Investing Billions - E106: How Pantheon ($60B) Invests Globally

Starting point is 00:00:00 We've invested behind a number of what we call blue chip private equity and venture capital managers globally. But we've also tracked thousands of other managers in the market over long periods of time. Some of these managers we've had decades long relationships on. We sit on over 600 advisory board seats for some of these funds globally. Again, that is a type of access that we've had. Let's double click on India. What is the opportunity set in India over the next several decades? India, I'd say, has benefited a lot from the largest ever youth population in the world, much of whom is also English speaking. So I think by some statistics, about 34% of students still pick STEM for their graduation. So India, as a result, has one of the largest STEM graduate

Starting point is 00:00:40 population in the world. It's benefited from political stability in, you know, you would have seen elections happen earlier this year, and an unprecedented third term for Prime Minister Modi's government, which is quite valuable in today's complex and often volatile world. This has really allowed the space for the government to push through significant structural reforms on the economic front, but also infrastructure development. To give you a sense of the pace of change in India, India is today building about 21 miles of national highways per day compared to the slow pace people complained about in the past. Kunal, I've been really excited to chat. Welcome to the 10X Capital Podcast. Thank you for having me, David.

Starting point is 00:01:21 Tell me about Pantheon. What does Pantheon focus on? Well, Pantheon is a specialist investor investing across a number of key private market asset classes, including private equity and venture capital, infrastructure, private debt, and real estate. We manage roughly about $67 billion in assets under management globally. We like to invest across the full cycle. So we have three main products. Well, how we do that, which is one is the primary fund investments where we take on the position of a limited partner with general partners. So LP and GP like to, as we call it, we also invest behind companies as a direct co-investor, which is where we partner up with our GPs in the market. And then we also do secondary purchases. So think of things like continuation fund strategies or GP-led secondaries. So Pantheon is a multi-asset class manager. Why would an LP go with a Pantheon versus a pure play like an Andreessen Horowitz or a KKR?

Starting point is 00:02:11 Well, that's a good question. So if you wanted to invest behind some of the names that you just mentioned, whether it's on the venture side or private equity side or growth equity or special situations, we have one platform that allows our clients to be able to access all of those strategies through one commitment. It's a great way to get exposure across different parts of the market and also different geographies. You invest in LPGP and direct and secondaries. Talk to me about the synergies between those asset classes and why do you guys do all of those in-house? With a long history and a deep roster of relationships in the market, we are able to

Starting point is 00:02:42 use the entire Pantheon platform to create distinct information and access advantage for ourselves. Let me bring this to life once more. When you're pricing an LP secondaries portfolio, we're able to access the best managers in the market. And remember, these portfolios are often intermediated and offer time-bound competitive processes. So in that timeframe, we're able to use our access that we have with the best managers to be able to generate insights from our knowledge of their portfolios, as well as a long history in many times of sitting on their advisory board seats, as well as our local knowledge and a deep data driven approach that we're able to generate insights that helps us not just price these portfolios more appropriately, but also be cognizant of the risk or inherent events that

Starting point is 00:03:22 might happen through the portfolio. For a player who's just not focused on the primary side or the co-investment side and only squarely focused on secondaries might find it hard to get that type of access and information advantage. Similarly, let me give you an example of things like co-investment or single asset GP leads. Now, here we're able to use, again, our team's experience as well as our GP's experience in different parts of the world. So if you're looking at a particular sector in one part of the world, we're able to leverage our network globally to get access to GPs who have done investments in the same sector,

Starting point is 00:03:52 or very similar company in different parts of the world, to be able to really, again, price risk better, find embedded value, and underwrite transactions with a lot more confidence. I'd say in Asia in particular, which is where I sit, again, we have the unique advantage of also using the same investment team across all of these funds, secondaries, and co-investment products. So many times it's the same boring phase, but again, it does allow us to be solutions oriented to our general partners. When I talk to large asset managers, such as Pantheon or some of your peers, it seems that a lot of the opportunity sets that you guys go after are relationship-based.

