Cade says that while using such a trust means investors give up the chance of getting some of the more striking and sudden gains in the sector, that is balanced with more downside protection.
The sector as a whole has seen a significant re-rating over the past year or so, but Cade says that the trust remains attractive at current prices.
"It’s had a very strong re-rating but the discount was far too wide at 30 or 40 per cent," he said.
The discount is currently at 18.6 per cent, according to AIC figures.
"Pantheon are very experienced fund of funds managers. The advantage is they have a strong secondary investment element rather than just primary commitments, and it’s focused on that," Cade said.
"It’s also globally diversified. Not just European, like many of the other funds in the sector, and has a venture capital element, not just buy-outs."
"The portfolio is rather mature, so it is generating a lot of cash and using that to buy back shares."
"We rate the managers highly. It still is attractive, although it’s not going to get some of the uplifts of the concentrated private equity vehicles."
"Private equity isn’t an easy investment class to get into, particularly a diversified portfolio."
PIP is a £708m trust run by Pantheon, which runs a wide range of private equity investments for institutions.
One of its activities is primary, direct funding for private equity investments, which means that manager Andrew Lebus (pictured) can draw on extensive knowledge of the sector to pick funds. "The primary investment activities in Pantheon make us active investors in the primary and secondary markets, while we buy more mature investments in the fund," Lebus said.
"We are not simply buying assets we know to be cheap, but that are well-managed and we know from our other business."
The closing of a wide discount along with solid NAV performance has seen the trust’s shares rocket in value in recent years.
Over the past three years they have made 86.62 per cent while the average fund in the sector has made 47.22 per cent, according to data from FE Analytics.
The FTSE Small Cap Index (ex IT) – the trust’s benchmark – made 48.9 per cent over that time.
Performance of trust vs sector and benchmark over 3yrs
Source: FE Analytics
The sector suffered badly in 2008, and Lebus says that one of the reasons for this was the high amount of leverage in the sector.
It has taken a long time for the sector to shake off the image of being debt-laden and risky, he explains.
"An issue we tend to have going in to a cycle is that balance sheets are more set up for boom conditions."
"One of the things that happens during a downturn is that private equity spends a lot of time re-examining its ability to service debt, and some of that requires restructuring balance sheets for worse conditions. All of that has happened over the last few years."
"Significant amounts of work needed to be done, and were. A lot of the refinancing was done in the 2007 to 2010 period, but it has taken the market quite a long time to catch up with that."
However, the manager says that there are significant advantages to investing in private companies over public companies, and these typically benefit the institutional investors who dominate the asset class rather than the average retail investor.
"Your interests as investors are in harmony with those of the managers, unlike other parts of the market where managers have their own short-term objectives," he said. "That’s a fundamental difference."
Managers are also freer to focus on the business rather than on the perceptions of numerous anonymous investors with different aims, he says.
"Management on public companies spend 30 per cent of their time communicating with the market, which is a wide range of investors from short-term traders to long-term ones. Private equity cuts out that layer."
He says the quality of management in the sector has benefited from the tough market conditions, however.
According to Lebus, over the past few years there has been a "professionalisation" of management, with investors increasingly holding them to account.
Lebus says that the structure of the trust helps it take the edge off the volatility often seen in UK-listed private equity companies.
"The main difference for the investor is you are investing in a single manager’s pool of companies and you are taking therefore a much higher concentration risk in relation to the underlying portfolio, which is typically much more concentrated," he said.
"Even the good ones have the potential to be very volatile."
Lebus says he prefers to pick managers with expertise in the specific industry sector and would rather pay a higher price for a good asset.
He says that while certain parts of the European buy-out market look attractive, the US, which houses 53 per cent of the trust’s investments, remains the country with the best opportunities on offer.
"In our view, the US market is the best-developed and most productive market in private equity, and that has been reflected on the portfolio."
In the future, Lebus says he expects there to be more opportunities in Asia, and the trust to gravitate towards those.
One of the themes the manager looks to benefit from is ongoing demographic change in the world, but the largest single sector weighting remains technology.
"IT done well by specialist managers is disruptive technology which equates to growth even in a poor market."
"We have been investing in successful managers in the sector for many years."
The trust does not receive dividends from its investments and does not pay them to investors. However, regulations now allow it to pay dividends out of capital, and the manager admits he has considered it.
"Ultimately we want to do what investors want, of course. Our investors aren’t telling us they want dividends. There doesn’t seem to be a significant rating difference between those companies that pay a dividend and those that don't."
The trust has no gearing and had ongoing charges of 1.21 per cent last year, inclusive of a performance fee.