Listed investment trust Harbourvest Global Private Equity’s (HVPE) set-up as a closed-end fund insulates it from issues that have hit the headlines in recent months, namely liquidity. As the structure is fully invested and trades as a company, it doesn’t have to be concerned with mass redemptions that can force open-ended equivalents to sell their holdings, which may be hard in an environment where liquidity is scare. However, in such an environment, the trust may trade at a hefty discount although investors can still get their money out.
The trust's investment manager, Harbourvest has a 36 year history of being involved in some eye-catching deals. Through investing in Harbourvest funds, HVPE has had exposure to global megacaps such as Facebook before it floated and also in Uber pre-IPO.
HVPE operates a fund of funds model which some may complain layer up fees as each fund will have a separate fee. However, its benefits are that it offers diversification as each fund may operate in different regions and target deals of various sizes. Richard Hickman, director of investments and operations at HVPE, says: “We have a global portfolio so we are investing across multiple funds. We have access to hundreds of private equity managers each with their own specialism. A single team couldn’t do that as you need multiple managers.”
In regards to the shifting investor base of the product, Mr Hickman says that the product is becoming more attractive to wealth managers with holdings growing significantly ‘in the last few years’. However he adds “we started off from a different position from many of our peers because we had institutions from the US as shareholders initially,”.
This said the trust has been ‘deliberately targeting wealth managers’ as said institutions have been selling down their positions.
Wisdom comes with age
Harbourvest has been operating in the unlisted company sector since 1982. It’s this rich history that gives the firm access to deals such as Uber, which, through its underlying managers, it invested in back in 2011 as well as many others.
The company’s head of investor relations, Charlotte Edgar, explains the benefits of being in the business for over three decades. “A lot of the managers are closed to new subscriptions so if you’re a large investor and you weren’t there ten years ago, chances are you won’t get a piece of that fund,” she says.
Mr Hickman discusses the brand of HVPE, saying that despite its £1.3 billion market cap “UK managers tend not to know us initially [although] it’s well known at the institutional level”.
Ms Edgar highlights the issues wealth managers would have investing directly in private equity. “They normally have high minimum entry levels in terms of the amount that you can allocate to these funds. Managing those cash flows is quite hard,” she says.
This is where the benefit of the closed-end structure comes into play as the company can manage cash flows and make sure they can fund commitments to their underlying funds.
Private equity has been criticised for some time for having dry powder and not deploying its ‘dry powder’ on assets. Mr Hickman is sympathetic to this view, to an extent. A typical private equity strategy is invested for around five years and then looks for an exit via and IPO or an alternative. He says that valuations are driven up by auctions for larger businesses where competition for the asset is elevated.
One of the benefits of HVPE is that it targets assets of varying market caps due to its structure so is not necessarily in competition with the behemoths of the industry like KKR and Bain Capital. Furthermore the $1.2 trillion of dry powder is about the same amount it stood in 2007, although deals with very little equity such as Alliance Boots are no longer a feature.
Given HVPE’s strong share price rally this year, it seems that the alternative asset class of private equity is alive and well. The trust trades on a discount in the mid-teens although this has come down significantly. Wealth managers looking to gain exposure to a diversified private equity portfolio could do a lot worse than HVPE’s offering.
