Brooks Zug: Countdown to 2008

HarbourVest's senior managing director is expecting longer holds for recent deals with a drop in IRRs and an increase in mid-market secondary buyouts.

Brooks Zug

“Large buyouts done in 2005, 2006, and 2007 will remain on the books for longer than normal, as GPs try to improve the underlying businesses and wait for market pricing to reach the levels in which those deals were done.

The result will be lower internal rates of return, but not significant write-downs. Small and mid-market buyouts pricing will stay largely as it has been, although there will be some competition from large buyout firms who move down-market in order to get their money to work.

The number of secondary transactions (GP to GP) will increase in the mid-market space, as the smaller firms sell deals to the larger firms.  In venture, the U.S. market will continue to show improved performance. As the market regains its resilience, venture IPOs will once again become the norm.” Brooks Zug, senior managing director, HarbourVest Partners

The global fund of funds HarbourVest Partners capped a good year by completing its first public offering in December, as it attracted $300 million of fresh investments, while $530 million of existing investors transferred their assets.

It managed to get the offering away despite problems in the worldwide markets and turn in sentiment against private equity. The firm listed a fund of its institutional funds on Euronext Amsterdam at $10 per share.

Investors in HarbourVest's conventional partnerships agreed to provide $680 million of assets, which including an allocation to HarbourVest’s latest fund of funds. It ensured the offering was 91 percent invested at launch, reducing the potential for cash drag, a common complaint of quoted private equity.

HarbourVest returned $150 million to these investors in cash, according to one of its managing directors George Anson. Of these funds around $110 million were reinvested.

The fund had targeted to raise $400 million of fresh capital from the public markets. Anson said that it had raised only $300 million did not matter because under the terms of the deal, the existing HarbourVest shareholders received shares in the vehicle to make up for any lack of public uptake as long as the fund of funds was able to raise $250 million.