Kasper:
Welcome to Balentic Edge, conversations that matter in private markets. I’m your host Kasper investor, entrepreneur and founder of Balentic. On this show, we explore the people, strategies and ideas shaping private markets today, from GPs building tomorrow’s funds to LPs allocating in a shifting landscape. This episode is brought to you by Orca, an AI-driven compliant platform connecting the right GPs with the right LPs, smarter matches, faster decisions and better outcomes.

In this episode, we’re joined by Craig McDonald, partner at HarbourVest and portfolio manager of the firm’s open-ended From the shifting sands of portfolio construction to the growing weight of secondaries and evergreen strategies, Craig a offers candid inside look at how one of the world’s most sophisticated platforms is navigating a fast globalizing and increasingly semi-liquid private markets landscape.

We talk about backward diversification, nav squeezing, and why alignment is no longer optional. Craig also shares his take on why private for longer isn’t just a catchphrase, but a guiding thesis. And we dive into the need for modern valuation frameworks, the return of liquidity, and the enduring truth that long-term value still begins with picking the right company at the right price with the right value creation potential. And of course, we settle the question of whether Denmark or Scotland has the edge on the pitch tomorrow evening.

Spoiler alert, neither of us thinks we’ll win.

Kasper:
Welcome, Craig.

Craig:
Thanks, Kasper Great to join you here.

Kasper:
We’re thrilled you could make the time. You have spent nearly two decades at HarbourVest Boston, London, now Dublin. What first drew you into private markets and what’s kept you in private markets?

Craig:
Well, what first drew me into it was the ability to invest across private markets. When I was an analyst at an investment bank in New York, you had two real avenues of choice. You could go for hedge funds and you could go for private equity. within private equity, there was obviously buyout, which was growing very rapidly at that time. And then I would describe sort of venture growth, was, coming off the back of the tech bubble and, perhaps out of fashion. When I was looking at my various options and interviewing, I was always attracted more to, those platforms that had a growth element to it and HarbourVest with its history of venture fund of fund investing, its history of growth investing, and also its ability to target that sort of more growth end of buyout in the form of co-investing was something that really appealed to me. An interesting story is that I also applied at the same time for the secondary business at HarbourVest . I ended up in the co-investment team. But again, one of the things that I really enjoyed about the platform was the opportunity to see how the secondary business worked back then. And I think what’s exciting in some ways in the industry today is that.

Maybe what I identified as an exciting component of HarbourVest has become one of the, biggest growth areas of private equity broadly in the secondary market.

Kasper:
We’re definitely gonna double click on that, but before I wanted to ask you this as well, because for 20 years you invested through the cycles. You’ve seen all of the changes that’s been going on for the past two decades. How has this influenced your thinking on investing?

Craig:
If you look at through the various stages and where I sit today, the emphasis on portfolio construction. So thinking about the whole fund as you make investments is particularly important. ⁓ That’s a big feature of what we do in Evergreen today. And I’ve certainly seen that in the evolution of portfolio construction in the industry, which has gone from really quite concentrated positions to to more and more diversification as I think we’ve understood the benefits of diversification. And that’s only come about through, some of the cycles that we’ve been through. Specifically, about the opportunity to invest and investments that you make. number one, have to be prepared to understand that you will have investments that don’t work out. I wouldn’t necessarily call them mistakes, but for multi-due to reasons sometimes.

Commitments that you make, the capital you invest doesn’t make the return you want. Importantly, if you stay true to the structures and the diligence processes that you’ve set up as a team, that you invest as a team, you’ll have success broadly. Maybe on the point of what keeps me in the industry and what I’m excited about, if you come to any sort of presentation from HarbourVest I think this is broadly true about people similar to us as firms, we’ll talk a lot about the opportunity in private markets. And I’m convinced that where we sit today in terms of the development of private markets, we’re still very much in the early phases. there’s lots of evidence to show that there’s many, many significant challenges in what’s happening with the public markets. And actually what we don’t lack for in the private markets is new opportunities.

Companies that you’ll read about tomorrow and the public markets will almost certainly be in the private equity industry today. And importantly, whereas when I started my career, that journey in the private equity industry might have only been three to five years. Often it’s 20 to maybe even 30. And look at some of the more recent announcements, the IPO of Figma.

