Planning Ahead: Investors Seeking Growth May Need to Look Beyond Public Equities

June 01, 2021
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Long-term investors in search of their next big growth opportunities may do well to look beyond public equities to find them. As companies increasingly delay going public, much of their growth – and returns – occurs while still private – and that dynamic translates into an interesting opportunity set for private market investors. What’s more, with the advent and expansion of more investor-friendly vehicles, the private markets are increasingly becoming accessible to advisors and their clients.

A number of compelling reasons exist to encourage advisors to consider the private markets. One of the most compelling? Performance – or more pointedly said, historical outperformance of the public markets. Over the last three years, private equity generated a 42% premium over public equities as of December 31, 2020. Over a longer time horizon, private equity and private credit have each outperformed their global public equity and public credit benchmarks, respectively, in 19 of the last 20 vintage years.1

We anticipate that those return trends could continue, as a confluence of factors encourage firms to stay private longer, experiencing much of their nascent growth and value creation before an IPO. The first factor is control. Staying private gives executives more direction over their business and strategy. It also shields the company from the volatility that is a natural byproduct of being publicly traded.

The regulatory environment offers another cautionary flag for going public. Between Sarbanes Oxley, and then Dodd-Frank, regulations are becoming increasingly burdensome and costly. Logic holds that if private capital is available, companies might want to consider delaying a public listing longer than may have traditionally been the case.

Plenty of available capital has given companies time to wait. As of late 2019, private equity companies managed $3.4 trillion in investor commitments, up more than six-fold from 2000.2

Each of these factors plays a role in keeping companies private longer. We see this in the technology space, where, on average, the age of a new public company has gone from 4.5 years in 1999 to more than 12 years old.3 Two of the largest-ever tech IPOs, waited 10 and 12 years, respectively, before going public, long after they had disrupted the industries in which they operate.

A Growing Opportunity Set

As one considers the size and scope of the private markets asset class, it’s striking how much public equity investors may have been missing.

There are roughly 17,000 private companies with annual revenues of more than $100 million, compared to just 2,600 public companies with the same revenues.4

For the better part of two decades, the number of publicly listed companies has been in steady decline. While IPOs increased in 2020 as some companies sought to take advantage of buoyant investor sentiment, the number of companies listed on major U.S. exchanges has still shrunk from more than 7,500 at the beginning of 2000, to less than 5,000 at the end of 2020.5

For decades, access to private companies has been largely limited to institutional and ultra-high-net-worth investors. But that is quickly changing. There has actually been a recent regulatory push to give Main Street access to the growing private markets space, and we’ve seen regulators offer guidance on more investor-friendly fund structures that allow retail investors to participate.

The industry has responded in kind. In the past few months, several new registered private equity funds have launched, catering to advisors and their clients. Often referred to as “evergreen” funds, these strategies help to solve some of the challenges around liquidity, large capital commitments and timing delays in funding requirements that have traditionally been barriers to investing in the private markets for wealthy investors.

From the lens of a high-net-worth investor, these funds are attractive in that they offer a single-access solution to gain diversified exposure to the private markets. What’s more, the minimum investment size may be as low as $50,000 in some cases. This means it should be possible for individual investors to not only access the private markets, but be able to do so while building fully diversified private capital portfolios alongside some of the largest institutional investors.   

With the opportunity set in private markets being more than five times the size of the public market, advisors and their clients may do well to give these strategies a look.4 As companies continue to stay private longer, private markets may provide the solution clients need to achieve their long-term investment objectives.

 

1 Source: Bloomberg, Hamilton Lane Data via Cobalt. MSCI World TR Index used to represent public equities. Data as of 12/31/2020 (May 2021).
2 https://kenaninstitute.unc.edu/publication/a-new-equilibrium/
https://www.skadden.com/insights/publications/2020/01/2020-insights/private-pre-ipo-investments
Source: Capital IQ, February 2021
Source: Research by Professor Jay R. Ritter, University of Florida.

