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Institutional investor profile: George R Anson, Managing Director, HarbourVest Partners

Anson on the impact of fund size on performance, on the current attraction of mezzanine, on the transparency debate and on what the future holds for levels of returns from private equity.

HarbourVest Partners is a global private equity fund of funds. It was created in 1997 by the partners that managed Hancock Venture Partners, which was formed in 1982. With $14bn under management, the firm invests 60 per cent into the US and 40 per cent across the rest of the world in all stages of private equity, including directly in companies. It has 105 employees in offices in London, Hong Kong and Boston. HarbourVest has recently closed its latest non-US fund, HarbourVest International Private Equity Partners IV, at $2.8bn, which includes $375m for direct investments. Anson joined the London office of HarbourVest in 1990 following seven years of fund and direct investing at Pantheon Ventures.

What type of investments do you tend to look for?
‘We have had a much more significant exposure in Europe in terms of dollars invested and numbers of groups in buy-out funds than in venture capital. The venture component has continued to increase over the last 12 years since we raised our first international fund. In our last programme, approximately 30 per cent of our European primary partnership allocation went to venture capital funds.

‘We'd like to think that we get good European coverage from the groups that we have invested in. That doesn't necessarily mean that those groups are spread across Europe. What we're looking for is the absolute return that any given group is able to achieve as opposed to how well engrained they are in a particular region. At the same time, the major economic regions of Europe are important because that's where the critical mass of opportunities tends to reside. We take very much a bottom-up approach, although there are certain markets where it just doesn't make any sense for us to invest in dedicated groups.

‘We have no preference on fund terms. Our view is that, in the first instance, terms don't matter. Rather, what I want to know is why a given fund is the best and why it thinks it is able to execute and achieve significantly superior returns. If groups can demonstrate that to us, then we'll be there. The reality of that is that success tends to be a magnet of capital and so successful groups do tend to raise more money than others.'

Do you think that size can ultimately impact fund performance?
‘Absolutely I do. One of the biggest issues we have with successful groups raising capital is the size of their next fund. You can ask any general partner that we have invested with recently and they'll tell you that one of the first questions we ask is how big a fund they are going to raise after this one. We then want to ensure that they are going to keep their feet to the fire. It's very important to us because we think that there is a direct relationship between the right amount of capital to manage and the results. I think that those that raise larger funds than is sensible for what they are doing, there is a large danger of strategy drift, but most importantly of all, there is an element of hubris. People can start believing what people write about them and they can be tempted to raise as much capital as they can.

‘Greed can be very persuasive. With either buy-out or venture capital funds, if the money is there, you can lock it in for ten years and you get your annuity stream. That is very tempting. We try to get everyone to sit down early in the fundraising process to agree what the upper limit on their fund will be, we get it in writing and ensure that they stick to it.'

There is a lot of interest surrounding mezzanine at the moment. Do you invest in mezzanine funds?
‘We have just made our first mezzanine fund investment on a primary basis - we have bought positions in several mezzanine funds on the secondaries market in the past. They have been great investments. In today's environment, we see mezzanine as having a useful role in an overall diversified portfolio. And so, on a very selective basis, we will be making some primary commitments to the sub-sector. It won't form a major part of our portfolio, but it will be important enough to make a difference. This is also driven by increasing client demand for mezzanine investment.'

Are you looking for opportunities outside the US and Europe?
‘We have invested in Japan and emerging markets in the past - in Asia in particular. We have made some money from these investments, but we have come to the view that, on the whole, our returns have not been significant enough to compensate for the political and economic uncertainties in many of these regions. These factors bear much more weight in emerging markets than they do in, say, the US and Europe. They are also affected by events that happen in other parts of the world much more than with the more established markets.'

What do you look for in a private equity manager?
‘We have a European team that has been in place now for well over 12 years and the firm itself has been in place for over 20 years. The experience that we bring to bear is very important in what we're looking for. The dynamics are fairly obvious - we're looking for an experienced management team that has worked together for some time and that has generated a track record that can be analysed and that bears up under scrutiny compared to their peer group. We're also looking for groups that follow market opportunities that enable them to perform hopefully as well as they have done in the past. Terms and conditions are important, but they are not the drivers behind a deal. My experience is that if you find a quality management group and you find a good market opportunity, then there will always be a set of terms and conditions that will fit that. Sometimes that gets flipped around and you'll hear groups asking which terms and conditions you will invest under. Our response is that that is what you pay corporate advisers for. We want groups to talk to us about why they are the best fund, why they are in the best market and why now is the best time to invest. If you get that process right, that tends to focus the conversation a bit more. It keeps us focused on what we want, too.'

How does your investment process work?
‘Our investment process doesn't have a beginning or an end. Sure, you can look at individual funds, but we see our investment process as having an ongoing relationship with the general partners. That word “partner” is very important to us. We try to enter into a partnership with every group that we commit to. We want to be there for them through thick and thin from one fund to the next and hopefully add some value to them as an investor other than just dollars.

