HarbourVest targets $4bn for its newest co-investment fund

HarbourVest Partners has set a $4 billion target for its seventh co-investment fund, which includes separate sleeves for buyout and growth equity strategies.

LP interest in co-investments has grown as institutional investors look to reduce the cost of private equity. However, many LPs lack the ability to manage co-investment programs themselves, which makes funds like HarbourVest’s attractive.

Details about HarbourVest Co-Investment Fund VII were included in board documents from recent meetings of the Ventura County Employees’ Retirement Association and Vermont Pension Investment Commission.

Ventura County approved a $25 million commitment to the fund while Vermont approved a $20 million commitment.

Fund VII offers LPs the ability to commit to a “combined fund” along with an option to commit to an underlying buyout fund and a growth equity fund, according to both systems.

According to Ventura County’s consultant NEPC, the combined fund will have a fixed allocation of 90 percent to the underlying buyout fund and 10 percent to the growth fund.

Recent fund performance

• Fund VI (2022 vintage): IRR: N/A, TVPI: 1.05x
• Fund V (2019 vintage) IRR: N/A, TVPI: 1.81x
• Fund IV (2016 vintage) IRR: 15.29%, TVPI: 1.91x

Source: Buyouts data as of June 30, 2023, citing various public pension systems. Subscribers can view here.

The combined option offers LPs a more advantageous fee structure, Ventura County CIO Dan Gallagher told the system’s board at its March 25 board meeting.

For the combined fund, HarbourVest will charge a 1 percent management fee for five years starting from the date of its first direct co-investment for LPs that commit at least $5 million, according to NEPC.

LPs that commit to the combined fund before the first closing date of April 30 will receive an annual reduction of 15 basis points to the management fee, NEPC said. A 10-basis-point reduction is available to LPs who commit before the end of July.

According to NEPC, the combined fund will have a fixed allocation of 90 percent to the underlying buyout fund and 10 percent to the growth fund.

Vermont’s consultant RVK said that LPs can make separate fund commitments to the underlying buyout and growth equity funds if they wish to customize their allocations beyond the 90/10 split.

According to NEPC, HarbourVest plans on making between 60 to 70 co-investments in Fund VII, with the average investment size ranging between $55 million and $75 million.

Fund VII’s capital is expected to be committed over a three- to five-year period with capital returned in approximately 10 years, RVK said.

HarbourVest will charge a 12.5 percent carried interest to co-investments made through the buyout fund and a 15 percent carry to growth fund investments, NEPC said. LPs in the combined fund will bear a pro-rata share of the carried interest of the two underlying funds.

Combined fund LPs have an 8 percent hurdle rate, according to NEPC.

According to both consultants, HarbourVest may also use up to 5 percent of Fund VII’s commitments to primary funds that could lead to co-investment opportunities in the future. The manager first included this strategy in Fund VI.

The manager will not charge LPs fees or carried interest on investments in primary funds, NEPC said.

Investments in primary funds will range between $10 million and $15 million each, according to NEPC.

HarbourVest will participate in syndicated deals in Fund VII, NEPC said. However, HarbourVest’s track record shows that it’s the only co-investor in 67 percent of its deals.

The manager also has a board seat or board observer position at one-third of its co-investment companies, NEPC said.

HarbourVest declined to comment for this story.

Fund VI closed in 2022 after raising $4.2 billion.