Welcome to Live from the Compound. My name is Michael Batnik and I am very excited. I've been looking forward to this for a long time. I'm joined today by Eric Hirsch. Eric is the CEO of Hamilton Lane. Eric, welcome.
All right. So, I want to start with a chart of Hamilton Lane's AUM. You took over as CEO when?
So, about two and a half years ago.
Okay. But you've been with the company for a while.
Long time. Joined there in the late '90s.
Oh, wow. Okay. So, we have this going back to 2005. We took this from you. $6 billion in assets under management. To say nothing of assets under advisory, which puts you guys over a trillion dollars. But from 2005, you've grown from $6 billion in assets to around $146 billion 20 years later. Pretty incredible run. Obviously, you guys have done something right. So, for the audience who doesn't know Hamilton Lane, a gigantic publicly traded alternative asset manager, who are you? What are you guys all about?
Who are you and why are you here? Hamilton Lane is what we think of as a private market solutions provider. So we are not a fund manager like a Blackstone or a KKR. We're really a provider of capital into firms like that and many many many others. And so our client base is really any investor who's looking to access the private markets. So think of that as lots of institutional investors, pension funds, endowments, sovereign wealth funds, insurance companies, banks, etc. And then lots of individual investors. And one of the misnomers around this asset class is that most people assume, well, I can just do it myself. Doing the private markets is really hard. Finding access, identifying managers, building portfolios is frankly not something even very large institutional investors do themselves. They mostly outsource. And so we are effectively that outsource provider.
I totally agree that this area of the market, you said it's an asset class. Um, yeah, sure. There's a million different subasset classes. I mean, even private credit has a million different layers under that hood.
That's another misunderstanding is that I meet most people and we talk about the private markets and I say, "Name me as many private market fund managers as you can." And the kind of the common names come spilling out very quickly. But once we get past, you know, 10 names or 12 names, they kind of get very quiet. And I say to them, okay, well, we have thousands and thousands and thousands more to go if we're going to actually name all the players in the market. So, 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 and they're all over the globe and they're all operating in different local and different geographies, different subsectors to your point. So, it's a huge industry and navigating that is hard.
Yeah. So, I want to lead with this. I am not anti-private markets at all. Um, I think that there are some things with the industry and some of the things that I do have issues with which we can get into. For example, not to harp on this point, but private equity to me is equity. I don't think that it's going to be that returns are going to be divorced from public equity returns. It's not going to be the same exact thing, but we're investing in the equity of a business. That's what we're doing here.
I agree. I mean, our industry when people used to say and some people still say incorrectly that, well, it's not correlated to the public market.
It should drive you nuts because it's not true. It's totally correlated to the public markets. The reason why it can look less correlated or is even sometimes uncorrelated is the reporting time lag, which is also another frustration about our industry, which is if you're in a private markets fund, a private equity fund, and you're a limited partner in that fund, you're getting your statements at least a quarter lag after the prior quarter end. Well, 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. But when you kind of erase that and mathematically you can, they're correlated. Equity markets.
If we have an honest conversation about it, as an investor, I understand that maybe even forget about an illiquidity premium. I love the fact that it's not marked on a daily basis, but don't lie to me about it. Don't tell me that it's not correlated. It's just a different marking system. Now, oftentimes public markets have a freakout that has nothing to do with the underlying fundamentals of the business. And so, it's okay that this gap exists, but let's just be honest and call it what it is.
I completely agree. I mean I think just generally our asset class has been its own worst enemy because we generally don't do a great job talking about it. We took private to sort of the extreme and so people thought that that was a good idea to kind of not talk about stuff. We've been misleading around this idea of correlation. So I think there's been a lot of sort of bad spokespeople for the industry that have then created some of these misunderstandings which are just not reality.
