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Explosive Growth of Private Markets with Erik Hirsch, CEO of Hamilton Lane | LFTC — Transcript

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0:07[music]
0:11[music]
0:16Welcome to Live from the Compound. My
0:18name is Michael Batnik and I am very
0:19excited. I've been [music] looking
0:20forward to this for a long time. I'm
0:21joined today by Eric Hirs. Eric is the
0:24CEO of Hamilton Lane. Eric, welcome.
0:26Happy to be here. All right. So, I want
0:29to start with uh a chart of Hamilton
0:32[music] Lane's AUM. You took over as CEO
0:34when?
0:35>> So, about two and a half years ago.
0:36>> Okay. But you've been with the company
0:37for a while.
0:38>> Long time. Joined there in the late '9s.
0:40>> Oh, wow. Okay. So, we have this going
0:43back to 2005. We took this from you. Uh
0:45six $6 billion in assets under
0:48management. To say nothing of assets
0:49under advisory, which puts you guys over
0:51a trillion dollars. But from 2005,
0:53you've grown from $6 billion in assets
0:56to around $146 billion 20 years later.
1:00Pretty incredible run. Obviously, you
1:02guys have done something right. So, for
1:04the audience who doesn't know Hamilton
1:06Lane, a gigantic publicly traded
1:08alternative asset manager, who are you?
1:11What are you guys all about?
1:12>> Who are you and why are you here?
1:14>> Hamilton Lane is what we think of as a
1:16private market solutions provider. So we
1:19are not a fund manager like a Blackstone
1:22or a KKR. We're really a provider of
1:25capital into firms like that and many
1:27many many others. And so our client base
1:30is really any investor who's looking to
1:32access the private markets. So think of
1:34that as lots of institutional investors,
1:37pension funds, endowments, sovereign
1:39wealth funds, insurance companies,
1:40banks, etc. And then lots of individual
1:43investors. And one of the misnomers
1:46around this asset class is that most
1:48people assume, well, I can just do it
1:50myself. Doing the private markets is
1:53really hard. Finding access, identifying
1:55managers, building portfolios is frankly
1:57not something even very large
1:59institutional investors do themselves.
2:02They mostly outsource. And so we are
2:04effectively that outsource provider.
2:06>> I totally agree that this area of the
2:09market, you said it's an asset class.
2:12Um, yeah, sure. There's a million
2:14different subasset classes. I mean, even
2:16private credit has a million different
2:17layers under that hood.
2:18>> That's another misunderstanding is that
2:21I meet most people and we talk about the
2:23private markets and I say, "Name me as
2:26many private market fund managers as you
2:28can." And the kind of the common names
2:31come spilling out very quickly. But once
2:33we get past, you know, 10 names or 12
2:35names, they kind of get very quiet. And
2:38I say to them, okay, well, we have
2:40thousands and thousands and thousands
2:42more to go if we're going to actually
2:44name all the players in the market. So,
2:46the vast majority of our market, the ma
2:48the players in that space, no one's ever
2:50heard of them because they're raising
2:53primarily institutional capital, they
2:55are managing a billion dollars or $2
2:57billion and there's lots of them and
2:59they're all over the globe and they're
3:01all operating in different local and
3:03different geographies, different
3:05subsectors to your point. So, it's a
3:07huge industry and navigating that is
3:09hard.
3:10>> Yeah. So, I want to lead with this. I am
3:13not anti-private markets at all. Um, I
3:16think that there are there are some
3:17things with the industry and some of the
3:20things that I do have issues with which
3:21we can get into. For example, not to
3:24harp on this point, but private equity
3:26to me is equity. I don't think that it's
3:28going to be that returns are going to be
3:30divorced from public equity returns.
3:31It's not going to be the same exact
3:33thing, but we're investing in the equity
3:35of a business. That's what we're doing
3:37here.
3:37>> I agree. I mean, our industry when
3:39people used to say and some people still
3:41say incorrectly that, well, it's not
3:43correlated to the public market.
3:44>> That drives me nuts. It
3:46>> it should drive you nuts because it's
3:47not true. It's totally correlated to the
3:49private to the public markets. reason
3:51why it can look less correlated or is
3:54even sometimes uncorrelated is the
3:57reporting time lag, which is also
3:59another frustration about our industry,
4:00which is if you're in a private markets
4:03fund, a private equity fund, and you're
4:05a limited partner in that fund, you're
4:07getting your statements at least a
4:10quarter lag after the prior quarter end.
4:13Well, that time lag, that's what again
4:16on a piece of paper creates the notion
4:18of, well, this doesn't look super
4:20correlated. Yeah. Yeah. Because you just
4:21timelagged it out. But when you kind of
4:24erase that and and mathematically you
4:26can, they're correlated. Equity markets,
4:29>> if we have an honest conversation about
4:30it, as an investor, I understand um that
4:36maybe even forget about an illquidity
4:38premium. I love the fact that it's not
4:41marked on a daily basis, but don't lie
4:43to me about it. Don't tell me that it's
4:44not correlated. It's just a different
4:46marking system. Now, oftentimes public
4:48markets have a freakout that has nothing
4:51to do with the underlying fundamentals
4:53of the business. And so, it's okay that
4:56this um gap exists, but let's just be
4:59honest and call it what it is.
5:00>> I completely agree. I I mean I think
5:02just generally our our asset class has
5:04been its own worst enemy because we
5:07generally don't do a great job talking
5:09about it. We took private to sort of the
5:11extreme and so people thought that that
5:13was a good idea to kind of not talk
5:14about stuff. We've been misleading
5:17around this idea of correlation. So I
5:21think there's been a lot of you know
5:23sort of bad spokespeople for the
5:25industry that have then created some of
5:28these misunderstandings which are just
5:29not reality.
