Insights Chart of the Week

Data at a Glance

Our weekly chart leveraging Hamilton Lane's proprietary data, coupled with economic insights from our senior investment team members to address timely private market topics.

May 16, 2024

Global Median Exit Markups During the Year Prior to Exit
Deals Exited from Q2 2021 - Q2 2023

The Buyout Exit Advantage

Over the last 18 months, critics of buyout deal performance have often claimed that GPs must inevitably exit their holdings at a loss to prior valuations. The lofty valuations from the last several years should surely have to be sold below the purchase price!

From Q2 2021 – Q2 2023, we observed the “peak” valuations window, seen in 2021 through the market volatility of 2022 - 2023, for realized buyout deals. The data shows that, during this timeframe, on average, deals were exited at a premium to their holding value, relative to their previous valuations.

Re-running this analysis across different time periods over the last several years, the trends have remained consistent. We believe this suggests that GPs are perhaps more conservative in their valuations than what critics suggest. If public markets are going up, GPs may try to avoid false expectations and provide more cushion in what they are presenting as valuations. This healthy conservatism can also extend into turbulent periods as seen in the last two years where buyout deals continued to be exited at premiums. Can your public equities say the same?

Corporate Finance/Buyout: Any PM fund that generally takes control position by buying a company. 


May 9, 2024

Median DPI by Strategy

The Primary Functionality of Secondary Funds

Private equity has contributed to portfolios seeking long-term gains from its historical strong, multi-decade performance. While private equity offers investors access to potential outperformance (relative to listed assets), it can also entail higher illiquidity.

A closed-end private equity fund’s investment period may last a few years and underlying assets may be held for five years or more. During this period, investors are likely to see limited distributions, as measured by the distributions to paid-in capital ratio (DPI). As portfolio companies in the fund generate value and are sold at a profit, DPI begins to accelerate, though it takes the average buyout fund over eight years to distribute its cost basis. Venture funds may take even longer. We believe secondary funds can offer valuable mitigants to these effects by presenting investors with immediate diversification and enhanced liquidity opportunities.

Secondary buyers step in as replacement investors by purchasing the commitment to a fund from the original investor. This provides immediate access to an established, mature portfolio and can facilitate faster distribution of cash flows to investors on a DPI basis.

As a part of thoughtful portfolio construction, LPs should weigh the potential for secondary funds' liquidity advantages, risk mitigation features, and diversification benefits across vintage years, industries, geographies, and GPs, alongside pricing advantages.

Corporate Finance/Buyout: Any PM fund that generally takes control position by buying a company.

Growth Equity: Any PM fund that focuses on providing growth capital through an equity investment.

Secondary FoF: A fund that purchases existing stakes in private equity funds on the secondary market.

Venture Capital: Venture Capital incudes any PM fund focused on any stages of venture capital investing, including seed, early-stage, mid-stage, and late-stage investments.


May 2, 2024

There’s too much leverage in portfolios… so buyout returns must be doomed
Realized Buyout Deal IRR Quartiles by Leverage and Deal Year Groupings

Return of the Levered Buyout?

This is an argument we hear often. Today, it is based on the premise that higher rates, coupled with the higher leverage levels being taken, means buyout returns will suffer drastically. Yes, there has been an upward trend in acquisition leverage multiples, but we haven’t moved a lot over a longer timeframe like the last 15 years. Our data shows median net debt / EBITDA is around the 5.0x mark right now. So yes, there is leverage – but is it so excessive that it can hinder return outcomes altogether?

This week, we look at returns of realized buyout deals by leverage and deal year groupings.

No, your eyes don’t deceive you; there is indeed a significantly lower dispersion of returns for highly levered deals across all cycles. Fascinating. Returns don’t appear to be consistently better for one level of leverage versus another. Sure, pre-GFC, high leverage levels hurt returns, but is that an environment we believe will return?

Interestingly, while lower leverage produced better returns, it was not so much better that you can conclude that high leverage in itself means returns will suffer. 

