HarbourVest Global Private Equity (HVPE), one of the largest listed funds in its sector after 3i Group (III), is facing calls to wind down or sell itself from top 10 shareholder Asset Value Investors.
The activist manager of AVI Global (AGT) and MIGO Opportunities (MIGO) investment trusts says it will not support the continuation vote the £2.3bn private equity fund is holding in July unless it suspends new investments or launches a formal sales process of the company.
In an open letter, AVI, holder of 3.3% of HVPE’s shares, a stake worth £75m, said it had held a “constructive dialogue” with the company’s chair and US fund manager and was pleased with its recent moves to tackle the chronic 28% discount, currently at a 10-year average.
However, a restructuring of the portfolio, increase in share buybacks and the decision to sell $300m of fund investments were insufficient given HVPE’s poor underlying performance, said fund manager Tom Treanor.
Removing the positive impact of buybacks, HVPE’s growth in net asset value (NAV) had lagged the FTSE All World index over all time periods up to seven years, and only over a decade did its 129% return come close to the global benchmark’s 130%.
For example, the worst underperformance was over three years where AVI calculated HarbourVest managers had generated a 5% total return in sterling compared to the FTSE All World’s 53%.
The disappointing returns and lack of investor demand were one reason why HVPE shares persistently traded below the value of its investments, said Treanor. In the letter to the company’s board, managers and shareholders, he also took aim at HVPE’s “stretched balance sheet, inaccurate cashflow forecasts, and a lack of material asset sales” that had hampered proper capital allocation.
While applauding the secondary fund sale announced last month, he criticised the company for buying just 3.6% of its shares last year. This was despite the fact such buybacks could generate a risk-free 41% return from purchasing its shares for around 70p in the pound. In light of this Treanor urged HVPE to go much further.
However, he reserved his strongest criticism for the company’s “wildly over optimistic” forecasts for distributions it received from the sale of investments by its external fund managers. For example, the actual amount HVPE received from distributions in the twelve months to 31 July last year came in 47% below the forecast made a year earlier.
“Despite what appears to be a rigorous process, a comparison of the forecasts to actual outcomes suggests the company has been flying blind for some considerable time,” Treanor said.
HVPE has been approached for a comment.
Our view
James Carthew, head of investment company research at QuotedData, said: “While there are exceptions, the private equity sector is burdened with poor performance (associated with post-COVID interest rate rises and a lack of exits) and wide discounts. Fortunately, there are signs that the pace of exits is picking up, but the jury is out over whether 2026 will be the year that the sector goes back to beating the listed global sector (as it has over 10 years). There is also a question mark over whether the sector can win back the professional investors it lost as a result of the cost disclosure mess. In that context, some shrinkage of the sector is inevitable. However, AVI’s proposed solution of seeking a buyer for the portfolio feels too drastic to me. I would prefer that HVPE offered to create a realisation pool for those investors who believe that there is greater upside from narrowing the discount than from a potential return to form for the trust. Even if 75% of investors wanted cash, a $1bn fund would still be viable.”