What’s fascinating to me, that’s a company we certainly have exposure to at HarbourVest , as do many other firms, thanks to the sort of investments and some of the funds that seeded it. And if I’m not mistaken, you’re going back to a company that first sort of started off over sort of 10, 12 years ago. That’s particularly exciting for private equity and private markets that you’ve been able to take that journey for 10, 12, 13, how many years now?

Again, when I first started that journey, it have only been two to three.

Kasper:
I want to stay with this topic we’re seeing a remarkable growth in private markets. Larry Fink was quoted in the FT as saying he expects that by the end of the decade it’ll be a $60 trillion industry. So that’s probably doubling or tripling from where we are today. What will that do to the industry,

Craig:
I would hope that it will make it more global. I think what you’ve seen is for quite a few years now that there’s been a pause in terms of the opportunity set globally and that you think about the US as roughly being half the market, Europe being somewhere between 20 to 30%, depending how you measure it, and then Asia taking up the rest.

Obviously, it’s be fair to say in the last five to six years, particularly with China, you’ve seen something of a slump there in the industry. there’s a lot of excitement about some of the green shoots that people are seeing again in China from a private market’s perspective. And if that part of the market continues to grow, it recovers. You combine that with what we’ve seen in India of late. Europe continues to build on some of the successes it’s had in the venture growth space and in fact maybe diversifies out from maybe financial services where there have been some conspicuous successes, but they’d like to be more diversified in terms of where and what sectors these growth investments emerge from. You’ll find an industry that is a little bit more balanced, I’d say, to the world economy. And that’s one thing that will certainly help it grow. I think the earlier point I touched on, you being private for longer, that’s a theme that will continue. And then the other aspect to it, and you you see this most notably, in sports over the last four or five years if I think about the opportunity set when I first started and what we were prepared to invest in as to what we’re prepared to invest in now, that’s continued to expand. you will find private equity going deeper into some new facets that previously have remained out of bounds. think about education and the provision of for-profit, particularly outside the US in the K through 12 area, that’s something that’s been a big development over 20 years now, at least. in the case of sports, you have a of, I would say, a sort of period of time, maybe 10 or 15 years ago where you see

CVC as a pioneer getting into Formula One, having previously done MotoGP. You now see that explode into a whole number of sports. we’re maybe definitely through the sort of the rapid growth phase there, but I think you’re going to continue to see growth. what’s important is where can we identify other areas of the economy or deal types that the private equity can participate in. And I can’t give you any tips to that, but

I know that the firms continue to sort of push for new frontiers and look for opportunity and I’ll be interested to see where that emerges.

Kasper:
I want to also go back to the point you made about portfolio construction and evolution. You’ve got that down at HarbourVest without a doubt as do your global peers. LPs at large, have they learned these lessons?

Craig:
I’d say over the last five years, LPs have got far better in terms of their own diversification, in terms of their own sort of, would say, sizing of investments. I think some of the times that the problem is a little bit with LPs is that they might oversize a commitment here or there and not get the outcome they wanted. So I think that they have certainly developed a lot more discipline. In terms of broad diversification,

I’d say that LPs maybe continue to remain subject to sort of, political influences or stylistic balances that come from their construct. I don’t think that all LPs have the right maybe evolution of their own investment committee. And as a result, sometimes you might find them exclude

geographies, they might exclude sectors, know, the rationale for that, you might be driven by politics, public opinion, whatever it is. I’m not sure that that’s necessarily as they step back in their long term interest, if they’re looking to sort of maximize the benefits that you get from diversification. Now, of course, I certainly understand those are important considerations and each LP base has to answer to its constituency. So I can understand that that’s

⁓ certainly features and dictates why some of the decisions are made, but equally that they should sometimes also make sure they try and work as hard as possible that they demonstrate the importance of diversification and make sure people understand the consequences of taking a decision to exclude a particular sector of the economy or exclude a particular geography because that can have a meaningful impact in performance.

Kasper:
So good advice to the LP listeners out there.

Kasper:
Craig, for those unfamiliar with HarbourVest, particularly your evergreen Solutions, can you walk us through the firm, the structure of the product, the mandate, and how it fits with the broader HarbourVest platform?

