HarbourVest Global Private Equity Ltd. (HVPE) Earnings Call Transcript & Summary

We hope this session will be useful. We'll begin with an introduction by our Chair, Ed Warner. Then I'll take you through the detail of the results. There will be an opportunity for Q&A -- live Q&A at the end. But if you'd like to submit questions via the chat function through the presentation, then please do, and we'll address those at the end. So without further ado, I'll hand over to our Chair, Ed Warner, for an introduction.

Thank you very much, Richard, and good morning to everybody. I'm delighted to deal with this today. Richard will take you through in some detail the semiannual results, but I just wanted to make a couple of comments before he does. First of all, and you'll see a lot more about the performance, but just to emphasize that this is very much a long-term vehicle. And we're pleased that NAV has grown over the reporting period to a new high, but we're very much focused on the long term. And that is the context in which you should view both the buyback that we're announcing today and also the review of the dividend policy that we're going to be undertaking over the course of the next couple of months. We do believe, as the last bullet point there says, that our established approach -- well-established approach is the correct one for HVPE. It has delivered superior returns for 15 years or thereabouts now. And we think that it will continue to do so if we continue to put together what we consider the optimal mix of private market exposures by stage, geography and type in the way that we've done and we'll continue to do so. When we didn't have spare capital or spare resources, we will absolutely look at buybacks as one of our investment options. And we have done that, and we have concluded that we can undertake what will be our third $25 million buyback program. And as and when, and if that's completed, it would bring the total to $69 million of shares bought back since September 2022, where we think buybacks are the right thing to do at the right time and when viewed against all of the range of investment opportunities that sit before us. Also, as we've flagged in the report today, we are intending to talk to our current shareholders and to non-shareholders about the possibility of distributing some of the cash that's generated by realizations from the underlying portfolio directly to shareholders as income some proportion of that cash that comes out of those investments. Why might we do that? Well, firstly, our share register has changed considerably over the period in which the HVPE has existed. And there is a far greater component of retail and wealth manager managed investors on the register, many of whom might value some income stream from this portfolio. So that's something we do want to discuss with them. But also, we're very conscious that as we continue to realize our investments as above net asset value, as stated, which has been the case for a decade or more for HVPE. So there is the opportunity for investors to participate directly in that and to enjoy NAV growth, but also to enjoy realizations at NAV as stated and above. So that's something which we are keen to explore. We have some ideas, we want to test them with our shareholders, and we'll make an announcement in due course once we've concluded that process. We have had, as you would expect, with the discount where it is, lots of advice from people, both shareholders, non-shareholders, analysts, commentators, some of it public, some of it private, some of it solicited, some of it unsolicited. And through all of that noise, much of which is very helpful input to us, we do want to continue to focus on the very long term. And that for us is, if you like, our North Star. We'll continue to pursue it and you should see the possible introduction of the dividend, and that dividend coming from realizations from the portfolio in the context of those long-term objectives, because they serve shareholders well, and we believe they will continue to do so for the next 15 years or more. Thank you. Richard, over to you for the detail.