5:30>> Yeah. Um the democratization of this is
5:33another thing and maybe we could talk
5:35about it. The history of the industry in
5:38private assets at a 10,000 foot view. It
5:41started not started it really blew up
5:44after David Swenson created the Yale
5:46model. Tons of alpha Bane and others
5:49came in in in the 80s and these private
5:52companies were selling at a legitimately
5:55unbelievable discount to public markets
5:59because there was an illquidity discount
6:02>> which the leverage factor back then
6:06shooting fish in a barrel
6:07>> right agree
6:08>> that that era is long gone
6:11>> long gone
6:12>> it has been gone for decades
6:14>> okay so there can't be alpha for
6:16everyone
6:17always. And so you could say that
6:20private assets offer um maybe different
6:24return streams, different so
6:26infrastructure. Yeah, that has nothing
6:28nothing. That is not really where the
6:30S&P 500 makes its bread and butter. Um
6:33so we could be honest about that without
6:35saying if you're in the S&P 500, you're
6:37just invested in the MAG 7 and we're all
6:39going to die if that falls apart.
6:40>> Agree. So, there are lots of good
6:43reasons to be in the private markets,
6:46but I would never recommend that a good
6:49way to access the private markets, you
6:51can't anyhow, would be through an index
6:53because not surprisingly, if we're
6:55talking about an asset class that has
6:56thousands and thousands and thousands of
6:58managers, you're going to have some
7:00really amazing managers and you're going
7:01to have some really lousy managers. And
7:03what's been interesting is the pundits,
7:06if you will, had sort of told us over
7:08time, hey, as this asset class gets
7:10bigger and more capital gets raised and
7:12time goes by, returns are going to
7:14compress.
7:15>> They have to.
7:16>> They haven't. So, they've actually
7:17stayed really wide. The dispersion of
7:20performance from kind of top to bottom
7:22is basically as big today as it was 20
7:25years ago despite a lot more capital
7:27coming in.
7:28>> But dispersion where? Venture, for
7:30example, the dispersion is huge.
7:31>> Dispersion is massive. It's also massive
7:33in private equity. It's also big by the
7:35way in dispersion in private credit has
7:36really wide dispersion.
7:38>> That's surprising.
7:38>> Yeah. Be because it comes down to
7:41choice. The example I always use is
7:44let's say that you know I'm speaking to
7:46an audience in a room of hundred people.
7:48I say okay we're all we're going to buy
7:50the hotel that we're sort of in for this
7:52event and for for the next hundred years
7:55right each of us is going to get a
7:56chance to be the CEO cart blanch full
7:59control. do whatever you want to do with
8:01that with this hotel. Try to make it as
8:03good as possible. We're going to have
8:05wildly different outcomes with that.
8:08Someone's going to choose to invest in
8:09the food. Someone's going to choose to
8:11upgrade the rooms. And the the clientele
8:14will tell you sort of what happens, but
8:15the results aren't going to be the same.
8:17And so when you look at private equity,
8:19things like purchase price tend not to
8:21be a huge determinant of the outcome.
8:24It's what you do with the asset once you
8:26own it. And that comes down to the skill
8:28of the actual management team and the
8:30private equity firm that's backing them.
8:33And it's that human component to this
8:35that causes dispersion to be very very
8:37wide because good choices get made and
8:40bad choices get made.
8:41>> I've never got an email saying we're in
8:42the bottom cile of returns.
8:44>> No, no one has ever said that. I mean,
8:45it's been it's it's laughable today if
8:47someone even comes in our office and
8:49wants to talk about quartortiling
8:50because you sort of go, okay, you're top
8:52quartortile, so you're what? one of the
8:54top two or three thousand best fund
8:57managers. The question is, how many
8:59funds does an LP or an investor need to
9:02do to kind of get appropriate diversity?
9:04The answer for the Hamilton Lane
9:06customers is that most of them are doing
9:07far fewer than 10 funds per year.
9:10>> I mean, I would hope so,
9:11>> right? Because you think about each fund
9:12is going to do 10 to 20 or 30 plus
9:14companies inside of it. And so just
9:17doing eight funds gives you [snorts]
9:18hundreds of companies and that's enough
9:20diversification. So, one of the reasons
9:23why we exist is if we're going to see,
9:25you know, 1,500 funds this year that are
9:27in market trying to raise capital and
9:29we've got a customer that says, "Hey, my
9:32portfolio only requires six, the
9:35Hamilton Lane team needs to do a whole
9:36lot of work to take 1,500 to six." And
9:39that's again back to kind of why we get
9:41to exist. You mentioned the work and the
9:44fact that most investors and it doesn't
9:46matter if you're an individual investor,
9:48an RA, a big platform, an institutional
9:51investor, it's really hard to diligence
9:53these companies.
9:54>> Hard the the funds, the the underlying.
9:56So, I feel like when we're talking about
9:59private assets, we talk a lot about the
10:01structure.
10:01>> Yep.
10:02>> We talk about the the the performance.
10:04We talk about liquidity, but I feel like
10:08the portfolio management is actually
10:11weirdly almost an afterthought. And
10:13let's say I was sitting over the
10:14shoulder of some of your analysts and
10:16some of your portfolio managers and I'm
10:18in the industry, but I wouldn't know
10:20what I'm looking at. I would under
10:22generally, but how would I know a good
10:23deal from a bad deal? How would I be
10:25able to diligence all 30 of the
10:27portfolio companies in there? Would I be
10:28able to understand the debt and equity
10:31capital structure? Who are the outside
10:32invest? I all of it it requires a lot of
10:34expertise. So it's difficult to
10:36diligence individually. So when people
10:38are investing in the Hamilton Lane
10:40funds, I would imagine that they're
10:41outsourcing their diligence to you and
10:43they're getting comfortable with your
10:44team.
10:44>> Correct. So we are the asset manager for
10:48them. So we have discretion over the
10:49assets and we're doing that work. I
10:51would say two things. one, the the pro
10:54the first problem, if you will, actually
10:56starts with the access issue because
10:59there's no rule that says, "Hey, you're
11:01going to go raise your private equity
11:02fund. You have to show it to everybody."
