Fundraising is like a box of…ice cream?
Let’s talk ice cream! Given his druthers, my father would eat ice cream for three meals a day. I’m no different, although modern science and pesky things like lipid panels suggest this is ill advised. But I digress…
Why ice cream? Well, if you know us you know we love an analogy. And in searching for something to appropriately and simultaneously capture the three distinctly different dynamics of real estate, infrastructure and natural resources, I landed on ice cream. Or more specifically, Neapolitan ice cream. Before the days of fancy Ben & Jerry’s flavors sold in pints, Neapolitan by the gallon box was a freezer staple. But there was only one problem — strawberry. Tucked neatly alongside the other two flavors, strawberry was usually in much lower demand and consumed even more slowly.
Seem like a stretch? Indulge me: Fundraising and investor activity in real assets is like that gallon of Neapolitan. Three distinctly different dynamics are dominating the landscape. Looking at real assets exposure between 1999 and 2021, we see growth in real assets overall as a percentage of investors’ portfolios. In fact, it’s grown by 25.3% annually, outpaced only by growth in private credit. But since the Global Financial Crisis, and even more so in recent years, different patterns have emerged among the three sub-asset classes. And sorry, natural resources, as far as fundraising is concerned, at least for now, you’re strawberry.
Closed-end fund fundraising by strategy
USD in Billions
Let’s look more closely at the dynamics:
Real Estate: Vanilla
Looking at real estate, it continues to attract capital and is in relatively steady demand. A bit like vanilla — always there, always consumed, but its audience isn’t necessarily expanding by leaps and bounds. It continues to push forward, with relatively few changes in the fundraising landscape.
One trend that we do see, however, is more and more specialist funds being raised to focus on specific markets and/or property types. This has been driven by investor desire to take a more active role in weighting their real estate allocations, no doubt being influenced by the increasing dispersion of returns between property types. As shown, in more recent periods, both multifamily and industrial have shown outperformance relative to other property types.
NPI Performance by Property Type
Infrastructure, by contrast, has been growing steadily. In 1999, infrastructure comprised only about 1% of private markets portfolios. By 2021, this had grown almost eight-fold (or “octupled” as we like to say). Part of this interest, particularly in more recent quarters, has been the desire for investors to seek both an inflation hedge and potential downside protection in a volatile market. As shown, infrastructure tends to outperform during periods where inflation is above 4%.
Average Performance During Periods of Elevated Inflation (>4%)
1999 - TTM Q3 2021
Emergence of Middle Market Infrastructure
But while the amount of capital raised in the asset class has increased more quickly than other types of real assets, the actual number of funds in market has returned to levels last seen around 2015. Huh?
Yes, the mega funds have arrived. From a macro standpoint, this demonstrates a healthy appetite for infrastructure exposure. But as managers have increasingly focused their attention on larger deals due to larger funds, transactions over $2.5 billion account for only 5% of the market by number.
This has given way to the other trend we see in infrastructure — emergence of middle market-focused funds. Perhaps taking a page from their private equity brethren or perhaps in search of higher returns, but recognizing an opportunity, more managers have created funds to focus on these ‘smaller’ transactions. We expect this trend to continue as investors seek to balance the exposures within their infrastructure portfolios.
Natural Resources: Strawberry
As mentioned, natural resources fundraising has retreated. This has been led by an obvious contraction of fundraising in energy, primarily upstream E&P-focused funds, due to volatility in the sector and possibly also related to ESG-related concerns. However, there has also been a contraction among funds focused on agriculture and timber, likely led by a reduction in returns within these sectors over the last decade. And natural resources as a sub-asset class tends to show lower overall returns than infrastructure or real estate, but with similar or higher dispersion of returns (read: not a good look).
Dispersion of Returns by Strategy
Vintage Years: 2000 - 2019; Ordered by Spread of Returns
But don’t ignore natural resources all together. Some investors have begun to consider the asset class once again, particularly within upstream energy, identifying the fact that reduced competition can provide opportunities for the brave. And let’s face it, although strawberry sometimes looked a little odd sitting there next to the monochromatic favorites, it was still pretty tasty.
Final Note on Investor Sentiment
Turning to some of our favorite metrics of dry powder and unfunded commitments as a proxy for investor sentiment, we see similar trends among the three sub-assets classes. Infrastructure has had the steepest increases in both metrics, followed by real estate. In both these cases, both dry powder and unfunded commitments have grown for the most part in tandem over the observed period. On the other hand, dry powder in natural resources has stagnated. Even worse, unfunded commitments to natural resource funds have steadily decreased since 2015, suggesting a pullback from the sub-asset class.
USD in Billions
USD in Billions
USD in Billions
Request a copy of the 2022 Real Assets Market Overview.
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 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.
This presentation has been prepared solely for informational purposes and contains confidential and proprietary information, the disclosure of which could be harmful to Hamilton Lane. Accordingly, the recipients of this presentation are requested to maintain the confidentiality of the information contained herein. This presentation may not be copied or distributed, in whole or in part, without the prior written consent of Hamilton Lane.
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 (Germany) GmbH is a wholly-owned subsidiary of Hamilton Lane Advisors, L.L.C. Hamilton Lane (Germany) GmbH is authorised and regulated by the Federal Financial Supervisory Authority (BaFin). In the European Economic Area this communication is directed solely at persons who would be classified as professional investors within the meaning of Directive 2011/61/EU (AIFMD). Its contents are not directed at, may not be suitable for and should not be relied upon by retail clients.
Hamilton Lane (UK) Limited is a wholly-owned subsidiary of Hamilton Lane Advisors, L.L.C. Hamilton Lane (UK) Limited is authorised and regulated by the Financial Conduct Authority (FCA). In the United Kingdom 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 July 27, 2022