There is a precedent for Scottish Mortgage’s £1bn share buyback programme, which amounted to 9% of its share capital on the eve of Friday’s announcement.
Pantheon International Plc’s buyback programme is even larger on a relative basis. The private equity investment trust committed 14% of its £1.4bn market capitalisation – £200m – to buybacks in the financial year ending 31 May 2024. This included a £150m reverse tender offer completed on 19 October 2023 at a weighted average discount of 35%.
The trust will continue to buy back shares in the next financial year beginning in June 2024, funded out of net cash flow.
Pantheon International’s discount has narrowed from 41% on 31 May 2023 to 34% on 21 February 2024. Its share price rose by 20% during calendar year 2023.
James Carthew, head of investment companies at QuotedData, said: “Unfortunately, buybacks are a common feature for the majority of investment companies right now. Scottish Mortgage’s £1bn buyback is attracting headlines because of its absolute size, but as a percentage of issued capital it is actually less ambitious than Pantheon’s.”
Despite this significant commitment, Pantheon International’s chair John Singer is sceptical about the propensity of buybacks alone to narrow the discount and the trust is embarking on other measures in tandem.
“Buybacks are not the universal panacea to reduce discounts between net asset value (NAV) and share price in stock markets. However large, used as a one-off event, they tend to disappoint as a long-term solution to this issue,” he said.
Singer met with the many of the trust’s shareholders last year and the board put in place a plan of action as a result, to prioritise its shareholders and “not, if I may say, because we thought that was going to be the silver bullet that would get rid of all of our discount problems in the market. It does not exist, that bullet,” Singer said.
The trust has increased marketing efforts to stimulate demand for its shares and joined industry-wide calls for changes to cost disclosure regulations. It also strengthened its balance sheet and created a more flexible capital structure by refinancing its £500m credit facility and agreeing a $150m private placement of loan notes.
Singer said Pantheon’s buyback programme is first and foremost “a way of allocating a portion of capital to an existing, high-quality portfolio that we know extremely well, and where we benefit both from value creation on the purchase, given the discount, and from the eventual future NAV uplifts which we regularly experience.
“Warren Buffett has stated his belief that not doing this would amount to ‘economic illiteracy’.”
It also sends a signal to the market of the board’s “deeply held conviction” in the value of the trust’s investment portfolio, he added.
“Thirdly, by incorporating a tender offer into this process, we were able to offer those shareholders who wanted to obtain liquidity for all or part of their shareholding the opportunity to do so through an egalitarian process open to all,” he noted.
Lastly, buyback activity reduces the volatility of discounts, according to data from Peel Hunt, which can be off-putting for some investors, Singer said.
Carthew shares Singer’s measured view of buybacks. “By themselves, buybacks may not sort out a discount, especially if – as Pantheon was – only one of a small handful of trusts in that sector is doing them. The danger is that you are seen as a source of liquidity (it is easier for a broker to sell your stock to the buyback than attempt to place stock with a new buyer),” he explained.
“Pantheon already acknowledged that there was going to be more to do. Its discount is now about the middle of the pack. It doesn’t help that NAV returns in the private equity sector were less exciting in 2023. I think that is likely to be a temporary problem, changing as IPOs get going again.”
Investec analyst Alan Brierley applauded the trust’s actions. “With discounts becoming entrenched there is a need for effective and clearly articulated capital allocation policies; and investors are becoming increasingly frustrated about those companies hiding behind the ‘buybacks don’t work’ mantra.
“Against this sobering backdrop, the actions of the board of Pantheon International are a beacon of hope; the recent interim results strapline ‘Putting shareholders first’ is a bold and refreshing statement.”
The trust’s interim results on 22 February 2024 included a revision to its capital allocation policy, the optimisation of the capital structure and a stated intention to use its balance sheet “in a more considered manner than in the past”.
Brierley said: “For several years, a conservative approach has resulted in relatively high levels of liquidity, but the resultant cash drag has had a meaningfully negative impact on performance. We welcome these changes, which further enhances a strong investment proposition and we re-affirm our long-standing Buy recommendation.”