11:05The answer is the good managers want to
11:07do as little fundraising as possible
11:09because that's not where they want to
11:10spend their time. They want to spend
11:11their time on deploying successfully and
11:13then managing those assets. No
11:15fundraiser wants to say to you, no, no
11:18asset manager wants to say to you, hey,
11:19the the the time I most enjoy about my
11:21job is fundraising. They want to try to
11:23compress that as much as possible. So,
11:25if you're really excellent, you can
11:27compress that time frame a lot because
11:30you don't have to go to very many
11:31sources to go get your capital, which
11:33means these 90% of the world may never
11:37see the opportunity. So, the access is
11:39kind of problem number one. Problem
11:42number two is the diligence, which is
11:44there's no rule that says everybody has
11:47to see the same information. That's not
11:49a thing. And so Hamilton Lane's ability
11:52because of our size and scale and
11:53importance in the industry means that we
11:55do get to see all 30 companies and we do
11:57see the cap structure and we are able to
11:59talk to the other investors and we are
12:01able to look at the debt structure. this
12:03investor over here who's deploying a
12:05tiny amount of money a may never see it
12:08access and b may not get the access to
12:11the diligence material at the level that
12:13we would say we require. So this is a
12:16very asymmetrical industry. It's not
12:19fair.
12:20>> I don't want to sell you guys short. I
12:22mentioned that you have $146 billion of
12:25assets under management. There is a
12:26non-discretionary piece which takes you
12:28guys over a trillion dollars. Correct.
12:29What does that mean? What are you doing
12:31with those clients? So, in some cases,
12:32we're providing them advice on those
12:34assets, but what we're mostly doing is
12:36we're kind of monitoring and managing
12:38those assets. The client made the
12:40investment decision, and we're
12:42essentially kind of dealing with now
12:44what happens afterwards. We're the back
12:46office. We're the check-in. We're doing
12:48all of that.
12:49>> Okay. All right. Let's back up. Talk
12:50about the industry where we are today.
12:52The cynical view or the skeptical view
12:53would say this. Here's the story. I
12:55mentioned the Yale model. a lot of
12:57excitement, so much alpha and it worked
13:00really well for the industry and for the
13:01investors frankly. Everybody did very
13:03well. Um, and institutional investors on
13:07average are 30% privates, whatever the
13:10number is, it's well above zero,
13:12>> well above.
13:13>> And we got there was a period of time in
13:172021ish
13:19where both public and certainly private
13:22markets got a little bit drunk. And I'm
13:23not pointing fingers because we were all
13:25involved in the same party together. And
13:26there was a lot of sloppy behavior and a
13:28lot of bad investments. And we're now
13:31five years removed from that. And some
13:33of the returns that people had hoped to
13:35get are not showing up. And therefore,
13:37this is a flywheel and it's not spinning
13:39as fast as it was because um a lot of
13:42the exits were not we're not seeing. I
13:44think exits are down 25% year-over-year.
13:45Whatever it is, everybody knows the
13:46story. But Daniel, show a chart too. And
13:48credit to you guys. This is from Oh, no.
13:49That's not from you. Did I pull some I
13:50pull this from pitchbook? Maybe it's
13:52from your deck from pitchbook. So global
13:54private markets fundraising and we're
13:56looking at closed end funding
13:57fundraising by broad asset classes. And
13:59it doesn't matter if you're looking at
14:00real assets or credit or equity. It's
14:02down. So in comes
14:06the wealth manager. In comes the
14:09individual investor who is basically at
14:12zero. And there was the story is it's
14:15very obvious. So the cynical take would
14:16say all right here's individual
14:17investors and their exit liquidity. Um,
14:19and I think the the uh media, not
14:23wrongly, so I'm not saying like, oh, the
14:24media, but they've harped on the story
14:26in a big way and they're running with
14:27it. And I don't think it's completely
14:28unfair. So, how do you answer the
14:31cynical version of, well, yeah,
14:33institutional investors are full. They
14:34can't deploy money. They're not getting
14:35their money back. Mom and dad are are
14:38going to hold the bag.
14:39>> So, I don't think that's cynical. I
14:40think the first part of that's not
14:41cynical at all. It's factually accurate.
14:44So, let's break it into pieces. And the
14:47listeners weren't hearing me nodding
14:48along as you were in agreement with you
14:50as you were talking.
14:54Drunken bad behavior coming out of COVID
14:55and during COVID, high prices paid, a
14:58lot of euphoria, a lot of questionable
15:00underwriting.
15:02Money was very fluid. There was lots of
15:05it. Fundraising was happening very
15:07quickly. People were doing all of that
15:09remotely. Questionable diligence. So,
15:12all of that happened. All that's true.
15:14That's not to say everybody did that
15:17because again I go back to my dispersion
15:19comment. The dispersion that we're
15:21seeing for those vintage years which is
15:22kind of how we as the industry think
15:24about it. So the difference between the
15:26managers in 2021 the best to worst and
15:282022 best to worse 2023 best to worse
15:32really wide gapping because the behavior
15:34wasn't uniform. And so you had people
15:36who were sober and they weren't at the
15:38party and they were actually making
15:40really good choices. So really wide
15:42performance. But what is true is if we
15:44take the industry as a whole, a for the
15:47last 3 to 5 years it's been lagging the
15:49public markets. Now we can I think we
15:51can agree the public markets have been
15:53on fire.
15:53>> Yeah, I wouldn't I wouldn't fault you
15:54guys for lagging.
15:55>> We we can debate rational or irrational
15:57and if you look at the industry waitings
15:59between kind of what's in the S&P 500
16:01and what's in the private markets, the
16:02industry waitings are really different.
16:04So that's not shocking, but it is true
16:05that they've been lagging. It's also
16:07completely true factually, not
16:09cynically, factually, that distributions
16:11are way down. And so I think about
16:13distributions as kind of total liquidity
16:15provided as a percentage of sort of the
16:17industry's net asset value. That's a way
16:19to kind of normalize for size and it's
16:22down. It's been down. And so the other
16:25piece is again not cynical factual
16:27holding periods are going up. So all of
16:31that is absolutely true. I think that's
16:34uncorrelated to the idea of well now the
16:36retail investor is is entering because
16:39the idea is not simply people are trying
16:41to sell assets out of the institutional
16:43bucket and sell them into the individual
16:45bucket. I think the rise of the of the
16:48individual investor into the asset class
16:51I think has to do with more about some
16:53changing structures some regulation
16:55change the invention of some different
16:57fund structures that kind of create
16:59vehicles that work for them. But there's
17:01no question that that is helping to kind
17:05of offset some of the fundraising
17:07pressure that has occurred. But the
17:11number of fund managers in the private
17:12markets who are participating in any
17:14way, shape or form in with the
17:16individual investor is like teeny teeny
17:19teeny teeny teeny tiny.
