Alternative asset managers’ appetite for permanent capital seems, well, permanent. Yesterday, HarbourVest, the private equity fund of funds manager, threw the covers off a planned $830m fund floatation in Amsterdam. Should HarbourVest go well, expect a flurry of follow-ups.
It is not hard to see the attraction for issuers. Closed-end funds provide managers with a steady amount of capital to run with little or no risk of redemption. For investors, however, the appeal is less obvious. When issued, most funds go straight to a discount to net asset value (NAV), and many stay there. Around half of the 57 funds of hedge funds listed on the London Stock Exchange, for example, currently trade at a discount to NAV, with an average gap of almost 4 per cent. Carefully managed success stories such as Dexion Absolute, BH Macro and, it is to be hoped, Harbourvest are exceptions.
Discounts to NAV are not necessarily bad news. Most mainstream investment trusts, for example, stand at a markdown. But some of the alternatives’ discounts are frankly embarrassing for managers who pride themselves on superior total returns. Hence the proliferation of features not traditionally seen in other types of closed-ended funds, such as vigorous buyback programmes and mechanisms allowing shareholders to wind the fund up if the shares persistently flounder.
The various tax advantages – share sales are taxed as capital gains in the UK, for example, rather than income – may take the edge off shareholders’ losses. And it is arguable that a discount is the price an investor pays for the ability to quit instantly. But it is telling that, the biggest issues apart, the primary market is generally not dominated by institutional buyers but by private client wealth managers. Investors’ willingness to buy into alternatives’ permanent capital might say more about the brand cachet of a Mayfair asset manager than it does about the investment’s credentials.