwriting banks, right? Because every GP we underwrite differently. And so that's really where, you know, we have access to the GP's track record, the sector dynamics, we have a whole database internally of deals that we track on a quarterly basis. And so that really informs, beyond the actual underwriting of the GP, that really informs our views on, you know, that particular industry or sector or asset.

• 24:31Speaker 01

  Just to play devil's advocate, you've already underwritten these managers to be your top 1%. In essence, you're trying to outsmart the managers. Why is that? And just talk, talk to me about that. Why is it 1 in 7? Intuitively, it would seem like maybe you do half the deals or 75% of the deals.

• 24:49Speaker 00

  Well, I think the first thing is that we have our own portfolio of construction guidelines on the co-investment program, and so we look to be diversified as well. And so depending on the available capital for any type of deals at any given time, there are deals that we just can't do, or we think is not the right fit for any given vehicle.

• 25:07Speaker 00

  Now, you also need to think about the fact that some GPs are maybe less experienced, or we have a more nascent relationship with, and so our comfort around their level of underwriting and the depth of our actual investment record with them, including exits, is necessarily more shallow, because we haven't been with them for the same amount of time. And so these GPs, the underwriting bar is naturally higher, because we want to make sure that as we build that co-investment relationship with them, it is middle of the fairway, no losses, and comparing alpha.

• 25:40Speaker 01

  You mentioned diversification. Across what vectors are you trying to diversify?

• 25:45Speaker 00

  First of all, geography, very important. Our view at Penton, and one of the benefits of being a global integrated platform, is that we follow global deployment patterns. And so the bulk of our deployment is in the US, followed by Europe, followed by Asia. So we have some concentration and portfolio guidelines from a geographic perspective. Second, we look at effectively concentration per sector, stage, and we also pay particular attention to levels of leverage and entry valuations. So we don't want to build a co-investment program where we just accumulated deployment at the peak of a cycle with unsustainable levels of leverage. So we pay attention to a different, a number of vectors across geography, sectors,

• 26:27Speaker 00

  vintage as well, GPs, and all the way down to the actual idiosyncratic factors of the deals. And I can tell you that some GPs have better track records than others on the co-investment side. And so when those come through, the bar is still really high, but we know that we've had so much success with them. Some GPs we've never lost a cent with on the co-investment side. It's been just a very smooth run. And so when those deals come through, there is that embedded muscle memory in the firm, where perhaps we can effectively have more conviction from the onset of the process. But if it's a more nascent relationship, we would be looking at effectively re-underwriting quite substantially and forming a view on, is that really what we think is a good deal?

• 27:04Speaker 01

  Do you expect the evergreen structure to make its way into the venture capital ecosystem?

• 27:08Speaker 00

  I think it will over time. I mean, venture is a very different animal. If you compare it to small cap, mid-cap and growth, no, late-stage growth, I would say, because venture can go all the way to early-stage growth. What really differentiates it is Venture can be a little bit of a black box in terms of valuations. So although you may have momentum and you know, some pretty significant unrealized gains, you never quite know what's the process that got you to that valuation. And the most successful venture GPs wouldn't be sharing any form of significant details on the valuation methodologies because it's quite private for the right reasons. And you sometimes don't even know what the performance level of the asset is. You know, you don't know what the revenues are, you know, the top line or the breakeven expectations, or you know, the profitability pathway.

• 27:53Speaker 00

  And you don't know the burn rate. I mean, all of this is quite confidential in a lot of situations. And so, you know, you have to think that, you know, that's one key difference versus small cap, mid cap and growth, where you have a great level of transparency. And if you've been in those segments for quite some time. Now, the second part is that evergreen funds need some form of predictable distributions so that you can recycle those distributions and compound them to the benefit of your investors. And venture effectively can be, if you're very successful in venture, you're going to end up probably having a fairly large number of IPOs. And that's typically what, you know, where the venture managers generate a lot of their alpha is for listed, like public listings. When you do that, you're effectively, you know, transferring your shares in public

• 28:36Speaker 00

  markets and you typically have lot of birds. Not only are you locked, but you also have a more valuation daily, you know, profile where your share price can go up and down. And honestly, you have no control over this. So you can hedge it, but you know, it's expensive. So that's always a bit of a, you know, you never know where you're going to get your liquidity and what valuation. And then the last thing is the venture portfolio D P I's. So you know, the actual distributed to paid in ratios, you know, for the first few years, you typically get nothing. And when you get something that's after crystallizing a large amount of losses, I've heard multiple times that a good venture fund should lose forty to fifty percent of its capital. I mean, that's a staggering loss rate if you think about it. You know, if you lose one dollar out of two over a period of time,

• 29:20Speaker 00

  you know, you need to make sure that whatever you have left in your book is going to generate at least two times and you only return cost at that point. And so, you know, there's that kind of volatility in that behavior, combined with lack of forecasting ability on distributions and that back ended public exposure valuation volatility that may actually lead you to have one of the most volatile ever green valuation environments ever created.

• 29:42Speaker 01

  Small buyout competes with venture capital and institutional portfolios. Why should an LP put their incremental dollar into small buyout versus venture capital?

