It was just after 9am on Monday 12 September and things were looking good for executives in HarbourVest Partners‘ London office. The firm had issued a statement just hours earlier outlining a 650 pence-a-share ($8; €8) offer for SVG Capital, a listed private equity investment vehicle. Between shares it had bought in the open market, an irrevocable undertaking from Coller Capital and various letters of intent, it had accounted for just over 51 percent of the company’s shares. It was beginning to look like months of hard work and planning was about to pay off.
“In a normal situation, with that level of support, where you’ve got the majority of shareholders there by 9.15 on the first morning…I think that’s quite a clear signal that the shareholder base was receptive to that proposal,” David Atterbury, managing director at HarbourVest, tells Secondaries Investor.
But this was no normal situation. Until that point, secondaries firms had only ever taken listed vehicles private with the prior support of the target’s board. So when SVG’s management issued a statement just after 10am urging shareholders to take no action, the deal moved into uncharted territory.
HarbourVest’s bid for SVG was successful, but only after a five-week saga involving some of the biggest names in secondaries. SVG capitulated to its £807 million offer for the firm’s portfolio of buyout funds. While the deal didn’t end the way HarbourVest initially planned, the process typifies the types of transactions HarbourVest likes to engage in: innovative, complex and with a level of execution risk many other secondaries firms shy away from.
“We didn’t think it would be a straight line,” says John Toomey, a managing director based in the firm’s Boston headquarters. “I’m not sure in any situation you’re in you have perfect visibility of exactly which twists and turns will occur. The fact that you have experienced a lot over the years [means] you’re prepared for many scenarios. Preparedness goes a long way in being able to execute these types of situations.”
HarbourVest’s attitude towards complex deals was instilled by Fred Maynard, one of the firm’s original partners who founded its secondaries business, according to Jeff Keay, a managing director in Boston. Associates and vice-presidents at the firm are encouraged to find opportunities that aren’t “middle of the fairway types of deals” and instead look for highly complex and labour-intensive transactions that may have a long time between launch and close, he says.
The firm tells limited partners in its Dover Street secondaries funds that between 60 percent to 75 percent of deals will be transactions that haven’t been thought of yet, according to Keay.
“That is our strategy,” Keay says. “There are lots of choices for investors who want to access the secondaries market, and fundamentally for those investors it comes down to: what strategy resonates with you the most?”
The SVG deal throws up a few questions for investors if secondaries funds are used to back unsolicited takeover bids of listed private equity vehicles. How do they feel about those funds acquiring private equity asset through the extra layer of a public vehicle? Does the entrance of competing bidders – Goldman Sachs Asset Management, Canada Pension Plan Investment Board, Pantheon and Pomona Capital in this case – take this kind of deal out of the “proprietary” bucket, and is an ensuing bidding war ultimately a good thing for limited partners?
While answers to those specific questions lie in how well Dover Street IX – the vehicle HarbourVest is using to back the SVG deal – performs, HarbourVest’s ability to find and execute complex deals is not in doubt. The firm’s 2011-vintage Dover Street VIII is the best performing secondaries fund of its vintage, according to Cambridge Associates, and its Dover IX fund closed ahead of its $3.6 billion target on $4.8 billion in early November, three weeks after SVG agreed to the deal.
HarbourVest, which is celebrating the 30th anniversary of its first secondaries deal this year, has come a long way from its 1986 purchase of a $1 million interest in Vanguard Associates II, a venture capital fund.
Among its standout deals over the last three decades include MidOcean Partners, a €1.5 billion spin-out involving the acquisition of Deutsche Bank’s latter stage private equity portfolio in 2003; Tresser, a $1.3 billion purchase of 53, mainly buyout, funds from UBS that took 18 months and closed in 2003; and Absolute Private Equity and Conversus Capital, two listed vehicles the firm took private in 2011 and 2012 respectively, and which paved the way for SVG, according to the firm.
Still, all investment managers have deals that don’t succeed and HarbourVest is no exception, though executives say complexity does not necessarily make a deal more susceptible to failure.
[quote]“There are lots of choices for investors who want to access the secondaries market, and fundamentally for those investors it comes down to: what strategy resonates with you the most?”[/quote]
“The unsuccessful deals have not been a function of the complexity,” Keay says. “More often than not, they have been a function of identifying a risk such as industry, capital structure or customer concentration, and misjudging the probability of that risk materialising.”
And while the firm doesn’t have a perfect batting average, it has never had a year or a fund when it hasn’t made gains for investors, managing director Brett Gordon says.
Being at the forefront of the secondaries market is something the firm prides itself on, but there are strategies it is not exploring just yet. The firm says it is not joining the likes of Hycroft Capital and Neuberger Berman into the GP interest business, nor does it plan to compete with 17Capital or Vision Capital on preferred equity.
Will HarbourVest turn what it has learned from the SVG deal into a template for other deals? Not exactly, according to Gordon, who says the transaction has given the firm an insight into how different sellers think.
“Where we are today with SVG is largely due to the learnings we had by taking Absolute Private Equity private, and then applying that to Conversus Capital, and taking that private,” he says.
“Different deals structured in very different ways, but it is those learnings that allow us to say, OK, where else can I apply some of this to something next.”