Q&A: HarbourVest's Sebastiaan van den Berg

Q: Several of the larger Australian GPs invested less heavily in 2013 compared to previous years. Is this cause for concern?

A: If you look at the broad M&A market, last year was fairly quiet in Australia. It is also not unreasonable to say that the election resulted in lower corporate strategic activity because people were waiting to see how things panned out. Dry powder is still available but a number of firms focused more on generating liquidity either through refinancing or outright exits, either strategic or through IPOs. We aren't worried about the slower investment. We still see Australia as an important private equity market in the Asia Pacific context and we will continue to see deal activity.

Q: If a manager deploys at a slower pace than expected in the early stages, what does this do to the j-curve effect?

A: The j-curve effect is always there. It is something investors in private equity need to live with, but at the same time it is something we can mitigate in the portfolios we construct - we don't only invest in primary funds but do secondary transactions and co-investments as well. At the end of the day, it is more important for us that managers are disciplined and stick to strategy. If the pressure to invest is too great, the risk is that managers start doing deals that are either overpriced or ill conceived, and this has a much greater impact on the long-term performance of a fund than the j-curve. In general, you do see some investors getting nervous when they see a manager hasn't done much for two years or more, but the reason GPs have 5-6 year investment periods - and funds have 10-year life terms - is so you can avoid the issue of needing to deploy capital immediately. The j-curve is not the driving parameter; it is all about the ultimate return.

Q: With the revived IPO market, a number of GPs have seen liquidity events and in some cases full exits. Is a full exit on IPO always a good thing?

A: As an investor, it is good that the GP can achieve liquidity at the get go. In China, lock-up periods can be as long as three years, which isn't great. Having that flexibility to sell down a significant stake - and I do think 100% is less likely these days, 70-80% is reasonable - for the right deal with the right sponsorship is feasible.

Q: Do you feel that retail investors would be reassured if private equity firms made incremental exits?

A: The capital markets in Australia are deep, well developed and there is significant investor experience, so you don't really need that type of hand-holding. And if you look at the quantum of retail capital versus institutional capital, the institutions are of course by far the largest player in that market. I don't think the data support the argument that private equity guys are listing companies at the highest possible valuation and then exiting before the stock sinks. These stories come up from time to time, but there is a reason institutional investors keep coming back to new IPOs underwritten by PE firms. They realize every deal stands on its own. What is most important to a new investor in an IPO is that the management team remains properly incentivized through equity ownership and participation in the company. If they cash out you would wonder what their incentive is to keep working.

Q: Australia stands out in Asia because of the number of buyouts. Does this mean you are a more active co-investor there than in other markets?

A: Co-investments don't only happen in buyouts - we co-invest in venture, growth equity and buyouts. And as to buyouts predominantly happening in Australia, I think that is changing. In China, about 60% of all investment activity by value in 2013 was in buyouts. Clearly, the data are skewed by some very large transactions like Focus Media, but we are definitely seeing more buyouts. We are also seeing increased activity in India, and then Indonesia and Malaysia are as much buyout markets as they are growth equity markets. Co-investments in part depend on how experienced the GP is in running an efficient and effective process. We don't always see this experience in emerging markets, but in Australia GPs tend to understand the dos and don'ts, and there is no need to spell everything out. It is a pleasant environment to work in.

Q: What is Australian LPs' appetite for foreign versus domestic private equity?

A: Australian LPs are still investing in domestic private equity but it's true that the overall quantum of commitments to Australian GPs has come down. Some of these groups haven't done much outside of Australia and they come to us and say they want a more globally diversified portfolio, but it's hard to say whether that fully replaces what they are doing in Australia or only partially offsets it. At the same time, a number of superannuation funds are playing catch up in terms of their general PE exposure. They recognize they made some commitments in the past but in hindsight these were too small because they are seeing significant inflows and growing rapidly. They need to make much bigger commitments and more quickly because they aren't meeting target allocations.

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• Topics
• LPs
• Australasia
• Fund-of-funds
• Australia
• LPs
• Co-investment
• HarbourVest Partners
• Fund-of-funds