Craig:
The platform of what we have on Evergreen really is built on the foundations of 40 plus years of HarbourVest as a firm. HarbourVest as a firm originally started back in Boston as part of a much larger at the time insurer called John Hancock. And at that time, two individuals at the firm, really the founders of HarbourVest , started to invest in the very early stages of private equity and they did it.

In a model that’s very similar to what we do today at HarbourVest . They invested into private equity funds and they invested into the deals themselves directly. And pretty quickly they started raising third party capital and after a time became such a significant part of the Hancock business that it was something that they hoped and desired to spin out, which they did in the mid-90s. But by that stage when we spun out and became fully independent in the mid-90s, we’ve already

I would say had fully developed the business model which holds true today that we raise money from third party, we look to raise money to invest into primary funds and from those primary investments we create deal opportunities and we can create deal opportunities in the form of secondaries both for buying LP interests or working with GPs and continuation vehicles. We can work with GPs to supply them, co-invest. More recently,

We’ve worked with them to supply them senior credit and junior credit for some of the opportunities that they’re trying to close as well. And as we grow, we continue to evolve. And so now we’re working on the infrastructure side of things as well, investing into deals directly. And we’re also, hopefully, really going to be continuing to develop some of our primary skills, but again, looking to invest on a bespoke basis into some of the credit funds out there in order to make sure that we can seed opportunities for us across the investment landscape.

Kasper:
That’s a really nice segue to my next question it’s fair to say Evergreen private markets vehicles are having a bit of a moment. Some, however would argue that it dilutes the advantage of vintage year investing. What do you think about that? And right now, is this the time for evergreen exposure?

Craig:
It’s kind of a fascinating question because by virtue of the fact that we’re always in the market and we’re always carrying an existing portfolio, you’ve got that backwards diversification. And one of the things that we’ve always found successful in our funds is frankly having that backward diversification. It’s core to what we do on the secondary side, right? Every time you launch a secondary fund or you talk to secondaries with clients,

One of the key, components that you want to emphasize is that backward diversification. That backward diversification helps you avoid the J-curve. It helps increase cash distributions. I think you can also, in an element, get backward diversification by joining a co-investment, close-ended fund towards the end of its fundraising period. If you join towards the end of a fundraising period, you might get a couple years prior of deal flow, and that deal flow will have fully matured and…

Actually be contributing gains and may help you also avoid the J curve from that component as well. there’s plenty, of GPs out there who similarly in their own funds, after having done a couple of deals, suddenly find there’s more momentum in the fundraise for that backward diversification reason. So look, I don’t see there’s any weakness in Evergreen funds from that perspective. some people might say, well, look, you

Maybe the opportunity set in two to three years or right now is better. If you’re carrying bad vintages, doesn’t that mean your performance is going to lag? I think somebody may have a point there, but then I think you’ve got to look at the portfolio construction of that underlying evergreen. And so I would argue that if you were thinking, hey, we have weaker vintages in 2022, 2023 in broader private equity.

That doesn’t necessarily mean to say if you drill down and get into secondaries that they’re going to be weaker vintages. In fact, some of better vintages we’ve seen from a secondary industry perspective are those of 2022 and 2023 as a case in point. if you’re going to get comfortable with evergreens, you have to look at, obviously, the strategy. You have to look at the scale and the existing portfolio and how they’ve been backward diversified.

You’ve got to fully understand that the reason it’s having a moment right now isn’t necessarily anything to do with underlying performance. It’s really about the demand coming into private markets from outside, from the wealth channel and not only the wealth channel, but I would say the sort of, know, groups of individuals who sit outside of that, the long term opportunity for private equity would hopefully be for it to be a core part of everybody’s portfolio.

From somebody with a small pension all the way up obviously to the large institutions and sovereign wealth funds.

Kasper:
It’s fair to say HarbourVest has been very pioneering with the construction you’ve made with AP7

Craig:
Exactly.

Kasper:
So completely

Can you tell us a little bit about that? Because this is not your standard vehicle where you’ve dipped into your own portfolios. You actually have a counterparty on the other side.

Craig:
We’re very proud of the institutional relationships we have. we’re as proud about our relationship with AP7 as we are about any of them. when we came up with the idea of really getting into the new age of Evergreen, we wanted to partner with somebody that obviously could provide a seed portfolio that we knew and liked and understood.

