“ Don't,” said the placement agent when he was told that George Anson of HarbourVest Partners was to be interviewed for Privately Speaking, “upset George”. And how might that happen? “Don't,” he explained, “ask any stupid questions.”
Notwithstanding an interviewer's capacity for stupidity, the message coming through from not only this particular pre-interview conversation was that George Anson was not a big fan of the clumsy – or perhaps the inappropriate – question. But when you are the public face in Europe (and the London office's founding managing director) of the world's largest dedicated private equity fund of funds (FoF) manager, then you are going to be asked lots of different questions from lots of different people.
Like: how much bigger can HarbourVest Partners get (it presently has around $16bn under discretionary management)? Or: why is the firm regarded as a bell-weather for a fund's credibility during a fund raise (when HarbourVest Partners commit to your fund, it's an instant badge of honour). Or: do you reach for your gun when people start talking about venture investing (market gossip presents the firm's significant investments in venture in the late 1990s as a notable millstone to returns). What's not clear yet is whether some or all of these questions are stupid things to ask.
HarbourVest Partners is headquartered in Boston, where 98 of the firm's total staff of 115 are based. There are a dozen people in London at their Berkeley Square address, including three managing directors: Peter Wilson, Kathleen Bacon and George Anson. It was Anson who was called by D. Brooks Zug in 1990, one of the co-founders of what was then John Hancock Venture Partners (see the accompanying boxed item for HarbourVest's evolution), and asked if he'd be interested in leaving London-based fund of funds manager Pantheon to set up a European operation for the firm. He said yes.
In 1990 Anson's new employer had $1bn under management and 30 employees, and was competing with four or five other private equity and venture fund of funds managers – but at a time when the entire fund of funds market was probably worth no more than $3bn. So even then this US operation was casting a significant shadow in what was then regarded as a specialised, niche market. Fast forward to 2003 and you have a FoF industry that according to recent research has around $150bn managed by around a hundred different firms – with HarbourVest still sat at the centre with more than ten per cent of that total under its management. And several of those early competitors are still at large: most notably, Pantheon and Adams Street Partners to name two of the three firms most often mentioned in the same breath as HarbourVest.
Some funds get too large and the managers too greedy – that's when we will walk away
The third other key FoF manager is something of an upstart – but has nonetheless won a seat at the head table: Goldman Sachs Asset Management's private equity group arrived in Europe with a bang three years ago with several billion dollars ready to be invested in private equity funds. And in that Goldman way the team there, headed by Phil Pool in New York and led by John Shearburn in London, have drilled into the private equity community with a vigour that leaves some competitors a little restive. The firm now has nearly $11bn of assets under management and is winning mandates from investors who were traditionally HarbourVest kind of clients.
HarbourVest Partners timeline:
Late 1970s: Ed Kane and Brooks Zug begin investing together at John Hancock Mutual Life Insurance Company.
1982: Kane and Zug form Hancock Venture Partners, Inc. to invest in private equity funds, as well as make direct investments. Investment staff is just the two.
1982: Hancock Venture Partners closes its first fund for investment in US private equity funds as well as direct investments on $148m.
1984: The firm begins investing in non-US private equity partnerships as well as direct investments in non-US opportunities.
1986: The firm completes its first secondary investment.
1990: The firm opens London subsidiary, led by managing director George Anson, to handle European deals and clients.
1990: The firm closes its first international fund for investment in non-US funds and direct deals on $250m.
1993: Firm forms fourth US fund, which closes on $352m. It was the firm's first fund with at least two distinct investment pools – one for investment in primary and secondary private equity partnerships and one for investing in operating companies.
1996: The firm opens its Hong Kong subsidiary, led by managing director Philip Bilden, for deals and clients in Asia.
1997: HarbourVest Partners is formed and becomes independently owned by its management team.
2000: Firm closes its sixth US fund on $4.6bn. The fund offers three programs – one for investment in large private equity funds with capital in excess of $2bn, one for investments in VC, smaller buyout funds, and special situation funds, and one solely for direct investments.
2002: HarbourVest closes its fourth non-US fund on $2.8bn. The fund has two programs – a traditional fund-of-funds and a fund for direct investment.
2003: HarbourVest has grown from two investment professionals in 1982 to 50, with a total staff of 112.
HarbourVest's London office is not a big place and its look and feel is modestly functional rather than grand or imposing. There's none of the mock Georgian and heavy teak panelling that some setting up office in London seem to like. The organisation is well known for being low key and as a wholly private company is happy to keep itself to itself. This muted office “persona” may also be because, although HarbourVest investment personnel spend many days on the road presenting to prospective clients from Amsterdam to Gothenburg to Newcastle, those same potential and actual clients visit Harbourvest too.