Yeah. The democratization of this is another thing and maybe we could talk about it. The history of the industry in private assets at a 10,000 foot view. It started not started it really blew up after David Swenson created the Yale model. Tons of alpha, Bain and others came in in the 80s and these private companies were selling at a legitimately unbelievable discount to public markets because there was an illiquidity discount.
Which the leverage factor back then, shooting fish in a barrel.
It has been gone for decades.
Okay so there can't be alpha for everyone always. And so you could say that private assets offer maybe different return streams, different so infrastructure. Yeah, that has nothing nothing. That is not really where the S&P 500 makes its bread and butter. So we could be honest about that without saying if you're in the S&P 500, you're just invested in the MAG 7 and we're all going to die if that falls apart.
Agree. So, there are lots of good reasons to be in the private markets, but I would never recommend that a good way to access the private markets, you can't anyhow, would be through an index because not surprisingly, if we're talking about an asset class that has thousands and thousands and thousands of managers, you're going to have some really amazing managers and you're going to have some really lousy managers. And what's been interesting is the pundits, if you will, had sort of told us over time, hey, as this asset class gets bigger and more capital gets raised and time goes by, returns are going to compress.
They haven't. So, they've actually stayed really wide. The dispersion of performance from kind of top to bottom is basically as big today as it was 20 years ago despite a lot more capital coming in.
But dispersion where? Venture, for example, the dispersion is huge.
Dispersion is massive. It's also massive in private equity. It's also big by the way in dispersion in private credit has really wide dispersion.
Yeah. Because it comes down to choice. The example I always use is let's say that you know I'm speaking to an audience in a room of hundred people. I say okay we're all we're going to buy the hotel that we're sort of in for this event and for the next hundred years right each of us is going to get a chance to be the CEO carte blanche full control. Do whatever you want to do with this hotel. Try to make it as good as possible. We're going to have wildly different outcomes with that. Someone's going to choose to invest in the food. Someone's going to choose to upgrade the rooms. And the clientele will tell you sort of what happens, but the results aren't going to be the same. And so when you look at private equity, things like purchase price tend not to be a huge determinant of the outcome. It's what you do with the asset once you own it. And that comes down to the skill of the actual management team and the private equity firm that's backing them. 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.
I've never got an email saying we're in the bottom decile of returns.
No, no one has ever said that. I mean, it's laughable today if someone even comes in our office and wants to talk about quartiling because you sort of go, okay, you're top quartile, so you're what? One of the top two or three thousand best fund managers. The question is, how many funds does an LP or an investor need to do to kind of get appropriate diversity? The answer for the Hamilton Lane customers is that most of them are doing far fewer than 10 funds per year.
Right? Because you think about each fund is going to do 10 to 20 or 30 plus companies inside of it. And so just doing eight funds gives you hundreds of companies and that's enough diversification. So, one of the reasons why we exist is if we're going to see, you know, 1,500 funds this year that are in market trying to raise capital and we've got a customer that says, "Hey, my portfolio only requires six," the Hamilton Lane team needs to do a whole lot of work to take 1,500 to six. And that's again back to kind of why we get to exist.
You mentioned the work and the fact that most investors and it doesn't matter if you're an individual investor, an RA, a big platform, an institutional investor, it's really hard to diligence these companies.
Hard the the funds, the the underlying.
So, I feel like when we're talking about private assets, we talk a lot about the structure. We talk about the performance. We talk about liquidity, but I feel like the portfolio management is actually weirdly almost an afterthought. And let's say I was sitting over the shoulder of some of your analysts and some of your portfolio managers and I'm in the industry, but I wouldn't know what I'm looking at. I would understand generally, but how would I know a good deal from a bad deal? How would I be able to diligence all 30 of the portfolio companies in there? Would I be able to understand the debt and equity capital structure? Who are the outside investors? All of it requires a lot of expertise. So it's difficult to diligence individually. So when people are investing in the Hamilton Lane funds, I would imagine that they're outsourcing their diligence to you and they're getting comfortable with your team.
