Rolling admissions

Ever since Harvard Management Company sidelined an effort to sell roughly $1.5 billion worth of interests in private equity funds, there have been bigger deals attempted, certainly, but none more talked about.

“No matter where you go, people ask about this deal,” says a secondaries buyer at a prominent US firm. “It has gotten ten times more attention than it's worth. For some reason people are not moving on.”

No matter who's bringing this to committee, you're faced with a wall of concern that you're going to look bad because you're on the wrong side of a trade against a smart seller

Harvard's move toward a major secondaries deal certainly has generated much chatter in the private equity market and, according to some annoyed insiders, given rise to many under-informed opinions about it. But it is not hard to see why this particular case study became a point of reference. Harvard's endowment, with its private equity programme led by Peter Dolan, is regarded as an especially savvy investor in private equity funds. Harvard, therefore, has become something of a trophy LP. When the selected partnership interests were originally brought to market last summer, brokered by secondaries adviser Cogent Partners, they represented a significant proportion of Harvard's overall private equity portfolio, based on GP submitted net asset value plus undrawn commitments. What was Dolan up to, the market wondered, and what does this mean for the direction of the market generally?

More prosaically, the deal got talked about because the broader market found out about it, or rather, because the Harvard name made the re-telling of the story that much more interesting. News of a defunct bank selling private equity assets presumably doesn't cause as many people to pick up the phone and say, “Guess what I heard?”

An important detail of the Harvard secondaries story is that the story hasn't ended. Although Harvard and Cogent decided against pursuing the sale of the select LP interests as a unified block, the endowment was successful at selling off individual or small clusters of funds, say multiple market sources. (Representatives from Harvard and Cogent declined to comment for this article).

In addition, a source that advises LPs on alternative investments said Harvard is preparing to sell more partnership interests from the original block in smaller clusters, and is also contemplating hiring multiple intermediaries to accomplish this. This could not be confirmed with Harvard.

A source close to the endowment said that Harvard LP interests have been sold to as many as 10 different secondaries buyers. The endowment has also declined bids on numerous occasions where Harvard thought the prices did not reflect the intrinsic value of the asset.

The eventual re-tooling of Harvard and Cogent's Plan A may be attributed to timing and, ironically, to Dolan and team's reputation for being smart.

For the last six to nine months, people have come to accept that portfolios will have to be broken up.

Cogent began marketing the Harvard assets in August 2008, says a source who saw a presentation, although a person close to Harvard says the process got underway in July. Secondaries sellers and their advisers would naturally prefer to sell assets in one package – it makes the process much easier, and in some cases it allows sellers to attach harder-to-sell assets to highly-sought-after assets. With hindsight, had the process started some three to six months earlier, Harvard may have pulled off one of the greatest portfolio moves in history and successfully sold the entire portfolio at an attractive price, say several market observers.

But as the crisis of autumn 2008 approached, it became apparent to serious secondaries market participants that “there was never a way anybody, including Harvard, was going to sell funds in large portfolios,” says a source.

In particular, many prospective buyers became increasingly concerned that they didn't have a handle on troubling uncertainties in the market outlook, made all the less certain by the large unfunded commitments, exposure to the public markets and dubious GP-provided investment valuations . Buyer s worried generally that negotiating around these valuations might lead to the equivalent of “stepping on a landmine”, as one bidder puts it.

And of course, that Dolan and company wanted to sell so many of these interests as near to the stated NAV as possible did not inspire self-confidence in prospective buyers. “Buying from Harvard is not the most comforting of situations,” says a secondaries buyer. “No matter who's bringing this to committee, you're faced with a wall of concern that you're going to look bad because you're on the wrong side of a trade against a smart seller.”

Certainly it was not the first time Harvard has been active in the secondaries market. The endowment has sold LP interests as recently as 2007. But the hand-selected group of funds was just what the market wanted when it was being prepared for sale, and not what the market wanted when it came to sale.

Harvard will continue to prune its portfolio through selective carveouts, and now that NAVs have fallen dramatically, secondaries professionals are hopeful that buyers and sellers will be able to agree on price with greater frequency, which will mean momentum for the Harvard process. But the trend away from large portfolio sales remains. Says one insider: “For the last six to nine months, people have come to accept that portfolios will have to be broken up.”

SNAPSHOT: HARVARD MANAGEMENT COMPANY
Headquarters: Boston

Leadership: Jane Mendillo, president and chief executive Peter Dolan, director, private equity John Shue, manager, private equity

Value of endowment, June 2008: $37bn Value of endowment, today (est.): $26bn

2008 target allocation to PE: 11% Current target allocation to PE: 13%

10-year annualised private equity performance, to Sept. 2008: 28.3%

Year first invested in private equity: 1982

Recent commitments to funds managed by: Claremont Creek Ventures; Altor Equity Partners; Avalon Ventures; Vector Capital; Vitruvian Partners; Serent Capital; SAIF Partners