Private Markets Investing

EMS:
Absolutely. So to kick off the conversation, tell us a little about Hamilton Lane and how you got to where you are today.

JB:
Yeah, really appreciate you having me on and Hamilton Lane, we've been around in the private markets business for 30 years. Really what we do is try to help investors find solutions within the private markets, whether it's private equity, real estate, infrastructure. We sit as one of the larger asset managers in the space, and as such we are able to see a lot of deal flow, but also have a lot of data and technology at our disposal to help our investors, some of which I'll share with you today.

EMS:
Great, John, and as a follow-up question, given Hamilton Lane's focus on private markets investing, love to hear your overall outlook for the space alluding to opportunities, challenges and more.

JB:
Yeah, no shortage of conversations about the markets given the volatility over the last year or so, but really what we expect in 2023 is probably more volatility as concerns around interest rates, geopolitical challenges that we may see continuing this year. But we really will see, I think more opportunities. I think in general the private markets will continue to outperform in a market environments such as this as opportunities and private markets evolve. I think as we see and look at the landscape, we see increasing opportunities around credit, secondary market and also infrastructure as well.

Certainly one theme that's continuing to come up as serves an opportunity is the increasing interest in the high net worth space, which we can certainly talk a little bit more about. The challenge is certainly, as I mentioned, inflation and rates increasing, certainly will drive up costs at any company that you're with, which may put pressure on valuations, potentially fundraising as well as many allocators are over their allocation targets in the private markets. And so that may impact the markets and we've certainly seen that so far for this year in terms of fundraising. But again, as we look at the performance, as we look at the data set that we evaluate, certainly companies, but also with the broader private markets on, we've seen what the data really can tell us is that the private equity markets, private markets in general really do well in these types of sideways or choppy or volatile environments.

EMS:
John, valuations have been a concern for the private market space as of late and would love to hear your outlook on this topic looking ahead.

JB:
Yeah, another one of the topics that we are continuing to see a lot of questions on, and again, I think the premonition for a lot of folks in the industry has been that, well, private equity and private markets did so well last year, the valuations can't be right and what we will find is that the data really proves otherwise. And so I think I would point to a few different factors as we look at here. One, generally if you look back at valuations in public markets compared to private markets, private markets have generally entered in at a lower valuation mark than the public environment. So you automatically have a little bit of cushion for those valuations to fall. And performance still hold up relatively well, which is certainly what we saw last year with public markets being down in the mid-teens, private markets being down in single digits or so.

I think secondly, if you look at the operational nature of private companies, it's just at better governance model, it's easier to operate a private company, it's easier to make changes and to respond more nimbly to different market environments. Third, I would say the sector makeup is very different from public markets into private markets. Public markets, if you look at the makeup of some of the public stock indices, very technology heavy, very financial services heavy, whereas some of the private markets are more industrial, which those sectors tend to hold up a little bit better in recessionary environments. And then I think last, one of the proof points we've always looked at over time is where do companies exit? As we look back at the history of private equity, generally those exit valuations are about 20% higher than where a general partner held that same asset about 12 months before. So again, it proves the point that a lot of these general partners are holding these valuations relatively conservatively and that exiting them at current valuations.

EMS:
John, to shift gears a little bit, I know you mentioned this earlier in our conversation about investor interest in this space. Love to hear where you're seeing the most traction and why.

JB:
Yeah, certainly in sideways markets like this, a lot of interest in the private markets and generally people want to know where to go. What we have is sort of a theme around supply and demand dislocation, and so we point to really three markets. As I've mentioned before, secondaries credit and infrastructure as being three areas that we're spending more time on and that we're seeing more interest on from investors in general. As I look at those in particular as secondaries, is probably the widest gap in terms of the amount of fuel flow that is out there versus the amount of capital that is to do those deals. And so that already sets you up for a very good investor appetite that could be from limited partners or clients being a little bit over allocation and looking for some liquidity to deploy into current markets, but it's also an area, probably the most abundant area in terms of innovation and creativity in the market right now, which makes it particularly appealing.

Second being credit, obviously with rates increasing, that automatically lends itself to a more favorable credit investor environment. Certainly, if you look at supply, demand balance there as well, you've seen a consistent trend, not just in the most recent months here with banking crisis, but even over a longer period of time that banks really... The traditional banks, I should say, really pulling stack from lending into the private markets. And really what you've seen is a huge emergence of private credit funds filling that gap. There is still an imbalance of supply, demand there. And so obviously we believe private credit will continue to be an attractive environment on a risk return basis to invest into over the next part of the cycle. The last one, infrastructure, really what we're talking about here are hard assets that are difficult to replace, generally proving to be good investments over a longer period of time.

An area where obviously the government has stepped up and governments globally have stepped up to try to fund that gap. But here we're looking at areas not just of traditional infrastructure like roads and highways and airports and things like that, but also more data infrastructure pieces, so data setters, fiber networks, things like that that are a little bit more outside of the traditional infrastructure space. And lastly, I think why this environment is appealing is that it does provide a certain amount of yield to investors, but also an inflation hedge. And lastly, a lower correlation to the public markets, which obviously with volatility we've seen over the last 18 months or so has been particularly attractive and so many more questions from clients about those three areas, Elana.

EMS:
John, we've covered a lot of ground today and wanted to see if there are any final thoughts you'd like to share with us.

JB:
Well, thank you very much for having me. I really appreciate this opportunity. I think as we look forward as Hamilton Lane, we exist entirely in the private markets, and so I think we're going to be paying particular attention to what the data is telling us about the markets, how we can use that to inform our clients and look for different trends and emerging thesises going forward in the private markets, which we think will automatically expand. We've already seen that a little bit with the emergence of tokenization and blockchain technology. We're excited to see what happens to our industry and as more transparency, more technology emerges within the private market's industry.

EMS:
Well, John, I want to thank you so much for sharing our perspective with our listeners, and thank you for listening to the EisnerAmper Podcast series. Visit eisneramper.com for more information on this and a host of other topics. And join us for our next EisnerAmper Podcast when we get down to business.

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