For just over six months, HarbourVest, a provider of private market investments, has also had an office in Zurich. Country manager Simon Jennings is very satisfied with the start.

HarbourVest has been active in Switzerland for nearly 40 years, since its founding, and is well known in the private equity sector. «But it's not the same as being on the ground,» Jennings notes. «Our clients really appreciate the fact that we have now reaffirmed our ties to Switzerland by setting up our own office here. They will now be looked after locally by local staff.»

In addition, there are many potential customers who are not yet familiar with HarbourVest. «They like our long history, especially the fact that we are still privately owned. We are not the kind of company that would make people's «Master of Universe» types happy, but rather a company that has developed a culture of good investing over decades.’ Jennings leads a team of four specialists in Zurich, and two more are to be recruited soon.

The significance of the Zurich location is further demonstrated by the visit of John M. Toomey, CEO of HarbourVest, who has been with the company for over 20 years. He traveled to Switzerland for a client event at the new premises on Claridenstrasse. finews.com took the opportunity to speak with him about the opportunities and risks of the boom in private market investments.

Mr Toomey, how important is the Zurich location for HarbourVest?

It is part of our strategy to be on the ground in order to better understand our customers. Today, we have 14 offices worldwide and are expanding our network organically. Our 250 experts manage assets worth over 140 billion dollars. Today, 85 per cent of our customers are institutional investors. The rest are other asset managers – and of course Switzerland is very important in this area.

Today, almost every asset manager promotes private market investments and also advertises itself as an expert in this area. How can HarbourVest still differentiate itself?

Competition has been around for a long time, but the market has become much larger and more mature. It is not difficult for a new provider to enter the market today to find money and hire people. But, it is incredibly challenging to acquire the experience we have built over the past 40 years and to keep pace with us in this field. After all, it is a 'people's business. And you only know how good the people you have recruited really are after a while and after a few market cycles. It is therefore crucial for us to retain and keep the good people – and we are quite successful at this: on average, our managing directors have been with us for 17 years, which is probably unique in the industry.

«It's not difficult to enter the market and find money. But it's damn hard to gain the experience.» 

And the most important incentive in your industry is likely to be the salary or bonus, right?

No. For talented people, it is more the intellectual challenge of how to create added value in the long term. It's about anticipating and forecasting events, buying and selling assets at the right time, exchanging ideas, convincing and being convinced, and our special corporate culture, which you have to embrace.

What do you do better than other providers?

We have been there from the beginning, starting with venture capital, then moving on to private equity and are now also active in private credit and infrastructure investments. We invest both through multi-manager funds and directly. And we were one of the first players to be active in the primary market, the secondary market and direct investments at the same time. This decision has proved to be the right one. Today, we have the necessary size and resources in all three areas to be an equal partner for fund managers.

Private equity and the like used to be seen as opaque, illiquid and a closed book to investors. The action was on the public capital market, which was characterised by clear rules, good tradability and high transparency. What has changed?

On one hand, the global focus has shifted from public to private markets. Today, companies remain private for much longer or refrain from going public altogether. The number of listed companies is declining. The consequence: as an institutional investor, you have to be invested in this asset class today.

«The management of privately held companies can often make better decisions than that of listed companies.»

This is probably also a consequence of the excess returns compared to conventional assets, which the industry likes to advertise. What do you attribute the high returns to – exploiting inefficiencies or financial engineering?

I believe this is primarily a governance issue. The management of privately held companies can often make better decisions than the management of listed companies, which have to report from quarter to quarter. Private equity investors take a long-term approach and influence corporate decisions through the board of directors. This also aligns management’s incentive structure, reducing short-term pressures.

Why should I, as a Swiss pension fund, invest in private equity? I was able to make excellent profits on the US stock market last year, with a great deal of transparency and liquidity.

There are always periods when public markets outperform private ones. However, over an entire cycle, private markets generate excess returns, making them a sensible investment for a portion of a portfolio. While private markets are illiquid, valuations have improved significantly over time. Emotions and fears play a smaller role than in the stock market, and volatility is lower. Our job is to ensure that our clients fully understand their investments—because understanding fosters trust.

And why shouldn't a pension fund that is desperate to increase its alternative investments simply buy hedge funds? They also promise high returns and a low correlation with traditional investments.

Hedge fund managers have a completely different incentive structure. We have skin in the game and have to make a profit before we can charge fees. Hedge funds report quarterly, and our investments are typically in closed-end funds over ten years. In fact, institutional investors have generally been reducing their exposure to hedge funds in favour of private market investments in recent years. As for the correlation, I would describe it as ‘low’ for us, but not as ‘low’.

What would happen to private equity investments if the US stock market were to lose 20 per cent of its value in one fell swoop?

I estimate that they would incur a loss of around 10 percent, but with a time lag. We have the luxury of time; we don't have fire sales or margin calls. In addition, the comparatively generous clauses currently in use in the bonds are positive for equity investors because they allow managers to ride out volatility.

«For years, I've been hearing that defaults are increasing dramatically. In reality, companies have been able to refinance themselves without any problems.»

But weak covenants in the bond terms do weaken the position of lenders, even with private credit.

For years, I have heard the same prediction repeated: default rates will soon rise dramatically, partly due to an impending wave of refinancing. In reality, these rates have never increased as sharply as expected, and most companies have managed to refinance without difficulty.

Regulators and their committees at the international level are eyeing the shadow banking industry with its high growth rates suspiciously and are concerned about financial stability. Isn't your industry part of the problem?

I understand that the regulators are seeking transparency and analysing the market. But we work with much less leverage than the traditional banking system and, above all, we have completely different sources of financing.. Our funds come from thousands of institutional investors, each with long-term commitments and small individual exposures. This makes our funding highly diversified and decentralized, eliminating the risk of bank runs. As a result, our industry is structurally far more stable than traditional banking.