We’re taking stock of the private markets landscape over the last quarter, highlighting the latest themes and evolving trends across all private markets sectors and strategies – in just a couple of bullet points.

Direct Credit

  • Private credit investors with exposure to floating rate credit are well-positioned for improved yields as the Secured Overnight Financing Rate (SOFR) forward curve is estimated to rise above 3.4% by year end.
  • Execution risk in the broadly syndicated loan market is creating opportunities for private credit lenders, particularly as issuers prioritize certainty of close.
  • Despite annualized U.S. sponsored leveraged loan volume tracking at 42% of prior year levels, Hamilton Lane’s direct credit deal flow remained robust through the first half of 2022, tracking at 96% of prior year levels (and 2021 was a record year of deal flow).
  • Inflation pressures continue to weigh on investors’ minds. While rising costs have the potential to challenge debt service coverage ratios, the Fed’s willingness to combat inflation through rising rates suggests that private credit investors will be rewarded. Credit manager selection will remain an important factor in the context of performance.


Direct Credit Investing at Hamilton Lane

Access to the private credit market, emphasizing current yield with an aim toward downside protection

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Direct Equity

  • Deal activity softened in Q2 as investors wrestled with weak public markets and a negative macro and geopolitical environment.
  • Growth equity and VC deals are seeing their valuations impacted the most, as the fundraising market in those areas remains challenging.
  • Buyout valuations have not been as impacted but those completed deals reflect the best, high-quality companies. In most other cases, sellers are opting not to engage at discounted values proposed by acquirers.
  • Corporate balance sheets and earnings continue to be strong, and our co-investment activity and access to allocation continue to be favorable, supported by strong demand for capital to complete deals.


Direct Equity Investing at Hamilton Lane

Globally diversified platform targeting the SMID market with unique positioning

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Fund Investments

  • Anecdotally it feels like every manager has a fund in market right now, but new fund launches are clearly down.
    • Hamilton Lane received 547 new fund opportunities in the first six months of 2022. Compared to the same period a year ago, fund launches have slowed by ~18%.
    • Yet the number of funds for which we are doing full diligence is at an all-time high, up 25% in the first half of 2022 when compared to 2021. This is not a sustainable trend, so for all the LPs struggling to keep up with their reups, we believe a slowdown is on the horizon and we may already be seeing some early signs of this now.
  • Public markets continued to trend down in Q2. YTD performance for most benchmarks is down around 20%, with ~75% of that decline hitting in the second quarter. Given the lag in reporting for private markets we are just publishing Q1 returns, which for private equity were down 1.65%, marking the first quarter of negative performance since Q1 2020 (down 8.1%). But the reality is everyone has moved on and the focus today is on trying to estimate performance for Q2.
    • While logic – as well as our models showing a comparison to the public market – would suggest that we should expect highly negative performance, GPs continue to have a positive outlook on Q2 valuations that seems to hover around flat.
    • Our key question is How is that being achieved? Are companies posting strong operating metrics, or are GPs being more aggressive in their approach to valuations? We’re still gathering information, but initial feedback suggests exits that had mark ups or real revenue and EBITDA growth are offsetting public market exposure or underperforming investments in portfolios.
  • With regard to deal activity, Q2 distributions and contributions continue to be more muted when compared to 2021. With $190 billion in distributions and ~$130 billion in contributions, the quarter was comfortably net cash flow positive, but distributions and contributions were down 30% and 33% respectively when compared to Q2 2021. 
  • While NAV for the asset class did have a minor contraction in Q1, it has grown more than $3.2 trillion over the last two years to ~$7.8 trillion in Q1 2022. As performance has been well above historical averages for the last two years, even record distributions have not been able to support a decrease in overall exposure.
    • With public markets down 20% for the year and private market exposure having yet to see any meaningful decreases, LPs are going to face pressure as private market allocations blow past target percentages of their total plans.
    • While everyone likely remembers the denominator effect from the aftermath of the financial crisis in 2009, today LPs will face both a denominator effect and a numerator effect. As we said in our 2022 Market Overview, too much of a good thing (outperformance compared to negative public market performance) could hurt private market allocations in the short term.


Primary Fund Investing at Hamilton Lane

High-quality primary fund investments with often hard-to-access general partners

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Impact

  • Recent mixed signals from governments and regulatory bodies have created some confusion for market participants.
    • The U.S. Supreme Court agreed to limit the EPA’s ability to regulate greenhouse gas emissions from powerplants. This decision may have knock-on effects for the SEC’s newly-proposed climate disclosure rules.
    • G7 leaders pledged to invest $600 billion into global infrastructure to help battle climate change, improve global health, further gender equality and enhance digital infrastructure.
    • Uncertainty around the global impacts of countries seeking alternatives to Russian fuels remains.
    • Institutions continue to develop their approach and strategies as clarification of SFDR continues.
  • Private markets capital, while remaining watchful of public market valuations and with an eye on regulatory changes, continues to be an important and attractive area for investors to drive impact and facilitate needed change.


Impact Investing at Hamilton Lane

Seeking to deliver attractive returns while generating meaningful and measurable impact

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Infrastructure

  • Transaction activity slowed in Q2 relative to Q1 as investors continued to digest concerns around inflation, rising rates and the resulting impact on asset values. 

  • Despite slower transaction activity, fundraising for infrastructure has remained strong this year and is on pace to outperform 2021’s record year. 

  • Transportation has been the largest sector winner for the year and while greenfield development remained strong in Q2, brownfield asset acquisitions still attracted the bulk of infrastructure capital. 

  • With rising rates, refinancing activity on infrastructure assets was down considerably (-32%) relative to Q2 of 2021. 

