Avoiding the herd

There is widespread belief that LPs are only likely to back existing fund managers, and even then only after prolonged due diligence and likely at a lower level than previously. What are your views on this?

I don't disagree with this statement, but for anybody fundraising, if you don't tick all the boxes, you've provided a ready-made excuse for why not to invest. Fund managers must demonstrate that they have a competitive advantage and a team with a great track record. If not, whether they are an existing fund manager or a first-time fund, they are setting themselves up for failure. The hurdle is higher for everybody, as no one wants to make an obvious mistake.

As a result of the downturn in the markets - LPs have been changing their investment strategies with regards to what areas of private equity they are interested in investing. Has HarbourVest changed its strategy, and if so, to what sectors and why?

I think following the herd is an obvious mistake. If an LP is looking to change its investment strategy then I would ask why and what it didn't like before. If the case was that the LP was investing solely in large buyout funds before, then changing now could be setting itself up for the same outcome. As a fund-of-funds, HarbourVest has a defined pool of capital and a set strategy that we stick with. The only thing that has changed for us is the opportunity set for managers we want to invest in. As the market has changed, we have had to adapt with this. If we were simply in the asset gathering business, distressed credit and secondaries are quite hot right now - everyday we get calls asking if we are raising a new secondaries fund.

As a fund-of-funds you see the market as both an LP and a GP. What are the major changes from both sides?

The major change from the LP side is that we have moved up popularity stakes with GPs, particularly with US-based venture capitalists. There is a huge capital squeeze right now - calls on capital are only increasing. As such, I believe GPs have realised that as a fund-of-funds, unless we have grossly overcommitted our capital, we have and always will be there.

From a GP perspective, they are focusing on the basics now, on their core competencies, for the purpose of building and expanding their franchise. There is now an increasing emphasis on investor relations, as GPs have realised that maintaining relationships with LPs is extremely important. You can't take them for granted anymore.

Do you find investors preferring to access fund managers through lower-cost secondaries rather than pump money into primary funds right now?

I think secondaries are a very attractive investment right now, but it is a question of whether the investor has the necessary skill set. It is still about manager selection and quality. Secondaries are competitive and transactional, and negotiation and attaining the right price is crucial. Secondary transactions also involve a lot of primary research. It is really a question of execution over theory.

There has been much talk on secondaries transactions, but less action it seems. What are your experiences of this?

I think this is absolutely right. Last year, for example, our inbound deal flow was $60bn. Of this $60bn, about $11bn actually closed, meaning about 20% of deal flow was actually transacted. This means that there is still a massive gap between what vendors want and what buyers are willing to pay. Most of the $11bn represented vendors that were forced to sell. The focus on secondaries has now changed to why the seller is selling rather than what the seller is selling. Secondaries really depend on the individual transaction: a pension fund looking to re-jig its portfolio is probably a deal that is not worth doing.

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