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Private Equity News: A World of Opportunity

October 2, 2023 | 6 min read

Private markets are undergoing a significant period of transition, opening their doors to non-institutional investors eager to access the opportunities offered by the asset class. 

Over the past five years, the rise of evergreen, or perpetual, vehicles has presented an opportunity for private client investors to enter the private markets space, and benefit from exposure to an asset class previously only available to large, well-established, institutional investors.  

Unlike traditional closed-ended PE funds, which typically have a fixed lifespan of about 10 years, evergreen products have no fixed end date, offer more flexibility, lower entry minimums, and provide immediate exposure with no ramp-up period. 

But why has this change occurred, who is driving it, and what will this mean for investors and the market? 

Simon Jennings, Managing Director and Head of HarbourVest’s Private Client Group in EMEA and APAC, and Per Olofsson, Head of Alternatives at Swedish government pension fund AP7, addressed these questions at a recent executive interview as they expanded on their decision to partner on a new private equity (PE) open-ended solution for both non-US high net worth (HNW) and institutional investors.

Jennings noted that recent market volatility and the closer correlation between fixed income and equity returns has fueled interest in the private markets among investors of all types. Countering that, however, are concerns about locking up capital.

“One of the biggest hurdles for investors in private markets is the perception of illiquidity,” Jennings said, “whether it is an institutional investor wanting to change or rebalance their PE allocation; or in the case of private clients, a change to personal circumstances that means a need to access capital or liquidity.”

The evergreen model, by contrast, allows for periodic investor redemptions, solving the liquidity issue in a way that is “transparent, relatively straight forward, and easy to run”, he added.

“Evergreen strategies address some of the limitations presented by closed-end funds, such as limited liquidity, high minimum commitment amounts, J curve with slower exposure build-up, and removes the administrative burden of managing capital calls and distributions.”

Private client appeal

Rising investor demand coupled with extensive efforts by many of the world’s biggest investment companies to tap HNW individuals is expected to drive rapid growth in individual investors’ participation within private markets.

Bain predicts that the private wealth segment of the alternatives market will grow 12% annually in the decade to 2032, rising to $13 trillion from $4 trillion as at 2022. 

Jennings himself has spent much of his career, including when leading PE divisions at UBS and HSBC, connecting HNW individuals to this asset class. At HarbourVest expanding private clients’ participation beyond the current 10% of its roughly $110 billion of assets under management (AUM) is a strategic priority.

One of the biggest hurdles for investors in private markets is the perception of illiquidity, whether it is an institutional investor wanting to change or rebalance their PE allocation; or in the case of private clients, a change to personal circumstances.
Simon Jennings
Simon Jennings
HarbourVest

He said the Evergreen model vastly improves ease of access to PE for wealthy individuals, with the current penetration rate of about 5% providing a “huge growth opportunity”. Traditionally this asset class was open only to family offices, though this later widened out to ultra HNW individuals, who would invest via feeder vehicles created by private banks, he explained.

Institutional interest

Institutional investors have long been investing in private markets and despite recent market volatility, continue to embrace the opportunity due to a spate of de-listings, the rise and rise of technology companies and the recent equities/bonds correlation make genuine diversification harder to achieve.

“Institutional investors are looking for innovative ways to augment their existing private markets allocation (post market turbulence and the denominator effect); and evergreen vehicles provide access to flexible asset allocation without the operational constraints of liquidity management of closed-end vehicles,” Jennings said.

AP7’s Olofsson said AP7 is planning to lift its allocation to private markets from about 5% of its roughly $100 billion AUM to 20% following a change in Swedish pension regulation from January this year.

Evergreen funds will be an increasing part of this mix, given the greater liquidity, operational ease and the ability to build more immediate exposure to PE that they offer.

“Our goal is to find innovative and responsible ways to put our savers’ capital to work in attractive opportunities,” he said.

“This solution allows us to quickly increase our alternatives allocation, and quickly increase our alternatives strategies such as secondaries and co-investments, which in turn will complement our more mature primary exposure.”

AP7’s evergreen collaboration with HarbourVest, which includes a $835 million anchor investment, is the first of its kind for the Swedish pension fund. The project is the fruit of two years’ work and more than 200 meetings, marking the evolution of a relationship with HarbourVest stretching back over 20 years. Olofsson described this as being based on “collaboration and trust”.

The partnership “allows us to reach our target allocation faster while maintaining diversification,” he added.

“We are constantly looking for ways to find value for our investors and wanted to partner with a like-minded organisation that understood those needs.”

Differentiating from rivals

The partnership leverages HarbourVest’s successful 40-year track record. This includes one of the largest and longest-standing investment teams in secondary and direct co-investments, and experience managing another evergreen strategy through the London-listed HarbourVest Global Private Equity. 