Starting point is 00:04:26 How true is that? We've been around in the market. We've invested behind a number of what we call blue-chip private equity and venture capital managers globally. But we've also tracked thousands of other managers in the market over long periods of time. Some of these managers we've had decades-long relationships on. We sit on over 600 advisory board seats for some of these funds globally. Again, that is the type of access that we've had decades-long relationships on. We sit on over 600 advisory board seats for

Starting point is 00:04:45 some of these funds globally. Again, that is the type of access that we've had. Now, when we look to fry some of these transaction strategies, like an LP portfolio, it may be a case where some of the managers in the portfolio may be people that we have not invested behind. But many times I have to say that these are mostly managers still that we've known for long periods of time. Very rarely do we come across portfolios where there's a large portion of the portfolio that we have no insights into or no access into. I think that's a rarity. Most of the time, we are able to either have a direct relationship or we've known of these

Starting point is 00:05:15 managers and seen their evolution over time. Now, that is a distinct advantage because I think, as I said, in timeframes that some of these competitive processes are run, it is advantageous to have the relationship at start. You don't have a cold start. GPs value that as well. So you mentioned you have a focus on the mid-market. How do you define mid-market? The answer to that really lies across different strategies as well as different markets.

Starting point is 00:05:41 So a mid-market for emerging markets like India in the Asian context might be quite different from the U.S. context. But what we've done is set across consistent benchmarks internally. While we focus on the mid-market, we invest across different types of strategies. So think of early-stage venture, late-stage venture, growth equity, buyouts, special situations. So again, while the mid-market is a term where we think where the best risk-adjusted returns might lie, we are able to access the full stack of opportunities in every market that we are investing behind. Today, growth equity is a little bit out of favor. Is that a time when Pantheon recalibrates its portfolios? How do you think about holistically as a strategy across different asset classes given different market macro conditions? The way we have approached things is that we've been thematic in our approach to investments. And what we've tried to do is really find drivers of return that are complementary to

Starting point is 00:06:33 the strengths of each market that we're investing behind and the strengths of the general partner, for example, that we're investing behind. So yes, growth equity in other parts, in the developed parts of the world might be something that people are, in some parts, some investors are shying away from. But I think if you look at other emerging parts of the world, growth equity still continues to be a bulk of the private markets activity. We pride ourselves to be able to invest across cycles, across different types of markets, catering to the strengths of each market, and really taking advantage of the skill set that every general partner also brings to that market. Hey, we'll be right back after a word from our sponsor. Our sponsor for today's episode is Carta, the end-to-end accounting platform purposely built

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Starting point is 00:07:48 What is the opportunity set in India over the next several decades? That's an interesting question. India, I'd say, has benefited a lot from the largest ever youth population in the world, much of whom is also English speaking. So I think by some statistics, about 34% of students still pick STEM for their graduation.

Starting point is 00:08:04 So India, as a result, has one of the largest STEM graduate population in the world. It's benefited from political stability in, you know, you would have seen elections happen earlier this year, and an unprecedented third term for Prime Minister Modi's government, which is quite valuable in today's complex and often volatile world. This has really allowed the space for the government to push through significant structural reforms on the economic front, but also infrastructure development, a complaint that's been a common complaint from investors globally. who complained about in the past, India today has about over 900 million internet users, 230 million online shoppers, and seven out of 10 of these shoppers actually sit outside of the large cities.

Starting point is 00:08:51 That has grown to an annual transaction value of $2.3 trillion. That's larger than the GDP of many developed countries across the world as well. So, you know, what this really, all of these statistics and, you know, growths that I just talked about, what this really does is provide us with a very attractive backdrop for investment opportunities.

Starting point is 00:09:09 And again, I should mention here that from our investment strategies, we've invested in India across VC, growths, and buyouts, and across all three of our products of investing into funds, into companies as a direct co-investor, as well as secondaries. You mentioned there's 21 miles a day in highway being built. One of the criticisms of India has been infrastructure. Give me an update on Indian infrastructure and where does it stand today? Well, the pace of change is quite rapid. I have to say, I have roots into India, and I'm based out of Singapore. But even every time I visit India, I visit a city like Mumbai, I'm amazed to see the pace of infrastructure development.

