Primaries

  • We anticipated that fund closes and diligence needs might slow during the summer and thus far we are sorely mistaken. The number of funds to process continues to remain high, with consistently top-quality managers. LPs will likely start to run out of allocation for the year soon and will either need to start making difficult decisions or borrow from 2022.
  • For Q1 2021, private market returns came down across the board. They are still above long-term norms, however, with all private markets posting an 8.28% quarterly return and private equity up 10.24% for the quarter. 
    • Private equity returns have now seen four consecutive quarters of double-digit returns, and initial feedback from many of our GPs leads us to believe that is not slowing down. We will see whether that plays out in the coming weeks once all data is in, but at least for now we expect strong performance.
  • For the first half of 2021, distributions have been at a record high for all private markets. Our data suggest $590+ billion was distributed in the asset class in the first half of the year and just above $1 trillion across the last four quarters. (Yes, we had to use the quad comma there -- a first for the asset class.) 
    • SPACs, IPOs, strategic sales, GP-to-GP exits and continuation funds all are helping to pump these numbers up—but we also suggest taking a step back and reflecting on the growth of the asset class. 
    • As a percentage of NAV, the private markets are looking good, but not breaking records. The last six months are just above median rates of distributions as compared to the first half of the year for the last 20 years.
  • In dollar terms, contributions tell a very similar story as distributions. Only about $950 billion was drawn in the last four quarters or about $485 billion in the first half of 2021. Again, the dollar amount does sound high, and it is a record amount for the asset class, but as a percentage of unfunded we’re right around median calls when compared to data for the last two decades.

Primary Fund Investing at Hamilton Lane

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

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Direct Equity

  • Direct Equity activity remains high for new deals and exits. Favorable conditions, low interest rates, borrower-friendly credit terms, strong financial results, and general optimism are fueling deal flow. Valuations are full, but still cheaper than public markets and leverage multiples are reasonable.
  • Our platform has seen historic levels of deal flow, with more than $14 billion of deals through the end of June across 321 opportunities. This is up approximately 70% from the same period last year and 30% from 2019. Exits and liquidity events for the most recent quarter are also at record levels.
  • At face value, the high level of activity is good news, but it is causing some strain within the private equity community. Many parts of the ecosystem report that they are at or near capacity and have been operating at this level for quite some time. Are these levels of activity sustainable? 
  • Many of the same themes discussed in prior updates continue, including:
    • The trend of sought-after deals going to the most responsive and capital-resourced co-investors has only increased as co-investors are dealing with full pipelines, which is causing GPs to focus on partners who can meet their deadlines and manage their robust deal flow efficiently.
    • As Sponsors increasingly seek to pre-empt sell-side processes for companies that they have previously built high conviction on – having already done deep level thematic sector work, decided which company they want to buy in a space and completed outside-in diligence – we’re seeing timelines accelerate, benefitting well-resourced co-investors that are able to conduct diligence under tighter timeframes. Not all CIs can do this, so it helps platforms like ours in securing allocation.
    • As M&A continues to be a major part of value creation theses from the outset, CI participation is becoming more critical given the associated equity requirement, prompting Sponsors to continue seeking out well-capitalized, long term CI partners on deals.

Direct Equity Investing at Hamilton Lane

Globally diversified platform targeting the SMID market with unique positioning

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Secondaries

  • The secondary market continued its strong pace in Q2 across LP deals and GP-led transactions.
  • The prevailing motive behind sales today continues to be strategic. Limited partners are looking to actively manage their portfolios and are increasingly comfortable transacting directly with buyers. Those sellers who are sensitive to taking discounts are often selling higher-quality funds.
  • A theme we’ve observed in the GP-led space: Some traditional LPs are looking to play syndicate roles in these transactions -- and looking to the expertise of secondary specialists to lead deals.
  • Expectations are for a continued busy and robust second half of 2021.

Secondary Investing at Hamilton Lane

A shorter duration complement to an overall private markets portfolio

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Venture Capital

  •  Venture activity is at an all-time high. Q2 was not only a record fundraising quarter, but a record financing and unicorn-creation quarter.
  • The globalization of venture continues, but we’ve seen the strongest year-over-year growth in funding for Silicon Valley companies.
  • The exit window is wide open and the first half of 2021 has seen a record number of IPOs and M&A events.
  • Sectors with the strongest investment activity include fintech, AI/ML, cybersecurity, life sciences and healthcare IT.
  • Managers continue to shorten fundraising cycles, with 18 to 24 months between fundraises becoming commonplace.
  • With so much follow-on financing activity, venture is not exhibiting its historical J-curve profile and the threshold for top-quartile performance for 2020 funds sits at an eye-popping 100% IRR.

