Almost every week now I find myself touching on the listed PE fund of funds. Last week I identified ICG Enterprise as another addition to my basket of PE funds. This week its HarbourVest, who I’ve traditionally not followed as closely as the likes of Pantheon. But a note out last week from Lberium’s alternative fund’s team prompted me to have a closer look.
The paper’s called “What’s not to love” and its by analyst Myrto Charamis. The overall thesis is, I think, probably spot on. It suggests that listed PE FoF are an increasingly essential part of a well balanced portfolio. The paper lists a number of positives not least reduced fees, relatively low leverage within the FoFs, and decent realisations over the last year (ICG Enterprise is a notable example of this trend). According to Liberum, the underlying assets of the FoFs in their universe “are valued at significant EBITDA multiples close to the global market average of 11.0x EBITDA (source: Bain).”. So, in sum, balance sheets are strong, long term NAV returns more than decent “and the sector is better priced compared to other alternative asset classes. We think this is a market that favours large managers with global reach and broad industry expertise that can sustain future returns.” Crucially valuations don’t look terrifically stretched – at least at the fund level. Discounts are still fairly chunky and more than a few well regarded funds are trading at close to 20% discounts.
One of these is HarbourVest, ticker HVPE, Liberum’s favourite pick which is currently trading at a 19.6% discount. According to Liberum the fund “stands out for its consistent track record, the scale it provides and the attractive valuation. It has the highest ten-year NAV total return in sterling terms and is a member of the FTSE 250. The company has a healthy commitment ratio, including an available fully undrawn credit line of $500m.”. Key features include:
– Assets of $1.7 billion
– a diversified base of investments. As at 31 March, 2018, the company had more than 7,500 underlying private companies from large buyouts to early venture
– half decent valuations for those businesses within the portfolio. As at 31 January, 2017, the overall valuation multiple of the holdings in the buyout portfolio was 11.1x EBITDA and the overall debt multiple was 4.6x EBITDA. The weighted average EBITDA growth was 11% over the previous year. As at 31 July, 2017, the uplift on carrying value at realisation was 30% and the average multiple on cost was 3.6x.
– far from extortionate fees. Management fees 1.08% plus performance fees of 0.51%
The only obvious downside is that unlike some its peers, it doesn’t pay out a dividend – which doesn’t bother me overly. It’s hard though to argue with a 10 year NAV return of 197% and a 19% plus discount. Another addition to my core portfolio.