While a growing number of players offer evergreen funds, Jennings stressed the differentiators of the HarbourVest/AP7 solution.

For one thing, the strategy is underpinned by a highly diversified seed portfolio from AP7, which removes the blind pool risk and the need for a ramp-up period.  In addition, the distributions from the mature portfolio can be quickly re-deployed into new investments thus reducing the need to hold cash.

The evergreen solution allows us to quickly increase our alternatives exposure and accelerate our exposure to both secondaries and direct co-investments, which in turn will complement our more mature primary exposure.
Per Olofsson
AP7

Unlike others, this is a pureplay private equity strategy providing investors with immediate access to HarbourVest’s robust deal flow, and its ability to deploy more than $10 billion a year across direct co-investments and secondaries. It is based on an open architecture and multi-manager approach, giving clients access to quality deals from leading PE managers.

The future

The investment case for evergreen funds is clear, while for PE firms themselves they allow for flexibility around investment holding periods, respite from the fundraising treadmill and facilitate the kind of patient capital preferred by shareholders.

In a rapidly changing private markets landscape, an increasing number of institutional and HNW investors are considering alternatives to the traditional closed-end fund, and evergreen products look set to gain considerable traction.

AP7’s Olofsson argued that the type of innovation and change driving the pension fund’s new partnership with HarbourVest is a “good way for institutional investors to rethink, reset and evolve”.

“Open-ended solutions also provide an opportunity for institutional investors to diversify and augment their existing and established private market portfolios,” he added.

Jennings said that the current market the backdrop gives private markets a unique opportunity to “showcase its potential” to new investors.

“Through open-ended solutions, there’s a great opportunity to reach the broader segment of the market,” he said. “The future is positive and open-ended solutions present a significant and exciting growth opportunity.”

Simon Jennings

HarbourVest

Would you like to discuss Open-ended private market solutions? 

Contact us

AP7 is a client of HarbourVest and has invested in a number of HarbourVest products.

HarbourVest Partners, LLC is a registered investment adviser under the Investment Advisers Act of 1940. This material is solely for informational purposes and should not be viewed as a current or past recommendation or an offer to sell or the solicitation to buy securities or adopt any investment strategy.  The opinions expressed herein represent the current, good faith views of the author(s) at the time of publication, are not definitive investment advice, and should not be relied upon as such. This material has been developed internally and/or obtained from sources believed to be reliable; however, HarbourVest does not guarantee the accuracy, adequacy or completeness of such information. There is no assurance that any events or projections will occur, and outcomes may be significantly different than the opinions shown here.  This information, including any projections concerning financial market performance, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. The information contained herein must be kept strictly confidential and may not be reproduced or redistributed in any format without the express written approval of HarbourVest.

Nothing herein should be construed as a solicitation, offer, recommendation, representation of suitability, legal advice, tax advice, or endorsement of any security or investment and should not be relied upon by you in evaluating the merits of investing in HarbourVest funds or in any other investment decision.

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Professional Investor Definition

“Professional Investor” under the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (the “SFO”) and its subsidiary legislation) means:

(a) any recognised exchange company, recognised clearing house, recognised exchange controller or recognised investor compensation company, or any person authorised to provide automated trading services under section 95(2) of the SFO;

(b) any intermediary, or any other person carrying on the business of the provision of investment services and regulated under the law of any place outside Hong Kong;

(c) any authorized financial institution, or any bank which is not an authorised financial institution but is regulated under the law of any place outside Hong Kong;

(d) any insurer authorized under the Insurance Ordinance (Cap. 41 of the Laws of Hong Kong), or any other person carrying on insurance business and regulated under the law of any place outside Hong Kong;

(e) any scheme which-

(i) is a collective investment scheme authorised under section 104 of the SFO; or

(ii) is similarly constituted under the law of any place outside Hong Kong and, if it is regulated under the law of such place, is permitted to be operated under the law of such place,

or any person by whom any such scheme is operated;

(f) any registered scheme as defined in section 2(1) of the Mandatory Provident Fund Schemes Ordinance (Cap. 485 of the Laws of Hong Kong), or its constituent fund as defined in section 2 of the Mandatory Provident Fund Schemes (General) Regulation (Cap. 485A of the Laws of Hong Kong), or any person who, in relation to any such registered scheme, is an approved trustee or service provider as defined in section 2(1) of that Ordinance or who is an investment manager of any such registered scheme or constituent fund;

(g) any scheme which-

(i) is a registered scheme as defined in section 2(1) of the Occupational Retirement Schemes Ordinance (Cap. 426 of the Laws of Hong Kong); or

