Learn about HarbourVest Partners and private equity secondaries

In private equity, secondary investments have emerged as a powerful tool for portfolio diversification and potential value creation. HarbourVest Partners, a global investment firm with more than US$100 billion in assets under management, has established itself as a leader in this space since its founding in 1982.

Secondaries in private equity involve the purchase of existing stakes in private equity funds, offering investors a unique avenue to access mature portfolios and potentially mitigate the J-curve effect. Investing in mature portfolios provides a greater degree of transparency and returns certainty, compared to a blind pool investment.

HarbourVest Partners’ approach to secondaries combines rigorous due diligence, active portfolio management, and a global perspective, enabling them to unlock value across various market conditions. Here’s a deep dive into what HarbourVest Partners does. 

Who is HarbourVest Partners?

HarbourVest Partners is a global private markets firm with over 40 years of experience and more than US$127 billion in assets under management, as of March 2024. 

Founded in the 1970s, the firm has steadily expanded its global footprint with offices across North America, Europe, and Asia.

HarbourVest’s investment strategies span primary funds, secondary transactions, direct co-investments, real assets and infrastructure, and private credit. Their platform provides clients access to global primary funds, secondary transactions, and direct co-investments, offering a comprehensive approach to private market investing.

With a team of over 235 investment professionals, HarbourVest combines decades of experience with a commitment to innovation, consistently identifying new opportunities to expand its expertise and meet evolving client needs.

Understanding secondaries in private equity

The secondary market provides private equity investors, also referred to as limited partners (LP), with a practical means to explore early exits and liquidate assets before fund maturity. 

Typically, transactions are classified as either LP-led secondaries or general partner-led transactions. The former describes limited partners selling their fund interests, while the latter is where the private equity fund manager or GP is the party initiating a sale of one or more of its portfolio companies to a new fund formed by a new set of limited partners. 

Transactions can also be classified as complex or non-complex, depending on how complicated the deal is.

Secondaries have been growing in importance, especially in recent years where private equity exits have been almost non-existent. LP-led secondary transactions have grown in volume, with many assets priced attractively as the original owners are required to sell for various reasons. There has been a corresponding growth in GP-led transactions as well, with private equity fund managers looking to extend the shelf life or holding periods of their funds/investments.

The role of secondaries in portfolio diversification

Secondaries can play a crucial role in diversifying your investment portfolio as they serve as a complementary element to primary private equity investing. Secondaries offer some unique advantages mentioned below:

Firstly, they provide a faster return on capital compared to traditional private equity investments as secondary investments are typically made when the primary private equity fund is around four or five years into its shelf life. 

This period is when a majority of investments have already been made and the fund is looking to harvest or realise returns from its investments. As such, secondaries can help mitigate the ‘J-curve’ effect, potentially enhancing the overall returns. 

Secondly, secondaries can offer wider diversification, reducing concentration risk in your portfolio. It implies, that on top of geographical diversification, secondary private equity solutions may diversify across strategies (direct, primary, and secondary investments), vintages (the year in which a fund began making investments), as well as the stages of the investees (buyout or growth equity or venture). 

Lastly, in unfavourable market environments for private equity investments, secondaries can be beneficiaries, due to the ability of fund managers to deploy capital and purchase quality assets at attractive prices in an opportunistic manner.

This potential for attractive risk-adjusted returns makes secondaries an increasingly popular choice for sophisticated investors looking to optimise their private market exposure. This is reflected in the surge in the secondary market scale, which has tripled in size1 over the past ten years.

According to PineBridge Investments, the value of secondary transactions is expected to triple over the next seven years, from US$114 billion2 in 2023 to US$417 billion in 2030, suggesting ample opportunity for LPs to put capital to work with the ability to access private markets more efficiently.

HarbourVest Partners' approach to secondaries

With more than 500 secondary transactions completed since its first secondary investment in 1986, HarbourVest leverages its extensive experience and proprietary data to identify high-quality opportunities. 

HarbourVest also ranks as one of the market leaders in complex transactions, having committed more than US$25 billion over more than 150 complex transactions since 1995. Their strategy aims to capitalise on market dynamics, such as the denominator effect, which creates attractive buying opportunities. 

HarbourVest's approach emphasises diversification, early distributions, and lower blind pool risk, particularly appealing in uncertain economic environments. 

By focusing on quality over discounts, HarbourVest aims to deliver strong, early performance for investors seeking exposure to seasoned private equity assets.

HarbourVest Partners' fund selection process

HarbourVest Partners employs a rigorous fund selection process, leveraging its global platform to identify and source primary fund investments. Their team conducts thorough due diligence and evaluation of potential investments. They assess factors such as track record, strategy alignment, and potential for top-quartile returns.

HarbourVest's approach involves meeting with over 500 managers globally each year, investing in only a select few. This selective process ensures alignment with investor objectives and access to high-quality, differentiated private market opportunities. The firm’s extensive experience in evaluating fund managers over four decades allows them to offer institutional-quality access to sought-after and next-generation managers alike.

How HarbourVest Partners navigates market cycles 

HarbourVest Partners has developed robust strategies to navigate various market cycles and economic environments. The firm's adaptability is evident in its approach to the current macroeconomic landscape, where it has adopted a more targeted approach to private capital deployment. Despite challenging conditions, HarbourVest continues to identify compelling opportunities, particularly in venture capital.

HarbourVest's long-term performance track record is bolstered by its deep market knowledge and extensive network. The firm's global primary team explores emerging innovation cycles, focusing on sectors such as climate change, BioPharm, and AI. This forward-thinking approach, combined with a shift towards sustainable profitability over high valuations, positions HarbourVest to capitalise on attractive investment opportunities across different stages of the market cycle.

Accessing private equity through Endowus

HarbourVest Partners stands as a formidable player in the private equity landscape, offering institutional-quality access to secondary investments. Their sizeable portfolio, expert fund selection process, and adept navigation of market cycles underscore their position as industry leaders.

As you consider incorporating private equity into your investment strategy, Endowus offers a gateway to these exclusive opportunities. Through our platform, you can access world-class fund strategies like those offered by HarbourVest Partners, benefiting from our curated selection and commitment to transparent, low-cost investing. This ensures that more of your returns stay in your pocket, maximising your investment potential in the private equity space.

Log in to your Endowus Hong Kong account to unveil strategies managed by HarbourVest Partners and other leading alternative managers. For more information on Endowus Private Wealth and hedge fund investing, please contact us for a consultation.

Read more:

• How much am I meant to allocate to private credit, private equity, and hedge funds?
• Why private equity can be a good addition to your portfolio
• Why invest through Endowus

Sources:

1  HarbourVest Partners, 12 July, 2024, How advanced analytical tools can help secondary managers find a competitive advantage - HarbourVest

2 Pinebridge Investment, 6 February 2024, https://www.pinebridge.com/en/insights/could-the-private-equity-secondary-market-triple-in-5-years

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