We also wanted to provide somebody who had the capability to support the fund on an ongoing basis. And in AP7, a firm with which we’ve had a long relationship already, we found the perfect partner. importantly, we could work with them on a seed portfolio of assets that HarbourVest had actually worked to create for AP7 previously as part of prior relationships. And importantly, given changes.

And their own portfolio construction mandate, we’re able to allocate more to private equity and what better way to do that at pace than via an evergreen vehicle. And so it’s really kind of, a match made in heaven, because we could address their goals, they could obviously help us put this product to market in a timely manner at scale, which would allow investors something substantially meaningful to invest in when they make their first commitment.

Kasper:
I want to follow up on the evergreen side because there is also some concerns about evergreens beyond the sort of vintage share investing. How do you get an illiquidity premium if a product is now liquid or semi-liquid? Because that used to be the argument for, that’s how we get higher returns.

Craig:
That’s a real, fundamental question. you’ve got to get into the construct of however evergreen valuations work and how evergreens themselves are accessed by the client. And importantly, from a valuation perspective,

I don’t think you’re going to get rid of that illiquidity premium in a sense. the base construct of how they go about it is very similar to what happens within the…

The traditional private equity landscape, right? There is a relationship between how private equity companies value on the closed ended side and how they’re valued in the evergreen. The difference really comes with how you sort of on that month to month basis, opposed to quarterly basis at a lag, interpret the market movements, which we all know from the comp based approach to valuations that almost everybody applies has an impact. And one of the things that we’re pleased to do is we’re pleased to work with a

Firm, in our case it’s Lincoln International, who provide the service of market adjustment. And that market adjustment is something which is based on the historic relationship between private and public markets and so in some ways the traditional movement, which can best be summarized in private equity, is the highs not being quite as high as the public market nor the lows being quite as low.

Is something that their methodology and model allows us to translate into the Evergreen valuations. And by translating it, you start to translate the benefit that you traditionally had from private market valuations. And I say that outperformance, which comes from private market assets versus their public peers.

Kasper:
Just staying with that

For the LPs listening, this is a point of concern. How do you get comfortable with that? Because there’s third party arms length, but still we don’t really know as LPs how the valuations move.

Craig:
Number one, LPs should demand evolution on the valuation approach. This isn’t a standstill subject.

Over time, what I expect you might see in the valuation of Evergreen assets is the industry will improve and increase the number of data points. It might be the case that we might use a second valuation agent to write additional data points so that we can

As they provide further independence, but also further validation because hey, we’re drawing in more resources, we’re deploying them into this valuation and by spreading the tentacles of what we have in terms of information, the more accurate that we’re going to make the underlying valuation, which obviously is crucially important, right? We wanna make sure in a product where you can subscribe and redeem on a monthly or quarterly basis, that you’re getting an actual reflection of the value at that point in time.

This idea of evolution I think is going to be important. As I say, we started that journey, we’re continuing on that journey. the very best firms will do that too.

Kasper:
So we look to you and your peers to kind of pave the way for the rest of us on that one. Another concern Craig, and there’s certainly a few notable cases out there now in the papers and elsewhere, is about how evergreen structures open the door to things like NAV squeezing where valuation timing might sort of skew redemption and subscription fairness.

You’re not doing this, your setup is not built for that and there’s governance around, but can you explain how it works and how concerned or not concerned should LPs be on this?

Craig:
Maybe for the audience just to explain what we think about that is that traditionally in secondary transactions it’s not always the case but in the current market environment and I’d say for the majority of the market environment you’re buying assets at a discount and different to the closed-ended funds in the evergreen model there are funds out there and we were certainly very familiar with it and it’s probably the majority of funds now where

Similar to the hedge fund universe, you can effectively take your gains as the gains come through the accounts. And so what happens traditionally in a closed-ended funds is that you would buy assets, the carry would accrue, and when you exit the investment, if you’re in the American model or after you get past the set of threshold in the European model, that you would get the gains. Well, here,

What’s happening is in that case, you can buy an asset in the secondary market, benefit from that discount, and let’s just say that discount is 10%. We mark it up 10 % immediately. And immediately, based on the new carry methodology, you can actually, even though the company is unrealized, the deal is unrealized, as a manager, take the gain and pay yourself the cash from.