Corporate Finance/Buyout: Any PM fund that generally takes control position by buying a company.


April 25, 2024

Median Operational Performance of North America Buyout vs. S&P 500 Index 

PE Efficiency Outperforms PMEs

This week’s chart is for those still struggling to recover from their 2022 hangover and singing the “valuations are inaccurate” song. Throughout 2022 and early 2023, it was broadly decided that private equity couldn’t be flat, let alone up, when public markets were down. It had to be a valuation gimmick that would correct at some point. That hasn’t happened, especially since public markets have seemingly moved up, but some investors hold steadfast to their belief that day of valuation reckoning is near. But private equity has historically outperformed in severe public market downturns. Our focus is on answering the question why private equity has historically excelled. The outperformance in 2022, along with the continued performance in 2023, is a simple matter of stronger revenue and EBITDA than the profiles of public companies typically found in comparison benchmarks such as the S&P 500 Index.

Does this mean private equity investors are smarter than their public counterparts? Not necessarily, but the industry’s governance does prove to be better, and the choice of companies is different and has historically contributed to better performance. Buyout has generally avoided some areas that are more represented in broad public market indices, notably materials and consumers. Instead, it has generally been overweight in sectors that have shown greater growth and resilience during economic cycles, such as information technology and industrials. More importantly, the size of companies varies drastically, with an average company size of $32.5B in the S&P 500 Index vs. $328M in the buyout universe.* The amount of control you can exert over such companies is likely enormous vs. larger ones.

Buyout’s operational outperformance is closely tied to better sector and company selection and a greater ability to create paths for operational growth. We believe this is, in the end, the core of the reason private markets have historically outperformed.

*Source: Hamilton Lane Data, Bloomberg (December 2023)

Corporate Finance/Buyout: Any PM fund that generally takes control position by buying a company.

S&P 500 Index:The S&P 500 Index tracks 500 largest companies based on market capitalization of companies listed on NYSE or NASDAQ.

PME (Public Market Equivalent): Calculated by taking the fund cash flows and investing them in a relevant index. The fund cash flows are pooled such that capital calls are simulated as index share purchases and distributions as index share sales. Contributions are scaled by a factor such that the ending portfolio balance is equal to the private equity net asset value (equal ending exposures for both portfolios). This seeks to prevent shorting of the public market equivalent portfolio. Distributions are not scaled by this factor. The IRR is calculated based on these adjusted cash flows.


April 18, 2024

Benchmarking CPI Against Private Infrastructure Funds 

Infrastructure as Portfolio Ballast

Following the GFC, conventional wisdom held that in volatile market environments, private infrastructure provided a hedge to portfolios due to their steady cash flows, ability to pass on cost increases, and lower correlation to public markets. This thesis had yet to be tested in a raising rate and/or high inflationary environment for private infrastructure – both of which we have witnessed globally for the past two years.

Looking across a combination of time periods that encompass different levels of market volatility, asset class performance and CPI rate changes, we observe a strong, positive, statistically significant correlation between one-year rolling private infrastructure performance and changes in CPI in the early GFC period, and subsequent volatility and rising rate environment of ’21-’23 and ’22-’23, respectively.

This is a welcome sign that the investment thesis for infrastructure has played out as expected under these market conditions. We believe that CPI plus basis point premium remains a reasonable option when private infrastructure is used as an inflation hedge within a portfolio while also providing defensive qualities in volatile market conditions. While the jury is still out on the long-term correlations between CPI and infrastructure, it seems the asset class can play its desired role during periods of rapidly escalating inflation.



April 11, 2024

Dispersion of Returns by Strategy: Older vs. More Recent Vintages
By Vintage Year Groupings, Ordered by Long Term Spread of Returns

Consider this…

When constructing a portfolio, investors must be mindful of developing risk and return assumptions that encompass data across historical periods. The evaluation of strategies in relevant time periods and the application of forward-looking investments can help guide judgement on portfolio construction and performance expectations.