17:21>> What do you mean by that?
17:21>> 20 firms. 20 firms that have viable
17:24franchises that are actually raising
17:26capital.
17:27>> But they're the biggest firms.
17:28>> They are the biggest firms. We But we go
17:30back to there's thousands and thousands
17:31and thousands of firms. None of those
17:33people are participating in this at all
17:35>> and they're probably happy they didn't.
17:36None of them.
17:37>> Well, they're going to live and die with
17:38the how the institutional experience
17:39goes. I mean, that that is their market
17:41there. There's no migration for them
17:43>> over to the other side of the wall.
17:45>> Yeah. They can't do it.
17:46>> They're in they're institutional funds
17:47only. Period. End of story. There's no
17:49changing that. So, their track record,
17:51their ability to survive is going to be
17:53completely dictated on how their returns
17:55are, how the institutional investor sort
17:57of sees them. The fundraising chart you
18:00showed is a little misleading. So you
18:03said it correctly that that is closed
18:05end fundraising, but that's it. Like
18:08period. That's
18:08>> So it doesn't show the evergreen part of
18:09it.
18:10>> It doesn't show the evergreen part. What
18:11it also doesn't show is as as you know
18:14because you've talked about it there
18:15there's a rise of our secondary world
18:18has been rising. So people trading
18:20funds, buying other LP stakes, that's
18:22sort of our secondary world.
18:24>> So we we'll definitely get there. Can I
18:25just say one thing?
18:26>> So that's that's not captured here
18:27either,
18:27>> right? So, sorry to cut you off, but one
18:29other piece of the story that I think is
18:31critical, critical, critical is 2022.
18:35I also want to make sure that I get to
18:38ask you how you view the the investing
18:41alongside the companies that are going
18:43to retail versus just the institution. I
18:44want to make sure we get to that. Um but
18:46okay, 2022 was the perfect storm in a
18:50good way for private credit because
18:54bonds got smoked the 60 and it brought
18:57down stocks with it and you had this
19:00thing that was actually negatively
19:03correlated. You had the floating rate
19:04aspect of private credit. Amazing,
19:07right? So you didn't get hit on the
19:08duration and miraculously there wasn't
19:11really a credit cycle. And so investors
19:14in 2022 in private credit got 10 to 12%
19:17whatever it was okay while bonds were
19:19down 15%. And then the the the fuse was
19:24lit and the money came pouring in very
19:27very fast.
19:29Agree. I'm going to throw in a few more
19:31ands.
19:31>> Go ahead.
19:33>> Why does private credit exist? Because
19:35if we went back 20 years ago and you and
19:38I owned a uh a lumber business in uh in
19:41the Midwest,
19:42>> let's call bagel business. I'm from Long
19:43Island.
19:44>> Great. Let's do that. And we want to go
19:46out and and and make some sort of we
19:47want to expand. We want to open. We got
19:49to go we got to go get some capital to
19:51do that. We don't want to go like give
19:53up our equity because we like our bagel
19:54company. And so what we would have
19:56typically done is you and I would have
19:57put on our, you know, best looking suits
19:59and ties and we would have marched down
20:00to the regional bank where we, by the
20:02way, keep our checking account for our
20:04for our bagel business. And we would
20:06have talked to our guy there and said,
20:07"Hey, we need a loan." That was a big
20:10provider of where, you know, private
20:12businesses got financed. It's the
20:14classic story of that, you know, that
20:15local bank that, you know, they know all
20:18the business owners in that town and
20:20they're kind of providing capital to
20:21them. Well, that went away. the regional
20:25banks and their ability to lend and
20:27their desire to lend has gone away
20:29dramatically. And so the capital need
20:31from the companies didn't go away. So
20:34something needed to replace it. And so
20:36in comes private credit effectively
20:39taking the place in a more uh scaled
20:42maybe more professional in some cases
20:44lending to private companies in lie of
20:47what the regional banks were doing. So
20:49that's that's sort of the first part of
20:50the equation
20:51>> and that's not bad.
20:52>> Uh none of that's bad. I mean that
20:54that's sort of what makes our economy
20:56flywheel work. It's like you want people
20:58to be entrepreneurs and you want us to
20:59expand our bagel business and you want
21:01all those things to happen. So at this
21:03point there's nothing wrong with that.
21:06>> Now we go to your point which is kind of
21:07what I'll call the middle of the story.
21:09So fuse is lit etc etc etc. A lot of
21:12capital comes coming in. Well, what
21:14happens is the number of private credit
21:17firms
21:18also grows exponentially because Bob and
21:23Sally who were working for this big
21:25large private credit firm are like
21:27there's a lot of money to be had out
21:28here. We're going to start our own. So
21:30they spin out and they go start their
21:32own private credit shop. And then the
21:34person that they hired, you know, Tommy
21:35in their shop also spins out and he
21:37starts his own private credit shop. So
21:39all of a sudden you have a whole bunch
21:41of managers kind of getting spinouts and
21:44kind of creating lots of lots of other
21:46private credit firms. We should put in
21:48parentheses here. Parenthesis. A whole
21:51lot of these people had never been
21:52operating in a down cycle because
21:54they're pretty young. And so that's
21:56where we sit here today. So what I get
21:59asked about the whole private credit. So
22:02we had the whole there's cockroaches
22:03everywhere. Well, we haven't really seen
22:05the data bear that out yet.
22:06>> That was almost two years ago.
22:07>> Yeah. We're waiting. I'm still looking.
22:10Now, it's not to say there aren't
22:11problems, because I will tell you, we
22:13can see it. There are absolutely private
22:15credit portfolios that have problems.
22:18>> Too risky, not diversified enough
22:21software, maybe.
22:21>> Yep. Questionable lending standards. But
22:23again, this is back to our dispersion
22:25comment. I got plenty of private credit
22:28fund managers, so I'm looking through
22:29their books, including our own, where I
22:30go, 99% of the stuff is performing. I'm
22:33not seeing any cockroaches. Things are
22:35fine. So, I think this is becoming a
22:38space where it's going to be really hard
22:39to paint with an overly broad brush
22:41because I think what fast forward 5
22:43years, you and I are going to be back
22:45sitting here hopefully and we're going
22:46to be talking about, wow, private credit
22:50had this really big gapping of great
22:53examples of it working and really
22:55terrible examples of it not working.