The carry calculation, whatever the carry level is, whether it’s 12.5 or 20%. And I think that one of the things that’s always stood private equity apart is this idea of alignment. And it’s hard to talk about alignment if you are benefiting from a deal in cash without there being a corresponding realization. So it’s something that…

We have to also acknowledge on the other side that there isn’t great ways of compensating via carried interest in an evergreen structure, right? We’ve thought about a number of ways at HarbourVest, actually we kind of have a foot in both camps. And so what I would say is that ultimately, Investors have to think past that, I would say carry mechanism because there’s always going to be discomfort.

Give me a sense of what is an alternative Craig? Why can’t we find an alternative? Well an alternative is that rather than having a structure in place which is based on the traditional hedge fund model with a high watermark and the ability to take gains as you go along without necessarily being a realization, you can look at another way which is okay we’ll take gains when there is a realization but in that environment what you end up with is a situation

Where there isn’t a high watermark. so actually, yes, you’re only getting it at exit, but what if the performance of the fund is down? Well, the performance of the fund could be down and yet you’re still generating carried interest. And so as I say, that’s why it’s not necessarily clear that there’s a better alternative at this stage. What I think investors should focus on, and this is clearly important, is you’ve got to sort of, number one, ask yourself about their approach to long-term valuation creation.

If it’s a secondary manager where this is most prevalent, you have to ask over the long term, where have you created value? Is it on the buy and actually marking up that NAV, or is it actually that post-closed valuation appreciation? And if you go out there and you speak to what I would consider the top tier secondary firms, they’re the top tier because they’ve always had a terrific capability of creating value post-discount,

One of the things I love about when we market and I’m talking to my secondary and direct colleagues and bring them into meetings so that they get the full picture about HarbourVest If I look at what they’re looking for on the secondary investments and what they’re looking for on direct investments, the marketing slides don’t say the same thing. But if you actually pore into what they’re actually telling you, what they’re actually telling you is we’re looking for companies that have got great growth futures ahead of them. They’ve got

Settled proven business models that can demonstrate profitability. And you start to focus and say, actually, any successful private equity firm, be it secondary or co-investment, provided they’re thinking about investing in assets that are going to appreciate in the long term, they’re going to improve their competitive positioning in the long term, they’re going to improve their product portfolio in the long term, they’re going to improve their cash flow in the long term and their margin in the long term.

That’s where you want to be investing. And as I say, the best way to measure that is hey, over time as a secondary investor, before you even got into Evergreen’s, where did you create value? Was it on the buy? Was it on the post-closed value appreciation? Or was it hopefully a little bit on the buy and a lot of it on the post-closed valuation? And one of the things that’s made HarbourVest successful is we’ve been able to buy sensibly, buy appropriately.

I’d say advantage of when value exists in the market, but in every single investment, think about what happens post-close and then how do we develop value from there.

Kasper:
Great. Let’s

It’s a crowded market for co-investment and secondaries. What’s your edge in HarbourVest? Is it sourcing, is it structuring, is it both, is it something else? What sets you apart from everybody else?

Craig:
Yeah,

For us, a maniacal focus on continuing to raise capital on the primary basis to invest into funds. That business model, as I made the point at the beginning, has been there at the very foundation of HarbourVest. It’s still true today. You cannot be a successful secondary investor. You cannot be a successful co-investor I would argue without having the primary

Investments and the access that it provides. And of course, people will talk about, we want information access and we can get information access, through making these small commitments. We don’t have to have a scaled primary program to do that. I don’t think that’s the case. I think

GPs want to work with those partners who are their most important investors. That’s always been true. For us, we’ve seen the benefits of that year after year after year, and that’s why we continue to ensure we’ve got the ability to commit funds to managers and we can commit them to managers at scale. One of the things that maybe best illustrates that is that in order to ensure

Private equity is growing, that we’ve got additional capability to invest into these funds is that both our secondary and co-investment, co-mingled funds have carve-outs for primary investing and so each fund that we’re raising on the secondary side each fund that we’re raising out or co-investment family have that carve-out and they’ve been investing into funds to provide us that additional capital. So it’s really important to stress that as a differentiator.