These people are not impressed by flash: many will often manage investment capital running in to the billions of Euros but themselves will receive quite prosaic levels of compensation – whilst being ever-vigilant of investing as prudently as possible for their own clients: the people who have entrusted their pension savings to them. A visit to HarbourVest will not leave you thinking that this is a profligate organisation hard-pressed to find further ways to spend fee income.
It's not as if HarbourVest is short of funds or fee income of course. Besides the total assets under management figure, the other numbers that occupy people when talking about the firm are to do with its income and its distribution. Given that 100 per cent of HarbourVest Partners is owned by the managing directors – and there are 16 of these including the two founders -many are prone to ponder the wealth that each accrues from the management fees derived from having $16bn under management. As one source familiar with the firm put it: “Running 100 staff in three offices around the world is not going to cost you that many millions, so the total net figure you can then divide by 16 is huge. Some of the MDs must be drawing handsome seven digit figures out of the firm.”
This can sound like sour grapes, and certainly some will admit to envying how the HarbourVest team have built such a powerful franchise. Others – and this includes some institutional investors – have more strategic a concern though: that the fee income is of such a scale the senior personnel at the firm have lost some of their hunger.
This last point is one of the perennials of private equity, whether it's in relation to a FoF manager or a GP and is something that HarbourVest itself monitors very closely. As Anson will comment in the interview: “Some funds get too large and the managers too greedy – that's when we will walk away.”
How do you do?
Meeting George Anson for the first time you'd not immediately think of his personal wealth. Initially quiet, but not self-effacing, you may well be reminded of others' comments. “George has been in the market a long time [he was at Pantheon for seven years prior to joining HarbourVest] and he has an excellent memory,” commented one GP who counts HarbourVest as an investor in their funds. “He's seen a lot of it before and that can make him seem a bit arrogant perhaps, a bit of a cool cucumber who knows what he wants and expects you to accommodate him.”
Anson clearly thinks about private equity and the people he encounters within it a great deal, in part because you can recognise another trait within him: an intense competitive instinct that typically does not manifest itself in an outspoken way but instead underpins various references to how mandates were won, why long term experience counts for so much and what are meaningful barriers to entry when it comes – for instance – to secondary investing. If it's not hunger, then it may well be this competitive spirit that keeps him on the road and in front of both current and prospective clients.
In June this year Private Equity International ran a cover story listing the “30 Most Influential LPs in European Private Equity.” As objective as anything that tries to define influence can be, the magazine's journalists talked to a wide spectrum of private equity practitioners and asked them who they thought mattered. HarbourVest -and Anson in particular -were frequent names mentioned.
Anson was put forward in part because of his experience and in part because he is regarded as the key person helping to invest HarbourVest Partners International Private Equity Partners IV (HIPEP IV), the most recent FoF from the firm that is dedicated to ex-US private equity investing. HIPEP IV, which had an original target of $2.5bn, had a final closing on $2.8bn in September 2002. The declared intention is to invest this $2.8bn in funds and companies directly located outside the US. Of that, the stated aim had been to deploy approximately $1.75bn into European GPs by the end of 2004.
Anson explains how the fund is broken down: “There's $375m in the fund allocated to direct investments, meaning that we have $2.425bn available -with up to $400m of that notionally allocated to secondary transactions. Between 88 and 90 per cent will go into European venture and buyout funds with the remaining 10 to 12 per cent going into Asia, Latin America and Israel.”
Clearly the fund is in the midst of its investment phase (the fund started to invest in 2001) and therefore will be deemed influential by any fundrais-ing GP you ask. It is also, according to Anson, “trucking along”, making a number of very significant commitments to European primary and secondary (of which more later) investments.
European firms that can count HarbourVest Partners as an LP include Apax Partners (with Apax Europe V), BC Partners (BC
European Capital VII), Candover (Candover 2001 Fund), CVC Capital Partners (CVC European Partners III), Atlas Venture (Atlas Venture Fund VI), Permira (Permira Europe III) and Cinven (with Cinven Fund III).
Another, more specialised, group who knows what it's like to receive a hefty commitment from HarbourVest are mid-market specialists B&S Private Equity in Italy. This team, who were formerly part of UK buyout firm Electra, have the local knowledge and contacts to get deals done in Italy. They were raising their fourth fund in 2003 and hoped to hit what some at the time regarded as an ambitious €500m total. HarbourVest Partners, who knew the B&S team well (they had invested in earlier funds) were keen to back this new fund in what Anson would call a “meaningful” way. As a result HIPEP IV committed €90m to the new fund, something that few other investors looking at the fund failed to notice. As is often the case when Harbourvest commits to a fund there was a hurried queue formed at B&S's door by some of these investors – and the fund was capped at €550m when it closed in April this year.