22:57[snorts]
22:58>> When this happened, I understand why
23:01everybody from pundits to the media
23:04last. It's a very juicy juicy story.
23:06>> Oh, sure.
23:07>> Right. Like it it's it's a great story.
23:10I was reminded of what happened with
23:13Beit.
23:13>> Okay.
23:14>> When they needed uh not a rescue, but I
23:17think it was Kalpers that threw in a big
23:19infusion of capital. And there was
23:21legitimately
23:22massive problems in real estate,
23:26particularly the office space. Nobody
23:27would deny it. And we're four or five
23:30years removed from that. They're still
23:31around. They didn't they didn't go to
23:33zero
23:34>> and doing well
23:34>> and doing fine. So with what little I
23:38understand about the private credit
23:40industry, I don't believe that this is
23:42like going to be I don't think that in 5
23:44years we're going to say, "Holy cow,
23:46could you do you guys remember private
23:47credit? That was cute." Or whatever.
23:48That was ridiculous. It's not I think
23:50it's going to be a lot bigger than it is
23:51today.
23:52>> It absolutely will be. But this is where
23:54again I I I will join you in sort of not
23:57saying like the media. The problem is is
24:00that data around you know this industry
24:03is hard to come by still. That's
24:06unfortunate. You can see we put out a
24:08lot of information because we think it's
24:09healthy. I'd rather you have the chart
24:12than trying to sort of guess or
24:13speculate. But if you look at what's
24:16take the last sort of year of of sort of
24:18coverage about the industry and look at
24:21how many of those stories actually had
24:25hard data, specific examples versus a
24:30lot of speculation and one off thereord
24:32source noted that there's probably a lot
24:34of problems coming. It it's just we've
24:36we've become very speculative around
24:38what problems might because I agree with
24:40you. It's juicy. It's fun to click on.
24:42It's interesting headlines, but I kind
24:45of go back to like let's bring data to
24:47the discussion and then let's talk about
24:49this.
24:49>> You know that it's okay for now and I'm
24:52not saying that there's not smoke or
24:53that there won't be problems, but if
24:54there was any inklings of a problem, it
24:56would be headline after headline after
24:58headline. And unfortunately, that
25:01spooked a lot of individual investors
25:03because we're still seeing outflows from
25:05a lot of private credit funds. Apollo
25:06this morning, Apollo debt solutions BDC
25:08has about $26 billion. That's huge. told
25:11investors on Tuesday. This is from
25:12Bloomberg, that it would again cap
25:14withdrawals at 5% of outstanding shares
25:15after 14.7%
25:17sought to pull their cash down from
25:1916.8% last quarter, but still. So, I
25:21have a question for you. Who's
25:22responsible for this? Is it, and it's
25:24not one person's fault, um, is it the
25:27private credit companies just getting so
25:30much money and just spraying it around?
25:33Maybe I'm using that ter, you know,
25:34being a little aggressive with that
25:35term, spraying, but sloppy underwriting
25:37standards because the money's coming in,
25:38it's got to be deployed. Is it the fault
25:40of their wholesalers not educating the
25:42adviserss? Is it the fault of the
25:44adviser? Because the easiest thing in
25:45the world in the world to sell is 10 to
25:4812% coupons with no volatility. Who
25:50doesn't want that? Is it the investor's
25:53fault for not not to point fingers at
25:55the end investor, but for not really
25:57understanding what they're getting into
25:58because they're outsourcing their
25:59diligence to the adviser. It's the
26:00adviser ultimately that the buck stops
26:01there. But now the investors are pulling
26:04out which might be rational because
26:07we'll get to this. the marks the marks
26:09aren't even down really. And so a
26:11rational investor might think, well, if
26:14there's smoke coming and if there will
26:16be problems and I can get a dollar for a
26:18dollar, why the hell would I stick
26:19around? That's rational behavior. So
26:22unpack all of that.
26:23>> So I think I think the the honest answer
26:25right now is it's too early to tell. And
26:27let's let's break it down.
26:31There are despite all the headlines,
26:34there's not enough data today to say to
26:38you that we're going to see huge
26:40performance declines across that
26:42segment. In fact, the data right now
26:45indicates that we're not seeing
26:46bankruptcies rising materially. Default
26:48rates are basically sitting around 2%.
26:50And so that sort of is showing you a
26:53pretty healthy book. Also, a lot of the
26:55managers, certainly those that are big
26:56private credit that are publicly traded,
26:59have been very vocal on earnings calls
27:01about quality of the portfolio. How much
27:03is sitting in cash pay? How much is
27:05actually flipped over to pick? Not that
27:07much. And so today,
27:11they're saying, "Hey, the marks are fine
27:14because I'm marking and the portfolio is
27:16performing, but you're still seeing huge
27:18withdrawals. So, let's start with the
27:20with the withdrawal part first. Who's to
27:22blame for that? I think what you have is
27:27this industry is pretty nent. Think
27:29about how long you've had a chance for
27:31individual investors to invest in
27:34private credit funds. Couple years.
27:36>> Yes. No,
27:36>> it's very new.
27:37>> And so I'll use this word, you know,
27:40kindly. There is an immaturity around
27:44this whole space that is not surprising.
27:47If you've only done it for a couple
27:48years and you don't have tons and tons
27:50of data and your education is still in
27:53its early phases because you just
27:55started doing it and your advisor is
27:58also in a similar spot where they just
28:00started doing it too and they've just
28:01started to kind of read about this and
28:03they've just started to study about it.
28:05It's not surprising with that as the
28:07backdrop that with a kind of avalanche
28:10of headlines that people get pretty
28:13spooked because like I don't have to
28:16stay in. I'd rather be at the cocktail
28:19party when I get asked like, "Hey, are
28:21you in private credit?" to be like,
28:22"Nope, not me." As opposed to be like,
28:25"Yeah, is there a problem? [laughter]
28:26Have you read that?" You know, he's
28:27like, "Have you read these 50 articles?"