Real Assets Investing at Hamilton Lane

Access to primary, secondary and direct investments across infrastructure, real estate and natural resources

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Real Estate

  • The recent rise in interest rates is expected to create investment opportunities due to capital value re-pricing in sectors with record-low cap rates, such as industrial and multifamily, due to negative leverage.
    • We are seeing a widening bid/ask spread between buyers and sellers, with buyers pushing back on broker/seller pricing and underwriting expectations in light of the market environment. While cap rates have increased over the past three months, the increase has been limited to 25-50bps.
  • U.S.-based opportunistic fund managers with dry powder to burn are starting to analyze distressed debt and equity investments in high-quality assets with strained balance sheets; there are similar efforts beginning in Europe.
  • The outlook for the multifamily sector remains strong. As ‘for-sale’ residential reaches record price levels, affordability becomes increasingly challenging. This trend coupled with rising mortgage rates eroding homebuyer purchasing power means that demand for multifamily is expected to strengthen. Rising interest rates and questions around the U.S. economy have meaningfully slowed new multifamily construction, which is expected to help support rental rates.
  • Sectors supported by structural demand drivers remain attractive, including industrial logistics, life science, medical office, self-storage, rental housing and cold storage.
  • Green Street Commercial Pricing Index fell 4% in June and is now 5% below its March high.
    • Pricing is down across property types between March and June, yet still meaningfully above valuations from a year ago.


Real Assets Investing at Hamilton Lane

Access to primary, secondary and direct investments across infrastructure, real estate and natural resources

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Secondaries

  • LP Interest Market
    • An increasing number of LPs are becoming overallocated to private equity, driven by private equity valuations holding steady, on average, in Q1, while many other asset classes declined. This dynamic should support LP-interest deal flow in the next several quarters as they rebalance portfolios and maintain their private markets commitment pacing, particularly into core managers. Pricing will be a big factor in how much of this potential future volume clears the market.
    • Secondary pricing for venture funds this year has fallen meaningfully since 2021, which had a backdrop of rising valuations and distributions. Pricing for buyout funds has declined marginally in 2022, while in some cases, purchase price deferrals and delayed closings have helped to bridge the bid-ask spread between buyers and sellers.
    • So far in 2022, we have seen strong LP interest deal volume (top of funnel) both in terms of number and volume of deals. However, anecdotally, the deal completion rate is lower than last year.
    • Because buyer interest levels and pricing are uncertain and untested for many funds since the broader public markets began to decline, many LPs are marketing larger portfolios with the expectation of selling only a portion of those funds. This often leads to multiple buyers purchasing small portfolio subsets because they are focusing on only those funds that they have tracked and can underwrite with some degree of conviction.
    • LPs are weighing lower pricing against the benefits of meeting their portfolio objectives and allocation targets. Targeted sales of higher-quality portfolio subsets may be the most efficient path for motivated, price-sensitive sellers, as buyers focus on funds they know best and the market shifts from macro to micro.
  • GP/Complex
    • GP-led/complex transactions comprised the majority of deal flow through the first half of 2022, and supply from general partners is continuing at a fast pace.
    • Within the GP-led space, single-asset continuation vehicles remain the most prevalent transaction type – some are being pursued alongside a third-party sponsor investment, some are being priced by the secondary market, and some are being informed by M&A processes and other sources of valuation.
    • Larger transactions that require a good amount of syndication are taking longer to complete, and in some cases require larger GP commitments and/or fund commitments to complete the syndicate.
    • The sentiment amongst participants is that GP-led secondaries will continue to be popular. They allow GPs to create liquidity for those LPs that want it, develop new relationships, and keep their existing portfolio companies for a long period of time. As GP-led deal volume has grown significantly, dry powder has not been able to keep pace with supply. This dynamic is creating a supply/demand imbalance that favors buyers.


Secondary Investing at Hamilton Lane

A shorter duration complement to an overall private markets portfolio

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Venture Capital & Growth

  • In Q1, the venture industry sought to make dollars last longer.  Companies have focused on cutting costs to extend runways and, with that, venture firms have slowed their deployment and drawdown pace to Q3 2020 levels.
  • Distributions remained strong in Q1 but that was largely driven by momentum that carried over from the prior year. With IPO activity down significantly in 2022, the industry is bracing for fewer distributions for the remainder of the year.
  • The contraction in public markets is putting downward pressure on valuations, but don’t expect the same magnitude of change in private marks. Last round pricing methodologies continued strong revenue growth and recent up-rounds will offset some of the impacts.
  • Venture fundraising, which had been at a breakneck pace, is showing signs of easing, with managers expecting to slow investment pacing.
  • Having taken advantage of robust fundraising markets, venture companies generally appear to be well-capitalized, but discussions of upcoming down-rounds have accelerated.  Late-stage investors, in particular, have become significantly more patient and price sensitive.

Venture Capital & Growth Equity Investing at Hamilton Lane

Seeking to access top-tier venture and growth equity companies through funds, secondaries and direct investments

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Definitions 
Co/Direct Investment Funds: Any PM fund that primarily invests in deals alongside another financial sponsor that is leading the deal.
Credit: This strategy focuses on providing debt capital.
Infrastructure: An investment strategy that invests in physical systems involved in the distribution of people, goods, and resources.
Private Equity: A broad term used to describe any fund that offers equity capital to private companies.
Real Estate: Any closed-end fund that primarily invests in non-core real estate, excluding separate accounts and joint ventures.
Secondary FoF: A fund that purchases existing stakes in private equity funds on the secondary market.
VC/Growth: Includes all funds with a strategy of venture capital or growth equity.

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