However, not all previous LPs in earlier B&S funds were so convinced that the proposition still added up and passed on coming back in to Italian Private Equity Fund IV As one put it: “We liked the team and they'd done really well previously but we had doubts as to how this new fund would perform so opted to say no.” Some cite this as evidence of a dilemma that HarbourVest finds itself in today: with a small number of quality private equity and venture funds raising money at present, there is the possibility that better than average but less than stellar product will be committed to in order to deploy some more of that $2.425bn.
Is HarbourVest having to make oversize commitments to too few funds? In Anson's view, the firm's capacity to make what others often describe as “big bets” is part of what his clients are buying into. “We don't make $5m commitments, we make $50m commitments: we think our investors expect us to make meaningful investments and one of our stated objectives is to be a large investor wherever we go.”
This capacity to commit large amounts of money to individual fund investments is an important part of the HarbourVest investment style and arguably has been a key factor in helping them deliver exceptional returns to their clients. It is a principle close to Anson's heart: “Every investment decision we make should make a difference. If you don't think it will make a difference you shouldn't do it and when you're talking about a $50m commitment that really focuses the mind [because] if this goes wrong it will matter.”
The investment process at Harbourvest Partners is a straightforward one, centring around a weekly investment meeting where two of the managing directors have to propose an investment which is then voted on by all the meeting participants. The two senior managing directors, founders Edward Kane and D. Brooks Zug, act as what Anson describes as “quality control”: they cannot advocate investments but have to sign off on every one.
There is another benefit to making big commitments to a fund and that is the influence you can exert subsequently. Anson confirms that HarbourVest sits on almost every advisory board for the funds they have invested in and he for one takes a keen interest in fund proceedings (he is, for example, on Cinven III's advisory board and readily recounts how the fund's investment in UK car park operator NCP has helped to transform that company's ability to pitch for new business).
“Every investment decision we make should make a difference. If you don't think it will make a difference you shouldn't do it” “European venture has unfortunately taken a giant step backwards along its evolutionary path”
That engagement with funds via their advisory board has also meant that Anson has been well placed to monitor something that he describes as still being a “huge problem.”
The transient nature of so many advisory board participants severely compromises the value and impact a board can have, as new arrivals endeavour to acquire sufficient knowledge of the fund whilst applying their own set of attitudes and objectives to the entire process.
This is something that frustrates many GPs, and Anson recounts how one such partner declared at the outset that his new fund's advisory board would be made up of particular individuals – not just institutions. “He said that it needed to be George Anson from HarbourVest who participated throughout – something I was happy to agree to as I was not expecting to be moving on – but I predicted that this would not hold true for the others on the board. After five years all seven committee members had changed, except for me.”
Going deeper, not broader
This deliberate, ongoing engagement with funds in the HarbourVest portfolio is a reminder that the firm remains wholly dedicated to this one asset class. “They eat, sleep and drink private equity” is how one investment advisor puts it, and this clearly matters to Anson. A temptation must be to apply the HarbourVest name to a broader range of products that many of their clients are now no doubt keen to explore. But whilst other managers have extended their brand into alternative asset classes (hedge funds, real estate) HarbourVest has not: “We are very purist about this and we have decided not to go this route because I think you run a very real risk of dilution because you can't [his emphasis] be in control of all those different types of product.”
It's not as if there aren't subsets of private equity to participate more extensively in; the most obvious of these at present being the secondary market. Anson is wary of HarbourVest being seen as opportunistic – he talks of the minimal barriers to entry for anyone wanting to be a secondary buyer -but equally wants to register the fact that HarbourVest expects to be a heavyweight player in this space.
The firm has a total of $3bn notionally available to acquire secondary interests (“We have the necessary resource available but we are not obliged to spend it” is how Anson puts it) and clearly sees the current climate as offering interesting opportunities to acquire portfolios. Anson though is sceptical of claims that the secondary market is going to track the explosion in primary funds raised in the late 1990s, suggesting that whilst the banks who are the most important vendors in the econdary market re-adjust their exposure to the asset class, pension funds who helped fuel that fundraising surge are not under the same imperatives and are inclined far more to hold rather than sell. That's going to mean fewer deals coming to market.
Anson also sees a time when returns from secondary funds will be much lower than in the past: “At present secondary funds achieve a better rate of return than primary funds despite being lower risk [because the funds they acquire are fully or partially invested and much nearer to realisations] and that is because it is still an inefficient market.” But that will inevitably change. “There is evidence coming that the big new secondary players are happier with 12 per cent returns,” continues Anson, “and that is way below what we'd expect from primary investments. There could be a time when secondary investments will dilute our returns.”