28:28I I don't really want to answer that
28:30sort of in that manner. I'd rather be
28:32like, "Not me. I'm smart. I'm not
28:33there."
28:33>> Yeah. So, I think there's a lot of that.
28:36It's sort of like I'm just going to go
28:38and I'm just going to go home. I don't
28:40really want to be around this. I'm sort
28:41of nervous.
28:42>> Well, also the rest are asymmetric from
28:44the advisor's point of view.
28:45>> 100%.
28:45>> Because on the one hand, if you think
28:47you're giving proper advice, and I think
28:48all advisers do,
28:49>> sure, you could really fight and push
28:51back and say, "Listen, I understand your
28:53concerns. I think
28:54>> I'm sticking I'm sticking to my guns
28:55here,
28:56>> okay?" And then you're wrong and it
28:58turns out and you're fired
29:00>> 100%. Or if you give your client a
29:01dollar back, yeah, you might look like
29:03sort of a jackass for recommending
29:04something that didn't work out, but
29:05you're fine. You're not getting fired.
29:07>> 100%. By the way, you give them their
29:09dollar back and depending on what you
29:11choose to put it in,
29:11>> well, by well, by fine.
29:13>> You could actually look like a hero. You
29:14could be like, well, I got out of this
29:16and I did this,
29:16>> right?
29:17>> Okay. So, I I'm with you. Like I go,
29:19yep, that none of that to me is all that
29:21surprising. By the way, I think fast
29:23forward a few years, this will happen
29:25less and less. more data, more maturity,
29:28more experience, more willingness to
29:30kind of stick through things. Think
29:32about the adviser through a lens of
29:35something happens that's panicky in the
29:37public market. You know, back in the
29:39day, they might have been like, "Okay,
29:40we got to get liquid." Now, those
29:42advisers say to, "Hey, calm down. We're
29:44not we're not pulling out right now.
29:46We're at a trough. Like, we're going to
29:47ride this back out. Like, stay with me
29:49here." And the client does on the credit
29:52side. Let's go and look at a different
29:54data point. what's the institutional
29:56investor doing? Because they don't have
29:59that dynamic that CIO of that
30:01institutional investor needs to own that
30:04decisionm and and needs to sort of hang
30:07with it. There you're continuing to see
30:10institutional investors moving money
30:12into private credit right now. So for
30:15Hamilton Lane, we actually launched a
30:17semi-liquid credit product right in the
30:19eye of the uh headline hurricane that
30:23was seated by a pension fund.
30:26Headlines going off everywhere. Pension
30:30fund very sophisticated, very smart,
30:32says, "Yeah, I see the headlines. I see
30:35also see the data and I'm not seeing a
30:37problem. I'm in different behavior." Uh,
30:42I find it funny that we spend so much
30:44time worrying about private credit.
30:46Guess what? If the credit's bad, what
30:49does the equity look like?
30:50>> This was the other part that again I go
30:52back to, and again, I'm saying this
30:53kindly because it's it's I it's it's
30:55just it's I think it's to be expected.
30:58You were literally seeing advisors and
31:01investors lining up to redeem out of a
31:05credit fund
31:08and then filling out the subdoccks to go
31:11into an equity fund
31:12>> backwards.
31:13>> It's like guys,
31:15>> yeah, it
31:17let's let's talk about secondaries
31:19because um this is an area where you
31:22guys are super active and
31:26I
31:28Okay, on the one hand, there have been a
31:31there has been a lack of exit liquidity
31:34and so a lot of LPs say, "Okay, we think
31:38this is worth a dollar. I'll take 89
31:40cents. I'll take 91 cents."
31:42>> Totally reasonable, rational behavior.
31:45>> I think where the problem is, and
31:46there's been reporting in the headlines,
31:48and you guys have been named
31:48specifically about this, are the day one
31:50markups.
31:51>> Yep. Now, if you buy something because
31:54you have scale and you have
31:55relationships and you are fortunate
31:57enough to buy something for 91 cents
31:58that you believe it's worth a dollar, I
32:00could understand you marking on that
32:02your books as a dollar. And I don't know
32:04where the line is, but if you buy
32:05something for 65 cents, it is not worth
32:08a dollar. So, I disagree. So, let's talk
32:10about it. So, one, this is not a
32:13Hamilton Lane practice. This is an
32:15industry practice because this is
32:17actually following accounting regs. So
32:19that sounds like a very defensive
32:21statement, but it's true. But it's
32:22absolutely true.
32:23>> You're not the only ones.
32:24>> Yeah. So let's talk about how the
32:26secondary space works. One, when we're
32:28talking about secondary trades for this
32:30for this purpose, because this is the
32:32day one mark issue, we're talking about
32:35buying a passive LP position in a fund.
32:40So lots of LPS in a fund. That's what
32:42we're talking about. LPX wants to come
32:45out and LPY steps in as the buyer of
32:48that position.
32:50So in that situation, it's the GP, it's
32:52the fund manager who's setting the
32:54marks. The GP is unaware of any trades
32:57that occur between we don't need to go
32:59to the GP. We're not there's no reason
33:01for us to disclose that LPX is out when
33:03we sort of file paperwork. So the GP
33:06knows we're now the investor of record.
33:08But this is happening separate and
33:11apart. So the reason why the accounting
33:14regs are what they are, which is when
33:17you come in as a passive LP, however you
33:19came in, the mark is whatever the GP of
33:22that fund tells you it is. So if we buy
33:25something at 65 that the GP has marked
33:28at a dollar, we have to take it on our
33:31books at a dollar.
33:32>> But you know the GP must be a if
33:33they're selling a dollar for 65 cents.
33:35>> Well, the GP is not selling it, right?
33:36The LP is selling it. So that what the
33:38GP says is
33:41>> Yeah.
33:43Johnny needed liquidity and didn't want
33:45to wait the 10 years or Johnny doesn't
33:48have faith in me as the fund manager and
33:50so I say it's worth a dollar. Johnny
33:53thinks it's worth 50 and so Johnny's
33:56like, "Well, if I can sell for 65 cents,
33:58I'm a hero." So there's lots of examples
34:01as to why you're going to have different
34:04valuations occurring at the trade time.