Correct. So we are the asset manager for them. So we have discretion over the assets and we're doing that work. I would say two things. One, the first problem, if you will, actually starts with the access issue because there's no rule that says, "Hey, you're going to go raise your private equity fund. You have to show it to everybody." The answer is the good managers want to do as little fundraising as possible because that's not where they want to spend their time. They want to spend their time on deploying successfully and then managing those assets. No asset manager wants to say to you, hey, the time I most enjoy about my job is fundraising. They want to try to compress that as much as possible. So, if you're really excellent, you can compress that time frame a lot because you don't have to go to very many sources to go get your capital, which means these 90% of the world may never see the opportunity. So, the access is kind of problem number one. Problem number two is the diligence, which is there's no rule that says everybody has to see the same information. That's not a thing. And so Hamilton Lane's ability because of our size and scale and importance in the industry means that we do get to see all 30 companies and we do see the cap structure and we are able to talk to the other investors and we are able to look at the debt structure. This investor over here who's deploying a tiny amount of money may never see it access and may not get the access to the diligence material at the level that we would say we require. So this is a very asymmetrical industry. It's not fair.
I don't want to sell you guys short. I mentioned that you have $146 billion of assets under management. There is a non-discretionary piece which takes you guys over a trillion dollars. What does that mean? What are you doing with those clients?
So, in some cases, we're providing them advice on those assets, but what we're mostly doing is we're kind of monitoring and managing those assets. The client made the investment decision, and we're essentially kind of dealing with now what happens afterwards. We're the back office. We're the check-in. We're doing all of that.
Okay. All right. Let's back up. Talk about the industry where we are today. The cynical view or the skeptical view would say this. Here's the story. I mentioned the Yale model. A lot of excitement, so much alpha and it worked really well for the industry and for the investors frankly. Everybody did very well. And institutional investors on average are 30% privates, whatever the number is, it's well above zero.
And we got there was a period of time in 2021ish where both public and certainly private markets got a little bit drunk. And I'm not pointing fingers because we were all involved in the same party together. And there was a lot of sloppy behavior and a lot of bad investments. And we're now five years removed from that. And some of the returns that people had hoped to get are not showing up. And therefore, this is a flywheel and it's not spinning as fast as it was because a lot of the exits were not we're not seeing. I think exits are down 25% year-over-year. Whatever it is, everybody knows the story. But Daniel, show a chart too. And credit to you guys. This is from Oh, no. That's not from you. Did I pull this from pitchbook? Maybe it's from your deck from pitchbook. So global private markets fundraising and we're looking at closed end fundraising by broad asset classes. And it doesn't matter if you're looking at real assets or credit or equity. It's down. So in comes the wealth manager. In comes the individual investor who is basically at zero. And there was the story is it's very obvious. So the cynical take would say all right here's individual investors and their exit liquidity. And I think the media, not wrongly, so I'm not saying like, oh, the media, but they've harped on the story in a big way and they're running with it. And I don't think it's completely unfair. So, how do you answer the cynical version of, well, yeah, institutional investors are full. They can't deploy money. They're not getting their money back. Mom and dad are going to hold the bag.
So, I don't think that's cynical. I think the first part of that's not cynical at all. It's factually accurate. So, let's break it into pieces. And the listeners weren't hearing me nodding along as you were in agreement with you as you were talking. Drunken bad behavior coming out of COVID and during COVID, high prices paid, a lot of euphoria, a lot of questionable underwriting. Money was very fluid. There was lots of it. Fundraising was happening very quickly. People were doing all of that remotely. Questionable diligence. So, all of that happened. All that's true. That's not to say everybody did that because again I go back to my dispersion comment. The dispersion that we're seeing for those vintage years which is kind of how we as the industry think about it. So the difference between the managers in 2021 the best to worst and 2022 best to worse 2023 best to worse really wide gapping because the behavior wasn't uniform. And so you had people who were sober and they weren't at the party and they were actually making really good choices. So really wide performance. But what is true is if we take the industry as a whole, for the last 3 to 5 years it's been lagging the public markets. Now we can I think we can agree the public markets have been on fire.
