Once considered speculative, private markets continue to evolve, especially as the structural hurdles for ultra-high-net-worth (UHNW) investors have come down. Still, no matter the level of expertise or market environment, investors and advisors who understand this segment of the market will be in a much better position to make informed and comprehensive decisions about their portfolios.
This Truth Revealed series explores private market investing with three objectives in mind:
- To dispel some of the incorrect notions about private markets
- To help investors and advisors better understand private markets’ potential to outperform public markets
- To assist investors and advisors as they consider how private markets investing may align with their investment objectives
The private markets universe is less concentrated and larger today than any other time in history.
What you should know
- Private equity has experienced exponential growth over the last several decades.
- The universe of private equity investors has increased, particularly among the UHNW segment.
- The number of privately held companies in the U.S. dwarfs that of public companies, which translates to considerably more opportunities for private market investors.
Global participation in private markets has swelled from $600 billion in AUM in 2000 to $9.7 trillion in AUM in 2022.
Over the last several decades, there’s been an explosion in private market investments opportunities. At the same time, there’s been a deluge of incorrect information circulating in investor circles. This may stem from the fact that, for many decades, only Institutional investors and very UHNW investors had access to private markets. Furthermore, this asset class had complex regulatory and structural hurdles. This left a large swath of investors and advisors on the sidelines, many of whom grew skeptical about the potential residing in private markets.
Further, there’s often confusion about what “private markets” actually means. The largest segment of private markets is private equity, which includes buyout, venture capital and growth equity strategies. Because private equity represents such a significant portion of private market activity, they are sometimes used interchangeably – which has unwittingly muddied the waters.
Still, there is much more to private markets than private equity. For instance, the next-largest slice of the private markets pie is private credit, followed by real estate and infrastructure.
Private Markets NAV
By Geography and Strategy
As an asset class, an important turning point for private equity was the Global Financial Crisis, which caused investors considerable pain even though private equity experienced unprecedented growth. This sounds counterintuitive, we know. But remember that between October 2007 and March 2009 the stock market dropped by more than 50%, and investors were losing faith in public markets, real estate and hedge funds. During the same period, private equity-backed firms were continuing to attract investors and performed remarkably well, especially in comparison to their public market counterparts.
Private market AUM grew to $9.7 trillion in 2022 thanks to an increasing number of private equity funds and assets, not to mention a larger universe of investors keen on testing the waters. Today, there are also fewer concerns over investing in private markets, such as asymmetric information and manager risk. This, in turn, has increased investor appetite for private equity – especially among those investors who are looking to outperform the public markets but previously thought private equity was out of reach.
As we look more closely, it’s easy to see why private equity investing is on an upward trajectory. With more than 95,000 private companies in existence globally with annual revenues over $100 million, private equity investment opportunities abound. What many people may not realize is how this compares to the universe of public companies: As of February 2022, there were 95,000 private companies with $100 million+ revenues versus 10,000 public companies with the same annual revenues.
The number of private companies dwarfs the number of public companies.
Public and Private Companies LTM revenue > $100M
We believe that private market growth – both in size and revenue – will continue. We also believe that HNW investors would be wise to continue educating themselves about private equity and how it may align with their investment objectives.
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.
Fund-of-Funds (FoF) – A fund that manages a portfolio of investments in other private equity funds.
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.
Mezzanine – Includes any PM fund that primarily invests in the mezzanine debt of private companies.
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.
ROW – Any fund with a geographic focus outside of North America and Western Europe.
ROW Equity – Includes all buyout, growth, and venture capital-focused funds, with a geographic focus outside of North America and Western Europe.
Secondary FoF – A fund that purchases existing stakes in private equity funds on the secondary market.
U.S. & EU Growth – Includes all growth equity funds investing in North America and Western Europe.
U.S. & EU VC – Includes all venture capital funds investing in North America and Western Europe.
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.
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 license 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. The PDS and target market determination can be obtained by calling 02 9293 7950 or visiting our website www.hamiltonlane.com.au.
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 May 31, 2023