34:07And that's not to me that's just not
34:09surprising.
34:10>> Yeah, I get that part of it. But with
34:11with so much money coming into
34:13secondaries, it's a new asset class,
34:15doesn't that have to doesn't that have
34:18to squish the alpha down? You can't
34:20possibly buy something at that steep of
34:22a discount because somebody else would
34:23say, "Whoa, whoa, whoa. I'll give you 66
34:25cents
34:25>> 100%." So, yes. I mean, I think that
34:28this is if you look at secondary pricing
34:31over long periods of time. So, when did
34:33we do our first secondary deal? Hamilton
34:36Lane did ours in 2000. I I remember cuz
34:38I did it. I was like the young analyst
34:40and did the model and and that all
34:42happened. So we've been doing these for
34:44over 25 years. The industry by the way
34:47back in 2000 was teeny teeny teeny tiny.
34:49And so yes, you're absolutely right and
34:51you could get big discounts back then
34:53because there was very few buyers and
34:55today one there's a lot of buyers and
34:58two there's a lot of brokers that sort
35:01of help sellers run efficient processes
35:04and make it competitive. So all that's
35:06fine. So what's like an average discount
35:09today?
35:09>> So today you're probably looking at
35:10average discounts running about 13%.
35:12>> All right. So that seems reasonable.
35:14>> Yeah. I mean again for for if I needed
35:17money that's like a reasonable discount.
35:19>> Rewind 15 minutes when you and I were
35:21talking about how long holding periods
35:22are and how long you're waiting for
35:24capital to get back. The idea of I can
35:27have my cash now or I can wait another
35:3010 years. That's not surprising that
35:33there's going to be a discount around
35:34that. Here's the other piece that I
35:36think people don't understand and it
35:38makes this whole day one issue seem more
35:40alarming.
35:42So you are the CIO of a pension fund and
35:45by the way you don't need liquidity. So
35:48what are you doing in the secondary
35:49space selling stuff? The answer is you
35:52might have a view on valuations that is
35:54might be contrary to some of your
35:55managers or you've decided that you
35:58don't like manager X anymore. you didn't
36:01re-up in their new fund. And so your
36:04team is like, "Look, if we're not
36:05re-uping with them, we should just sell
36:07the current positions that we have
36:09because it's not an ongoing
36:10relationship." So you call us as a
36:14potential buyer. So you call Hamilton
36:15Lane, "Hey, I've got six funds I want to
36:17purchase." And we say, "Okay, we got to
36:19set we got to set a date on which we're
36:21valuing those." Well, we went, you and I
36:24already talked about the whole quarter
36:25lag on the reporting. If we're buying an
36:28asset today in the middle of September,
36:31we're basically working off of the March
36:34valuation. Well, a lot's happened since
36:37March, but that's the last sort of date
36:39of record that we actually have a
36:41quarterly statement for to say here,
36:43this is going to be what we're pricing
36:45off of. By the way, when are we going to
36:47close this transaction? It's going to
36:49take a couple months to close the
36:50transaction. So, now we sort of priced
36:53you on a March date. So we said, "Hey,
36:55it's going to be 92 cents on the dollar
36:57off of the March date. By the time it
36:59comes on to Hamilton Lane's books, it
37:02comes on our books in January." That's
37:04using a September valuation. So time is
37:08also occurring here and that's causing
37:10valuations to move up or down.
37:12>> This is so complicated.
37:14>> It's super complicated, but it's also
37:15been like we've been doing this for 25
37:17years and the SEC's been looking at all
37:19this. There's kind of like I I it it
37:21sounds it sounds ridiculous,
37:24particularly when you're wearing a
37:25public equity hat, which is how most of
37:28our listeners
37:29>> It sounds It sounds unfair and fake.
37:31>> It it 100% sounds that way. And when you
37:33sort of sit here and sit
37:34shoulder-to-shoulder with us and watch
37:36us do this,
37:37>> I get it.
37:37>> You sort of go, "Oh, yeah. This is
37:39really weirdly complicated."
37:41>> So, when I say it's super complicated,
37:43I'm saying that through the lens of this
37:45is not for people with a million
37:47dollars. It's just not they they don't
37:50they can't possibly understand the fact
37:52forget about whether they need it or
37:54not. It is it's just too much. So I want
37:56to I want to transition to a question.
37:59In the last call earnings call, you guys
38:01reported that for the quarter ended of
38:03June, you generated nearly $640 million
38:05of net inflows across all strategies um
38:09and ended the period with over $19
38:10billion of of AUM
38:12>> in our semi-liquids.
38:13>> Okay. Y
38:14>> um importantly,
38:15>> yes,
38:15>> we did not enact gates on any of our
38:18funds and we saw positive net inflow
38:21across 10 out of 12 funds. That is very
38:23impressive. True. And so the question
38:24that I have for you is because a lot of
38:26funds are experiencing outflows,
38:27particularly private credit funds. Um
38:29>> how do you think about deploying capital
38:32into companies that are facing retail
38:35investors that do have the headlines and
38:37the negative flows? Are you staying away
38:39from them or do you or do you does that
38:40not factor into your thinking? Look, I
38:43so one, we're big believers in portfolio
38:45construction. You said it right before,
38:47which is it's not really a thing that
38:49gets talked about in the private
38:50markets. We all like to talk about the
38:51manager that we like or the deal, but
38:53you rarely hear anybody talk about
38:55portfolio construction. Come visit us at
38:58Hamilton Lane and you're going to have a
39:00huge part of your day on portfolio
39:02construction because we think it's
39:03essential. So the other piece is how
39:06picky are you? So in our secondary
39:08business, we're big player, deploy a lot
39:10of capital. Okay, of all the deal flow
39:11we see in a given year, how much do we
39:13invest in? Less than 1%. So, we're
39:16saying no to 99% of the stuff that we're
39:18seeing. And that kind of holds true sort
39:19of across our investment platform. So,
39:22yes, we're really mindful about looking
39:24at what industries are going to come
39:26under pressure, what companies
39:27specifically, who are the lenders into
39:30that, who's got the equity, all of that
39:32becomes important. Let me go back to
39:33your comment of this isn't for the
39:35million-dollar investor. It it may not
39:36be. However, what we most believe in is
39:40we need a lot more education. We need
39:43these discussions happening where people
39:45can listen to this and see data and then
39:48they can decide whether that's
39:49appropriate for them or not. But I think
39:52right now we're still at a at an
39:54undereducated level and that needs to
39:58rise. All right, I know I don't have you
40:00forever. I want to talk about how public
40:03markets are viewing the equity of these
40:06alternative asset managers. I have been
40:08of the mindset of listen to paint with a
40:12broad brush maybe there's some great
40:13funds in here. Of course there are
40:14obviously but why be the LP when you
40:16could be the GP just buy the equity. Um
40:19equity public equity markets have not
40:21been kind to the entire asset class and
40:23you guys are not you guys are not immune
40:25from that. So, Daniel, try 12, you guys
40:27are killing it on the incentive fees.