I think maybe some of the other ones that perhaps are less obvious but maybe equally as important is the investment resources and how we manage our investment resources. So if you look at the size and scale of the deal team, it’s close to 250 investment professionals. Of those between secondaries and co-investments, you’re looking at a figure not far off 150 dedicated to those strategies. And that’s important.

We’ve got a terrific primary team. That primary team is of scale, but in order to ensure we can properly harvest the opportunity set, we don’t ask the primary team to then source the co-investments and then source the secondary investments. We’re providing a dedicated team that sits on top of that, builds off the platform that they create, but remains focused on ensuring that we can cover as much ground as possible. And then equally, when opportunities are presented, we can diligence them with scale and confidence.

And accuracy and again, that’s only achievable if you’ve got the size of the deal teams that we do.

Kasper:
On the team, is there any difference in how the primary team is set up versus the evergreen team versus the co-investment and secondary team?

Craig:
Importantly, the basic memo structure on the core investment teams, so think of that as the primary, secondary, core investment credit and infra teams at HarbourVest are all the same. They have their own investment committees. They have the same three-step review process and they all report in once a deal is approved into what I call an allocation committee, what we refer to as the PCC. So there’s tremendous amount of…

Of similarity. that’s helpful because we do use team members across the platform to help others when they’ve got a deal. So if you’re looking at an opportunity in the co-investment side, its a manager, that perhaps this is the first co-investment opportunity you’re looking at with them, you’d absolutely want to have your primary colleague as part of the process. And having that same three-step process and they understand the steps and the nature.

Of the process allows that to be a of a seamless incorporation of the capability.

Kasper:
So you got the governance down, but it touches upon another sort of point of concern and certainly a topic of much, if nothing else, sort of academic debate which is at what point are you over diversified? You’re running a large machine, there’s a lot of capital to allocate. How do you manage for over diversification and potentially giving up some returns?

Craig:
From the position of where we sit we’ve looked, thanks to our quantitative investment science team, at about a number of scenarios of whether you’re working with 30 positions, 40 positions, 80 positions, we’ve gone in the opposite direction, said, hey, what if we just did 10 positions? And I think what we’ve learned over all that work is that ultimately…

Yes, there’s a point at which additional diversification does not bring any incremental benefit. But if statistically you look at returns over the long term, having a minimum level of diversification is the most important thing that you can establish. once you get to about 30 positions and you start to go from there to 40 to 50 to 60, yes, the incremental improvement in that is very small and perhaps maybe at outer level starts to diminish slightly. But

The change in performance that you can see at that level is tiny as to warrant it’s sort of unimportant in my personal opinion. The most important thing is not to be in the opposite direction, which is to fail to diversify yourself quickly enough. And so, you if you’re looking at portfolio three, five, 10, 15 companies versus what I’m talking about at 40, 50, 60, the range of outcomes obviously is tremendous. And importantly, the median outcomes actually are

Very much inferior if you’re at the lower end and the smaller diversification 5, 10, 15, than it would be if you’re in the sort of 20, 30, 40, 50 range. And so, you for us, I certainly, acknowledge the point, but importantly, for something like an evergreen vehicle where you’re investing consistently, you need to be out there consistently. You need to ensure that you’ve got liquidity consistently.

Going down the direction of becoming concentrated, making big bets, shooting for the maximum return possible, ignorant of the risks, is not going to be successful because when you do make a mistake and you don’t have the liquidity available, then obviously you’re going to bring to bear a lot of sort of downsides that people consider with evergreen investing, which relates to gating and then not being able to access your money, even though that was one of the deals that you struck and investing into evergreen funding at first.

Kasper:
It’s almost fair to say that private equity, maybe leaving aside fundraising, is sort of entering another golden age with all that’s happening. What are you most excited about that’s happening in private markets today?

