“In the past you had to be public to be a large company, but that's no longer the case. There are enormous private companies”
“In the past you had to be public to be a large company, but that's no longer the case. There are enormous private companies”
Pantheon Ventures has launched a new partnership with Israeli investment house Altshuler Shaham as it aims to draw more wealthy Israelis into private equity investments
"If I were to sum up the personal worth of the people who are here, I would reach tens of billions of shekels, if not more than that," said one of those present at an event held at the beginning of this month at the Hilton Hotel in Tel Aviv by the investment house Altshuler Shaham, which launched its new collaboration with British private equity investor Pantheon Ventures.
Pantheon was founded 41 years ago and currently manages assets amounting to $92 billion. Pantheon specializes in investing in private equity funds and making investments alongside the funds in which it invests (Co-Investments). It invests in funds in two ways - directly, i.e., through investment in the funds' fundraising rounds, and through secondary transactions, i.e., the purchase and sale of participation units in these funds. Pantheon's customers are institutional entities - insurance companies, pension funds, and investment houses - as well as qualified investors. Pantheon has been active in Israel for 20 years, and its clients include almost all Israeli institutional bodies.
Now, as part of the collaboration with Altshuler Shaham Alternative Investments, a subsidiary of the publicly-traded Altshuler Shaham, it is addressing qualified Israeli clients for the first time. As part of the collaboration, a fund has been established that will be managed by Pantheon for Altshuler Shaham, which will invest in the fields of private equity and private debt. The minimum investment amount will be $200,000 per customer.
The fund will not make initial investments, but only secondary and co-investment transactions, with the investment period limited to one year. On the occasion of the launch, two of Pantheon's senior partners - Francesco Di Valmarana and Charlotte Morris - visited Israel for a packed day and a half and met many of Israel's wealthiest individuals in the conference hall of the Hilton Hotel. They are launching this activity at a challenging time: the markets are very volatile due to high inflation and rising interest rates aimed at combating it, and the fear of a recession is causing belt-tightening across sectors.
"What is happening now is that the private equity market is also attracting retail investors," Di Valmarana said in an interview with Calcalist. When he says retail investors, he obviously does not mean investors from the general public who started trading in the stock market using apps like Robinhood during the peak of the corona epidemic, but rather wealthy private investors who are seeking and increasing exposure to private equity. "These are investors whose characteristic is the ability to bear the illiquidity of assets. They have money, and they don't need it all immediately. After all, in the world of private equity, it takes 5-7 years to realize returns."
As mentioned, Pantheon is not a private equity fund but a company that invests in other private equity funds of various types, including venture capital funds and debt funds. "We have worked in the past, and we work, more or less, with all the fund managers. In the end, it's not an infinite market, and everyone knows everyone. We have invested and worked with Tene, Fortissimo, and Fimi, and we have also invested in Insight Partners."
Since you appeal to people with money, why do they actually need you? After all, if I am a qualified investor, I can turn to Fimi or Fortissimo myself and invest in them.
Di Valmarana: "We believe that we can create a portfolio consisting of the best fund managers. That's why the company is called Pantheon." Currently, Pantheon's portfolio comprises approximately 130 fund managers, with a focus on mid-sized fund managers. The term "mid-size" can be misleading, as even Fimi falls under this category. These are considered "second-tier" funds, managing several billion dollars or a low double-digit number of billions, unlike giants like Blackstone or KKR, which manage hundreds of billions of dollars each. In this sector, there are around 4,000 fund managers out of approximately 10,000 active private equity fund managers worldwide. According to Morris, building this portfolio requires tools that "a private individual, even a fairly wealthy one, does not possess. It is challenging for them to undertake this task alone due to the lack of analytical tools necessary for in-depth evaluations of numerous funds that hold multiple companies."
Di Valmarana: "We also facilitate secondary transactions between investors who wish to enter or exit funds after their initial investment. This process is based on our analysis of the fund managers and our familiarity with them. In private equity, there is no such thing as 'insider information' as seen in the public market. All information is not readily available, and substantial resources are required for successful fund analysis."
How involved are you in the funds you invest in?
Di Valmarana: "It depends on the type of deal. If you initially invest in the fundraising round and you are a large investor, you will get a seat on the advisory committee, which participates in making structural strategic decisions but not investment decisions. We have a closer relationship with the funds in which we make secondary transactions and do not interfere in their day-to-day management or decisions."
What challenges does the world of private equity face in view of the volatility in the public markets?
Morris: "This volatility actually creates interesting opportunities, especially in secondary transactions. Today, there are more players in need of liquidity, and they are interested in or need to sell. Often, this happens because institutional bodies are forced to balance their portfolios due to declines in the public market. This pressure can generate buying opportunities. However, in these times, we need to invest even more effort in analyzing and understanding companies and each fund's portfolio. We must thoroughly understand factors such as customer loyalty, financial stability, and growth prospects for each company."
Where are you looking for opportunities? Are there sectors or countries that you put more emphasis םמ?
Di Valmarana: "In the last ten years, we have focused on three industries: healthcare, which is significantly influenced by aging population and culture, with most funds we invest in having exposure rates of up to 20%; business services; and of course, technology. We primarily invest in American funds, which make up about 60% of our portfolio, simply because it is the largest and most liquid market."
What are the main trends in the private equity market today?
Di Valmarana: "It is clear that investors are becoming more specialized, focusing on different specialties. Each fund has its own areas of focus, such as debt or infrastructure. Each specialty requires different abilities, and this trend has developed over the last decade."
