HarbourVest Partners today announced that it has raised $2.9 billion for its seventh secondaries fund, named Dover VII. So we’ve got 5 questions for Harbourvest managing director Brett Gordon:
1. There has been lots of secondary capital raised over the past 24 months, and there obviously are a lot of interested sellers. But actual deal volume hasn’t seemed to correspond. Is it still a supply/demand gap, or more a a chasm in buyer/seller price expectations.
From the supply/demand imbalance perspective, I’d say that the supply of assets available for sale still far outstrips the demand, or capital raised to purchase assets. Not just by a little bit, but by a multiple, which dramatically favors the buyers and lets them be very selective.
But you’re right that there is still a bit of an expectation gap between buyers and sellers. Part of that is driven by buyers’ underlying uncertainties over future portfolio company performance. We’re looking at assets and trying to predict what they’ll be worth in the short-term, mid-term and long-term. But how do you do that in today’s environment with any certainty? So you either offer to buy something at a very low price, or don’t offer anything at all.
2. Do you expect deal volume to pick up over the next 12 to 18 months?
I do. Another reason things haven’t sold is that most of the people who had to sell for liquidity reasons have already sold at really depressed pricing. Some other people trying to sell were doing so because they feared future liquidity crises. That second type of seller could wait it out, because the danger wasn’t as immediate.
At some point, however, the fear of a liquidity crisis becomes a liquidity crisis. Either because of problems in other parts of your asset base, or because the world gets better and GPs begin making capital calls again.
3. Generically speaking, is there a sub-sector of LP interests you prefer right now? Venture? Buyout? Distressed?
We tend not to generalize because you need to know the underlying assets. It would be easy to say that we’ll stay away from a certain type of asset, but then we might miss out on something attractive. We want to see the underlying companies, and determine the potential for growth. You can find diamonds in the rough…
4. HarbourVest recently acquired Lehman Brothers’ position in Lehman Brothers Venture Partners, and helped that group’s management spin out into an independent firm called Tenaya Capital. Do you think this new fund will do more transactions like it?
I do. We call them synthetic secondaries, or spinout transactions. We’ve been active in that part of the market since the mid-1990s, but it wasn’t too well known until the past few years. HarbourVest itself spun out from an institution – we used to be the private equity arm of John Hancock – so that helps make us a unique partner for someone looking to spin out. It also helps that Dover is part of the larger HarbourVest platform…
I would tell you that today there are lots of teams and portfolios of assets like the MidOcean [which HarbourVest helped spin out of Deutsche Bank] and Tenaya situations that are going to be spun out. Those teams are looking for steady sources of future capital and help in structuring the transactions.
5. Yesterday, a new online platform called SecondMarket launched for providing liquidity to venture capitalists. Do you believe that we’re getting to the point where secondaries will begin to get traded below the institutional level? If not by retail investors, at least by accredited ones?
In general, people are going to need to seek liquidity. As I said, once we start seeing more capital calls, you’ll see a whole new group of sellers, which will create lots of buying opportunities for lots of different people. It’s tough for me to say it will or won’t make it to the individual investor, but nothing would surprise me.
One other thing that’s been a challenge in the past, though, is that the GPs have very strong concerns about confidentiality. They don’t want fund documents up on the Web or information about their portfolio companies out there. It’s going to be very difficult for people without existing relationships with GPs to make well-informed buying decisions.