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HarbourVest launches next international fund of funds

HarbourVest Partners

Year entered alternatives: 1982

Investment strategy: Includes fund commitments, direct investments and secondary investments in venture capital, buyouts, mezzanine and other strategies around the world

Assets under management: $18 billion

Limited partners: 3M, Chicago Teachers Pension Fund, New York State Teachers’ Retirement System, Ventura County Employees’ Retirement Association, Vermont State Retirement Systems, Virginia Retirement System, Washington State Investment Board

General partners backed: Advent International, Bain Capital, The Blackstone Group, GTCR, IK Investment Partners, Permira, according to Dow Jones

Web address: http://www.harbourvest.com

Institutional investors may be over their love affair with co-mingled funds of funds. But that hasn’t stopped the industry’s pioneers from launching new ones, even as they continue diversifying into separate accounts, co-investments, secondaries and other products.

Boston-based HarbourVest Partners in April launched its latest international fund-of-funds, HarbourVest International Private Equity Partners VII.

HarbourVest hasn’t officially announced the launch, but the firm filed a number of Form Ds with the U.S. Securities and Exchange Commission in connection with the offering. The filings suggest that HIPEP VII, like its predecessor, consists of several smaller partnership funds.

The funds that make up the HIPEP VII partnership include HIPEP VII Asia Pacific Feeder Fund, HIPEP VII Asia Pacific Fund LP, HIPEP VII Emerging Markets Feeder Fund LP and HIPEP VII Europe Fund. Investors have a choice of making a single commitment to HIPEP VII, or, for a more tailored approach, they can commit capital to one or more of the sub-funds.

The firm’s seventh international fund of funds is not expected to be as large as the $2.9 billion, vintage 2008 predecessor, which as of September 30 had generated a net IRR of 5.28 percent for backer Montana Board of Investments. However, commitments are already rolling in.

Vermont Pension Investment Committee, which manages the Vermont State Retirement Systems, committed $5 million to the new fund in March. Chicago Teachers’ Pension Fund followed last month with a $20 million commitment. And an undisclosed amount has been committed to the fund by Pitney Bowes as well, according to data provider Preqin.

One investor familiar with the offering said HarbourVest’s timing is good. “Europe is bouncing back now,” this investor said. ”There were a lot of successful fundraises there last year and investors are ready to take a look at this fund.”

HarbourVest completed its first deal in Europe in 1984 and opened its first office in London in 1990. The firm then expanded to Hong Kong in 1996. “Other firms are now rushing to Asia. We have been there for almost 20 years already,” said Gregory Stento, a managing director with HarbourVest. The firm has opened additional offices in Beijing, Bogota, and Tokyo in the last decade.

As for the United States, HarbourVest’s most recent domestic fund of funds, divided into a venture fund, buyout fund and credit strategies fund, closed in 2011 at $2.8 billion.

All told, the firm is looking to put about $2 billion to work annually through its fund-of-funds vehicles, cutting equity checks from $5 million to $150 million. Across all of its products the firm invests about half of its capital in the United States and the other half in other locations around the globe. About 60 percent of its outlays take the form of primary commitments, while 25 percent is earmarked for secondary investments and 15 percent for co-investments. Buyout sponsors that the adviser has backed over the years include Advent International, Candover Investments PLC, CVC Capital Partners, IK Investment Partners, Hellman & Friedman, Kohlberg Kravis Roberts & Co, Mid Europa Partners and Permira, according to Dow Jones.

“Funds-of-funds continue to be an important solution for investors and they are not something we see declining or going away,” said Stento. That said, he added, “in the last five to 10 years we have seen more interest in customized vehicles. Some LPs want solutions that are unique for them and (separate accounts) best meet their needs.”

Eggs in many baskets

Indeed, HarbourVest, which has $18 billion under management and 280 employees working in offices around the world, has pursued a variety of different businesses, including separate accounts, co-investment funds and secondary funds.

In early April the firm closed on a $1 billion co-investment vehicle, HarbourVest 2013 Direct Fund, beating its target of $750 million thanks to backers such as Ohio State Highway Patrol Retirement System. The fund’s predecessor, the $734 million HarbourVest 2007 Direct Fund, had generated a net IRR of 7.92 percent as of September 30, 2013 for backer Montana Board of Investments.

Look for the fund to make investments of $10 million to $100 million each and to be deployed at a rate of $300 million to $400 million per year. Through its co-investment vehicles HarbourVest has invested alongside sponsors including ABRY Partners, Advent International, Apollo Global Management, Bain Capital, The Blackstone Group, TA Associates and others.

Meantime, HarbourVest closed its latest global secondary investment vehicle, Dover Street VIII LP, in July 2013 at $3.6 billion, above its $3 billion target. Its predecessor, closed in 2008 with $2.9 billion in commitments, was generating a net IRR of 13.19 percent as of September 30, 2013 for Montana Board of Investments.

HarbourVest’s secondary fund has the ability to write much larger checks than its co-investment fund, and the firm is looking to put $1 billion to work annually. Dover Street VIII has already closed on four transactions, the largest of which was the $1.4 billion acquisition of the assets of Conversus Capital, which had been the world’s largest publicly-traded portfolio of third-party private equity funds.

The adviser is also expanding its mezzanine lending business. While it continues to back funds through its credit fund-of-funds, the firm plans to make direct mezzanine investments alongside sponsors as well.

“They are trying to capture a lot of different strategies that are of interest to LPs and they are very active,” said the investor familiar with HarbourVest’s international fund of funds.

Stento said that, even with a highly diversified strategy, HarbourVest does worry that the private equity market is closer to the top than the bottom of the cycle based on the high multiples being paid for deals in the United States. “Debt isn’t as plentiful in Europe and there are interesting opportunities there now,” said Stento. “There isn’t a problem in the U.S., but we are paying attention to all the different macro factors that go into investing.”