(ii) is an offshore scheme as defined in section 2(1) of that Ordinance and, if it is regulated under the law of the place in which it is domiciled, is permitted to be operated under the law of such place,

or any person who, in relation to any such scheme, is an administrator as defined in section 2(1) of that Ordinance;

(h) any government (other than a municipal government authority), any institution which performs the functions of a central bank, or any multilateral agency;

(i) except for the purposes of Schedule 5 to the SFO, any corporation which is-

(i) a wholly owned subsidiary of-

(A) an intermediary, or any other person carrying on the business of the provision of investment services and regulated under the law of any place outside Hong Kong; or

(B) an authorized financial institution, or any bank which is not an authorised financial institution but is regulated under the law of any place outside Hong Kong;

(ii) a holding company which holds all the issued share capital of-

(A) an intermediary, or any other person carrying on the business of the provision of investment services and regulated under the law of any place outside Hong Kong; or

(B) an authorized financial institution, or any bank which is not an authorised financial institution but is regulated under the law of any place outside Hong Kong; or

(iii) any other wholly owned subsidiary of a holding company referred to in subparagraph (ii); or

(j) any person of a class which is prescribed by rules made under section 397 of the SFO for the purposes of this paragraph as within the meaning of this definition for the purposes of the provisions of the SFO, or to the extent that it is prescribed by rules so made as within the meaning of this definition for the purposes of any provision of the SFO.

The first of such classes of additional “professional investor”, under the Securities and Futures (Professional Investor) Rules (Cap. 571D of the Laws of Hong Kong), are:

(k) any trust corporation (registered under Part VIII of the Trustee Ordinance (Cap. 29 of the Laws of Hong Kong) or the equivalent overseas) having been entrusted under the trust or trusts of which it acts as a trustee with total assets of not less than HK$40 million or its equivalent in any foreign currency at the relevant date (see below) or-

(i) as stated in the most recent audited financial statement prepared-

(A) in respect of the trust corporation; and

(B) within 16 months before the relevant date;

(ii) as ascertained by referring to one or more audited financial statements, each being the most recent audited financial statement, prepared-

(A) in respect of the trust or any of the trust; and

(B) within 16 months before the relevant date; or

(iii) as ascertained by referring to one or more custodian (see below) statements issued to the trust corporation-

(A) in respect of the trust or any of the trusts; and

(B) within 12 months before the relevant date;

(l) any individual, either alone or with any of his associates (the spouse or any child) on a joint account, having a portfolio (see below) of not less than HK$8 million or its equivalent in any foreign currency at the relevant date or-

(i) as stated in a certificate issued by an auditor or a certified public accountant of the individual within 12 months before the relevant date; or

(ii)  as ascertained by referring to one or more custodian statements issued to the individual (either alone or with the associate) within 12 months before the relevant date;

(m) any corporation or partnership having-

(i) a portfolio of not less than HK$8 million or its equivalent in any foreign currency; or

(ii) total assets of not less than HK$40 million or its equivalent in any foreign currency, at the relevant date, or as ascertained by referring to-

(iii) the most recent audited financial statement prepared-

(A) in respect of the corporation or partnership (as the case may be); and

(B) within 16 months before the relevant date; or

(iv) one or more custodian statements issued to the corporation or partnership (as the case may be) within 12 months before the relevant date; and

(n) any corporation the sole business of which is to hold investments and which at the relevant date is wholly owned by any one or more of the following persons-

(i) a trust corporation that falls within the description in paragraph (k);

(ii) an individual who, either alone or with any of his or her associates on a joint account, falls within the description in paragraph (k);

(iii) a corporation that falls within the description in paragraph (m);

(iv) a partnership that falls within the description in paragraph (m).

For the purposes of paragraphs (k) to (n) above:

  • “relevant date” means the date on which the advertisement, invitation or document (made in respect of securities or structured products or interests in any collective investment scheme, which is intended to be disposed of only to professional investors), is issued, or possessed for the purposes of issue;
  • “custodian” means (i) a corporation whose principal business is to act as a securities custodian, or (ii) an authorised financial institution under the Banking Ordinance (Cap. 155 of the Laws of Hong Kong); an overseas bank; a corporation licensed under the SFO; or an overseas financial intermediary, whose business includes acting as a custodian; and
  • “portfolio” means a portfolio comprising any of the following (i) securities; (ii) certificates of deposit issued by an authorised financial institution under the Banking Ordinance (Cap, 155 of the Laws of Hong Kong) or an overseas bank; and (iii) except for trust corporations, cash held by a custodian.

