Revolutionizing Private Markets: Hamilton Lane’s $950 Billion Vision with Co-CEO Erik Hirsch

Those who have pensions today have been significantly benefiting from private market allocation because, as we just talked about, those pensions have 5, 10, 20, 25, up to 40% in the private markets in some cases. The fact that the average American, the average saver, hasn't had any exposure to that, I think is just an inequality. We're big believers that we have a real retirement crisis here in this country that needs solving, and one of the ways to solve that is to give people access to more tools. The second part is we're a business, and if you just look at the pure opportunity set, the amount of capital in the hands of individual savers globally is tens of trillions of dollars, so it's a massive market. Again, if we look at the average exposure of that investor base, the average mass affluent individual has an exposure of 0%.

The markets have evolved enormously since that mindset was put into common thinking. One, fixed income today in a purely public sense is just not what it was decades ago when you were often seeing double-digit interest rates. And the 60/40 portfolio completely omits one of the best performing asset classes, which has been the private markets. If you look today at where investors are pivoting, they're frankly mimicking what's been happening in the institutional world. You couldn't find me an institutional investor today that's sophisticated that has a 60/40 portfolio. Most of them today in the institutional world have a public equity portfolio that is probably 50% at max, and then has huge exposures to things like private markets and other alternatives including hedge funds.

I think it's really twofold. One, for the first time, mass affluent individuals now actually have access to this asset class where five years ago they just didn't. The structures weren't there. There have been some changes in regulation, but it's mostly around products that have come to market that are actually affording them the chance to do it. Those products typically are evergreen products with relatively modest minimums. In traditional private markets, you would often see minimum investments at $5 million or more, so obviously that's not obtainable to an individual investor that's ultra high net worth. But for mass affluent investors, having fund vehicles today that are starting at $50,000 minimums has been a real change. Number two is that the retail investor is now seeing what the institutional investor has been seeing for some time: when you look at performance, the public equity market versus the private equity market over a 10, 15, 20, 25, 30-year time frame, the outperformance on the private side has been significant. If you talk to an endowment, a sovereign wealth fund, a pension fund, a bank, an insurance company, and ask them why their exposure to the private markets has been moving up and to the right over the last few decades, they're going to say two things: performance and diversification.

If you think about what's been happening in the public equity market today in the US, there are about 4,000 listed companies, and that number over the last several decades has actually been in decline. The number of public companies going from the 80s and 90s to present time has been down and to the right. Why? A couple of reasons. You need to be much bigger today to be viable public. Being public is time-consuming and expensive. Ironically, we are a publicly traded company, HLN on the NASDAQ, and it often can force companies to have very short-term mindsets, where a lot of CEOs want to have very long-term mindsets. On top of all that, the private markets have grown so much that they are a huge capital provider. Back in the 80s or 90s, if you were a certain size business, you kind of had to go public because there was no other choice for liquidity or to deal with shareholder issues. None of that is true anymore because of the size and scale of the private market. The last thing I would say is that aside from the fact that there are fewer publicly traded businesses, the concentration in the public markets has never been higher. You've got a handful of businesses today that represent an enormous portion of the overall market cap of the public indices. When you realize that most investors have gone with a passive index style investing, they've got duplicative exposure all over the place in a very small number of businesses. Today you have the Magnificent 7 accounting for anywhere from 20 to 30% of the entire market cap based on how it's trading that day.

The industry breakout between what the public equity markets embrace and where the private equity markets actually deploy capital are noticeably different. While you think of venture capital as being very tech oriented, and it is, venture capital is actually a minority portion of the private markets. The private market's exposure to venture is less than the public markets. The private market's exposure to energy, for example, is significantly less than the public markets. Even if we just put pie charts of industry sector allocation side by side between the public side and the private side, you would also see a huge amount of differences. And of course, from just an average size of company, the private markets are doing a whole lot of investing in businesses with enterprise values that are sub $100 million. Name for me the number of public companies that are sub $100 million. Name for me the number of public companies that are even sub a billion dollars today. It has become such an incredibly mega-cap weighted part of the market. This isn't to say that people shouldn't have public equity exposure, of course they should, but the idea that you're going to have an equity strategy today that doesn't have both, I think that's misguided.

A few reasons. One, I think we're a big believer in our asset class and think that everyone should have access to it. From an equality standpoint, essentially what we've done in US society is say most Americans were getting retirement decades ago via pensions. That was the norm: you put in your time, you got your pension, you could economically plan and budget for your retirement because you knew what that payment was going to be. Then we shifted dramatically, where very few people today actually receive pensions, and most of us are left to save on our own, whether we're using a Roth or a 401k. The burden of retirement planning has completely shifted from your employer to the employee. From an equality standpoint, those who have pensions today have been significantly benefiting from private market allocation because those pensions have 5, 10, 15, 20, 25, up to 40% in the private markets in some cases. The fact that the average American, the average saver, hasn't had any exposure to that, I think is just an inequality. We're big believers that we have a real retirement crisis here in this country that needs solving, and one way to solve that is to give people access to more tools. The second part is we're a business, and if you just look at the pure opportunity set, the amount of capital in the hands of individual savers globally is tens of trillions of dollars, so it's a massive market. Again, if we look at the average exposure of that investor base, the average mass affluent individual has an exposure of 0%. So for us as a business, this is a big, powerful wind at our back, a growth engine.

