Q&A 
Evergreen funds: Accessing private markets alpha
April 22, 2024
February 19, 2024 | 4 min read
Limited partners (LPs), especially those with limited resources, face many administrative challenges that have only been exacerbated by recent market slowdowns. Monitoring cash flows, managing capital calls efficiently, implementing optimal legal and tax structuring, and reconciling individual reporting can prove daunting for even the best LPs. Separately managed accounts (SMAs) offer an efficient solution to address many of these demands by providing a streamlined, yet custom, approach to private markets investing.
Read below as six leaders from HarbourVest discuss how SMAs can help solve the operational obstacles commonly faced by thinly-staffed LPs.
What are the benefits of an SMA?
Investor Relations
A separately managed account is a tailored portfolio made up of private market investments that is customized to meet a single investor’s goals and objectives. Investments can be allocated to strategies including primary, secondary, direct, credit, and infrastructure in any combination, so SMAs are both an efficient means to create a diversified private markets portfolio and an excellent way to access private markets for the first time.
Their bespoke nature means that they can address many challenges that may be unique to a specific investor, including liquidity needs, net asset value (NAV) targets, approach to environmental, social, and governance (ESG), and regional or sector exposure. But perhaps their biggest advantage, especially for LPs who are managing investments with small staffs, is the administrative ease and operational support they provide.
How does the legal structuring of SMAs provide operational benefits to LPs?
Legal
SMAs are, by design, tailored to the unique needs of the LP. This customization carries through to structuring, where factors such as an LP’s investment goals, tax sensitivities, regulatory profile, jurisdiction, and desired level of involvement in portfolio sourcing inform the optimal design of the SMA.
A thoughtfully structured SMA can deliver meaningful operational benefits to the LP, including streamlined outsourcing of all portfolio-related services, such as legal, tax, cash management, and reporting, to a single provider. Given this degree of delegation, an important consideration for an LP contemplating investment via an SMA is the extent to which the SMA provider has a well-documented and audited control environment in which it delivers these services.
In addition, SMAs can be structured to provide statutory protections that shield an LP from unlimited liability. SMAs are also an effective tool through which an LP can capitalize on a cost-efficient economy of scale, which is borne out of the use of a single operating structure (versus separate structures for separate commitments) and which is strengthened as the LP makes new commitments over time to the single structure.
How can SMAs achieve operational efficiencies through tax structuring?
Tax Structuring
While private markets investors are often primarily focused on achieving compelling investment returns, many are equally concerned with the complexity and operational burden that an investment program can create for their personnel. Investment diligence, non-local tax filing risk mitigation, and tax compliance for investment vehicles are common pain points for LPs. When considering a new SMA, it is important to identify trusted partners who not only have a strong investment track record but who also provide the experience and resources to address these concerns.
The development of every custom solution should start with collaborative discussions to identify the investor’s objectives and sensitivities, and continue in the design of the SMA, including when selecting the jurisdiction, legal form, and tax treatment of the investment vehicle. This scope of work requires access to a robust team of tax lawyers, certified public accountants, and others. Following the activation of the program, these individuals provide SMA investors thoughtful tax-related investment diligence and manage ongoing tax compliance of the vehicle, both of which would otherwise be the responsibility of the LP.
How does the use of a credit line offer administrative ease to an LP?
Capital Markets
Liquidity is a huge concern for LPs, especially in today’s economic environment. Managing cash can present challenges for short-staffed LPs with obligations across multiple fund commitments. Investing via an SMA can solve for this by allowing LPs to leverage revolving credit facilities to manage working capital or use funded NAV loans as a portfolio financing tool. Administrators of SMAs typically manage large portfolios of credit facilities arranged on behalf of many borrowing entities and provided by various banks and lenders – and SMA investors serve to benefit from the resulting relationships with these financing providers.
The teams that support SMAs, like our Capital Markets team at HarbourVest, work directly with LPs to understand their unique financing requirements, and, as a result, are able to drive tremendous success in accessing capital in debt markets while reducing the strain brought on by the administration of capital calls and distributions.
How does an SMA provide simpler solution to manage multiple investment strategies?
Treasury
An LP investing in multiple funds likely manages the daily cash requirements for tens, sometimes hundreds, of investments. Simultaneous, frequent capital calls from many partners can present challenges given the volume and complexity inherent in the cash management obligations of an investment portfolio. In addition, there is increasing payment fraud risk. Treasury requirements present a time-sensitive administrative strain on an LP who invests via individual funds at scale.
By investing in private markets via an SMA, not only can capital calls be consolidated, but they can also be timed to overlap with distributions to streamline what is required of an LP. Further, the amount of time LPs have to pay those capital calls can also be standardized. An SMA, even one including multiple investment strategies, can simplify cash management by requiring fewer capital calls and distributions while maintaining performance transparency at the individual investment tranche level.
