Q&A: HarbourVest Partners' George Anson

Q: In recent years a number of Western LPs have said that Asia isn't meeting their return expectations on a risk-adjusted basis compared to developed markets. What is your view on this?

A: Asia splits in two: buyouts in the more developed markets and then growth and venture in the emerging markets. In the last 12-18 months our Asia Pacific investment performance has jumped dramatically. That is partly improving economics, but there seems to be a more inherent volatility to the region. Investors generally understand that. What we try and avoid is getting caught up in a momentum play, like China venture capital a few years ago.

Q: There is a lot of interest from Asian LPs in US mid-market buyouts at present. Is this a momentum play?

A: They don't believe that US mega buyout funds have been able to demonstrate how you make outsize returns doing really large deals. With small and medium-sized buyouts there are supposedly more inefficiencies to address and greater opportunities to consolidate industries. I think that is generally true, but you don't necessarily get the best managers because they are working for the big companies. The performance numbers that we see do not say clearly that small and medium-sized buyout funds always outperform large buyout funds. It really comes down to careful manager selection.

Q: To what extent do you now provide customized separately managed accounts (SMAs)?

A: A: Very large clients have separately managed accounts in equities, bonds and real estate, so that is what they are going to want for their alternatives. About 10% of our assets under management are in separately managed accounts. I don't think we'll ever get to 50%, perhaps 20%. Then it's really a case of how that fits within our own capacity analysis: how much capital we have to commit to managers, and how much of that goes into the co-mingled funds and how much into separate accounts.

Q: What scale do you need to remain competitive in the fund-of-funds business?

A: If you have less than $3 billion in assets under management (AUM) you are going to struggle. Costs are going up and fees are under pressure. However, AUM is just one aspect; the other is your platform. We have seen single-strategy fund-of-funds raise two funds, then launch a third and clients start asking questions about the performance of the first fund. They are told it is too early to tell, so the clients decide to wait. These groups are stuck because they have no other strategy. We have secondaries, co-investment, a US-based fund-of-funds platform, which does venture and buyout in different sleeves, and an international platform. You couldn't have sold a penny's worth of our European fund-of-funds four years ago during the euro crisis, but now sentiment has changed and we are seeing strong interest in Europe. When Europe was cold we were raising a $3.6 billion secondary fund, so our business continues to move ahead.

Q: Is there a minimum threshold for a SMA?

A: SMAs are more about the client's specific needs and the strategic partnership going forward than the dollar amount. If I said the minimum is $100 million, it would likely be a client where you would hope the $100 million grows into something bigger if we do a good job.

Q: Once a client reaches a certain size, isn't there a risk that it will set up an in-house team?

A: The weakness of the fund-of-funds model is that if clients are growing in size and experience and not seeing added value from their manager through investments as well as the broader relationship, they may eventually hire people to do (some or all) of it internally. We have to create programs and performance that will stop clients making that decision. For our small and medium-sized clients that commit $10-50 million a year to PE, putting together a global program is difficult, so fund-of-funds is a solution for them. Then there are the large public pension funds where they just don't have the pay scales to be able to hire people to do this job. They either back very large managers, where they can commit $100-500 million per fund, or they are in the fund-of-funds market.

Q: HarbourVest has shown increased interest in senior debt in Australia. How important is this kind of diversification?

A: We are always looking at adjacent areas. I don't think you will see HarbourVest going into the hedge fund-of-funds world, but private debt and private credit is adjacent enough to what we are doing with our co-investment capability - you are looking at small and medium-sized companies but focusing on a different part of the capital structure. In the same way, we have been buying secondaries in PE and VC funds, so why not also real estate, infrastructure and energy? Whether or not we actually launch these strategies depends on client demand. The best way to get into new business areas is through separate accounts: find someone who likes your idea and get them to support you. If you are successful you can roll out the next product on a co-mingled basis.

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• Topics
• Fund-of-funds
• Fund-of-funds
• HarbourVest Partners
• Asia