Explosive Growth of Private Markets with Erik Hirsch, CEO of Hamilton Lane | LFTC

Hamilton Lane's Growth and Business Model [0:35]

• Hamilton Lane has grown from $6 billion in assets under management in 2005 to approximately $146 billion.
• The company acts as a private market solutions provider, offering capital to firms like Blackstone and KKR, and serving institutional and individual investors seeking access to private markets.

• "So we are effectively that outsource provider."

The Misconception of Private Market Simplicity [1:49]

• Many assume private markets are easy to navigate, but finding access, identifying managers, and building portfolios is complex, even for large institutions.
• The vast majority of private market players are unknown to the public, managing smaller funds and operating globally across diverse sectors.

• "The vast majority of our market, the players in that space, no one's ever heard of them, because they're raising primarily institutional capital, they are managing a billion dollars or $2 billion. And there's lots of them."

Correlation and Reporting Lag [3:12]

• Private equity returns are correlated to public equity returns, contrary to some industry claims.
• The perceived lack of correlation is often due to a reporting time lag, where statements are issued at least a quarter after the period ends.

• "That time lag, that's what, again, on a piece of paper creates the notion of, well, this doesn't look super correlated. Yeah, because you just time lagged it out."

The Historical Context of Private Markets [6:24]

• The private markets, particularly private equity, gained traction after David Swenson's Yale model, offering significant alpha due to illiquidity discounts and high leverage.
• This era of "shooting fish in a barrel" is long gone, and alpha is not guaranteed for everyone.

• "That era is long gone. Long gone. Long gone. It has been gone for decades."

Performance Dispersion in Private Markets [8:00]

• Despite increased capital, returns in private markets have not compressed as predicted; the dispersion of performance remains wide.
• This wide dispersion is attributed to the skill of management teams and the choices made after acquiring assets, not just purchase price.

• "And it's that human component to this that causes dispersion to be very, very wide because good choices get made and bad choices get made."

The Role of Hamilton Lane in Diligence and Access [12:00]

• Hamilton Lane acts as an asset manager, outsourcing diligence for clients. Access is a primary problem, as top managers raise capital efficiently and may not offer opportunities to many.
• Diligence is asymmetrical; Hamilton Lane's scale allows access to detailed information (cap structure, debt, other investors) that smaller investors might not get.

• "This is a very asymmetrical industry. It's not fair."

Non-Discretionary Assets and Advisory Services [15:30]

• Hamilton Lane manages over $1 trillion in assets under advisory, providing advice and back-office support for client investment decisions.
• This involves monitoring and managing assets after the client has made the investment decision.

• "We're the back office, we're the check-in, we're doing all of that."

The "Drunk" Market of 2021 and Current Slowdown [16:30]

• The period around 2021 saw euphoria and sloppy behavior in both public and private markets, leading to questionable investments.
• Fundraising is down across asset classes, and distributions (liquidity provided) are decreasing, with holding periods increasing.

• "And we're now five years removed from that. And some of the returns that people had hoped to get are not showing up."

The Rise of the Individual Investor [20:00]

• The entry of individual investors into private markets is driven by changing structures and regulations, helping to offset fundraising pressures.
• However, only a small fraction of private market firms participate in serving individual investors; the vast majority remain institutional-focused.

• "But the number of fund managers in the private markets who are participating in any way, shape, or form with the individual investor is like teeny, teeny, teeny, teeny, teeny, tiny."

Private Credit's Perfect Storm in 2022 [22:10]

• In 2022, private credit benefited from bonds and stocks declining, offering negative correlation and floating rates that avoided duration risk.
• With minimal credit cycle impact, investors saw strong returns, leading to a rapid influx of capital.

• "And miraculously, there wasn't really a credit cycle. And so investors in 2022 in private credit got 10 to 12%, whatever it was, okay, while bonds were down 15%."

The Evolution of Private Credit [23:30]

• Private credit has replaced regional banks as a primary source of financing for private companies seeking expansion without giving up equity.
• The industry has seen exponential growth in managers, many of whom have not experienced a downturn.

• "Well, that went away, the regional banks and their ability to lend and their desire to lend has gone away dramatically."

Addressing Private Credit Concerns [25:45]

• While some private credit portfolios have issues (risk, diversification, underwriting), widespread problems are not yet evident in the data.
• Default rates remain low, and many managers report healthy portfolios, indicating wide dispersion rather than a universal crisis.

• "But again, this is back to our dispersion comment. I got plenty of private credit fund managers who I'm looking through their books, including our own where I go, 99% of the stuff is performing."

The Secondary Market and Day One Markups [30:00]

• The secondary market provides liquidity, with LPs selling positions at a discount (around 13% average).
• "Day one markups" occur because buyers must adopt the GP's valuation according to accounting regulations, even if they acquired the position at a discount.

• "So if we buy something at 65 cents that the GP has marked at a dollar, we have to take it on our books at a dollar."

Public Market Skepticism of Alternative Asset Managers [37:00]

• Public equity investors have been skeptical of alternative asset managers, despite strong performance metrics like incentive and management fees.
• This skepticism suggests a belief that current success is unsustainable or that outflows will continue.

• "And yet, your stock has almost been cut in half. And again, I should say, you are definitely not alone."

The Necessity of Private Markets for Diversification [39:30]

• Investors leaving private markets must place savings in public markets, which are increasingly dominated by mega-cap, AI-driven stocks.
• Many companies opt to stay private due to available capital, making private markets essential for exposure to the full economy and diversification.

• "If you want exposure to the entire set of the economy, and if you want diversity, if you want all those things, you're gonna have to come to the private markets."