Direct Credit Investing
Access to the private credit market, emphasizing current yield with an aim toward downside protection
- On the deal front, we had another record-setting year for direct credit deal activity in 2024, reviewing $16.6B in opportunities. This trend continued into 2025 with deal flow increasing 83% YoY through Q1 2025.
- As we look ahead at the market environment, M&A and LBO volumes may slow based on market uncertainty. However, credit has strong deal flow drivers that should create continued deal momentum in areas like incremental facilities, refinancings and an approaching, large maturity wall.
- Dislocation may also lead GPs to get creative about driving liquidity as LPs are craving it (i.e., continuation vehicles, GP financing solutions or NAV loans), which private credit is well positioned to support.
On the opportunistic side, expect there to be demand for capital solutions in structures like HoldCo notes and preferred equity where a maturity wall may demand financing solutions that offer attractive risk/return characteristics such as low LTVs and the potential for equity-like returns.
Lastly, spreads are forecasted to widen, which may create renewed opportunities to lean into senior parts of the capital structure at attractive yields.
During times of uncertainty, there has historically been a flight to quality, with private credit offering both yield and downside protection. Our credit platform is well-positioned to lean into attractive opportunities as the market environment evolves.
Direct Equity Investing
Globally diversified platform targeting the SMID market with unique positioning
- 2024 was a year of recovery, with dealmaking up YoY (preliminary deal count and deal value were up over 10% and 20%, respectively), bringing an end to a two-year dealmaking slump that saw deal value decline by more than 40% peak to trough.
- The deal flow that our direct equity platform is seeing is even more robust – our 2024 deal flow outpaced 2023, which was a record year, by more than 29%.
- In terms of the types of deals getting done, it’s notable that platform LBOs have picked up quite a bit. These deals took a hit during the last two years amid higher debt financing costs.
- We continue to find ourselves in a favorable supply market as a co-investor, with a reduction in PE dry powder driven by a decline in PE fundraising, which has been elongated.
- What is accounting for the discrepancy between what we’ve been seeing in the market broadly, which has largely been a continued pullback in fundraising, and increased CI volume?
- GPs are still looking to get deals done with fewer traditional capital sources available to them. Hamilton Lane, as a large, institutional co-investor and capital solutions provider, is positioned favorably given these supply/demand dynamics.
- Since the peak in 2021, exit activity declined meaningfully. GPs were holding onto companies for longer, with substantial bid/ask spreads between buyers and sellers and challenged credit markets making it tough to get deals done.
- The good news is that we appear to be past the trough, with exit count and exit value up for 2024, albeit still far below the highs of 2021.
- Supporting the continued turnaround in exit activity is the Fed’s efforts to engineer a soft landing through rate cuts.
- Invest in resilient sectors and mission-critical products and services.
- High earnings and asset quality are paramount.
- Align deals alongside GPs with sector expertise to invest through cycles.
- Price equity returns at levels that are appropriate for the higher cost of debt and reduced leverage levels to drive moderating valuations.
- Remain highly selective and only invest in the highest-conviction opportunities.
Emerging Managers
Early access and introductions to best-in-class emerging and diverse-led managers across primary funds and co-investment transactions
- Hindrances posed by macroeconomic factors such as tariffs, geopolitical conflicts and policy shifts have collectively suppressed overall M&A activity and, consequently, realizations remain limited. In turn, the fundraising environment continues to be significantly impacted. Given this constrained transaction environment, we are seeing an uptick in the number of spinouts from organizations where the crystallization of carried interest flows has been muted. Several junior partners and mid-senior professionals who anticipated meaningful payouts have found themselves underwhelmed. As a result, this cadre has founded new organizations under their own flag.
- Emerging managers launching out of their previous firms face challenges primarily around the capital required to establish and grow their businesses. This scenario has led to an increased demand for GP seeding and staking groups, stepping in to provide vital financial support. There has been a massive uptick in anchor and working capital injections into these emerging managers, a trend that is gaining traction and prevalence in the market. However, it is critical for emerging managers to carefully consider several key factors before entering into such partnerships: the duration of the partnership, the percentage of the top-line revenue leaving their management company, the economic allocations which might restrict future growth of the investment team and the value-add brought by the seeding firm.
- On the transaction front, despite the macroeconomic factors mentioned above, we have observed consistent transaction volume from small-cap and emerging investors. Although without certainty, we suspect that the fundraising achieved in the previous 18-24 months by a myriad of emerging sponsors is now placing pressure on these managers to deploy capital even in the midst of market turmoil. At a minimum, solace can be taken from the fact that valuations seemingly remain unelevated. We will continue to monitor transaction activity and scrutinize the strategies employed by these smaller managers to navigate these macroeconomic challenges effectively.
