Companies are staying private for longer. Start-ups no longer sell shares to the public to fund expansion. Instead they use “private equity” funds via deals arranged behind closed doors, locking out the average investor from fast-growing businesses. But all is not lost. One investment trust has been democratising private equity for some time and has used the trend away from stock markets to boost returns for investors.
HarbourVest Global Private Equity does not do deals itself. It invests in funds that invest in yet more funds, making it a rare fund-of-funds-of-funds. None the less, its shareholders get a slice of the action. They have been richly rewarded: investors have quadrupled their money since launch.
However, the trust has had a tough year, the share price falling by 5pc as the pandemic caused investors to ditch its high-risk investments. The manager, Richard Hickman, tells Telegraph Money how the trust is run, why the sell-off was unjustified and why private stocks make good investments.
Who is the fund for?
It is for people who want access to fast-growing private companies that are not available on stock markets. This can include a broad range of shareholders. We started off with big investors such as pension funds but have broadened out to include DIY investors. About 7pc of our shares are held by individuals.
How do you invest?
We own 49 HarbourVest funds and each is either a fund of funds or invests directly in private companies. This means there are more than 9,000 holdings in the portfolio, although 85pc of our cash is invested in just 1,000. We like our managers to have specialisms so they are deeply involved in what they own. This is critical when investing in private stocks.
Why have the trust’s shares been so volatile this year?
We saw an impact from Covid pretty much straightaway. In March our share price went from an all-time high of £18.68 down to a low of £9.21, thanks to an exaggerated panic that resulted in more of a sell-off than was, in hindsight, appropriate.
Our net asset value – which reflects the true returns from companies in the fund – was down by just 6pc in the first quarter but the share price halved. In the second quarter the NAV rose by 8pc yet the share price discount is still about 10 percentage points wider than it was.
Is this discount typical?
The share price discount has ranged over the past five years from 8pc to 32pc. Before the pandemic we felt like we were making progress, but unfortunately the market shock has undone some of that.
How have you managed the portfolio during Covid?
Early on in the outbreak we shifted our focus from finding new companies to making sure our existing portfolio was robust and the companies had enough cash to survive. We have moved back to looking at new deals and are seeing opportunities creep back up again. But it won’t return to normal until the outbreak is over.
Have your holdings asked for more cash this year?
We have always maintained a healthy cash balance because we knew at some point we would need it. In the first half of the year we effectively used up our cash and are now using our credit facility. We had the foresight to set up a $600m (£463m) credit facility in case something unpredictable happened, and it has. We are now $17m in debt on a portfolio of $2.3bn and have drawn $120m, meaning we have $103m in cash for emergencies.
What have been your best and worst investments?
The best was an online furniture company that was a more specialised competitor to Amazon. We bought it as a private business and sold it a couple of years ago for a good profit. It has since gone public, so we reinvested.
However, in the early 2000s we bought a diet business that sold weight-loss bars and shakes. It started off well and sales were increasing but the quality of the food was not great and consumers were not repeating orders. It fell from grace quite quickly. The business was fundamentally dependent on what turned out to be a fad.
How are you paid and do you invest in the fund?
I am paid a salary and bonus, part of which is linked to the trust’s share price. I use my own self-invested personal pension and Isa to invest in the fund.
What would you be if not a fund manager?
A combination of a philosopher and a scientist, although I know that doesn’t really exist as a career.