• 29:53Speaker 00

  In venture, my opinion is that you really want to go with those top tier groups. And, you know, those top tier groups are heavily oversubscribed. So what that means is that, you know, your potential deployment budget, if you're on large institutions or even an institution, you know, you're going to be capped in terms of what you can deploy if you want to maintain that, you know, top quartile or top tier venture focus. Second, you know, if you want to do venture and you want the risk reward to look like small cap, you need to diversify your venture bucket extensively. Because if you start taking GP risk or sector risk or, you know, reduce cyclic risk with your venture allocation, this won't end well. And that diversification applies per GP but also per vintage. There's on, I mean, it's very important, it's crucial actually to participate in the venture.

• 30:38Speaker 00

  If you commit to venture, you need to come in for a number of years every year. So that, you know, you can participate in multiple vintages because in venture you have good and bad vintages. For example, coming out of COVID, the valuations went through the roof. You know, venture series B, C, D, we're looking at the significant increase in valuation trends. And so if you only came into those two or three vintages, you would be probably looking at losses or, you know, some form of volatility today. And so you really want to make sure that you commit to like a five to 10 year program. Now, I think there's that myth, David, that, you know, small cap is more, is volatile. It's a myth.

• 31:11Speaker 00

  If you look, as I explained earlier, you know, the only thing that doesn't matter in private equity is size. Scale matters, but size doesn't. So if you go into small cap and mid cap GPs or small cap GPs, you're going to be, you're going to be buying smaller assets. Yes. So potentially a little bit more volatile, but better alignment, as we discussed. You're investing with a principal, you're probably one of the first institutional investors in, you can bring your playbook, sector specialty, regional specialty, you know, your track record and process and philosophy to really help the entrepreneur grow. And in that, there is magic, that alignment between a GP that is very focused and entrepreneur that wants to scale is really powerful. Now, those assets also tend to be profitable and growing quickly. And you buy them at a fraction of what you pay, you would pay for a large cap asset with a fraction of the leverage.

• 31:55Speaker 00

  And so what matters here is the risk spectrum, it's not size, it's actually how much you pay, what's the leverage, and how much the asset will grow. And so I think that myth needs to be debunked.

• 32:04Speaker 01

  Is that myth there because small cap public companies are much more volatile than mid and large public companies?

• 32:10Speaker 00

  Small cap companies, you know, would not have the same features than small cap private companies. So the public companies are different. And on the small cap private side, as I mentioned, you know, you're looking at, I can't comment on public companies, it's not my specialty, but on the, on the private side, I can comment. And you're looking at great alignment, cheaper valuation, lower leverage, and potentially asymmetric growth in terms of top line EBITDA margins. And then David, the best part about this is, on the private side, large cap funds are getting larger. Listen, I mean, this is a key part of the investment thesis here. These funds have pressure to deploy. And because they have that pressure, they typically would come for, you know, to buy tokens, more add-on acquisitions from small cap funds, or maybe platforms from mid-cap

• 32:55Speaker 00

  funds. And that is going to be a once in a lifetime opportunity. The large cap segment has never been larger. It's never been tested at that scale. And if you look at the availability of leverage, the cost of leverage, you know, following the Fed pivot, there's an opportunity here where, you know, leverage will remain expensive, but will become a little bit cheaper versus the last, you know, few years. So that may reopen the floodgates in terms of, you know, those large cap GPs being able to effectively start investing at some more scale. And if they don't have access to that leverage, what they're going to, they're going to have to do is focus on M and A, integration, small add-ons, tokens, and that also works in our favor because they're going to be leaning into those small cap GPs to effectively buy assets that have been created.

• 33:31Speaker 01

  What would you like our audience to know about you, about Pantheon, or anything else you'd like to shine a light on?

• 33:36Speaker 00

  Penton is really a firm that has the interest of the clients at heart. And that's something that we've spent so much time on, you know, building over four decades with the institutional community. And the brand there has been well established in terms of, you know, being great stewards of capital and working with our institutional investors to deliver access to small cap and mid cap. And so that gateway positioning or being a point of access for larger institutions, I think is what we're bringing now to the wealth community and maybe smaller institutions or, you know, family offices, multifamily offices. And over the last 10 years, we've brought that in a very innovative format, right? So we were first movers or early movers into that semi-liquid kind of story and journey.

• 34:20Speaker 00

  And, you know, we look to effectively launch new products as we scale. And we're going to be bringing very differentiated risk rewards into, you know, instead of being large cap, you know, levered risk reward, we're going to be looking at providing that gateway access, the single access, core access, diversified access to to the wealth community. And so in that, I think there is a, you know, a great kind of cost assessment and cost to, you know, cost to return analysis. We are great stores, cost focused, making sure that our solutions are cost efficient. But with that small cap and mid cap focus, we think we can generate compelling returns in some alpha. And so the the ratio of, you know, cost to to potential alpha would be compelling as a result. And that's really where I think the Pantheon DNA shines through is we've been so diligent

• 35:03Speaker 00

  with that, you know, kind of focus on, you know, making sure we provide the best products. And for me personally, David, I'm incredibly excited to be a vote for the manager on the evergreen side.

• 35:11Speaker 01

  Well, Victor, you've been a trailblazer in the evergreen space. Thank you for sharing your story and Pantheon's story and look forward to seeing you soon.

• 35:17Speaker 00

  Thank you for having us, David. We look forward to staying in touch.

• 35:20Speaker 01

  Thank you for listening. The 10x Capital Podcast now receives more than 170,000 downloads per month. If you are interested in sponsoring, please email me at [email protected].