If you are starting to feel the markets are looking a little too volatile for your tastes, the quiet and leafy suburbs of private equity may be more suitable for at least some of the cash in your portfolio. Private equity specialist HarbourVest has a listed investment trust – HarbourVest Global Private Equity (LSE:HVPE) which allocates to private equity funds (including purchases through the secondary market) and direct co-investments in operating companies.
The trust makes investments into HarbourVest’s own funds during their initial fund raisings, further parallel investments alongside HarbourVest funds of funds, and also the purchase of limited partnership interests in HarbourVest funds from existing investors.
HVPE has put up some solid performance numbers over the years, up 69% over a tough three years versus +51% for the Association of Investment Companies’ Private Equity sector. It is also looking excellent over 12 months, up 23.1% to 10 March against sector performance of 13.6%. NAV total return over 12 months was 46%, again beating the sector by 11% or so.
Leading US private equity fund of funds
HarbourVest is a US-based private equity fund of funds specialist and manages around $92bn in total (December 2021). It is recognised within the private equity industry as one of the leading private equity fund of funds names out there. It has an excellent pedigree – e.g. it has been in the secondary investing market since 1986 and has been investing for almost 40 years.Part of the attraction of the HVPE investment trust is that it offers a broad diversification across many of the best names in the PE world, including venture capital, growth equity, buy out and real assets funds. There is simply no way for smaller investors to get into these funds other than through a structure like this.
We spoke with Richard Hickman, Managing Director responsible for HVPE at HarbourVest, and asked him about the impact of the pandemic on private equity and his trust. He explained that the main lesson managers took away from Covid was the importance of managing the balance sheet and that in his case the investment trust was able to manage its commitments well. At the underlying level, some deals were cancelled or postponed, “but by summer 2020 we felt balance had been restored. The [fund’s] portfolio has performed very well over the last two years and investors have been rewarded.”
Why private equity? Five things to know:
- Private equity funds invest in unlisted, off-stock market companies
- Funds are usually closed-ended, and make investments over a period of time
- Institutional investors commit to funds that can last for up to 10 years
- Buoyant sectors like technology and biotech are full of successful private companies
- A secondary market exists for investors who want to sell out of funds before they wind up
Massive private equity investment team
All of the private equity investments in the HVPE trust have been filtered through the deep expertise and risk management at the HarbourVest firm level. It is hard to underestimate the importance of the fact that the company has over 175 professionals on its investment team. This also confers additional advantages when it comes to sourcing secondary deals – when investors are looking for buyers of their private equity stakes.
“The fund is very broadly spread,” Hickman told us. “There is not a single vintage year that is more than 14%.” HVPE also tries to keep each sector at less than 20% of the fund, although technology remains an exception because of the exposure to venture funds, which are typically more focused on the technology sphere.”
As at the end of December 2021, HVPE had a good balance of funds in its portfolio, with 51% buyout funds, 40% in venture capital and growth equity, and another 9% in mezzanine and real assets. Some 54% were in the investment phase, with another 7% close to maturity. The biggest sector in the portfolio was Tech & Software (31%) followed by Consumer (13%) and Medical & Biotech (13%).
Secondary market edge
It should be stressed that HarbourVest’s position within the market gives it a considerable edge within the secondary market for private equity – the buying and selling of positions in funds which are already closed. This allows it to pick up some good deals in funds that have closed already.
HarbourVest competes in the investment trust sector with NB Private Equity. It really is a two horse race in our view, and we saw Winterflood analysts going through the same agonies when they dropped HVPE in favour of NBPE in January. Both were strong performers, but NBPE was trading at a bigger discount, used gearing and has a 3% dividend policy.
We should also mention risk management in this trust which is managed at the HarbourVest firm level, and takes into consideration the deliberations of the firm’s risk committee, overseeing all its allocations across a wide menu of PE and venture funds. This is a reassuring aspect for investors who want to ensure the portfolio is being independent reviewed for risk elements on a regular basis.