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The information contained in this presentation may include forward-looking statements regarding returns, performance, opinions, the fund presented or its portfolio companies, or other events contained herein. Forward-looking statements include a number of risks, uncertainties and other factors beyond our control, or the control of the fund or the portfolio companies, which may result in material differences in actual results, performance or other expectations. The opinions, estimates and analyses reflect our current judgment, which may change in the future.

All opinions, estimates and forecasts of future performance or other events contained herein are based on information available to Hamilton Lane as of the date of this presentation and are subject to change. Past performance of the investments described herein is not indicative of future results. In addition, nothing contained herein shall be deemed to be a prediction of future performance. The information included in this presentation has not been reviewed or audited by independent public accountants. Certain information included herein has been obtained from sources that Hamilton Lane believes to be reliable, but the accuracy of such information cannot be guaranteed.

This presentation is not an offer to sell, or a solicitation of any offer to buy, any security or to enter into any agreement with Hamilton Lane or any of its affiliates. Any such offering will be made only at your request. We do not intend that any public offering will be made by us at any time with respect to any potential transaction discussed in this presentation. Any offering or potential transaction will be made pursuant to separate documentation negotiated between us, which will supersede entirely the information contained herein.

Certain of the performance results included herein do not reflect the deduction of any applicable advisory or management fees, since it is not possible to allocate such fees accurately in a vintage year presentation or in a composite measured at different points in time. A client’s rate of return will be reduced by any applicable advisory or management fees, carried interest and any expenses incurred. Hamilton Lane’s fees are described in Part 2 of our Form ADV, a copy of which is available upon request.

The following hypothetical example illustrates the effect of fees on earned returns for both separate accounts and fund-of-funds investment vehicles. The example is solely for illustration purposes and is not intended as a guarantee or prediction of the actual returns that would be earned by similar investment vehicles having comparable features. The example is as follows: The hypothetical separate account or fund-of-funds consisted of $100 million in commitments with a fee structure of 1.0% on committed capital during the first four years of the term of the investment and then declining by 10% per year thereafter for the 12-year life of the account. The commitments were made during the first three years in relatively equal increments and the assumption of returns was based on cash flow assumptions derived from a historical database of actual private equity cash flows. Hamilton Lane modeled the impact of fees on four different return streams over a 12- year time period. In these examples, the effect of the fees reduced returns by approximately 2%. This does not include performance fees, since the performance of the account would determine the effect such fees would have on returns. Expenses also vary based on the particular investment vehicle and, therefore, were not included in this hypothetical example. Both performance fees and expenses would further decrease the return.

Hamilton Lane (UK) Limited is a wholly-owned subsidiary of Hamilton Lane Advisors, L.L.C. Hamilton Lane (UK) Limited is authorized and regulated by the Financial Conducts Authority. In the UK this communication is directed solely at persons who would be classified as a professional client or eligible counterparty under the FCA Handbook of Rules and Guidance. Its contents are not directed at, may not be suitable for and should not be relied upon by retail clients.

Hamilton Lane Advisors, L.L.C. is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 in respect of the financial services by operation of ASIC Class Order 03/1100: U.S. SEC regulated financial service providers. Hamilton Lane Advisors, L.L.C. is regulated by the SEC under U.S. laws, which differ from Australian laws.

Any tables, graphs or charts relating to past performance included in this presentation are intended only to illustrate the performance of the indices, composites, specific accounts or funds referred to for the historical periods shown. Such tables, graphs and charts are not intended to predict future performance and should not be used as the basis for an investment decision.

The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice, or investment recommendations. You should consult your accounting, legal, tax or other advisors about the matters discussed herein.

The calculations contained in this document are made by Hamilton Lane based on information provided by the general partner (e.g. cash flows and valuations), and have not been prepared, reviewed or approved by the general partners. As of May 28, 2021

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