GP diligence

The widespread belief that LPs are only likely to back existing fund managers, and even then only after prolonged due diligence and at lower levels than previously, has been somewhat validated in recent issues of unquote". This is not the case for Pantheon Ventures, however.

"We try to keep a very open mind when looking for new opportunities. It is always risky backing new fund managers, but we have done very well in the past backing emerging groups," says Steers.

Emerging or not, fundraising is a serious hurdle for making investments in this climate. Steers says that even some well-established managers might not be supported in the future, and this is all a part of the evolution of the industry. Pantheon, for example, has an open-door policy: if there is a better manager in a certain segment, then the firm will consider backing them. While there is a great deal of uncertainty in the markets, Steers insists that now, as always, LPs should be looking to form long-term relationships to back a series of funds from the same manager - not simply one. Therefore, it is always important that LPs are extremely diligent and consider a lengthy time horizon when it comes to supporting GPs.

In the spotlight

Pantheon is always careful when diligencing fund managers. "The firm looks at a number of both quantitative and qualitative criteria, including performance attribution, how managers have created value, drivers of successful or unsuccessful investments, how well the fund has done in different sectors and geographies, appropriateness of strategy and organisational factors," says Steers.

Now, however, there is an increased spotlight on organisational diligence and strategy changes. "We have always done thorough reference checking on individuals and looked at whether portfolios are sensibly constructed, but this is now more important than ever and we are continuously improving our monitoring and analysis tools," she asserts.

"In these times, it is about assessing the rationale behind investment strategy and assessing manager quality - not just focusing on the numbers, which tend to be backward-looking. In this way, private equity investing is both an art and a science," adds Steers.

A science indeed

With the market as volatile as ever, many LPs have been shifting their allocations when it comes to what areas of private equity they are interested in. But it is important to remember that what might be a hot asset today, may not be tomorrow.

"Pantheon has always been a diversified investor and this hasn't changed. We are not trying to time the market now because we may make a commitment to a fund today, but the manager will draw down the capital over the next five to six years and may be exiting some of their investments in ten years' time. To try and call the market years ahead from now is nearly impossible," says Steers.

Indeed the fluctuating market has been a driver of some LPs seeking an exit before the end of a fund's life - hence the increasing popularity of buying and selling investor stakes. Pantheon has been an active player in secondaries for 20 years now.

The real value in the market now seems to be providing liquidity to help restructure the industry. Four secondaries funds have closed this year on a combined $10bn+, with another three on the cards by year end. Secondaries are an important part of investors' portfolios since they have a different cash flow profile and can mitigate the j-curve (see feature, page 14).

But as a science, it is crucial to invest in a range of strategies and construct a portfolio that is not too concentrated in any one area, as this can come back to bite an LP. "We stay in close contact with GPs and are on over 180 advisory boards. We find that a great deal more is being discussed at these meetings, which provide a very good vantage point on the industry in general," insists Steers.

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• LPs
• UK / Ireland