Vintages since 2010 feature a higher proportion of unrealized gains, emphasizing the importance of assessing fund age and its potential impact on an overall portfolio. These differences across strategies and vintages underscore the significant spread between top and bottom-performing managers, which present both opportunities and risks for investors.

Across asset classes, spreads have consistently remained wide over industry history, suggesting that despite the growth of the industry, equity markets have not become more efficient by this measure. Certain strategies can exhibit a greater dispersion of returns across market cycles, offering substantial long-term return potential. This draws attention to the intricacies of portfolio management and underscores the critical role of thorough analysis and forward-looking decision-making to meet investment needs.

All Private Markets: Hamilton Lane’s definition of “All Private Markets” includes all private commingled funds excluding fund-of-funds, and secondary fund-of-funds.  

Credit: This strategy focuses on providing debt capital. 

Distressed Debt: Includes any PM fund that primarily invests in the debt of distressed companies. 

Growth Equity: Any PM fund that focuses on providing growth capital through an equity investment.  

Infrastructure: An investment strategy that invests in physical systems involved in the distribution of people, goods, and resources. 

Mega/Large Buyout: Any buyout fund larger than a certain fund size that depends on the vintage year. 

Natural Resources: An investment strategy that invests in companies involved in the extraction, refinement, or distribution of natural resources.  

Origination: Includes any PM fund that focuses primarily on providing debt capital directly to private companies, often using the company’s assets as collateral.  

Private Equity: A broad term used to describe any fund that offers equity capital to private companies.  

Real Assets: Real Assets includes any PM fund with a strategy of Infrastructure, Natural Resources, or Real Estate.  

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.  

SMID Buyout: Any buyout fund smaller than a certain fund size, dependent on vintage year. 

Venture Capital: Venture Capital incudes any PM fund focused on any stages of venture capital investing, including seed, early-stage, mid-stage, and late-stage investments. 


April 3, 2024

Loss Ratio of Realized Buyout Deals
% of Deal Count

What Condition Are Your Positions In?

In this week’s chart, we look at the proportion of deals in the buyout asset class that were either held below cost or at a write-off throughout the last 20 years.

We found the average loss ratio (the number of deals held below cost or at a write-off over the total number of deals in the given year) over the 20-year time period to be 22% on a deal level. However, this loss ratio can vary greatly from regional exposures, sectors, vintages and whether investments occur on a deal level, or fund or fund-of-fund level.

Manager skill, economic conditions during acquisition, exits and exit opportunities can significantly impact the performance of buyout deals.

So, should investors just count their losses? While recent periods have seen lower-than-average total loss ratios, it’s important for investors to reduce the idiosyncratic risk that individual deals could have by diversifying across a number of deals, regions, sectors, vintages and managers.

Definitions
Corporate Finance/Buyout - Any PM fund that generally takes control position by buying a company. 



March 28, 2024

NAV in Fully Invested but Unrealized Buyout Funds
Funds >70% Deployed with DPI < 0.1x

Why Do You Build Me Up?

Buyout has experienced tremendous growth over the years, especially since the turn of the new decade. This week, we compare the growth of all buyout funds to the portion of such funds that managers have deployed but are still waiting to distribute back to investors. We define the latter sample of funds as those with >70% deployed but with DPI <0.1x. A low DPI suggests that the investments made by the fund have not yet been realized.  

Buyout, like many other private market asset classes, has seen growing demand from investors with record fundraising figures in 2021. Fundraising since then has been more challenging, albeit still far above long-term averages. Deal activity around this time also hit a record amount which meant increasing many funds’ deployment speeds into private markets. This has also since been challenged with quickly changing market conditions. Adding to this, exit activities have been sluggish: Holding periods have increased, IPO markets have remained muted and M&A markets have slowed. All of these factors reduced the pace at which capital was distributed back to investors. This drives the build-up in the share of NAV occupied by “fully invested but unrealized” funds. 

However, it is also important to note that recent years’ deal activities will take time to realize and distribute back; the investment time horizon in this asset class spans across multiple years and requires patient capital. That patience may pay off with record distributions (in absolute terms) if deal activity thaws in 2024.  So, it is most important for investors to stay diversified across managers, vintages and sub-strategies to reduce volatility and maximize the potential to reach target returns.   