Thanks, Ed. So moving into the first part of the presentation, a reminder for those who may be less familiar, HVPE has a very particular structure in that we are investing into HarbourVest Partners funds, most of which are very long term in nature with lives of 10 years or more. The majority of those funds are themselves fund of funds vehicles. So they're investing into funds raised by third-party managers, which we turn GPs, either via primary commitments, i.e., when the new partnership is being raised, or via a secondary purchase of more mature assets, typically more than 5 years after the fund has closed. We also do commit to HarbourVest Partners direct co-investment funds at around 20% of the portfolio, which cuts out one layer by investing alongside some of those same general partners into the operating companies directly. The result of all of this is that we have a very diversified portfolio, the most diversified in the sector, with more than 1,000 material private company exposures in the portfolio. Next page. A reminder of the team day-to-day as well as the Board of Directors. I won't say too much about the Board as there have been very few changes other than at the AGM, the departure of Pete Wilson, who was the second HarbourVest nominated director, leaving only Carolina Espinal on the Board from the manager. She is the Head of European Primary Investing for the firm. So brings significant on-ground expertise in terms of portfolio investments. We also have, importantly, an investment committee dedicated to HVPE. So there are 2 senior individuals at HarbourVest, John Toomey, who is effectively co-CEO of the firm; and Greg Stento, who is the CIO, representing the interests of shareholders on behalf of the Board in discussions around future commitments, strategic asset allocation changes, and other issues through the year. I, of course, lead the team on a day-to-day basis. It's ably supported by the colleagues you see here. Some of you would have known Charlotte Edgar, our former Head of Investor Relations, who departed over the summer. I'm pleased to say a replacement should be up and running by January in that role. So moving on. A reminder of HarbourVest Partners and some key stats on the Manager itself, which continues to grow strongly with AUM of nearly $113 billion. That's up from $98 billion a year ago. Growth has been strong across strategies and geographies. So we've brought on additional employees globally, now more than 1,000 individuals across the firm, including 200 investment professionals. The managing directors have, between them, a huge amount of experience across all of the subsegments that HVPE invests in, with an average industry tenure of more than 25 years across that pool of 70 MDs. Also as a firm, because of our long history and the range of funds that we commit to, we have advisory board seats on more than 1,000 funds. So we have a very broad spread of information coming into the firm. Also, we track more than 10,000 managers. So we're committing to a relatively small proportion of those that we have an engagement with. Clearly, the firm has a long history, more than 40 years since the founding in 1982. And during that time, the firm has made substantial multi-billion dollar commitments across regions, strategies and stages. Next page. I think it's really important now moving on to HVPE specifically to look back over the last 10 years, and Ed mentioned the long-term track record. And we are amongst the top performers in the listed PE sector despite being the most diversified fund with NAV per share compound growth running at 14.5% per annum in U.S. dollars. As a reminder, of course, that is net of all costs. It represents outperformance of 5.2 percentage points on an annualized basis compared to the FTSE all World Total Return Index. And of course, the share price has not quite kept pace with the NAV growth, but still a gain of 249% in sterling over that same 10-year period, we ranked 12th out of 324 investment companies across all segments. So even with the discount being wider than it has been in recent history, the return to shareholders over that longer period is still very strong. I would also add that the NAV per share reached a new high in the half year at just over $50 per share. That represents a fivefold difference versus the IPO when we started at $10 per share. So net of all costs, in U.S. dollars, a 5x return in what is coming up to 16 years. Of course, within that period, we also have the global financial crisis early on in the company's life. So measured over the last 10 years, as you can see on this chart, it's still more than a 4x return net of all costs. Moving on. So some of the key numbers in the semi-annual report here are summarized very clearly. So as I said, NAV per share at a new high represents a 3.3% increase in the 6-month period. The share price at GBP 22.50, slightly lagging behind, but still a gain of 1.8%. Net assets, $3.9 billion with only $150 million of new commitments made in the 6 months. And that really reflects the degree of caution around the distribution flow, which has been relatively weak as we'll come to. Top right corner, you see the net portfolio cash flow was quite strongly negative in the 6-month period at $157 million, as capital goals continued at a normal pace, but distributions we were certainly weak. So we are taking a cautious view. We do still have the $800 million credit facility available in full. We've drawn $200 million of that so far. It remains a long-term facility, $700 million committed until