HarbourVest Global Private Equity — Celebrating its 10th anniversary

Private equity as an asset class is typically viewed as a higher risk investment than listed equities due to a number of factors, including less transparency over underlying investments, and infrequent valuation reporting. We review HVPE’s performance over the 10 years from its launch in December 2007 to end-October 2017 across three risk-adjusted performance metrics: Sharpe ratio, Sortino ratio and information ratio, and compare these with the metrics for HVPE’s listed benchmark indices and a listed private equity index. The ratios shown in Exhibits 1, 2 and 3 below have been calculated using monthly returns in US dollar terms, taking the US three-month treasury yield as the risk-free rate in the Sharpe and Sortino ratio calculations.

Our analysis shows that HVPE’s risk-adjusted share price returns are broadly similar to those of the MSCI AC World and FTSE All-World indices, although the comparison is less favourable over 10 years than over three and five years. In our view, this reflects the low liquidity of the shares and consequent sharp price moves prior to HVPE listing on the LSE in 2010, together with the shares moving to a very wide discount to NAV during the global financial crisis. While HVPE’s risk-adjusted returns are strong over one year, they do not match the exceptionally strong returns of the MSCI AC World and FTSE All-World indices over this relatively short period.

The Sharpe ratio represents the added value over the risk-free rate per unit of volatility risk. The Sharpe ratio is calculated as the annualised excess return over the risk-free rate divided by the annualised standard deviation of the returns.

Exhibit 1 shows the Sharpe ratios for HVPE price and NAV returns, as well as the returns of its blended benchmark, the two indices that constitute the blended benchmark, and the respective price and NAV returns of the LPX 50 listed private equity index. All the Sharpe ratios shown are positive, which indicates outperformance of the risk-free rate. The exceptionally high values for the blended benchmark indices over one year reflect the particularly low volatility of returns over this period, combined with the above-average strength of the underlying performance.

HVPE’s share price Sharpe ratios vary considerably over one, three, five and 10 years but follow a similar pattern to the Sharpe ratios of its benchmark listed equity indices. Relative to the Sharpe ratios for the benchmark indices, HVPE’s share price Sharpe ratio varies between being higher and lower over the periods shown, with no clear trend evident in terms of relative performance from a risk-adjusted perspective taking into account the volatility of returns. HVPE’s NAV Sharpe ratios are much more consistent over the periods shown and are above the NAV Sharpe ratios for the LPX 50 index over three, five and 10 years, although marginally lower over one year. This suggests that HVPE has achieved superior risk-adjusted NAV returns compared with its listed private equity peers over the majority of the 10 years since its launch.

The Sortino ratio is a variation of the Sharpe ratio that uses downside deviation as its measure of risk. The Sortino ratio is calculated as the annualised excess return over the risk-free rate divided by the annualised downside deviation (standard deviation only considering negative deviations from the mean) of the returns. If the downside deviation is the same as the standard deviation over a particular time period then the Sortino and Sharpe ratios will also be the same for that period.

Exhibit 2 shows the Sortino ratios for HVPE price and NAV returns, as well as the returns of its blended benchmark, the two indices that constitute the blended benchmark, and the respective price and NAV returns of the LPX 50 listed private equity index. Similar to the Sharpe ratio analysis above, all the Sortino ratios shown are positive, which reflects outperformance of the risk-free rate.

The Sortino ratio analysis shows similar results to the Sharpe ratio analysis above, which indicates that average downside deviations of monthly returns relative to the mean return over each of the time periods are broadly similar to the upside deviations. HVPE’s share price Sortino ratios vary appreciably over one, three, five and 10 years but follow a similar pattern to the Sortino ratios of its benchmark listed equity indices. Relative to the Sortino ratios for the benchmark indices, HVPE’s share price Sortino ratio fluctuates between being higher and lower over the periods shown, with no clear trend evident in terms of relative performance from a risk-adjusted perspective when differentiating between positive and negative volatility. HVPE’s NAV Sortino ratios show much greater consistency over the periods shown and are above the NAV Sortino ratios for the LPX 50 index over three, five and 10 years, while modestly lower over one year. This analysis also suggests that HVPE has achieved superior risk-adjusted NAV returns compared with its listed private equity peers over the majority of the 10 years since its launch.

The information ratio is a benchmark-relative return measure which incorporates the consistency of relative returns. The information ratio is calculated as the annualised excess return over the benchmark return divided by the tracking error, which is a measure of consistency or volatility, calculated as the annualised standard deviation of the excess returns over the benchmark return.

Exhibit 3 shows information ratios for HVPE price and NAV returns against its blended benchmark, the two indices that constitute the blended benchmark, and the respective price and NAV returns of the LPX 50 listed private equity index. To give some context to the figures shown, we note that it is typically observed that the median manager or fund in a peer group has an information ratio near or below zero, while it is generally considered quite rare to see managers or funds with information ratios in excess of 1.00 over long time periods. Positive information ratios reflect outperformance of the comparative index, while negative ratios reflect underperformance.

HVPE’s share price information ratios versus its benchmark listed equity indices vary over one, three, five and 10 years but indicate relatively consistent outperformance, particularly over one and five years. The lower information ratios versus the LPX 50 index largely reflect smaller performance differentials over each of the periods. HVPE’s NAV information ratios are negative over one year, reflecting the exceptionally strong performance of the listed equity indices; in absolute terms HVPE achieved a 14.5% NAV return and the LPX 50 index a 15.7% NAV return, both in US dollars over one year. HVPE’s NAV information ratios over three, five and 10 years indicate relatively consistent outperformance of the LPX 50 NAV return, with less pronounced outperformance of the listed equity indices. Overall, this analysis suggests that HVPE has achieved relatively consistent share price and NAV outperformance of its benchmark listed equity indices and its listed private equity peers.