Corporate Finance/Buyout - Any PM fund that generally takes control position by buying a company. 


March 21, 2024

Growth of $1

$1 for Your Thoughts

Adding private markets to a portfolio can bring diversification benefits, improve risk-adjusted performance and provide access to a greater investable universe compared to public capital markets. Using a "60/40" stock-bond portfolio as a benchmark, we track the growth of $1 of a mature, diversified private markets portfolio and a “traditional” portfolio with a 45% private markets allocation from 1Q’2013 to 2Q’2023. The private markets allocation encompasses a diversified mix of private markets strategies, inclusive of private equity, private credit and private real assets.

The outcome underscores the potential of a private markets-enhanced portfolio to generate superior returns across diverse macroeconomic landscapes. Notably, the 45% private markets-allocated public portfolio has yielded a remarkable 143% cumulative return since inception, surpassing the 78% yield of the 60/40 public portfolio. This is a staggering wealth creation gap for investors who are able to maintain a substantial private markets exposure.



March 14, 2024

Buyout Spread of Net IRR by Fund Size
Vintage Years: 2000-2020

Does Fund Size Matter?

Breaking out buyout returns by fund size reveals several key observations that might shape how investors allocate capital. On the smaller end (<$1B) we observe the greatest dispersion of outcomes within the peer set. This is likely attributable to small fund managers having emerging backgrounds (often with a short or unproven track record) and running more concentrated portfolios. We believe mid-market funds offer an attractive balance of risk and return: Those funds have less downside than smaller peers by virtue of slightly more diversification but can still capitalize on niche opportunities. In contrast, larger funds tend to demonstrate a narrower dispersion of returns, likely because they are generally more diversified across sectors, and often contain more deals.

We believe the mid-market opportunity offers the best experience for most investors, given the slightly higher average return, lower downside dispersion, and ample upside for skilled fund pickers to differentiate themselves. A core mid-market exposure can be complemented with exposures to small, specialist funds in niche sectors. Larger funds can be an attractive option for investors seeking a diversified exposure through a single commitment. Investors may also find added comfort in larger funds during market headwinds given the lower risk profile. Although the median returns across all fund sizes are similar, each have a slightly different risk profile that investors should be cognizant of when crafting a portfolio strategy.

Corporate Finance/Buyout: Any PM fund that generally takes control position by buying a company.


February 29, 2024

Private Equity NAV in Funds > 10 Years Old

The Zombie Fund Era

The NAV trajectory of private equity funds in the last five years has generated concern about a shift in the private equity landscape. A prevalent perception suggests a surge in capital residing within "zombie" funds, loosely defined as funds that hold assets well past their intended life cycle with little hope of exiting those assets. This week we examine the NAV in funds 10+ year old funds, as a proxy for so-called “zombie fund” NAV.

While the absolute dollar value of such funds has increased, this is partly attributable to the industry's overall growth. It's essential to contextualize this increase within the broader landscape of the private equity sector. As a percentage of total NAV, 10+ year old funds reached their zenith between 2016 and 2018, largely influenced by funds originating during the Global Financial Crisis era. Since then, the landscape has witnessed robust fundraising and increased investment activity, resulting in a notable decrease in the share these elder funds occupy in the average LP portfolio. That is welcome news for most LPs.



February 22, 2024

Sector Composition of Middle-Market Buyout Funds
By Count

Navigating Middle-Market Investments

A common question we hear from LPs is how fund size and sector, as it pertains to portfolio construction, should take part in the allocation conversation. We believe that, for most investors, middle-market funds offer the best risk and return trade off, and offer a deep opportunity set.