Craig:
Well, what I’m most excited about at this point is maybe something that everyone on the call will be excited to hear, and that’s liquidity returning to sort of levels that we’re more familiar with. we’ve had a tremendous third quarter, we’ve a tremendous fourth quarter in terms of the portfolio management. we’ve actually significantly increased our expected distributions for the next 12 months as part of our modelling exercises. And so, we’re fantastically excited that this huge area of concern

For private markets seems to hopefully have an end. Now, I’m not necessarily telling everybody that this is gonna take us back to where we might have been in 2020 and 2021, but I certainly think that sort of jerk of 23 and 24 and even actually parts of 2022 are pretty much looking like they could be finally knocked out time in the rear view mirror. I’m very excited about that. The real sort of, piece of

Private equity that I’m excited about in private markets is just the number of deals that we hope to do in the future, really, at this stage of our career, are only sort of, I would say, scratching the surface of the potential deal universe out there now. HarbourVest has a number of slides out there that talk about the number of private companies over 20 million in revenue and what a huge opportunity set it is. And I won’t do justice to them, but…

We’re literally talking about hundreds of thousands of companies globally. And when I think about the success stories that we read about in the papers today, and that might be Figma as an example, if you want to access to them and you want to access to them for the long term, then you’ve got to be in private markets. And that’s why I remain excited about the opportunity set private equity and private markets in general is that you are in all the best companies of tomorrow will have.

Huge amount of their valuation appreciation in the private equity and private market universe, not as it would have traditionally been the case when I first started my career 20 years ago in the public markets.

Kasper:
And on the flip side, Craig, what keeps you up at night?

Craig:
From the perspective of Evergreens what certainly keeps me up at night is ensuring that we’ve got liquidity to take advantage of opportunities when things are tough. We have a commitment to our investors that we can redeem them at NAV at a point of their choosing. We absolutely are focused on managing the fund that we can do that. But we also importantly really want to have

The ability when times are tough to benefit from the valuation opportunity that will present itself. And so, managing the fund in such a way that we’re going to have the capital to meet redemptions, but yet invest is something that keeps me up at night because, your worry is that sometimes you’d be in a scenario where, you’re getting a lot more redemptions and you’re not necessarily getting any more subscriptions. And so, hey, at a time we’ve got a secondary component to your capability.

You want to lean in and make sure you’re taking advantage of what could be a splendid buying opportunity. You need to have the capital available to that. And one of the things that we’re really excited about is as we’ve launched these funds, we’ve obviously done it with a mind to capturing the wealth opportunity, but we’re not ignoring the institutional opportunity. And in times of stress, having that capability to either go wealth or institutional will allow us to hopefully benefit. as I say, that’s

This was keeping me up at night because I know there will be times there where liquidity and new capital and subscriptions will be scarce. I just want to make sure we’re best positioned to take what share there is of that new capital coming

Kasper:
Some would claim and maybe not unfairly, especially in the sort of more retail / wealth space, that evergreen structures allow investors to start redeeming at the exact moment when it’s least opportune, i.e. they get worried, they get nervous, they leave too early and then they miss the entire upside and it’s hard to get back in potentially. What are your thoughts on that?

Craig:
There’s always a debate about monthly and redemptions. I think one of the arguments in favour of quarterly redemptions is that it does allow enough time, perhaps, depending on when it happens for an investor to reflect on their decision and potentially cancel the redemption order if they’ve got time. So I certainly understand the dynamics of having and why some groups opt for quarterly and some groups opt for monthly. I don’t think there’s a right or wrong answer to that one.

I do sort of see the point that perhaps it does give retail and wealth investors maybe the opportunity to sort of hurt themselves. I think the burden on that is not necessarily with HarbourVest ultimately what we try and emphasise is that evergreens should be considered similarly.

To close ended funds as long-term investment opportunities. You’ve got to invest for a period of time in order to get the benefits. I think the average evergreen investors in a fund for eight years, that’s not too bad a timeframe. if you look statistically, if you invest over eight years in a closed-ended fund, you kind of get most of the valuation development or the vast majority of the valuation development. So, look, I think the investors today have understood that message. Hopefully the industry…

Can continue to do what we focus on, is providing that education to make people understand that this is your long term and that by making decisions on a short term basis, an impulsive reaction to recent information isn’t necessarily going to result in you getting the best out of the investment.

Kasper:
We talked about what keeps you up at night. I want to stay with that a little bit, but zoom out. Where’s the risk in private markets today? Is it NAV lending? Is it continuation vehicles? Is it semi-liquid structures? Where is the real risk?

