Private Markets

i'm michael steingold a senior research analyst on the private markets desk at russell investments based here in london with me today are two investment professionals uniquely well positioned to talk private markets they have both macro and micro visibility that is they see in real time across asset classes in private markets so private equity private debt real estate infrastructure and also individual deals happening within these asset classes uh drew sharp is head of global investment strategy at hamilton lane where he also serves as co-head of direct credit uh he's based in their philadelphia headquarters and then vic leverette is the head of alternative investments at russell investments based in our seattle headquarters so we'll start with a panel discussion and then we'll turn to your questions as time allows so uh please do raise your questions by typing in the q a box on the right hand side of the screen i want to start drew and vic with the hard question that seems to be on everybody's minds whether they're meaningfully invested in private markets today or not and that's whether these assets still offer value after a great run we just heard from andrew the macro themes that have benefited private markets they're no longer surprises they're now consensus higher inflation digital disruption higher nominal interest rates they may be monitoring moderating from here but they're here and now and as andrew just said of course there's always more to worry about at the same time there's been record fundraising into private markets uh in anticipation of these trends so drew i'll start with you our private assets still offering value today relative to public assets and where's hamilton lane finding that opportunity set sure i i may be biased but the answer i think to your question is is yes absolutely and it comes down really to why investors continue to like the asset class and continue to lean in in terms of increasing their allocations and its performance the performance has not only been strong on an absolute basis but relative to public equity alternatives for example and it is the consistency of that outperformance which investors have come to expect from the asset class and to put a point on that 19 of the last 20 vintage years if you look at just the average private market performance it has outperformed your public market alternative so again it's that consistency and then if you peel the onion back and say well why is that so consistently repeatable it's really the dynamics of the investment sphere in private markets it is an active not passively oriented strategy meaning the investors in this asset class come in take control of those private assets and then have a view towards value creation over longer term time horizons and then the other dynamic at play that's facilitating that is just the landscape of private companies you're literally talking about hundreds of thousands of private companies globally with meaningful scale of say over 50 million dollars of annualized revenue compare that to a very efficient public market where there's just a few thousand public companies overall it's a very efficient market everyone has the same access the same information and there's just fewer opportunities i mentioned in terms of numbers so i think all of those things lead us to believe that the trend you've seen of consistent outperformance versus public markets is likely to continue into the future and that's reflected in investor sentiment fundraising and allocations and what about you vic are you seeing value in the market and how is russell investments accessing it well uh to drew's point i mean absolutely i mean i think uh you know to drew's earlier comment about the the opportunity set within the broader private markets has continued to grow and if you look at the number of public companies that are going private um you know that trend continues we've seen that for the last decade or so so that again creates more of the opportunities within the the private segment i think the other thing like on private credit for instance which is getting a lot of attention is in in the press a lot part of that dynamic is the fact that you know again banks and this kind of goes to some of andrew's earlier points some of the lending just still isn't there and it's not likely to be coming back in a big way but yet you have the growth of the the companies in the in the private sector that are still in need of of capital to to grow and to expand and so then again they're looking to the private sector to provide that that financing so i think we continue to see the opportunities uh broadly um not only uh in europe uh but across obviously the us and in asia pacific as well so i think taking that broad approach which is what we do um and looking at the relative attractiveness across not only regions but also sectors is still creating a lot of opportunities and i just don't see that going away anytime soon and drew coming back to you can you access that in the same way today right is it still that primary funds are the way to access are there other transaction types that are more relevant today yeah and i think that's one of the more compelling things michael of the asset class what you asked about is no longer your grandfather's private markets or private equity world there are different structures to go along with those great returns the great strategies and as vic is pointing out there's more strategies there's not just private equity venture and that's it there's private credit there's real asset and infrastructure so there's not only more flavors and investment strategies within the private markets to your point some of the structures that were being created are more accommodating particularly for newer investors that may have limited or no exposure to the private markets historically putting the right structures in place almost in some ways making it akin to how they'd be used to investing in you know a mutual fund or an etf though that is the way the asset class continues to evolve to open and broaden access to that newer group of investors that i mentioned yeah so more user-friendly and i want to come back to how you incorporate that in a portfolio a little bit later but saying on this thematic so the opportunity set is there for returns the other consideration that seems to be front of mind increasingly for investors around the world and many in this audience have been on the forefront of this is esg consideration and do you see opportunities and vic maybe i'll start with you on this one do you see opportunities to affect an esg strategy and impact strategy in private markets how is that different