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.
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 (UK) Limited is a wholly-owned subsidiary of Hamilton Lane Advisors, L.L.C. Hamilton Lane (UK) Limited is authorized and regulated by the Financial Conducts Authority. In the UK this communication is directed solely at persons who would be classified as a professional client or eligible counterparty under the FCA Handbook of Rules and Guidance. Its contents are not directed at, may not be suitable for and should not be relied upon by retail clients.
Hamilton Lane Advisors, L.L.C. is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 in respect of the financial services by operation of ASIC Class Order 03/1100: U.S. SEC regulated financial service providers. Hamilton Lane Advisors, L.L.C. is regulated by the SEC under U.S. laws, which differ from Australian laws.
Any tables, graphs or charts relating to past performance included in this presentation are intended only to illustrate the performance of the indices, composites, specific accounts or funds referred to for the historical periods shown. Such tables, graphs and charts are not intended to predict future performance and should not be used as the basis for an investment decision.
The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice, or investment recommendations. You should consult your accounting, legal, tax or other advisors about the matters discussed herein.
The calculations contained in this document are made by Hamilton Lane based on information provided by the general partner (e.g. cash flows and valuations), and have not been prepared, reviewed or approved by the general partners.
As of December 5, 2020