Starting point is 00:09:45 You know, from one trip to the other, a new flyover would come up, a bridge would make dramatic progress. And you'd say, wow, that's not the pace of change that you've seen in India over the past. So I think that pace of change is what has really accelerated. And a couple of things have allowed for that. One is, as I talked about, the political stability, which has allowed the governments to push through the reforms. But also, I'd say the digitization of the economy has allowed digital infrastructure to be rolled out as well, much ahead of time than other emerging countries have struggled on some of these parameters. For example, India's UPI, the real-time digital payment system, is frankly a case study for a number of emerging countries where India has

Starting point is 00:10:24 been able to leapfrog its almost broken digital payments infrastructure of the past to now use this interface to see the type of volumes that I talked about, which is much bigger than many other developed countries as well. For somebody that might be listening to the podcast and thinking, I want to invest in India, how should they think about an emerging market in the context of their existing portfolio? Yeah, sure. Well, look, India's benefited from a lot of progress that you've seen and we talked about earlier in our discussion. I'd say the benefit of investing in India is that the drivers of return are often very different to what you see in the markets like the US. Growth being one key driver of return is obviously almost a given because the kind of underpenetration and tailwinds

Starting point is 00:11:04 that many sectors have seen, we feel that there is a long opportunity for growth to be a key driver of returns. We've also seen very little reliance on leverage, which is quite different for many developed markets because historically the cost of leverage was too high or access to leverage was because of either local regulation or sector sort of requirements where it was hard to access leverage. And so GP's playbook have really come up trying to make real value adds to these companies, trying to make a real difference and real change

Starting point is 00:11:33 by having a playbook of value add and really going to companies and improving their margins or improving the Salesforce effectiveness or improving their ability to go into different parts of the country and improve the penetration of the market and gain market share. I think those drivers have been more at the forefront rather than debt or too much reliance on easy capital on the credit side.

Starting point is 00:11:55 Congratulations, 10x Capital podcast listeners. We have officially cracked the top 10 rankings in the United States for investing. Please help this podcast continue climbing up in the rankings by clicking the follow button above. This helps our podcast rank higher, which brings more revenue to the show and helps us bring in the very highest quality guests and to produce the very highest quality content. Thank you for your support. Let's talk about two other markets in Asia that are very interesting, Australia and Japan. What can you tell me about those markets? Japan is in a really interesting position. It's going through, I say, a bit of a transition phase

Starting point is 00:12:27 with the Bank of Japan starting to normalize monetary policy after nearly two decades of zero or near zero interest rates. This has impacted global carry trade, but I think there's still some further room to go, especially with the Japanese yen. Stock market, on the other hand, in Japan has done really, really well. The tropics has doubled in the last five years because as inflation rises, there is a need for higher returning assets. And that becomes more and more evident with the rising inflation. But let's also remember that Japan is the third largest economy in the world. It's a developed market with a high GDP per capita.

Starting point is 00:12:59 So, whilst you've heard me talk and emphasize a lot of the growth and the underpenetration investment themes in markets like India, in Japan, we've tended to see opportunities behind themes like corporate carve-outs, succession, also public to private themes as well. What we've also seen in Japan is that the regulatory landscape and the corporate governance reform that has happened over the last few years have really evolved to the extent that Japan is starting to see a lot of shareholder activism. To give you an interesting statistic, 45% of companies listed on the topics with a combined market cap of $1.5 trillion trades below one-time spreads to book. So on the back of these themes, we feel that we've invested behind the buyout theme in Japan because you're able to access opportunities that are still more reasonably priced in terms of entry valuation multiples. The cost of financing and leverage and access

Starting point is 00:13:48 to leverage is much lower. There's been an improvement in return on equity that you've consistently seen. And if you look at the penetration of both private equity and M&A as a percentage of GDP, that is much below what you see in other developed markets. When you go in the market and you compete against private equity firms like at KKR, how do you compete against them and what's the differentiation? Well, some of those firms may be playing in different parts of the market.