from affecting that in the public markets no i think michael you're right i mean that's one of the the areas that we've seen a tremendous amount of interest in um and particularly throughout europe i mean europe is definitely on the forefront of that i'd say australia is probably behind and actually the us is is trailing quite considerably as far as you know the focus on on esg but from from russell's perspective esg has been something that we've looked at through our research process i mean it's part of our dna as far as what we do not only across the traditional asset classes but across hedge funds as well as private markets so so there is it's really table stakes now you have to be able to do that and managers i think increasingly some maybe somewhat reluctantly are recognizing that they they have to put that into their process and i think it's important to know something certainly something that we focus on is just making sure that they're not saying they're doing it but they actually are doing it is it something that is truly embedded within uh how they're you know researching how they're identifying managers and how does that you know completely play out so i think it goes across a bit of everything today but then you do see the opportunities with like impact where they're wanting to investors are wanting to get even more uh specific on on how they're implementing and how that particular investment is is being utilized so we're seeing it kind of both i mean across the broad spectrum of of private markets in just every product that is being developed and how we think about it but then also getting into the more specialized piece and i know this is something that hamilton lane has been doing for a while now uh with you know impact funds and impact focused funds that are just i would call it more concentrated more emphasis on on those types of strategies and kind of the role and that they play in the overall portfolio as far as what you're trying to achieve so some investors that i still think um you know want it uh to be more broad-based in everything they do others even are doing some carve-outs and saying okay we want to be really specific with with this segment of our portfolio for these particular reasons and so it's really kind of that role that it plays in the total portfolio that each investor is a little bit different but for sure i think esg is is only going to increase in importance globally drew do you agree with that characterization is it table stakes today to have esg throughout your process and if that is the case how are you raising that how are you raising the stakes at hamilton lane what's sort of the the state of the art uh with esg and your process at hamilton lane vic is 100 right and spot on we need as an asset class to continue evol to evolve and to do better whether it's regarding esg impact etc and a lot of it is is the points that vic makes it means actually incorporating you know e s and g and considerations into your investment strategies into your due diligence of companies so just like you would diligence for example the revenue or the earnings of those businesses there should be a firm diligent section on each of the e the s and the g and again any impact oriented strategies that's part one i think part two into your question on what is next and what do we need to continue to do better with i think it is more standardized information and reporting and the asset class is doing a much better job at least those that are being effective in these areas at not only capturing the data but doing it in a standardized way that's been a challenge historically of every investor is looking at something different in terms of the metrics maybe the underlying control oriented general partner that owns those businesses sharing different metrics and so i think what we're starting to see and we're at the forefront of is trying to create technologies and information hubs that not only sort of solicit and capture the data in a consistent way but where we can can help control and standardize the methodology of how that is being reported so investors can peel the onion back and understand exactly what it means to have an esg portfolio what it means to have an impact portfolio and measure the performance there on more of an apples-to-apple basis and as i mentioned technology and information in these areas is going to be what's critical to driving that change successfully vic what about it at russell right so we were an early signatory to unpri uh that became really rapidly integrated into the research process on the private markets desk anything you'd point to at russell that's that's leading edge and what are we doing that's advancing the game on esg well yeah i mean i think um to to drew's point i mean the the the data uh collection the data measurement and management is going to be increasingly important and i think you know one of the things that we're obviously looking at at russell is is the total portfolios right and so it's you know we've been uh quite successful and and very diligent on the the public equity the fixed income side information is a little bit more readily available it's more transparent so it's easier to to to do things with that data and to to really you know formulate the the metrics around how you'd want to evaluate it i think to our earlier comments about just the growth in privates in overall portfolios that now is becoming a bigger component and therefore to drew's point we want to make sure that we're able to try and tie those things together from an esg reporting standpoint and that has been you know a bit of a challenge thus far but there are more tools or data providers that are out there trying to solve this including you know hamilton lane you know they made a recent investment in a group nevada that is actually you know kind of at that forefront of trying to solve this issue but what we see the real value is then being able to tie that into the the public side as well so you can look at things on an apples-to-apples basis because i think one of the challenges up until now has been it's the you know you measure your traditional assets and the esg componentry there but then you kind of have to qualitatively assess what you're doing on the private side and so we've been spending a lot of time at russell trying to make those those ties together a little bit better and i think it's only going to get better as we start to look you know more you know across and i think the other thing is as investors start to put more pressure on managers to be more transparent and in the need for uh them to have that type of information so those that are more uh willing to accommodate