It’s Market Overview season at Hamilton Lane, so we thought it’d be fun to share a small highlight from this year’s presentation (coming soon to a city near you…). We like to think of this chart as our liquidity scorecard, which provides a snapshot of annual liquidity segmented by various private markets strategies.
We define the “liquidity ratio” as the ratio of distributions to contributions in a given calendar year. A liquidity ratio above the dashed lined (> 1.0x) is a good thing; it means that the strategy is returning more cash than it is calling. In other words, it is self-funding.
In reviewing the liquidity ratio by strategy, a few interesting trends appear. Buyout, which has been self-funding since the financial crisis, has started to dip below the 1.0x line over the last two years. Perhaps unsurprisingly, venture capital and growth equity, despite their recent run of gains in IRR, have not posted a liquidity ratio above 1.0x in any of the last five years. And absent a heroic fourth quarter of distributions, neither is on pace to do so this year either. Despite struggles earlier in the decade, lately, real estate has proven to be the strategy that has most consistently provided LPs with liquidity. In 2017 and 2018, credit was providing more cash than it was taking in and might just continue the trend in 2019. And juuuust making it into the liquidity party, infrastructure and natural resources just barely returned more cash than they took in thus far for calendar year 2019.
If you’re still with us, let’s now turn to the question of why the liquidity ratio for each strategy is trending a certain way. To illustrate this analysis, we’ve added dots for each strategy that show the weighted average age of NAV. Think of this as a measure of the maturity of each strategy. Given the mechanics of private markets fund investments, we would generally expect older portfolios to have a higher liquidity ratio than younger portfolios.
For buyout, we observe that the weighted average age of NAV has steadily declined since 2014, coinciding with the decline in liquidity ratios. Mature buyout funds have mostly sold down their large positions and new funds have raised substantial capital in recent years, injecting youth into portfolios. Accounting for those dynamics, it seems reasonable that the industry is experiencing a decline in buyout liquidity ratios. The opposite trend is occurring in credit: There, portfolios are generally getting older (although, in an absolute sense, they are still younger than equity portfolios), coinciding with a rise in the credit liquidity ratio.
So there you have it. Credit and real estate strategies seem to be the leaders of the pack for now, while buyout and venture capital and growth equity appear to have their work cut out for them. We’ll be keeping an eye on infrastructure and natural resources to see if they can continue returning more cash than they take in. For additional interesting private markets analysis, stay tuned for the release of this year’s Hamilton Lane Market Overview.
DEFINITIONS
- Buyout:
- Any private market fund that generally takes control position by buying a company.
- Venture Capital:
- Venture Capital incudes any private market fund focused on any stages of venture capital investing, including seed, early-stage, mid-stage, and late-stage investments.
- Growth Equity:
- Any private market fund that focuses on providing growth capital through an equity investment.
- 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.
- Real Estate:
- Any closed-end fund that primarily invests in non-core real estate, excluding separate accounts and joint ventures.
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As of December 5, 2020
