Private equity: Supporting wealth preservation for future generations

As a large global private markets investment manager, how can you help ultra-high-net-worth families with their investment strategies?
HarbourVest has been investing in private markets for more than 40 years and, throughout this time, we’ve gathered a lot of data and information on private capital and private equity in particular. Today, our databases comprise more than $8 trillion worth of commitments, spanning across more than 15,000 funds and over 67,000 holdings [1]. Within all that data resides valuable insights  that is helping us differentiate our investment decisions, uncover opportunities for value creation, and elevate our investing outcomes. 

Why is this relevant for family offices and high-net-worth private investors? One of the key value propositions of our robust data and our investing platform is the potential information advantage and pattern recognition of trends over our long-term investing history. It also gives us very deep and longstanding relationships across private markets, which enables us to better understand businesses and sectors and ultimately empowers us to be better investors. 

At a strategy level, our position gives us a very broad basis to observe new trends in private markets and share these insights with our investors early on. One of the initiatives we’re working on is what we call private equity continuation solutions (PECs), which has resonated well with family offices who see the value in backing good GPs around high-value businesses with strong management teams that can potentially create positive returns.

Private equity sponsors are increasingly turning to continuation solutions as traditional pathways to liquidity remain challenged in the current market environment. While this dynamic has created a compelling entry point for new investors to gain exposure to top-quality assets, what happens if, or when, markets improve?
In this market environment, liquidity has been at a premium and only the best assets are having successful continuation transactions completed around them.

If tomorrow the IPO and the M&A markets come back, why would GPs continue to do these deals? Well, I point to 2021, when the markets were wide open and there was plenty of liquidity available. GPs had many exit alternatives, but we still saw a boom in continuation solutions. GPs were electing to remain invested in their stronger performing assets for longer rather than selling them to strategic acquirors or other private equity firms, or selling them in the public markets.  This highlights the fact that continuation solutions are not at all dependent on exit markets, but rather, they are actually an all-weather solution and becoming a very accepted fourth way for GPs to generate liquidity for their investors. What this route offers that is different from other alternatives is that it allows GPs to offer a liquidity option to their limited partners but also remain invested in their assets for the next phase of growth. 

It has taken a while for GPs to become familiar with that fourth route to generate liquidity. But as more and more of these deals are being done, we think they are a becoming a more permanent liquidity alternative for GPs and an increasing opportunity for new investors. As markets open up once again, we expect continuation solutions to continue to present opportunities for GPs and both their existing and new limited partners.

Campden Wealth’s North American Family Office Report 2023 [2] found that, due to global financial markets uncertainty, family offices have continued to adopt a more conservative approach towards investment strategies with an increased focus on wealth preservation. Have you begun to observe similar behaviours in your own investor base, and how do you see the outlook developing as global financial and geopolitical events continue to take hold?
I think everybody has been very aware of the macroeconomic and geopolitical environment over the past couple of years. We’ve certainly seen attitudes evolving along similar lines – not only in the family office space, but throughout our entire investor base. While investors are still fundamentally focused on returns, we see downside risk becoming much more prominent in their considerations, with a balanced focus on generating the highest level of risk-adjusted returns. Given the current macro environment, we believe this trend will continue over the coming years. 

With the help of data, we are supporting investors to sharpen their portfolio construction, making sure sufficient attention is brought to things like cash flow management, diversification, and downside protection. For some investors, including some of our family office allocators, this has meant incorporating strategies that maybe hadn’t been part of their focus historically, such as secondaries, private credit, or infrastructure. These are strategies that are generally less inherently risky as compared to buyouts or venture capital.

The continuation solutions that I mentioned before are a relatively new strategy in the market. But what’s interesting is that they often have buyout upside potential, with characteristically lower risk.  We think that this is because these types of transactions typically involve high-quality assets that continue to be owned by the same general partners (GP) and managed by the same management teams, removing new deal risk, and benefiting from positive selection bias exercised by the existing GP.

For a new investor in these transactions, a key factor is the ability to see the existing performance of that asset under the current ownership structure. In this sense, knowing the track record of the asset, the GP, and the management team lowers the risk profile relative to making an investment alongside a new GP in a new company with limited history.  Given that kind of visibility into the performance of the company under the GP’s ownership, we think you can better assess the path for potential upside and private equity-like returns. 

Furthermore, GPs tend to roll their carry and often invest fresh capital alongside the new investors in the continuation solutions, so there’s usually a strong alignment between the GP and the investors at the time of the transactions. 

For all these reasons, continuation solutions have become quite interesting for investors in this market environment, where people are focused on risk, but also still looking to generate attractive private equity returns.

The same report found that, as part of this conservative investment approach, North American family offices have increased allocation to private markets – making it the largest asset class in use amongst those surveyed. Why are private markets considered such an important addition to an investor’s portfolio today?
Looking at the internal research conducted by our Quantitative Investment Sciences (“QIS”) team (a group of quantitative research analysts who analyse and interpret data to optimise our activities, both on the investment and investor side), I think it’s important to note that  private markets is more of a long-term investing strategy.

When we think about risk, we think about it in a data-driven way – how do we break down and understand the various risk factors at play, and what can the data show us about the relationship with other characteristics such as returns, liquidity, and time horizons.  Our QIS team has normalized the tremendous volume of data residing on the HarbourVest platform and created a huge pool of research and quantitative tools that helps us make informed investment decisions.

This research of private markets over multiple decades has shown that private equity has significantly outperformed public markets over the long term [3] and that outperformance has been consistent across vintages and through cycles. We have also found that private market valuations are typically less reactive to public equity performance when you have extreme events — the big highs and lows are generally more moderate in private markets, historically experiencing shallower dips and quicker recoveries when there is market stress and dislocation. Ultimately, the data confirms that private markets have historically delivered both strong returns with lower risk, compared to public markets when you look at it on a time-weighted return basis [4].

On a more qualitative basis, historically, private capital has, and continues, to sit at the epicentre of global innovation. And despite the current macro backdrop we continue to see top managers innovating and adding value, transforming some extraordinary companies into household names.

The main focus of family offices is really about wealth preservation, and this makes a particularly strong case for why private markets are such a focus within this investor group. If you’re investing for the long term and your day-to-day liquidity needs are more limited, then there is a compelling reason for taking advantage of all the benefits that private markets investing can offer over the long term.

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[1] HarbourVest, as of September 30, 2023.
[2] Campden Wealth, The North American Family Office Report 2023.
[3] HarbourVest, as of September 30, 2023.
[4] HarbourVest, as of September 30, 2023.

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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.