The sector allocation of these middle-market firms, in aggregate, has experienced notable shifts over time. Noteworthy trends include a discernible increase in emphasis on information technology-related sectors, coupled with a relative decline in consumer discretionary sectors. This evolution reflects the dynamic nature of market conditions and the varying returns generated by different sectors. It's evident that middle-market GPs often concentrate on just a few sectors, a strategic choice that aligns with their expertise and maximizes returns. Consequently, LPs engaging with middle-market funds should carefully consider these sector preferences when constructing their portfolios, recognizing the potential impact on overall fund performance. This nuanced approach to portfolio construction is essential for LPs seeking to navigate the evolving landscape of middle-market investments.

Corporate Finance/Buyout – Any PM fund that generally takes control position by buying a company.   


February 15, 2024

Total Exposure by Strategy
% of NAV + Unfunded

Turn of the Millennium

Private markets have undergone tremendous growth since the turn of the millennium, expanding their reach into new strategies like credit and infrastructure. This week we look at both the growth of the asset class and total exposure by strategy since 2000.

While private markets have grown rapidly since 2000, we can’t forget that they are still very small relative to the MSCI World. From a strategy perspective, private markets were dominated by equity in 2000, which encompassed 80% of all private market exposure. However, over the past decade credit, infrastructure and natural resources have taken more market share, which has remained consistent over the past two timeframes (though keep in mind the size of the total pie has grown!). What does this mean for investors? It means more choices available to them, a positive thing for those willing and able to invest the time and resources to sift through those choices.

Strategy Definitions 

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. 

Mega/Large Buyout – Any buyout fund larger than a certain fund size that depends on the vintage year. 

Natural Resources – An investment strategy that invests in companies involved in the extraction, refinement, or distribution of natural resources.  

Real Estate – Any closed-end fund that primarily invests in non-core real estate, excluding separate accounts and joint ventures. 

SMID Buyout – Any buyout fund smaller than a certain fund size, dependent on vintage year. 

VC/Growth – Includes all funds with a strategy of venture capital or growth equity. 

Index Definitions 

MSCI World Index – The MSCI World Index tracks large and mid-cap equity performance in developed market countries. 



February 8, 2024

15-Year Strategy Returns & Volatility
Bubbles Sized by NAV

The Tradeoff Between Risk & Return

Risk versus return: a constant tradeoff that investors look to while determining allocation percents. Here we look at the 15-year annualized returns for various private markets assets classes compared to their annualized de-smoothed volatility (a better estimator of “true” risk). The bubbles are sized according to their total industry net asset value.

Over the last 15 years, equity strategies have offered more premium returns, with buyout lower on the risk spectrum than other equity strategies. Growth equity, however, can help offer higher returns with only slightly more risk than buyout offers. Credit exhibited the lower volatility expected of that strategy, though it did not yield returns as comparable to equity. Over this timeframe, real estate is heavily influenced by the GFC-era funds. We’d expect the real estate volatility measure to continue to come down as we shift further from that timeframe. Overall, it’s important for investors to understand the risk-return tradeoffs each strategy can have and use that information during portfolio allocations to layer multiple strategies to get the risk-return profile desired of the portfolio.

Credit – This strategy focuses on providing debt capital. 

Distressed Debt – Includes any PM fund that primarily invests in the debt of distressed companies. 

EU Buyout – Any buyout fund primarily investing in the European Union. 

Growth Equity – Any PM fund that focuses on providing growth capital through an equity investment.  

Infrastructure – An investment strategy that invests in physical systems involved in the distribution of people, goods, and resources. 

Natural Resources – An investment strategy that invests in companies involved in the extraction, refinement, or distribution of natural resources.  

Origination – Includes any PM fund that focuses primarily on providing debt capital directly to private companies, often using the company’s assets as collateral.  

Private Equity – A broad term used to describe any fund that offers equity capital to private companies.  

Real Assets – Real Assets includes any PM fund with a strategy of Infrastructure, Natural Resources, or Real Estate.  

Real Estate – Any closed-end fund that primarily invests in non-core real estate, excluding separate accounts and joint ventures. 

ROW Equity – Includes all buyout, growth, and venture capital-focused funds, with a geographic focus outside of North America and Western Europe. 

