FTSE 250 private equity vehicle HarbourVest (LSE:HVPE) has received an outperform rating from broker Peel Hunt as it initiates coverage on the company. HVPE is one of the leading listed private equity vehicles out there with a strong track record and with diversification benefits and the oversight of one of the best PE teams in the business.
We last looked at HarbourVest ourselves six months ago when we spoke with Richard Hickman, managing director responsible for HVPE, largely about how the investment trust had fared during the pandemic. “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 we mentioned in our analysis then:
Peel Hunt noted that the investment trust’s balance sheet is strong, with over USD 1,050m in cash approx plus a credit facility. Include expected distributions over the next 12 months, and this brings the total to USD 1.8bn. This compares to forecast cash investments in HarbourVest funds over the next 36 months of USD 2.7bn. “This represents both prudent balance sheet management and a disciplined long term strategic approach,” said Anthony Leatham, an analyst with Peel Hunt.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.
Note that HVPE is currently trading at a 44% discount to the end of July, which Peel Hunt considers to be “a rare level.” They have strong confidence in HarbourVest as a manager, and given strong NAV progression to date, reckons this to be an attractive entry point into a private equity strategy that has historically shown very low beta to down markets.
As we noted in our previous article on the trust, long term performance is very strong on this one. Yes, the short term chart looks messier, but that is what is setting up the buying opportunity for investors. The five and 10 year annualised NAV total returns of 21% and 16% have outperformed the wider peer groups and are second only to HgCapital Trust. The five year to date annualised NAV total return makes HVPE the top performing fund in its PE fund of funds sector.
Tarred by the same brush?
Two other points we’d make here: firstly, net gain on investments in the year ending 31 January 2022 was USD 1.06bn, with consistent positive returns across different geographies. US exposure was up 35% and we’d expect something similar over the short to medium term. Secondly. the discount levels on the investment trust – 44% – were last seen during peak Covid. It is rare to see HVPE trading at this kind of a discount historically.
“The macro and market environment has deteriorated and the sentiment reversal against growth investing has been severe,” said Leetham at Peel Hunt. “In some case, particularly for those strategies exposed to the more highly rated pre-IPO stage, trusts have seen damaging mark-downs take their toll on more concentrated portfolios. We would note that HVPE’s portfolio features exposure to both growth and value companies.”
Peel Hunt reckons this is just a case of history repeating itself: HPVE is being dragged down in line with the worst affected private equity and growth capital strategies, in spite of having greater diversification through its fund of fund of fund structure. ‘Tarred by the same brush’ seems to be setting up a bargain short term entry point.
