- HarbourVest Global Private Equity's activity is picking up
- A wide discount looks like an attractive entry point
- Good long-term performance
- Diversified exposure
- Recent uplift in valuations
- Wide discount to NAV
- Relatively high fees
While there are hundreds of investment trusts that invest in listed equities, there are only a handful for investors looking to access private markets. Investors' first decision is between a trust that invests directly in unquoted companies, of which there are at least seven, or a trust that invests in a portfolio of private equity funds, of which there are five, according to Winterflood data.
The funds that invest directly in private equity tend to be more volatile, though can deliver stronger returns. For diversified exposure to private equity, a fund of funds may be a more suitable option, although the fees can be quite high.
The best performing private equity fund of funds over one, three and five years in terms of net assets, and with the second best five-year share price performance, is HarbourVest Global Private Equity (HVPE). This is also the largest, with net assets of £1.87bn on 22 January. With the exception of eight co-investments, the trust has exposure to thousands of companies via HarbourVest funds, which in turn are made up of direct and indirect private company investments.
HarbourVest Global Private Equity aims for long-term capital growth and is diversified by geography, strategy, stage of investment, vintage year and sector. As at the end of July, the trust invested in 49 HarbourVest funds, amounting to over 9,500 individual assets in the portfolio at various stages of maturity. The top 1,000 companies represented 86 per cent of the trust’s net assets.
One of the reasons the fund has performed better than peers recently is its relative overweight exposure to the technology and software sector, which made up 29 per cent of the portfolio at the end of December. The consumer and healthcare sectors are the second-largest exposures each at 15 per cent, which has also helped boost performance.
Around half of the fund invests in the primary market, where new funds are committed to companies, and 30 per cent in the secondary market, where pre-existing investor commitments are bought and sold. The rest is held in direct investments.
In a research paper published at the end of November, analysts at broker Numis said HarbourVest Global Private Equity had delivered a net asset annualised total return of 11 per cent for the past 10 years, compared with an annualised FTSE All World index total return of 7 per cent, in dollar terms.
While the first half of last year was slow for realisations – underlying assets being sold either through buyouts or an initial public offering (IPO) – activity picked up significantly towards the end of the year. In December alone, there were 41 liquidity events compared with an average of 20 per month in 2020, including 28 mergers and acquisitions, and 13 IPOs.
Analysts at Numis say many realisations in the private equity sector during 2020 were at significant uplifts to valuations, “which should give comfort over the conservative nature of NAV valuations and reflects a bias towards high quality businesses in resilient sectors”. They add that the special purpose acquisition company (SPAC) boom in the US is also expected to support the exit environment for private equity.
HarbourVest Global Private Equity's largest geographical exposure is the US, which accounts for 59 per cent of its assets, compared with 23 per cent for Europe and 15 per cent for Asia Pacific. In its interim report for the six months to 31 July 2020, the trust reported strongest gains came from the European portfolio, which generated a value increase of 3.6 per cent, followed closely by the US assets, which returned 3.5 per cent.
56 per cent of the portfolio is concentrated on the investment buyout stage, 35 per cent on venture and growth equity, and the rest on mezzanine and real assets. The trust, listed in London, is managed by HarbourVest Advisers, an affiliate of HarbourVest Partners, a private equity firm based in Boston. HarbourVest was founded in 1982 and has grown to more than $69bn (£50.44bn) in assets under management, with more than 145 investment professionals working across 10 global offices.
The HarbourVest funds invest the trust’s commitments over a period of roughly four years, with the funds typically fully invested for the next three to six years, with the managers actively engaging to drive growth. Within approximately seven to 10 years, managers are typically realising investments and the investment cycle starts again.
The trust made handsome profits in recent years across a number of companies that had high-profile IPOs including data security services provider CrowdStrike (US:CRWD), business software provider Slack Technologies (US:WORK) and taxi service Uber Technologies (US:UBER). Notable IPOs last year included technology-based health insurer GoHealth (US:GOCO) and clinical-stage oncology biotechnology firm Revolution Medicines (US:RVMD).
At the time of the trust’s latest interim report to 31 July 2020, Corsair Capital Infrastructure Partners was its largest individual manager across the strategies, making up 3.8 per cent of the portfolio, held within the HarbourVest Global Private Equity-seeded real assets vehicle. IDG Capital Partners was the second largest, which focuses on technology companies located in China, and has had success investing in household names such as Alibaba (HK:9988) and Baidu (US:BIDU).
The largest individual company making up 1.1 per cent of the portfolio was Preston Hollow Capital, a speciality finance platform focused on niche underwriting and opportunistic investing.
Because it is a fund of funds portfolio, total fees can be quite high. The total expense ratio for the six months to 31 July 2020 was quite low at 0.74 per cent, owing to a significantly reduced performance fee charged on secondary investments and direct co-investments. The total expense ratio for the 12 months to 31 January 2019 was 2.37 per cent, reflecting all the management costs and the performance fee. While the operating expenses and the management fees do not vary greatly from one year to the next, the performance fee varies significantly.
The trust’s annual report says the total expense ratio has been trending downwards since inception, with the management fee component in particular having declined steadily from more than 2 per cent of net assets in the early years to an annualised 0.83 per cent in the 12 months to 31 January 2019.
During the sell-off in March, the private equity sector swung to huge discounts as underlying assets in the funds became very difficult to value amid a lot of uncertainty. However, recent activity in the HarbourVest portfolio has been strong and underlying earnings have proved broadly resilient. The trust was trading at an 20.8 per cent discount to net assets at close on 22 January, which could narrow as activity continues to pick up. If you have a long-term investment horizon and a high risk tolerance, this looks like a reasonable time to access this diversified private equity fund. Buy.
HarbourVest Global Private Equity (HPVE)
|AIC sector||Private Equity*||NAV||2341.05p|
|Fund type||Guernsey domiciled investment company*||Price discount to NAV||20.80%|
|Market cap||£1.48bn||Ongoing charge||0.55%*|
|No of holdings||57**||Yield||0.00%|
|Set-up date||6/12/07*||More details||hvpe.com|
|Source: Winterflood as at 25 January 2021, *AIC, **HarbourVest.|
|Fund/benchmark||1-year total return (%)||3-year cumulative total return (%)||5-year cumulative total return (%)|
|HarbourVest Global Private Equity share price||1||46||115|
|HarbourVest Global Private Equity NAV||15||52||104|
|Private Equity Fund of Funds average share price||-4||26||102|
|Private Equity Fund of Funds average NAV||9||36||82|
|FTSE All-Share index||-7||0||41|
|FTSE World index||12||35||113|
|Source: Winterflood, as at 25 January 2021.|
|Geographical break down|
|Rest of world||3%|
|Source: HarbourVest 31 Dec 2020|
|Sector break down|
|Tech and software||29%|
|Medical and biotech||15%|
|Business services and other||12%|
|Industrial and transport||9%|
|Media and telecom||5%|
|Energy and cleantech||4%|
|Source: HarbourVest 31 Dec 2020|
|Investment stage of assets|
|Venture and growth equity||35%|
|Mezzanine and real assets||9%|
|Source: HarbourVest 31 Dec 2020|