Yeah, I wouldn't fault you guys for lagging.
We can debate rational or irrational and if you look at the industry weightings between kind of what's in the S&P 500 and what's in the private markets, the industry weightings are really different. So that's not shocking, but it is true that they've been lagging. It's also completely true factually, not cynically, factually, that distributions are way down. And so I think about distributions as kind of total liquidity provided as a percentage of sort of the industry's net asset value. That's a way to kind of normalize for size and it's down. It's been down. And so the other piece is again not cynical factual holding periods are going up. So all of that is absolutely true. I think that's uncorrelated to the idea of well now the retail investor is entering because the idea is not simply people are trying to sell assets out of the institutional bucket and sell them into the individual bucket. I think the rise of the individual investor into the asset class I think has to do with more about some changing structures, some regulation change, the invention of some different fund structures that kind of create vehicles that work for them. But there's no question that that is helping to kind of offset some of the fundraising pressure that has occurred. 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.
What do you mean by that?
20 firms. 20 firms that have viable franchises that are actually raising capital.
But they're the biggest firms.
They are the biggest firms. But we go back to there's thousands and thousands and thousands of firms. None of those people are participating in this at all.
And they're probably happy they didn't.
None of them. Well, they're going to live and die with how the institutional experience goes. I mean, that is their market there. There's no migration for them over to the other side of the wall.
They're in institutional funds only. Period. End of story. There's no changing that. So, their track record, their ability to survive is going to be completely dictated on how their returns are, how the institutional investor sort of sees them. The fundraising chart you showed is a little misleading. So you said it correctly that that is closed end fundraising, but that's it. Like period. That's.
So it doesn't show the evergreen part of it.
It doesn't show the evergreen part. What it also doesn't show is as you know because you've talked about it there's a rise of our secondary world has been rising. So people trading funds, buying other LP stakes, that's sort of our secondary world.
So we'll definitely get there. Can I just say one thing?
So that's not captured here either.
Right? So, sorry to cut you off, but one other piece of the story that I think is critical, critical, critical is 2022. I also want to make sure that I get to ask you how you view the investing alongside the companies that are going to retail versus just the institution. I want to make sure we get to that. But okay, 2022 was the perfect storm in a good way for private credit because bonds got smoked, the 60/40, and it brought down stocks with it and you had this thing that was actually negatively correlated. You had the floating rate aspect of private credit. Amazing, right? So you didn't get hit on the duration and miraculously there wasn't really a credit cycle. And so investors in 2022 in private credit got 10 to 12% whatever it was while bonds were down 15%. And then the fuse was lit and the money came pouring in very very fast.
Agree. I'm going to throw in a few more ands.
Why does private credit exist? Because if we went back 20 years ago and you and I owned a lumber business in the Midwest.
Let's call it a bagel business. I'm from Long Island.
Great. Let's do that. And we want to go out and make some sort of we want to expand. We want to open. We got to go get some capital to do that. We don't want to go give up our equity because we like our bagel company. And so what we would have typically done is you and I would have put on our best looking suits and ties and we would have marched down to the regional bank where we, by the way, keep our checking account for our bagel business. And we would have talked to our guy there and said, "Hey, we need a loan." That was a big provider of where private businesses got financed. It's the classic story of that local bank that they know all the business owners in that town and they're kind of providing capital to them. Well, that went away. The regional banks and their ability to lend and their desire to lend has gone away dramatically. And so the capital need from the companies didn't go away. So something needed to replace it. And so in comes private credit effectively taking the place in a more scaled, maybe more professional in some cases, lending to private companies in lieu of what the regional banks were doing. So that's sort of the first part of the equation.
