HarbourVest Global Private Equity (HVPE) has agreed to sell $300m (£224m) of assets from its $4.6bn portfolio to boost share buybacks and highlight the extreme undervaluation of its stock.

Five HVPE positions in buyout funds will be sold over the next year at a blended discount of 6% below the 30 June valuation. That contrasts with its own shares standing 29% below net asset value (NAV), or the value of the investment company’s investments.

Run by Boston-based HarbourVest Partners, HVPE is 62% invested in North America and conducts its business in US dollars although the shares in the Guernsey investment company are listed on the London Stock Exchange.

It will receive two tranches of cash, starting with $138m in March followed by $162m in December, of which 30%, or $90m, will go into its distribution pool to return capital to shareholders through share buybacks. At 31 October the pool stood at $64.1m.

In addition to the liquidity, the sale of one co-investment fund and four fund-of-funds vehicles will reduce the proportion in company management buyouts from 61% to its 55% target.

Stifel analyst Iain Scouller said the transaction – which is six-times larger than a $45m disposal last year – should lop $210m off HVPE’s net debt to leave it at $234m, down from $444m at 31 October. As a proportion of net assets, debt will fall to 6% compared to 11% previously.

It also lowers investment commitments over the next five-to-seven years by $105m to $2.21bn, equivalent to 52.8% of the portfolio compared to 55.3% previously.

Scouller said: “We think one the reasons HVPE has been trading at a discount of between 30% to 40% over the past year has been due to concerns about the balance sheet with relatively high leverage and commitments. In one fell swoop, this sale helps ease these concerns at a relatively low cost, with the 6% discount on the $300m sale equivalent to an NAV reduction of 0.4%.”

The move increases the pressure on rival Pantheon International (PIN) to follow suit. Yesterday activist investor Metage Capital published an open letter urging the company to offload £500m, or 22%, of its portfolio in response to its 28% share price discount.

Winterflood analyst Shavar Halberstadt said the timing was “uncanny”.

“If there’s one thing investment trust investors have been beating the drum for in the last few years, it would be ‘proving the NAV’. HVPE has now done so, creating substantial goodwill ahead of the fund’s voluntary continuation vote in July,” he said.

Chair Ed Warner said: “This transaction is a clear demonstration of HVPE’s proactive approach to portfolio management and our commitment to delivering long-term value for shareholders. We have taken decisive steps to enhance liquidity and the size of the distribution pool, to align the portfolio with our strategic objectives, and to ensure we remain well-positioned to capture future opportunities.”

Through HarbourVest’s platform, HVPE invests in external private equity fund managers such as QHP Capital, Sterling Investment Partners and Leonard Green & Partners. In January it announced a move towards a new separately managed account structure that will be cheaper and more flexible than its traditional “co-mingled funds” approach.

According to the company’s data, since launch in 2007 HVPE has generated an underlying 10% annual return from its diversified portfolio spread across sectors and investment stages. A total return of 476% over 18 years has beaten the FTSE All-World index total return of 283% or 8% a year. In sterling terms, UK shareholders have done even better, receiving a total 504% through their shares or 11% a year.

However, the picture has reversed over the past five years with shareholders receiving a 77% total return or 12% a year that lags the FTSE All World’s 103% or 15% annualised return, although HVPE’s underlying growth has matched this.

Our view

James Carthew, head of investment company research at QuotedData, said: “$300m is about 6.5% of HarbourVest’s portfolio. Selling these funds on an average 6% discount looks like a great deal when you compare it to a share price discount to NAV of 29%. However, when you consider that it will have to wait for up to a year to get its money and that, on an average based on the experience of the last 13 years, when it waits for exits to occur naturally it gets a 51% uplift to its carrying value, it does not look quite so clever. There is a push by some investors for a dismemberment of funds such as HVPE and PIN to free up cash for buybacks. I am a shareholder and I would prefer to be patient and make more money long term.”