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The end of a ‘gentlemanly’ era?

SVG’s capitulation to HarbourVest’s final offer for its portfolio marks the end of a saga that may usher in a new era for secondaries.

Here's an interesting thought exercise: a portfolio of private equity fund stakes is up for grabs at a discount to its last reported net asset value. The bundle contains some high-quality fund interests – Cinven, IK Investment Partners, Permira – as well as some lesser known ones, and, on top of that, the portfolio is about 40 percent unfunded. Do you buy it?

Let's assume you answered “yes” to this question. Now imagine the portfolio's price changes to a 0.6 percent premium to NAV. As a secondaries buyer, you would have to be pretty sure the portfolio has enough upside and high quality assets for you to raise your price.

HarbourVest Partners certainly believes this is the case with SVG's assets. Having initially bid for the share capital of the management company, the firm ultimately had to fend off competing proposals from two separate consortia before agreeing to a traditional secondaries deal, except that unlike most such transactions, this one played out very publicly.

The epic battle has thrown up questions about what the deal means for the ever-evolving secondaries market.  

One is whether the price HarbourVest will pay – which over the five-week bidding war went from being an almost 12 percent discount to July NAVs to a slight premium – is a good thing for limited partners in HarbourVest's Dover Street IX secondaries fund, the vehicle it is using for the deal. 

Only time will tell – “it's not about pricing, it's about the assets”, as any secondaries buyer will tell you – but if track records are anything to go by, the cards are stacked in HarbourVest's favour. The firm has previously taken private two similar entities – Conversus Capital in 2012 and Absolute Private Equity in 2011. Its previous secondaries vehicle, the 2011-vintage Dover Street VIII, was as of May ranked as the best performing secondaries fund in the Cambridge Associates' private equity universe with a 43.2 percent net IRR and an investment multiple of 1.36x invested capital.
 
And the deal may fundamentally change the dynamics of the market. Secondaries players are known to be tough negotiators – and competing fiercely against rival bidders for assets isn't new – but GPs may have to get used to secondaries buyers as activist shareholders.

“It just shows how much the secondaries business has developed,” another London-based source told us. “Before it was a relatively gentlemanly thing to take things off people's books and provide them with liquidity discreetly. Now to go do a hostile public takeover, it's right up there with Barbarians at the Gate, Wall Street-type stuff.”