Mushak Lifshitz, head of Israel at Pantheon, added, "15 years ago, each insurance company had maybe one person responsible for private equity investments. Today, each institutional body has a team of 5-10 people dedicated to investing in funds. Previously, family offices didn't even know what private equity was." Di Valmarana added, "Today, institutions are increasing their exposure to the private market because the public market has become more challenging for companies. It is now more expensive to be a public company, and many institutions see fewer opportunities there. The public market is largely driven by passive investment products, such as basket funds, mutual funds, and index funds. In contrast, private equity is driven by the individual performance of each company, allowing opportunities to be found even in suffering sectors. That's why more and more money is going into private equity." And it's not just from the institutional side. Private investors now hold marketable assets totaling $4 trillion. Estimates suggest that this amount will more than triple to $13 trillion within a decade.
According to Lifshitz, "In the last 30 years, there was only one year in which the median return of private equity funds was lower than the MSCI World Index. Institutions increase their exposure because they seek an excess return. Additionally, the number of private companies has more than doubled, and their growth rate is higher than that of public companies. This means that many opportunities lie in the private market. If you want to invest in a company before it becomes a huge public company like Facebook or Amazon, you need to be in the private market. Not long ago, it was clear that to be a large company, you had to be public. But that's not the case today. There are enormous private companies. The financial world is more comfortable with the concept of large private companies."
Still, the private equity market is not without problems. What are its weaknesses?
Di Valmarana: "Firstly, there's a lack of liquidity, which requires patience. Secondly, there are valuation concerns. Some believe that the pricing in the private market is problematic due to insufficient transparency. Unlike the public market, private market assets are valued periodically, such as quarterly or annually, or only when the property is sold."
Some will say that this is the reason for the excess performance of the private funds, and that they even prolong the crisis periods for investors because the declines in value are reflected long after the crisis began, and sometimes even after it has passed.
Di Valmarana: "That's true. In the public market, investors find it difficult to accept a situation where a company reports consecutive quarterly losses. They might be skeptical when the company claims these losses are temporary and part of a strategy to drive future growth. In private equity, this is not required, and you can invest in improvement and tolerate loss periods with the aim of future profitability. Investors in private equity are more comfortable with this approach." Morris added, "It's a completely different mindset. Is it a weakness? It could be, depending on the perspective. The private market lacks the transparency of the public market, and private fund managers don't disclose all the information publicly."
Di Valmarana: "The traditional model of private funds can also pose a challenge for retail investors. When private equity funds raise money, they collect investment commitments, and whenever there's a transaction, they request the funds. Institutions are accustomed to this process, but for private investors, including wealthy ones, it's not always convenient. A fund's investment period can span several years, and it's uncertain whether investors will feel comfortable with a call for several million dollars two years after committing to the fund." Lifshitz added, "Analyzing companies in private equity requires much more effort. The information is not publicly available like on a Bloomberg terminal."
How does the current macroeconomic environment affect you?
Morris: "We operate without leverage, so in that aspect, we are less affected. However, we must thoroughly assess our investments and their sensitivity to the current situation, which cannot be avoided. It also impacts the funds' ability to realize assets and make timely exits. Realizations and exit funds will now take more time."
Does this affect the willingness of investors to invest in private funds?
Morris: "I'm not sure because it's a market for qualified institutions and investors who knowingly invest for the long term. They are less affected by short-term fluctuations driven by the macroeconomic environment. However, it certainly has a significant impact on the decision of where to invest the money."
And yet, look at Insight. One of the most successful and respected venture capital funds in the world is unable to raise funds for its new fund. It cut the fundraising target by 25% to "only" $15 billion, and has raised only $2 billion so far.
Di Valmarana: "That's true, but part of this difficulty is due to bureaucracy. Institutional investors are obligated to maintain a certain mix of marketable and non-marketable investments. As government bonds, for example, decline, the relative share of non-marketable investments increases, and institutions must rebalance to maintain the allocation. This prevents them from investing in other private funds."
How long will the current storm last?
Morris: "This is the million-dollar question, and no one has a crystal ball. In my opinion, it will take time for things to start recovering. The macro environment will remain challenging for a while." Di Valmarana agreed, "Yes, it's clear that eradicating inflation will be more challenging than anticipated, which means higher interest rates will persist for a longer period. This will create a particularly difficult environment for companies."
However, the starting point is that someday there will be a change for the better. How are you preparing for this change, when it comes?
Lifshitz: "When you've experienced crises and worked with enough companies, you learn to always be prepared. It might be time to advocate for the appointment of a new CEO for some companies, someone who knows how to act swiftly and drive growth when the time comes. This is very different from defensive management required at other times."
Are there any opportunities you are passing up on due to the situation?
Di Valmarana: "There are sectors where it might be better to maintain some distance for now, especially those heavily dependent on consumer sensitivity, such as the catering industry. The uncertainty in China also encourages caution when considering investments in the country." Lifshitz added, "Recently, many venture capital funds have offered and executed secondary transactions. We passed on these transactions mainly because we need sufficient capacity to analyze the assets being sold. In many venture capital funds, there is a lack of transparency. So, we didn't participate in those transactions, but others did, and I believe they lost a significant amount of money. It's likely that the assets were overpriced, as during times of prosperity, the risks are often overlooked, and many assets acquired during the 2021-2022 boom are included in these funds."