40:31Uh, $175
40:33uh million in incentive fees for fiscal
40:35year 2026 so far. I mean, it's up and to
40:37the right where you guys were in 2022.
40:39It was a fraction of this. It was it was
40:4154. I mean, nothing. And yet, your stock
40:45has almost been cut in half. And again,
40:47I should say you are definitely not
40:48alone. But what are public equity
40:51investors missing? because they do not
40:53believe that either the story is
40:55sustainable, that the outflows will
40:57stop, that the alpha is there, whatever
40:58it is, they're calling BS. They don't
41:00like it. I
41:00>> I agree.
41:01>> So, I assume that you're excited as a
41:05somebody that likes to buy something at
41:06a at a discount. Yeah.
41:08>> How do you think about the public marks
41:09of your companies?
41:10>> Um, it's funny, you know, as as the
41:12private market person, we we we spend a
41:14lot of time talking about why the public
41:16markets can be very flawed because
41:18certainly there's no shortage of talking
41:19about why why we're flawed. Um, and I
41:22think, you know, the public market is
41:23not always rational. We always like to
41:25say, "Oh, the market's never wrong. The
41:26market's never this." You said it
41:28earlier. It's like you can have this
41:29sort of single day reaction where the
41:31world like implodes. Nothing's happened
41:33to the underlying companies.
41:34>> Yeah. Software,
41:35>> right? It's like, "Oh my god, it's all
41:36they're all going away now. They're all
41:37coming back." So, to me, the public
41:39market kind of swings too far in
41:41extremes. And and and
41:42>> this has to piss you off, though.
41:44>> Uh, sure. I mean, look, it it pisses me
41:45off. And what we're doing is we've been
41:47buying back stock. I've been personally
41:48buying. So all that's publicly, you
41:50know, public available if you took so
41:52you you chose to look at the incentive
41:54fees. You could have looked at anything.
41:55You could have looked at margin,
41:57>> management fee, earnings. It's all going
41:59up into the right. But you're right, the
42:01public market, quote unquote, the public
42:03market is saying, "Yeah, I know that was
42:06another good quarter, but it can't
42:08continue. It can't happen." And when we
42:11talk about sort of the the sort of
42:12individual investor behavior and them
42:15sort of leaving
42:16what I sort of and I'm now getting a
42:18little bit more aggressive about this. I
42:19say to people, "Finish the sentence."
42:22And they look at me and they go, "What
42:23do you mean?" I go, "No, finish the
42:25sentence. You left off half of the
42:26sentence." And they're like, "Well,
42:28what?" I go, "Well, here's the full
42:30sentence. They're leaving the private
42:32markets and they're going to have every
42:35dollar of savings in the public markets
42:39in a increasingly highly correlated
42:42massively mega cap AIdriven that's what
42:46they have to do because if they're not
42:47going to do the privates then they have
42:48to go back are they are are they going
42:50to put it in their mattress? I mean what
42:51are they going to do with it? And I
42:53think once you start to get people to
42:54sort of think about that I think a
42:56little bit of a light goes on. The
42:58public markets can't be the sole answer
43:00for investors. We're not seeing a
43:03growing number of public companies. A
43:05lot of companies don't want to be
43:06public. And by the way, today, no one
43:09has to go public. You can stay private
43:11forever. There's plenty of capital to
43:13finance you. And investors should be
43:15realizing that when you look at
43:17something like SpaceX, I got asked
43:19recently by somebody, are you bothered
43:20by how the stock is performing? I go,
43:22I'm I'm not bothered by that. our cost
43:24basis is a teeny teeny teeny tiny
43:26fraction of where that stock is trading.
43:29And same thing, it's going to be with
43:30anthropic, AI, all of that. The money is
43:32not going to get made in a major way by
43:35the public holders. It's already been
43:38made by the private holders. That's who
43:40was backing these businesses when they
43:42were a couple billion dollar valuation,
43:44not when they're now a trillion dollars.
43:46And so if you want exposure to the
43:49entire set of the economy and if you
43:50want diversity, if you want all those
43:52things, you're going to have to come to
43:53the private markets. And I think that's
43:55what the public investors are getting
43:57wrong right now, which is we're taking
43:59some lumps in the media. And by the way,
44:01some of it's wellfounded. I'm not
44:02sitting here. We've been agreeing on a
44:04lot of the cynicism stuff,
44:07but long-term, the growth is continuing
44:10for good firms like ourselves, and
44:13that's not going to stop. And so at some
44:15point the market will realize like oh
44:17okay this is this is actually real and
44:20sustainable and and we'll go back.
44:22>> Last question before I let you get out
44:23of here. Are you are people accessing
44:24your funds only through intermediaries
44:26like only through their adviser or are
44:28they able to get it just through swap or
44:30fail [music] or whatever.
44:30>> So they can 100% get it directly through
44:32those places. They can also we've also
44:34tokenized a bunch of our funds.
44:35>> Next conversation [music] we'll do that
44:36next time.
44:37>> Yeah. But so but that's you can also get
44:38it that way and that's actually like a
44:40much lower minimum. like some of these
44:41are like $500 minimums. Uh which I think
44:44is just another interesting access
44:45point.
44:46>> Okay. Um Eric, this is great. I'm glad
44:48that we had the you on on here to set
44:50the record straight. Thank you for doing
44:51this.
44:52>> Thanks for the conversation.
44:57[music]

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