HarbourVest is happy to join forces with these big new players if the deal makes sense though: the $1.6bn spin out from Deutsche Bank to form MidOcean Partners in February this year had the firm join forces with NIB, Ontario Teachers Pension Plan and the CPP Investment Board to lead the underwriting of this deal (the four of them provided 90 per cent of the funding). And this transaction already seems to be coming good -only last month (August) MidOcean sold its stake in European holiday village owner Center Parcs to fellow shareholder Pierre & Vacances for a multiple the team were “proud of.” Anson's evident satisfaction with this transaction makes it reasonable to assume that the firm is ready to do more of the same.
Anson makes the point too that with $1bn plus secondary deals happening at the moment, he considers it vital that HarbourVest can “speak to the deal,” in other words readily evidence the ability to mobilise significant amounts of funds quickly.
More broadly, HarbourVest continues to trawl Europe and the rest of the world for talented managers. Clearly Europe will dominate HIPEP IV and Anson makes the point that he sees “later stage, change of control buyout as being one of the most interesting parts of private equity around.”
What about venture? First, Anson wants to qualify the term as in his view too many people are talking just about early stage technology investing when they use the word. In part this may be because HarbourVest made a significant amount of tech VC commitments in the late 1990s and these – like everybody else's have suffered (one competitor acknowledged though that the firm has not been shy in declaring that these investments have disappointed).
Anson says today the firm is “relatively comfortable” remaining exposed to another key VC area – life sciences – but he has concerns about the industry as a whole. “European venture has unfortunately taken a giant step backwards along its evolutionary path because many firms were caught out by the crash and many GPs are now wondering, ‘what happens next…?’ What we have found is that a lot of the tourists have left, and you are left with a core group that looks more like a cottage industry than an asset class. I'd like to say we'll have as much as 20 per cent [of HIPEP IV] in European venture funds but I don't know if we'll get there.”
One gets the sense that Anson is wary of making any grand predictions about how the firm's investment allocations will work out – it's not as if private equity, as he himself remarks, has the same kind of protocols as public equity investing. And there's plenty of alternatives within the asset class to explore. That may well mean that venture will occupy a markedly diminished position in the portfolio – and that the secondary market (for the moment) offers more compelling opportunities. Anson shows every sign of relishing this variety -knowing full well that having HarbourVest on your card gets you a prime seat at pretty well any table you want. To think otherwise would be stupid.
HarbourVest Partners' funds:
US Funds (year indicates year the fund was formed):
1982: John Hancock Venture Capital Fund LP $148m. Fund formed to invest in partnerships and direct investment opportunities.
1985: HarbourVest Partners II LP $200m. Fund formed to invest in partnerships and direct investments.
1988: HarbourVest Partners III LP $200m. Fund formed to invest in partnerships and direct investments.
1993: HarbourVest Partners IV Investment Program. $352m. Fund structured as two partnerships – the Partnership and Direct Fund. Partnership Fund invested in US primary and secondary private equity partnerships. Direct Fund made investments in U.S. operating companies.
1997: HarbourVest Partners V Investment Program. $1.01bn. Fund structured as two partnerships – the Partnership and Direct Fund. Partnership Fund invested in US primary and secondary private equity partnerships. Direct Fund made investments in US operating companies.
1999: HarbourVest Partners VI Investment Program. $4.62bn. The fund offers three programs – one for investment in large private equity funds with capital in excess of $2bn, one for investments in VC, smaller buyout funds, and special situation funds, and one solely for direct investments.
1990: HarbourVest International Private Equity Partners LP $250m. Fund invests in non-US private equity partnerships
as well as non-US direct investment opportunities.
1995: HarbourVest International Private Equity Partners II Investment Program. $950.5m. Fund structured as two partnerships – the Partnership and Direct Fund. Partnership Fund invested in non-US primary and secondary private equity partnerships. Direct Fund made investments in non-US operating companies.
1997: HarbourVest International Private Equity Partners III Investment Program. $2.12bn. Fund structured as two partnerships – the Partnership and Direct Fund. Partnership Fund invested in non-US primary and secondary private equity partnerships. Direct Fund made investments in non-US operating companies.
2000: HarbourVest International Private Equity Partners IV Investment Program. $2.808bn. Fund structured as two partnerships – the Partnership and Direct Fund. Partnership Fund invests in non-US primary and secondary private equity partnerships. Direct Fund makes investments in non-US operating companies.