Asian assets are increasingly sought after as the world's fastest-growing region attracts more yield-hungry private equity investors, so it's no wonder that HarbourVest – a Boston-based private markets investment firm with a long history in Asia – has been expanding there. Last year the firm, which manages more than $43 billion in assets, opened a Seoul office, the latest addition in the region after Beijing (2012), Tokyo (2010), and Hong Kong (1996).
As a private equity investor, HarbourVest is active in buyouts, venture, credit, and real asset markets, operating across three key areas: it makes primary investments in funds as well as secondary investments, and also handles co-investments. A global firm, HarbourVest invests in the US, Canada, Asia, emerging markets, and Europe, where it recently launched a £1 billion unsolicited bid for a smaller rival, London-listed SVG Capital.
Haide Lui, HarbourVest’s Hong Kong-based principal, who focuses on partnership investments in Asia-Pacific and emerging markets, tells Private Equity International why it pays off to be active across all three types of private equity investing – in primary funds, secondaries, and co-investing – and shares her views on the outlook for the sector in Asia right now.
Q. What are some interesting observations you are seeing among fund managers in Asia?
A. Asia is an ever-changing market. In some historically stable markets, for example in Australia, we’re seeing a couple of new GPs raise first-time funds, or others going through succession. In Korea there has also been quite a few new GP additions and people movements. China is one market where you can always expect change: there’s very strong interest in private equity from both offshore and onshore capital that is diversifying away from traditional assets and moving into alternatives.
Q. What is HarbourVest's criteria in fund manager selection?
A. In terms of the selection itself, there are three main criteria. The first is strategy and the suitability to the current market opportunity. The second is people, their capabilities and the team dynamics. And the third is track record and performance.
They are all equally important. I would emphasise however, that a strong team dynamic and team stability are vital, as they can impact fund performance and portfolio management down the road.
We have local team members from nearly every market in the Asia-Pacific region and we have frequent interactions with the managers, both those in which we are invested as well as their peers. We interact with the GPs themselves, with the portfolio company management and working level teams, as well as with the intermediaries who work within PE, such as the accountants and lawyers. In addition to doing a lot of work on understanding the historical track record, we dig even further to determine who on the team did those deals and who added value. These conversations not only inform us with regard to who is strong right now, but also which professionals are going to be important for the next cycle.
Q. What is HarbourVest’s ratio of primaries, secondaries and co-investments in Asia?
A. We have several portfolios that we are actively investing into the region. The ratio of primary, secondary and co-investments varies depending on the particular mandate and objectives of the portfolio. Because we have these interactions with managers as a primary fund investor, a secondary buyer, and a co-investor, we are able to constantly refine and have a comprehensive, all-around view of the GP and their capabilities.
Our primary team maintains consistent, close contact with GPs and generally knows the pipeline and pacing of upcoming opportunities.
The secondary team will focus a lot more on reviewing the assets, while the co-investment team will have a larger engagement with the entire deal team, not just the senior team, when they’re working side by side on a deal. These types of different interactions help inform our judgment on capability and character of each manager.
Q. Private equity fund governance is increasingly attracting scrutiny. How does HarbourVest ensure there is an alignment of interest with GPs?
A. First of all, we emphasise working with like-minded people who believe in partnership and want to work together, and do the right thing. Once we identify a manager that is a strong performer with a solid track record and good team dynamics, then we go into the terms of the limited partner agreement, which is what we generally use to ensure alignment of interest.
Some of the terms that we review closely are, for example, the terms related to suspension of the investment period and GP termination—suspension and dissolution are drastic measures and are rarely utilised in most investments, but it’s vital to have them in place to ensure that limited partners are protected if there are serious negative developments in the fund.
Another example is key man trigger. We focus on details of which people are included, whether there are multiple tiers of triggers, and what happens after a key man event takes place—for instance, if it would automatically initiate the suspension of the investment period, the process of a cure, etc.
Our approach is to be an advisor to the GP where they can come to us for advice to resolve small problems before they grow into big issues, because they feel comfortable that we can provide fair and good advice; that is very important to us. Sometimes these are questions on how to deal with team dynamics, or questions related to fund management mechanics or managing potential conflicts, such as splitting a deal between multiple fund vehicles. In the Asian market, it could also be about renminbi funds or other parallel funds, and the investment restrictions and reporting requirements that should be put in place. Some of these issues will be covered in the LPA, but others may be down to GP discretion. That’s where we can share our experience and observations across markets and vintages and give them fair suggestions.
Q. What’s ahead for HarbourVest in Asia?
A. We’ve got a good plan for deployment and are considering a number of re-ups as well as new GPs. With Asia’s rising importance in the global economy, we see both Asian investors and global investors seeking Asian assets. There is increased appetite for strategic advice about this complex market and customised solutions to help [investors] reach their target allocations.
In terms of the market environment, we’re feeling positive. Pricing was very high a year ago, but it has been moderating and that is likely to continue. It’s going to be positive for investments, so we’re looking forward to that. There are GPs in our portfolio that had slower deployment than they would have liked because the valuation expectations were just too high, but we are quite happy with their caution in avoiding overpriced assets.