David Atterbury, managing director at global
private markets asset manager HarbourVest Partners, analyses
the trends and developments in the private equity secondary
Boston-based private equity firm HarbourVest Partners is
one of the world's largest private equity asset managers. Here
IFLR speaks with its London-based managing director David
Atterbury. In 2016, the fund acquired the portfolio of SVG
Capital after a fraught battle – the deal won the IFLR
private equity deal of the year award at the IFLR Europe Awards
2017. It sparked a lot of media debate as it was launched as a
hostile bid under the UK Takeover Code before switching to an
asset deal: a secondary acquisition of SVG's investment
portfolio. It also had a dramatic impact on the sleepy world of
listed funds. Atterbury explains the way the secondary market
is influencing private equity and the broader M&A
What are the broad private equity trends you are seeing and
how does the secondary market fit into that puzzle?
The private equity asset class as a whole is growing as
investors globally look for ways to enhance returns in their
broader portfolios in the current environment. Existing
investors are increasing these allocations as they look at the
returns that private equity has generated for them over past
years (when you look at the long-term performance of the asset
class there is a clear outperformance, certainly relative to
the public markets). The asset class is also generating
increased appetite from different types of investors.
One likely development going forward is greater penetration
from retail-type investors, whether it be through the high net
worth end of the marketplace via banks and intermediaries, who
put their high net worth channels into private equity, or
through defined contribution pension schemes, such as 401(k)s
in the US, or other such plans in the UK.
The secondary market has played an increasing role in the
growth of private equity. People have historically thought
about private equity as an illiquid asset class, and certainly
it is a long-term asset class given the nature of the
underlying investments, but the illiquidity also comes from the
fund structures that are typically used. The secondary market
has gone some way to improving liquidity in this market,
enhancing people's ability to move in and out of private equity
holdings and realise their investment or their entire portfolio
before the natural long-term realisation of their investment
takes place. It has breathed some maturation into private
equity in the form of increased liquidity.
There is also a whole spectrum of risk-return profiles
within private equity, and secondary funds have a role there
too. Secondaries have demonstrated the ability to provide very
strong returns with good downside protection. If you look at
the numbers, secondary funds have very low loss ratios and
typically deliver strong IRRs (internal rate of return) for
investors. Therefore they have a place within any broader
private equity portfolio.
What changes to the secondary market has this growth
The secondary market has grown dramatically in recent years
as investors have seen strong returns. The increase in
allocations and thus capital available to invest has added to
the level of competition for deals. We have seen smaller, more
niche secondary groups spring up and at the same time, the more
established players have increased in scale and raised larger
funds. When it comes to larger deals, we have also seen some of
the sovereign wealth funds or large pension funds becoming more
active in pursuing deals directly. It is fair to say the market
continues to be dominated by the same 5 or 10 large managers
that existed 10 years ago, as we have not seen many new
competitors of real scale. We have also seen increasing levels
One likely development going forward is greater
penetration from retail-type investors
The secondary market has traditionally been dominated by
fairly straightforward transactions with a secondary buyer
acquiring an interest in a private equity fund from the
original investor. That remains a big part of the market today,
but it has become ever more competitive and with an associated
upward move in pricing. What a limited number of secondary
players have done is look for other ways to access private
equity portfolios on the secondary market and find different
ways of unlocking those assets. We consider ourselves at the
forefront of that.
HarbourVest's secondary fund's acquisition of the investment
portfolio of SVG Capital in 2016 is a prime example of moving
outside the mainstream and looking for other ways of accessing
portfolios of private equity assets. Those more complex
opportunities have fewer competitors and therefore, we believe,
present more fertile hunting ground.
What's more, it is not just about buying limited partnership
interests in funds, the fundamental way in which we add value
as a secondary buyer is by providing solutions that meet the
seller's needs and allows us to create a compelling investment
opportunity. For example, we have increasingly been working
with funds and with general partners at the tail end of their
fund's life to provide liquidity across an entire portfolio of
investments as an alternative to a fund manager selling its
companies one by one. That is providing more of an efficient
and timely end to an older fund.
How have regulatory developments influenced the market and
Over the years regulatory change has been an important
driver of deal flow; whilst banks and financial institutions
have always been a significant portion of the sellers into the
secondary market, more recent regulatory change post financial
crisis has placed even more pressure on them to sell. To a
certain extent though, that pressure has softened in recent
years. The banks slowed down their selling activities as some
of the regulatory changes were pushed back, but as those
deadlines come back into view, then the banks will likely come
back to the market with a motive to sell, albeit having already
sold a large part of their legacy assets.
I do not think there is much else in the form of specific
regulatory change that has driven deal flow. Regulatory change
always creates a level of uncertainty and that can catalyse
opportunities for us. Aside that wave of bank sellers as
mentioned before, our deal flow in recent years have not been
based on regulatory changes. What we have seen over the last
two or three years in terms of deal flow are many of the more
complex deals I described before, working with fund managers to
manage out their end-of-life funds. An example is HarbourVest's
deal with Motion Equity Partners in Paris in 2013 –
that was a fund nearing the end of its life.
