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.

September 12, 2024

All Private Markets Rate of Distribution

2024 Distributions Revisit Pre-2021 Era

We focus a lot on risk and return, but liquidity is another major consideration when thoughtfully constructing private market portfolios. In this week’s chart, we observe the rate of distribution across all private markets as the total amount of distributions as a percentage of NAV. Also shown are the annual amounts to illustrate the magnitude of distributions per year, demonstrating distribution activity in two ways. Investors experienced diminished distribution activity in 2023 compared to the record amounts in 2021 and 2022, and it is unlikely to see distributions of that magnitude based on 1H 2024.

Distribution rates, however, show some evidence of recovery from the all-time lows they saw in 2023, which was the lowest annualized rate of distribution over the past 10 years. This can be attributed to minimal exit activity during that year, but it appears to have begun picking up traction in the start of 2024. Still, the distribution pacing declines are more a function of NAV growth, rather than a massive decline in absolute distributions, as distributions continue to be on pace or exceed those of pre-2021 levels.

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.


September 4, 2024

All Private Equity 10-Year Rolling TWRs

Want Historically Premium Returns? See PE.

For this week’s chart, we explore 10-year annualized returns on a rolling basis. Over a long time horizon, private equity has bested listed equities over most 10-year periods and across various market cycles. In fact, when compared to the MSCI World index, private equity outperforms in every time frame. Even when taking into account the most recent period of public market volatility, private equity continues to substantially outperform.

Private equity outperformance is typically most pronounced during periods of mediocre or negative public market returns. This disparity arises more from the volatility in public markets than from the nature of private markets themselves. When public markets are strong, private equity's outperformance diminishes; in any other environment, it increases. Regardless of market volatility and market cycles, private equity continues to generate premium returns that investors cannot access from listed equities.

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

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

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

MSCI USA Small Cap Value Index – The MSCI USA Small Cap Index is designed to measure the performance of the small cap segment of the U.S. equity market. 

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

Volatility – Volatility is a statistical measure of dispersion of return, specifically standard deviation. 


August 29, 2024

Impact of Top and Bottom-Quartile Funds
All Private Markets, Net IRR by Vintage Year

When Saying "No" Can Add 2 – 3%

Top-quartile fund performance can be one of the many drivers in a private markets portfolio. However, there is also meaningful upside to avoiding bottom-quartile funds. Shown this week is the impact of top and bottom-quartile funds by vintage year for all private markets funds. It’s important to note that even without the top-quartile funds (dark blue), on a pooled IRR basis, private markets have still performed quite well.

That begs the question of how much alpha can be added by only selecting top-quartile funds. While this varies by vintage year, the chart illustrates that roughly 3-5% can be added by selecting top-quartile funds. That is a substantial premium that comes with good portfolio management. While everyone strives for the best of the best, what can be said of simply avoiding the bottom-quartile funds? Does that have as drastic of an impact to pooled performance? Not quite; however, roughly 2-3% can be added by avoiding bottom-quartile funds. In either scenario, the importance of portfolio management is evident and careful manager selection – knowing who to choose and avoid – can drastically impact returns.

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.


August 22, 2024

Cumulative Returns During a Crisis
Buyout vs. Global Equities Cumulative Returns

Will M&A Accelerate PE Performance in 2024?

A common question we hear among investors is what to expect from private equity during market crises and downturns. We’ve looked at a few significant market crisis environments: The dotcom bubble in the early 2000s as well as the Global Financial Crisis (GFC) and compared them to equity market drawdowns over 2022 and portions of 2023. During both the dotcom and GFC eras, the public market decline continued well past three quarters and took five to six years to reach breakeven. The downturns in buyout, however, were much more muted than those of the public markets. In addition to taking less of a hit, the private markets recovered sooner than public markets during both crisis periods.

At the start of 2022, we saw another market downturn, though much less severe than previous eras. Private markets once again showed more resilience and muted aspects, including breaking even prior to the publics. But there’s something noticeably different this time around: The sharp rebound in the public markets from 2023 through 1H 2024 has not yet been matched by the private markets. Perhaps a rebound in M&A activity will provide a boost to private markets... It is safe to say, however, that the downturn seen in 2022 is nothing like what we saw in the dotcom bubble or GFC era.