January 2028 and $100 million expiring in August 2027. Moving on. So a reminder of where we stand in terms of the total investment pipeline. You'll see on the chart here, there are a series of 3 bars for each of those 4 financial periods, the first 3 or 4 years and the last one is the half year. And first, we show new commitments in that year or period followed by the total investment pipeline at that point in time and the investment portfolio value. And so the really important difference to note is the gap, as indicated on the right-hand side between the total investment pipeline, which represents the unfunded commitments, yet to be called, versus the investment portfolio value, of course, the assets in the ground. We like to keep that at a conservative level, and you'll see it's actually declined. So the investment pipeline has shrunk relative to the portfolio value, and in absolute terms in the last 6 months, as again, we've been cautious on new commitments, which are lower even than the full year of 2021, when we paused for much of that year due to COVID. So we have been committing at a much slower pace. Moving on. And here we look at cash flows specifically. So the bars above the line represent distributions received in U.S. dollars in the periods, same periods as the prior slide. Beneath the line, you'll see the capital calls. So you get a sense for the net cash flow. But also the 2 lines, the gray line at the top shows you the annual or annualized distribution percentage as a percentage of NAV. And so we've shown the half year there. We've annualized that figure to give you a real sense for the reduction in distribution pacing as the annualized figure is 8%. That is lower than during COVID and actually the lowest level since the financial crisis in 2009. So distributions have been depressed. Meanwhile, the black line at the bottom there shows the capital call percentage expressed over the unfunded pipeline. So you can see that's much more stable, but the black line is effectively straight as capital calls have continued at a normal pace between 20% and 25% of the portfolio on an annualized basis. Moving on. So the key strategic asset allocation targets are shown in gray in each of these pie charts. And the story for the half year is one of convergence to those targets. If you look at first the stage on the left and the strategy in the middle, you'll see that no segment of the portfolio is more than 1% away from the target level, which we are very pleased to see. As a reminder, looking at the stage allocation, that has changed quite substantially. Two years ago, venture and growth equity was at 40% versus the target of 30%. We made a conscious decision at that time not to change our target allocation in the full expectation that natural realizations and potentially value declines would take that percentage down. And indeed, we have now seen it return to the target level. I should note that with the exception of the geography allocations, none of these reductions you might see as a result of value decline in the period. Rather, it is a result of relative growth and investment pacing across the categories. So for example, the growth in the buyout allocation from 57% to 60% is a result of strong value growth in that part of the portfolio, combined with net investment over the period. By strategy, the primary, secondary, and direct co-investment allocations are, as I said, very close to target. We strongly believe in primary funds as the bedrock of our portfolio, giving us that very steady investment pacing even if the pacing of our own commitments is more volatile, and also providing opportunities that are not available, simply not available on the secondary or co-investment market, particularly in the venture capital space. And then finally, looking at geography, the only significant move here that I'll mention is Asia, which did see a decline in value overall. So the allocation moved down from 15% to 14% away from our target of 20%. That being said, the recent commitment we made to an Asia-focused fund is still in the very early stages of deployment. So we should see that allocation grow towards that 20% over time. Moving on. Now a note on sector exposure. I think this should be a familiar slide, but tech and software remains, by some margin, our largest exposure, and that's a function of the venture and growth equity allocation. On the right-hand side, we show the top 3 individual companies in each of those top 3 sectors. So in tech and software, Figma, Discord, and Databricks are the top 3 at the moment. Figma is going through an acquisition process. Adobe launched a bid some time ago. That is going through regulatory review. But if complete, will represent quite a significant uplift on the carrying value prior to the announcement of that transaction. Databricks is rumored to be considering an IPO, so also could be on the slate for an exit soon. As is moving down to consumer, Shein, rumors of an IPO there at around the current valuation. Froneri, as a reminder, is Europe's largest ice cream producer. No sign of an exit there, but trading very well. And moving down to medical and biotech, Olink proteomics is a provider of protein biomarker sampling technology. That is, again, in an exit process, one of our more successful direct co-investments in recent times. So we're seeing considerable activity even at the top end of the portfolio in these specific opportunities. Moving on. So new commitments, I've mentioned, lower than normal for the period. The largest commitment on the left-hand side