Primary Fund Investing
High-quality primary fund investments with often hard-to-access general partners
- Equity fundraising continues to trend toward longer cycles, and groups have pushed from mid-2025 to end-of-2025 or even into 2026 as LPs seek a validation of unrealized marks and monitor the ongoing macroenvironment.
- Credit fundraising remains robust, led by the larger platforms, but is healthy across the industry, particularly in opportunistic areas. One GP expects their fundraise to be approximately six months instead of 12.
- The denominator effect is coming back in vogue; however, it is still too early to tell what market moves will be longer lasting. Commitment plans for 2025 are largely set and we continue to seek consistent deployment and proper vintage year diversification.
- On the buy side, GPs willing to embrace complexity and avoid reading broadly syndicated CIMs should be able to find opportunities, however, they need to find sellers who are less price sensitive.
- Exit deal flow remains challenged for most sectors outside of service-oriented businesses which should be insulated from tariff impacts. However, this could present an interesting dynamic for capital solutions (e.g., preferred or HoldCo notes), which provide additional capital without increasing expenses since loans are largely PIK.
- Exit processes continue to be held up due to broader uncertainty, while liquidity-starved LPs seeking sales from their managers, however, do not want to see a haircut from prior marks.
- The elusive “uptick at exit” continues to be a bifurcation between quality businesses that demand a premium and deals that are just long in the tooth as buyers are aware of the fund management aspect of the business.
- In response to the tariffs, GPs have been proactive with portfolio companies, trying to lessen the impact through supply chain reorientation, cost measures and optimizing processes.
Impact Investing
Seeking to deliver attractive returns while generating meaningful and measurable impact
- Direct impact deal flow continues to thrive, with 2024 setting a new record for both number of deals (173) and total opportunity size ($6.6B). The Impact team’s deal flow sourcing engine is working well with continued growth of inbound deals both from sponsors as well as directly from businesses and advisors.
- The Impact team is focused on continuing to expand deal flow sourcing in 2025, with proactive outreach to GPs in the U.S. and globally.
- The impact portfolios are largely insulated from increased tariff risks due to their typical focus on regional businesses with minimized cross-border revenue exposure.
- Within the environmental theme, renewable energy businesses that heavily rely on a software service orientation or domestic manufacturing models remain an attractive area to invest.
- Service businesses are also a focus area within social impact focused portfolios because of their resilience to tariff risks.
- Market participants are keeping a close eye on potential changes to the IRA and evaluating whether adjustments need to be made to the underwriting of renewable resource businesses to factor in changes by the administration.
- There is massive demand for new energy installations to support the growing power demand fueled by AI and its reliance on data centers. The new administration continues to be a proponent of continued AI investment growth.
- Industry experts say that there is not enough energy supply in the near term to service data centers, which will be a major demand driver and the cheapest generation to be added to the grid is solar, even without the Solar Investment Tax Credit.
- Many of the trends and tailwinds regarding renewables in the infrastructure space also help to accelerate the business services affiliated with that expected growth.
Infrastructure & Real Assets Investing
Access to primary, secondary and direct investments across infrastructure and natural resources
- Despite meaningful policy uncertainty around energy policy and its associated effects on power markets, demand growth and a need for new power capacity is the consensus amidst increased re-shoring, voracious power demand from data centers and increased electrification. Specifically, key markets for data centers globally are experiencing power shortages, constraining overall market growth while also necessitating the buildout of additional baseload and intermittent generation resources.
- According to SEIA, an industry association for the solar industry, 2024 saw 50 GWdc of capacity installed in 2024, the second consecutive year of record breaking of capacity additions, with solar representing a majority of all new generating capacity added to the U.S. grid during the year.
- Amidst policy uncertainty, renewables dealmaking has slowed whereby the value of deals within fossil fuel generation more than doubled in 2024, with recent high-profile transactions, including Calpine, emblematic of continued growth in this space.
- Despite noise around the launch of DeepSeek, the demand for data center capacity remains robust, with hyperscalers doubling down on aggressive capex projections, with Microsoft and Meta forecasting capex between $60B and $80B in 2025, primarily focused on AI-related data centers.
- For all of the headlines around AI, data center demand has been growing at a double-digit CAGR, excluding AI, which has certainly added to demand.
- Lines are blurring, with macro tailwinds driving increased demand for fiber-based fixed line infrastructure, data center capacity as well as power demand, the availability of the latter is creating barriers to entry across several markets.