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

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


August 15, 2024

Sizing Considerations
Distribution of Portfolio Returns - 1 Fund Per Year

Distribution of Portfolio Returns - 10 Funds Per Year

Diversification: Increasing the Likelihood of Success

We’re celebrating Chart of the Week’s first anniversary with one of the charts you all found most interesting over the past year: the distribution of portfolio returns.

The goal of successful portfolio management is mitigating downside risk while creating the best chance of achieving your target returns. Diversification plays a major factor in that success. Here we see the return distribution of portfolios of varying levels of diversification by strategy. The first chart shows the distribution of returns for portfolios investing in one fund every vintage year. The second chart shows increasing the portfolio to invest in 10 funds each vintage. As you would expect, the dispersion of returns is wider for the more concentrated portfolio.

When the number of funds per year is increased from one to 10, the spread of returns tightens drastically. Credit and infrastructure have limited upside potential in this scenario, but they have the tightest dispersion and therefore greatest likelihood of achieving a set return. Narrowing the dispersion in any strategy increases the certainty of portfolio return, which reduces idiosyncratic risk. These figures do not imply optimal diversification but rather illustrate the impact of diversification in portfolios. Importantly, careful manager selection may also increase the likelihood of achieving target returns.

Corporate Finance/Buyout: Any PM fund that generally takes control position by buying a company.  
 
Credit: This strategy focuses on providing debt capital.  
 
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. 

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


August 8, 2024

Public vs. Private Company Universe 

Where $100+ Million Companies Thrive

This chart shows public and private companies with revenue greater than $100 million over the last 12 months. 

Private equity can represent a target-rich environment, the market potential of which studies show is larger compared to publicly traded companies. 

Globally, there are over 140,000 private companies with annual revenues over $100 million vs. approximately 19,000 public companies with the same annual revenues. 

This highlights the breadth of investment opportunities available in the private capital universe, where the opportunity set across different strategies, sectors and regions is likely to be much wider and more available than the public landscape. As such, we believe that private markets offer investors the unique potential to outperform and diversify their overall portfolio.



August 1, 2024

60/40 Portfolio

The New Allocation Blueprint

The 60/40 portfolio has long been the blueprint for a so-called “diversified” portfolio. A 60% allocation to public equity and a 40% allocation to bonds has been shown to provide some ballast and better potential risk-adjusted returns than a 100% public equity-only portfolio.

However, this has not always held true in all market environments. In fact, this may be the outdated diversified portfolio; the “new 60/40” investors are looking to more frequently now includes a mix of private assets as well.

This table shows the return and risk (standard deviation) outcomes of different allocation variations to private equity and private credit, scaling down public equity and bonds in the overall portfolio. Adding some private equity and private credit, we find there is an improvement in the long-term return, risk and Sharpe ratio when compared to the traditional 60/40 portfolio.

Credit: This strategy focuses on providing debt capital.

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

The Sharpe Ratio is the average return earned in excess of the risk-free rate per unity of volatility or total risk.


July 25, 2024

Buyout Deal Value Creation by Sector 

Buyouts: GPs Don't Extract Value; They Create It

How do certain sectors generate value for buyout deals? This is a question an investor might contemplate as they construct their buyout portfolios. Unlike public managers, buyout managers actively manage and add value to their portfolio companies by selecting those with strong growth potential and implementing transformative operational strategies.

This week, we outline the general trends of equity value creation across different sectors based on aggregate data from over 6,000 deals. Consumer staple deals generally rely less on value generated via EBITDA growth than multiple expansion and contain less debt at exit vs. other sectors. Financial services companies conversely see more value generated via EBITDA growth than they do from multiple expansion, generally speaking.

EBITDA growth remains the principal driver of total value creation across all sectors. EBITDA multiple expansion can be driven by passive market factors and through GP efforts to grow businesses. Debt paydown is the difference in net debt between the exit and acquisition period, which can shed light on a company’s debt management practices.

Contrary to buyout critics, this data demonstrates that GPs focus on enhancing fundamentals rather than relying on obscure financial engineering or gutting companies to extract value.

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


July 18, 2024

Dispersion of IRR Returns by Emerging and Established Managers
By Asset Class, Vintages 2010-2021

Emerging Managers' Masterstroke

Should you give a new manager a chance? For this week’s chart, we explore the case for adding emerging managers to private equity portfolios. We define an emerging manager as a GP who is raising a first, second or third institutional fund in their original fund series with fund sizes <$2B.

