HarbourVest Global Private Equity 21 September 2023
Disclosure – Independent Investment Research
This is independent research issued by Kepler Partners LLP. The analyst who has prepared this research is not aware of Kepler Partners LLP having a relationship with the company covered in this research report and/or a conflict of interest which is likely to impair the objectivity of the research and this report should accordingly be viewed as independent.
HarbourVest Global Private Equity (HVPE) is one of the larger London-listed private equity trusts, with net assets of $3.8bn, and provides exposure to a very wide range of private market investments – largely to companies, but also to real assets and private credit.
Key to the manager’s investment thesis is diversification, which the team believe helps long-term returns not only by ensuring the portfolio has some exposure to the real winners in the private equity sector, but also by minimising risk. As such, the portfolio has exposure to over 1,000 companies around the world, invested in alongside a wide range of private equity managers.
As we discuss in the Portfolio section, the manager and board periodically set strategic asset allocation (SAA) targets, which represent long-term goals for the shape of the portfolio. One feature from a year ago was the extended allocation to venture capital, which was significantly above the tactical asset allocation goal. A combination of valuation moves and investment activity has meant that HVPE’s portfolio is now more in line with the SAA.
HVPE is effectively 7.5% geared on a net basis. As with any investment, gearing enhances the upside, but exaggerates the downside. Compared to peers, HVPE has amongst the higher commitments relative to NAV or cash, but we would observe that historically the managers have managed cash flows well. During Covid, the board made relatively few commitments, so the last two financial years saw a significant step-up in commitments made and reflects something of a catch-up. As such, we would expect to see coverage ratios modestly increase over time.
Over the long term, HVPE has delivered impressive NAV returns. As we discuss in Portfolio, the outperformance of comparators in more recent years has largely been the result of exposure to venture funds, which contributed to considerable NAV growth post-Covid. In the year ending 31/03/2023, as one might have expected, venture detracted. On the other hand, the elements of the portfolio contributed relatively well – in particular, the credit and infrastructure exposure – leaving the NAV down only 1.3% and showing the benefits of diversification. This represented a resilient performance against world equity indices, but was disappointing relative to other listed private equity trusts. That said, over the longer term, HVPE has been amongst the strongest NAV performers in the peer group, especially on a risk-adjusted basis.
HVPE’s discount to NAV is currently 40%, which is wide in absolute terms and relative to its history, as we discuss in the Discount section. Having a geared investment position, as well as significant commitments (see Gearing section), buybacks clearly need to be managed with caution. However, we would share the board’s view that the level of buybacks currently being deployed is unlikely to act as a powerful force to narrow the discount. However, it is highly accretive and it also shows confidence in the reported NAV. Absent a larger buyback, in our view, the main catalyst that will see the discount narrowing is shareholder appetites returning, possibly a result of bond yields declining as the interest rate cycle plays out and the resultant level of private equity activity increasing.
- Long experience and expertise of manager in private markets is a clear differentiator
- Low stock-specific risk, and broad exposure, should smooth returns over time
- Wide discount to NAV should provide reassurance to long-term investors
- Relatively opaque underlying holdings
- Geared exposure can exacerbate downside
- High OCF is likely to limit appeal for some investors