Hamilton Lane (Nasdaq: HLNE), a leading global private markets investment management firm, has published its 2024 Market Overview. This year’s report offers a data-backed counter-narrative to several commonly held misconceptions about the private markets asset class.
The firm’s annual Market Overview is a comprehensive, data-driven review and analysis of private markets investment activity over the prior year. It features predictions for the year ahead, underscored by Hamilton Lane’s industry-leading database encompassing $18.9 trillion in assets and 52 vintage years.
The 2024 Market Overview addressed the following myths.
Myth: Private market valuations are inaccurate
It’s not the first time private market valuations have been criticised, but this past year’s skepticism toward how private markets value their holdings has been notable. There are a few reasons why we believe both the valuations are realistic and there is unlikely to be a downturn driven solely by inflated valuations today.
- Strong operational performance: As noted in the chart below, outperformance in 2022, along with the continued performance in 2023, is generally a simple matter of stronger revenue and EBITDA than public companies.
- Paths to revenue growth: Private equity’s historical operational outperformance is closely tied to better sector selection and a greater ability to create paths for operational growth, and the report found that GPs expect that to continue.
- Sales prices > valuations: The report also found that, again this year, managers tended to exit deals at a premium to carrying value.
Myth: The fundraising market is bleak
To be clear, private markets fundraising indeed remains challenged, however, the overall picture is more nuanced, with 2023 figures shaping up to be the seventh-largest fundraising year in history. The biggest funds performed the best and are expected to continue to dominate, according to the report. Also, Hamilton Lane’s Private Wealth Survey showed that nearly 75% of respondents plan to increase their allocation from the prior year. At a time when the institutional fundraising market is weak and there is a massive delta between the amount of capital GPs were seeking to raise and what they did raise, there will continue to be an even sharper focus on reaching the private wealth channel.
Myth: GP-led secondaries are terrible, and/or are just like co-investments (especially single-asset deals)
Using a buyout index as a proxy for co-investments (CI), the data shows that while returns between single-asset GP-leds and co-investments are similar (with a slight advantage to CI), the risk profile is quite different. Single-asset GP-led secondaries historically have a tighter return band, and much lower loss ratios than co-investments. This suggests that they may be lower-risk, albeit lower-returning, assets than other secondaries or co-investments – and as such, have an integral role to play in portfolios, according to the report.
Myth: A focus on sustainability will ruin future returns
One of the most hotly-debated myths is that sustainable investments sacrifice performance, which at one point in time might have been a justified stance. As illustrated below, sustainable investment trailed behind non-sustainable for much of the aughts and early teens, but the last five or six years have seen that trend change meaningfully. According to the report, deal-level returns – particularly relevant given 39% of sustainable investments are in the venture sphere – for sustainable and non-sustainable investments historically have virtually the same return profiles, suggesting that focusing on sustainable investments will not necessarily have material negative impact on future returns. The data showed the same pattern in funds, with those having a sustainable focus doing better more recently. In the future, Hamilton Lane predicts sustainable investing will become more mainstream as investors recognize that it does not inevitably result in sacrificed performance.
Mario Giannini, Executive Co-Chairman and author of the Market Overview, commented: “As new investors enter the asset class and we continue to navigate a broadly challenging economic climate in 2024, the need for data-oriented analysis becomes even more important. This year’s Market Overview finds that overall, private markets remain resilient, despite skepticism and nerves driven by slow fundraising. In our view, investors must get comfortable making hard decisions, and must be able to separate fact from fiction. That matters today more than ever.”
Definitions
- Internal Rate of Return (IRR) – IRR is the annual rate of growth that an investment is expected to generate. Mathematically, the interest rate that sets the net present value of all cash flows to zero.
- Time-weighted Return (TWR) – Time-weighted return is a measure of compound rate of growth in a portfolio
- TVPI – Multiple to measure cumulative returns, both realized and unrealized. TVPI is the ratio of current value of remaining investments of the fund plus total value of all distributions to date, relative to total amount of capital paid to date.
- MOIC (Multiple on Invested Capital) – The same mathematical definition as TVPI, except is typically a multiple of the investment commitment itself rather than what was paid in by the investor.