is to an international multi-strategy fund of funds, a primary fund, which will draw capital over a period of several years and again has a 10-year life. So that vehicle is designed to access venture, growth equity and buyout opportunities over the next decade and represents, we think, a very attractive opportunity. The secondary commitment appears very small, relatively. It's actually the final tranche of a $250 million commitment to the current global secondary fund, which has enabled us to unlock the opportunity to co-invest alongside that fund with no fee or carry chargeable. So that marginal commitment of $25 million unlocks that significant opportunity for value add in the future. And just to complete the picture, there were no direct co-investment fund commitments during the period. So looking at the relative growth rates. I've touched on these a little bit here, but we did see considerable strength in the buyout portfolio and that continued the trend from the full year. So buyouts have been resilient. Venture and Growth equity also eked out a small growth figure of 1.7% in the period, a significant turnaround from the 12% decline we reported at the full year ending January, so signs of stability and resilience in that portfolio. I would say at this point as well, we do understand from many of our venture managers that it's become much more common place now for them to proactively adjust valuations if they deem that to be appropriate rather than simply wait for the next funding round. That being said, there could still be opportunities there or portfolio exposures there that could see down rounds in the next 12 months. We're certainly alive to that possibility. But overall, across the very diversified venture and growth equity exposures, we are seeing signs of stabilization. Mezzanine and Infra continued to contribute significantly with the credit side actually performing much better than the infrastructure side in the 6-month period. Moving to strategy. We've seen real strength from secondaries, again, continuing the full year trend, 5.3% growth from that part of the portfolio in the 6 months. But all 3 strategies demonstrated quite strong growth in the period. And moving across to geography. We're seeing Europe show particular strength. That was something that had started to emerge during the COVID period. Actually, where prior to that, the North American exposures were considerably outperforming the European portfolio, we're seeing a bit of a shift there in Europe outperforming. And now we've also seen, as I've mentioned, Asia show a little bit of weakness at a 1% decline in the period. So here we're showing the breakdown of the stage chart. So the leftmost chart on the prior slide broken out to show some of the detail in the subsegments. And what strikes immediately is the consistency of growth across the subsegments. No single subsegment showed a decline in the period. Indeed, buyouts were particularly strong, as I've mentioned, and particularly the large buyout segment that actually was the weakest subsegment in the full year. So a real return to growth there as Managers were able to add value considerably in the 6 months. Moving across to venture and growth equity, early venture, which is 11% of NAV, was the weakest segment. We are seeing Managers increasingly focus on that area as they see real value. So deployment into early venture is increasing. But certainly, in terms of 6 months, growth equity and balanced venture, i.e., the later-stage opportunities did marginally outperform. And then as I mentioned, on the right-hand side, credit delivered a 5.5% gain in value as interest rates continue to rise, and so those deals benefited from floating rate contracts. Moving on. Now a word on portfolio company metrics. There is a health warning here in that, as I always remind listeners, we do see significant turnover in the sample set each period. And the half year period, I would say, is potentially less valid in terms of the sample size and quality of data. But nonetheless, I think encouraging to see continued strong growth across the sample of 1,400 companies, more than 10% revenue growth and more than 10% EBITDA growth as well. Looking to the right-hand side of the slide, you'll see broad-based growth with 2/3 of companies growing in the period, and of those, nearly 2/3 growing at more than 10%. So a really broad spread of high-quality businesses demonstrating resilience in the period. Debt multiple is around 4.6x. No major change there from prior period reports. The valuation multiple is slightly higher at this point. I think that is skewed by the smaller sample that we have for the semiannual, but compared to the 13x figure that we reported at the year-end. Moving on. So we do remind investors that HVPE invests capital very steadily. So as a reminder, those capital call numbers being stable over the last 3.5 years really are reflected in this chart, which shows the vintage year diversification, a very smooth curve with the blue bars representing the latest position and the gray bars comparing the prior full year. So you'll see the largest single vintage is only 14% of NAV, the 2020 vintage. And as a reminder, that is the partnership year. So essentially, the year at the first close of the underlying fund. And so those partnerships will continue to invest. You'll see some early exposure to the current vintage there as well at 4%. We do categorize the portfolio as mature, growth, and investment phase. And you'll see that the majority of the portfolio is in those kind of later