U.S. Mega/Large – Any buyout fund larger than a certain fund size that depends on the vintage year and is primarily investing in the United States. 

U.S. SMID – Any buyout fund smaller than a certain fund size that depends on the vintage year and is primarily investing in the United States. 

Venture Capital – Venture Capital incudes any PM fund focused on any stages of venture capital investing, including seed, early-stage, mid-stage, and late-stage investments. 



February 1, 2024

Asset Class IRR vs. PME Spread
By Vintage Year

Different Strategies, Same Outperformance: IRR vs. PME Spread

Different asset classes can have very different return profiles, but outperformance remains a focal point regardless of strategy. This week’s chart shows the pooled IRR versus Public Market Equivalent (PME) spread by vintage year for each asset class. The public index used for each PME differs by asset class to better serve as an appropriate benchmark for each. Overall, across strategies, private markets tend to outperform their public PME. We’ve seen that to be true especially in the past decade. While real estate struggled during the GFC, it has seen the largest relative outperformance against REITs since 2010 of all the strategies, averaging over 1000 bps of outperformance. Infrastructure and credit have been more muted since 2010 but still averaging a nearly 400 bps premium to their benchmark PMEs.

There has been relative consistency over the past decade of outperformance across all strategies. While return profiles differ across asset classes, the historical spreads can help choose appropriate benchmark premiums across various asset classes.

Corporate Finance/Buyout – Any PM fund that generally takes control position by buying a company.   

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.  

Real Assets – Real Assets includes any PM fund with a strategy of Infrastructure, Natural Resources, or Real Estate.   

Other: 

PME (Public Market Equivalent) – Calculated by taking the fund cash flows and investing them in a relevant index. The fund cash flows are pooled such that capital calls are simulated as index share purchases and distributions as index share sales. Contributions are scaled by a factor such that the ending portfolio balance is equal to the private equity net asset value (equal ending exposures for both portfolios). This seeks to prevent shorting of the public market equivalent portfolio. Distributions are not scaled by this factor. The IRR is calculated based on these adjusted cash flows.  


January 25, 2024

Periodic Table of Gross Returns
Sector Median Gross IRR by Deal Year

It’s Not Periodic Performance: Sector Allocation Can Drive Return Potential

Sector allocation can be a critical driver of private equity returns. This rather colorful chart shows median performance by sector and vintage year. Across sectors and deal vintages, gross returns have proven attractive, with only one case of a negative returning sector. Even the sectors that had been consistently at the bottom (such as energy & utilities) have recently shifted to some of the best performing sectors in recent deal years. There has been no sector that is always in the same location on the periodic table. Even sectors that have remained lower on the table have shown positive performance. The average return across all deals has remained strong, consistently nearing the mid-20 percent range. The returns have remained healthy year over year, with no evidence of performance declining.

Co-investors take note: Sector allocation should be another element to consider when building a portfolio.



January 18, 2024

Buyout IRR vs. PME
By Vintage Year

Clocking in Ahead: Buyout IRR Outperforms Global Equities

We’ve looked at buyouts in aggregate over various time horizons before, but one question remains: Are there only certain vintages driving the outperformance while others underperform? This week, we examine the pooled buyout IRR by vintage year compared to the MSCI World Private Market Equivalent (PME). While some bars show higher absolute returns than others, one thing has remained consistent: Over the last 22 vintages buyouts have outperformed global equities in every vintage. They have also done so quite handedly, outperforming with an average margin of 940 bps across vintages. Regardless of economic cycle or vintage age, buyouts have continued to show strong performance, both standalone and compared to their relevant PME. 

This consistent historical outperformance can help investors when choosing an appropriate benchmark and premium to compare returns to and suggests that it’s a good time for new investors to consider an allocation to the private markets for the consistent premium that we’ve historically seen.

Corporate Finance/Buyout – Any PM fund that generally takes control position by buying a company.  

Index Definitions: 

MSCI World Index – The MSCI World Index tracks large and mid-cap equity performance in developed market countries.  

