HVPE a look at this one
Harbourvest Global Private equity assessed
Dear reader
Following the article “One to Chew Over” a reader questioned why had I not considered Harbourvest Global Private equity (HVPE) and Pantheon International (PIN) too. I didn’t have a ready answer to that, but decided I would be HVPE to look at them and give an o-PIN-ion. (I’ll cover PIN in a separate article).
Harbourvest
Clearly we see the same NAV growth and divergent share price and growing discount to NAV as ICGT, so that’s a good start.
HVPE is a fund of funds like ICGT but its focus is not 100% on buyouts. Instead buyouts are 55%, Venture & Growth Equity 30%, Mezzanine & Infrastructure 15% as of April 24, against a target 60/30/10 split.
Annual Report / Presentation / Latest Monthly FactSheet
Latest net profit at HVPE is far higher at £120.2m vs £17.4m although relative to its market cap HVPE’s profit is 3X that of ICGT. Interestingly, on a 2024 forcast P/E basis the difference disappears (9.6 vs 10.2). HVPE pays no dividend (although HVPE says its reviewing this in its latest presentation which is over 10 months old) vs ICGT’s 2.7% yield. Buybacks are constrained too at HVPE due to its gearing but also due to philosophy. The board’s core presumption is that “in normal conditions, reinvesting capital into new private market opportunities, rather than buying back shares, should provide a better outcome for shareholders over the long term”. I question the logic of that. A 40% discount to NAV means new investments have to grow 67% FASTER than existing investments in order to be accretive to shareholders. What are the chances of that? Zero I suspect. Instead could it be buybacks reduce the charges and elevate the OCF percentage - or am I being cynical?
Moving to its investor relations it last released a video presentation back in June 2021 despite claiming to be “constantly fine tuning its messaging to investors”. After 3 long years of fine tuning there is a presentation scheduled for 3rd June 2024. Tune in, reader, and find out was the wait worth it? A presentation with three years of fine tuning should be the most incredibly fine-tuned presentation. Infinitesimally fine tuned.
Saying all of that the long-term performance is impressive. An over 4 bag performance in 10 years. However since July 23 to April 24 NAV has moved from $50.12 to $50.47, which is a 1% annualised performance, and a 2% performance in 2022. The question therefore is either can the NAV close or will 2024 be like 2020-2022?
Distributions appear to be slower than ICGT and more variable.
Industry appears more focused towards Tech (32%) and Consumer (15%), with lots of well known names like Databricks and Shein (which will shortly be a realisation since it’s listing in the UK soon).
I was growing a little bit anti-HVPE until I reached this part of their presentation.
(Why wait until page 22 for this important info?) The uplifts achieved in 2020-2022 blow ICGT out of the water (average 35% over 10 years).
The 11 years average is a 55% uplift on realisations compared to carrying value. In other words. You pay £1 for something with a NAV of £1.67 which sells for an average £2.59. Or put another way the true NAV could be said to be 61.3% not 44% once you consider the average realisations.
The uplift makes a BIG difference. If you take 2013-2019 this is a more comparable 38%. So the question in my mind is what happened in 2020-2022… and more importantly will it happen again???? Frustratingly there is no analyst coverage between 2020 when Edison stopped and 2022 when Kepler started. Neither explain the outperformance except in a single sentence “the high weighting to venture funds which contributed considerable NAV growth during 2021”. You can find a little bit of info on the top VC funds currently in HVPE on https://www.hvpe.com/portfolio/top-25-company-exposures/
Shein is valued at at $85.2m and 2.1% of HVPE’s NAV. Back in 2010 Shein had a $10bn and by 2022 a funding round placed it at $100bn. The IPO is reportedly $90bn although private sales earlier in 2024 were being made at a $45bn valuation. So could HVPE be on the cusp of a huge uplift when Shein IPO? I simply can’t find out. They bought via a fund and don’t tell you which one. So when Kepler say in their bear case that HVPE is opaque. Yep, it sure is. At a $10bn valuation the Shein IPO might mean a 9X $85.2m = $766.8m realisation or if might mean a 0.9X $85.2m = $76.7m.
The former would be a gain equal to 30.6% of the share price and would boost the NAV per share by £6.97. The latter would be 9p per £22.80 share or about 0.4% drop in the share price (assuming the discount remained the same)
HVPE also holds Figma (SaaS), Crownrock (O&G), ByteDance, Discord and Databricks among its larger venture holdings.
Charges
Also to note HVPE 3.36% OCF charges are even higher than 2.81% at ICGT. Although the TER 31/1/23 was 1.18% so there’s a chunk taken in performance fees in some years.
Conclusion
The VC upside from the targeted 30% of portfolio has led to outsize returns in certain past years. I can’t take away from its ability to achieve upside from its realisations. Could HVPE provide a whacking return in 2024? Quite possibly.
However it’s very difficult as an investor to work out your chances. Just that past probabilities mean it could happen again. There’s a large margin of safety. If you simply are happy to commit based on past performance then HVPE offers an interesting investment. The list of fund managers is a who’s who so you are accessing an extremely wide range of holdings. It’s almost like buying an M&A/VC ETF with a bit of infrastructure on top.
On the negatives, high charges, lack of transparency, lack of past communication and also the 60/30/10 portfolio might not suit everyone. It’s not clear why the 10% infrastructure is even there. What does it add? Perhaps I’m influenced in that I can choose ICGT for its 100% buy out portfolio with high realisations and one of a number of VC funds like CHRY, TMT, AUGM and GROW for their 100% VC portfolio. There are good infrastructure funds out there too. Or buy and sell each type according to the business cycle.
So, HVPE, which is a mish mash of all three, leaves me a vague unease. Do you value something just on past performance and then hope for the best? Do you choose a mishmash with a wide exposure to different funds? Perhaps that finely-tuned forthcoming presentation will assuage concerns and warm me to HVPE.
Regards
The Oak Bloke.
Disclaimers:
This is not advice
Micro cap and Nano cap holdings including those held in VC stocks might have a higher risk and higher volatility than companies that are traditionally defined as "blue chip"