investment phases. So between 2015 and 2020 is where the bulk of the assets are. Moving on. And this very similar looking chart now focuses on the percentage of distributions received from each vintage. So this is cash in the period as a percentage of the total showing the weighting from each vintage. And again, same approach, the blue bars are the current period and the gray bars are the prior full year. So we're seeing actually a more even distribution of exits, even though volume is down. So 2016 was the most significant vintage in terms of the source of cash in the 6-month period. But again, a very broad spread, even some pre-2009 vintages still throwing off cash even at this stage. Now here we give some examples of the top M&A and IPO transactions. So these are the full exits that we report in the period, just cutting off those that are most significant for the portfolio. Overall, the number of transactions was down on prior periods, so 153 over the 6 months. But surprisingly, we did see 21 IPOs, which may be hard to believe given public markets have largely been closed to new issuance in the first half, but 14 of those IPOs were in Asia. So again, testament to the importance of geographical diversification as those realizations continued from the Asian portfolio. Looking down at the individual businesses that you see in the top 5 list for M&A. You'll see actually a distinct cost of living theme here. Reward Gateway is a U.K. business that provides employers and employees with a more efficient utilization of such things as salary sacrifice schemes and other benefits that help with the cost of living at this point. So clearly, a theme in that business. But also LeasePlan, the car leasing firm, we saw a full exit there as more and more consumers move to leasing away from traditional financing. And then skipping one, we look at Tusker. Again, that's a similar theme to LeasePlan. That is an electric vehicle-focused leasing platform that provides effectively, again, kind of offsetting gross income. So it's effectively a company car scheme for employers. Moving to the IPOs, the most significant there in terms of this theme is Savers in the U.S., which is a large chain of thrift stores, physical stores, more than 300 locations across the U.S. So again, taking opportunities there in the current inflationary environment to exit those businesses. Moving on. I don't want to spend too much more time on this, so the full list of realizations, including partial realizations, so that the prior slide is just full exits. And again, you'll see a similar theme emerging, but also continued realizations from some of the technology businesses. So I'd point to ByteDance around halfway down, owner of TikTok, and also DynaTrace, a cybersecurity firm. So we're still seeing those realizations from the venture and growth portfolio often at uplift to carrying value. Bringing on to that theme. So the total uplift over the period in the 6 months was 32%. As a reminder, that's the valuation achieved at exit versus the carrying value prior to the announcement of that exit, which could have been 1 or 2 quarters ago. And since 2012 -- in fact, not shown here because we focus on just the last 10 years, but since 2012, we have delivered an uplift on exit on average across the portfolio of more than 30%. The peak in 2021 now in hindsight appears even more extreme, that was clearly a unique period in history. But we are seeing sustained uplift in line with 2017 and 2018. So it's a very normal environment in terms of the valuations that we're achieving on those selected opportunities. I would also point to a consistency between the North American and European portfolios, where we're seeing very similar uplifts. The Asia uplift was very strong, but it's based on a very small sample. So we're not showing that number here. Moving down to buyouts and venture, somewhat surprisingly perhaps again, venture and growth equity premiums much higher on average than buyout deals, although clearly in venture and growth there were smaller number of exits. Moving on to total expenses. There's a mixed picture here. But overall, the net OpEx ratio, the first bold row down near the bottom of the table did fall marginally on the prior 6 months, which is shown on the right-hand side. And that comes despite the increase in HVPE operating expenses driven by higher interest payments on the credit line, as we've drawn down on the credit line in that period. The terms of the credit facility are unchanged, but of course, the drawn margin is higher than the commitment fee. So that is the sole reason that the OpEx figure has increased. Management fees to HarbourVest have fallen marginally from 0.31% in the prior 6 months to 0.29% in the recent period. And OpEx at the HarbourVest fund level broadly unchanged at $0.09 as fewer commitments actually were made versus the full year. You'll see the full year figure of $0.25 is substantially higher. Interest income of 0.13% clearly has risen dramatically and helps to offset the cost of the credit line. So the net OpEx ratio overall, as I said, ticking down to 0.54%. Carried interest returned to a modest degree at 0.28%, driven by the return to growth in the underlying partnerships. So the total expense ratio has increased on the prior year 6 months to 0.82%, but it's still below the long run average. A couple of words on ESG. Clearly, HVPE relies fundamentally on HarbourVest Partners as the Investment Manager. And HarbourVest does have a very comprehensive ESG program as shown on the left-hand side of the slide