‘When it comes to fundraising time, we go through all the usual mechanics of analysing how value has been created in past deals, what the current deal flow looks like, what the current environment looks like and how the management team is structured. That gets encompassed into a document and is subject to a series of reviews and committee approval. None of it is rocket science. But I think that there is a lot that goes into the analysis that drives us towards picking winners.'

You claim to add value to the funds that you invest with. How do you do that?
‘We have a separate, but related, direct investment arm. Certain fund of funds managers see that as a great conflict; we see it as a huge benefit. We have a separate legal entity for our direct investment programme, which counteracts any concerns about conflicts of interest. By having our direct investment team involved with certain venture capitalists or buy-out firms, they give us a huge insight into the ways in which these groups operate at the coalface. So if we are involved by sitting on the boards of directors of companies, for example, we can see whether groups bother to turn up to board meetings, whether they pay attention or whether they are scribbling on their notepads or whether they are in the hallway on their mobile booking the next flight home. There is no amount of desk due diligence or reference calls that will tell you any of these. I think that seeing people in operation ensures that we add huge value and hopefully helps us make better investments.

‘The added value to the funds that we invest in comes from the fact that our global direct investment experience can be a huge benefit to the fund managers themselves. It gives us an added dimension that no other ordinary fund investor can bring to the table.'

What is your appetite for first-time funds?
‘I don't hold any bias for or against first-time funds when they are managed by experienced teams - rather than individuals - who have worked together before. However, we probably wouldn't go near a fund managed by two or three or so individuals that have come together from different backgrounds. Individually, they may have very valuable experience, but if they don't have experience of working together then I think it's too risky a proposition. It's like a marriage: you want to live together for a little while to see if it works before you tie the knot. We'd rather not be in that process to begin with.'

What advice would you offer to a new private equity investor?
‘Let me turn this around. The most frequently asked question new investors pose to me is this: is now the right time to invest in private equity? The answer is: that's the wrong question. The question you should be asking yourself always is: am I talking to the right managers? Whether you are going down the fund of funds route or investing directly in funds, you need to research the market and understand who all the players are to ensure that you are only going with the best. Oftentimes, that means that you would use a consultant, who can help you process all the information and details. Timing is a mug's game in this business. You have to have the courage of your convictions and discipline to continue to invest in the asset class over time.'

What do you think is the biggest issue in the private equity industry?
‘I think the biggest issue is finding the best quality deals. I don't want to believe some of the more pessimistic people in the market who say that net fund returns are likely to be around 15 per cent. I believe that top class private equity managers can do better than that. I still believe in the fundamental inefficiencies of the private equity market. Money is not the issue. It's finding good deals. Part of my job in London is insulating the rest of the team from getting their heads turned by fundraising and worrying about capital. Finding good deals and staying ahead of the pack is really key for us.'

And how do you find those best deals?
‘Many funds of funds claim that they source good deals because of who they are. I would start to believe my own hubris if I said that it was to do with the fact that we are HarbourVest. However, I think it is true that if you are upfront, early and a significant investor - which we have been for a large number of our European fund investments - you gain access to the best opportunities. It means that you have a reputation for being a good, long-term investor.

‘I think that the big issue with this will come when firms start raising smaller - not bigger - funds, particularly in the US venture capital market. Who, out of the investors, is going to be left standing? There will be an almighty scrum to get into certain funds and the GPs will have the luxury of deciding who they will accept as investors. And some GPs are now looking as much at who their partners are as at how big a fund they are raising.'

How do you think that the issue of transparency will pan out?
‘I think that we will end up with agreements that are much more up-front at the time of subscription. If a customer or a client of ours has disclosure requirements that go into the public domain, they will have to accept - not just from us but also from others - that the amount of information that they will be provided with will be limited. It will be limited to what we feel is able to be disclosed so that it is not going to have a negative effect on our relationship either with the GPs we invest in or with the companies that we invest in. I don't see why that should be a problem. We talk to our clients that have disclosure requirements and they totally understand. But I think that it will end up in writing. There is currently a confidentiality clause in most LP agreements, but investors are allowed to disclose the information they receive if it is required by law.

‘I think that we will see more public pension funds being required to disclose their private equity fund performance statistics. I would like to think that it is a fad and that when the next big scandal comes up in the media, attention will be turned away. Look at it this way: when the figures were positive, you didn't see the regional and local press demanding to see private equity performance data. This is a storm that will eventually blow over.'

What is your biggest mistake?
‘My biggest mistake was believing a management team when they sold their management company to an institution that nothing would change. And it did. The returns went right down the plughole. It was my biggest mistake. It was writ large on the wall and I ignored it.'

How do you think that the market will change in the future?
‘I don't see a slowdown in the number of investors coming into the market. What has happened over the last couple of years is that everybody is much better advised than they had previously been. Many investors have started involving consultants and other advisers in the process and that has been an important development. I think funds of funds - love them or hate them - will be around for a while. But, rather like in the venture capital industry over the last couple of years, there will be some fall-out. There will be some orphan assets out there. It just takes a long time for groups that don't succeed to disappear. The management fee keeps them locked in. They can downsize their organisation and still draw on a good annuity for the next few years.

‘Beyond that, I think that the biggest change in the industry will be a realisation among investors that the returns achieved over the last five or six years will never be repeated.'

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