Other: 

PME (Public Market Equivalent) – Calculated by taking the fund cash flows and investing them in a relevant index. The fund cash flows are pooled such that capital calls are simulated as index share purchases and distributions as index share sales. Contributions are scaled by a factor such that the ending portfolio balance is equal to the private equity net asset value (equal ending exposures for both portfolios). This seeks to prevent shorting of the public market equivalent portfolio. Distributions are not scaled by this factor. The IRR is calculated based on these adjusted cash flows. 



January 11, 2024

Worse Comes to Worst
Highest 5-Year Annualized Performance

Lowest 5-Year Annualized Performance

Measuring Risks: Public vs. Private Market Tradeoffs

Market volatility is an inevitable consequence of investing, but just how bad is bad when the markets take a turn for the worse? This week we examine both the lowest and the highest annualized five-year returns across various private market strategies as well as comparable public indices. Impressively, we see positive returns for developed markets buyout, credit and infrastructure, even in the worst-case scenario. Public equity and credit strategies exhibited more downside risk, generating negative returns in their worst-case scenarios. Private real estate and private natural resources historically have had negative worst-case returns but still experienced smaller losses than their public benchmarks.

Switching to the highest annualized five-year returns, private markets unsurprisingly posted impressive historical performance in the “best-case scenario” with the majority of returns exceeding 20%. While VC/Growth had the lowest worst case, the data shows the massive upside potential in that strategy as well, which can be achieved with proper manager selection. Overall, looking at the worst-case scenarios can be a useful indicator of risk in an asset class where risk is hard to measure. This would appear to suggest the downside risk is lower than the relative public benchmarks while also showing a higher upside potential. We think that is a good tradeoff for the private markets!

Corporate Finance/Buyout – Any PM fund that generally takes control position by buying a company. 

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. 

Natural Resources – An investment strategy that invests in companies involved in the extraction, refinement, or distribution of natural resources.  

Private Equity – A broad term used to describe any fund that offers equity capital to private companies.  

Real Assets – Real Assets includes any PM fund with a strategy of Infrastructure, Natural Resources, or Real Estate.  

Real Estate – Any closed-end fund that primarily invests in non-core real estate, excluding separate accounts and joint ventures. 

VC/Growth – Includes all funds with a strategy of venture capital or growth equity. 

Index Definitions 

BofAML High Yield Index – The BofAML High Yield index tracks the performance of below investment grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market.  

Credit Suisse Leveraged Loan Index – The CS Leveraged Loan Index represents tradable, senior-secured, U.S. dollar-denominated non-investment grade loans. 

DJ Brookfield Global Infrastructure Index – The DJ Brookfield Global Infrastructure Index is designed to measure the performance of companies globally that are operators of pure-play infrastructure assets.  

FTSE/NAREIR Equity REIT Index – The FTSE/NAREIT All Equity REIT Index tracks the performance of U.S. equity REITs.  

MSCI World Energy Sector Index – The MSCI World Energy Sector Index measures the performance of securities classified in the GICS Energy sector. 

MSCI World Index –The MSCI World Index tracks large and mid-cap equity performance in developed market countries. 


January 4, 2024

15-Year Asset Class Performance
Annualized Time-Weighted Return as of 6/30/2023

Return of the Premium? Charting Private Markets Performance

We all know that the private markets are a long-term asset class, so this week let’s focus on long-term returns. Here we’re showing 15-year asset class performance of the private markets against their closest public market comps. The green bars show that private markets are outperforming their benchmark index by more than 300 bps. The yellow bars show outperformance from 0-300bps and the red bars show where public markets are outperforming the private markets.

We’ll state the obvious here, but the data shows a lot of yellow and green. Yellow and green = outperformance almost entirely across the board, and in some cases quite substantially. The one exception to that would be what we’re seeing in real estate. That particular strategy is heavily influenced by GFC-era funds that weigh on longer-term performance. Overall, the long-term private market returns have historically generated meaningful return premiums over public benchmarks.

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. 