i think are going to probably get a bigger share of the pie which again is a good thing for everyone i think so i'm hearing the ability to put green uh throughout the portfolio and in private markets and where we're headed with that you know the final topic i want to come to is more of the portfolio construction side and we hit on it a little bit earlier with some of the comments about just the increasing breadth of private markets today companies are staying private longer there are more types of assets that are accessible to investors they're more user-friendly in terms of structure which drew mentioned relative to the past how are you both leveraging that more colorful palette in your portfolio construction vic i might start with you on that yeah so again um this is something that we've seen um all quite a bit of change the last five years i would say as far as within the the private market space whether it be venture whether it be buyout whether it be credit the different flavors within each of those sub categories has grown enormously which is it makes it difficult i think for investors to assess again the relative attractiveness and again if you look at ventures maybe an example you have the early stage late stage which was kind of the historic way of bucketing things well now you're looking at health care you're looking at fintech you're looking at robotics and ai kate mentioned it um earlier some of the the um artificial intelligence that is being incorporated so even within venture it's starting to get sliced even thinner which again creates a lot of opportunities for us as as allocators and researchers but i think it does make it a little bit more challenging from a portfolio construction standpoint so one of the things that again we're looking at data is is huge um and it's a in growing importance within private markets that's something that wasn't always the case it was it was a lot of time just you know picking you know we thought was the the best managers kind of letting them do it and and not really thinking about the geographic exposure that they're looking at or the sector exposures that they're looking at but again i think increasingly from a total portfolio perspective that those risk elements especially as it becomes again a bigger part of the overall portfolio is something that needs to have more attention so again that's one of the things that we've been spending a lot of time at with at russell is looking at the the risk components of privates and how it fits into the total portfolio so whether it be again from the geographic exposure whether it be with you know technology exposure across your public your hedge in your private that's increasingly uh uh you know as far as factors and and what's driving overall portfolios is important and then it allows you as an investor to look at again the relative attractiveness between the public market and the private market in that overall portfolio construction process so it's given i think us on the private market side a lot more levers to pull it has no question complicated things a bit more so having proper tools and data and resourcing to to evaluate and put that all together uh is critically important but i think it does especially in this environment that that andrew is alluding to it does give us more opportunities to lean into certain segments of the of the private markets than we ever have before drew how about a hamilton lane how creative are you able to get these days in private markets uh portfolios right when you're designing solutions for your clients yeah i think uh vic did a great job summarizing that which is there are more flavors of ice cream than there ever have been that's good that choice for investor particularly if you bring it back to what andrew pease was saying um you know you're facing an environment now today where a lot of the you know macroeconomic and secular tailwinds have shifted course a little bit and are creating and creating some headwinds for us as we look forward therefore i do think you're going to see relatively newer areas of the private markets like private credit like infrastructure and private real assets where there is some duration characteristics there are some inflationary hedge characteristics there's some current yield characteristics that are going to be interactive in an environment that probably has a bit more volatility than we've been seeing for the last 10 or 15 years for example and those strategies as i mentioned have continued to evolve the capital bases around those strategies the managers within those landscapes on the private side are there in a bigger way than they ever have been before and i think the other point here is just as an investor generally you can't ignore the benefits of the private market so if you think of the traditional 60 40 portfolio think of that landscape dynamic that i described just in terms of the numbers of investable opportunities in the private side relative to the public markets do you want to diversify your portfolio more in these types of environments and climates going forward where you have access to again hundreds of thousands of companies or are you going to continue to try to create value in a public equity world for example where there's only several thousand companies so you can't ignore again the opportunity set that exists today and then when you combine that with what has the historical experience been in terms of returns observed volatility within the private markets relative to public asset classes and that's also been a benefit when you mix that into that more traditional portfolio and i think more and more investors are not only recognizing that but as we talked about earlier there are structures and ways to access the private markets that are also new to go into some of those new flavors of ice cream that vic and i have been describing that's great and that's a great uh segue as we turn and look at some of the questions that have come in uh from the audience you the first one i think is really relevant to bring andrew uh into this question and drew you just touched on it a little bit which is we're at a point in the cycle where volatility is rising to andrew's you know great turn of phrase there's a there's a moderation ahead you know andrew from your perspective as you look macro and you think across asset classes i'm wondering you know how do you think investors should be positioning private markets today right as they think about where we are in the cycle where we've had this run how do you see that from a macro review well i i think right now um like more than ever it's always the same but more than ever diversification matters a