Craig:
Fundamentally, private equity is about buying and selling, And I wouldn’t look at where we’re sitting here on the evergreen universe and think, hey, the risk is in evergreen, or the risk is in, you new lending structures or the increase in private credit. ultimately, what’s going to be important is

What’s happening in the underlying businesses themselves and how do you make sure that you’re buying something at the appropriate valuation and you’re not going to see a sudden cratering in value. So the risk is and will continue to remain and potentially certain asset classes reaching levels of valuation that are unsustainable can’t be supported into the future and obviously

That becomes all the more dangerous if you start to incorporate leverage into those calculations. And so, I think, post GFC, we saw a correction in valuations, we started to see limits on how much leverage can be put on companies, actually even legal limits within the various sort of, I would say, governing authorities. And, over time, that sort of, crept away, I don’t see any potential danger in the…

Short, medium or even long term at this point from a private equity standpoint but ultimately you always have to be aware that over time that you can get into a situation again where the level of valuation for a company means that it’s not necessarily going to meet the… it’s exceeded the total market size and if it’s exceeded the total market size how likely is it

For example, that it’s going to realise something substantial. And you’ve got lots of examples The one I always think about a little bit and I see it is some of the sort of Beyond burgers or some of these meat providers that were sort of darling during the sort of COVID stage. The market cap of all those companies combined was worth more than the market buy of all the pea protein being made on an annual basis. And that kind of math didn’t sound that great to me. That suggests a fad.

That suggests a run-up in valuations that’s unsustainable. Those are the kind of things that we need to continue to work on and ensure we have a good understanding of. And as I say, I don’t see that as an issue in private market right now, far from it. what we’re seeing right now, and as I said earlier, we’ve upped the level of distributions we expect to year end. That’s a fantastic development that’s built in the back, that there’s real activity going out there and

GPs are transacting, showing a willingness to sell. It might not be for the valuations they once thought they might get for the assets, but importantly I think it’s at valuations which will continue to ensure that private equities are top performing asset class.

Kasper:
Craig,

One private markets trend that you think is overhyped.

Craig:
Probably sports investing at this point. we’ve had an unbelievable run up. there’s been some terrific deals done. we’re now at the point where I think that the deal value for some of the companies, not necessarily those at the very top, sort of I would say the second tier, I really call into question.

How much value they’re going to see from some of those transactions. there’s a few out there I already know of that people probably think, this is not going to maybe work out the same way as I thought it would.

Kasper:
Yeah.

Craig. This was a fantastic conversation

On how evergreen private equity is evolving, the importance of portfolio construction and how it is evolving, how companies are staying private for longer and thus the increasing importance of private equity, the expanding investment universe within private markets, sports and education, the growing importance of secondaries, how HarbourVest uses the size of its platform to create deal opportunities, which I really liked, more evergreens, it’s demand driven and how backwards diversification

Is

Actually important and goes hand in hand with portfolio constructions. We moved on to valuation methodologies that need to actually evolve. So that’s really important for the LPs to keep an eye on. We talked a little bit about nav squeezing and the importance of alignment for LPs with their GPs and LPs pushing for this. Then there was the importance of long-term value creation. Keep an eye on this. Is that actually what is going on in secondary portfolios? If not, you might want to find another manager. We talked a little bit about how the primary side drives a success

Of secondaries and co-investments at HarbourVest . We talked about, and I really like this, and you heard it here first potentially, liquidity is returning, fingers crossed, for everybody on that one. We talked about the size of the opportunity set, and I agree with you on that. We have barely scratched the surface.

We also talked about the risk of unsustainable valuations. And then finally, we both predict that our respective national teams are going to lose tomorrow. So maybe it’s a draw and we can all settle for a quiet beer afterwards. Craig, thanks so much for joining us on Ballantic Edge. It’s been an absolute pleasure.

Craig:
Yeah, thank you.

Yeah, listen, I’m impressed how much we got through there. yeah, my reputation for talking too much continues.

Kasper:
Not at all, not at all, we’ll have you back another time I’m sure. Thank you Craig.

Craig:
Thank you very much.

Kasper:
Thank you also to our listeners for tuning in to Balentic Edge. I hope you enjoyed the conversation. If you did, please hit follow on Spotify or Apple, or subscribe on YouTube. And consider sharing this episode with a friend or a colleague. Do you have feedback or questions? I’d love to hear from you. Connect with me on LinkedIn. This episode was brought to you by Orca, helping GPs reach the right LPs and LPs discover the right funds. Learn more at balentic.com/orca Thanks again for listening, and until next time, stay illiquid.

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