under the blue headers. But in addition, HVPE does have its own ESG measures in place. So most notably, we offset our carbon emissions at the level of the HVPE investment company. And you'll see along the bottom, details of the project that we're sponsoring in order to achieve that. And we are, of course, as is HarbourVest, focused on diversity and inclusion. For HVPE that means really at the Board level, and we have very strong representation on the Board from females and ethnic minority. So that is a great result. We also monitor HarbourVest's ESG progress annually via the Management Engagement Committee. So we are absolutely committed to be maintaining and improving these standards. Moving on. So a word on recent events. So we're now looking at the monthly figures to September. We continue to see negative cash flow post period end. So you'll see on the left-hand side, we are now in a net drawn position on the credit line. So the top line here in dark blue shows the net cash position and the light blue line shows the total credit line. So the $800 million total facility, with the green arrow demonstrating the gap there effectively representing the headroom we have in terms of liquid resources. So while cash flow has been negative, the fact that we increased the credit facility size during the prior financial year from $700 million to $800 million has ensured that we continue to enjoy a significant level of flexibility in terms of credit. Monthly cash flows have been volatile, as is, frankly, quite normal. We do tend to see more distributions come through at quarter ends -- of the calendar quarter ends. June was a particularly strong month. September a little bit weaker than a typical September, but we have seen encouraging signs of the underlying portfolio level. The transactions are returning. So the average for the last 3 months was more than 25 transactions per month versus 15% in the prior 6-month period. So there is a typical delay between transactions occurring and being reported to us and the cash flowing up through the structure, but it's a useful leading indicator of potential recovery on the cash flow side. In terms of balance sheet, we continue to see a strong position. The total commitment ratio, while it is at the upper end of its 12-month range, is below the long-term norm that we had been operating to pre-COVID, when typically it was between 170% and 180%. So we've taken a more conservative approach in recent years. We have also seen continued strength in the medium-term coverage ratio. So as a reminder, that takes the available cash and credit facility plus 12 months of forecast distributions from the portfolio and divides all that by the next 3 years of forecast capital calls based on existing commitments. So that ratio is really intended to provide insight on a relative basis to peers where they have much shorter-term investment pipelines than we do. The conventional commitment coverage ratio of 30% is always lower than peers due to our structure in terms of long-term commitments, but remains at a stable and acceptable level overall, particularly in view of the medium-term ratio in the middle. And in the financial period in the 6 months, we saw fund level borrowing increase by around $30 million. So that represents an increase of just under 1% of NAV. This figure does fluctuate as funds call capital using either the credit line or direct capital calls, and the balance can shift from quarter-to-quarter. So we'll keep an eye on that as we move forward. But it's at a similar level to 18 months ago as a percentage of NAV. Moving on. A reminder of the current valuations available in the market. So the September NAV is based on essentially a full suite of June valuations combined with the public market exposures and a small amount of direct investments that are valued on September marks. So very much as up-to-date as it can be for a structure like HVPE. And as I say, it shows continued resilience. There was a small downtick in September, but no major trend emerging there. In conclusion, I'd like to remind everyone on the call, clearly, we take a long-term approach. The 10-year performance figures are very strong. The share price total return of 249% over 10 years places us very close to the top of the table of all investment companies tracked by the AIC. We're, of course, very cognizant of the discount and are doing all we can on that front. But we do value the opportunity to continue to commit longer term and deliver the very strong NAV growth that this vehicle has come to be known for. We have a strong balance sheet. We have a long-term committed credit line, which will support continued investment. And we have very strong diversification across regions, stages, and strategies, which we believe position us very well for whatever may lie ahead.

Thank you. We currently have no further questions in the queue, and so I will pass back to Richard in a moment. As a reminder, the full presentation from today, including the appendix and the disclaimers can be found on the HVPE website, and that will be available for downloading along with the recording of this session in the next few days. I'll pass it back to you, Richard.

Thanks, Amelia. So all that remains for me to say is thanks again for joining. Really appreciate the time you've taken to listen to us, and look forward to speaking in person. Happy to answer questions one-to-one. If you have any further questions to ask, I'm available for the rest of the day. And again, thank you for joining. Hope to see you soon, and goodbye.