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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Credit

  • Hamilton Lane’s credit deal flow has reflected the robust market environment with $3.3 billion in direct credit opportunities reviewed YTD through June 28, an increase of 171% vs. the prior year.
  • Investor appetite for yield, inflation concerns and falling default rates continue to attract capital to the loan markets. CLO new issuance, by example, is at record levels with ~$75 billion in formation volume through June 2021, according to LCD. This is up 127% over the prior year and among the highest levels seen in over a decade.
  • Capital markets liquidity has led to a borrower-friendly environment specific to structure and price; however, sponsor equity contributions as a percentage of the overall capital structure remain attractive, particularly in the middle market.
  • In a robust capital markets environment, lender scale and market access remain key to seeing the broadest set of opportunities and maintaining selection and credit discipline.
  • Loan distress rate is near multi-year lows. The leveraged loan default rate dropped to 2.6% in May of 2021 from a peak of 4.9% in 2020; May also saw no leveraged loan defaults.
  • Pandemic-era deals are poised to exit one year non-call periods, creating the opportunity for refinancing or repricing as spreads have tightened more recently.
  • Heavily COVID-impacted sectors such as fitness, hospitality, travel and aerospace are beginning to show signs of improvement.

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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Infrastructure

  • Transaction activity continues to be strong with primary interest in renewable and data-related assets, and pricing remaining very tight across these sectors.
  • Transportation assets are also seeing an uptick in activity and investor interest, as infrastructure investors are betting on a strong post-COVID recovery for these assets.
  • Activity in the energy infrastructure space remained subdued in the first half of this year, though higher and more stable commodity prices have helped volumes rebound on midstream systems, and investors are starting to look for value opportunities in the sector.
  • Given competition in more traditional infrastructure sectors, we are seeing investors move more aggressively into social infrastructure and other infrastructure-adjacent plays.
  • Lots of interest in a bipartisan infrastructure plan getting done in the U.S., though opportunities for private capital investment are still unclear.

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

  • 12 to 18 months ago, it appeared as if real estate debt default risk around the world was potentially as high as it has ever been.  Across all property types, rent collection was anticipated to be an enormous challenge potentially spurring an industry-wide wave of mortgage defaults.
  • Fear was quickly mitigated by better-than-expected fundamentals, including operating expense management and revenue/collections for all property types but hotels. 
  • Residential and warehouse strategies globally have quickly recovered, while office and retail performance lags.  Distress is greatest in the hotel sector. It is noteworthy how strong even retail rent collections were though the pandemic. 
  • Investors’ willingness to consider non-gateway markets has grown, compressing cap rates in markets previously considered “second tier.” Growth in these lower cost markets is strong relative to many urban coastal gateway markets.
  • Significant dry powder in already formed funds expecting global distress are driving cap rates down across all property types as the wave of distress failed to materialize. Many funds have moved into Industrial to capture rent growth and total return from existing buildings and new development.
  • Investor interest in niche sectors has significantly increased. These property types include, among others, data centers, Storage, mobile homes, and life science real estate. For-rent single family residential is emerging as a major residential subcategory.

Real Assets Investing at Hamilton Lane

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

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Impact

  • Awareness of and interest in impact investing has converted to action, as the impact investment market has expanded to $715B globally, with private investments comprising a meaningful percentage of those dollars.1   
  • The increased investor demand has resulted in a proliferation of new funds focused on the impact space from both established and emerging impact managers.  
  • Regulatory frameworks meant to address definitions and disclosures are being developed globally.
  • Hamilton Lane observed an increase in deal flow of 70% for impact direct investments in the first half of 2021 compared to the second half of 2020.
  • While activity and opportunities have increased across environmental and societal impacts, the global drive to reduce greenhouse gases (“net zero” targets) has accelerated the focus on clean energy transition and sustainable processes. The capital needs within these sectors are significant and expected to grow.
  • Regardless of themes, impact investors need to stay focused on metrics, measurement, tracking and reporting, as methodologies and approaches vary widely.

1Source: GIIN

Impact Investing at Hamilton Lane

Seeking to deliver attractive returns while generating meaningful and measurable impact

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