Observing the dispersion of returns and median IRRs for emerging managers, we note greater variance across private equity strategies. While median returns might be lower than their more established peers, top-quartile emerging managers offer the potential to generate exceptional returns. For investors able to navigate this higher- risk environment, identifying top performers offers attractive access to long-term relationships.

Emerging managers often manage smaller funds and target smaller, niche deals, giving them added flexibility to source deals in less competitive processes. For investors, they offer opportunities to diversify into new geographies and industries. Some emerging managers offer niche strategies that can complement more traditional strategies from established managers. Given the range of returns, having the skill set to identify top-quartile emerging managers is crucial.

DM Buyout – Includes any buyout fund that is primarily investing in developed markets of North America, Western Europe and Global 

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

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

Venture Capital – Venture Capital incudes any PM fund focused on financing startups, early-stage, late stage, and emerging companies or a combination of multiple investment stages of startups. 


July 11, 2024

Five Largest Infrastructure Funds as a % of Total Fundraising

Infrastructure SMIDs = Hidden Gems

In addition to the ballooning average fund size we’re seeing, fundraising concentration at the very top end of the spectrum has increased as well. Despite a challenging fundraising environment, the top five largest fundraises captured a staggering 80% of infrastructure capital raised through 2023, as seen in this week’s chart.

What does this mean for investors? The larger concentration of capital being allocated to fewer large-cap funds has led to higher competition for deals with enterprise values over $2.5 billion. As a result, we believe that lower and middle-market opportunities continue to be an attractive segment due to less competition from an increasing number of large and mega-cap funds which all compete for the same deals.   

Learn more in this highlight from our 2024 Real Assets Market Overview.

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


July 4, 2024

Infrastructure IRR vs. PME
By Vintage Year

Infrastructure’s Historical Outperformance? Check!

This week, we’re taking a look at private infrastructure. We continue to see value inmanager selection  in this space with top-half strategies adding several hundred basis points of outperformance across vintage years. Like all things in the  private markets, we see tremendous value in  portfolio construction and careful manager selection. Alpha or not, the asset class has outperformed the public markets every single vintage year since 2012, as seen in this chart.

Downside protection, attractive total returns, low volatility and the potential for additional alpha – what more can you ask for? How about inflation protection as well, because, why not? While the results aren’t fully tabulated yet, early indicators suggest that private infrastructure is checking off many of the boxes on this wish list, especially as we navigate the modern era’s first prolonged period of elevated inflation.

Learn more in this highlight from our 2024 Real Assets Market Overview.

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.  

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

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 off of these adjusted cash flows.  


June 27, 2024

Deal Leverage vs. Gross IRR 
Realized Deals from 2012 - 2022

Leverage ≠ Higher Risk, Lower Returns

This week we’re taking a look at a spectrum of private equity investments across their leverage multiple at acquisition and their exit IRR. A lot has been debated on the relationship of the two characteristics. We find, with this analysis, there has not been significant correlation between acquisition leverage multiple and performance. The data runs counter to popularly held beliefs that high leverage levels mean increased risk and lower returns.



June 20, 2024

Interquartile Range of IRR Across Funds
Vintage Years: 2010-2021

Sourcing Outsized Returns

This week we’re focusing on interquartile range of funds’ IRR that are bucketed into three implementation strategies across private equity.

The lowest interquartile range in returns is in secondary funds, highlighting its potential for relatively lower risk implied by lower dispersion in returns. More diversification and robust investment selection in co-investment funds are particularly important to be prudent about and are implied by the highest interquartile range vs. primaries or secondaries.

It is important to note that this is not considering the top and bottom deciles of the dispersion. Although the interquartile range for co-investment funds is higher, the top decile could also be higher, implying both higher expected return and risk. Co-investments also typically show a longer tail on the right of their return distribution, emphasizing the potential for strong, outsized returns if investors have capable sourcing, investment selection and risk management skills.

Co/Direct Investment Funds: Any PM fund that primarily invests in deals alongside another financial sponsor that is leading the deal.

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


June 13, 2024

Duration by Fund Strategy
By Number of Years, For Liquidated Funds

How Long Should You Stay Invested?