Institutional Investor / Accredited Investor Definition

An institutional investor as defined in Section 4A of the SFA and Securities and Futures (Classes of Investors) Regulations 2018 is:

(a) the Singapore Government;

(b) a statutory board as may be prescribed by regulations made under section 341 of the SFA, as prescribed in the Second Schedule of the Securities and Futures (Classes of Investors) Regulations 2018;

(c) an entity that is wholly and beneficially owned, whether directly or indirectly, by a central government of a country and whose principal activity is —

(i) to manage its own funds;

(ii) to manage the funds of the central government of that country (which may include the reserves of that central government and any pension or provident fund of that country); or

(iii) to manage the funds (which may include the reserves of that central government and any pension or provident fund of that country) of another entity that is wholly and beneficially owned, whether directly or indirectly, by the central government of that country;

(d) any entity —

(i) that is wholly and beneficially owned, whether directly or indirectly, by the central government of a country; and

(ii) whose funds are managed by an entity mentioned in sub‑paragraph (c);

(e) a bank that is licensed under the Banking Act 1970;

(f) a merchant bank that is licensed under the Banking Act 1970;

(g) a finance company that is licensed under the Finance Companies Act 1967;

(h) a company or co‑operative society that is licensed under the Insurance Act 1966 to carry on insurance business in Singapore;

(i) a company licensed under the Trust Companies Act 2005;

(j) a holder of a capital markets services licence;

(k) an approved exchange;

(l) a recognised market operator;

(m) an approved clearing house;

(n) a recognised clearing house;

(o) a licensed trade repository;

(p) a licensed foreign trade repository;

(q) an approved holding company;

(r) a Depository as defined in section 81SF of the SFA;

(s) a pension fund, or collective investment scheme, whether constituted in Singapore or elsewhere;

(t) a person (other than an individual) who carries on the business of dealing in bonds with accredited investors or expert investors;

(u) a designated market‑maker as defined in paragraph 1 of the Second Schedule to the Securities and Futures (Licensing and Conduct of Business) Regulations;

(v) a headquarters company or Finance and Treasury Centre which carries on a class of business involving fund management, where such business has been approved as a qualifying service in relation to that headquarters company or Finance and Treasury Centre under section 43D(2)(a) or 43E(2)(a) of the Income Tax Act 1947;

(w) a person who undertakes fund management activity (whether in Singapore or elsewhere) on behalf of not more than 30 qualified investors;

(x) a Service Company (as defined in regulation 2 of the Insurance (Lloyd’s Asia Scheme) Regulations) which carries on business as an agent of a member of Lloyd’s;

(y) a corporation the entire share capital of which is owned by an institutional investor or by persons all of whom are institutional investors;

(z) a partnership (other than a limited liability partnership within the meaning of the Limited Liability Partnerships Act 2005) in which each partner is an institutional investor.

An accredited investor as defined in Section 4A of the SFA and Securities and Futures (Classes of Investors) Regulations 2018 is:

(i)  an individual —

(A) whose net personal assets exceed in value $2 million (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe in place of the first amount;

(B) whose financial assets (net of any related liabilities) exceed in value $1 million (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe in place of the first amount, where “financial asset” means —

(BA) a deposit as defined in section 4B of the Banking Act 1970;

(BB) an investment product as defined in section 2(1) of the Financial Advisers Act 2001; or

(BC) any other asset as may be prescribed by regulations made under section 341; or

(C) whose income in the preceding 12 months is not less than $300,000 (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe in place of the first amount;

(ii)  a corporation with net assets exceeding $10 million in value (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe, in place of the first amount, as determined by —

(A) the most recent audited balance sheet of the corporation; or

(B) where the corporation is not required to prepare audited accounts regularly, a balance sheet of the corporation certified by the corporation as giving a true and fair view of the state of affairs of the corporation as of the date of the balance sheet, which date must be within the preceding 12 months;

(iii) A trustee of a trust which all the beneficiaries are accredited investors; or

(iv) A trustee of a trust which the subject matter exceeds S$10 million; or

(v) An entity (other than a corporation) with net assets exceeding S$10 million (or its equivalent in a foreign currency) in value. “Entity” includes an unincorporated association, a partnership and the government of any state, but does not include a trust; or

(vi) A partnership (other than a limited liability partnership) in which every partner is an accredited investor; or

(vii) A corporation which the entire share capital is owned by one or more persons, all of whom are accredited investors.

Continuation solutions encompass a host of transaction types in which a GP secures interim liquidity and/or additional primary capital for their LPs in a strongly performing asset, or set of assets, that the GP will continue to own and control. Specifically, they include continuation funds, new funds created by GPs for the purpose of acquiring the asset(s) that continue to be managed by the same GP and capitalized by one or several secondary buyers, or equity recapitalizations involving a direct equity or structured equity investment into a portfolio company. These transactions can also include a parallel investment from the GP’s latest fund into that same pool of assets (a “cross-fund trade”).