Starting point is 00:14:11 They may be direct buyout shops versus someone like us who's able to access almost all parts of the market, of private markets across different asset classes and across different products. So someone like us

Starting point is 00:14:21 will be able to provide access to venture capital, which some of the examples that you quoted may not have as a strategy, or growth equity or special situations, or buyouts within private equity, and then other asset classes as well. So I think, look, it's a competitive environment, but that's where the history and the deep track record and the experience of the team over decades, over a 40-year history, really comes. Let's talk about a very underrated market, Australia.

Starting point is 00:14:47 What can you tell me about Australia and what are the opportunities in Australia today? Well, look, if India was the high growth emerging market and Japan, the giant developed market that's going through a transformation, Australia is perhaps the steady Eddie of Asia Pacific. It's a large country with low population density, but they have recognized the importance of and contribution of immigration to their growth and economic activity and availability of labor, which has provided a strong base for economic growth and also population growth, which has been a driver of just economy and just general activity in the market. Other than a brief period of time during COVID, you might find it interesting. Australia has gone through nearly 30 years without a recession. And so when you combine that with factors like a reasonable government debt as a percentage of GDP, a diverse economy, and increasing prominence of the technology sector in the market,

Starting point is 00:15:34 you've seen opportunities frankly across different sectors in the Australian economy. What we've invested behind is really taking advantage of a range of themes in the market. So for instance, because of a stable regulatory and legal regime, we're able to invest behind special situations and turn around opportunities in a market like Australia, alongside growth equity and buyouts as well. Australian VC is also amongst the fastest growing parts of the private market landscape in Australia.

Starting point is 00:16:00 And again, you're starting to see a number of demonstrated, you know, scale up of companies and a number of pre-breakout companies, companies like Canva and AirVolux and Atlassian that you may have heard of, who really have been Australian companies that have been able to go global. You focus on some very diverse markets, India, Australia, Japan, the rest of Asia. Talk to me about how you calibrate your skill sets for the different markets and how do you go about learning from one market to the other? That's a good question. I think, look, we are thematic in our approach. And the drivers of return in each of these different markets are often driven by the strengths of each market.

Starting point is 00:16:36 And when you combine that, it helps you build a portfolio that's quite complementary because it's not the same driver of return across Asia Pacific, right? So every market will have its own strengths, different drivers of your investment thesis, and you're able to play each market to their strength and really generate attractive returns for investors. So when you talk about these different markets, what we're able to do is really leverage some of the playbooks that the GPs have adopted in different parts of the market, but also our knowledge of sectors, right? For example, consumer characteristics may be may be different and different and consumer characteristics may be different in different parts

Starting point is 00:17:06 of the market. The trend we might have seen in say an emerging market of consumers going online and how that shifted the type of spend they did is something that we might be able to apply to a market like Japan

Starting point is 00:17:17 as more digitalization happens and e-commerce grows there, we might be able to use learnings from each market to the other. You've been at Pantheon for 11 and a half years. What do you wish you knew before starting at Pantheon? I came from a direct investments background with a mid-market GP and then moved over to the LP side. I have to say I enjoy the relationship and the transaction nature of

Starting point is 00:17:36 the job. But personally, I feel that the way transactions have been underwritten in the past may be different from the way that we probably need to underwrite transactions in the future. So for example, while the importance of things like relationships in the market, access, knowledge, experience is always important, that perhaps in the next decade needs to be supplemented by unique data insights

Starting point is 00:17:59 and machine learning and analytics. So at a personal level, I'm quite interested in how we transition and integrate these old and new capabilities. So to your question on what I wish I knew, look, I wish alongside being an investor, I was also a data scientist and perhaps a programmer as well in the new world. Well, Kunal, this has been a masterclass on asset management and Asia. Thanks for jumping on the podcast. Thank you, David. Thank you for listening. The 10X Capital Podcast now receives more than 170,000 downloads per month.

Starting point is 00:18:29 If you are interested in sponsoring, please email me at david at 10xcapital.com.

Investing Billions - E106: How Pantheon ($60B) Invests Globally

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