Natural Resources – An investment strategy that invests in companies involved in the extraction, refinement, or distribution of natural resources.  

Private Equity – A broad term used to describe any fund that offers equity capital to private companies.  

Real Assets – Real Assets includes any PM fund with a strategy of Infrastructure, Natural Resources, or Real Estate.  

Real Estate – Any closed-end fund that primarily invests in non-core real estate, excluding separate accounts and joint ventures. 
 

Index Definitions 


Barclays U.S. Corporate Aggregate Index – Tracks the performance of U.S. fixed rate corporate debt rated as investment grade. 

DJ Brookfield Global Infrastructure Index – The DJ Brookfield Global Infrastructure Index is designed to measure the performance of companies globally that are operators of pure-play infrastructure assets.  

Credit Suisse High Yield Index – The Credit Suisse High Yield index tracks the performance of U.S. sub-investment grade bonds. 

FTSE/NAREIR Equity REIT Index – The FTSE/NAREIT All Equity REIT Index tracks the performance of U.S. equity REITs.  

MSCI World Energy Sector Index – The MSCI World Energy Sector Index measures the performance of securities classified in the GICS Energy sector. 

MSCI World Index – The MSCI World Index tracks large and mid-cap equity performance in developed market countries. 

Russell 3000 Index – The Russell 3000 Index is composed of 3000 large U.S. companies as determined by market capitalization. 

S&P 500 Index – The S&P 500 Index tracks 500 largest companies based on market capitalization of companies listed on NYSE or NASDAQ. 


Other 

Time-weighted Return – Time-weighted return is a measure of compound rate of growth in a portfolio. 


December 28, 2023

Private Equity IRR vs. PME Spread
Vintage Years 2016-2020

Tug of War: Private vs. Public Markets

While absolute performance has been volatile recently, we like to view private equity returns on a public market-relative basis, as that tends to provide more context for returns. This week, we examine the spread between private equity since-inception IRR and their public market equivalents (PMEs). We’ve looked at since-inception returns for 2016 – 2020 vintage years, as these were the funds that drove private market performance prior to the drawdown that began in 2022, and we’ve compared each private equity strategy against an MSCI World PME for each quarter since Q4 2021. A positive spread indicates the strategy is outperforming its PME. 

Here's the bottom line: Relative performance, especially for buyout funds, rose during 2022. That may seem counterintuitive, but in periods of volatility, historically public markets fell more sharply than private equity. Venture capital and growth equity, however, saw less of an uptick in their return premium given those strategies experienced larger markdowns. But volatility works both ways and public markets rebounded more sharply. In 2023, public markets moved up more sharply than private markets, indicating a closer spread in performance. 

Corporate Finance/Buyout – Any PM fund that generally takes control position by buying a company. 

Growth Equity: Any PM fund that focuses on providing growth capital through an equity investment.  

Private Equity – A broad term used to describe any fund that offers equity capital to private companies.  

Venture Capital – Venture Capital includes any PM fund focused on any stages of venture capital investing, including seed, early-stage, mid-stage, and late-stage investments. 

Index Definitions: 

MSCI World Index – The MSCI World Index tracks large and mid-cap equity performance in developed market countries. 


December 21, 2023

Private Credit Median Net IRR by Vintage Year Group
By Fund Age in Quarters

Does Private Credit Pacing Deserve a Rethink?

Private credit has shown consistency in performance across vintages. This is true for both end-of-day returns as well as the J-curve (or lack thereof). Here we look at the J-curve of private credit median net IRR by vintage grouping. There has been little variance in the vintage groupings throughout their life cycle. The asset class has historically shown resilience in keeping the time to break the J-curve and the depth of the J-curve low. Additionally, we see that most vintage groupings have achieved their end-of-day return fairly quickly and with a tighter band of end-of-day returns throughout vintages. This shows a lot of historical consistency for this asset class and could make the argument that, with less variance in vintages, consistent commitment pacing might not be as crucial to private credit as we see with other strategies.

Private Credit – Any fund that focuses on providing debt capital

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