This part of the market has gone from strength to strength
and we have seen an increasing number of high quality fund
managers look to provide solutions of this type to their
investors. This is gratifying to see as some of the early deals
completed in this space generated some negative attention and
there was talk about potential regulation. The industry though
has worked very hard in recent years with much greater
transparency for all stakeholders involved and there is clearly
a best practice as to how these deals are done.
What regulatory challenges do you most have on your horizon
and how are you managing them?
There is a question in the US with the Volcker rule [which
limits banks' total investments in private equity and hedge
funds to 3% of their core tier 1 capital and individual
investments in a fund to 3% of the fund's assets] and whether
there will be a pull back in terms of implementation, which
ties in with my comments above on deal flow. In terms of
managing our own business, the Markets in Financial Instruments
Directive II (Mifid II) and the Alternative Investment Fund
Managers Directive (AIFMD) have had an impact on our day to day
business – the structure of the funds we manage, the
disclosures that our clients have to make, and the reporting we
provide to them – rather than being a driver of our
secondary investment activities.
Changes such as AIFMD and Mifid II create challenges for us
in terms of managing our business, given the number of
countries in which we operate and our local offices. This has a
knock-on effect for our processes and systems as we strive to
deliver best in class information to our clients. These types
of change have led to growth and increased investment in that
part of our business. .
The other obvious challenge being here in London is Brexit
implementation and its impact on our business in the future.
Clearly, this is something we are actively considering as we
look at the next three years of business.
What for you was interesting about HarbourVest secondary
fund's acquisition of SVG Capital's portfolio?
I think this was the first time a secondary transaction
moved over from the private equity press into the broader
financial news. Our funds previously closed transactions with
two large publicly-listed fund-of-funds vehicles (Absolute
Private Equity and Conversus Capital), but I think the SVG deal
was propelled into the limelight as it took the market by
surprise and as SVG was a high profile UK name in listed
private equity. Then interestingly, SVG moved the focus from
looking for a competing bid to our fund's share offer to trying
to sell the underlying assets and the underlying portfolio
– the other potential buyers that emerged were large
quality institutions and this demonstrated there was some
serious 'smart money' interested in this deal which kept it in
the press. It was not just the fact that the SVG board went
down that route, but also the fact that our deal team was able
to change approach and move from a share offer to an asset deal
in a very expeditious fashion that kept the media interested
for quite a period of time.
What impact has the SVG deal had on the market?
The listed private equity space is not a big space. Several
vehicles, post-financial crisis, have changed strategy and gone
into liquidation mode, driving the absolute number of
publicly-traded private equity vehicles down. The SVG deal
certainly put the sector back on the map, especially with
several blue-chip organisations chasing the assets. By virtue
of what played out with SVG it illustrated that it is not an
easy thing to do. I am not sure you are going to see a whole
wave of deals that look like this.
What will be the areas of focus for the secondary market in
the coming years?
The secondary market by definition is largely opportunistic.
We have to look at where assets are available for sale. Part of
the challenge has been that private equity has been very cash
generative for investors for a number of years and there is not
a great deal of pressure for long term holders of private
equity to sell big portfolios. What we are seeing in the
marketplace now is people using the secondary market to
rationalise or restructure their portfolio, sell older managers
and redeploy capital. We think the focus of the market will
continue in the same vein.
This means that the average age of the assets sold in the
secondary market has gone up. There are more tail-end
portfolios and there are groups that are focused around
tail-ends. The other big area of focus, and certainly for us,
are those end-of-life transactions where we are working with
fund managers on 'whole fund liquidity solutions', as we call
them. This involves approaching a general partner or manager of
a fund in year eight, nine or ten, and making a proposal to
provide a liquidity solution. It is estimated that funds over
10 years old hold more than $100 billion of assets and there is
an opportunity for the secondary market to come in and work
with such funds and either acquire assets, or offer to buy out
the underlying investors, or create a hybrid of that.
Finally, what are the biggest risks to your business?
The obvious one as an investor is pricing. In the more
mainstream traditional secondary market place it is clear that
pricing is key. That part of the market is very competitive
which has put pressure on the targeted returns for many
secondary buyers. We are focused on the more complex end of
where we the market can see more value.
T: +44 (0)20 7399 9820
David Atterbury focuses on European secondary
investments. He joined HarbourVest in 2004 and has led
a number of European secondary transactions, including
Absolute Private Equity and SVG Capital. He currently
serves on the advisory boards of funds managed by
Abénex Capital, Bridgepoint Development Capital,
Clyde Blowers Capital, Magnum Capital, Motion Equity
Partners, and NewQuest Capital Partners.
Atterbury joined HarbourVest after five years with
Abbey National Treasury Services, where he was director
of private equity. His previous experience also
includes five years with PricewaterhouseCoopers.
Atterbury received a BSc (with honours) in
International Management and French from the University
of Bath in 1994, and qualified as a Chartered
Accountant in 1997.