Understanding the duration of an investment can be helpful in assessing the illiquidity of closed-end primary funds. In this week’s analysis, we calculate “implied duration” for different private markets strategies. In other words, how much time, on average, is capital at work for a private markets fund?

Infrastructure and credit origination funds demonstrate shorter implied durations – often less than four years. This expedited recuperation period can indicate lower liquidity risk exposures for investors, as capital is returned more swiftly. In contrast, higher risk and returning strategies such as venture capital see an extended duration as their underlying assets take longer to generate and return value.

Understanding the duration of illiquid assets is vital for making proactive portfolio changes that align with an investor’s strategic goals and capital needs. This nuanced approach to portfolio construction is important for LPs seeking to balance their portfolio’s return, risk and liquidity across private market investments.

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

Credit: This strategy focuses on providing debt capital. 

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.  

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. 

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. 


June 6, 2024

All PE Average 4Y Excess Return By S&P 500 Return Regime

Does PE Performance Reign Supreme?

In the spirit of our 2024 Market Overview’s theme Hamlet, we beg the question: To invest or not to invest in the S&P 500? To aid Hamlet’s decision, this week's chart highlights the degrees to which average private equity (PE) four-year rolling performance surpasses S&P returns. Regardless of your expectations for interest rates over the next few years, historical performance indicates that private equity has outperformed public markets. In other words, regardless of who was the President, Fed Chair, or winner of the World Series for the past 30 years, private equity performance has historically rewarded investors with lofty premiums. Talk about consistency!

Private equity outperformance is historically most pronounced during periods of mediocre or negative public market returns. This disparity arises more from volatility in public markets than from the nature of private markets themselves. When public markets are strong, PE's outperformance diminishes; in any other environment, it historically increases. This is because PE tends to be conservative in its valuation practices. GPs might avoid inflating expectations and provide a cushion in their valuations when public markets are rising.

We believe that PE performance will continue to outpace public markets due to key factors such as governance and the alignment of investor interests. PE boards are structured to align with management teams, focusing on maximizing business value. Without the pressure of quarterly earnings calls, management can make medium and long-term investments rather than concentrating solely on short-term operations. That’s a tough act for public markets to follow.

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

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


May 30, 2024

Dispersion of Gross IRRs
Realized Deals Only, Deal Vintages 2010 - 2020

Busting Sustainability Myths

This week, we continue with the theme of sustainability. This time, we're showing returns of underlying sustainable deals from the same research as last week. As a reminder, for this analysis we used the UN SDGs for what constitutes a sustainable investment.

What we find is that the return differential is fairly similar across sustainable and non-sustainable deals. This fits with our overall view that sustainable investing will become mainstream and there won’t be a different portfolio set called “sustainable funds.” As investors recognize that sustainable deals do in fact have quite similar return profiles, we believe they will become more common in portfolios over time. There is no evidence that future returns will be reduced by any focus on sustainable investing.

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.


May 23, 2024

The Sustainable Addressable Market within Private Markets 
Addressable Market by Asset Class and Sectors

Sustainability Data Challenges Assumptions

This week, we’re switching gears to sustainability. We know...mere mention of the word “sustainability” and we run the risk of moving into an unwinnable debate, but bear with us. Sustainabilityas it relates to investment choice, is what we’re focusing on today.

One of the arguments against it relies on the assumption that investments predicated on sustainability are, by definition, lower-returning investments than those that are not. We wanted to test the data ourselves by looking at the difference in addressable market between sustainable and non-sustainable funds. For this analysis, we used the UN SDGs to determine what constitutes a sustainable investment. We then compared the constituent parts of sustainable investments to those of all private equity.

A large proportion, more than one-third, of sustainable fund opportunities are in the venture sphere. That percentage is more than double venture’s overall market share. This is an important takeaway to keep in mind as you build a sustainable portfolio in today’s environment. Additionally, healthcare investments comprise more than half of sustainable assets and triple what that sector represents in the private markets universe. This contrast demonstrates that sustainable investing could require a portfolio construction shift, and that's why data matters.

Look out for next week’s chart of the week when we expand this research comparing sustainable and non-sustainable return dispersions.

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

Credit: This strategy focuses on providing debt capital. 

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.  

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

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 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.

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