How can consolidated reporting in an SMA offer administrative ease to an LP?
Client Experience
LPs, especially those with smaller teams, are hyper-focused on whether reporting and portfolio analysis can be customized to meet their needs. Consolidating the varied reporting outputs from individual fund interests for quarterly portfolio updates can be especially time-consuming, often requiring careful matching of disparate line items into a standardized template.
Investing via an SMA can eliminate this burden. Rather than an LP gathering reports from individual fund providers, putting them together, then checking and double checking for accuracy, an SMA provides a single line item that encompasses their entire portfolio of investments, as well as summarized analyses highlighting key activity and trends custom to their investment portfolio.
Not only do SMAs support the operational infrastructure of an LP, they lessen numerous administrative, data, and technology challenges faced by thinly-staffed LPs on a daily basis. This is another area where deep experience working with different types of investors around the globe can be beneficial.
Key takeaways
- Optimal legal and tax structuring can reduce back-office workload for LPs investing via an SMA.
- A custom financing structure can solve liquidity and cash management challenges, reducing strain brought on by capital call and distribution activities.
- Consolidated reporting for SMAs is tailored to the needs of each individual investor to ease the challenges brought by reconciling individual quarterly and annual reports.
The increasing complexity of managing administrative and operational aspects of private markets investments creates strain on personnel for LPs of varying scale. As these trends continue, custom SMAs can offer a streamlined and scalable way to achieve and exceed a range of client objectives.
Disclosure
HarbourVest Partners, LLC (“HarbourVest”) is a registered investment adviser under the Investment Advisers Act of 1940. This material is solely for informational purposes; the information should not be viewed as a current or past recommendation or an offer to sell or the solicitation to buy securities or adopt any investment strategy. In addition, the information contained in this document (i) may not be relied upon by any current or prospective investor and (ii) has not been prepared for marketing purposes. In all cases, interested parties should conduct their own investigation and analysis of the any information set forth herein and consult with their own advisors. HarbourVest has not acted in any investment advisory, brokerage or similar capacity by virtue of supplying this information. The opinions expressed herein represent the current, good faith views of the author(s) at the time of publication, are not definitive investment advice, and should not be relied upon as such. This material has been developed internally and/or obtained from sources believed to be reliable; however, HarbourVest does not guarantee the accuracy, adequacy or completeness of such information. The information is subject to change without notice and HarbourVest has no obligation to update you. There is no assurance that any events or projections will occur, and outcomes may be significantly different than the opinions shown here. This information, including any projections concerning financial market performance, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.
An investment in the Fund will involve significant risks, including loss of the entire investment. Before deciding to invest in the Fund, prospective investors should pay particular attention to the risk factors contained in the Memorandum. Prospective investors should make their own investigations and evaluations of the information contained herein. Prior to the closing of a private offering of interests in the Fund, HarbourVest will give investors the opportunity to ask questions and receive additional information concerning the terms and conditions of such offering and other relevant matters. Each prospective investor should consult its own attorney, business advisor, and tax advisor as to legal, business, tax, and related matters concerning the information contained herein and such offering.
Important Information and Risk Factors
An investment in the private markets involves high degree of risk, and therefore, should be undertaken only by prospective investors capable of evaluating the risks of the Fund and bearing the risks such an investment represents. The following is a summary of only some of the risks and is qualified in its entirety by the more detailed “Certain Investment Considerations, Risks and Conflicts of Interest” sections of the Private Placement Memorandum, if applicable.
Risks Related to the Structure and Terms of a Private Markets Fund
Investments in a fund of funds structure may subject investors to additional risks which would not be incurred if such investor were investing directly in private equity funds. Such risks may include but are not limited to (i) multiple levels of expense; and (ii) reliance on third-party management. In addition, a fund may issue capital calls, and failure to meet the capital calls can result in consequences including, but not limited to, a total loss of investment.
Illiquidity of Interests; Limitations on Transfer; No Market for Interests.
An investor in a HarbourVest-managed closed-end fund or account will generally not be permitted to transfer its interest without the consent of the general partner of such fund. Furthermore, the transferability of an interest will be subject to certain restrictions contained in the governing documents of a closed-end fund and will be affected by restrictions imposed under applicable securities laws. A HarbourVest-managed open-end fund or account will generally provide limited liquidity events for investors, subject to certain restrictions contained in the governing documents of an open-end fund and will be affected by restrictions imposed under applicable securities laws. There is currently no market for the interests in HarbourVest-managed funds or accounts, and it is not contemplated that one will develop. The interests should only be acquired by investors able to commit their funds for an indefinite period of time, as the term of the closed-end fund could continue for over 14 years. In addition, there are very few situations in which an investor may withdraw from a private equity closed-end fund. The possibility of total loss of an investment in a fund exists and prospective investors should not invest unless they can readily bear such a loss.