- Are we in a bubble? Although caution is warranted in markets wherever there is excitement, HL sees a compelling opportunity to invest in a sector experiencing favorable long-term demand growth drivers while also benefiting from strong downside protection. Selectivity is key to investing in the sector.
Real Estate Investing
Seeking to deliver attractive, risk-adjusted returns across primary fund commitments and transactions within real estate
- Negative appreciation across 2023 and 2024 led to a historic basis reset with property values declining approximately 20% on average from peaks in early 2022, creating much more attractive entry pricing for investors.
- In addition to more favorable capital market conditions, the sharp decline in new construction starts across property types over the past two years supports supply side fundamentals, leading to stronger medium-term rent growth and reduced vacancies.
- We expect 2025 to be a strong year for real estate, with an acceleration of transaction volume. The historic basis reset provides an opportunity for investors to capitalize on attractive entry pricing and acquire assets at a significant discount to the prior cycle’s peak pricing.
- The recent developments in foreign trade policy have created additional uncertainty and risk for real estate markets depending on the nature of investment.
- For more core, stabilized assets with lower LTV’s and fixed rate financing, the impact of trade policy is much less meaningful. Conversely, for opportunistic deals where there may be development components, there is more risk and uncertainty related to cost overruns and development timelines (related to the higher cost of building materials and potential pauses in construction and uncertainty creating delays).
- Given the volatility in the capital markets, there is risk across real estate investments with near-term debt maturities, or floating rate risk (if it is unhedged).
- Overall, if these risks are well managed and/or hedged, we feel that real estate investments are well-positioned to provide attractive risk adjusted returns to investors.
- Although markets have been tumultuous over the past few weeks, secondary portfolios which are highly diversified and mid-market focused are well-suited to withstand volatility in the near term.
- Regarding the secondary market and current uncertainty:
- LP Interest: With public market declines and a slow exit environment, we expect a continued lack of private equity distributions. Portfolio rebalancing and commitment pacing are top of mind for investors. LPs will seek liquidity and deal flow may even increase from already high levels. However, we expect the bid-ask spread to widen as buyers increase their equity risk premium, resulting in less volume in the near term. Buyers will focus on smaller portfolio subsets or single fund interests.
- GP-Led: Opportunities will be robust in a challenged exit environment. Fundraising remains difficult and GPs are relying on continuation vehicles to generate liquidity for their LPs. We are well-positioned to capitalize on high-quality GP-led deal flow due to our established relationships with fund managers and information advantage.
- Complex: In uncertain markets, we typically see an uptick in structured transactions, such as preferred equity solutions. In these situations, the GP favors liquidity, while the buyer benefits from downside protection plus a preferred return with an attractive cushion of equity that is junior to the preferred security. GPs often prioritize working with firms like Hamilton Lane which have a long history of mutually beneficial structured transactions execution.
- Our relationships, technology and information advantage shine in a market environment like this, helping us to uncover opportunities with embedded value.
Venture Capital & Growth Equity Investing
Seeking to access top-tier venture and growth equity companies through funds, secondaries and direct investments
- Deal activity in Q1 2025 rose, continuing a trend towards accelerated deal making. With continued uncertainty around tariffs and markets going into Q2, we expect numbers could taper.
- The resurgence of mega rounds continued into Q1 with the largest 10 deals representing over 50% of all U.S. venture dollars invested in Q1 2025.
- We expect 2025 to remain an active year as the early-stage environment has been strong and the pipeline for mid- and late-stage companies has grown.
- Traditional exits remained slow during the first quarter, which drove increased activity in the secondary market as LPs, GPs and other direct shareholders looked for liquidity.
- We expect to see robust secondary opportunities throughout the year as market uncertainty will likely drive increased conservatism from companies which otherwise planned to go public in 2025.
- GP-led activity continues to grow as managers become increasingly aware of secondaries as a portfolio management solution.
- VCs approaching their next fund are using the secondary markets to generate re-up capital for LPs ahead of their next fundraises.
- LP secondaries activity remains strong; however, underlying valuations and bid/ask spreads remain the largest barrier to closings.
- Overly diversified portfolios and NAV concentration in higher-valuation investments continue to weigh on pricing.
- The universe of buyers for LP secondaries remains limited, favoring those with information access and sector expertise.
- 2025 got off to a strong start on the GP fundraising front, with several firms kicking off fundraises at the beginning of the year.
- Several large, established firms shored up their fundraising in 2024, so activity in H1 2025 is expected to be driven by smaller and emerging firms.
- We also expect growth equity fundraising will continue to pick up throughout 2025 after most firms slowed deployment and stayed out of the market following the market pullback of 2022.
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.
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.