Article from Investment Trust Newsletter July 2024.  For full access to all articles and back copies, please SUBSCRIBE HERE.

HARBOURVEST GLOBAL PRIVATE EQUITY 

(HVPE, 2407.5p)

HVPE was another one of our ISA recommendations in March at 2232.5p, since when the shares have performed reasonably well, but we have been feeling there is much more to come here.  When all investment trusts are ranked by their ten-year NAV performance, HVPE appears on the front page, in the top twenty, and yet its shares still trade on a very wide discount to NAV of 41.1%.  This apparent lack of demand for the shares is something of a sector-wide issue, but we remain perplexed by the reluctance to invest in what is a proven trust of considerable scale in a proven sector.

To recap HVPE is a £3bn private equity trust that has been in the FTSE 250 Index since 2015, with a highly diversified fund-of-funds portfolio that ultimately provides exposure to more than a thousand underlying companies held in 63 Harbourvest funds and 16 co-investments. As the name suggests, the trusts invests globally and Richard Hickman, managing director of Harbourvest in London, says the trust tries to capture the full range of private market opportunities from smaller, early-stage companies to mid-market buyouts, up to larger companies and infrastructure investments.  HVPE’s portfolio currently comprises 61% buyouts, 31% venture and growth equity, and 8% mezzanine and infrastructure.  By geography it is 63% in North America, 21% in Europe, 14% Europe, and 2% elsewhere. Overall around a third of the portfolio is technology and software, including cloud computing, AI, software-as-a-service, biotechnology, big data, and robotics.  

It has compounded its NAV per share at 13.4% annually over the last decade, considerably outperforming the FTSE All-World Index over the same period, although recent performance has been well below that level.  HVPE says its primary portfolio has outperformed its industry peers in 16 of the past 25 years, and the trust’s access to the full resources of Harbourvest means it is well placed generally to benefit from the performance of some of the best managers in the industry.  In the year to 31st January the NAV per share grew by 4% in dollar terms, and Richard admits “we have seen weaker growth over the last two financial years.”  Despite reduced distributions from its portfolio companies, the trust has found the cash for some share buybacks, but we cannot say these have worked particularly well to narrow the wide discount and the trust has more recently announced a revised capital allocation policy as a next step.  The new ‘distribution pool’ mechanism provides a new structure whereby 15% of all incoming cashflows from realisations will be available for distribution to shareholders, either through share buybacks or possibly in the future through special dividends.  Richard says he is expecting a recovery in distributions in the months ahead as exit processes in the underlying funds are “ticking up.”  The current balance of the distribution pool gathered since the start of February is US$52m, and a total of around US$150m-US$250m in aggregate is expected to flow into the pool by the end of 2025.  This is a fixed commitment on the part of the board, with the amounts to be updated and published each month in future factsheets. This should prevent the frequent criticism that boards talk a good talk on share buybacks but then fail to follow through with significant concrete action.  “We are absolutely determined to close this gap between share price and NAV”, Richard says.

It is sometimes argued that discounts to NAV arise and persist in the private equity sector because of scepticism about the calculation of NAVs and how reliable they might be, but we have always considered this a red herring. This is not a new industry, and many private equity funds have consistently demonstrated uplifts on realisations from their carrying values on a consistent basis over time.  HVPE has recorded an average uplift on exit of 52% since it began analysing the data in 2012, and has never had a year without the figure being over 20%.

Rising interest rates, a quiet period for IPO activity, a focus on costs, a general fear of unlisted investments, and geopolitical concerns across global markets have all been a brake on performance and demand for private equity during the past couple of years, but we think the sector can look ahead with more confidence.  We think HVPE has been through such cycles before, and combines good liquidity with excellent resources, a strong track record, and of course the currently attractive valuation.  It remains to be seen whether the trust’s distribution pool approach will work over time, but the board has signalled its intention to address the discount, and we think the current entry point looks compelling.  We keep our buy recommendation.