lot um and we're getting towards so we've come out we've come out of early cycle when everything takes off we've had the big recovery we've had three years with 20 plus gains in the major liquid equity markets we know things are going to get tougher from here i think we'll still get healthier returns from equity markets maybe not so much from at least the government bond part of portfolio so i think it just makes the case that you need to spread your returns and you need to have less volatility and more diversification across your portfolio and i think from that perspective private markets do make quite a bit of sense yeah i want to get a little more micro maybe back to the uh the tacticians what what mistakes have you seen investors make when we're at this point in a cycle private markets have done well public markets have done well when volatility is rising what do investors tend to do with their private markets allocation are they scaling back are they skipping vintage years what are the mistakes that they make and you know anything that you'd suggest that investors do as we see that volatility rising now yeah maybe i'll jump in there michael yeah real quick um i i think the biggest thing is that that investors will often time just get fearful right so i mean maybe the example and this has come up you know quite a bit more recently with you know venture you know venture's been you know on a tear obviously uh with technology with you know a number of companies staying private longer as we talked about earlier but i think that if you're going to be in the private markets you just need to be consistent with with staying with vintage diversification it kind of goes to andrew's point about you know diversifying um you know across the portfolio but one of the mistakes we see is people think that they can time you know when the right vintage is to get entered to get out and i mean it's just not that easy even though you know that the data may be there they would suggest it timing it is very very difficult even within the private side whether it be credit venture buyout you name it so i think the one thing is if you're going to be in the private markets be consistent be diversified you know you can maybe lean in or lean out slightly but again our philosophy and i know the philosophy in hamilton lane is is not to take big bets to say okay adventure's been on a big run so we're going to be out for the next two years that's usually the kiss of death for investors because they're ultimately going to miss something undoubtedly you know to that point one of the themes that we're seeing in these questions that are coming in one that keeps coming up is liquidity and i wonder how are your investors thinking about liquidity today you know there's some structural impacts some regulatory impacts in key markets especially in this region any themes that you draw about how investors are thinking about liquidity today yeah i can take that and i i think that's one of the sort of not only have the performance and returns been strong on paper there was a record year of distributions last year there's over a trillion dollars of distributions that came back to private market investors last year and so i think that theme in and of itself is when that great those great returns come back to you where do you reallocate them and to the points we've been making it's nice to have more choices than you have before more choices that are you know cognizant of some of the volatility characteristics and risks that may lay going forward and for investors um you know that is something that they're mindful of that those record amounts of distributions coming coming back from from their private market portfolios overall and i think you also think you know the shorten shortening some duration having more current yield and some of these other strategies that are in more nascent areas of the private markets is also a consideration um that can help be a natural risk hedge if you will if the markets are a bit choppy here going forward yeah i think the other thing that i would say that we've seen increasingly as investors maybe that have historically done you know private equity you know buyout venture are now looking at private credit or maybe they're looking at infrastructure core infrastructure or you know real estate to get some yield coming off of that which again is a little bit more predictable as far as flow so that can help mitigate you know some of those j curve effects are you know trying to smooth a little bit of that distribution so again it kind of again goes back to a little bit of what you know andrew was talking about is even within private markets having a more diversified approach will help to mitigate some of those peaks and valleys that maybe you saw historically you drew one of the other questions that we're getting is about transactional investments and we talked about it before the secondaries the co-investments what do you see geographically in terms of investor appetite are you seeing more appetite for transactional deals in north america in europe is there anyone who's you know behind the game who you think is going to catch up no i i think there's been a basically the transactional volumes last year were up about 20 across the board and it was pretty consistent by geography and it ties a little bit to your last question on liquidity take the secondary market for example there a large swath of the deal and transactional volumes have been in these single asset general partner led continuation vehicles or secondary opportunities that is a tool in the toolkit that for liquidity investors didn't necessarily have four five six years ago that today makes up roughly 60 of the secondary transaction market so i think you have to have an eye and access towards those evolving trends because not only are they interesting ways to create liquidity it can also be in a market where i think it's you're going to be rewarded more for thematic investing deal picking those gp led continuation vehicles with crown jewel type assets can be a great way to tailor your industry and asset exposure and again a tool that really wasn't there until more recently and i think that ultimately is a good thing but you need to understand it you need to understand the risks around it transactionally investing in a single asset versus a portfolio that's more diverse but at the same time there's also the upside enhancement if you do get some of those trends and themes on the on the correct side great well i think that's a great place to leave it uh this has been a really interesting discussion for me drew vic appreciate it very much and thank you everyone for joining