Through a variety of channels. One, we have the direct-to-buyer approach, and the buyer in this instance is more of a wealth advisor. We're not literally knocking on doors handing out pamphlets. Most people who are mass affluent today are using some sort of wealth advisor. Channel number one is a Hamilton Lane sales team directly engaging with wealth advisors around the world, educating them, showing them why our product could be a good fit for customers. Channel number two is through some of the wealth advisors themselves. Think about the wirehouses, the big bank wealth platforms. We've been fortunate enough to be vetted and placed on a couple of those wirehouse channels, where we're partnered with them as a product they are recommending to customers. Channel number three is using a variety of different strategic partnerships, including some non-traditional ones, although I hope they're becoming more traditional, like tokenization. You can find some of the Hamilton Lane products today available on a variety of different token exchanges. In the US, think about a company like Securitize, where you could register, build yourself an account, open up your own digital wallet, and then begin to transact in the token world. There you would find a variety of Hamilton Lane products available for you to purchase.

I think it's both a push and a pull. On the push side, we're focused on building our brand, getting our message out there, and educating people on the benefits of the return and diversification. Some of it's a pull. In the institutional world, Hamilton Lane is one of the absolute largest managers of private market capital, helping institutional customers build out and gain access to this asset class. We're incredibly well known within our industry, and that results in some pull where people are saying, 'If they're doing this service and building portfolios for this pension or this government or this sovereign wealth fund, I'd love to have them do that for me.' The other piece we're trying to work on is making all of this easier and more streamlined. I mentioned the tokens as one example. The institutional world in this asset class is fairly antiquated, with lots of subscription docs, paperwork, illiquidity, and long duration. On the retail products, what you're seeing is things like these evergreen products actually have monthly redemption features. In a token world, it's much more of a click and purchase, digitally native. We're trying to make that buy experience much easier, faster, and cheaper for that customer base.

All investors have been a little overly fixated on liquidity, and I don't think it serves them well. I think you've seen some real changes in that thinking on the institutional side, and I now see that migrating more on the retail side. If you are a 45-year-old saver and this capital you're talking about investing is really for your retirement, you're talking about capital that's not even going to be accessed for probably at least 20 years or more. Why do you want all of that in fully liquid securities? I think frankly it leads to bad temptation. What do we see when we see significant market corrections? We see a lot of savers do the exact wrong thing: they're quick to pull out of the market because they get a little panicky, and then inevitably they're slow to return into the market, so they miss that correction. If you look at studies between institutional investment performance and retail investment performance, the institutional side wins pretty consistently. Why? Two reasons: they're much more illiquid and have access to the privates, and you don't see them trying to market time as much. I'm not here to advocate that everyone should take all of their savings and put it into the private markets and have it be relatively illiquid. I am saying the notion that taking your retirement savings, which you might not be accessing for decades, and thinking that all of that needs to be fully liquid seems a little misguided to me. Liquidity could not only be something that's not bad, it could actually be something that's good. You're shopping and you buy a bunch of junk food in your home. You could be very disciplined and not eat it, or the better solution is just not to buy that junk food at all. We are our own worst enemies, and I think one of the great protections is often from ourselves.

Let's talk about what tokens are and what they're not. Tokens are not crypto. The only thing they share in common with crypto is the idea that they're both a bit of a coin, but more importantly, they both share a blockchain backbone. If you're an investor today and you want to trade stocks, you go to your broker of choice, open up an account, and in doing that, they're going to put you through a qualification process, an anti-money laundering process, and a know-your-customer process. Once that account is open, you are free to buy and trade stocks to your heart's content. You're not asked to reverify with sheets of paperwork to verify who you are. In the private fund world, each of those fund managers is required to take you through that anti-money laundering or know-your-customer process every time you're subscribing to a fund. In a token world, you can go to a token exchange, like Securitize, open up an account, fund it with whatever funding mechanism you want, go through that KYC/AML process one time, and you now have your digital passport and a funding mechanism. Depending on your qualification, because there's a difference between qualified purchaser and accredited investor, your shopping universe will be tailored to you. You'll see a variety of products, and if you want to purchase, you can click on them, see all the fund information, and it literally is a click and buy. It is truly better, faster, cheaper for the customer. You also have the added benefit of being able to have your digital wallet housing all of your digital assets in one place. Rather than having invested in five or six private markets funds with no ability to house, analyze, or store those in one place, now with the digital wallet, you can simply pull up your phone, see your private markets portfolio, your cost basis, and what's happening from a performance standpoint. It's much more attuned to what we all do today in the public equity world.

I think that's where this is heading. For mass affluent investors, it really has been fixed income and public equity, and that's it. I think we're just now heading to a world where it's going to be fixed income, public equity, and private markets. Private markets means a variety of different sub-asset classes: real estate, infrastructure, private credit, venture capital, growth equity, leveraged buyouts. Even within the private markets, no different than the public markets, there's still a whole wealth of different strategies that will allow investors to build out appropriately risk-adjusted, risk-tailored, diversified portfolios, no different than they're doing today on the public side.